A Sudden Realization About the Sub-Prime Crisis

I've written a fair amount about this topic, so this will be short. (Having impending deadlines, like other forms of death, concentrates the mind wonderfully.) But when I started thinking about how this debacle came to being, I wrote the following:

By combining pools of mortgages with rising housing prices, lenders were able to wash off the risk because the failure of some percentage of borrowers still left the pool safely covered.

That was the explanation I had read, but something bothered me about it. It didn't quite make sense that some juggling could improve the credit rating that much. After all, to really cover the potential default rates, you'd probably need to add a significant number of "good" mortgages that would be unlikely to default so the return on the investment had a reasonable chance of occurring. But then the default rates shouldn't have had that kind of impact. And yet, it seemed that the derivative securities were largely based on poor credit lending. How did bundling them get better ratings than the individual loans would have?

After paying attention to more reporting on the subject, I think I now understand. The rating agencies abdicated any ethical or moral responsibility to give an honest opinion on the derivatives because they are paid by the very financial institutions that were issuing them. Unfortunately, investors pay significant heed to these ratings and often pass on doing further due diligence. I could understand that from individuals who are intimidated by understanding financial matters. But these derivatives could never have taken off without significant institutional investor participation. What happened here? Don't these large organizations that hire lots of brainy people actually do their own thinking? Actually, many rely on the opinions of others far more than you might thing, certainly in proxy voting issues, as I learned in writing an article for Corporate Secretary.

So many individual investors, putting their money into money markets, pension funds, and other aggregations of cash might be taking a larger risk than they realize, because they don't always know who's really making the decisions. Where has the financial media been through all this? This story has an Enron-like cast, with lots of people writing in awe of the clever financing and no one pointing out that the Emperor ruled in the buff.

Uncover Cybersquatters

Usually I look at business theory and practice, but today is one of those excursions into the completely pragmatic. As your company gets better known, it may become the target of cybersquatters. These are people who try to capture traffic that would otherwise go to your company's site. Their intent might be to see if they can make online ad revenue from the diverted audience, to twist your arm into buying the rights to the domain, or even to pull a scam.

Ideally you should have registered other variations of your domain, such as .net, .org, .biz, and so on. To see if you're covered your bases, go to the Internic Whois server, which lets you look for different domain names, and check variations on your domain name.

Next, see if there are any typosquatters - people who try to anticipate how people might misspell a domain name or type in a good, but wrong, guess as to what it might be. BCI Law Group has a free tool that will do various searches.If you're doing work on a corporate website, this can be a valuable extra value service you can toss in to help build good will and alert the client to potential problems.

Online Software's Potential Problems

John Dvorak had an interesting piece on software as a service (SaaS) - a rising trend in which software companies make software available as hosted services on Internet servers. You pay the fee (or, in the case of a company like Google, don't), and you can then use the software.

Dvorak's rant uses a big SaaS network failure that Microsoft recently had and then goes on to point out the following:

Though tech trends are clearly going in the direction of having apps online, last weekend's massive failure of an important online subsystem does prove that such reliance on the network and applications servers has the potential to be catastrophic. Microsoft is a provider of server software and is more than a little familiar with running huge installations. This 19-hour outage that the company itself said would last perhaps 72 hours happened to Microsoft, not to Alabama Joe's Server Farm and Toaster Repair. So that in itself is scary.

That is certainly true, but hardly inclusive. There are many other potential problems with SaaS:

• If you have that software on a laptop, what happens if you're traveling and can't get an Internet connection? Or if you have to pay additionally for one-day access as happens in many airports? Not only are you at the mercy of network outages, but you're at the mercy of always having that tether to the Internet.


• Your data - possibly sensitive - may be up on someone else's server. Sure, hackers are a ptoential problem. So is industrial espionage, or government subpoena. I'm no lawyer, but I bet that it could be much easier for someone to get information from a third party than directly, because the software host won't want to get in the middle.


• You lose control over what version of the software you're on. I know that keeping up to date is supposed to be one of the features of SaaS - you always have the latest version. But I've seen too many new software versions that turned out to be disasters. It used to be a rule that, at least with many vendors, you'd never upgrade on a new release. Instead, you'd wait some time and see how others fared. With software as a service, that no longer works.


• With SaaS, you keep paying. There's no such thing as owning a license and being able to use it freely. What if the company changes its rates? You end up paying them. If you're running a small business and cash is tight that month, it's another bill that you must pay, or risk losing access to your information.

And that last point is really, I think, the essence of Dvorak's article. Instead of using software as a tool, you are at the mercy of the company. If it goes out of business - as happened with services in the dot com explosion - then it's probably not going to give you advance notice and you may be stuck. If it changes its usage policies, you are stuck. If it has financial difficulties and service suffers, you are stuck. Of course, this entire trend isn't about better service for the user. It's about a sustainable fee structure for the software vendors, who eventually found that the early promise of sell a copy and then sell upgrades eventually putters out as a company reaches a natural saturation point in the market. When you hear a lot of enthusiam for this business model, it's vendors being focused on themselves, not on you, the user.

Wal-Mart Thinks Small?

Yesterday the Financial Times had a story on how Wal-Mart is considering lessening its reliance on its Supercenters for future growth:

The world’s largest retailer, whose US stores had sales of more than $64bn last year, is seeking an executive to assess the “strategic implications of any possible M&A on our overall portfolio”, according to a Wal-Mart job posting.

I found it interesting, given my rant yesterday about the company's gas price commercial. It seemed like a contradiction - blaming "disappointing" results (though I am skeptical on how disappointing what you do can be when you're on the top of your particular hill) on high gas prices while essentially acknowledging that the biggest box store strategy might be a dead end, but on reflection it isn't.

If the story is right (and I suspect it is), Wal-Mart is looking at acquisitions, and sees this as an gengine of growth, not of continuance. So it's an addition - and that still leaves room to blame others. I think there's still a problem: economics, mathematics, and common sense suggest that there is only so much market share you can have. Eventually you run out of people who want to do business with you for whatever reason.

So, to get someplace new, give them a new reason to buy. The online music move is interesting - and even faster than Amazon.com. Maybe what Wal-Mart needs is a real challenge. Instead of acquiring some chain and then rebranding the name to some variation of its own, creating the inevitable emotional associations, Wal-Mart might think of doing heavy research, finding some concept that really is missing, and then investing and building its own chain with a different brand, from scratch.

That flies in the face of most assumed business logic, I know, but the idea would be to do more than just become more bloated. The company has all this money that could use investment. It could create an obvious internal challenge with a focus on something it could make happen rather than the fuzzier "get bigger." It could grow and make more revenue and profit as the natural byproducts of trying to achieve something concrete.

I think the psychological quirk of trying to control numbers and creating strategy as a result instead of the other way around is a definite problem in business. It led to the current mortgage market, to over-investment in the 1990s, and to many other general business failures. You don't get someplace by wanting to have fame as an explore; instead, you get fame as an explorer by heading to the North Pole. It's a lot harder, but ultimately more rewarding for management, for exmployees, and for investors.

Wal-Mart's New Gas Price Campaign

I was watching some network television last night and saw a Wal-Mart commercial in which actors talk about the price of gasoline but then say how they won't let it dictate their lives - and, presumably, going to Wal-Mart is one of those life choices.

The commercial seems quite peculiar to me, and I wonder if this isn't a sign that something is seriously wrong with Wal-Mart's marketing and business strategy. First, gas prices have come down, oh, a good 30 to 40 cents a gallon here from the spike earlier this year. I suspect they're down around the country as well - and I also think that consumers have made their peace with prices. Certianly they're not giving up shopping for what they need. (In fact, last night I heard a number on NPR that pegged it at 40 cents overall since spring.)

So you'd think that the commercials are runnning at least a month late, and are really negatively-based. They argue not to give up life style choices - no matter what the price, which, I guess, is easy enough to do if your annual business equals many national GNPs. But there is no reason to go to Wal-Mart. If gas was such a problem, why not roll out Wal-Mart gas stations with subsidized prices to get people to the stores? And other stores, like Target, seem to be weathering the economic issues, which hit most equally.

But Wal-Mart has been blaming gas prices for recent poor performance. Maybe the problem is not gas prices, but strategic decisions. Perhaps they've gained too much bad will through their own actions in dealing with labor issues. Perhaps people are angry about outsourcing and see Wal-Mart as selling out to China. Maybe the idea of having superstores apart from malls, where people can more efficiently shop, is the real problem. (I wonder what the company's same store sales are in mall locations versus standalone.)

Whatever the issue is, I don't believe it's largely driven by petroleum. Yet the commercial, along with Wal-Mart's remarks to Wall Street, show this as an officially adopted excuse. Maybe it's time for upper management to look and see whether there might not be more serious issues - for example, the well-publicized internal company report on mistakes in moving outside the existing brand. There is something more going on inside the company. Trying to find the logical explanation for investors won't solve anything and will only get management more determined to keep the blinders on.

US Gambling Stance Endangers Copyright

The New York Times has a great story about how US attempts to stop its citizens from using online gambling in Antigua could result in that country getting permission from the World Trade Organization to infringe on US copyright and sell copies of American products. Essentially, Antigua took the US to the WTO court, complaining that we were selectively allowing online gambling. So far, the US has lost the original case and an appeal, but has been ignoring the ruling.

But not complying with the decision presents big problems of its own for Washington. That’s because Mr. Mendel, who is claiming $3.4 billion in damages on behalf of Antigua, has asked the trade organization to grant a rare form of compensation if the American government refuses to accept the ruling: permission for Antiguans to violate intellectual property laws by allowing them to distribute copies of American music, movie and software products, among others.

Wow. The WTO is stuck because it must follow its own rules. The US doesn't want to allow offshore gambling, but by protesting and ignoring the ruling, it opens doors for other countries, like China, to do the same. And if Antigua gets permission to go ahead, what can the US actually do to stop sales and the losses that businesses would feel? This is the hidden problem of talking about completely open markets - eventually you get caught by the law of unintended consequences. Most countries that talk about open markets are all for them - for others.

Patent Politics

I have an article in the August 2007 issue of IP Law & Business about politics, displeasure, and the US Patent & Trademark Office. I actually preferred the original first paragraph:

Business people and lawyers complaining about federal agencies? Quick, call the TV cameras—the sun rose today. But noise about the U.S. Patent and Trademark Office in the patent community is escalating lately from complaints to serious criticism and even to allegation.

Ah, well, editing is about change. The topic is interesting, though - and given new continuation rules (which affect the entire patent application process) and proposed changes in patent law, there's a lot that CEOs and CFOs should be considering. This is not just an issue for a company's general counsel.

Dell Not Well After Knell

A death knell usually means the end of something. Sometimes it happens after a long illness. In the case of Dell, the bell tolls for for conditional listing, for having to restate four years of accounting records, for being unable to predictably deliver products on time. It's the end of Dell as everything thought they knew it.

I'm generally suspicious when praise of anyone or anything gets too loud and continues for too long. It was perhaps three or four years ago that there were some obvious signs that Dell was traveling down a dark path. They were insanely profitable compared to other PC vendors, and while Wall Street rejoiced, investors should have been scratching their heads. As the saying goes, when a deal seems too good to be true, it probably is. Given the thin margins and massive supplies of products, pricing dropping faster than a stone through a clear sky, how could they have been managing profits that were triple those of companies like HP?

One part of the answer came from electronic component analysts who said that they were squeezing suppliers tight enough to suck out virtually every penny of savings the vendors could get from economies of scale. "We're making you efficient," said Dell, according to these analysts. "Get your profits from your other clients." Those other companies - sometimes even competitors of Dell - naturally took offense that they should be underwriting that company's earnings. So a growing number of suppliers began to walk away.

No problem for Dell: suppliers were a dime a dozen. But management forgot that there's more cost in a supply chain than the incremental expense of parts that you buy. There's reliability and service. Bottom feeders eventually get down into the muck, and if things go badly, their low-priced friends don't have enough capital to pull things back up into cleaner waters. Then there was the other strategy: reduce customer service, outsource technical help, anger customers, leave them on their own to solve their problems. All of these actions happened to lower Dell's costs - and another way of putting that is the company wanted to take even more money out of customers' pockets, only without being obvious about it.

And now we see that Dell had yet another strategy: stretch the truth. (It's something most of us grew up calling a lie.) Here's how the Reuter's put it:

Dell Inc. said on Thursday it would restate four years of financial results, reducing net income for the period by as much as $150 million, after a lengthy audit found that top executives sought accounting adjustments to reach quarterly performance goals.

It wasn't enough to keep trimming corners and tick off customers. To keep the stock price up, managers were prepared to play with the numbers to get the results they wanted.

It was perhaps in 2003 or 2004 that I began telling some people I knew that I expected to see front page stories, titled, "Whatever Happened to Dell?", in BusinessWeek within five years. Maybe I was a year or two optimistic. As the Reuters story further stated:

Dell, based in Round Rock, Texas, said it did not expect the restatements to have a "material" impact on its current balance sheet or on cash flows during the restatement period, which covered fiscal 2003, 2004, 2005, 2006 and the first fiscal quarter of 2007.

Not material? Of course management is going to say it's not material. Once you use the M-word, you're really SEC fodder, because the CEO and CFO are now personally responsible for having signed off on misleading financial reports. Right now the analysts are saying that the adjustments look "minor." I'm with Larry Dignan on SeekingAlpha that these reactions are annoying and, to my mind, at least, misleading:

While the restatements were small, Citigroup analyst Richard Gardner notes that Dell would have missed estimates during its first fiscal quarter of 2003, second quarter of 2003 and fourth quarter of 2005 without the accounting hijinx. That’s hardly meaningless.

What company misses multiple quarters and then sees analysts say, "Oh, that's OK, it's the thought that counts?" And that doesn't address the really big problems in supply chain and in customer service and, ultimately, customer retention. What is Dell doing? Saying everything is fine and looking for a new advertising agency. Obviously the company needs a new story. Let me suggest a lead:

After evaluating how we've treated business partners, customers, and investors, we've decided that we have to completely change the way we do business and act with respect toward the people and organizations that hold our future in their hands.

It may not be catchy, but it might actually work.

Blame the Home Buyers

I've heard a couple of broadcast pieces lately that note how many of the problems with the sub-prime market meltdown started with home buyers lying about their incomes on the mortgage applications. Although I haven't yet heard anyone come out and say, "It's all their fault," there's an undertone in the reporting and in the remarks from experts.

It's total bunk, in my opinion. The responsibilty for prudent lending isn't the customer's. Risk management is clearly the duty of the lender. Why did the people lie? Because they had poor credit and yet desperately wanted to own their own home instead of continuingly putting money into a landlord's pocket. That's not a hard psychology to predict. No one goes into this type of financial obligation consciously thinking that they are going to fail. They tell themselves that it will be tough, but that they'll be able to do it. And then they don't read the fine print of how rates can suddenly jump.

These were people motivated by the desire to get out from under. Why did lenders grant lans? Becasue they figured they could squeeze out that much more profit. It's a classic credit strategy: you get more return for risk that is greater. I can understand that, but you have a problem when the money you want cranks the risk up to a much higher degree. They lenders should have done projections to see how much danger loans were in from potential default at different levels of interest - not from a lack of inherent trustworthiness of the borrowers, but because they changed the economic conditions to make payback virtually impossible.

"But that's why we wanted a high enough income in the first place," they will claim. Oh, please, don't make me laugh. They wanted higher income and yet wouldn't verify? The only reason they did verify - or check enough - is because they wanted to do the business too badly. You'd think that a mortgage company would have all the power in a negotiation, but, ironically, they didn't. This is a perfect example of neediness in a negotiation (see my review of Jim Camp's book, No).

The entire credit industry wanted every penny it thought was out there, and so completely dropped all the barriers of logic, reason, and prudence. Last week, the Financial Times had a story about web sites that would charge people to act as income verification, even though the people had never worked for them. Yup, that would be financial fraud. But to trust the word of a phone call? Not to check what business the company was in? How long does it take to run a standard credit check on a company and how much does it cost? The answers are not long and not much. If the borrowers were literally criminal in their misrepresentations, the lenders were figuratively criminally stupid.

Although it will be painful for the global economy, I do hope that governments don't drop interest rates to effectively bail out the lenders. It's not as if they haven't seen the potential consequences of foolish risk taking in the past. How many lessons does someone need before having to pay for their actions? We expect poor individuals to pay at the first mistake. Perhaps it's time that business leaders do their own hard times.

Disney, And When Big Views Aren't Necessarily Good News

The New York Times had a story of how the High School Musical movies have become a major property for Disney. The first has turned into a Broadway show and that musical is being performed by a frighteningly large number of schools across the country. The second had an estimate audience that apparently would be the largest in "basic cable history."

Even with "lukewarm reviews" (from adults, after all), it sounds like a winner. Only, I'm wondering if any of the people involved have kids. The first HSM was a favorite at my house, and my teenage daughter, my preteen son, and a teen niece were all looking forward to the sequel. They were ensconced on the sofas when it started - and by the time it ended, they were snorting and derisive. There were complaints about the direction, the acting, the singing, the dancing, the story, and the writing. That didn't keep a slightly reconfigured set - three teenagers and a pre-teen - from watching a second singalong showing ... and openly mocking throughout.

Brand is tricky, and I'm not sure I'd be happy even with an enormous audience if my kids represented any large part of the public. Good marketing, in the form of the original product appeal and the promotion for the sequel, can often kill something faster than a good competitor. And when your new big thing is something invoking derision, at least among some previously supportive group, I suspect it does damage to the overall corporate brand. Here's a relevant remark from the article:

Nevertheless, sustaining interest in “High School Musical” required Disney and its promotional partners to bombard capricious young viewers with a relentless stream of merchandise and marketing in the 18 months between the first and second movies.

And now some analysts wonder if Disney is risking the health of this budding franchise by expanding it too quickly.

I would join the came of those wondering. The company has done well in the past, even with series like the Halloweentown movies. And it's beyond doubt that Disney is capable of getting good writers and composers, creating musical material, and making movies that both become perennial favorites that then translate to the stage and, ultimately, are performed by school and community groups.

So what went so wrong here? It's not the lack of talent, I'm sure. Could the Big Kahunas decided that things would go even better if They got involved with directing the talent where it needed to go? Whatever the case, between over hype, under delivery, and the merciless nature of the tween and teen markets, Disney may have given a solid punch to its own corporate solar plexus.

The Real Problem of Compliance

I was recently speaking at a meeting with some fairly large public companies. The topic was a relatively new SEC requirement: plain English explanations of executive compensation. After I spoke, there was a lull and it seemed that no one had any questions. And then, just as the organizers were about to move ahead onto something else, one question came, then another, and another, and another.

Actually, I'm not sure that question is the right word. The tenor was more of a statement ... really, a complaint about the prospect of having to spend even more money for compliance. It wasn't the plain English disclosures so much as all the recent waves of compliance issues. The displeasure really came in several parts: the seeming arbitrariness of many of the regulations, the sense that business is starting to exist for the sake of regulation and not the other way around, the attempt of the SEC to push its requirements into other countries, and the cost of it all.

I could understand the displeasure - I've heard much of this from upper level management before - but this spilled forth in a rush of bitter anger that was palpable. Someone did eventually say, "Let's be fair; he's not with the SEC," which did get a laugh, but it was like putting a spark to gunpowder.

What really surprised me, although in retrospect it shouldn't have, is that so many businesspeople from such a range of companies were acting completely emotionally. Their focus was on themselves, understandably, but in a way that did not allow any improvement of the condition. For example, they were literally saying, "The regulations are killing us!" I asked, "Were your revenues higher this year than last? Did you make higher profits this year than last?" The answers were yes and yes. So I replied, "Then it's not killing you." Oh, no, they said, the compliance issues are killing us.

Again, hearing this isn't new, but I found that as I applied some logic to the situation, they wouldn't change their focus. They wanted to remain in pain, which is a pretty common, if perverse, reaction. But complaining only about how something is unfair is useless. Either it is out of your control, in which case you can't do anything about it and should focus on what you can do to minimize the impact, or it is in your control, in which case you should stop complaining because you're doing it yourself.

But many executives apparently are doing neither. They continue to complain and don't make the effort to find a better way to deal with things. For example, I pointed out that Sarbanes-Oxley business controls documentation gets you maybe 90 percent of the way to real business process reengineering, where you can eliminate a lot of waste and work in a more rational fashion. Their reaction? "It sounds good, but I'd like to see you make it happen here." Yet I can imagine the reaction of any of these people if a subordinate took the complaining approach when being told that there was only X amount of time for a given project.

If compliance is that much of a burden, use the courts and lobbying to see if you can get changes. But in the meanwhile, the real problem, as usual, is ourselves. Instead of feeling crushed, find how you can make the weight lighter at least, or see if you can make multiple times more profit from the expense, by actually using the information you get to improve business.

China Becoming Patent Giant

According to WIPO, the UN's intellectual property agency, China has become the third largest filer for patents behind the US and Japan, as the BBC reported. China has for some years become the manufacturer of first resort for many companies around the world. But that's a low profit type of business. The country is moving up market, so to speak:

China knows it cannot bet its future economic success on low wages alone. Other countries are already cheaper.

I can remember a few years ago speaking to an executive of a global consumer electronics company who was working in China. He said that people had no idea how quickly the country had advanced and exactly what was going on there, that to see it for yourself was a stunning experience. It still makes me wonder how many businesses and countries still write off China as a source of cheap labor and manufacturing, where there is little interest in intellectual property and where the chief capability of interest is copying what has already been done by another. How long will it be before the west faces China as a powerful competitor on all levels? Look how long it took to recognize - not just intellectually, but emotionally - Japan and then South Korea. We may all be in for a rude awakening.

Counterfeiters Going One Better?

I've written a number of times in the past about product counterfeiting, and one of the big concerns is that the knock-offs can be dangerous, and have been proven so on occasions. But I've heard from experts who say that the products are getting better. Now we see an example where maybe the counterfeiters and knock-off experts are taking a few steps ahead of the original product. According to Popular Science, a Chinese company, Meizu, has effectively knocked off the iPhone, calling its product the miniOne.

A few days before Apple's launch, an online video surfaced depicting a sleek new product called the P168 [watch the video below]. The phone came in a black box, marked with both the iPhone and the Apple logos. The video showed the phone being unpacked and operated (the start-up screen also featured the Apple branding). There were features that the iPhone didn't have, such as the ability to operate on two different networks at once; six speakers; and, addressing a major prerelease complaint about the iPhone, a removable battery. I asked my translator if she could find one on the street. They weren't available in Beijing—yet—but a few weeks later, a friend discovered one in Guangzhou. The manufacturer of the P168 wouldn't comment for this story, but the hardware was real, and it worked.

Given the many public complaints about the iPhone, perhaps it's time for US companies to start copying the copiers.

Vitoria's Secret To Move Into Athletic Gear

Yes, you read it correctly: the strong brand of intimate women's apparrel, owned by Limited Brands, plans that "yoga pants, sports bras and other athletic clothes could soon become a major portion of the lingerie retailer's business," according to a story in last Friday's Wall Street Journal. The store chain's CEO, Sharen Jester Turney, told the WSJ that the new products will go into 30 stores:

Early customer response to the gear has been "extremely positive," Ms. Turney said. "Many of our customers have said, 'I've been waiting for you to do sport wear that is sexier'" than other athletic brands, which tend to look less feminine, she said.

In a phone interview from New York, where Ms. Turney rang the opening bell of the New York Stock Exchange to celebrate the 25th anniversary of Limited's listing, the CEO said athletic wear eventually could produce as many sales as Victoria's Secret's Pink brand, a line of lingerie and sleepwear aimed at college students and young adults. Pink is expected to post about $900 million in sales this year.

Limited is also adding cosmetic bags, luggage, and hand bags "which it hopes shoppers will buy as gifts." I know that sounds good, but it's leaving me scratching my head. Yes, Limited has dropped the Express and Limited stores, so there are more resources now available, but what about the VS brand?

I've been doing some reporting on a couple of stories for Advertising Age regarding branding - with one yet to run (the danger brand can face when companies try to gear up operations for growth). As part, I have been speaking with branding experts. Between that and some common sense, it's not clear to me that this is necessarily a smart idea, even though in July the company faced 3% same store sales drops overall and 4% at Victoria's Secret in particular.

Here's a view from Laura Ries of Ries & Ries, who also happens to be the daughter of marketing expert Al Ries:

This is a common concern, whether we are going to service a market versus creating a market. We work with big companies and, really, it happens all the time. They say we have these cusotmers that want more from us – should we deliver on that, or should we stay focused and say no? Syaing now is a parnful and diffiuclt thing for most companeis to do. We say, 'You have to do what’s best for the brand.' Many times we would go into a meeting with the client and they’d have three product lines. One would do 75% of the business, another is 20%, and the other is 5%. We say to get out of those [smaller]businesses and go with the winner. They say, 'But we’ll lose 25% of the revenue.' We say, 'Yes, but you’re probably spending so much serving those markets.'

She mentioned that the company she was thinking of did drop the two lower-earning lines and ended up making more than ever before with just the single line.

Decisions about brand are not simple. Customers have to give you permission to expand beyond your niche. Are VS buyers going to see their bags as so much more desirable than, say, Coach or Louis Vitton? Are the ones buying the athletic wear actually going to use it to work out? That would suggest significnatly different styling - read different brand - than the intimate aparrel. And if they aren't wearing it out, are we talking about the equivalent of a housecoat to wear about before you get dressed?

I'd think that it would make sense to see what the consumers are buying. I'm betting it's not products, but a way of thinking of themselves as beautiful, desirable, and sexy - in an intimate setting, very possibly with someone else, or at least the fantasy or possibility that there might be someone else. Of course, this is just a guess on my part, but I've heard from women who buy from VS. Like all consumers, they're looking for a psychological experience, not just a product. And I'd bet that athletic wear has a significantly different experience, which means brand dilution and devaluation might be around the corner.

Business Using Sub-Prime as an Excuse

There have been many news accounts of how the meltdown in the sub-prime credit markets have become like a contagion, affecting a growing amount of all business. The reasoning, as I understand it, goes something like this:

1. Housing prices kept escalating, so people had burgeoning amounts of equity, at least on paper.



2. Sub-prime lenders kept taking on more risk because high demand for homes and rising housing prices made it seem relative safe.



3. Lenders bundled together derivative securities that held the mortgages.



4. By combining pools of mortgages with rising housing prices, lenders were able to wash off the risk because the failure of some percentage of borrowers still left the pool safely covered.



5. Prices topped and dropped, and a growing number of people were defaulting - not just on first mortgages, but on secondary ones, including equity-backed lines of credit.



6. Someone had to start paying out money, which meant credit insurers and mortgage lenders alike had to start pouring out cash, which meant reducing liquidity.



7. Those with lots of cash didn't want to lose it, so they stopped underwriting so much of the business being done.



8. As a result, some groups are losing money on deals because they couldn't get the terms they needed, and some hedge funds started to close because they were effectively undertaking high stakes gambling and finding that the house eventually wins.



9. Private equity firms, which had been indirectly fueling the rise in stock prices (not some quick miracle of economic conditions), are backing away from deals because they can't get the terms and returns that drive their business models. (Friday's Wall Street Journal had an article called "Leveraged Buyout Remorse?" with the following first line: "Having spent years racing to put deals together, some private-equity firms are puzzling over whether they should take them apart.")



10. The stock market is likely to see an increasing pinch as people and institutions aren't rushing to make a killing on the next takeover prospect.

So it's all the fault of the sub-prime markets, we hear. But I don't buy it. Yes, that is a mechanism, but it's not the finger pulling the trigger. That honor belongs to greed unchecked by business sense.

In the face of economic history, expecting that prices relative to other demands of life could rise forever, and even planning on that happening, is idiotic. That has never happened and isn't about to start. What we are seeing is the same as the tulip market mania of the 16th century. It's multi-level marketing on a grand scale. It's a ponzi scheme. At each point, furthering of the business "model" depends on someone having the expectation that no matter what the inflated price, he or she will shortly see the same type of return. If a business or investor wants to take some risk for high returns, that's fine, but it's called risk for a reason. There is a measurable chance, sometimes large, that you will lose part or all of the money you've invested.

To put virtually all of your eggs into this one basket is insane. Yet that's what the markets have done. All manners of companies have been betting on consumer spending to continue. But the spending wasn't itself fueled by increases in wages. No, because that would lead to inflation and corporations having higher labor expenses, and smaller returns. Instead, everyone more or less turned their heads, opened the credit taps, and let the money flow because, well, those increased housing prices would make everything fine in the end. One could always refinance, pay off the one lender at risk by transferring the risk to another, and take a little extra money out at the same time.

It's over. People are increasingly stuck in houses they couldn't afford and that, with dropping prices, they can't afford to sell, because they would remain in debt as the sales price wouldn't cover the mortgage. The markets are experiencing (I'm not sure they realize quite what is actually happening) a cold turkey economic abuse program. Now governments are involved, making cash available to keep enough money in the system to leave it afloat. Although you won't see it called such, this is the world's largest economic bailout masked as maintaining market liquidity. The sums that are going in and will probably continue to pour in will dwarf the savings and load debacle this country experienced. I wouldn't be surprised if it ultimately overtook the real spending during the Great Depression. We are in a pile of doo-doo, and all the finger-pointing and rationalization won't change the fact that it is of our own making.

Getting the New Media Landscape

Although I try to keep my blogs separate, I'm going to point to an entry I did in WriterBiz, which is about the freelance writing business and intended for freelance writers. For those who don't want to make the jump, it refers to a post on Reflections of a Newsosaur. In short, sometimes web sites that you'd swear must be obscure can generate more interest and attention, and direct more readers, than even sites of the largest traditional media outlets - we're talking BusinessWeek, Wall Street Journal, Forbes, and so on.

This matters to business because it's about communication - with customers, employees, stockholders, business partners, and so on. Many companies make the enormous mistake of thinking that a mention in major media, or placing an ad there, is going to do wondrous things for their businesses. That may happen, but it doesn't have to. Talk to people in PR, for exmaple, and if they will be candid, they'll acknowledge that prominent treatment in even a publication like the Wall Street Journal might do exactly nothing in terms of driving sales or interest. I've heard the same from some book authors who found that mentions on specialized blogs coudl sometimes get them many, many more sales than traditional media.

The world is changing, and if you want to be successful in communicating, you have to start understanding how the new media work. Send the assumptions out the window and start exploring things without a guide whispering in your ear, "This one is important ... that one isn't." Chances are that the tour master has never been off the main streets and has no idea what the real dynamics are. Forget about the ego trip of appearing in Important Places, and figure out what will actually work.

Book Review: No by Jim Camp

I reviewed this on my blog about the writing business, but it's just as applicable to regular business. I htink this is a must read - one of the few business books I've seen with an experience-based take on an important topic that offers a plan for how to improve things. Here's the link to the review.

US Outsources to India, Which Outsources to US

This is just too peculiar for words. According to a story in Fortune, an Indian outsourcing company has set up a call center in Ohio

The phenomenon has a name: "insourcing," the term experts are starting to use when foreign multinationals open offices on U.S. soil and hire Americans, at a higher price, to do the very jobs they once lured overseas. In this case the center in Reno is targeted toward companies willing to pay a premium - its workers there cost up to 40 percent more than their counterparts in India - to give their U.S. customers a more culturally fluent, less frustrating 1-800 experience. (No more hearing someone read from a script ten time zones away.)

So, let me get this straight. A US company's management trumpets to shareholders how it has a Bright Idea: outsource because, well, hey, everyone is doing it so it must save money, right? And then you can keep your core competencies and outsource the unimportant ones, like maintaining good relationships with your customers.

The US firm contracts with an Indian firm that immediately gets beaten up over the difficulty Americans have in understanding non-native speakers reading off scripts and maybe providing technical support for things they don't really know, like the US company's products. Now the outsourcing firm has a Bright Idea - pay more to Americans to do the same work (it's apparently called insourcing). They trumpet this to the Americans as a benefit (even though they'll obviously charge more for the service) and American management goes to shareholders with the latest Bight Idea. The final irony would be if it were the same group of Americans who got laid off to outsource the jobs in the first place. (Did Joseph Heller write modern management textbooks?)

So, we've got the base costs of American employees (because their time is controlled, so you're talking fully loaded with benefits as well) that then get the mark-up of the Indian firm's infrastructure costs and then profit percentage, then add the management costs in the US of making sure everything happens ... and you're telling me that this is actually cheaper than hiring people in the States? Given that the true savings overall of outsourcing a function, if done intelligently, is about 20%, and that the big expense here is the staffing, and I'm wondering if the US comapny isn't now paying more to outsource than it would to have staff. Oh, wait, I forgot a cost - the bonus to management for coming up with this hare-brained scheme in the first place.

Financial Times on Insider Trading

The Financial Times has another scoop - a study it commissioned, looking at stock trading in select compaines running up to announcements of big M&A activity:

Almost 60 percent of the 27 big deals announced in North America this year were precded by unexplained spikes in trading in the stock of the target company, according to a review of data by Measuredmarkets, a Toronto research firm. This compares with 15 percent for the seven largest deals announced in 2003.

Let's not go totally off the board, as 27 deals do not make a large subject for statistical analysis. And these were only "suspicious trades" and not an item-by-item analysis to see who was involved. But the analysis did look at whether news on specific days might have acted as an expected trigger for the activity. The pattern depended on the industry, with the spikes happening 80 percent of the time with hotels and casinos and just under a third of the time in telecommunications.

Although this isn't proof - let's be clear on that - it sure is a whole lot of smoke. Combine this with the study that the FT featured on July 30, showing that many Wall Street analysts received personal favors from executives whose companies they followed, and you've got to wonder if anything has changed in the world of big investing. Actually, you could assume that it's business as usual, which is a pity. Such activities are undertaken by robber barons - emphasis on the robber - and not real businesspeople, who have some regard for the entire activity of business itself.

The article itself is here, though you have to be a subscriber.

Nardelli Rebounds to Chrysler

I was mildly shocked when I read this New York Times story about Cerberus Capital Management, new owners of Chrysler, choosing Robert Nardelli as the auto manufacturer's new CEO. Let's think about this. Chrysler has slipped to number four among auto manufacturers. It faces difficult relationships with union workers and a new contract negotiation. The company needs new life in product development to woo consumers and a smarter way of doing business. And given the dynamics and requirements of automobile engineering, it takes at least two years (and that's a sprinter's pace in the industry) to create a new model and bring it to market. Five years is more the norm.

Now let's look at Nardelli. He did double Home Depot's sales - pretty much by doubling the number of stores, which is called a basic strategy of doing more of the same thing. The stock price stalled as a result and he developed the reputation of being a poor leader who was grossly over-paid. So shareholders basically dumped him and he walked away with a $210 million severance package, otherwise known as an expensive mistake.

What the devil are the owners thinking? Here are two paragraphs toward the end of the story that really have me scratching my head about management thought processes in general:

The Cerberus chairman, Mr. Snow, had expressed support for Chrysler’s existing management team, particularly Mr. LaSorda, who had been Chrysler’s chief executive since the start of 2006.

Mr. LaSorda’s job security appeared fragile last year, when Chrysler lost $1.5 billion and built 100,000 more vehicles than it had dealer orders for. Senior executives at Chrysler said Mr. LaSorda might be promoted to a job with the company’s then-parent, DaimlerChrysler.

The CEO is in place a little over a year but is in trouble when the company, in his first year, had lost huge money and built a massive fleet of vehicles that dealers didn't want. On one hand, who realistically thinks that the plans weren't in place long before the new CEO had taken charge. On the other, promoting the guy? Maybe Nardelli's the right choice after all. I mean, how much crazier does it sound than everything that was already going on?

Big Toy Recall Underscores Business Danger of Outsourcing

As the New York Times and other outlets have reported, Mattel is recalling something like a million toys because a Chinese contract manufacturer had used lead-based paints. That follows other companies' recalls of products made in China: food, toothpaste, tires, and another set of toys. What is particularly disturbing for business, as well as for consumers, is that Mattel had a supposedly sophisticated set of safety checks and was dealing with a vendor it had used for 15 years.

For years experts have said to outsource non-core processes and functions because that way companies could focus on where they could make the most difference to their businesses. However, how do you define a core competency? If you can't ensure that suppliers will do what you need, perhaps manufacturing is something that should be core. If you can't operate without certain types of information technology, maybe keeping at least the capability of doing that work should be core. I can understand wanting to save money, but the savings aren't as astronomical as many think when the risk is something like this.

Taking Bets on New Internet Bubble

John Dvorak, who pretty much came in with the PC and whose death will probably be a harbinger of Computing As We Know It, wrote an interesting article on the concept of Web 2.0 being the next bubble waiting to happen:

Every single person working in the media today who experienced the dot-com bubble in 1999 to 2000 believes that we are going through the exact same process and can expect the exact same results—a bust. It's déjà vu all over again. And since this moment in time is only the beginning of the cycle, the best nuttiness has yet to emerge. Nevertheless, this is not to say that a lot of nuttiness hasn't already happened.

He then suggests that there is a continuous series of bubbles in high tech, each one worse than the other. I don't know about the progressive deterioration, but successive bubbles? Absolutely - as in any part of industry. There was the 17th century tulip bubble. I remember the paperless office mania, the total quality hysteria (remember TQM?). There is the current housing bubble, along with the bubble in mortgage-based security derivatives. Every multi-level-marketing scheme is, to some extent at least, a bubble. Then there are the countless ones that no one ever names.

A bubble is a form of economic hysteria that comes about when a small group of people find a way to make a whole lot of money at something that seems to promise the same for many others. There are economists who argue that the term bubble is inexact and sloppy thinking.

So forget economics and focus on psychology. Call this phenomenon the free lunch, or something from nothing, syndrome. People become convinced that they're going to become fabulously wealthy, that a trend will continue ad infinitum, that no one will tire of buying a given something, that everyone will want it, and that enough available money is around to fund the whole rollercoaster ride. That's a human failing that I suspect is as old as the species. No wonder we keep falling into manias - we're too anxious for the free payoff to realize that we're two-legged lemmings and that there's a cliff looming ahead.

A New World on the Business Desktop?

There are three threads on Slashdot.org that, taken together, offer an interesting look into what might be happening in corporate computing. A Computerworld article quotes a study from a third party software vendor indicating that a vast majority of businesses have any intention of moving their computers to Microsoft Vista:

In a just-released poll of more than 250 of its clients, PatchLink noted that only 2% said they are already running Vista, while another 9% said they planned to roll out Vista in the next three months. A landslide majority, 87%, said they would stay with their existing version(s) of Windows.

Those numbers contrasted with a similar survey the Scottsdale, Ariz.-based vendor published in December 2006. At the time, 43% said they had plans to move to Vista, while just 53% planned to keep what Windows they had.

That's a big difference from what I've seen in past cycles. Old versions of Windows would stick around for years - far longer than most people generally thought. I can remember that when Windows 95 came out, at least a third of companies were still running some amount of Windows 3.1 several years after the new platform's introduction. Businesses prefer the devil they know.

But if this study is actually representative, then the results have to be stoking the fear furnaces in Redmond. The company simply cannot survive financially without heavy adoption of new versions of Windows, and business buyers have generally been more pervasive adopters. New machines will likely run with some version of Windows, but Microsoft also needs older machines to upgrade. Here's another clip from the article:

Although Microsoft recently announced it had shipped 60 million copies of Vista so far, it has declined to specify how many buyers are businesses, or even what percentage of the estimated 42 million PCs covered by corporate license agreements have actually upgraded to Vista.

What is the problem? The article speculates that it may be because of changed perceptions of what Vista would add from the security front. My guess is that the reluctance has much more to do with the many problems that people have reported with Vista - often slow operation, even on machines designed for it, and the difficulty in installing the operating system on existing machines. Comapnies like hardware to last at least 3 to 5 years. If you want to upgrade to Vista, you pretty much have to go for new or very recent hardware, as I understand it. That means the software has an effective added cost of at least hundreds of dollars, which is really expensive, particularly if you have to replace a whole lot of machines.

Attempts to supplant Microsoft's dominance in the office software world by an open standard not owned by any one party seem to have gone nowhere. LinuxWorld basically threw in the towel on the OpenDocument standard. So Microsoft is probably safe on that front - for now. But if the OS landscape starts to change, then its grip on other aspects of software life might also loosen.

And now we add the third thread. CareGroup CIO John Halamka, an influential chief information officer, has been publicly testing various desktop operating systems, reporting on progress in CIO Magazine, and sees a shift in strategies that is starting to make sense:

"A balanced approach of Windows for the niche business application user, Macs for the graphic artists/researchers, SUSE for enterprise kiosks/thin clients, and Ubuntu for power users seems like the sweet spot for 2008," says Halamka. "I’ll continue to watch the marketplace evolve and report on my progress. For now, the only devices I’ll be carrying are a Dell D420 with Ubuntu Feisty Fawn and a BlackBerry 8707H e-mail device."

If a few other influenctial CIOs also start moving down this route, business as a whole could see the biggest single computing realignment since the shift from the mainframe to the PC.