Michael Dell Says Changes Are Necessary

According to a Financial Times article on April 28, 2007 (sorry, no free link), a leaked memo from Dell has the company's founder and current CEO stating that the company is “a defining moment in its history and in [its] relationships with customers.” Dell replaced his former hand-picked replacement, Kevin Rollins, in January because of disappointing results. The memo suggests some pretty significant changes in direction:

He said their plans were to simplify IT for business and the consumer and to innovate beyond its traditional hardware business. They would also work to fix
their core direct-selling business. “The direct model has been a revolution, but
is not a religion,” he said n the e-mail. “We will continue to improve our
business model, and go beyond it, to give our customers what they need.”

The company apparently wants to "radically simplify IT' for corporate customers and go beyond its direct sales model for consumers, which has done well but that is a limiting factor in growth.

I'd like to suggest that these changes are not what the company needs. Consumers aren't moving to HP because of store sales. Dell has developed a recipe for atrocious customer service. (Disclaimer, I once got so frustrated in trying to get a PC from the company on a timely basis that I cancelled the order.) Trying to chase expanding sales before management really fixes this problem is setting up the conditions for business calamity, because customer service that functions poorly now is only going to get worse with greater demands. And the idea that the company will change IT for companies is a level of arrogance that smart corporations won't tolerate - because they don't have the time, money, or inclination.

Then the Dell memo discussed how the company would "take our supply chain and manufacturing to the next level of efficiency." I've done some pieces on Dell's supply chain in the past and have heard from analysts who closely follow electronic manufacturing that Dell is already pushing so hard on its vendors that some are walking away from doing business with the company.

The amount of efficiency increases in the past could not explain the company's profit level growth compared to the rest of the industry. What seemed far more likely, according to the experts I've interviewed, is that it was beating up suppliers and pulling out every last penny of increased profit it can and telling suppliers to use the increased economies of scale that Dell can offer to make more money off their other clients. But those clients are reportedly starting to balk, because essentially they pay for Dell's ability to make more money.

The short prediction: within the next three to five years, major business magazines will be running "What Ever Happened to Dell?" stories, because you can only push your clients and vendors for so long, and then, as the poet W.B. Yeats noted, things fall appart.

Retail Price Optimization

Thanks to a Slashdot.org reader I saw this AP article about retail price optimization and a related one with some examples. The one misleading impression you could get from the article is that such pricing optimization software works primarily for retailers. Not so. Pricing, whether b-to-c or b-to-b, is generally an area little understood and poorly controlled by companies. Many of the same techniques work for manufacturers - and, I'd guess, even for service providers. The real advance here is getting away from guessing what pricing strategies might work and using analytical methods to create candidates to test. Notice that test is different from submit to. Many people assume that technology cannot be wrong, and so figure that if the suggestion comes from one of these admittedly complex systems, it must be right. Not so. However, using the recommendations as something to try and then to judge the results would seem a smart approach.

For Music Labels, Distribution Is the New Worry

There's an interesting article in the Wall Street Journal of April 27, 2007 about the problems that music labels face from the big box stores. According to the reporting:

big-box chains are now responsible in the U.S. for at least 65% of music sales (including online and physical recordings), according to estimates by distribution executives, up from 20% a decade ago.

Having that much potential distribution and sales tied up with a limited set of customers is a scary concept for any company for a few reasons that I learned in my time in business and in writing about business. One is that with so much ability to exert pressure, you can bet that prices to the retailers will eventually be coming down. Another, you now have narrower demographic segments dictating what will be commercially acceptable music.

Third, big producers need small producers to create new niches and open fresh areas for production, and that gets much tougher when the large stores are going to be less likely to pick up the work of small labels because it becomes too much trouble to maintain a vendor that supplies a small amount of what the retailer sells.

The kiss of death is, as the story mentions, is that the stores will find the category unprofitable compared to other areas:

That's partly because, with CD sales falling steeply, the discs aren't as hot as other products the stores sell. Also in the wake of the Don Imus controversy, the debate over the lyrical content of rap, rock and pop has flared up again. Oprah Winfrey recently has focused on rap lyrics on her talk show.

Best Buy has apparently reduced the space devoted to CDs, and Wal-Mart has given a quiet heads-up to the big music distribution industry that it will cut back space for music by as much as 20%.

What's a record label to do? Learn a lesson about non-traditional distribution. Some book publishers have been smart, putting their books for years into places where their natural customers might appear but that aren't the usual independent and chain stores. Most publishers don't get it, which is why so many are having problems. You have to meet the consumer where the consumer wants to be. So look at what Starbucks has done and start moving in that direction. Popular music labels could experiment with selling CDs through various fashion outlets, specialty interest stores, and other places where they could receive impulse buys - if music isn't a life style purchase, I don't know what would be. Put it in in the Gap, in Williams-Sonoma, at news stands, in gas stations, in craft stores. It doesn't matter where so long as the people who go to those places are the sort who buy the music. When things get tough, it's time to start thinking outside of the big box.

Kaiser Permanente and Messy Electronic Patient Records

The Wall Street Journal ran a front page story the other day about Kaiser Permanente and how a 22-year-old turned the company's $4 billion electronic medical record (EMR) project into a public freeway pile-up by sending a company-wide email challenging the effectiveness of the project and whether the CIO had conflicts of interest. While CEO George Halvorson - whom I interviewed a few years ago on the topic of EMR - answered in another email the next work day essentially dismissing Justin Deal's analysis, the company's CIO resigned earlier the same day without a public explanation. Not long after this incident, Computerworld (disclosure - I used to contribute to the publication in years past) had its own reporting based on a leaked 722-page internal document that corroborated many of Mr. Deal's complaints about the system, called HealthConnect by the company.

Ironically, Mr. Deal first sent his complaints to Kaiser's compliance officer and to the board of directors:

Kaiser's assistant general counsel sent Mr. Deal a letter saying that "a thorough investigation" found no evidence of misconduct by the executives, nor of a "disastrous failure" of the HealthConnect project.

And yet there was this internal report. In either case it's clear that the board has some problems. Either it knew of the system issues and ignored them - which would seem like criminal negligance if patient health was affected - or it was incapable of unearthing this report. In either case, this would seem a clear issue of board dysfunction.

Kaiser Permanente and Messy Electronic Patient Records

The Wall Street Journal ran a front page story the other day about Kaiser Permanente and how a 22-year-old turned the company's $4 billion electronic medical record (EMR) project into a public freeway pile-up by sending a company-wide email challenging the effectiveness of the project and whether the CIO had conflicts of interest. While CEO George Halvorson - whom I interviewed a few years ago on the topic of EMR - answered in another email the next work day essentially dismissing Justin Deal's analysis, the company's CIO resigned earlier the same day without a public explanation. Not long after this incident, Computerworld (disclosure - I used to contribute to the publication in years past) had its own reporting based on a leaked 722-page internal document that corroborated many of Mr. Deal's complaints about the system, called HealthConnect by the company.

Ironically, Mr. Deal first sent his complaints to Kaiser's compliance officer and to the board of directors:

Kaiser's assistant general counsel sent Mr. Deal a letter saying that "a thorough investigation" found no evidence of misconduct by the executives, nor of a "disastrous failure" of the HealthConnect project.

And yet there was this internal report. In either case it's clear that the board has some problems. Either it knew of the system issues and ignored them - which would seem like criminal negligance if patient health was affected - or it was incapable of

Output and Jobs Statistics Don't Match

Although there isns't a free link to this, I'd urge people to subscribe to the Financial Times and look at the April 26 story by Krishna Guha titled Output and jobs pose statistical mismatch. It's an interesting examination of why output growth is apparently less than its potential and yet unemployment doesn't seem to go up, in violation of an economic rule called Okun's Law. Seems that there are three explanations. One is that official counts of unemployment are below the actual (the article seems to find this unlikely because the count is done by a household survey, but that would still depend on how the answers are classified). Another is that the official counts of economic growth are low-balling the number. The third is that the ptoential for the economy is lower than people have been thinking. In any case, an interesting read.

Investors Back Patent Trolling

Forbes had a great story on how some patent trollers - small companies that take out broad patents with no intent of actually making anything, only of suing large companies that do - are now getting funded by hedge funds, private equity firms, and other deep-pocketed investors. AS if life wasn't tough enough before. Last year the U.S. Supreme Court limited the ease with which a small company that was obviously looking to make money the new fashioned way, by suing, could threaten a large company with an injunction. That was in the Altitude/eBay case, in which the small company has received a $25 million infringement verdict because eBay's "Buy It Now" feature supposedly infringes on that company's patent. Yet I can remember all the fuss when Amazon got a patent for its one-button shopping feature.

The problem is that even if there is prior art, someone has to dig it out and continue to fight in court while lawyers prepare a Patent Office challenge - a process that, according to what I've heard from IP lawyers, can be extraordinarily long. Not surprising given the backlog in the system and the number of years it can take to get a patent issued. So in the past many companies have folded their tents, deciding that paying off what can, in some cases, seem like extortion is cheaper than a prolonged legal battle.

It seems like there needs to be some reform of the patent system, though it's not clear that anyone has a clear idea of how to do that effectively. The one sure thing is that it's going to take money - a lot of it - to get enough patent inspectors with deep enough experience and training to give a more critical look at many of the patents that seem more and more absurd in their breadth and lack of depth.

Chocolate Manufacturers Want to Change Brand

Normally when companies talk about changing brand, they mean an advertising campaign. Real brand change is organic and involves changing the entire company to some degree or other. That could mean what Delta Song did when it deliberately engineered a specific customer experience before going to market or as companies do when they refine a brand by focusing on what they really do best. But some large members of the U.S. chocolate industry - through the industry trade group Chocolate Manufacturers of America - are petitioning the FDA to change the definition of chocolate so they can reduce their costs. (You can see a quick rundown on this with some links at my food blog.)

Certainly lowering costs is important, but when it requires a wholesale redefinition of what you make, you really enter the dangerous waters of trying to create a new type of business. Drop the cocoa butter and replace it with vegetable fat and no matter what the FDA allows you to call it, the result isn't chocolate as people understand it. Perhaps such manufacturers as Hershey, Nestle, and Archer Daniels Midland (ADM) think that people won't notice. Many might not, but some percentage of the population will. Think candy sales can't go down? They have at times for some manufacturers, as these companies all know. Making more money is great, but not if you potentially endanger your future business. Why do I get the sense that the CEOs of these companies, or even the presidents of the relevant divisions, haven't talked to a single customer in years?

Blackberry Outages and R.I.M. Points the Finger

R.I.M. has finally blamed insufficiently tested software on the Blackberry outage that cause such executive outrage. You'd think that the managers would have been happy to have a short period in which they didn't have to jump through hoops. But the story may be a bit more complex. I heard an albeit second-hand explanation/rumor that R.I.M was warned the that software wasn't ready to go live, but that no one listened.

Conversation on Disability and Politics

I was speaking with someone who has 25 years as a disability case worker for Social Security. This person mentioned that at the beginning of every Republican adminstration, the organization staffs up to brace for the onslaught of disability applications that will follow from people who are poor.

"But why would disability go up?"

"Because there will be fewer jobs at the lower end and disability gives extended benefits."

"I'd think that such a big change in the number of unemployed would be noticeable."

"They aren't unemployed."

"But they don't have jobs? How are they not unemployed?"

"It's all part of how unemployment is counted. If you're not looking for work or are disabled, then you're not unemployed."

"Let me get this straight. The number of jobs drops which pushes people who can't find work into looking for disability if it's remotely possible. But the minute this happens, they are no longer unemployed."

"That's it. The unemployment figures are garbage."

"And then Social Security immediately hires?"

"Nope. The administration always puts on a freeze at the start, but then they find a way to hire a few months later because there aren't enough people to do the work."

It makes me wonder two things: how many unemployed people there really are, and what a real pro-business politician might look like. I suspect the person would be less solicitous of business wish lists and more interested in creating conditions that would encourage fundamentally strong business - with employment up and down the scale.

University PR and Twists of Fate

I was speaking yesterday with a marketing and PR person at a writing convention. This man is essentially responsible for a good aprt of the topics and guests on television and radio shows, because he publishes a directory of potential experts and guests for the industry. He said something that tell a lot about the country, public perception, and business. Remember what happened last week, before the Virginia Tech shootings? If you mentioned universities the talk would have been of financial aid personnel taking kickbacks from sources of money. Or, and I'll add this one in, it might have been of universities complaining about the school listings of U.S. News & World Report (and a disclaimer, I've written for the publication a few times in the past). In either case, schools did not seem like candidates for sympathy or public concern. Now they're nothing but.

Companies often try to cover up problems they have, but for the vast majority of these issues, that's pointless and damaging, as any expert in crisis communications would tell you. They may have various theories, but it really comes down to a) if you start doing the right thing, people stop being so harsh, and b) when you cover up, you extend the life of teh story. If you don't extend the story life, something else will come along to push it out of the headlines. It's another case where the right thing is also the smart thing.

How Do You Judge CEO Pay as Fair or Not?

Reuters has a story today about NASDAQ's CEO Robert Greifield getting $18.4 million for 2006. Stock value fell, and yet the exchange's profits more than doubled. And recently I had an executive compensation consultant make the same point about Robert Nardelli, who was forced out as CEO of Home Depot. As people bemoaned the level of his compensation, this consultant said that Home Depot's actual financial performance improved - and others have pointed out as much. So how do you value a company? Is it the stock price? I can remember one company in the semiconductor business that steadily increased their profits quarter after quarter with little interest from investors because it was in an "unexciting" segment of the industry. But what else can happen? So long as investors expect to see the big pay-off from increased stock prices regardless of what the business fundamentals do, there will continue to be a split between how CEOs are paid and how companies perform, because too often the firms will do well from one point of view and badly from another.

Fuel Cell Vehicles - and Who Will Sell the Fuel?

I heard a story today concerning GM and a fuel cell vehicle with a supposed 300-mile range on a tank of fuel. That's good to hear, but with all the attention on designing the vehicles, I've seen relatively little about the issue of concept viability: fuel stations. A few years ago I remember sitting over lunch with a PR person from ChevronTexaco as we were killing some time before I was to interview CEO David O'Reilly. We got onto the topic of alternative fuels and how difficult it would be to make that work until some had set up distribution for those fuels.

You can design cars from now to the next decade, and it won't matter if you can't get the substances to run them. That's where the oil companies should be spending some of those large sums of cash that have been coming in - particularly as their capital expenses seem to have been dropping over the years. someone has to build the stations, create the new storage tanks - generate the fuel that will go into those tanks.

It would be a logical step. Oil companies aren't really in the "energy" business so much as they're in the twin industries of chemical refining and transportation of those materials. Moving to a new set of chemicals will require a lot of work and investment, but in the long run, what else are they going to do?

Verizon's VoIP Patents May Be Invalid

Thanks to Slashdot.org readers for finding this: a Techdirt.com report of an analyst finding prior art on Verizon's voice over IP patents. Tier1Research analyst Dan Berninger, long involved in VoIP, has published a report citing public discussions of the concepts in Verizon's patents prior to the company's filing.

In the patent world, this is called prior art. If such material exists, a patent can be refused or even often successfully challenged. The rationale is that the prior art makes it clear that the entity did not invent something new.

Given Verizon's suing of VoIP vendor Vonage, this could be interesting. A court could conceivably hear an appeal by Vonage to at least indefinitely halt action because the patent's validity may be in question and the challenge process is not quick, keeping them in business at least for now. As the concepts were under discussion in open standards development efforts within the year before filing, that should fall within the grace period allowed under U.S. law, and technophiles are arguing whether Verizon's corporate rear is covered. But in reviewing 35 U.S.C. 102 Conditions for patentability; novelty and loss of right to patent. - Appendix L, there is also the following grounds for loss of a right to a patent: "(f) he did not himself invent the subject matter sought to be patented."

Beyond Vonage for a moment, which I think has seen problems beyond Verizon, what would a successful challenge mean to the value of the latter's intellectual property? Surely if Vonage doesn't survive long enough to mount a challenge, the possibility is out there from some better heeled competitor; some members of the open standards development effort were Microsoft, IBM, Cisco, and Intel.

The management question that should be of concern at Vonage - and among its investors - is why the company didn't pick up on any of this. I'm sitting back and waiting for the shareholder suits to begin.

Recording Industry Wins Copyright Issue, But At What Cost?

A three judge panel decided that the Copyright Royalty Board decision about Internet music royalty rates should stand. Companies providing streaming music over the Internet have been vocal in saying that the rate hike would make the difference between any profit for them and running in the red. According to this press release, John Simson, executive director of SoundExchange, the industry group that accepts and distributes the royalties, made the following statement:

Our artists and labels look forward to working with the Internet Radio industry
-- large and small, commercial and non-commercial -- so that together we can
ensure it succeeds as a place where great music is available to music lovers of
all genres.

The question is whether of the companies involved are being realistic. On one hand, the Internet stations, which includes traditional and public radio stations that stream over the Internet, say that they can't afford the new rates. But simmering under the surface of words is an air that I can only classify as entitlement. Of course they want their businesses to exist, but why should the recording companies have to take less than what they want?

At the same time, it seems that the music labels might believe, as this Fortune story suggests, that the stations will adapt and make enough money to stay in business. If not, then it would be clear that the recording industry is targeting the stations - either because the labels think that they'll get more sales of CDs or licensed music for MP3 players, or possibly that the larger labels want to bury the small and independent ones so that few people hear their offerings and buy their products instead of mainstream recordings.

It's usually a good bet that truth is somewhere in the middle. Yes, some number, perhaps many, Internet radio stations will go off the air, and the ones remaining will be those that find ways of making money. But it's been clear for years now that the record labels are in a state of constant reaction to change in technology and listener habits. It wants to keep control over a situation that it has only controlled in its imagination. As much as the stations want a world that will orient itself around their needs, the recording industry wants the same thing. While the end for many if not all of the stations will be swift and obvious, the problems facing the labels will be slower, more subtle, but no less inevitable.

Google Acquisition of DoubleClick Would Be Data Powerhouse

Will everyone have to do business with Google? It could be given the observation of the editor in chief at TMCnet.com, who argues that the combination provides the data necessary for expansive behavioral targeting of ads. Google has the search histories of a huge portion of Internet users, to say nothing of email contents (Gmail), shopping (Froogle), and desktop contents (desktop version of Google). DoubleClick cookies give a history of browsing for an equally large portion of online users. Combine the two, and there's enough data to profile a huge number of people through their online activities and, theoretically, to create staggeringly effective ad campaigns.

At the same time, let's consider an important limitation of viewing this as the marketing silver bullet. Say that you could use this information to push your company's wares. What if the products stink? All the marketing will do is help put you out of business faster than ever before. What if your customers find out that you're prying into every corner of their lives? They might react badly and go to your competitor. What if your target market is in a geographic region that doesn't have the high rates of adult Internet useage as in North America? And you'd still have to determine that online ads actually create business for you and aren't touted as one of those important "brand building" exercises that never manage to prove their financial worth. So the need for ability, skill, and, most importantly, hard work work in marketing aren't about to go away.

Jon Stewart and Lorne Michaels on YouTube

Jon Stewart, host of The Daily Show, gets it. Saturday Night Live creator Lorne Michaels gets it. Viacom management doesn't.

The neuter third-person singular in this case is YouTube - or, to be more precise, the promotional value of the video sharing service. The management has some legitimate concerns. Apparently Mr. Michaels is involved in the process for clearing clips to appear, and anything from music or material copyright to the practicalities of agreements with unions or guilds can kill a clip.

But plenty of material that could go up doesn't, and this is where Viacom management falls down when it has its legal department send out the official "take that damned clip down" notices. I understand wanting to get paid for work; I make my living in writing and photography, and like getting checks. But I also understand thatyou have to think bigger. Customer word-of-mouth is something that most companies would love to have, because it's the most effective type of marketing. Yet Viacom still doesn't seem to get the zeitgeist - literally the spirit of the current time. There is only so far people can go in describing what they saw: "There was this really funny bit on the Daily Show. Jon Stewart ... uh ...well, he was talking about the administration and said ... I can't remember exactly what he said, but it was so funny!"

YouTube is nothing more or less than word-of-mouth made manifest. This is how people are describing what they enjoyed, except they're talking to hundreds ... or thousands ... or hundreds of thousands of people. And if you don't start to get the spirit of how things happen these days rather than wishing for days of how they used to be, you won't ultimately stand a ghost of a chance of getting the business benefits that are there for the asking.

Dow, Buy-Outs, and Double Standards?

Although I can't point to a free copy on the Web, I would recommend a Richard Beales analysis in last Friday's Financial Times of the Dow Chemical buy-out rumors. The company fired a board director and a senior executive, accusing the two of having “unauthorised discussions with third parties about the potential acquisition of the company.” Mr. Beales's major point is this:

Aside from potentially putting the company into play, the episode raises a question about double standards in boardrooms.

When a chief executive surprises board members with a fully thought-out and funded management buy-out plan that they did not know about, do they fire him or her for having those unauthorised discussions?

Unless Mr Liveris takes this course, we will never know what Dow’s directors would have done.

In other words, should a CEO develop a buy-out strategy without talking to the board, the CEO stays in place. If it's a board member, that director goes. As Mr. Liveris suggested, the director and executive in question "made the mistake of being dispensable."

He also extends the theme to the current furor over the sub-prime market and climbing default rates:

“Predatory lending” is the cry from Washington, with Barney Frank, a Democrat, among those trying to decide who should be financially responsible. Some of the same people used to tell lenders to make it easier for people to get loans to buy homes.

Just another example of why I think the Financial Times is the best paper I've seen, bar none. (And, for full disclosure, I've written for them a few times in the past, though the remuneration was hardly at levels that could buy even temporary loyalty...)

CA Points Fraud Finger at Founder

It only took some 390 pages for software company CA (in the past known as Computer Associates) to accuse its founder and former board chair Charles B. Wang of running one of the biggest shell games in town. For over ten years, the company alleges, he was basically the chef de cuisine in a company where cooking the books was the course du jour. Wang is blaming Sanjay Kumar, whom he personally installed in the office of CEO. Now the company says that this has cost it $500 million in fines and the trust and goodwill of employees and shareholders.

I also remember the company developing the reputation of being an enormous bottom feeder when it came to acquisitions, to taking over product lines to squeeze the profits dry and not invest any additional money, and to creating a lot of bad will among customers - which could certainly lead to poor stock prices. The company's woes are a legacy of many bad choices, period, and that sort of seeding doesn't go away too easily.

Firing Imus, Unacceptable Attitudes, and Corporate Cowardice

I understand why so many people are upset at radio talk show host Don Imus. There is certainly genuine outrage and in some, I suspect, also a desire to pay back previous personal conflicts. I can also understand why a company employing him might decide to fire him. I even understand how CBS would plan on one course of action and then, in the face of advertising pressure, choose another. What I do not understand is how Les Moonves, the network's CEO, can state:

At the same time, we wanted to take the time necessary to listen to the many diverse voices that were raised on this issue. In so doing, we have been trying, as best as is possible in such a complex and emotional environment, to determine what is, indeed, the right thing to do. I believe that in taking this action, we are doing the right thing.

Nonsense. This is not an action based on principle or strong feeling. If the advertisers hadn't bolted, Imus would still be behind a microphone. Moonves and CBS management can claim they were "revulsed" by Imus's insensitive and boorish remarks. But making cutting and even nasty comments is not unusual for the former host. No matter what else was going on in his mind, no matter what in his background, upbringing, or inclination might have slipped, the network had always looked the other way in the past. It gave him permission and I would guess even egged him on so long as the green kept coming in.

Perhaps CBS thinks that it has executed proper damage control PR, but I'd argue that it hasn't. The best damage control comes from admitting that there was damage and reacting swiftly to what has gone wrong. But when days go, whether you call it "a period of thought, discussion, listening to you, and the pursuit of due process" or not, all you're doing is trying to play the odds. The company has only hurt itself far worse in the long run than if it had immediately fired Imus or even if it had let him stay. We all make choices and live with the consequences. Imus has paid for his. CBS has yet to, but it will.

Magazine Industry Scraps Monthly Reporting - and Why Advertisers Shouldn't Care

According to MediaDailyNews (and thanks to Bob Sacks for pointing this out), the Publishers Information Bureau - the organization that provides the numbers on booked magazine advertising revenues and pages - will discontinue its monthly report (free registration required) and go to quarterly updates. This apparently has put into a knot the knickers of many advertising buyers:

...the move is the latest in a pattern of similar moves by other media trade groups over the past several years that appears to be suppressing, not enhancing the flow of information about the advertising performance of their member media companies.

But I think that's a self-defeating view. Why do advertisers make choices based on media revenues? It's an institutional lemming effect - "Hey, look, Doug, all those lemmings are jumping off that cliff. Maybe we should, too!" A more sensible business approach would be for companies to examine the effectiveness of ads compared to the dolalrs they pay for them. If you aren't getting enough results per dollar, who cares how many others use the magazine? And if you are getting good results, who cares how many others use the magazine?

I suspect the real concern is that without some sort of outside guidance, media buyers and marketers will actually - gasp! - have to determine that effectiveness. Before too long, it would become apparent that they don't really know what works best and what doesn't, which would mean that many of thse people would be out of a job. However, don't blame them. Blame the marketing officers and CEOs and CFOs of corporations who recklessly spend ungodly sums. Worried about lowering your costs? Forget about outsourcing product manufacturing and service delivery - and handing the foundations of your company to someone else. Labor is probably only a few percent of your costs, whereas the marketing component will be ... what? A quarter? Half? More? What makes the misdirected effort so darkly humorous is that the techniques for doing this exist. Companies could save money now. But management would have make a decision to do something different - and that would mean being accountable. Perhaps the real onus lies with the investors and owners. If they didn't put up with such a waste of their money, management wouldn't either.

Interview with Intel Global Marketing VP

I interviewed Don MacDonald, vice president of global marketing at Intel, as one source in an Advertising Age story I did on how marketing departments deal with shifts in markets. As is typical, I could only use a small portion of the conversation, so here is an extended, and exclusive, Q&A.

ES. How are PC markets changing the Intel business landscape?

DM: [M]ature markets … make up about 50% of our revenues, perhaps more. We moved from a goal of roughly one PC per household. We now sell more laptops in the US than desktops. From a saturation perspective, it really becomes one per person in the family. The technology is becoming affordable. The average PC is … around $700. But in 1996, the average cost was $2,000. [But] the reality is less than 5% of the world has a PC. In some cases, you actually have village PCs. We’ve actually designed PCs that run off of car batteries because you can’t guarantee a constant supply of AC.

ES: When PCs are everywhere, how does that affect the Intel brand?

DM: If you actually look at the prominence of the Intel brand, we’ve made that much more pronounced. People had heard of Pentium or Centrino, but people didn’t realize it was from Intel. Look at the original Centrino brand. The Intel logo on it was so small, so trivial, that even I couldn’t tell there was an Intel brand on there. We’ve had tremendous change. The single biggest problem we have is that people are so much more comfortable with technology. Technology for consumers was scary. They wanted help. They looked to a brand to help them make a choice. Now they’re so much more comfortable, the problem there is to make people think about the technology.

ES: How do you do that?

DM: Job one is to make people care about the technology. You have to educate and explain that there are things you simply cannot do unless you have access to the latest technology. The reality is we’re delivering more and more goodness. But how do you communicate the goodness of [the platform]? We’ve gone way beyond standalone processors. A good example of this would be New York Central Library. Ten years ago it was a place where you borrowed books. Fast forward, and it’s a place you can go online, where you can borrow DVDs and CDs as well as books. What we have to do is extend the definition of a processor so it can represent so much more without throwing away our history.

ES: Can you give an example?

DM: A good example is wireless. There were nine years between the 802.11b spec being published and Centrino. In November 2002, there was a 5% attach rate of wireless to notebooks. In 2003, it was almost 100%. The average cost of wireless in December 2002 was $150. We were able to deliver wireless technology in March 2003 for less than $15. We made it very affordable and then drove our cost down.

ES: So you subsidized the cost to grow the market?

DM: Subsidizing is too strong a word. We knew what the average price would be through the year [and so started with that average price] Most business models are usually dictated by customer acquisition costs and customer support costs. We eliminated a huge number of support calls that otherwise would have [happened]. We spent $40 million in testing and took out hundreds of collars of cost per user in support. We had to break the chicken and egg. The same with VIIV. We’re at the very beginning of what is shaping up to be a whole new industry.

ES: How has the new market changed your marketing?

DM: PR in my opinion is by far the most important aspect of this. We have more emphasis on a fully integrated marketing campaign than ever before in history. The idea of just using an advertising campaign is gone. We have a unified campaign through the multiply theme. Online’s been very interesting for us. We had four days of dialog. We let people talk to the people who invented the products, one hour a day, four consecutive days. We had 25K people in the chats. In the past, to get 25,000 conversations for an hour, that would have been a more expensive event. If you actually look, particularly in the IT space, at how much you spent on your budget on media and then factor in media inflation … in an apples to apples comparison, we’re probably at 50% of the effective media spend of five or ten years ago. We’re having to place a premium on innovation in communication. If it’s relevant, you’ll still break through. If it’s not, you won’t. We’re ruthless about how we spend the money. If it doesn’t work, it gets cut.

ES: How has the marketing message changed?

DM: Originally, it would be business users thinking about buying technology. That would have been probably 30 years ago. Five years ago, it would be giving PC users faster PCs. Now we’re in the era of processing. Anywhere there’s processing, that’s our target audience and where we move away from one side fits all. Now we have five business units arranged around customers: digital health, digital home/entertainment, enterprise, mobility, and [the retail] channel. Most people don’t want to know how these things work – the 1.7 billion transistors. People want the benefits. They don’t want to know what pipelines you have to use to make it possible.

How CMOs Deal with Shifting Markets

My article on how CMOs manage when companies have to shift markets is out today in Advertising Age:

Everyone knows Intel. With a great brand and overwhelming market share, it's no surprise people associate it with PCs. And that success is exactly why the company is changing its marketing.

Here's the full article.

Dealing with Angry Online Mobs

BusinessWeek has a story on how companies deal with the electronic tidal waves of customer and employee displeasure they can receive. Whether emails, postings on major blogs, or videos catching unpleasant happenings (like rats running about a fast food establishment), the results can be brutal on reputation, and according to experts I've interviewed, there's a strong correlation between corporate reputation and how well the company's stock does.

Companies deal with the bad news in a number of ways. Some directly engage sources like bloggers, which may work for now, but not all will back down, and eventually they'll become inured to the lavished attention. What seems a smart move is to directly engage the broader range of discontent, like when Home Depot's new CEO apologized for the poor level of customer service his company offered customers, after an MSN Money column set off "10,000 angry e-mails and 4,000 posts, which took the company to task for pretty much everything."

But surely the company knew that it was letting people stand around without help. Why did the CEO wait until the dam of resentment burst? Posting a letter isn't enough in an age where customers are increasingly taking control of communications. Some companies are even trying to use services that promise to correct or "destroy" unwanted information. Perhaps warranted corrections can help, but trying to subvert honest opinion is bound to backfire. Look at the bad press that Wal-Mart got for how it works with bloggers, or that Microsoft received when sending out full laptops with its new operating system to influential technology bloggers.

I had two odd cases in my food blog, where comments about a product that I reviewed appeared days or even a week after the pieces originally ran. In both cases, the company knew that the review was there. And in both cases, some anonymous "user" started spouting off about the true value of the product in ways that were obviously marketing jargon. I eventually disabled comments - but only after I publicly wrote about how the comments appeared to me to be fake. So, when a mixed (or even largely positive) review isn't good enough, well, then, provoke something far more negative instead. Now that's bright.

Last year I wrote in Advertising Age about the phenomonon of customers having large megaphones (sorry, but I know of no available unpaid link). That trend is only going to increase. Companies would be wise to start operating as though people were watching over their shoulders and reporting on their every move - because they are and they can.

Another Reason Music Labels Have Problems

Music CD sales are down 20% in the first quarter of 2007 compared with the same period in 2006. The typical explanation you might hear is the upswing of digital music. But there is a danger in equating the proximity of events with causality, and many are missing another significant cause for lowered sales: crap product. I've been continuing reading Chasing Cool and came across the following:

Today, artist development departments and A&R executives, those people responsible for signing talent, are disappearing. Their replacements, instead, often look to data to define whom they sign. it becomes less about a gut decision to sign someone who seems genuinely talented than it is about the arc on a spreadsheet.

Of course data is important when making decisions, but that information has to fit into an intellectual framework and inform the decision, not replace it. Look at the numbers the wrong way, or misinterpret them, and you will only more quickly and thoroughly tank what you do. By watching the tracks on the stations, the labels forget that they are pushing what goes onto the stations - for an example, look at the settlement between the FCC and some major broadcasters about the station owners taking payola from labels. Even when the choices were strictly from the stations, this is an example of companies making decisions for consumers - and then depending on the results to see what consumers want. Real commercial power comes from giving people what they didn't know they wanted. Look at the emergence of trends in music over the last 2,000 years - each new type of music was a significant break with what came before. Yet when you base your decisions on history, you get more of the same. If labels want to be relevant, they need to stop trying to be, as Melville put it, eminently safe. Growth comes from risk, not assurance.

Jeremy Allaire Profile

A profile of Jeremy Allaire - Internet media pioneer - that ran last year in Advertising Age:

Forrester principal analyst Josh Bernoff hears about new ventures all the time. But four or five people he trusts all were talking about the same one: Brightcove, which was trying to revolutionize broadband video distribution. Then again, founder and CEO Jeremy Allaire is not the typical entrepreneur.

“He’s got an ability to look at the markets and say a year and a half from now what’s really going to be hot is X, then build it and see what happens,” Bernoff says.

After creating Cold Fusion, the first Web development program, with his brother and then joining Macromedia to co-lead transforming Flash into a Web interface, Allaire is ready for another challenge. “Traditional programmers are trying to take the products they’ve created for broadcast and re-factor them for the Internet,” he says. “They’re missing the essential qualities that make a broadband Internet business exciting.” Allaire wants to let video producers of all sizes to reach audiences of all sizes, all while enabling video advertising and consumer participation.

Mixing video ads into online video distribution might seem obvious today. It wasn’t when Allaire started Brightcove a few years ago. Yet there’s a good reason he can see the future of what people will need: he’s actually one of them. Taking degrees in political science and economics, he was “borne of the Apple II generation” – a self-styled tinker who in 1990 saw the Internet as a media platform that could help transform society. First someone had to make it technically possible, so he volunteered. Essentially he wants to allow the content barbarians over the walls of tradition, producing material for niche audiences – while still serving the media giants. “I think we’re just on the cusp of these alternative distribution models being real enough that the creative community will have creative alternatives where they can maintain and protect their own rights,” says Allaire.

Even beyond the customer-focused vision, Allaire is unusually effective says Tim Hanlon, senior vice president of Ventures Denuo, the media futures consulting practice of Publicis Groupe advising Brightcove. He brings an underlying pragmatism and appreciation for both what the customers want to accomplish as well as the barriers facing them. Not only did Allaire get that there “was an unchaining of video from its traditional environment,” but knew that any distribution platform would need a way for consumers to respond and for advertisers to pay and make it all possible.

In addition, Hanlon says Allaire’s personal management style is “affable and approachable” when working with people in his own company and at others. He treats Brightcove as a new start, not a continuation of something he’s owed. “That’s what you want out of an entrepreneur – someone who visionary is trying to make things happen.”

It’s not a given that Allaire will succeed a third time. “We’re going through very much an experimental phase despite all the hype and excitement,” he says. But with his experience and drive, he has as good a shot at success as anyone. Or as Hanlon puts it, “I think it’s very difficult to bet against him.”

More to EMI-Apple Pact for Unprotected Music

EMI has finally agreed to let Apple distribute unprotected digital music. Apple's CEO Steve Jobs has been publicly vocal about the need for the music labels to pull their heads out of whatever beach sand they inhabit and face reality. But there is at least a second force at work: patent licensing of audio compression.

All digital sound that you'll find on the Internet is compressed, so the files take up less space and transmit faster. The major format had been MP3, whch is actually a spin-off from a type of video compression. However, Apple for various reasons (including an easier time protecting content from users who might choose to swap files) decided on chose to use ACC.

There is a significant difference between the two formats in their licensing terms. Companies distributing audio in MP3 format must pay royalties. That isn't true for ACC. And devices that play the files must pay royalties for either MP3 or ACC.

Apple and EMI (and, presumably, other labels going forward) have just demonstrated a brilliant competitive use of intellectual property. By making ACC more attractive, the labels help move the market to a format that will reduce their costs and, obviously, increase their profits. As the labels move, virtually all the other player manufacturers will have to support ACC, which ensures that they are paying the same number of royalties as Apple, leveling the playing field in manufacturing costs. Yes, a number of manufacturers already have added ACC support, but this would become the nail in the coffin. And the relationships help cement Apple's position at the forefront of mobile music. What really brings a smile to my lips is the thought that they managed all this through smart use of IP that neither Apple nor the labels owns. Instead of Other People's Money, or OPM, maybe we should talk about OPT - Other People's Technology.

The New York Post: Another Company Bribing Customers

There seems to be a rash of desparate companies offering steep discounts or incentives to get and keep customers. Joining the role is the New York Post. According to the Village Voice story, cutting costs and losing money has long been a customer acquisition strategy of the News Corp. property:

A few months before resigning in 2005, Post publisher Lachlan Murdoch acknowledged to BusinessWeek that halving the cover price widened the paper's annual loss, rumored to be in the tens of millions. In the same article, he said he intended to restore the paper's 50-cent cover price if and when the Post passed the Daily News in circulation, adding, "We very much care that it make money one day." But it seems pretty clear that "one day" will not come until the Post is straddling the bleeding, lifeless corpse of the undercut Daily News. (Current Post publisher Paul Carlucci did not return calls for comment.)

And that's pretty much what it will take, because customer bribery as an acquisition tactic is a poor retention strategy. Once the price goes up, many of those new readers might well go elsewhere. The interesting question, brought up by Piet Bakker, who blogs about free newspapers, is whether newspapers will go to completely free copies and rely on other revenue streams.

True North and the New Old Leadership Paradigm

The other day I read a New York Times review of a management book - usually not the sort of thing I spend much time with, but the article's author, Bill Holstein, is a former editor of mine whose work I respect. And I'm glad to have taken to detour. The book, True North: Discover Your Authentic Leadership, sounds like someone has finally begun again to look at the fundamentals of what it takes to get business done. The certral theme (though I haven't read the book yet) seems to be that real leadership means being interested in something other than yourself. Profits are welcome, but the people profiled in the book had drives beyond making money. In fact, I'd argue the obvious point that money only comes as a byproduct of doing something else that people want. There has to be something greater than the company and, certainly, than the CEO. As Bill puts it:

The best leaders are also capable of developing a virtuous, or reinforcing, cycle of leadership, Mr. George explains. They are driven people with moving personal stories and they empower the people around them. That leads to business success, and attracts even more ideas and people.

I found this theme reflected in a way in another book (one that I'm actually reading) called Chasing Cool: Standing Out in Today's Cluttered Marketplace. The publisher had sent an advanced copy for me to see in the context of another article I'm writing for Advertising Age. Although not yet through the whole volume, there's quite a bit I like about it. One of the main themes is that companies looking to harness the branding power of being cool never get it by faking or trying to advertise it in. Ultimately, brand is what the company is, not what it wants customers to think it is nor what consultants say it should be. For example, it mentions skateborder entrepreneur Tony Hawks (ask your teenager): "If I had to go to someone else to be cool, I'd just pack up my bags and find a new profession." Real cool is doing what you believe in and not worrying what people think - and the result is that people follow. Funny, that's another definition of leadership.

Will Farmers Go on an Ethanol Bender?

I remember in college that dorms and frats with a taste for spirited beverages would spike punch with pure ethanol, which was cheap and easily obtained in labs. In my freshman year a classmate who had lived a quiet life, drank an unbelievable quantity of the liquid at a party and then spending the next 24 hours with a mattress in a common bathroom so he wouldn't have too far to move to get to a toilet. He lived - luckily - and learned a lesson: when you over indulge in grain distillates, you can end up with a nasty hangover.

American farmers may be setting themselves, and the rest of us, up for a similar experience. Ethanol has become all the rage, and that has drive up the price of corn and increased the number of dollar signs in the eyes of growers. As the Financial Times noted last Friday:

US farmers plan to increase their corn-growing area by the largest amount seen over a 12-month period in more than 100 years, as they try to cash in on the rush for ethanol, the US Department of Agriculture said on Friday.

This means fewer soybean plants and less cotton production. Some have been arguing that the diversion of crops to fuel would have a negligible effect on the cost of feed for animals and, ultimately, the cost of food for humans.

But the impact of the switch will be more complex. As the FT noted:

Grain analysts said the reduction in soybean growing could lead to falling stockpiles, which could push up prices and result in livestock farmers paying more for animal feed made from soybeans.

Now consider that as more farmers seem to make more money, we will likely see some degree of a gold rush effect, particularly as oil prices again rise. Then there is that great principle shown by history: as everyone rushes in one direction, something bad is bound to happen. Let's hope that as the corn crop expands to create ever more grain alcohol, someone is considering how to build the world's largest aspirin for the morning after.

Microsoft Ready to Buy Search End Users

Yesterday I wrote about the dangers of frequent buyer programs. A story in the New York Times shows that Microsoft has embraced the philosophy of "If you can't beat 'em, try bribing customers" - or, as the clever headline read, "If at First You Don't Succeed, Write a Check."

Because Google's share of the search market is only expanding, as is its influence on people and its cash flow, Microsoft is apparently paying large companies anywhere from $2 to $10 per user annually in credits for the vendor's products and services. As the article (which did acknowledge John Battelle's Searchblog as the source that originally breaking the story) puts it:

“We’re the underdogs in this business,” Mr. Sohn acknowledged. Breaking users of their inclination to use what he called “the incumbent” — he would not use the “G” word if he could help it — requires a willingness to depart from standard practice, and to weather sniping from outside critics. “There’s always controversy when anyone tries something new,” he said.

I hate to break it to Mr. Sohn, but there's nothing new in trying to pay companies to use your services. The problem is that you've set the precedent and the chance of ever not paying for their business is pretty slim. And while Microsoft does that, Google comes out with a free ad servicing business that will compete with DoubleClick - just as Microsoft considers buying the company. Quick, better buy a few more customers.

The Responsibility of the World's Largest Publisher

I almost put this into the previous post, but thought it was really a separate topic. Although corporate managers often want to claim that the only interest of a company should be making profit, that's an incomplete and unrealistic view of the world. Any business has stakeholders - investors, employees, business partners, and communities - that have a variety of interests. A responsible business cannot simply ignore the environment, for example, because nonjudicial acts can promote economic disaster from ecological disaster.

When a company like Google becomes prominent in its field - publishing information - it takes on a responsibility because people will rely on what they find. That's what makes this story about the replacement of post-Hurricane Katrina images with some before the storm so disquieting. As the AP story says:

Swapping the post-Katrina images and the ruin they revealed for others showing an idyllic city dumbfounded many locals and even sparked suspicions that the company and civic leaders were conspiring to portray the area's recovery progressing better than it really is.

Whether fueled by economic interests or desire for power, this comes uncomfortably close to the rewriting of history in George Orwell's 1984. Change something in the database and suddenly you've altered views of "reality" in real time. Again, according to the story:

John Hanke, Google's director for maps and satellite imagery, said "a combination of factors including imagery date, resolution, and clarity" go into deciding what imagery to provide.

One might hope that truth and accuracy would become significant factors before people relying on the company's information offerings unknowingly take part in a rewriting of the past.

Google Wants to Be a Publisher

Google is an odd duck, apparently making money in and around what publishers of all shapes and sizes do. The theme, as most analysts have seen it, has been search and advertising. Look at a New York Times article from yesterday about the problems the company has had in selling radio and television advertising. In calling Google's growth "insane," Microsoft CEO Steve Ballmer called it a "search and advertising" business. I'm starting to think that pretty much everyone has been getting it wrong.

For a moment, stop thinking about Google's categories and start looking at what it does: find content, develop new ways of presenting the content, act as a conduit between content and users, wrap advertising in and around the content. Search? That's only on-demand real time content sourcing. Google isn't a search engine or even an information distributor. Google is looking to become the world's largest publisher.

Add it up. Search is important when content is decentralized, as it is today. Partnerships to put books online are important when there vast audiences will never fit into even at the largest university library. Video is just more content for another form of publishing. As are images. As are maps, and business information, and business directories, and product pricing lists, and blogs. And what if print publications try to keep Google from making money on their content? There is always revenue sharing, or when, as the story mentions, you can easily talk about hiring a thousand television ad salespeople, why not add writers and videographers and audio producers all around the world? The company certainly could, and then publish that information in what is probably the single largest destination for content around. What do you think Google News is? Or Google Blogs? They are publishing.

That's why scaling up so quickly is important. A search engine can find content, but it takes people to really create it. And if Google doesn't stumble, I can't think of a single "media" company that could hope to catch up. All they can do is cooperate and pray that they join the chosen partners. However, when business is decentralized, the partners may be very small, and the publishers may have bigger nightmares than they realized.