Double Blind

Rogers has just fired their own broadside with the introduction of another virtual mobile service, Chatr, which feeds off of their own phone network (very similar to Fido, another Rogers-owned company).

It is very obvious with their pricing structure, and the cities that they are in that they are strictly trying to wipe out Wind Mobile and/or Mobilicity off the face of the planet. What’s hilarious is that Wind Mobile has no spectrum license in Quebec (other than the Ottawa-Gatineau area), and Rogers/Chatr’s service offerings are identical to the locations offered by Wind Mobile – Vancouver, Edmonton, Calgary, Toronto and Ottawa. On Montreal, they stated:

“We’re working out some translation issues in Montreal, but it will very soon be our sixth market,” Chatr’s senior vice-president Garrick Tiplady said in an interview.

Translation issues indeed! More like “There’s no rush since our competition isn’t there!”

You can be sure as Wind Mobile expands to other cities and/or expands their coverage in their existing cities, that Chatr will come up with “service enhancements” to incorporate those areas into their own “home network” as well.

Their pricing plan is, for the most part, identical to Wind Mobile’s structure, with the most notable exception that on Rogers/Chatr’s $35 plan, they charge 25 cents to recover your voicemail, and they charge for incoming text messages.

Since the coverage areas between Chatr and Wind is nearly identical, I have no idea who would sign up to them.

As I stated in a previous post, the new entrants to the Canadian wireless market are not going to be making any money. The only reason why Rogers is doing any of this is to bankrupt Wind Mobile and Mobilicity – Rogers/Chatr’s offering adds absolutely no value whatsoever to the Canadian mobile marketplace other than wasting consumer’s time as they have yet another offering to review.

I have had the rarest of luxuries today, a day out by myself in the city. I really love the concept of the “tourist in your own city”, and I was in the Vancouver area for the day. Some thoughts that went through in my head:

0. The sunny, but not overwhelmingly hot weather in Vancouver is really, really nice. There is also a nice breeze.

1. Translink day-passes are $9 and is a good bargain for those that do not extensively use the transit system. A couple one-zone passes are $2.50 and two-zoners are $3.75 so it doesn’t take long to make the day pass worthwhile.

2. I was having coffee with a friend in downtown near the waterfront station and when we were sitting on one of those cement chairs around a dry fountain, a seagull pooped from up above, narrowly missing my friend and myself. He got a little bit of white splatter on the top of his hand, which was nothing compared to the brown soupy goo that was on the concrete below us. Probably the closest “bird strike” call I’ve had in my life.

3. Mobile technology is interesting – for example, I am writing this from a Starbucks near the Olympic Village Canada Line station. I was intending on doing some much-needed park board work, but the weather and environment make it far too distracting to get anything real done. This location, in particular, has really good natural light coming in and by virtue of its sub-optimal location, is not too densely populated.

4. I went to the Lonsdale Quay and resisted the myriad of goodies that were on sale there (especially the bakery – I love bakeries). I picked up some Tuscan soup thingy and it came with a bun. I forgot what the soup place was called at the Quay but it was quite tasty soup. The soup chef there said he has been making soup for 15 years. I am starting to restrain myself from eating excessive amounts of goodies since my metabolism is no longer as effective at shedding the calories, but man, looking at the stuff is mouth watering.

5. I walked around Ambleside park. Lots of dogs there. I noticed how they divided the park into an off-leash area and a leashed area. Very smart of them.

6. Park Royal South, what was interesting was that three tables in the mall had people playing chess against each other. Otherwise the air-conditioned mall felt quite sterile. The entire corridor between the Quay and Park Royal is being “spruced up”, I hardly recognize it anymore – not that go to North or West Vancouver very often.

7. The bus from West Vancouver to downtown Vancouver was much quicker getting through traffic than the cars, by virtue of having the bus lane bypass. There is so much of a crunch of cars trying to get on the Lion’s Gate Bridge – it makes you wonder if the city planners that originally conceived of the bridge would still think over 70 years later that it would be handling much, much, much more traffic but still have three lanes.

8. The Canada Line at the downtown Vancouver location headed south was packed. It is clear that they are going to have to figure out a way to increase rush hour capacity.

9. They were giving out free samples at Starbucks of their sandwiches, and they were very recently heated up. I took two samples, and they were quite good. While I wouldn’t go out of my way to order them, I could see why others would – they had the right amount of “crunch” and taste.

Now back to my boring work!

I believe a voluntary long form census would provide statistically useless information simply because of selection bias – it would make the results easy to manipulate by statisticians as they perform “corrections” to this data.

However, I also do not like the argument of the other side that claims that a mandatory census form would result in reliable information. For example, nothing prevents people from just entering in bogus information in an attempt to retain their confidentiality. I am sure people that don’t like intrusive government questions will just give what they believe to be the most politically correct answer, or an answer that is most to be expected of them when they mail in, as opposed to getting truly reliable answers.

In today’s age, I don’t think anybody believes that the government can keep information secure, so expecting a government agency to keep your census return secure for 90 years is not a reasonable expectation. I am not sure how confidential the census data truly is – if they treated the information just like the CRA treats a tax return then at least there is an audit trail for access to that information. Still, you hear occasionally a CRA employee getting fired or charged for improper access of information, so it makes you wonder how many of these cases were settled internally without it being elevated to the public domain.

As such, while the information is desirable to have, the ability to get that information reliably will continue to degrade over the next few decades.

(Cross-posted with BC2013)

There has been so much spin about the HST. My post comes from both an accounting background and a physics background (two professions that might seem quite distant have a lot in common). I am also very well versed with income tax legislation and government policy concerning finance in general.

Both sides of the HST debate have spun the facts so hard that it is difficult to get legitimate analysis on it. The following is an attempt at clarifying the HST, as I see it.

Q: Who wins with the HST?
A: Businesses that have high amounts of inputs that they previously would have paid PST for – they can claim these as input credits with HST. Generally, this applies for businesses that deal with products as opposed to services. So industrial companies, or manufacturing companies would be a significant winner with the HST.

Q: Who loses with the HST?
A: On the business side, any businesses that have their costs dominated by labour and/or non-PSTable items. Examples include restaurants and consultants. Individually, almost everybody is going to end up paying more in consumption taxes than before the HST implementation. It is impossible to conceive of a scenario where ordinary middle-aged working individuals will pay less tax with the HST, even when factoring in the increase in the basic exemption (the amount of income you can earn without paying provincial income taxes).

Q: Will prices drop as a result of HST?
A: Only in those industries that have significant amounts of PST on their business inputs. It is also unlikely these price increases will be seen immediately – it will be subtle and impossible to measure, although in theory competitive industries should realize some price decreases in the medium and long term had HST not been implemented. The real strategic issue is that the HST benefits manufacturing, and manufacturing has been consistently been outsourced across the Pacific (to countries like China, India, Thailand, etc.) – HST will clearly enable us to be more competitive with manufacturing, but since labour costs are also a significant cost input, I haven’t seen any clear analysis to establish that we will be able to draw in more manufacturing capital. A lot of the theory behind the positive aspects of HST depends on capital asset purchases being a detriment to manufacturing, as opposed to high labour costs (which the HST does not address at all).

Q: Will HST increase my wages?
A: Very, very, very indirectly. The theory is that with increased investment, you will have demand for labour, and with labour demand, this will result in increased expectations for wages. The answer to this question is much closer to “no” than it is to “yes” and to claim that HST will result in increased wages is simply not true – doubly so if you work in a service industry.

Q: What products will cost less after HST?
A: Children’s disposable diapers. Before, they were subject to 12% (GST+PST), but they will receive a provincial exclusion on HST. The tax on a hotel room was 13% (8% provincial, 5% GST), which will be 12% after HST. Other than that, I don’t know of anything that will become cheaper. A side note is that liquor (beer, wine, spirits) should, in theory, have been cheaper (10% liquor tax plus 5% GST applied, 12% HST after), but the BC Liquor distribution branch is pocketing the extra 3% differential after July 1. (Update: A voice out there pointed out that if you drank the liquor from a restaurant it would be subject to 12%, while previously it would be subject to 15%; it should also be said, liquor is probably one of the only input credits available on non-capital expenditures in a restaurant, and the liquor would have to go through the LDB anyway, so presumably the 3% price increase is being passed on – the net result is that liquor will cost less for restaurants to purchase because they get an input tax credit on the entire tax amount, but patrons should experience the same price.)

Q: What services will cost the same after HST, and what will change?
A: Legal bills, auto mechanic bills, cell phone, “special” cable service, long distance calls, and internet are the significant services that were subject to PST and thus will not change after HST. All other services that were not subject to PST will now have the full 12% HST applied and will cost more.

Q: Explain the impact on my condominium/townhouse strata fees.
A: Although the fees themselves will not be subject to any consumption taxes, embedded within the strata fees are services (e.g. maintenance contracts, gardening, alarm security, etc.) that will likely be subject to HST when they were not subject to PST previously. Since GST/HST is not refundable to a strata, it is very likely that residents will pay more upon the implementation of HST – given the strata statements I’ve analyzed, I would guess you would see roughly a 4-5% increase in your strata fee.

Q: What about me going to McDonalds/Tim Hortons/Starbucks?
A: Other than relatively minor recoveries on capital equipment, it is unlikely the restaurant industry will decrease prices simply because they don’t stand to gain much with HST – in fact, because the bottom-line price is higher due to HST, they will witness some degree of demand destruction – take the example of a $1.30 coffee at McDonalds, your $20 bill could buy 14 coffees. With HST, that goes down to 13 coffees – although this is a very subtle change, the fact remains that you will be able to buy 7% less coffee with the same amount of money. Subconsciously, since it is unlikely you will change your coffee habits, something else in your budget will have to change as a result – or if nothing else changes, it will eat into your net savings. One thing that can be promised, however, is that the price of coffee will not go down by 7% after the HST is implemented.

Q: What about the tax credit for lower income earners for HST?
A: This affects single people making less than $20,000 a year and couples earning $25,000 or less a year. This is a political payoff mainly to retired seniors. It will not affect most ordinary middle-aged working British Columbians. In particular, this spin by Colin Hansen was particularly reprehensible since not only was he re-hashing previously revealed facts about the HST implementation, but he’s expounding on a federal benefit (the GST/HST credit) that the provincial government has nothing to do with. Whoever wrote this press release should be given a 10/10 for spin, but a 0/10 for ethics.

Q: What is the best case you can make that the HST is good for individuals?
A: HST will reduce costs for “product-heavy” industries, making BC more cost competitive. In theory this should increase investment and with investment comes tax revenues for government, and in some cases, employment. The HST will also promote specialization and horizontally-integrated (as opposed to vertically integrated) companies in various industries (as there is no longer a PST penalty to pay for inventory transfers). The benefits of HST are very indirect to measure, and very uncertain to measure as it is not entirely clear that these benefits will be realized.

Q: Aren’t consumption taxes “better” than income taxes?
A: Not necessarily. The argument is that consumption taxes represent a choice – you can choose to avoid consuming in order to avoid paying a higher tax. However, this argument falls flat when you consider that many necessary items in life require the payment of HST, such as toiletries (e.g. toothpaste). In theory, this model could work if the government purely taxed consumption instead of income, but no government will ever do this since income taxes represent such an ‘easy’ source of income.

Q: Who is this economist Jack Mintz the government always quotes, what was his research?
A: The government has always been quoting this study by Jack Mintz. Unfortunately for Mr. Mintz, the government focused on a single paragraph in the report, when Mintz was comparing the effects of both corporate tax decreases and the harmonized sales tax on capital investment – the only issue is that capital investment is not operational cost savings. Previous experience in the Atlantic provinces would suggest that the positive effects of harmonization are significantly less than advertised. It should be noted that other economists have been quite silent about this issue, probably both for political reasons and policy reasons.

Q: What about the $1.6 billion the provincial government received?
A: This reflects about $350 per British Columbian, but the government is going to eventually spend it. The government’s primary budget issue is not one of revenue, rather it is one of trying to figure out how to cap spending on healthcare and education without killing themselves politically. The money is a nice bonus for the government, but should have factored little into the decision to get into the HST.

Q: Didn’t they say the HST revenues goes directly into healthcare?
A: About half of the province’s expenditures go into health services. So yes, you could say half the revenues do go into healthcare. To say the HST is ‘dedicated’ to healthcare, however, is not true.

Q: What should have the provincial government done instead, politically speaking, if they had to do implementing something like the HST?
A: The best interim measure the government should (and could!) have taken is to introduce the concept of input tax credits on the provincial sales tax. This would have likely caused much less uproar than harmonizing the sales tax. The disadvantage of this is that you still have to retain government staff on the revenue collection side (especially for compliance since abusing input tax credits is the most common fraud for GST/HST processing), and not obtain the $1.6 billion offer from the federal government. Another option would have been to have a significant increase in the basic exemption while implementing the HST – basically a shift from income to consumption taxes. However, the government failed to do either. There are also other minor issues I have with various HST exemptions.

Q: What was the biggest flaw of the Fight HST campaign?
A: Their attached legislation to the initiative petition, the HST Extingushment Act, is very poorly written. It is so poorly written that the people that drafted and reviewed it should be embarrassed – it is like reading a grade 7 essay when it should be graduate level caliber piece of legislation. They also were very over-zealous on the spin (not nearly as bad as the government side) concerning issues such as the government’s list of “before and after HST” price changes, and overplaying their hands concerning use of the media.

Would you like some more questions answered? If so, comment below.

Summer is always short in this country, and I have been on a break. Posting will continue to be light until around mid-July, or whenever I feel like posting something. In the meantime, here are some trivial notes of the day:

1. Although it may seem like a stereotype, I am always impressed whenever I go to Richmond I can witness some flagrant act of bad driving.

2. HST comes in two days. The only item that I can think of that you can buy after July 1st that will become cheaper are kids’ diapers. Previously they are subject to GST and PST, while after the HST implementation, they receive an exemption for the provincial component of HST. Almost everything else that was GST-eligible will now have an extra 7% tacked on and this will cost a significant amount of money based on my spending habits. Included in this is the cost of restaurant meals, which will piss off every British Columbian every time they stop off at Tim Hortons for a coffee.

3. A (large) bag of pine nuts now costs $40 at Superstore. Normally it is around $15. Apparently there was some sort of large crop failure in China which has caused a massive price spike until the next harvest season, which will be this autumn. You can also see some other food prices edge up in general; I memorize the prices for an array of staple goods (e.g. pastas, cereals, canned goods, beverages, fruits/veggies, etc.), and a lot of the grain-type products are definitely higher priced.

4. Getting away from the computer and not checking email or the news for a couple days is something I should do a lot more often. The only problem is that it causes some mental atrophy for no apparent benefit other than enjoying the time off.

5. The June 25th Lotto Max was finally won by two parties. Despite having a $105 million prize pool instead of $95 million in the previous draw, the number of tickets sold was still around 24.7 million – on June 18th the number was roughly 24.5 million. This shows that there is a saturation point concerning this particular lottery – it was likely that it was reached on June 18th. Future lottery studiers should note this for future designs – does a higher prize (at ever-increasingly low probabilities) cause more tickets to be sold? By comparison, a typical Lotto 6/49 draw for a non-special prize has about 10 million tickets sold, twice a week. The Lotto Max, on a glance, cannibalized about 20% of the 6/49′s player base.

6. G8/G20: What a seemingly useless conference. Does any policy of any real substance ever get created from these things? They do release a statement on how they plan on solving the world’s problems, but a week after the fact, it’s in one ear and out the other.

Nobody won the June 18 $50 million jackpot.

There were approximately 24.5 million tickets sold, which is approximately $123 million dollars. You can certainly see the dollar signs in provincial lottery corporation executives’ eyes when they see this volume, as well as the respective Ministries of Finance since they get a good cut of the action. It’s probably Canada’s largest legalized pyramid scheme to date.

At 24.5 million tickets, that means there was a 42.5% chance of the $50 million jackpot not being won.

However, the $1 million dollar jackpots (45 of them) were distributed as such:

No winners: 15/45 (33.3%)
1 winner: 16/45 (35.6%)
2 winners: 9/45 (20.0%)
3 winners: 4/45 (8.9%)
4 winners: 1/45 (2.2%)

More $1 million prizes were won than what would have otherwise been statistically predicted (57.5% predicted vs. 66.7% actual).

The next Lotto Max (June 25) is expected to have 55 million-dollar draws, so a ticket will have a 1 in 511,313 chance of getting 7/7 correct on one of the 56 million-dollar+ draws. Again, as far as lotteries go, this is fairly good value for money. However, there are considerably better (casino) alternatives if your primary goal is to compound $5 into $1 million.

I must admit that this consecutive string of non-winners is getting fairly tiresome to write about and it also shows the design of the lottery might be flawed in a sense – because $30 million was extracted out of yesterday’s prize pool, it does not allow increased accumulation of $1 million draws since it will reach a steady-state solution.

A fellow that runs Bronte Capital remarks on how he is forced to use his Amazon Kindle in order to access his Amazon-purchased library. If he decides to get rid of his (fragile) Kindle, the library goes with it.

This is always why I have been very conscious of the fact that digital asset locking is very dangerous – once you’ve made the outlay for a particular library (whether it be books, music, etc.) then you are locked into that one vendor. This is the case with the Kindle, and also the case for people that buy stuff in the iTunes store.

But, as the author writes, a lot of people buy into it, which is probably why Amazon and Apple are two very rich companies at the moment.

It’s a pretty sad statement on the stock market that my list of investment candidates is so dry that I have to keep writing about the lottery. I did an expected value analysis on June 3rd.

On June 11th, the Lotto MAX draw came up blank for the main $50 million prize three times in a row. Subsequently the jackpot has grown extraordinarily large – there will be a $50 million prize plus 45 estimated 1 million dollar draws on June 18th.

Analyzing the June 11th results, nobody won the main prize, but out of the 27 $1 million prizes:
12/27 were not won;
9/27 prizes were won by a single individual;
3/27 prizes were won by two individuals;
2/27 prizes were won by three individuals;
1/27 prizes were won by four individuals.

By looking at all the results, you can do some statistical reverse engineering and infer that approximately 18.2 million lottery tickets were purchased for this lottery. At $5 a piece, this is $91 million dollars, or another way of thinking about this is that about 53% of every man, woman and child in Canada bought a lottery ticket.

18.2 million lottery tickets, assuming a random distribution of numbers, coincidentally means that there was a 53.0% chance that the main prize would not be won, slightly better than a coin toss. If we pretended that every Canadian in the country (34 million) bought a lottery ticket (with their numbers drawn being randomly chosen), this would still leave a 30.5% chance of the main prize not being won.

So we move onto the June 18, 2010 Lotto Max and putting this into terms of probabilities, $5 buys you:

- a chance to win $50 million (1 in 28,633,528, with potential for splits). Expected value: $1.75
- 45 chances to win $1 million (1 in 28,633,528, with potential for splits). Expected value: $1.57
- A 1 in 4,090,504 chance to win roughly $580,000. Expected value: $0.142
- A 1 in 99,768 chance to win roughly $5,400. Expected value: $0.0541
- A 1 in 1,584 chance to win roughly $120. Expected value: $0.0758
- A 1 in 71.3 chance to win $20. Expected value: $0.281
- A 1 in 76.7 chance to win $20. Expected value: $0.261
- A 1 in 8.1 chance to win $5. Expected value: $0.617

Add all of this up, and you have a nearly expected-value lottery ticket (about $4.75 in expected value). This still doesn’t account for potential splits (which will happen and thus will make this expected value calculation much lower, especially with a split on the main prize) and still makes the lottery a losing proposition, but the lottery does offer what I consider to be a very good chance of winning a million dollars – again, assuming no splits, a $5 ticket will buy you a 1 in 622,468 chance of winning a million bucks or more. This is an order of magnitude better than the usual 1 in 5.6 million for the Lotto 6/49 (assuming you played $5 worth of Lotto 6/49 tickets, which costs $2 per play).

Coincidentally, 1 in 622,468 is within the bounds of your odds of getting struck by lightening in a single year, while normally your chances of winning a million dollar lottery prize are considerably worse than that.

However, these odds are considerably worse than your 1 in 257,340 chance of winning a million dollars, starting from $5 on a single-zero roulette wheel.

Another story about iPad/AT&T (USA-only) subscribers getting hacked. The exploit was due to a bad security design on AT&T’s part, rather than any problem with the iPad itself (other than the fact that the iPad device is popular, and thus a target for hackers).

The core lesson here is that any networked data is likely to be vulnerable.

I remember a decade ago that the visionaries were saying that in the future, all data will be networked, and thus impervious to the usual problems with locally held data – you don’t have to worry about a disk crash or a house fire wiping out your photo albums.

However, the flip side of having everything up on the internet is that you are susceptible to getting hacked, and your data security compromised.

The Battlestar Galactica mantra of “no networked computers” seems to be quite relevant in the 21st century as well. The copy of Windows XP I have has probably a dozen unpublished exploits out on it, running a browser (Firefox) that likely has a ton of exploits and this website running WordPress has been known to be susceptible to spam-style attacks where hacks modify the script template for Google gaming purposes.

It seems the only valid security model these days is pulling the network jack out of the computer.

Back in the 1990′s, the players were the telecoms we know today (Telus, Bell) and three companies that the younger generation doesn’t know much of today – CanTel (which was taken over by Rogers), Microcell (which is most known as Fido, but was taken over by Rogers) and Clearnet (which was taken over by Telus).

Putting a long business story short, all the original competitors went away except for Telus, Bell and Rogers. Telus and Bell had their landline markets subsidizing the wireless capital construction, while Rogers had (and still has) their cable business. CanTel, Microcell and Clearnet were exclusively wireless providers and did not have enough financial capacity to remain as businesses. Microcell was the last holdout before it got munched by Rogers in 2004; although it should be noted that Microcell was in dire financial straits well before this date.

Fast forward ten years and the consolidation, and we now have some new entrants into the Canadian wireless market. They are Public Mobile (concentrating exclusively on the low end user of Toronto/Ottawa/Montreal); Wind Mobile (recently introduced in Vancouver and currently concentrating on a broad approach across metropolitan centers in Canada minus Quebec) and Mobilicity (in the same market space as Wind).

I predict that none of these companies will be making any money, but the consumer, over the next couple years, will be receiving some excellent deals for mobile voice/data service.

In particular, Wind Mobile should be a formidable competitor by virtue of having a deep-pocketed parent, Orascom. I am less certain that Mobilicty will last as long, simply because they likely are less capitalized. I have no idea how Public Mobile will do, but they appear to have a very low cost approach which may work simply because the major companies have too much fixed overhead to compete properly (on a cost basis) against Public.

I also highly suspect that the reason why Shaw Cable is waiting so long to get into the mobile market (even though they have made the proper wireless spectrum purchases) is because they want to see who consolidates with who – or maybe consider its entry into the Canadian wireless market through a purchase once Wind and Mobilicity have lost enough money and want to give up.

So my deep suspicion is that Shaw Cable and the retail consumer will be the big winner in the Canadian wireless market over the next few years.