I'm kind of busy right now, so blog posts will be a little shorter and further between.
The Insider counts the reported drop in new home sales to mean that Google will suffer. They haven't drawn a clear line from A to Z, but whatever.
Brad De Long puts up a graph putting this decline in perspective.
What does it mean? I don't know. But that's kinda the point.
Interestingly, I think Blodget believes that the decline in new home sales means there will be a recession that will impact consumer spending and thus the companies that market to them who will respond by cutting online advertising spend. While this is a rather long train of speculation to support, I'm personally more worried about the car immediately following the locomotive: that recession thing. That seems like a more interesting topic than Google's growth slowing from a gazillion percent a year to a bazillion percent a year.
Friday, September 28, 2007
I'm kind of busy right now, so blog posts will be a little shorter and further between.
Posted by Jerry Neumann at 11:40 AM
Wednesday, September 26, 2007
Here's a second-hand rumor that Apollo Group acquired Adteractive.
If what I knew of Adteractive is still remotely true, the acquisition would be material to Apollo and have to be disclosed. Nothing on Edgar to date. They disclosed a month or so ago that they were acquiring Aptimus for $48 million. Adteractive would go for more than that, unless they've seriously imploded.
Posted by Jerry Neumann at 2:40 PM
Fred Wilson blogs his opinion on whether VCs should blog. The answer is somewhat self-evident, but his post is interesting reading, as always.
He quotes one Boston-area VC saying, essentially, that he's not giving away his hard-earned knowledge to anyone other than portfolio companies and potential portfolio companies. Fred thinks that intellectual property should be shared, out in the open.
I agree. I think there are two types of people: those who need to hoard the knowledge they have because they aren't getting new knowledge fast enough and those who can give away what they have because they are learning or generating new knowledge so quickly. Fred is clearly one of the latter. I think we should all aspire to be one of the latter.
As an aside, when I was a VC I found that what I learned had a very short halflife. I tried to give it away as quickly as possible because in a few weeks or months, it would become worthless. As I said here, yesterday's idea is yesterday's idea. The best way for a VC to keep the startup machinery healthy (and thus keep themselves in companies to fund) is to let entrepreneurs know what the current thinking is so they can come up with something entirely new. I doubt Fred shares intellectual property because he's an altruist: I think he wants to help people think of new ideas so that he continues to have plenty of investment opportunities. That's good business.
Posted by Jerry Neumann at 1:00 PM
Tuesday, September 25, 2007
Jay Weintraub--one of the few really knowledgeable people willing to write frankly about lead gen--writes about payday loan and subprime credit card lead gen. A pretty dense read, but information you'd otherwise have to spend a year and several hundred thousand dollars of misdirected email and mispriced offers to learn.
Posted by Jerry Neumann at 9:44 AM
Monday, September 24, 2007
I'm not going to write about the mortgage market anymore (after this that is.) I'm not really interested in the mortgage market, I'm only interested in the marketing. I write about mortgages so much because mortgage lead gen and new car lead gen were the canaries in the coal mine for online lead generation and they remain the two most mature lead gen verticals.
That said, something about the reporting on the subprime mortgage market jitters kept bothering me. Holders of mortgage debt are having financial problems because some of that debt looks to be going bad. But what does this have to do with the underlying business of mortgage lending?
Here is some data on mortgage applications from the Mortgage Bankers Association. First, applications for purchase mortgages:
Note that the y-axis is clipped, showing 90 to 130 of this seasonally adjusted index (week of 1/2/2003 equals 100.) You'll notice that purchase mortgage applications peaked about two years ago, bottomed out a year ago and have been generally climbing since.
Aside from the madness that was Spring 2003, applications have been generally climbing since beginning of 2006.
There does not seem to be a link between people defaulting on their subprime mortgages and mortgage applications, these two things are probably mostly disjoint.
My point is that mortgage originators are not having any trouble finding customers today that they didn't have in the first half of the year: there are just as many--if not more--applications. Lenders may not be accepting as many applications as they were, but the "end-customer pool" does not seem to be "drying up", as claimed in this Barron's article.
Posted by Jerry Neumann at 6:06 PM
The Insider points to a Barron's story about the effect on Google of the sub-prime mortgage bubble popping. I feel like I'm
beating a dead horse feeding a full horse here, but here are some quotes from the Barron's article--the meat of the article was an interview with a hedge fund manager, who we should not presume to be objective--and my thoughts.
It's hard to argue with his logic.Oh, pshaw.
For loyal advertisers still open for business, it only makes sense for them to slash their ad budgets as their revenues slide because of industry woes.That's the old "if you can't defend it, call it obvious" trick. Why does it make sense to slash ad budgets when revenues slide because of industry woes? If the woes were customer woes, perhaps. If the woes were operational woes, perhaps. But "industry" woes? Isn't that when you want to increase ad expenditures and grab market share?
On top of that, the going rates in key-word auctions are plunging because there are fewer eager bidders. Thus, the prices Google fetches for paid search are probably declining, especially as fewer Internet leads turn into actual transactions, the hedge-fund manager says.Mortgage related keyword prices are not plunging, according to SEM specialists Reprise. Conversion rates on leads are not plunging, according to lead management specialists Kaleidico.
According to the fund manager's back-of-the envelope estimates, it could be costing some major lenders who spend millions on paid-search more than $10,000 for every lead that results in a closed loan -- an expensive marketing program. "The math doesn't work," he insists.
Where the heck did he get those numbers? I talked about this already: average cost to close a loan coming from internet marketing was $1,958 in 2006 (according to Fannie Mae.) The cost for online lead gen is, I estimate, more like half that. So this hedge fund guy is saying that close rates for people who have filled out a form with lots of personal information have been cut by 90% over the course of a few months.Now, while this may have been true for a week or so in the midst of all the panicky coverage of the sub-prime "meltdown", I refuse to believe this is the new reality. Things change, but they don't change that quickly that fast when it comes to consumer behavior.
If he isn't pulling these numbers out of a hat then he's talking to originators who buy keywords for branding, not for ROI-driven customer acquisition. Those lenders pay indiscrimate prices and don't know how to drive from click to close. They were paying $10,000 for a customer a year ago and are paying close to the same now. Those companies will stop buying keywords and start buying leads, leaving the lead gen to the professionals.
Even if the ad cost per loan application is lower, the end-customer pool is drying up. The customers generated by Web ads are people who won't be able to afford homes under tighter credit and won't be able to refinance after having tossed their house keys back to the banks.A font of misdirection! The customers generated by web ads often are sub-prime because those are the leads the originators wanted to buy. Purchase leads, the majority of leads generated went begging. So, if mortgage originators decide that if there is no more sub-prime business they're just going to take their call center and go home, then web ads will follow. If, on the other hand, they suck it up and start pitching purchase mortgages again, then web ads are still an excellent business to be in.
There are a lot of moving pieces here, but it pays to start with reality when trying to see what the future holds.
Posted by Jerry Neumann at 9:22 AM
Friday, September 21, 2007
A month ago I took Forbes and Dan Lyons (aka Fake Steve Jobs) to task for his articles about SCO that turned out to be profoundly misguided.
To his credit, he has admitted that he got it wrong. I admire him for that.
The part that still bothers me is that his apology is "I got it wrong." Reporters are supposed to report, aren't they? While Lyons might be off the hook for me, I still wonder why Forbes feels the need to be a journal of opinion rather than reporting.
Posted by Jerry Neumann at 3:49 PM
Just yesterday I said I was going to try and write less. I am going to try, but I'm telling you now that I'm going to be unsuccessful.
This Nielsen report on first half 2007 advertising spend is full of interesting conundrums! For instance, it reports that H1-07 ad spend is down 0.5% from H1-06, but that spend at the top ten advertisers is down 7.3%. That means (using conservative assumptions) that the rest of the advertisers actually increased their aggregate ad spend by 0.4%. Who benefits from advertising dollars going up at small advertisers? Search, perhaps?
Another conundrum: if you take out the auto manufacturers, ad spend increased. This is interesting because, by my calculations, US auto sales fell by 2.2% in H1-07 compared to H1-06. Historically this would have meant an increase in auto advertising. Perhaps the auto manufacturers' CMOs were a little slow on the uptake, or perhaps not.
The hard part of all this for me is that this report is about advertising spend in major media, not marketing spend by companies. Lead purchases would not show up in this. Direct marketing does not show up. My argument--that marketers will move dollars from non-accountable advertising to more accountable marketing, like lead gen--is neither supported nor contradicted by this data. I would love to see total marketing spend across the US economy (or even a representative subsector, like public companies) from H1-06 and H1-07. Anyone have that data?
Posted by Jerry Neumann at 9:47 AM
Read in the Post this morning that Nielsen reports that advertising spend decreased in the first half of 2007 compared to the first half of 2006. Is the dreaded advertising recession upon us?
Who cares? While overall ad spend was down 0.5% in the first half, online advertising was up 23%. Twenty-three percent? 23%. That's a lot.
Blodget's take is that the sky may still fall: "we still question how long this strength can continue if the overall pool of ad dollars shrinks..." Sorry to tell you Henry, but the overall pool just did shrink... and online grew like wildfire.
In reality, both Blodget's and my arguments are completely unaffected by this report. We had no economic turbulence in the first half to speak of. Why did ad dollars go down? I doubt anybody knows, but I'm guessing it has to do with the 50% of variability that has nothing to do with overall GDP growth. I'm in the process of building a ginormous spreadsheet with all available economic data from 1900 to today. Then I'll start doing statistical analysis to find the real drivers of ad spend growth or decline. I expect--when I'm done in five or six years--to be able to answer this question.
The really surprising thing in this report, to me, is that spend in national magazines grew by 8.4% while local magazines fell by 5.2%. What's up with that?
Posted by Jerry Neumann at 9:21 AM
Thursday, September 20, 2007
There used to be an idea that to understand something you had to try and do it. I think this is true: it's impossible to understand the beauty of a pencil sketch hanging in the Met unless you've taken pencil in hand and tried to sketch something yourself. What I have usually learned from this type of activity is that doing something that looks easy well is often incredibly difficult.
I've been blogging for two months today. My initial fears--that I wouldn't have enough to write about--have faded. In fact, I'm no longer quite sure how I could possibly have thought that. My problem, I think, is quite the opposite: I write too much.
Yesterday, Henrik Torstensson saw one of my posts and blogged about it (why, I don't know, it was one of worst posts I think.) His comment was short; he simply said what needed to be said and that was it. I guess that's why he's Sweden's top blogger. He's my new role model.
So, here are my goals for the next two months:
- More graphs, fewer numbers;
- More conversation, less oratory;
Posted by Jerry Neumann at 12:40 PM
Wednesday, September 19, 2007
The Insider says that
Unlike those who argue that Google's magical business will accelerate in a recession as advertisers spend only where they know they will get a great ROI, we think Google's growth will be hit by economic weakness...Oh, Henry, who's arguing? This is just cocktail chatter. Without the cocktails, unfortunately.
Seriously, this is a really interesting question: what are the drivers of advertising spend? Certainly GDP growth and growth in advertising expenditures are correlated. The correlation is about 0.5 since the end of World War II, according to this data. (I wonder if the correlated part is the allegorical half that's wasted...) So an economic recession would often coincide with an advertising recession. But what's the mechanism for that decline? Decline in CPMs or decline in users of media? That is, is it driven by marketing departments or consumers? Is the decline caused by the economic decline, or are they both caused by some third thing? I can't answer these. I need a lot more data.
And there isn't a lot because advertising recessions are unusual. There have been only three since 1945, in nominal terms: in 1961 (decrease of 0.8% from the previous year), 1991 (-1.6%) and 2001 (-4.9%). Clearly the last one was the most significant: it was the disappearance of the dot-com spending. (If you hadn't had 2000's stupendous growth in dot-com related advertising there would have been no decline when it disappeared.) But yes, if there's a recession, we may have another ad recession.
Everybody gets hurt in an ad recession, but not equally. According to Piper Jaffray's research (sorry, no link), 2001 saw a fall-off in advertising expenditures of 6.7% from 2000 (why can't these people get together and agree on their numbers!) The loss in spend was not evenly distributed. In 2001 direct mail and yellow pages advertising did not decline. TV was hit the worst, magazines second, internet third, then newspaper and radio.
Accountable and local advertising did not decline during the worst ad recession since 1938. Why? Because businesses still need customers; they're just not willing to take as much risk.
The riskiness of forms of advertising--and by riskiness I mean the variance of cost to acquire a customer--in decreasing order, is:
- Buying a spot with no metrics
- Buying a measurable impression
- Buying a click or call
- Buying a lead or action
- Buying a customer
But there aren't many ways to buy a customer yet, so the money can't reach up that far. Buying leads and buying actions will benefit the most, growth-wise, but off a small base. I think perhaps Google benefits the most, dollar-wise.
When I say "benefits the most" I mean, of course, "gets hurt the least." Ad recessions hit all players to some extent. If there is one, Google will grow more slowly than they would have otherwise, but they will still grow.
[BTW, I am not advocating buying Google stock. In my opinion--which is worth what you're paying for it--Google is wildly overvalued, ad recession or not.]
Posted by Jerry Neumann at 5:09 PM
Tuesday, September 18, 2007
AdWeek has an article summarizing findings from a McKinsey study on online marketing. The question posed to a bunch of marketing execs who market online was, essentially, why aren't you marketing more online?
- 52%: insufficient metrics to measure impact;
- 41%: insufficient in-house capabilities;
- 33%: the difficulty of convincing management;
- 24%: limited reach of digital tools;
- 18%: insufficient capabilities at agency.
From the article:
...although a majority ... find online vehicles to be more efficient than traditional advertising, the relative newness of the medium and its still developing benchmark data make it a hard sell internally to bosses who demand accountability... the multiplicity of online channels can make it difficult to isolate what's working and what's not...I agree it's more efficient, but not accountable? The beauty of online versus most other media is that you can isolate what's working and what's not. Is TV accountable? Newspaper? Radio? This is truly an odd survey and frankly, I can't make sense of the results. Am I missing something? Do I just not get it?
My opinion? To coin a phrase, online advertising is clearly the worst form of marketing, except all the others that have been tried from time to time.
Here's an alternative survey.
You aren't increasing your online advertising spend because:
- Janice, could you print out my email for me to read, please?
- Do you mind closing the door? I'm working on my putting.
- That's not going to impress my buddies at halftime during the Superbowl.
- Accountability? You trying to get me fired?
McKinsey, feel free.
Posted by Jerry Neumann at 1:18 PM
Fred Wilson is worried. He thinks that the internet industry is headed for a rough patch. He says this is a gut feeling, but coming from Fred a gut feeling can't be discounted.
I agree with Fred about the cyclicality of the venture industry. Startups start, get funded and get traction. Imitators follow. At some point, the best few in each category go public or are acquired, most of the rest fail or go sideways. This has started.
In the past month I've had many people approach me about starting companies much like those recently acquired. These entrepreneurs are looking at recent exit valuations. But the opportunity is gone. Being part of the first wave is usually pretty critical. If you're not, then you can't just compete with the early companies, you need to displace them. This requires a revolutionary change in product, not just improvement.
When startups fail, they tend to fail in tranches, soon after the choice few are acquired or go public. This is not driven by the larger economy, it's driven by the disappearance of exit opportunities, and thus funding, for these money-losing firms.
In a nutshell, here's what is and will be happening:
- Large companies can't see where growth in their core businesses is going to come from;
- They invest in the best of the entrepreneurial ventures, paying whatever it takes, hoping to create growth;
- Other entrepreneurs see the crazy valuations and start me-too companies;
- After a year or so, the acquirors realize they overpaid;
- Both the companies that weren't acquired in the first go-round and the me-too companies find no buyers;
- Investors, realizing that valuations will not be what they hoped, either fold or offer down rounds, effectively killing off the company;
- Meanwhile, entrepreneurs that are focussed on disrupting the way things are done rather than on a quick exit are starting companies that will be the Tacodas of2012.
If you start something I haven't even thought of, then you've got a shot.
Posted by Jerry Neumann at 9:31 AM
Monday, September 17, 2007
Today MacMall delivered me a new MacBook Pro. It is a brick. Won't boot, right out of the box. I called MacMall. They told me it is Apple's problem, not theirs, they're just a reseller. After complaining vociferously for half an hour, they agreed to repair it. So now I get a refurbished computer for the price of a new one. They refused to replace it, they refused to let me return it.
Their rationale? I quote:
If you asked a friend to buy something for you in a foreign country and they brought it back and it didn't work, would you blame your friend?Dear MacMall, I am not your friend. I am a customer. Don't pretend that you are doing me a favor by selling me a computer.
Maybe I've been spoiled by companies that actually care about their customers, like Amazon.com, who--the few times I have had problems--ships me a new product before they even receive the defective one back. That's why I've been a loyal Amazon.com customer for twelve years.
Absent the "customer service" people getting a clue, I'll never buy from MacMall again.
Posted by Jerry Neumann at 3:46 PM
I was thinking about Bill Rice's point that not all mortgage originator cost cutting is cuts to revenue generation capacity and some data that Josh Reich sent me a couple of weeks ago popped into my head.
Below is a chart of relative volume of a couple of Countrywide's origination sources: retail and correspondent originations from July 2006 to July 2007. Retail originations stayed between 31% and 35% of all originations while correspondent originations rose from 38% to 49%.
Why? Maybe Fannie Mae's Mortgage Focus 2006 Executive Summary's analysis of costs of origination suggest the answer (sorry, I don't have a link to the actual document.) Average cost to originate a closed loan in 2006 for the retail channel: $3,581. For the correspondent channel: $2,512. The industry is moving to cheaper ways to originate loans.
My point? The average cost to originate a closed loan for the internet/call center channel was a paltry $1,958. I have good reason to believe that the cheapest sub-sector of internet/call center is lead generation (versus, say, the lender's own site.) As lenders try to originate ever more cheaply in this difficult earnings environment, the most rational way to do it would be to direct more resources to buying leads.
Posted by Jerry Neumann at 12:46 PM
Bill Rice took his sweet time to weigh in on what the mortgage mess will do to online advertising. But I'm glad he did, because his opinion is well reasoned, supported by data, and clearly written (a refreshing change for readers of this blog, no doubt.)
And I'm not just saying that because I agree with him.
Posted by Jerry Neumann at 12:06 PM
Saturday, September 15, 2007
It's the weekend and the baby is napping, so let's talk about something different.
An old friend of mine told me an even older story recently. I'll let her tell her version of the story when she starts her blog. Here's the one I tell my children.
Once upon a time there was a tribe of people who lived near the ocean. Everybody in the tribe liked to give the things they had to other people. They weren't afraid to give away things because they knew that everyone else in the tribe liked to give gifts also, so no one would ever end up with nothing, no matter how much they gave. The people who gave the most away were the people that everyone else looked up to, so everyone worked hard to produce more to give away. Sometimes there would be gigantic parties where someone would give away absolutely everything he owned.
Then outsiders arrived and saw this custom that was so different from theirs. Their custom was to keep what you earned from your own labor and only give it up in exchange for something of equal value. They decided the tribe's custom was worthless. They called it demonic and then outlawed it. The tribe sank into poverty.
My friend's version, which sounds like the Nigerian version of this tale, via the Girl Scouts, has a happy ending. Mine doesn't. But mine has the virtue of being historical. Several tribes in the Pacific Northwest practiced some version of a gift economy before the custom was outlawed in 1885 after protests by missionaries.
Gift economies are interesting. Capitalists argue that without markets there is no motivation to produce. In a gift economy the motivation is status, not goods and status often has more utility than goods. The fatal objection to gift economies is that they do not allocate resources well. This is hard to argue with: it is difficult enough to maximize your own utility, directing your production to maximize the utility of a group is harder. As the group grows, it becomes unwieldy or impossible. The feedback on production in a gift economy ("how happy were they to receive my gift?") is less direct or timely than the feedback in a market economy (price.)
Because of this lack of timely feedback, gift economies can easily mismatch supply and demand in the short- to medium-term, wasting resources. If it is easy to catch fish, a tribe member may decide to catch far more fish than the tribe could eat in order to give the biggest gift.
Gift economies, because they do not depend on material exchange, avoid both one of the failings of the market economy and communism's fatal flaws. Because goods are given freely, no one is poor. But because there are rewards for production, no one underproduces.
But gift economies are unstable. They require the cooperation of the entire tribe. In a form of the Prisoner's Dilemma, all players are better off if they cooperate, but if players start to defect (in this case, not give gifts but keep taking them, becoming freeriders) then all players would do better to defect. It takes strong cultural and ethical constraints to keep people from defecting.
Unstable equilibra exist, of course. You can balance a coin on its edge and it will balance for quite a while, provided there is no outside disturbance. Gift economies exist all over the place: from the open source movement to academic research. The participants in these economies are so much better off from them that there is plenty of extra to leak out to the rest of us, who do not contribute.
Why do gift economies work with knowledge goods? Because knowledge, once created, can be widely distributed at almost no cost. The misallocated resource problem of gift economies is minimized when production cost goes to zero. Resource wastage is a minor effect when the ratio of output to input is so enormous.
But these modern gift economies are still unstable. I wonder if we should worry about the entrepreneurial model of academics (I will call it the "Stanford Model" although it's much more widespread than that.) In the last thirty years (and remember that the current model of academics freely sharing the results of their research with each other is at least 400 years old) research performed in universities has begun to be used to start companies, get patents and otherwise be owned rather than given away freely. At what point do these defections cause all academic research to be closed? And what would that cost society?
Posted by Jerry Neumann at 11:44 AM
Friday, September 14, 2007
I'm feeling a little lonely in my belief that marketers will react to lower sales by increasing marketing spend. Now even Niki Scevak disagrees with me. And there's this happy song sung in a minor key over at CNN.
Let's step back from the trees to see the forest. Imagine the CMO walking into the CEO's office. He closes the door, pulls out a chart showing declining revenue and says "Boss, Customers are getting harder to find." The CEO says "What should we do?" The CMO says "I suggest we cut back on advertising."
Is that what you'd say if you were the CMO? Is that what you'd want the CMO to say if you were the CEO?
When times are tough and firms have to cut expenses to stay in business--like dot-coms in 2001--marketing dollars decline, mainly because they can. It's painful to cut personnel, rent, etc., but telling the wiseacres from your agency to go pound pavement is sort of satisfying. Right now, Countrywide aside (and to some extent not even them anymore), operating firms are not facing restructuring. The people going out of business are the hedge funds, and they don't advertise.
I just saw a research note from Sandeep Aggarwal over at Oppenheimer. He has revised his growth estimates for online advertising down, from 26% to 25% for 2007 over 2006, and from 24% to 23% for 2008 over 2007. Considering that these estimates have a pretty large variance to begin with, I consider this no change at all. He also said that the least affected online advertising sector would be search marketing.
Posted by Jerry Neumann at 2:49 PM
Thursday, September 13, 2007
I love a good argument. I'm still waiting for one.
The Insider keeps insisting they're right about the coming online ad implosion that the mortgage crisis will cause. But they can't cite a shred of evidence. Their latest post says that the online ad slowdown of the first half of the year is evidence that Countrywide's current liquidity problems are having an effect. Because, you know, online media buyers can time-travel.
Here's some real data. My friends over at the top SEM firm in the country, who know more about CPC than anyone outside of some dimly lit basement room in the Googleplex, tell me that mortgage-related keyword CPCs are essentially unchanged from the beginning of the year through last week.
I'll also note that the top sponsored result when I type "mortgage" into Google is Countrywide.
Another friend in the mortgage lead generation business tells me that business is booming for him, although in purchase leads, not subprime or refi.
What does this mean? To me it says that ad spending in mortgage has remained constant but that there's a shift away from the high-margin mortgage products to the vanilla. Countrywide will suffer, as will the other mortgage purveyors, from reduced profit margins, but Google et al will not.
The Insider prefers to look at the big picture, while I prefer to read tea leaves. Time will tell.
Posted by Jerry Neumann at 4:55 PM
We had a wiki at my last company. We also had a rule that people had to post or update their posts every week. We had to have a rule or noone would do it.
At one of my previous employers, one of the world's largest consulting companies, there was a Knowledge Management initiative. It resulted in a shelf full of process and best-practice manuals. Noone ever looked at them, that I knew of.
So how is knowledge transmitted in learn-as-you-work industries? Through apprenticeships, cooperation with coworkers, mentor/mentee relationships and the like. Through face-to-face trust relationships.
But the internet has changed the nature of relationships. Face-to-face relationships are now augmented by virtual ones and, in some case, replaced by them. Regardless, knowledge transfer requires two things that are usually neglected in favor of tools and schemas: motivation and trust.
Motivation has been created in many ways online. From monetary payment to peer recognition. But, as Yogi Berra said in the quote that titles this post, relationships require a quid pro quo also.
How are trust networks built and maintained in the absence of personal contact?
Posted by Jerry Neumann at 4:27 PM
Wednesday, September 12, 2007
Techcrunch just reported that Google will be investing $10 million in 'green' startups. This set me on a whole train of thought about corporate VC and under what conditions it can compete with standalone VCs. I was once a corporate VC, so this was a subject dear to my heart.
The best research I could find on this subject was done by Harvard professor Josh Lerner. My take away was corporate VCs can only compete when they invest in companies that are complementary to their existing lines of business. Oddly enough, almost no corporate venture capitalists follow this strategy. The reason: existing business units kick and scream when the company invests in start-ups that either take dollars away from their development programs or might one day grow up to be competitors. Corporate politics trumps common sense in most cases.
But, after that rumination and before I could take Google to task for making a rookie mistake (common as it may be), I read the press release. It's not Google spending the money, it's Google.org, their philanthropic entity.
Tuesday, September 11, 2007
Why am I asking you to do my dirty work? Here's some data on the US new car market: cars sold and dealer advertising dollars. Why cars? I wanted an industry subject to cyclical downturns resulting from exogenous effects, like the current mortgage downturn. Also, I wanted an industry where I already had a whole bunch of data on my hard drive.
The correlation coefficient is -0.8. Although this data set is way too small to be very significant, it's pretty darn suggestive. Data is all from the NADA.
Posted by Jerry Neumann at 10:45 AM
A few weeks ago the Silicon Alley Insider predicted that the implosion in the subprime market would drastically cut online ad spending by mortgage purveyors, thus hurting the earnings of the online media folk. I don't agree.
Now it seems that, on the one hand, they think I might be right, but, on the other hand, they think I might be wrong. Personally, I'd like to see some actual analysis here: is there a correlation between an industry's product becoming less attractive and the ad spending by that industry? Well, obviously. The real question: is that correlation positive or negative?
I'm guessing negative. When it's harder to attract customers to a profitable product, you spend more on marketing, not less. There has to be some data on this. Anyone, anyone...?
Posted by Jerry Neumann at 9:44 AM
Monday, September 10, 2007
Free Exchange, the Economist's blog, pointed me to this paper by Alan Krueger. The paper talks about one of my favorite subjects to while away my idle brain cycles with: is economic inequality in itself a bad thing? The negative answer ("why are you looking in my pocket?" as an old boss used to put it) is fairly simple to understand analytically. The positive answer less so, except from a values point of view.
Krueger argues that one of the primary drivers behind the US' recent increase in income inequality is inequality in education. This doesn't say that income inequality is bad in itself, but that income inequality is concomitant with a lack of skilled workers in an age where higher education is needed to be skilled. So, even if you think income inequality isn't an issue, you probably agree that the dearth of skilled workers is. Solve one, solve the other. Increased educational spending
kills two birds with one stone feeds two birds with one piece of cake (as a sunny friend of mine says.)
An interesting point Krueger makes is that disadvantaged families have a higher implied discount rate when evaluating the decision on how much to spend for schooling. I wonder if this is a rational constraint or an evolutionary one. It would seem the latter, given Krueger's calculations on the actual returns to the educational investment. An evolutionary 'swing for the fences' strategy manifesting itself as a discount rate--a measure of the expectation of variability, not downside--would be an interesting hypothesis.
Posted by Jerry Neumann at 2:37 PM
I was reading an article in the Sunday New York Times about the fashion industry trying to get Congress to pass laws outlawing knock-offs and it started me thinking. And don't worry, once I get this off my chest I'll start thinking about lead gen again, I promise.
I should note, first-off, that I think the worries of the fashion industry are ridiculous. Perhaps this is a guy's point of view, but I get annoyed when the buttons fall off my Paul Stuart suits soon after I buy them. I expect the defining aspect of higher-priced goods to be quality, and I'm pretty sure that quality costs money to produce, justifying a higher price tag. But, that aside, the really interesting question raised by the article is about getting compensated for ideas.
Early on in my investing career I told an entrepreneur--re an argument about a NDA--"ideas aren't worth anything, execution is the only thing that matters." I was wrong, certainly. Ideas are worth something. But I was right about this: an idea does not make a business. Coming from consulting and advertising and venture capital and entrepreneurism, all businesses that rely on the constant production of ideas, I have come to the conclusion that you can make a living on producing ideas and you can make a living on taking an idea and executing it really well, but you can't make a living on owning an idea.
Unless you're a patent troll.
Which brings me back to what I was thinking when I read the article: is intellectual property worth protecting? I'm not going to go into the justice of it--except to say that ideas are not property in any sense that Locke would have recognized--I'm more interested in what is best for society.
The argument for intellectual property protection has historically been an economic one--"to promote the progress of science and useful arts"--not an ethical one. Do IP laws do this, promote the progress? Are consulting firms, advertising agencies, tech entrepreneurs, fashion designers and artists of all stripes at a disadvantage because they usually don't have protection for their ideas? (not the expressions of their ideas, these often are protected, but the ideas themselves.)
When it comes to patents, supporters like to argue that the pharmaceutical industry would not create new life-saving drugs if they did not have patent protection. Is this true? It seems so intuitively correct: no effort would be made without a reward, it's like a defining axiom of economics. But the flaw in this reasoning is the same flaw people often have when thinking about economics: that it's about money.
Who has been more intellectually creative over the past century: pharmaceutical companies or physicists? I can't answer, partly because there's no metric for creativity, but also because no matter what the metric, the two groups are both pretty far off the right end of the chart. And what do physicists get for their creativity? Fame? How many physicists can most people name? (Okay, present company excluded, because you're all a bunch of geeks.)
Physicists share knowledge because it's their culture, they generate knowledge for non-monetary reasons. I believe that scientists do what they do because thinking of new things is a reward in itself. Physicists love to be creative; people love to be creative. You can't buy creativity, you can only allow it. The old cliche that the best way to ruin an artist is to have people start paying for her work is a cliche because it has a grain of truth in it. What sense does it make to have a monetary reward (because that's what a government-granted monopoly is) for an inherently non-monetary activity?
What would the pharmaceutical industry look like if there was no patent protection? I think it's a question worthy of the rejection of preconceived notions. It would certainly be vastly different. But I would venture to guess that we would have just as many drugs; that our development path for new drugs would be faster, cheaper and more open; and that, in the end, we would all be much better off. All of us except for the pharma company executives, lawyers, lobbyists and shareholders, that is.
Posted by Jerry Neumann at 12:07 PM
Tuesday, September 4, 2007
It's a two post day because I'm out of town tomorrow and Thursday.
I was digging through mortgage origination data and found this interesting paper co-authored by some guy named Alan Greenspan. The paper uses the available data to suss out mortgage originations.
Purchase origination volume has been pretty steady over this time period (this is annual data.) But refinance has had its ups and downs. This seems pretty intuitive: when you have to buy a house, you have to buy a house, but you refinance when the stars align (i.e. lower interest rates, better investments elsewhere.)
Note the two downturns in refinance volume shown in the chart: in 2000 and 2004. Now think back to the online mortgage lead market in those years... I know it was a long time ago... think, think... internet years are so long...
Here's a hint: in 2000 LendingTree's revenue almost quintupled. And everyone here remembers 2004 and the ginormous growth in volume.
I know this is all circumstantial and the past is no predictor of future returns and you get what you pay for, and I'm not getting any investment bank analyst job offers (that's not a solicitation, btw. Ugh. Uh, unless you're paying a LOT), etc. But I haven't found any data to contradict my point. I mean, aside from IACI going from $40 to below $30. But, hey, who knows what goes on at IAC anyway?
Posted by Jerry Neumann at 4:40 PM
I wrote about where mortgage lead gen was going last week and got quite a few responses from people I know in the industry. It's an interesting question, and a complicated one.
A few data points. In "Mortgage Originations in a Down Market" Booz Allen says that the average retail cost per loan (meaning, in this case, the cost to the originator) is about $3,000. From their graphic it looks like about half that is sales cost.
My friend Bill Rice over at Kaleidico (a great lead management system company), who has an interesting vantage point on the industry, pegs the close rate of a mortgage lead at 2%-3% (although he points out that companies that use his LMS have a much higher close rate.) If we assume that two-thirds of the sales cost is lead acquisition, then the effective break-even cost per lead from the originator standpoint is between $20 and $30, higher if they use a LMS (or have otherwise implemented some sort of financial accountability in their handling of leads.) Note that this is the lead-gen versus all marketing break-even: the point at which it is more effective to buy leads than to do other sorts of marketing.
Here's the dynamic as I see it:
- People looking for a mortgage become harder to find; the cost of marketing to them increases;
- Mortgage originators decide to lower their marketing risk by doing less marketing themselves when they can buy leads at a lower effective cost-per-close;
- Lead generators also have a harder time finding borrowers; this leads to fewer leads and a higher cost for generating a lead;
- Higher demand and lower supply of leads increases the purchase price of a lead;
- Each lead sells more times, lowering average close rates for everyone;
- Originators with already low close rates can't compete;
- Originators who know what they're doing get the additional business.
Two other things I see happening:
- Originators will scramble to implement lead management systems;
- Providers of low-quality leads (those that have the lower close rates) will be squeezed out of business quickly (as Niki Scevak pointed out last week).
Posted by Jerry Neumann at 4:10 PM