Going going gone (E)

0:14Hey, it's Kevin Beach, and this is a special archived episode of Akimbo.

0:24In 2010, a rock went up for auction. At the time, people figured it would go for about$20 million. It ended up selling for more than$40 million. In that moment, the graph pink became the most expensive diamond ever sold. For most of us, auctions were just an interesting sideshow, a form of entertainment, something to make fun of because people with those little paddles would sit at antique auctions or art auctions and buy really expensive stuff that we could never own. But lately, auctions are showing up more and more because auctions offer a huge benefit to the seller, particularly if the seller has something unique.

1:23And I think it's worth taking a few minutes to think about how auctions are creeping into our lives and how they change the way we engage with the market. Just a couple years ago, Michelle and Barack Obama sold a series of books in an auction to the book world. The final bid was reported to be more than$60 million. That would probably make it the most expensive book sale in history. The thing about the book industry is that just about every author gets paid the same royalty. that what distinguishes one offer from another offer is the advance. How much the publisher is putting up up front, risk-free to the author, to ensure that the author picks them, that the author assigns their copyright and marketing rights to the publisher exclusively to bring the book to market.

2:27This is a foolish way for the book industry to act because it makes it super easy for authors and agents to choose among competing offers. Just pick the one with the biggest advance. The second challenge is that they are willing to allow authors and agents to submit their proposals to multiple publishers at the same time. And so they are setting themselves up for an auction. Why do they do this? Here's what happens in a book auction. Multiple publishers look at the same information, the same material, and each one of them bids for the right to publish it. It is said that the worst thing to do is to win a book auction.

3:21Because what it means is that your competitors, with the same information you had, decided what the book was worth, and you paid more than that. On the other hand, people in the book industry like book auctions because it gives them deniability. It's hard to be criticized for dramatically overpaying for a book if you paid just a little more than the other guy. Because so much money changes hands in auctions, whether you're selling tulips or books or diamonds, people have put a lot of thought into how to structure auctions to maximize the money that's raised. So here are four kinds. There's the first price sealed bid auction in which you go to all of the bidders and say to them, write down on a piece of paper how much you're willing to pay.

4:19Seal it in an envelope. I will collect all the envelopes at 5 p.m., and the person who wrote down the biggest number wins. That kind of auction works really well for people who are super risk-averse about losing the auction because what they end up doing is bidding in their own head against themselves a little bit more, a little bit more, because they know they're not going to get a second chance. The second kind of auction is a second price sealed bid auction, sometimes called a Vickery auction. And in this case, there's only one difference from the first kind. In the first situation, there are plenty of people who in the back of their head will say, well, I don't want to overbid.

5:06I don't want to make a fool of myself. So I'll back off just a little bit. In the Vickrey auction, the rules are exactly the same, except the high bidder pays what the second highest bidder bid. So if the bids are 10, 8, 6, and 5, and you win, you pay 8. With this logic, the bidder says to themselves, well, I can bid an absurd amount, because I won't have to pay the absurd amount. I'll pay the amount just a little bit less than that. it gets rid of one level of buyer's remorse. As you're probably realizing, auctions are way more about psychology than they are about rational analysis of value. The third kind is an English auction.

5:56This is the auction you're used to. Do I hear five? Do I hear 10? Do I hear 15? Do I hear 20? Going once, going twice. Sold. In this sort of auction, you get to hear what everyone else is bidding. Or on eBay, you get to watch what everyone else is bidding. In this kind of auction, you get to say to yourself, the market has spoken. I don't have to spend a lot of time trying to figure out what it's worth. I just have to figure out if it's worth a dollar more than you think it's worth. So if I am confident in my marketing prowess as a book publisher, I can wait till Random House or Simon & Schuster bids something, I can say to myself, well, I'm better than they are, so I'll just bid a little bit more.

6:43And this leads to a special kind of frenzy. In a second, we'll talk about one of the most recent vivid examples of this sort of frenzy. And the fourth kind, the fourth kind is the famous Dutch auction, which we don't see that much anymore, even though computers make it pretty easy to implement. And in this sort of auction, the auctioneer picks a price higher than anyone wants to pay, and then starts going down, backwards, lowering the price until someone says, I'll take it. The advantage of this sort of auction is that the fear of missing out is palpable, and it might make someone jump sooner than they ordinarily would.

7:31My guess is that in practice, in our fast-moving hustle-up culture, a Dutch auction is probably a little too calm to get people into a frenzy. So what's the auction I was just talking about before? It's the auction that Amazon is having for which city will pay the most to have them open their headquarters there. We're talking about billions and billions of dollars of taxpayer money with cities competing against each other to see who can bid the most. Not just straight up cash, but taxes, infrastructure, any way you want to look at it. I wrote a blog post about the appropriate response to this request for an auction, and I think it resonated with some people.

8:21And basically what I said is, there's nothing wrong with collusion if you are organizing the weaker side in an engagement. So in this case, the cities should have gotten together and signed a deal with each other. and the deal would have limited how much any city would have been willing to invest in the auction. It still would have ended up going to one city. The difference is that the city that won wouldn't have overspent to win the prize that they sought. At the top of this episode, I talked about how auctions are showing up more and more in our lives. Let me explain what I mean by this. sellers are discovering that if you own a unique irreplaceable asset the most efficient way to sell that asset is by auctioning it off so if we think about retail real estate in cities the real estate that's used by the local convenience store the local bakery the banana republic there's only one northeast corner of fifth avenue and 20th Street.

9:35There's only one. If you want that slot, you have to buy that slot from this landlord. There is no direct substitute. There are indirect substitutes. You can go to the corner of Fifth Avenue and 19th Street, but sooner or later, the substitutes run out and there's just this one. And so what's going on is a slow motion auction, not one that's going, going on, but that happens over the years. How does this auction work? Well, if I know that my store is going to generate$10 ,000 a month in profit for me, the question is, how much am I willing to pay to rent the space where that store will generate its$10 ,000 in profit?

10:26Would I pay$6 ,000? Well, sure, that's rational. But if a competitor is also going to make$10 ,000 from renting that store, they'll happily pay$6 ,500. And then$7 ,000, then$7 ,500, and you get the idea. So when one of these auctions takes place, almost all of the profit from that retail establishment flows to the landlord instead. That's one reason why retailers are often in trouble and landlords almost never are. The fact is that retailers competing against each other in an auction almost always have to overbid or else they don't get to play. Because if there's just one bidder that's willing to overbid, they get it.

11:21This gets even bigger when we think about the internet. Here's the question. How does Google make all that money? I know you could say, well, it's a search engine everyone uses or Gmail or whatever. But how do they make all that money? They make almost all of their profit. The money that they use to subsidize the Pixel phone, to subsidize Android, to subsidize Gmail, to subsidize Google Drive. Where do they make all that money? they make it with an auction. And it's an auction that takes place every day, 24 hours a day around the world. And the auction is just like the auction the landlord is having.

12:01Here's how it works. Let's say you sell soundproofing, foam soundproofing. If someone does a Google search for foam soundproofing, what you will notice is there are three ads on the side of that search. How much do those ads cost? Well, the brilliance of what Google perfected, beginning with something that Bill Gross and Overture began with, was this. It costs a penny. It costs a penny to buy that ad. Unless someone's willing to pay two pennies. Unless someone's willing to pay four pennies or eight pennies or 20 pennies. that every single ad you see on Google is an auction. And the way the auction works is really simple.

12:51You figure out how much a click is worth. How much is it worth to your company to get someone to click, look at what you have, and maybe buy it? And the people who build internet sites, who build websites, are really facile at figuring out to the penny how much a click is worth. The math isn't that hard to do. Once you know what it's worth, then you enter the auction. Let's say you've decided it's worth a dollar, that one new visitor, one new click is worth a dollar. Well, if it's worth a dollar and your competitors bid 90 cents, will you bid 91 cents? Will you bid 94 cents? Sooner or later, you'll get to the point where you'll bid 99 cents.

13:38You won't be happy about bidding 99 cents, but you're still making a penny and you're keeping your competitor from getting that customer. And then over time, you will make the onboarding ever more efficient. So instead of a click being worth a dollar, it's worth$1.20 because you've gotten better at copy and offers and the way you're interacting with people. Okay, so now it's$1.20 or$1.50. How much will you bid now? I think you get the idea. Google is clearing the table of almost all the profit. That 99 % of the value of those clicks goes to the person who's holding the auction for the irreplaceable bit of attention.

14:26So now we live in an economy not driven by how much the pink graph rock is worth, but an economy based on how much attention is worth. The attention that Google is selling to you, the attention that they earned by offering all those things they subsidize. And so the auctions continue. They continue for someone's memoirs. They continue for the right to have Amazon's headquarters in your city. And I guess what I'm getting at here is there's nothing wrong with auctions. They're super efficient and fast. But one, we have to figure out how to get unemotional about them and not be the fool who pays a little too much every time because the market has spoken.

15:19And so what we end up with is something that wasn't worth it in the first place. And second, as enterprises get more powerful, as enterprises build these assets that they can auction off to the highest bidder, I think we need to think deeply about whether collusion is appropriate, efficient, and something that we want to pursue. Because what we end up with is spending all of our resources on something that's not worth that much to us in the long run. And then the third thing, if you're listening to this as a practitioner, which is at the heart of my work for the last 20 or 30 years, is really simple.

15:59Build something worth auctioning. Build a unique asset, one without an easy substitute, one that someone, more than one someone, needs. Because if you own that resource, you get the privilege of offering it to the highest bidder if you choose. Thanks for listening. We'll see you next time. Hey Seth, it's Maria. Hey Seth, my name's Kyle. Greetings, Seth. This is Stephen out in Madison, Wisconsin. Hi Seth, Alicia from Charleston here. Hi, Seth. This is Anupam. Hi, this is Caitlin. Hi, Seth. Warm greetings from Curacao. Hey, Seth. My name is Nick Ryan from Pittsburgh, Pennsylvania. Hey, Seth. This is Rex.

16:42Hey, Seth. Hi, this is Vasilis from Greece. Hi, this is Roberta Perry. My question is... And that completes my question. Shifting gears away from education, here's a question that came in about a previous episode. Hey, Seth. This is Isaac from Cincinnati. This is a question that has been kind of brewing for a while, but came into focus with your All Rights Reserved episode. Basically, I was wondering if you could speak to the apparent disconnect between appreciating the work of an artist and supporting their sustainability and long-term viability in a digital age. so I know this is happening in a lot of different mediums especially with news outlets putting up paywalls but I work in music so the example I have would be being in a band and at a merch table having your albums and shirts and things out someone comes up to the table they really love the show and the music and what the band was doing and then they add that the album to their Spotify library and show the band like, hey, I'm being supportive.

17:58Even though if they were to listen to that album 24 hours a day, for a week, it would maybe buy a four-person group lunch at McDonald's. So my real question is, how do musicians or artists in general change culture without opting out and becoming a self-imposed martyr of anonymity? And lastly, how do you personally engage with musicians or artists that you want to keep creating? Thanks in advance for your time. I love the show. Super inspirational. Keep up the good work. Sometimes it seems like a coincidence. The geniuses all sort of show up at the same time. Da Vinci and Michelangelo, did they go out for coffee?

18:45Or the late 1800s, all the artists coming out of France? Or what about those digital startups 20, 30 years ago in Silicon Valley? It's not a coincidence, of course. Thanks for this great question. It's not a coincidence because the patrons are there. When the patrons are there, when they are showing up and saying to the artists or the creators, here, make your work, then the work gets made. So Janis Joplin or Cosby, Stills, Nash, or even Young.

19:26We heard about them because the patrons were there. John Hammond was looking for Aretha Franklin, which is why we found Aretha Franklin. So what does this have to do with you and selling your merch at the merch table after a concert? Well, most of the middlemen have been pushed out of the building, and the patrons who are left are us. And so the short answer is, buy the vinyl. Buy the vinyl. Buy the collectible. buy the concert ticket. You could do it because you're generous, because you want to be a Medici, because you're a patron of the arts. Or you could do it because if you don't do it, they're not going to come back to town.

20:13Because if you don't do it, the band is going to break up. Because if you don't do it, there won't be a new album when you want there to be a new album. So for me, one of the joys of spending 20 bucks to support a musician is that I get a triple whammy. I get the vinyl. I get the satisfaction of feeling like a big shot A &R record person. And there's a better chance that they're going to come back to town. Buy the record. Buy the vinyl. Back in the old days, when software was underpowered and overpriced, piracy was rampant. And the software companies said, you better buy the software or we'll go away.

21:02Well, the users called their bluff. And as a result, we ended up with a few massive software companies that live on taxing us when we access the network. and not too many other people who are living around the fringes coming out with amazing new bits of software. The Kai power tools of the world, it's not there anymore. What happened to Macromedia Freehand? They had to sell out. It disappeared. It disappeared because not enough people bought the software. So yeah, buy the vinyl. It's fun and it's worth doing. Thanks for your question. We'll see you next time.