Old Media Companies Try to Sabotage New Media Efforts

Given the number of "studies" I've seen that claim to show the "superiority" of print over online, I've gotten a sense of desperation on the part of publishers. (And given their financial results and dropping ad revenue, no wonder.) The latest has some interesting data:

Among Web users, nearly two-thirds (63%) of banner ads were not seen. Respondents' eyes "passed over" 37% of the Internet ads and "stopped" on slightly less than a third, McPheters & Co. found.

In contrast to online ads, TV and magazine ads generated a strong propensity to be seen and recalled. Full-page, four-color magazine ads were determined to have 83% of the value of a 30-second television commercial, while a typical Internet banner ad has 16% of the value.

Here are the major findings from the press release issued by the market research firm that undertook the study:

• Within a half hour, magazines effectively delivered more than twice the number of ad impressions as TV and more than 6 times those delivered online.
• Though TV doesn't deliver as many ads per half hour as do magazines, net recall of TV ads was almost twice that of magazine ads; magazines in turn had ad recall almost three times that of Internet banner ads.
• 85% of Internet ads served appeared on-screen and could be identified by brand.
• Among web users, 63% of banner ads were not seen. Respondents' eyes passed over 37% of the Internet ads and stopped on slightly less than a third.
• For Internet ads, almost all net recall could be attributed to ads that were seen.
• Internet video ads appeared much less frequently than banner ads, and their exposure skewed heavily towards young men. When they did appear they were twice as likely to be seen as banner ads.

In my experience I definitely avoid looking at banner ads. But there are some enormous suppositions and biases here:

• The report does mention online vehicles other than banner ads, but only mentions video ads as appearing less frequently than banner ads and skewing heavily toward young men. But that is one of the most desired demographics for marketers. And, apparently, it didn't seem to measure text ads, which are surely the most prevelant form of online marketing today.
• Recalling an ad is not necessarily the same as ad effectiveness. Consider the famous example of the hilarious Alka Seltzer ad series from the sixties. They had huge recall, but the company dropped them because no one remembered the product, just the humor. Also, if you find an ad irritating, is there any transference of that feeling toward the manufacturer?
• Although it may be in the study, I don't see any mention of the intent of the ad. Was it meant to sell product? Recall doesn't show whether people buy, or even if they become more inclined to favor the mentioned brand.
• Where is the audience spending its time? Even if magazine and television ads are more effective in a more extensive way than recall, is that the medium that consumers prefer to consume? If they read news and watch video online, then placing ads in print and on television starts reaching a smaller audience.
• That last point has another implication: cost. Print and television ads cost more to run than online ads. So how much does it cost to acquire and maintain a customer? That must be part of the equation, particularly when budgets are constrained. Even if one type of ad is five times more effective, what if it costs a hundred or thousand times as much?

And now for the really big point, in my opinion. Conde Nast and CBS Vision (described by CBS as a new research initiative to explore changes and opportunities in the media marketplace) sponsored the study. I've generally found that sponsored studies almost always mean that the results are only released when they support the underlying goals of the corporate sponsors. For example, can you imagine a drug company backing a study showing that a cheap alternative to an expensive prescription medicine was superior?

But publishers and broadcasters all claim to be interested in online as a medium. (Disclosure: I cover high tech for BNET, which is owned by CBS Interactive.) But this clearly delivers the impression that the sponsors are interested in having older media -- which deliver more ad revenue and profit -- shown to be superior to online. In other words, it's the old dog at the media companies trying to kill off the upstart medium, with the Internet still a business toddler compared to print and broadcast. How are the media companies ever going to make the transition they say is coming if they do everything in their power to defeat it?

This is why tech companies like Google and Amazon, which are big in online advertising and media, are likely to be the real winners in the media wars. They aren't spending significant resources and time trying to debunk the very businesses they say they are anxious to establish. And the financial results the market has been seeing is nothing more than the public results of the internal uncivil wars taking place in these companies.

Dodd and AIG Scratch Each Other's Back

The Hartford Currant has documented Connecticut Senator Christopher Dodd's flip-flop on the AIG bonuses, but it seems that there is more going on than he's addressed.

On Tuesday, Dodd said that he was not a member of the conference committee that crafted the final compromise bill and said that the exception had not been in the bill as he drafted it.

But late Wednesday, Dodd admitted in an interview with CNN that he had been involved in the change.

"I agreed reluctantly," Dodd said. "I was changing the amendment because others were insistent."

Don't think that Dodd is at an arm's length relationship with the financial services conglomerate. If you check the record of donations to him, you quickly see that AIG was his fourth largest contributor from 2003 to 2008, with a total of $223,478 donated.

The total money he raised during that time was $8,938,003. That means that AIG was directly responsible for 2.5 percent of all the money he raised during that period. The insurance industry was one of his top five industry donors with a total of $1,440,422, making AIG responsible for 15.5 percent of all insurance company donations to Dodd.

It's not surprising that Dodd has close ties to financial services as he's chair of the Senate's Banking, Housing, and Urban Affairs Committee. This is clearer when you add the total of campaign money received from 2003 to 2008 from securities and investments, insurance, and commercial banks: $6,588,012, or 73.7 percent of all campaign contributions to the senator.

It's not that the money comes directly from the companies, because that would violate election laws. However, 71% of the money comes from individuals; organizations like OpenSecrets.org collect the public information and then cross reference to find the totals. It seems pretty hard to believe that Dodd's own office wouldn't have made the same calculations.

Wired has an article called Recipe for Disaster: The Formula That Killed Wall Street. It's about how a mathematician came up with an idea of how to easily quantify the coupling of risks in individual cases that investors want to know so they can make better decisions. For exmaple, you know that one investment has a given chance of going into default, and that one debt arrangement is bundled with others to make a bigger financial instrument in which you could put money. If one starts going badly, are others also more likely to head south, or are the individual risks really independent of each other? You need to know the answer if you're going to intelligently understand the risk.

The solution was a formula using a technique called a Gaussian copula function. All of Wall Street rejoiced because suddenly it was easy to calculate risk without waiting for historic data:

The effect on the securitization market was electric. Armed with Li's formula, Wall Street's quants saw a new world of possibilities. And the first thing they did was start creating a huge number of brand-new triple-A securities. Using Li's copula approach meant that ratings agencies like Moody's—or anybody wanting to model the risk of a tranche—no longer needed to puzzle over the underlying securities. All they needed was that correlation number, and out would come a rating telling them how safe or risky the tranche was.

And then, eventually, the market imploded. But when you look at the approach the mathematician took - examining the historic prices of credit default swaps - you start to see just how stupidly so many in finance acted:

The damage was foreseeable and, in fact, foreseen. In 1998, before Li had even invented his copula function, Paul Wilmott wrote that "the correlations between financial quantities are notoriously unstable." Wilmott, a quantitative-finance consultant and lecturer, argued that no theory should be built on such unpredictable parameters. And he wasn't alone. During the boom years, everybody could reel off reasons why the Gaussian copula function wasn't perfect. Li's approach made no allowance for unpredictability: It assumed that correlation was a constant rather than something mercurial. Investment banks would regularly phone Stanford's Duffie and ask him to come in and talk to them about exactly what Li's copula was. Every time, he would warn them that it was not suitable for use in risk management or valuation.

The article focuses on how you cannot count on the correlation of financial securities, because risks that seem out of sync one day can suddenly all manifest at the same time.

I'll put it a little differently than stated in the article becuase I think there's an even more fundamental point that financiers missed. Like any market, CDO purchases largely move on emotion - it's one of those indisputably human activities. When people think they are safe, they will do the most astoundingly stupid things because they simply don't perceive danger.

CDO prices are an accurate historic measurement of what people thought risk was, not of the actual inherent risk of the underlying investment on which the CDO was taken. So all of these investment decisions were made based on looking at people's perception of risk, whether right or wrong, and not the actual risk. No wonder everything blew up. It was like betting on the results of a card game when you weren't one of the players, didn't know their history of success, and couldn't see any of the cards. Here's the scary part: the people who didn't notice the difference are the ones still in charge.

Obama Administration Making the Banker's Error

The Obama administration is already finding itself having to defend its economic projections of a strong economic recovery. We're still in the middle of a mess that stemmed in no small part from the refusal of bankers to consider the worst case scenario, from admitting that things could be far worse. So why is the current administration doing the same? For the same reason: It is unpleasant to ask people face reality.

But Obama was elected on the idea of a change in the past and some respect for the truth ... at least, that is the marketing angle his staff used. The only way to escape the danger of the overly optimistic is to use a range of scenarios: good, realistic, and bad. The bad one has to be really bad, take into account the worst that could happen. The realistic should be just that. Presenting only one scenario that tends toward the optimistic is to whistle past danger. To do what has been foolish in the past only continues the foolishness.

Did FDR Make the Great Depression Worse?

Fortune has an article on the growingly common criticism that FDR's New Deal actually prolonged the Great Depression. The conclusion is that it probably wasn't as good as the fans claim or as bad as the critics complain. But I found an interesting juxtaposition of information. Here are statements from the article:

• "Roosevelt's programs were first passed in 1933 but economists generally agree that the Great Depression did not end until 1939, when the country began preparing for World War II."


• "On the more dire end of the scale, Harold L. Cole and Lee E. Ohanian, economics professors at the University of Pennsylvania and UCLA respectively, estimate the New Deal's labor and industrial policies caused the Depression to last seven years longer than otherwise."

Does that mean that the Depression should have been over two years before the New Deal was even passed?

What If Banks Are in Deeper Trouble Than Anyone Realizes?

The Wall Street Journal has a sobering article that starts with a disturbing question: What if nearly half of U.S. banking assets turn out to be bad?

Defaults are rising on every form of debt, which should come as no surprise to anyone. Those who thought that the issue was subprime mortgages need to wake up and realize that no form of debt exists separate from any other. People strapping themselves with mortgages they cannot afford are clearly going to be financially strained elsewhere. But then, people taking out lines of credit against homes, using multiple credit cards, and leasing fancy autos that they wouldn't be able to afford to purchase are also going to be hard-put to manage any untoward financial situation. That will likely add up to a lot of money:

Indeed, Goldman Sachs Group estimates that troubled assets could exceed $5 trillion, if defined as assets that could show a loss rate close to, or above, 10%. To put that in context, $5 trillion is just over 40% of the $12.3 trillion in total assets of U.S. commercial banks.

Granted, actual losses will be much smaller than $5 trillion, and banks won't have to sell every bad asset. Most still can reserve for a good share of their losses. Moreover, the government already is on the hook for losses at Citigroup and Bank of America, with $3.8 trillion of assets between them.

Why take for granted that the losses will be a lot less? This is exactly the type of willful blindness that has led banks to where they are today.

The talk today is of creating a government-owned so-called bad bank, which would buy the bad assets and then liquidate them. The strategy is at least twenty years old and was in use during the 1980s, when many more banks were failing than are failing now.

The problem is that everyone is making things up as they go along. No institution to my knowledge has done risk management planning for such an extreme situation as that much potential default. Not even the U.S. government can take on this level of debt with impugnity. How many years -- how many decades -- will it take to pay off this volume of money?

I don't think anyone in government or the financial community is being straight, either with the public or with themselves. They are likely concerned about inducing panic, but maybe that is exactly what the public needs. Already we're seeing lowered spending and more attention to debt levels, at least by individuals. They are right to react strongly, because they see they are living with choices made over the years. But how long will it be until those who are in charge do the same?

Clever Retail Revamping

The Financial Times has a story about Danish silverware company Georg Jensen, which recently revamped its retail look. How do executives justify such an expense at a down economic time? By being innovative. Jensen got in touch with 25 top Danish companies and offered a swap: use of consumer electronics, furnishings, housewares, and so on in return for a showcase of that company's goods. Jensen isn't selling the products of the other, just its own. It's similar to how many magazines get use of materials from various companies in return for credit. It's a smart bit of business innovation.