I thought this was interesting as it deals with BP.
NEW YORK (CNNMoney.com) -- For Gulf businesses wondering if their oil spill claims will be paid, there's one guy who'll decide -- Kenneth Feinberg, the former special master of the September 11th Victim Compensation Fund.
As the oil spill claims czar, Feinberg has access to the $20 billion pot of BP's money that is in escrow to pay for damages.In multiple appearances on Capitol Hill, Feinberg warned that not everybody who files a claim will get paid. At the Economic Club in Washington, D.C., this week, Feinberg presented a few hypothetical scenarios:
A restaurant in the North end of Boston that can't get Gulf shrimp. Feinberg's vote: "Highly unlikely."
A motel on a beach where there's oil. Feinberg's vote: "Pay them. Pay the claim."
Business at a golf course 50 miles from the Gulf is down 30%. Feinberg's vote: "Dubious."
BP has been paying individual claims, but many business claims have gotten stuck in a holding pattern.
That's where Feinberg comes in.
Feinberg answers to no one. There are no committees. There is no bureaucracy.
"I'm totally independent. I do not answer to the administration, nor to BP," said Feinberg at the Economic Club in D.C.
Feinberg aims to officially take over the claims process from BP by August.
Some claims are straightforward: Shrimpers can't shrimp, fishermen can't fish, and oyster harvesters can't harvest oysters because of the oil.
But in many cases, the legitimacy of a claim is debatable. For example, hotels, restaurants and bars that depend on tourist dollars have seen a drop off in sales. They say it's because of the public's perception that oil might ruin their vacation even if it hasn't reached their beach yet, but proving that isn't clear-cut.
Feinberg can lean on state and federal law to determine what is an eligible claim.
But not always. For example, real estate values and real estate brokers are being impacted by the oil spill even in places when there isn't oil on the beach.
"I am hearing from them constantly. I am not sure whether legally they have a claim," said Feinberg Wednesday in front of the House Judiciary Committee. At the same time, after numerous visits to the Gulf region, Feinberg said he is realizing "those real estate brokers make a credible argument that I have to do something to help them."
No looking back: Despite his notable Boston accent, Feinberg brings clarity and decisiveness to a region that's tired of waiting -- waiting for the oil to stop spewing, waiting for their claim checks to be paid and waiting to know just what the damage has been to their way of life.
For now, residents of the Gulf and members of Congress are thankful for Feinberg's work and reassured by his no nonsense style.
Still, Feinberg admitted that "self-doubt goes with the territory. It's a good thing just to make sure it doesn't paralyze you," he said. "At some point you make a decision. Others might make it differently. You make that decision. Move on."
Claimants also have to make tough decisions and then move on. While Feinberg says he will give out up to six month emergency payments without asking claimants to forfeit their right to sue BP, if claimants opt to settle with the fund for the long term, they'll sign away the right to sue BP.
Feinberg makes this pledge though.
"I'll be much more generous than any court would be, and at the same time, you won't need to pay lawyers and costs. So you ought to come into this program."
Thursday, July 22, 2010
Monday, July 19, 2010
CEO Traits
http://online.wsj.com/article/SB119543240896797405.html
This article in the Wall Street Journal talks about the results of a study about traits a successful CEO has. Persistance and efficiency beat out teamwork and flexibility (thought of as soft traits). It took a personal assessment of more than 300 CEOs and detailed their personality traits. The top traits being "following through on commitments, hiring Grade A players, analytical skills and setting high standards. Traits with less correlation included enthusiasm, treating people with respect, creativity, persuasion and listening skills."
I think these traits are ones you definitely want your boss to have, but the ones not ranked as high: treating people with respect and listening skills shocked me. I would have definitely thought these would have been at the top because if you dont treat your employees with respect, then how do you expect them to respect you and not having good listening skills really surprised me. How can you get to the top if you don't listen to those you work with along the way?
I just thought it was a good article that met our requirement for CEO characteristics:)
This article in the Wall Street Journal talks about the results of a study about traits a successful CEO has. Persistance and efficiency beat out teamwork and flexibility (thought of as soft traits). It took a personal assessment of more than 300 CEOs and detailed their personality traits. The top traits being "following through on commitments, hiring Grade A players, analytical skills and setting high standards. Traits with less correlation included enthusiasm, treating people with respect, creativity, persuasion and listening skills."
I think these traits are ones you definitely want your boss to have, but the ones not ranked as high: treating people with respect and listening skills shocked me. I would have definitely thought these would have been at the top because if you dont treat your employees with respect, then how do you expect them to respect you and not having good listening skills really surprised me. How can you get to the top if you don't listen to those you work with along the way?
I just thought it was a good article that met our requirement for CEO characteristics:)
Ethics in Business Schools
Here is an article I found discussing ethics in MBA programs post Enron/Worldcom and post financial crisis.
Sunday, July 18, 2010
CEO Compensation
http://www.aflcio.org/corporatewatch/paywatch/
This isn't an article but it is a website that tracks some CEO's compensation. I thought it was interesting - especially looking at the BoA's pay of 29 million dollars!!!
This isn't an article but it is a website that tracks some CEO's compensation. I thought it was interesting - especially looking at the BoA's pay of 29 million dollars!!!
Wednesday, July 14, 2010
Executive Compensation
Cracking the CEO Pay Puzzle
By Laura Vanderkam
From the March/April 2008 Issue
Filed under: Big Ideas
Why has executive compensation exploded in recent years? New York University’s Xavier Gabaix gives one answer.
Americans may be used to the rich getting richer, but the issue of CEO compensation never fails to set them fuming, especially in the post-Enron era. Since 1980, executive pay at big corporations has increased more than sixfold. According to the Corporate Library, an independent research firm, the average CEO of an S&P 500 company made $15.06 million in 2006. Late last year, the House Committee on Oversight and Government Reform held hearings on the issue. “Reports of astronomical payouts to corporate CEOs have led many to question the fairness and effectiveness of the system for setting executive pay,” said Chairman Henry Waxman (D-CA).
The furor over CEO compensation intrigued Xavier Gabaix, 36, a French-born and Harvard-trained economist who now teaches at New York University’s Stern School of Business. He and fellow Stern economist Augustin Landier decided to investigate whether corporate bosses were, in fact, “overpaid.” They tested a variety of possible explanations for the recent spike in executive rewards, and came to a conclusion that may surprise the populist scourges on Capitol Hill.
As Gabaix and Landier write in a new Quarterly Journal of Economics article, the sixfold increase in American CEO pay from 1980 to 2003 is almost wholly explained by the roughly sixfold increase in market capitalization of big U.S. companies over the same period. (Asset values have increased sixfold because both corporate earnings and the price-to-earnings ratio investors are willing to tolerate have increased by factors of 2.5.) The trend lines of market capitalization and executive payouts rose and dipped in near-perfect tandem.
According to Gabaix and Landier’s model, the talent differences among CEOs are generally minor. For example, if a given firm substituted the most talented CEO for the 250th most talented CEO, its market capitalization would only increase by 0.016 percent. But for a $500 billion company like ExxonMobil, 0.016 percent is equivalent to some $80 million. In other words, as companies get bigger, a talented CEO can have a greater impact. Therefore, large companies bid up prices across the board for the small number of men and women deemed capable of managing them. The reason CEO pay in other countries (such as Germany) tends to be lower is that the “big” companies abroad are generally smaller than the big companies in America. We do not yet have a global market for CEO talent.
Given the controversy surrounding this issue, Gabaix’s explanation for ballooning CEO pay has come under fire. He freely admits it is not a universal rule. For example, the model doesn’t work well in Japan. Gabaix reckons this is because the Japanese CEO market is relatively static, at least when compared to the more fluid and competitive U.S. market. “In Japan, you groom your CEO in-house,” he says. This means that firms need not bid up CEO salaries by competing for outside talent.
Averaged over the largest 500 companies, CEOs have not managed to systematically boost their pay during down markets. CEO pay has fallen as the market has tanked.Nor does the Gabaix model work well for the United States before 1970. Union power—which has declined steadily over the past four decades—may help explain that. Or it could be that new managerial talent glutted the U.S. market in the immediate postwar era. Or perhaps “the U.S. in the 1950s may have been like Japan is now,” Gabaix speculates, with Organization Men refusing to dart from one company to another to advance their careers. Or it could be a combination of these factors. “We don’t completely know.”
There’s also the question of folks like former Home Depot CEO Robert Nardelli, who received a whopping $210 million severance package even though Home Depot’s stock price declined under his tenure. Gabaix notes that there are always outliers. And as Enron showed, there will always be genuine corporate swindlers. Averaged over the largest 500 companies though, chief executives have not managed to systematically boost their pay during down markets. Indeed, CEO compensation fell from 2000 to 2003, as the market tanked.
Of course, it’s not just the sixfold increase in CEO pay that bothers people: it’s also that executive compensation has risen relative to that of the median worker. Critics want to know why CEOs seem to be the only ones who are benefiting from asset-price gains.
Gabaix has two answers. First, “the median worker, sadly for him or her, just manages a very small part of the economy,” he says. “The economy as a whole has not grown by that much—just 2.5 percent a year or so.” In most jobs, the stakes are very small. The head of procurement in a medium-sized business may be supremely talented—but since even an abundance of talent in that job will save the business only a small amount of money on supplies, superior talent isn’t terribly valuable.
‘People don’t really begrudge the compensation to sports stars,’ Gabaix observes. But with individual CEOs, ‘it’s harder to measure talent.’Second, it’s not just CEOs who are seeing outsized returns these days. In virtually every field where a small difference in talent translates into a big difference in profits, superstar performers have seen their compensation skyrocket. Tom Cruise may only be marginally better at his craft than a thousand actors you have never heard of—but putting Cruise in a movie will make it a blockbuster, so he’s paid accordingly. Likewise, New York Yankees third baseman Alex Rodriguez has used his impressive statistics to negotiate a mind-boggling salary.
“People don’t really begrudge the compensation to sports stars,” Gabaix observes. But with CEOs, “it’s harder to measure talent.” Their individual performance cannot be quantified with pure statistics. “Perhaps there’s more room for suspicion that they’ve put their friends on the board—that sort of thing,” adds Gabaix. All of this translates into a fierce resentment of executive pay—even though, as the Gabaix-Landier model shows, America’s CEO market is working pretty well.
Gabaix is not a free-market absolutist. “I’m completely open-minded,” he says. “I have no ideological commitment at all.” He has also done research on “shrouding”: when businesses charge annoying add-ons and fees after luring you in with a low price. While the CEO market works well, this one does not. Rather than stimulating productive competition, shrouded markets lead to a game of cat and mouse. For example, consumers bring their cell phones to hotels in order to avoid telephone charges—only to find that they’re paying a “resort fee” for use of the pool. And yet few businesses seek to compete by advertising that they have no fees or add-ons—a situation Gabaix finds fascinating, (if frustrating). “There’s always this extra x percent of the economic transaction that could be improved upon,” Gabaix says. “I’m not advocating that you should regulate that, because there’s a lot of innovation and often the regulation is too far behind.” But forcing full disclosure is “probably a good idea.”
Whatever project Gabaix tackles, there’s always a heavy dose of math involved. Indeed, he warns that he’s just relying on “weak sociology” and “liquid, fuzzy notions” whenever he’s asked to explain why his mathematical models work the way they do in real-world situations. This may explain why one of his ongoing research projects—bits of which have been published in Nature magazine—includes teaming up with physicists to crunch numbers on the origins of large stock market fluctuations. At the bottom of it all, Gabaix says, he’s just “trying to better understand the simple economic structures that govern the apparently messy world.”
By Laura Vanderkam
From the March/April 2008 Issue
Filed under: Big Ideas
Why has executive compensation exploded in recent years? New York University’s Xavier Gabaix gives one answer.
Americans may be used to the rich getting richer, but the issue of CEO compensation never fails to set them fuming, especially in the post-Enron era. Since 1980, executive pay at big corporations has increased more than sixfold. According to the Corporate Library, an independent research firm, the average CEO of an S&P 500 company made $15.06 million in 2006. Late last year, the House Committee on Oversight and Government Reform held hearings on the issue. “Reports of astronomical payouts to corporate CEOs have led many to question the fairness and effectiveness of the system for setting executive pay,” said Chairman Henry Waxman (D-CA).
The furor over CEO compensation intrigued Xavier Gabaix, 36, a French-born and Harvard-trained economist who now teaches at New York University’s Stern School of Business. He and fellow Stern economist Augustin Landier decided to investigate whether corporate bosses were, in fact, “overpaid.” They tested a variety of possible explanations for the recent spike in executive rewards, and came to a conclusion that may surprise the populist scourges on Capitol Hill.
As Gabaix and Landier write in a new Quarterly Journal of Economics article, the sixfold increase in American CEO pay from 1980 to 2003 is almost wholly explained by the roughly sixfold increase in market capitalization of big U.S. companies over the same period. (Asset values have increased sixfold because both corporate earnings and the price-to-earnings ratio investors are willing to tolerate have increased by factors of 2.5.) The trend lines of market capitalization and executive payouts rose and dipped in near-perfect tandem.
According to Gabaix and Landier’s model, the talent differences among CEOs are generally minor. For example, if a given firm substituted the most talented CEO for the 250th most talented CEO, its market capitalization would only increase by 0.016 percent. But for a $500 billion company like ExxonMobil, 0.016 percent is equivalent to some $80 million. In other words, as companies get bigger, a talented CEO can have a greater impact. Therefore, large companies bid up prices across the board for the small number of men and women deemed capable of managing them. The reason CEO pay in other countries (such as Germany) tends to be lower is that the “big” companies abroad are generally smaller than the big companies in America. We do not yet have a global market for CEO talent.
Given the controversy surrounding this issue, Gabaix’s explanation for ballooning CEO pay has come under fire. He freely admits it is not a universal rule. For example, the model doesn’t work well in Japan. Gabaix reckons this is because the Japanese CEO market is relatively static, at least when compared to the more fluid and competitive U.S. market. “In Japan, you groom your CEO in-house,” he says. This means that firms need not bid up CEO salaries by competing for outside talent.
Averaged over the largest 500 companies, CEOs have not managed to systematically boost their pay during down markets. CEO pay has fallen as the market has tanked.Nor does the Gabaix model work well for the United States before 1970. Union power—which has declined steadily over the past four decades—may help explain that. Or it could be that new managerial talent glutted the U.S. market in the immediate postwar era. Or perhaps “the U.S. in the 1950s may have been like Japan is now,” Gabaix speculates, with Organization Men refusing to dart from one company to another to advance their careers. Or it could be a combination of these factors. “We don’t completely know.”
There’s also the question of folks like former Home Depot CEO Robert Nardelli, who received a whopping $210 million severance package even though Home Depot’s stock price declined under his tenure. Gabaix notes that there are always outliers. And as Enron showed, there will always be genuine corporate swindlers. Averaged over the largest 500 companies though, chief executives have not managed to systematically boost their pay during down markets. Indeed, CEO compensation fell from 2000 to 2003, as the market tanked.
Of course, it’s not just the sixfold increase in CEO pay that bothers people: it’s also that executive compensation has risen relative to that of the median worker. Critics want to know why CEOs seem to be the only ones who are benefiting from asset-price gains.
Gabaix has two answers. First, “the median worker, sadly for him or her, just manages a very small part of the economy,” he says. “The economy as a whole has not grown by that much—just 2.5 percent a year or so.” In most jobs, the stakes are very small. The head of procurement in a medium-sized business may be supremely talented—but since even an abundance of talent in that job will save the business only a small amount of money on supplies, superior talent isn’t terribly valuable.
‘People don’t really begrudge the compensation to sports stars,’ Gabaix observes. But with individual CEOs, ‘it’s harder to measure talent.’Second, it’s not just CEOs who are seeing outsized returns these days. In virtually every field where a small difference in talent translates into a big difference in profits, superstar performers have seen their compensation skyrocket. Tom Cruise may only be marginally better at his craft than a thousand actors you have never heard of—but putting Cruise in a movie will make it a blockbuster, so he’s paid accordingly. Likewise, New York Yankees third baseman Alex Rodriguez has used his impressive statistics to negotiate a mind-boggling salary.
“People don’t really begrudge the compensation to sports stars,” Gabaix observes. But with CEOs, “it’s harder to measure talent.” Their individual performance cannot be quantified with pure statistics. “Perhaps there’s more room for suspicion that they’ve put their friends on the board—that sort of thing,” adds Gabaix. All of this translates into a fierce resentment of executive pay—even though, as the Gabaix-Landier model shows, America’s CEO market is working pretty well.
Gabaix is not a free-market absolutist. “I’m completely open-minded,” he says. “I have no ideological commitment at all.” He has also done research on “shrouding”: when businesses charge annoying add-ons and fees after luring you in with a low price. While the CEO market works well, this one does not. Rather than stimulating productive competition, shrouded markets lead to a game of cat and mouse. For example, consumers bring their cell phones to hotels in order to avoid telephone charges—only to find that they’re paying a “resort fee” for use of the pool. And yet few businesses seek to compete by advertising that they have no fees or add-ons—a situation Gabaix finds fascinating, (if frustrating). “There’s always this extra x percent of the economic transaction that could be improved upon,” Gabaix says. “I’m not advocating that you should regulate that, because there’s a lot of innovation and often the regulation is too far behind.” But forcing full disclosure is “probably a good idea.”
Whatever project Gabaix tackles, there’s always a heavy dose of math involved. Indeed, he warns that he’s just relying on “weak sociology” and “liquid, fuzzy notions” whenever he’s asked to explain why his mathematical models work the way they do in real-world situations. This may explain why one of his ongoing research projects—bits of which have been published in Nature magazine—includes teaming up with physicists to crunch numbers on the origins of large stock market fluctuations. At the bottom of it all, Gabaix says, he’s just “trying to better understand the simple economic structures that govern the apparently messy world.”
Sunday, July 4, 2010
Changing Competitive Environment
New York Times Should Charge for News, Google Too: Janet GuyonJuly 04, 2010, 3:22 PM EDT
Commentary by Janet Guyon
July 4 (Bloomberg) -- Hal Varian, the chief economist at Google Inc., spends a lot of time talking about the economic state of the news business, partly at the behest of the Federal Trade Commission, which wants to know how free online access has contributed to the financial difficulties of dozens of newspapers such as the Rocky Mountain News, Los Angeles Times and Chicago Tribune.
That Google has anything constructive to say may seem counterintuitive given that many folks who run large news organizations -- News Corp.’s Rupert Murdoch, for instance -- say that Google and its search engine are the principal cause of the declining advertising revenue at most print publications.
Varian has never run a business. His main credential in the debate is the book “Information Rules” that he wrote in 1999 with Carl Shapiro, a fellow professor at the University of California at Berkeley. In it, Varian and Shapiro apply durable business and economic rules to the Internet with particular attention to the value and pricing of information. So while he’s no newspaperman, he has given the economics of news considerable thought.
If he had to choose a newspaper to run successfully, it would either be one with a rich audience -- such as that of the New York Times -- and unique content, or the hometown paper with compelling news and local ads. “The hopeless case to me is a newspaper filled with generic, widely available content,” he said in an interview.
Both models have something in common: they sell information that’s not available elsewhere and that is targeted to a particular audience. While one source of revenue comes from advertising directed at this audience, there’s no reason why content producers shouldn’t charge consumers as well. That’s called subscription. It’s something publishers have been doing for decades.
Louis Vuitton
How much, where and when is determined by the competitive environment and how well a producer can distinguish his product in the mind of the consumer. That will be the challenge of the New York Times when it begins charging for online access next year.
“The issue is not how much people value access to a particular newspaper, but whether comparable content is available elsewhere for a cheaper price,” says Varian.
Perhaps the most brilliant practitioner of getting people to overpay in a world of cheap knockoffs is Louis Vuitton, the luxury goods maker.
Louis Vuitton never goes on sale and charges $1,000 and up for a printed, plastic-coated canvas handbag. Last year, the company recorded revenue growth of at least 10 percent. Parent LVMH Moet Hennessy Louis Vuitton SA earned almost 2 billion euros on 6.3 billion euros in revenue from fashion and leather goods purely via the allure that items sold in its shops were authentic artistic statements worth multiples more than very good copies found on the street corners of New York City.
Cable Billionaire
Why content creators, in particular newspapers, ever succumbed to the notion that they should forever give away their product online seems one of those odd, lemming-like phenomena akin to the “irrational exuberance” that preceded the dot-com stock market crash. Lured by the siren song of having an infinite audience via electronic distribution, publishers forgot that it meant infinite ad inventories whose price is rapidly approaching zero. Traffic was everything.
As John Malone, the cable television billionaire and head of Liberty Media Corp., says, “Traffic ain’t money.” Liberty’s own Internet investments have been concentrated on e-commerce sites or those with subscriptions, such as Bodybuilding.com, QVC and Right Start. “The ad-supported model has been in decline for awhile,” says Liberty CEO Greg Maffei.
The main beneficiary of all this free content on the Web has been Google, which has invented thus far the best solution to sorting information and matching it with people who want to find it. Just like the publishers, Google makes its money by selling ads next to content, except Google’s search engine is much more efficient and its content costs are zero. Facebook Inc. is next in line to do the same thing, only it’s using content that users generate.
Google Versus New York Times
This competitive advantage becomes obvious when looking at the operating margins of Google versus the New York Times Co. Google: 35 percent. New York Times: 5.4 percent, according to data compiled by Bloomberg.
It’s no wonder that Google and Facebook are suddenly courting publishers, recognizing that if news devolves into a world of screaming blogs, there will be less and less valuable content to place ads against. More worrying, perhaps publishers will decide to ask Google and Facebook to pay for access just as they do their print and Internet syndication partners. Murdoch’s London Times and Sunday Times already block Google News from aggregating content from its website. Both papers went to a pay model July 2.
Charge for Online
It is only rational that publishers are now deciding to charge online users just as they charge print customers. One might argue that if a New York Times print subscriber is willing to pay $300 a year for day-old news, the online subscriber who gets breaking news, blogs, slide shows, video, personalized stories and a slew of other advantages (how about throwing in real-time stock prices?), may be willing to pay even more.
Give that online subscriber an iPad or other electronic reader for free and you’ve got the same model that the mobile telephone operators have been using for years. New York Times executives say after two years, their subscribers are hooked for life. About 800,000 out of their 950,000 print subscribers fall into this category. If you could get them to pony up for a two- year subscription in return for an Apple Inc. iPad, that might work. Online subscription plus better ad targeting could do a lot to improve the bottom line of many newspapers. Or at least keep them in business.
Publishing, in particular the newspaper business, has always been more about gaining influence than making money. Law, banking, medicine and, these days, software development, have always been more stable and more lucrative than newspapering.
Work for Free
Journalism as a serious profession, rather than a craft, developed after World War II when economic growth created a boom in the ad business and television brought announcers into the living room. Even now, plenty of would-be writers are willing to work for free on the chance that they become famous and hit the jackpot. Few do.
My great uncle, Fred Guyon, was a reporter and editor in Oregon during the beginning of the last century. He owned a newspaper for awhile, sold it and made no money on it. He never got paid more than $45 a week, the equivalent of $30,000 a year today. He didn’t marry, had no children and “retired” in his mid-50s, spending the rest of his life ambling about town and reading French in the public library.
He died in 1981 at the age of 91 at Garber’s University Nursing Center in Eugene. The Register-Guard wrote a couple stories about him, one while he was alive, another when he died. Someone tried to get him a posthumous degree in journalism.
He left his only heir, my father, $1,282.23 in a bank checking account.
It didn’t cover the cost of the funeral.
Commentary by Janet Guyon
July 4 (Bloomberg) -- Hal Varian, the chief economist at Google Inc., spends a lot of time talking about the economic state of the news business, partly at the behest of the Federal Trade Commission, which wants to know how free online access has contributed to the financial difficulties of dozens of newspapers such as the Rocky Mountain News, Los Angeles Times and Chicago Tribune.
That Google has anything constructive to say may seem counterintuitive given that many folks who run large news organizations -- News Corp.’s Rupert Murdoch, for instance -- say that Google and its search engine are the principal cause of the declining advertising revenue at most print publications.
Varian has never run a business. His main credential in the debate is the book “Information Rules” that he wrote in 1999 with Carl Shapiro, a fellow professor at the University of California at Berkeley. In it, Varian and Shapiro apply durable business and economic rules to the Internet with particular attention to the value and pricing of information. So while he’s no newspaperman, he has given the economics of news considerable thought.
If he had to choose a newspaper to run successfully, it would either be one with a rich audience -- such as that of the New York Times -- and unique content, or the hometown paper with compelling news and local ads. “The hopeless case to me is a newspaper filled with generic, widely available content,” he said in an interview.
Both models have something in common: they sell information that’s not available elsewhere and that is targeted to a particular audience. While one source of revenue comes from advertising directed at this audience, there’s no reason why content producers shouldn’t charge consumers as well. That’s called subscription. It’s something publishers have been doing for decades.
Louis Vuitton
How much, where and when is determined by the competitive environment and how well a producer can distinguish his product in the mind of the consumer. That will be the challenge of the New York Times when it begins charging for online access next year.
“The issue is not how much people value access to a particular newspaper, but whether comparable content is available elsewhere for a cheaper price,” says Varian.
Perhaps the most brilliant practitioner of getting people to overpay in a world of cheap knockoffs is Louis Vuitton, the luxury goods maker.
Louis Vuitton never goes on sale and charges $1,000 and up for a printed, plastic-coated canvas handbag. Last year, the company recorded revenue growth of at least 10 percent. Parent LVMH Moet Hennessy Louis Vuitton SA earned almost 2 billion euros on 6.3 billion euros in revenue from fashion and leather goods purely via the allure that items sold in its shops were authentic artistic statements worth multiples more than very good copies found on the street corners of New York City.
Cable Billionaire
Why content creators, in particular newspapers, ever succumbed to the notion that they should forever give away their product online seems one of those odd, lemming-like phenomena akin to the “irrational exuberance” that preceded the dot-com stock market crash. Lured by the siren song of having an infinite audience via electronic distribution, publishers forgot that it meant infinite ad inventories whose price is rapidly approaching zero. Traffic was everything.
As John Malone, the cable television billionaire and head of Liberty Media Corp., says, “Traffic ain’t money.” Liberty’s own Internet investments have been concentrated on e-commerce sites or those with subscriptions, such as Bodybuilding.com, QVC and Right Start. “The ad-supported model has been in decline for awhile,” says Liberty CEO Greg Maffei.
The main beneficiary of all this free content on the Web has been Google, which has invented thus far the best solution to sorting information and matching it with people who want to find it. Just like the publishers, Google makes its money by selling ads next to content, except Google’s search engine is much more efficient and its content costs are zero. Facebook Inc. is next in line to do the same thing, only it’s using content that users generate.
Google Versus New York Times
This competitive advantage becomes obvious when looking at the operating margins of Google versus the New York Times Co. Google: 35 percent. New York Times: 5.4 percent, according to data compiled by Bloomberg.
It’s no wonder that Google and Facebook are suddenly courting publishers, recognizing that if news devolves into a world of screaming blogs, there will be less and less valuable content to place ads against. More worrying, perhaps publishers will decide to ask Google and Facebook to pay for access just as they do their print and Internet syndication partners. Murdoch’s London Times and Sunday Times already block Google News from aggregating content from its website. Both papers went to a pay model July 2.
Charge for Online
It is only rational that publishers are now deciding to charge online users just as they charge print customers. One might argue that if a New York Times print subscriber is willing to pay $300 a year for day-old news, the online subscriber who gets breaking news, blogs, slide shows, video, personalized stories and a slew of other advantages (how about throwing in real-time stock prices?), may be willing to pay even more.
Give that online subscriber an iPad or other electronic reader for free and you’ve got the same model that the mobile telephone operators have been using for years. New York Times executives say after two years, their subscribers are hooked for life. About 800,000 out of their 950,000 print subscribers fall into this category. If you could get them to pony up for a two- year subscription in return for an Apple Inc. iPad, that might work. Online subscription plus better ad targeting could do a lot to improve the bottom line of many newspapers. Or at least keep them in business.
Publishing, in particular the newspaper business, has always been more about gaining influence than making money. Law, banking, medicine and, these days, software development, have always been more stable and more lucrative than newspapering.
Work for Free
Journalism as a serious profession, rather than a craft, developed after World War II when economic growth created a boom in the ad business and television brought announcers into the living room. Even now, plenty of would-be writers are willing to work for free on the chance that they become famous and hit the jackpot. Few do.
My great uncle, Fred Guyon, was a reporter and editor in Oregon during the beginning of the last century. He owned a newspaper for awhile, sold it and made no money on it. He never got paid more than $45 a week, the equivalent of $30,000 a year today. He didn’t marry, had no children and “retired” in his mid-50s, spending the rest of his life ambling about town and reading French in the public library.
He died in 1981 at the age of 91 at Garber’s University Nursing Center in Eugene. The Register-Guard wrote a couple stories about him, one while he was alive, another when he died. Someone tried to get him a posthumous degree in journalism.
He left his only heir, my father, $1,282.23 in a bank checking account.
It didn’t cover the cost of the funeral.
Thursday, July 1, 2010
Netflix Business Strategy
While I was doing some research for our presentation I came across this article that I thought was kind of interesting especially considering what we're talking about this week with business strategy.
http://seekingalpha.com/article/30771-why-netflix-can-t-match-blockbuster-s-competitive-advantage
Note it was written in 2007 - its basically talking about how he sold his Netflix shares because Blockbuster had started their program where they now let you return movies to the store. This wouldn't have been really interesting in 2007 - but I like it now because Netflix responded to their changing strategy with their "Watch Instantly" feature which negated the near-instant gratification that Blockbuster was offering. This guy should have kept his Netflix stocks!
I was trying to think of any other companies that reacted so quickly to change their company strategy...and then I thought that may be a good discussion post for all of us! The only other ones I can think of didn't do so well - like Kmart trying to partner with higher end names (Martha Stewart) to save their stores.
http://seekingalpha.com/article/30771-why-netflix-can-t-match-blockbuster-s-competitive-advantage
Note it was written in 2007 - its basically talking about how he sold his Netflix shares because Blockbuster had started their program where they now let you return movies to the store. This wouldn't have been really interesting in 2007 - but I like it now because Netflix responded to their changing strategy with their "Watch Instantly" feature which negated the near-instant gratification that Blockbuster was offering. This guy should have kept his Netflix stocks!
I was trying to think of any other companies that reacted so quickly to change their company strategy...and then I thought that may be a good discussion post for all of us! The only other ones I can think of didn't do so well - like Kmart trying to partner with higher end names (Martha Stewart) to save their stores.
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