My wife pointed out after being told my argument in this post, that I've been asking to be paid in equity rather than cash for years. This is true.
I'm reminded of the difference between investing and speculating, as explained by a trader friend: if you make money it's investing, if you lose money it's speculation.
There are several points to be made here re asymmetrical risk, the nature of the firm and why certain tasks are outsourced in the first place, and the no-arbitrage theory of finance. But all I can say is that I'm glad we don't live in that alternate universe where I was unlucky. I'd never hear the end of it.
Friday, August 31, 2007
My wife pointed out after being told my argument in this post, that I've been asking to be paid in equity rather than cash for years. This is true.
Posted by Jerry Neumann at 10:49 AM
Henry Blodget, who is pretty damn smart, thinks that the mortgage mess will impact online ad spend. Worth a read.
I believe that the mortgage lenders will advertise less. But I think that means that they put their marketing dollars into buying leads. This means the lead generators advertise more. Since lead generators are too smart to buy anything but the ads that generate the highest blended ROI, this will cause a hit to the PPC media (either a drop in the CPC or a drop in volume, or both) and to the overpriced CPM media. It almost certainly means a pickup in email marketing.
Time to upgrade the spam shield, unless you're looking for a mortgage.
Posted by Jerry Neumann at 10:42 AM
Thursday, August 30, 2007
A couple of weeks ago I advised businesspeople to focus on their strengths and not get into their customers' businesses. I was thinking--because this is the situation that presents itself to me most frequently--of marketers, really good professional services people, deciding that the real money is in owning a piece of the product they are pushing.
The thinking is, if you're really good at selling a product, you get paid (essentially) by the hour while the owner of the product makes bazillions off of your marketing genius. Examples abound: Snapple, Vitamin Water, all those annoying kids' fad toys, etc.
Some marketers have come to me with the idea of buying busted brands and fixing them. Others want to be paid in equity by their clients. In my experience, it always ends in tears, either way.
The latter case is the subject of an article in the September 3 Forbes, "Squeezed: Prowling for new revenue, ad agencies are buying stakes in the brands they advertise." Advertising types asking their clients to pay with equity rather than cash.
Now anyone over the age of 24 is entirely aware that when people start to ask to be paid in illiquid equity rather than cold, hard cash, it's the biggest sell signal ever. Biggest Sell Signal Ever. Even more than the apocryphal taxi driver/shoe shinesman talking his portfolio while he works.
The article is unForbes-like in its passivity towards its subject. The penultimate paragraph has the money quote, though: Martin Sorrell says "adding equity causes all sorts of stresses and strains."
Sorrell is a piece of work, isn't he? One of the smartest men in professional services, a financier who built the second largest marketing company in the world through hard work and smarts. He doesn't really think equity causes stresses and strains. He's all about equity. What he's saying to his people is this: if the work is worth $100, get the $100 in cash; don't get $100 in illiquid equity. If the company can't sell that equity to someone else and get the $100 to pay the marketers, then it isn't worth $100, now is it? Conversely, the private equity firm that pays $100 for the equity knows how to manage the investment; the equity is worth $100 to them (but not to you.) Managing investments is a job, and being good at it is just as hard as being good at any other job. If you're good at marketing, market. And charge a fair rate and get it in cash that someone whose job is investing has put into the company.
Stresses and strains. When all the equity you've taken for your work turns out to be worth nothing, that's a formidable stress indeed.
Posted by Jerry Neumann at 9:36 PM
Wednesday, August 29, 2007
I've been viewing from afar the reactions to Mark Cuban's post about the Internet Being Dead and Boring after reading Fred Wilson's opinion to the contrary. I didn't really have much to say about this, and I sort of agreed with Fred and hated saying so because I'm jealous that he got to see Wilco play at the Warsaw and I didn't. Then I read this, in Advancing Knowledge and the Knowledge Economy, and thought it might be worth pointing out:
The complementarities between the invention of new [information and communication technologies] and the coinvention of applications inject a dynamic feedback loop in which advances to ICTs lead to unpredictable inventions in applications, which in turn raise the return to improvement in ICTs.Dominique Foray, the author of the chapter quoted--"Optimizing the Use of Knowledge"--goes on to point out the externalities generated by this feedback loop: falling investment costs due to user learning, and improvements in the technology by suppliers investing further in a winning product. Foray then says:
The coinvention of the related applications takes time! This is why the first episode of the "new economy" was characterized by productivity growth limited to the producer sector (the computer industry) prior to its impact on the many user sectors.This is obviously more true today than it was when he wrote it a couple of years ago. It's also an interesting place to stand when looking at Wilson and Cuban's disagreement. Cuban talks about the internet as if it were the technologies, and these are not growing nearly as quickly in functionality as they had been. Wilson looks at the internet as the applications, and the experimentation and growth happening in applications is phenomenal.
Maybe they are both correct. But Wilson's point of view is more interesting because the growth in applications signals future growth in productivity in all parts of the economy, not just the computer/telecom industry. This, in its dynamic feedback turn, means that technology suppliers will eventually re-up their investment in the technology infrastructure, causing the continued improvement that Cuban misses so much.
So maybe both of them are correct today. But I'm guessing that five years from now Wilson will still be right, and Cuban will have become wrong.
Posted by Jerry Neumann at 3:44 PM
Tuesday, August 28, 2007
People keep asking me what I think happens to the mortgage lead generation business in the long-anticipated chaos that is the mortgage business today. For those of you living in bubbles (how's the resale price of those holding up, btw?) the mortgage lead gen business has made plenty of hay in the last few years catering to the scramble by lenders to find high fee subprime and refinance mortgagees.
Now what? Subprime and refi were the leads that lenders paid the big money for. If subprime becomes the redheaded stepchild and casual refi can't generate quick homeowner cash like it used to, what happens to the lead generators?
This is a tough question. One the one hand, lenders need to continue to lend, that's what they do. If they have a harder time finding customers, they'll be willing to pay more for leads, benefiting the lead generators. On the other hand, generating leads in an environment where prospective customers are licking their overdrawn wounds becomes more expensive.
Couple this with the already small gross margin and the effects are difficult to predict. I assume the smaller players will exit the market or redirect their energies to lead gen categories that will prosper in this environment (lower profile subprime loans, for instance, credit repair, personal bankruptcy lawyers.) Even so, if the overall demand for online ad inventory doesn't go down, then the cost of generating a lead inevitably rises because click-through rates go down. So which rises more: the cost of generating the lead or the price that the lender is willing to pay?
I'm betting on the latter. I have several reasons to believe this, but I'm going to point, instead, to a document filed by LendingTree.com with the SEC when they were going through the process of their sale to USAI back in 2003. Look at page 31, where they show the results of various interest rate environments.
The conclusion? When interest rates were rising in Q2 2002, a difficult environment to sell mortgages in, the number of leads available for sale almost halved, just as we would have predicted. But, the percentage of these leads that were purchased by lenders grew from 50% to 83%, also as we would have predicted. The thing that threw them over the top, though? Keep in mind that a mortgage lead can be sold up to four times (no particularly compelling reason, it's just industry standard). The average number of times that each sold lead was sold rose from 2.1 to 3.1 times.
So, if you multiply these contrarily changing factors, all else being equal (ok, ok, I didn't verify that all else was equal--pari passu, you know, harumph--but I'm pretending to be an economist) the number of units sold went from 104 to 143 as the mortgage marketing environment got worse. This does not even take into account that LendingTree could charge more for each sold unit (I don't know that they did, but they could have, I suspect, without lowering the times sold per lead.)
What, you say? How could this be?
It may seem counterintuitive, but it's not. Here's the bottom line: when mortgage companies had a tough marketing environment, they outsourced their marketing to a company that specialized in marketing mortgages. That's just good business. And if it was good business then, I believe it will be good business now.
Posted by Jerry Neumann at 3:59 PM
Monday, August 27, 2007
My friend Greg Yardley asks "What happens ... if due to the increased effectiveness of targeted advertising, we all experience a sudden uptick in the things we want?"
It's an interesting question. First, let's stipulate that no one has any more money to spend than they already do (the Bureau of Economic Analysis shows the personal savings rate at less than 1% of disposable income... not much for marketers to fight over.) We also have to note that having too many choices causes consumers to make suboptimal choices, a theory popularized in books like The Paradox of Choice (or, if you prefer, as I do, by Devo: "In ancient Rome there was a poem/About a dog who found two bones/He picked at one/He licked the other/He went in circles/He dropped dead.")
Clearly, if targeted marketing gets really good, we'll be alerted to more products that we really want but can't afford. One result will be that we replace products we almost wanted with products we really did (in Greg's example, we'll get the chocolate covered bacon burger instead of the suboptimal caramel covered bacon burger. Or vice versa in my case.) Another result will be that we'll be unhappy ("Look at all the things I can't afford. Waah.")
But in the spirit of advancing the Science of Marketing, what's the best path for these advances to take? What moves us forward at the highest speed?
Let's talk about this paradox of choice/behavioral economics bunkum. I prefer to think of the problem of too many choices as an information cost problem, not a my-poor-brain-is-too-small-please-make-my-choices-for-me problem. In the words of X: "there are seven kinds of Coke/500 kinds of cigarettes/This freedom of choice in the USA drives everybody crazy." (woohoo, this Amazon.com associate thing could turn out to be a firehose of earnings!) Comparing two products is relatively easy, comparing 500 kinds of cigarettes is impossible without some sort of tool. Given the difficulty of deciding between Kools and, I don't know, Salem Lights, I think many people just throw up their hands and walk away. Or they just go with the biggest brand, the Marlboros (do you want the hard pack or the soft pack?) It's easy to explain suboptimal results from too much choice as a cost of search.
This dovetails with the problem of not being able to afford more than we consume already. We have too many choices, we need to decide what to buy and which brand of those things to buy. How do we maximize our spending utility?
Clearly, comparison tools are one solution. But there's not many tools out there except for ones around big-ticket items like cars, or ones that are internal to a brand (i.e. do you want this Dell or that Dell.) And what is out there isn't so easy to use. I'd be curious to know why this is. Regardless, I think it's clear that consumers' desire to maximize spending utility, coupled with the shrinking cost of searching for product information, will cause people to rely much more heavily on finding the products they want themselves, rather than waiting to hear some marketer's pitch.
My theory is that consumer-driven product search is what will flip marketing from being a shotgun used by marketers to being a tweezer used by consumers. We know the general outlines of what we need and want and how much expendable income we have (more or less.) We will, more and more, search for the type of thing they want rather than be told. What happens then and how should marketers respond?
I was emailing a friend about sea-kayaking the other day. Gmail started showing me various ads targeted to the keyword kayak. I ignored them all. Instead, I searched for sea-kayaking and looked for a site that could recommend trips. I don't trust the ads, I trust the sites that don't advertise. I trust the enthusiast sites, the user-driven content, the blogs from people who have actually been there. How can a marketer reach me?
Traditionally marketers have done PR, paid for product placement, given away free product, let journalists have an advance look. All for the understood quid pro quo of rave reviews (how many test drive invitations do you think a journalist would get after a pan?) Aside from consumers having become quite cynical about this (at least in my imagination), this is no longer viable: you can't give a free kayaking trip to the writer of every sea-kayaking blog. So what do you do now?
Here's what I would do: give all the information anyone could possibly need to compare your product to others away. For free (as in speech, not beer.) If you're a car manufacturer, create an open API to your database of car specification. Cooperate to make the data fields standard across the industry. Put up a library of photos and videos that anyone can put on their site in any way they choose (they won't put them up otherwise, bloggers hate being manipulated.) Let every blogger easily compare your new car to any other new car, or old car for that matter. The fact is, a blogger who runs a Mustang enthusiast site is only going to savage your new Mustang if it really sucks. If you believe your product is at all competitive, even if only on its own terms, then make it easy for the new media to judge it on its merits.
My grandfather, a notable curmudgeon, once said that marketing is the art of getting people to buy things they do not want. Perhaps it was. That strategy will no longer work. Targeted marketing will eat itself.
Posted by Jerry Neumann at 12:52 PM
Friday, August 24, 2007
I was having lunch yesterday with Candice and Josh G. (I have to mention it's Josh G, because if it were Josh R the conversation would have been shorter and more definitive.) Candice brought up a company she knew that was building a marketplace for a certain type of information. The plan is to auction the information. We had a long discussion over whether this would work, after I asked if auctioning a non-rival good was the most efficient solution. I'm sure there's an analytical answer to this question, but that isn't my point here (although I'd be curious for any pointers to research, as always.) The interesting thing is that we could have the conversation at all. As all of you know, I'm an economics geek, but Candice and Josh aren't, and we're all primarily businesspeople.
I think it's fair to say that everyone who is reading this could have had that conversation, in some form. That's easy to say because there aren't that many of you, but I think it's also fair to say that 99% of the hundreds of people I have worked with in the past five years could have and would have been interested in having a conversation on this point. We're all steeped in information economics, it's become second nature to us.
It's been interesting for me to think about information products in a business context. When I went to business school, there were almost no information products. Music was a physical product, news was a physical product (unless you worked at an investment bank), etc. The few information products at the time (stock price information, sports scores, direct mail lists) were insignificant in the scheme of things.
I'm not going to argue the point that this is no longer true. It is, or it soon will be, depending on how you define significance. I like to apply standard economic thinking to information products. Write out the formulas and then drive the variable representing the cost of information transfer to zero and see what happens. As I've mentioned previously, marketing changes completely, for one thing. The media industry changes completely. Any industry that depends on innovation changes completely.
Information economics drives several other 'economics': the Attention Economy, the Entertainment Economy, etc. It drives them in the same way that physics drives chemistry or biology: in a fundamental but not very useful in practice sort of way.
I've been reading Advancing Knowledge and the Knowledge Economy edited by Brian Kahin and Dominique Foray. I'm finding Knowledge Economics a much more useful framework for dealing with the issues I'm sorting through. I'm going to be blogging about the essays in this book quite a bit in the next few weeks as I work through it.
Posted by Jerry Neumann at 1:14 PM
Thursday, August 23, 2007
NEW YORK (Reuters) - Citigroup, Bank of America Corp. and three other top banks took the rare step of borrowing more than $2 billion total from the U.S. Federal Reserve ... in a bid to reassure markets and remove the stigma of getting short-term financing from the central bank...Translation: the Fed asked us to borrow from the discount window so people won't worry when banks do. But we want you to know we're just doing them a favor, because if we had to borrow from the Fed, you would be right to worry.
Borrowing money directly from the Fed has historically been seen as a sign of weakness, but Bank of America, Germany's Deutsche Bank JPMorgan Chase & Co, and Wachovia Corp said they did it for the sake of the financial system. All five banks emphasized they have access to other, cheaper funds.
Posted by Jerry Neumann at 10:54 AM
Wednesday, August 15, 2007
Yesterday's Wall Street Journal had an article titled "Hot Online Marketing Niche Cools Fast" about the Valueclick earnings miss. Aside from proving my point about the NY Post being the only source of business news (their vastly similar article was published more than two weeks ago), the article tars everyone in the industry with the "incentive marketing" brush. Then it says:
...marketers [are] questioning the effectiveness of getting names through incentive offers--realizing these consumers want the prize and often have little interest in the marketer's product...Do you think that marketers ever thought these people wanted their products? Of course not. They either:
- did not know how the leads were being generated;
- were paying almost nothing for the leads, so on a cost-per-sale basis the leads were still cheap; or,
- were paying on a cost-per-sale basis.
If you could track your ROI and back into a cost-per-sale, then this whole brou-ha-ha becomes an opportunity. You could arbitrage the low-and-going-lower price of incentivized leads (and affiliate leads, which are cheap for a different, but related, reason) by buying more of them for less. For some products you don't care so much if you buy a lead for $20 and convert to a sale at a 5% rate or buy a lead for $2 and convert at a 0.5% rate (as long as the sale process itself isn't a cost: if you have to pick up the phone and call every lead, then that has to be factored in.)
Alternatively, and in the spirit of Monday's heuristic: buy low-cost leads, go one step down the process (by, for instance, calling the lead, having the lead fill out an application or otherwise verifying intent) and then sell the resulting better-quality leads. If you are relatively good at discriminating between just-bad and really-horrible batches of leads and can figure out how to weed the few good from the mass of bad leads cheaply, you can reap the arbitrage profits without a lot of fuss. Unlike most businesses, this is just a math problem.
Posted by Jerry Neumann at 1:49 PM
Tuesday, August 14, 2007
I know everyone else is pointing to Dan Lyon's stupid article about bloggers now that he's been unmasked as Fake Steve Jobs. Personally, I think it's an unusual coincidence that the Forbes writer I associate most with being a cheerleader for SCO's ridiculous legal shakedown of Linux vendors has managed to change the subject just when a judge finally determines that SCO has absolutely no case.
It's not a bad career strategy to take a gamble on a contrarian position: if you're right you look like a genius and get rewarded for it, if you're wrong you look like someone who would push an unfounded idea for potential personal gain despite the harm it might do to your company, colleagues or customers, and you get dinged or maybe quietly fired. The upside is often more personally rewarding than the downside.
In journalism it seems that the price for being wrong when you take sides on a story you just don't know enough about to know who is right is... nothing. No wonder our business press is so freakin bad.
Instead of taking Lyons to task for being so wrong on the SCO story (and, no doubt, convincing some readers of Forbes to put their money into SCOX; look at the five year chart and check out the price when the Lyons story was published--about $12 per share--and the price at open today--$0.40... yes, 40 cents.) Lyons will, instead, reap the benefit of the media's short management attention span.
Posted by Jerry Neumann at 12:14 PM
Monday, August 13, 2007
I am back from vacation and was immediately immersed in work (why did I write that in the passive voice? Hmm.) I'm too scatterbrained from sun and sea to really write anything, so I'm taking the lazy man's way out. The Heuristic of the Day.
Well, at least it's not as lazy as the quote of the day. (Which, btw, is "if you can't solve a problem, make it bigger." My morning meeting attributed it to Eisenhower. I believe it was recently uttered by Donald Rumsfeld. Regardless, sheer genius. Of course, I just use it in my personal life, not in international relations. I'm not sure how wise it is in international relations. Actually, it hasn't worked so well in my personal life, either, but I still think it's genius.)
In my life as venture capitalist, I had several rules of thumb. I liked to think of them as primary drivers and limitations of business change, but same difference. Here's one on market evolution.
As markets get bigger, companies that specialize in each piece of a process chain replace end-to-end players.There are a lot of reasons for this and a complete proof (such as it is in economics) would have to take into account the rationale for the firm itself, the economics of the knowledge economy and producer-consumer learning, etc. But the easy reason is that you can be better at something if it is all you do.
Well, duh, you say. Isn't that the theory that made Adam Smith famous, when applied to pins? Yes it is, grasshopper. I didn't say I made them up, I just said I used them.
But, you know, it's something that entrepreneurs forget all the time. After a while I got tired of successful entrepreneurs--especially marketing entrepreneurs--thinking that because they've become good at one thing (marketing, that is) they should immediately branch out into their customers' business. The old "I've sold a lot of soda for that guy, so maybe I should get into the soda business." We've all heard it, and it's a seductive idea. If you provide a product you want to provide a service also, if you provide a service, you want to provide a product also.
Sometimes it works. Everyone has a success story to point to. I've never seen it work, personally, and I've seen lots of people try it, but that's me. It just seems to me that if you're really good at something, the best business strategy is to do more of that.
Posted by Jerry Neumann at 1:56 PM