More Data to Chew On

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.

I'm Not So Lonely I Could Cry... Anymore

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.

Saturday Potlatch

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?

I'm Only a Contrarian Because No One Will Agree With Me

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.

If It Wasn't Obvious

The "top SEM firm in the country" is Reprise Media, natch. I figured you knew that already.

I've Recently Switched from Entrails

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.

If You Don't Go to Someone's Funeral, They Won't Come to Yours

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?