Facebook Re-learns Basic Customer Lesson

I'd ask when will companies learn, but the answer is usually never. Facebook decided, again, to try and "monetize its assets" - that is, the users. It wanted to track what people did and exploit what it learned for its own ends. And, as newspapers like the Washington Post are reporting, those customers have forced the company to back down. Read the article to see how a man's surprise Christmas present for his wife (at least, I hope it was for his wife, and if it wasn't, it is now) became known to her and many others, as Facebook broadcast his purchase. Here's a quote, in the story, from a MoveOn.org rep:

"Sites like Facebook are revolutionizing how we communicate with each other and organize around issues together in a 21st century democracy," said Adam Green, a spokesman for MoveOn.org, a liberal activist group that has launched the petition drive to pressure Facebook to stop broadcasting members' purchases and using their names as endorsements without explicit permission. "The question is: Will corporate advertisers get to write the rules of the Internet or will these new social networks protect our basic rights, like privacy?"

It's not just about privacy, though. When you start dealing with customers, you are entering a contract. It's not written, but it's stronger than any piece of paper, because it involves their expectations and demands. Flub enough on your end, and you're ended, because the people who make your business possible will walk away with their money.

Unfortunately, businesspeople who damned well should know better let greed and wishful thinking get ahead of them. That's why there was a dot com blow up, and why the current credit crisis is in full bloom. And unless online companies start getting street smart and people wise, they're going to find that the market and even government step in to put bounds on what they can do. And no one should look to have those forces registered as friends that watch your every move.

Dunkin Donuts and Brand Positioning

There was a great discussion on NPR this morning with Leslie Bielby, chief strategist for Hill Holliday, who was in charge of tweaking the branding and advertising for Dunkin Donuts. Not only is there a very funny piece about people not being able to say things like latte and cappuccino, underscoring an affinity with people who just want a cup of coffee. But perhaps the most interesting point that came out is how many people from an upscale background are trying to indentify with "regular" folks, and how that could play to DD's strengths.

One More Twist On Dollar

I was reading an article in the Financial Times (sorry, don't have the URL handy) that made an interesting point. Although the US press has been talking about the danger of the Euro supplanting the dollar as the standard for international trade, that would take many years to happen. Why? Too many governments and central banks have enormous dollar holdings. Should the Euro suddenly become the currency of choice, all of a sudden, all that paper might have to be written down, and no one wants to take that kind of hit, which would make the credit crisis look like nothing. So we should all temper that home-brewed doom and gloom, favored for its ability to drive audience and, as a result, advertising, with some old-fashioned facts.

Thanksgiving Sales Rituals

Once again retailers pushed sales into Thanksgiving itself, and although they did get a jump on competitors, it was at sales hitting 50% off, and it was probably just shifting dollars from one day to another - robbing Peter to pay Paul. I understand that, given their frame of reference, that's all they can do. They need to get enough sales to satisfy Wall Street and keep the stock price up.

But entire industries are facing real problems. Tightening credit and lack of money is huge pressure. There have to be major changes in how they do business. They have to understand that sales can't necessarily rise every year, you can't count on more people spending more every year. Investors can't count on ever expanding sales. Perhaps it's time to understand that companies can't stand with one strategy for one set of demands. Perhaps it's time to know that constant expansion is like constant inhaling. There must be cycles of expansion and contraction. When conditions contract, perhaps what a smart company, management, board, and investors do is look to use the time to strengthen the organization, find weaknesses, reform bloated processes, and otherwise realize that there could be advantage into changing a business approach to get ready for the next expansion. But that would require a view extending beyond immediate personal gain, and that doesn't seem to be in the cards in business these days.

A Coming Shift in the Media Business

Although the writers' strike has been portrayed, depending on whom you ask, as David versus Goliath (writers), greedy David versus the poor viewers (the studios), and a bunch of people arguing about money (everyone else), it really is a portent of a new business model.

Check this LA Times piece. NBC has decided to air a show that started on the Internet. Why? Because it hasn't been on television yet. (Does that mean it hasn't existed any more than the tree out in the forest?)

It's already produced, so isn't affected by the WGA strike - and probably won't be, because the writers involved are the ones who own it. Suddenly, there is no question about who is going to get a slice of Internet revenues, or who, for that matter, is going to get most of the money, period. The writer/entrepreneurs.

Read the LAT article carefully. A number of recent movies that have done well were financed by outside money people - and largely in control of the writers:

Being entrepreneurial isn't for the faint of heart. If you want a sweet upfront paycheck, you may not have the stomach for it. But after seeing studios bowdlerize their scripts, many writers will swap a big payday for more control. [Writer-director David] Twohy says that after Relativity read his script, "They told me, 'Script approved as-is.' I've never heard a studio ever say that."

It's now happening in television and movies. Some authors have found they can control their books through self- and cooperative-publishing. The reins are slipping out of the fingers of those who traditionally controlled them as writer-producer-directors get outside investment money and blaze their own path, and then find their own audiences.

What does it mean for the market? More decentralization, a likely greater drive toward better quality scripts, and a lot of studio managers who will end up learning that maybe they weren't adding all that much to warrant their jobs. You've heard of the long tail? That appendage is getting pretty wide, as well, and could end up smacking a great many people about. Add in the degree of animosity that writers have developed toward studios, and it will likely be thrashing about. After all, why play nice with all those businesspeople if they really can't do that much?

Microsoft Vista Hits New Problems

Microsoft's love of operating systems is a direct result of its bottom line, with probably 40% of its revenue owing to the product line. Key to any successful operating system introduction is business acceptance - companies buy in bulk, and if you're Microsoft, they also condition people to use the latest version. Only, evidence continues to mount suggesting that's not how things are going this time. According to this Computerworld UK article, studies on both sides of the Atlantic suggest that IT professionals are not keen to introduce Vista into their companies:

The survey, echoing one from Forrester last week, shows most IT professionals are worried about Vista and that 44% have considered non-Windows operating systems, such as Linux and Macintosh, to avoid the Microsoft migration."

Clearly many companies are serious about this alternative, with 9% of those saying they have considered non-Windows operating systems already in the process of switching and a further 25% expecting to switch within the next year," the report "Windows Vista Adoption and Alternatives" reads.

Microsoft has been concerned about Linux for a long time, and that has only grown as some versions of Linux have become more user-friendly. But this is the first time I can remember seeing that large a part of the IT world considering not just Linux, but the possibility of moving back to the Mac, which would have its own slew of problems, as would trying to manage a selection of operating systems - and the versions of business applications they'd need.

Risk Won't Get Repriced

One of the problems with the credit crunch was that risk wasn't proportionately priced. Relatively risky investments didn't pay all that much more than safer ones, and so investors couldn't get that last visceral hint that they were writing a check for real danger. The problem was that there is just too much money in the world seeking a home, and that hasn't changed. For example, D&O (directors and officers) insurance premiums have actually been dropping in price for years, even though the chances of corporations getting sued by shareholders aren't dropping equally quickly. According to brokers I've spoken to, the reason is that there are always new sources of money trying out this type of investment, creating competitive pressures. I've heard the same from an economist who consults to upper management at large corporations.

And that money hasn't all disappeared in the recent market thrashings. Look at a Wall Street Journal article today about hedge funds bouncing back:

Through the end of the third quarter, hedge funds have seen $164 billion in new asset flows this year, already a record for a full year, according to Hedge Fund Research Inc., based in Chicago. The previous record year was 2006, with $126 billion in new asset flows. As much as $45 billion was invested in hedge funds in the third quarter, when markets were the most turbulent. Some 71% of that went to big hedge-fund firms -- those managing more than $5 billion each.

A lawyer at a major real estate firm told me that his clients in Europe were about ready to start a buying spree in the US because they have cash and because the exchange rate between the Euro and dollar gives them even more leverage.

The money goes pouring in, and it all has to find homes, so the differential between high risk and low risk will continue to remain small, not because the risks are that close in nature, but because the supply of money outstrips the demand. So people will continue to invest, largely ignoring the real risks, because they can't afford to be picky. They're all at a dance where they want to get picked, it's getting late, and being choosy means being alone. It's only in the morning that they see what they've done, but by then it's too late.

Ads and Historic Diminution of Thought

I've been listening to XM Radio and the old-time radio channel. There's a pleasure in listening to voices not engaged in bombast or wrapped in treacle. Aside from the audio drama and comedy, there is the occasional commercial from the 40s or 50s. They often seem humorous in this time, with earnest announcers mentioning the supposed benefits to consumers of some product. The juxtaposition seems humorous because of the contrast - back then, certainly big promised of big happiness from big buying. But the tone is unlike anything you might hear today. There is no rushing breathless voice urging you like a lover moaning in the dark, no dazzling effects to stun someone's senses. The pitches are generally calm and almost reasoned. Oh, it's not as though they were rational appeals. Clearly the marketers were appealing to emotion with a veneer or rationality for respectability. Yet, they were at least a tacit nod to some intellectual capacity on the part of the audience. Think of some of the classic advertisements, like the one asking, "Do you make these common mistakes in English?" Are today's advertisers savvier than their predecessors, trying to bypass any intellectual content? Or are they following a trend that actually doesn't work? Companies often think they are much smarter than their customers - though a quick look at the performance of most would make you wonder whether it was the customers who were smarter. Perhaps, by eliminating the attempt to even talk to the thinking portion of the brain, helping to create at least rationalizations for emotional desires, they are undercutting their own effectiveness.

Legal Snag in Credit Mess

Gretchen Morgenson has been doing a good job for the New York Times of following some of the more interesting threads in the credit meltdown. She has a story about a legal snag on the mortgage front - a federal judge in Ohio has dismissed 14 foreclosure cases brought by mortgage investors because they didn't prove that they had title to the properties they wanted to seize:

But as foreclosures have surged, the complex structure and disparate ownership of mortgage securities have made it harder for borrowers to work out troubled loans, in part because they cannot identify who holds the mortgage notes, consumer advocates say.

Now, the Ohio ruling indicates that the intricacies of the mortgage pools are starting to create problems for lenders as well. Lawyers for troubled homeowners are expected to seize upon the district judge’s opinion as a way to impede foreclosures across the country or force investors to settle with homeowners. And it may encourage judges in other courts to demand more documentation of ownership from lenders trying to foreclose.

I hadn't realized that the structures put additional squeeze on the borrowers, but if it works against one, then it's going to work against the other. The cases were brought by Deutsche Bank National Trust Company - amusingly enough, Deutsche Bank is one of the firms that is being least affected by the meltdown. When asked for proof of assignment of the mortgages, the bank's lawyers could only dig up letters of intent to transfer, and not the actual documents that would have shown ownership. As the judge wrote (and paper reported):

The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the court to stop them at the gate.

One source said he had heard of cases where a loan was in more than one pool, and there is apparently no repository showing who has what. Here's another snippet from the story:

And a recent study of 1,733 foreclosures by Katherine M. Porter, an associate professor of law at the University of Iowa, found that 40 percent of the creditors foreclosing on borrowers did not show proof of ownership.

No proof of ownership would mean no standing to sue - and although I'm not a lawyer, I think this problem is going to run very deep. It's not just about foreclosures. You have huge pools of securities that are based on owning these loans, only if you can't prove that you own the loans, are you now in the middle of securities fraud?

Some Financial Companies Get It Right

The Wall Street Journal has an article about some financial companies - Goldman Sachs, Lehman Brothers, and Deutsche Bank - that have managed to largely ride out the credit crunch. What was the common theme? They all knew risk when they saw it and didn't let their desire for easy profits undermine intelligent management. Some of the strategies included shorting the mortgage collateralized debt obligations (CDOs), greatly limiting exposure, and choosing carefully from among opportunities. In other words, this is old fashioned prudence governing recklessness. None seem headed for the massive write-offs some of their competitors are facing.

Market Meltdowns and Oil Spills

When listing to the radio and more news about the San Francisco oil spill, I heard some official wonder how it could all be possible - how, with all the GPS systems and electronics and procedures put into place that a freighter with an experienced pilot at the helm could hit into a bridge, open a 90 foot rip, and pollute the bay. At that moment, I realized this is the equivalent thought that had been going through the mind of every CEO dismissed or pushed out from one of the large banks, of the head of every investment department, of everyone in every board room. How could this have gone wrong? We had all the best computers and software, most highly paid experts and geniuses.

They did, and the mistake was to trust that it's possible to mechanically cheat the law of averages. Technology is fine, when used, but it isn't an omniscient and tireless protector. It can't think and doesn't have the flexibility to react to situations that are beyond programming. Technology only does in an efficient manner what people understand how to perform. Experts and mathematicians and economists can make amazing calculations, but they are still only approximations of reality that work the way they were designed. As conditions move past assumptions, the results fall apart.

We're back to the same word: risk. If you're going to make money, there's a risk you could lose it. The more money you make off your capital, the bigger the chance of loss. That, my friends, is the way of life. According to Hollywood insider Alec Baldwin, we've even seen this attitude in the results of the studios.

People, including those in high positions in business, want something for nothing, and when they can't get it, they want a guarantee that their losses won't be too painful. If all the people who called for letting the market do what it knows best were sincere, they would watch as entire large companies melted down. That is how the market tries to deal with it - through brutal and overwhelming force as punishment, so people will hopefully learn that when you touch a hot stove, you'll be burnt if you're not careful. But businesspeople aren't sincere in what they want. That's why no one will learn anything from the current market turmoils, why things will continue to spin out of control, and why we're all going to pay a potentially huge price, as those who set things into motion refuse to.

Credit Crunch and Trickle Down Economics

We're starting to see the beginning of credit crunch fall-out. From the tech sector, Cisco Systems mentioned that if large banks are having to write down billions of dollars because of bundling debt into securities and getting rating agencies to give a better credit rating than the individual loans could often get, chances are they won't have money to spend on things like new technology. As a Financial Times story quoted:

“If there is a concerted slowdown in financial services you are going to have a big problem,” Richard Parower, managing director at J&W Seligman, said.

Makes sense, and investors agreed by suddenly knocking the NASDAQ composite down. Stocks recovered, more or less, but in a way that doesn't matter. Banks buy less and are wary of deals, which means that law firms don't get all the money they were used to. As things slow, there will be a drop in spending, and in jobs, probably. Tech and finance will affect virtually everything. Energy costs are hitting everyone and everything and food is getting more expensive, so consumers will have less to spend. Borrowing can't cover it, as the dollar is no longer so attractive a deal for those countries like China that are brining in the cash.

Personally, I'm steering more of my own writing business to publications that serve sectors that have some cushioning against recession, like legal, food, and I'm even considering getting a foot into the health care door. Now's the time to take stock of where things will go and to seek out the relative safety you might find.

Food Hikes Join Oil's March

According to the Financial Times, the UN's Food and Agriculture Organization is warning of a significant boost in food prices - a 21 percent increase in the world's food import bill as compared to 2006. Developing countries will be hit even harder at 25.5 percent, and may follow Russia's direction of retail price controls. Of course, that's only going to aggravate things, as merchants will get to the point of no longer being able to operate, the food sector generally being one of the lower margin businesses in the world.

The culprits? One is oil. Pricing approaching $100 a barrel are encouraging greater use of corn for biofuels, which means less room to plant crops for eating. Add various droughts that are lowering wheat production, and the short term is looking shaky. It does make me wonder how bad things would be if the value of the dollar wasn't slipping, as the pound exchange rate just hit $2.10.

Citigroup and Back at the Farm

Citigroup, and its ilk, are currently showing the value of barnyard analogies when it comes to the financial market. We have chickens, and when you do see a baker's half-dozen of poultry on a continuous basis, you recognize the practical meaning of popular saying. Most people saying that chickens come home to roost have no just how literal that is. Let chickens out, and they wander about, eating all sorts of odd things, poking their beaks here and there. But when night comes, they come back to the coop to roost, perched up on anything high and sending droppings everywhere below.

Who let out the financial fowl that are fouling the markets over which they sit? Shareholders. Yes, CEOs of massive institutions should have known better than to think their companies could get a free lunch, and that risky behavior was safe. Boards should have reigned in these people far earlier. Underlings should have had the courage to warn about the insanity of pretending that an enormous downside didn't accompany the upside glittering in the sky.

But all of this ultimately sits on the shoulders of investors: institutional, large individual, and so-called retail. Greed prompts the desire to get every last penny available in the world, and self-delusion says that it's possible. There's another farm-related analogy of seed corn. Farmers haven't traditionally sold all the corn they raised because they knew they needed seed for the next year. So they hold back some corn to provide the germination basis for next year's crop. In financial terms, you can't pull out every penny from a program, a market, a company, or an industry. If you do, you've drained your financial seed corn. Money is necessary for everything, from fueling all the moving parts in the financial chain of events to having the buffer necessary when things go terribly wrong, like keeping grain in the silos. When you've taken every earning possible, something is going to turn upside down, and suddenly you'll be in debt, and the only place to take the money is from your own pockets.

Citigroup former CEO Prince (a telling name, eh?) may be paying a personal price, but so are the investors. The question is whether anyone will learn from this, or will it become another lesson in a line that fertilize fields empty because no one is paying attention to them? It reminds me of another analogy: you can lead a horse to water, but you can't make it drink.

O'Neal, Merrill Lynch, and Boards

Via a PR person, I heard from Ron Garonzik, vice president of leadership talent at Hay Group, a New York-based consultancy. He thinks that Merrill Lynch's board is making a mistake in naming a board member as even an interim CEO.

The fact that its Board has appointed a board member -- a non-executive chair -- is indication of the absolute breakdown of its accountability of ensuring business continuity for Merrill’s most critical management positions. The success rates of outside CEO hires are grim: it is well documented that the chances of getting the boot of a forced resignation are much higher for external CEO hires as compared to insider hires (by 20 percentile point or more for North American companies).

That certainly squares with what I've heard over the years. Plus, if a company develops candidates internally, it isn't at the economic mercy of someone from the outside who already probably has a good deal and whose personal fiscal future now has to be guaranteed under what are now more questionable circumstances.

I did take some exception to the idea of a breakdown of the board's accountability, but Mr. Garonzik did have a good explanation:

The breakdown in accountability isn’t about the stopgap measure of appointing an interim CEO – but rather that fact that no credible successor is waiting in the wings to take over from O’Neal. As if things weren’t bad enough with Merrill’s name being dragged through the mud with investors, and that they have to deal with the negative publicity concerning O’Neal’s departure package. On top of all that, they have to deal with the uncertainty of not having a pair of steady hands at the helm of a venerable “Wall Street” firm. That alone is evidence of the board’s failure to meet it’s accountability of ensuring business continuity.

Now here's where the board really fell down. When O'Neal was coming up through the ranks, so were a number of other people. But the CEO got rid of much of Merrill's old guard - and potential successors, or challengers. The board allowed him to do this, which really was foolish. The evidence is that the board evidently had to consider a short-gap measure and someone from the outside to follow. A company with a well-developed succession plan always has someone who could reasonably well take over.

Unfortunately, this isn't going to be an issue just for Merrill Lynch. Investors are calling for the head of Citigroup's Charles Prince. Does that company have talent ready to go? And if New Jersey Institute of Technology finance professor Michael Ehrlich is right, structured investment vehicles - the class including the securitization of mortgages - could still face another $30 billion to $50 billion in losses. According to this from a press release:

The SIV rescue attempt, led by JP Morgan, Citibank, and Bank of America with US Treasury Dept encouragement, will not stop the losses, Ehrlich said. The SIV bailout fund known as the Master-Liquidity Enhanced Conduit (M-LEC) will, at best, slow down losses because there is no Federal bailout money in the plan.

"The fundamental market mispricing of the real estate and also the credit risk markets will be corrected," said Ehrlich. “In the best case, the M-LEC might forestall a panic leading to an over-correction in pricing. Unfortunately, there is likely to be the unintended consequence that the M-LEC will discourage new capital from flowing into this market.”

That leaves the question of the red ink or the blood on the water will spill faster.

Copyright and Fixing File Sharing

As I'm a writer, I have an interest in strong copyright protection, and understand why the music labels and others dependant on content for income object to passing files around. It would be as though a farmer grew corn and then someone could magically make copies of the corn, complete in every detail, which elminates most of the potential revenue. The market is discounting the value of all the risks the farmer makes and decides that no one should have to pay. Evne if you sell a few ears, that doesn't help when most of the market becomes closed to you and others essentially profit from your work by not having to pay for it.

But why do we have to look at file sharing as the inevitable multiplication of copies? What if there were a system in which people could register copies that they had bought or otherwise legally had and then trade them with others for some period of time. While you swapped, you could enjoy the other person's music or writing or video or what have you, but you'd surrender the copy you originally had. And then, when you were tired of the deal, it could revert.

This obviously isn't a perfect solution, but I think it offers an interesting approach to comehow reducing the draconian approaches taken by so many in the creative industries while protecting legitimate interests. If you and I buy CDs, we can legally swap them, whether temporarily or permanently. No music label can preven that because they are our property. Couldn't there be a way to enforce the same sort of activity over the Internet? Sure, I could have made a tape of teh CD, or a photocopy of the book or what have you. There will be some people who figure out how to abuse the system. But I wonder if many more wouldn't stick with the deal, because they want the freedom to listen to new things and let their friends listen/read/view what they have. The online distributors could possibly act as referees and facilitators for the process, which would only reinforce the vendor-customer relationship and improve their businesses in the long run.