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March, 2009

  1. The Problem with Vanilla News: a Porter’s Five Forces Analysis

    March 28, 2009 by Matt Mireles

    Porter5forces3
    After graduating from Columbia last May, I spent the summer at the Stanford Graduate School of Business in their Summer Institute for General Management (which I HIGHLY recommend). The experience changed how I thought about the news industry, and made me realize how much journalists are poorly served by their willful ignorance of the business-side of the industry.
    But first, a little explanation of the chart above: Porter's Five Forces, as they're known in B-School land, allow you to analyze and understand the dynamics of a particular industry and predict long-run profitability and ROI (Return On Investment). Here's a quick run-down:
    • Barriers to Entry: Is it easy to start a business in your industry (e.g. blogging), or do you big $$$ and lots of special skills or special permits (e.g. aircraft carriers)? 
    • Supplier Power: Do the people who supply you with the stuff you need to operate have a lot of leverage over you (ex Exxon vs the family-owned gas station), or are they numerous, divided and weak (ex farmers vs the grocery store)?
    • Buyer Power: Do the people who buy your stuff have lots of leverage over you (ex Wal Mart vs every manufacturer on earth), or are your buyers numerous, divided and dependent on you to supply them with a critical good (ex. beer consumers at a Yankees game)? 
    • Substitutes: Is it quick, easy and common for people to switch over to your competition (e.g. umbrellas), or are the switching costs––monetary or mental––especially high (e.g. PC vs Mac before you could run windows on a Mac)?
    • Competitor Rivalry: Is the competition gunning for your customers (ex Taxicabs in NYC), or are all sides happy with their current lot (ex Bodegas in NYC)? 

    Ok, so how does this apply to the news industry? Well, let's take a look at the newspaper industry before the internet came around…

    • Barriers to Entry: High. You needed big $$$ to buy a printing press, pay for home delivery and special skills to gather, write and edit articles.
    • Supplier Power: Low. Lots of paper manufactures in the world, and while journos and the delivery/printing folks tended to be unionized, this fact that was mitigated by intense competition from the legions of doe-eyed wannabe writers graduating from college every year.Extremely-obese-cat
    • Buyer Power: Low. People desperately want to know what's going on the world, and before the internet, you had only two options: TV news and your local newspaper.
    • Substitutes: Few to None. If you wanted high-quality information on a daily basis, you'd be hard pressed to find it outside of a newspaper. (TV was only a partial substitute as it tended to trade depth and breadth in exchange for timeliness.) And if you were an advertiser trying to reach a certain educated demographic in specific locality, the newspaper was your only choice (think classified ads).
    • Competitor Rivalry: Medium. While newspapers would go to war every now and then to capture market share, they by and large operated on the tacit understanding that circulationwars benefitted not they the producers but the consumer. The relatively few newspapers in a given market made this tacit collusion possible

    Money 5

    These factors made newspapering an extremely profitable business for a very long time. Witness Rupert Murdoch and the Sulzberger family  However all this money, it seems, also made the newspaper mangement fat and lazy and incapable of altering the larger business strategy. They could have used a lesson on Strategy with my homeboy Garth at Stanford.

    Ok, before we jump the gun, let's take a look at the local newspaper business as it exists now in the internets era….
    • Barriers to Entry: Virtually Non-Existent. Want to deliver news and information to millions of people instantly? Start a blog, post a video to YouTube. Want to advertise to a specific locality? Try craigslist, it's free.
    • Supplier Power: Medium, but high relative to the competition. Newspaper reporters demand a salary, whereas bloggers tend not to. Oh, and because the workers are unionized, it's much harder for management to cut labor costs, lower salaries, and combine job descriptions (although not impossible). 
    • Picture102Buyer Power: Moderate. Lots of buyers with a lot of options. The monopoly on information is over.
    • Substitutes: Innumerable. When it comes to the generic local, national and regional news that was the bread and butter of the newspaper industry, there's a zillion alternatives for the news consumer. And with these numerous portals come exponentially more advertising options for the potential advertiser.
    • Competitor Rivalry: Insane. News sources who once had comfortable margins and sustainable business models are suddenly competing for your limited attention spans not only with each other but with a multitude of bloggers just like me. Economies of scale is where is the only way to make online advertising pay, and to achieve that, you need eyeballs and lots of 'em. Enter insane-o competition.

    What does all this mean, exactly? Well, in essence, it means that journalism is Ok, so now that I've laid out a framework that explains, in business strategy terms, why the newspaper industry is a horrible business, the question remains: Is there anything to be done?  

    To Be Continued…

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  2. Matt Mireles, Crime Fighter?

    March 18, 2009 by Matt Mireles

    MrT15

    Ok, so this has absolutely nothing to do with journalism, economics or technology, but i thought I'd share nonetheless…

    Today I stopped a thief. Here's how I recounted the episode on Facebook:

    ok, trying to remember the details…was checking out a hot drunk babe in the subway. Scuffle breaks out on the platform. Dominican guy wrenches iPhone from girl and takes off running….Hipster guy gives chase then gives up. I take off after him….5 subway cars later the thief realizes he's running into a dead end and turns around with his fists in the air…Takes a swing at me. This is where it gets blurry…

    I punch him? Grab him? He ends up on ground. I'm on top of him…Thief ditches the iPhone and puts his hands over his face, saying "take the phone! take the phone!" Hipster boy picks up phone for his girlfriend…No cops in sight. I get off the guy and step back onto the subway.

    Total damage: bloody fingernail and a skinned knee.

    My good deed for the day. Actually quite a bit of fun.

    Happy St. Patty's Day to you all! 

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  3. Newspaper Death Map

    March 12, 2009 by Matt Mireles

    Warsaw.boy

    But now, some economists and newspaper executives say it is only a matter of time — and probably not much time at that — before some major American city is left with no prominent local newspaper at all.

    “In 2009 and 2010, all the two-newspaper markets will become one-newspaper markets, and you will start to see one-newspaper markets become no-newspaper markets,” said Mike Simonton, a senior director at Fitch Ratings, who analyzes the industry.

    The consequences?

    “It would be a terrible thing for any city for the dominant paper to go under, because that’s who does the bulk of the serious reporting,” said Joel Kramer, former editor and publisher of The Star Tribune and now the editor and chief executive of MinnPost .com, an online news organization in Minneapolis.

    “Places like us would spring up,” he said, “but they wouldn’t be nearly as big. We can tweak the papers and compete with them, but we can’t replace them.”

    And therein lies the heart of the matter: Journalism will continue, but unless someone figures out a way to dramatically cut the costs of newsgathering, serious reporting will fade away.

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  4. Planned Obsolescence

    March 10, 2009 by Matt Mireles

    Big-korey-2

    Michael Arrington, founder of TechCrunch, published a story about a conversation he had with "a big music label executive" today:

    I asked the usual question: Why are you guys so damned clueless?

    The response he got was pretty damn interesting. 

    It’s all part of a master plan. The labels fully understand that recorded music, streamed or downloaded, is going to be free in the future (we’ve argued this relentlessly). CD sales continue to decline by 20% per year, and the only thing that’ll stop that trend is when those sales reach zero. Nothing will replace those revenues.

    By 2013 (maybe as early as 2011) it’ll make sense for the labels to finally reorganize their business models around the reality created by the Internet and person to person file sharing services. No longer will the labels be tied to revenue limited to sales of master recordings – by then most or all artists will be under 360 music contracts that give the labels a cut of virtually every revenue stream artists can tap into – fan sites, concerts, merchandise, endorsement deals, and everything else.

    But until then, he says, the spreadsheets and financial models dictate that suing customers and partners just makes too much sense. 

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  5. The Economy, She is a Changin’ (Permanently)

    March 7, 2009 by Matt Mireles

    0307-biz-webECON-(JOBS)
    The economy, she is a changing, or so say our friends at The New York Times:

    The unemployment rate surged to 8.1 percent, from 7.6 percent in January, its highest level in a quarter-century. In key industries — manufacturing, financial services and retail — layoffs have accelerated so quickly in recent months as to suggest that many companies are abandoning whole areas of business.

    “These jobs aren’t coming back,” said John E. Silvia, chief economist at Wachovia in Charlotte, N.C. “A lot of production either isn’t going to happen at all, or it’s going to happen somewhere other than the United States. There are going to be fewer stores, fewer factories, fewer financial services operations. Firms are making strategic decisions that they don’t want to be in their businesses.”

    Now, the real question is a) Why? and; b) Is this really as bad a thing as it sounds?/What new industry or jobs will replace the ones that were lost? The short answer:

    This dynamic has proved true in past recessions as well, with fading industries pushed to the brink during downturns before others emerged to create jobs when economic growth inevitably resumed. 

    Basically, this means that in the short run, a lot of people are fucked. However, in the long run, there's hope. Another neat unemployment graph from NYT:
     07jobs-graf01 
    Now, let me just take this chance to reiterate and expound upon an idea that I've mentioned here before: 
    WE NEED MORE ENTREPRENEURS
    The state can affect this in two ways: 

    1. Startup-friendly tax structures and laws. So, for example, the US (in my case, New York) should abolish the stupid "publication requirement," whereby newly formed Corporations and Limited Liability Companies are required to publish the fact of their formation in two local newspapers. Cost for me in New York City: $1700-2500. One-word: INSANE. In 1975, the law might have made sense. But this 2009, for Christ sakes!! Let us publish it on the internet. Now, this might sound like a stupid complaint, but you gotta remember, this is required of startup companies who probably have no money and no income. When every penny counts, it's a real issue. The broader point here is that the govt should make it as easy as possible for you to start a business because the truth is that the odds are already heavily stacked against you.

       

    2. Economic and Financial Education for the Masses. As some of you may or may not be aware, I graduated from Columbia University, an Ivy League school in New York City. Now, I bring this up not pat myself on the back but to share with you an important lesson I learned while I was there: Rich kids are taught how to handle their finances a lot better than normal people, and it gives them an unfair advantage as they go forward in life. Most people learn the hard way, and the price of a hard way education is typically a ruined credit score. This disparity should not exist.  Every American should be taught to understand the basics of this capitalist system we're in. Every teenager should be taught how the credit system works. Every American teenager should be taught the relative $$$ value of education in actual dollar figures: High School vs. College vs. Grad School. Now, knowledge alone will not prevent people from fucking up, but it will improve their odds of success, and in life, I think that's all we can ask for. But that's just me.

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  6. Google and the Life Cycle of Ideas

    March 7, 2009 by Matt Mireles




    Highlights of Google VP     Marissa Mayer on the Charlie Rose Show (VIDEO). Complete interview with transcript is on TechCrunch. 

    (Q: Would you rather I post the full thing here? Leave a comment.) 

    To me, the amazing thing about this interview is how
    much it demonstrates     the continuing vibrancy of Google as both a
    company and an intellectual community    . Not that I know from experience, but I think one of the biggest problems that companies face as they go from startup to big mega-corporation is decadence.

    This, essentially, is the problem
    facing the news industry    . When you are a young and cash poor startup, you cannot survive without adaptability and creativity. Your survival depends on your vitality. The forces of inertia and gravity are against you. But when
    you get big and especially when you have serious     barriers to
    entry     erected around your business (as there are in both the internet search business and as there were for such a long time in the
    newspaper business), it becomes harder and harder to sustain the intellectual
    discipline and focus that drives a company to prominence in the first
    place. 

    My homeboy Peter Drucker
    nailed the problem in his classic work,     Innovation and
    Entrepreneurship    :


    To render an existing business entrepreneurial, management
    must take the lead in making obsolete its own products and services     rather than
    waiting for a comepetitor to do so. The business must be managed so as to
    perceive in the new an opportunity rather than a threat.     It must be managed to work today on the products, services, processes, and technologies
    that will make a difference tomorrow.

    This is really, really hard for the
    human mind to do. In our brains,     we discount the future and the new because they are uncertain. The established, the current is real and tangible and known. And as human beings, we like that. Lazy_tshirt
    This fact makes Drucker's advice really hard to follow. Moreover, this discounting gives the established order and established businesses a certain amount of
    unfair staying power. Investors invest in the known because it is––or
    seems––stable. Users use existing products (even when better options
    exist) because it costs either money, time or energy to switch to some new
    product that they then must learn anew. 

    And yet in the long run, it is this force that the competitive venture must fight if it wants to survive and even flourish over the long term. The same is true not just of business but of ideas more generally. John Stuart Mill actually talked about the phenomenon back in the 1800's in his badass essay,"On Liberty":

    Peculiar doctrines are more questioned, and have to be oftener defended against open gainsayers. Both teachers and learners go to sleep at their post, as soon as there is no enemy in the field.

    Ignore the archaic language. Here's the point: The new (idea, business, etc.) must prove itself where the old need not. And that discipline, that experience of having to overcome the inertia and gravity of
    the established order makes the new even better, even leaner and meaner and
    more vital than it would be otherwise, like a penniless skier who has to hike
    to the top of the mountain while the rich kids sip hot chocolate and ride the
    ski lift. Even though the poor man will be out of breath when he gets to the
    top, his legs will be interminably stronger. And in a fight, his mind will be
    tougher, more resolved, more focused, and more unwilling to give up. 

    This is the upstart's leverage, and indeed it what the fat firms of yesteryear and yesterday must worry about the most. Which brings me back to my original point: By now, Google should be getting fat and lazy; but if
    this interview is any indication,     they are not. And that fact alone is
    extremely impressive.

    CrunchBase Information
    Google
    Marissa Mayer
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  7. John Stewart Slams CNBC (VIDEO)

    March 7, 2009 by Matt Mireles

    Classic!

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  8. Reid Hoffman = (Passion*Vision) + Brains

    March 5, 2009 by Matt Mireles

    Reid Hoffman, Founder of LinkedIn, on the Charlie Rose Show (VIDEO); courtesy of TechCrunch. 

    I dunno how, but some day I’m gonna meet this guy and bring him on board as an investor. Homeboy’s got a magic combo: vision and passion. He reminds me of my man Peter Drucker. From the interview…

    “My Principle Motivation is ‘How Do You Change the World?’ “

    “The difference between a company which is a dollar profitable and a dollar unprofitable is essentially immortality and death. Right? So if you want to have an influence over, you know, decades, hundreds of years, thousands is probably too much to hope for, create sustainable models, which in the action of that organism — I look at companies as organisms with an ecosystem. Within the action of it, it produces good…And if you do that, you’ve created a massive amount of good.”

    “It’s a question of what do you want to be known for? What meaning do you want your life to have had? And you know, he or she who dies with the biggest bank balance isn’t a terribly interesting life.  And is that really the meaning, the measure of a life?”

    Just, WOW. I want this guy on my board. If anyone knows him or knows someone who knows him, please give him my name.
    CrunchBase Information
    LinkedIn
    Information provided by CrunchBase

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  9. Stimulus for Startups

    March 4, 2009 by Matt Mireles

    Today, Reid Hoffman, Founder of LinkedIn, offered a creative, entrepreneurially -focused stimulus plan for the US economy, via TechCrunch:

    1) Ramp up small business lending, presumably via govt subsidies.

    2) Abolish the limit on H-1B worker visas and replace it with a 10% payroll tax. Funnel the proceeds of said tax to US worker education.

    3) Matching funds for Angel Investment and Venture Capital.

    Personally, I like first two ideas, but I'm luke warm on the third. As the eminent VC Fred Wilson of Union Square Ventures explained in his blog, A VC:

    The venture capital business, thankfully, does not need any more capital. It's got too much money in it, not too little.

    The venture capital business is an asset class where the top 10-20 percent of the firms make 80%+ of the returns. 

    The top venture firms don't want, don't need, and are never going to take government money. The same is true of the top entrepreneurs.

    The worst firms, on the other hand, will gladly accept government money. And that is what is going to happen with all of these government efforts to pour more money into the "innovation sector". That money will go to bad investors and weak entrepreneurs and management teams for the most part. It's a problem of adverse selection.

    To a certain degree, I think Wilson is right: government $$$ will undermine market discipline. However, I think this is true with the more direct government investment of the traditional stimulus variety as well. 
    What is market discipline, exactly? you ask. Here's how the idea works…

    a) money is scarce (i.e. the supply of it is limited)

    b) because money is scarce, investors must actually compete to get their hands on said $$$ 

    c) this combination of scarcity and competition pushes investors to be picky about what they invest in

    d) investor picky-ness leads to better decision-making and smarter investment economy-wide 

    e) bad investors and bad companies tend to die, leading to a darwinian business ecosystem and the hyper-efficient delivery of goods and services to consumers (i.e. the people) that capitalism is famous for

    Communism_is_evil
    The obverse of market disciple is central planning, where governments decide what companies to fund, what industries to promote and what goods to produce. (See also "socialism.") 

    In a capitalist system, consumers choose the winners and losers––and thus it is the individual consumers needs and wants that are served and met. 

    In a socialist system or a centrally planned economy, the government chooses the winners and losers––and thus it is the individual government official's (the decisionmaker) needs and wants that are served and met. Hence, bribery and corruption were endemic parts of the centrally planned economies of the Soviet Union. 

    In truth, however, market forces are at work in both systems––the variable is who, exactly, is the consumer? In capitalism, buying power is diffused throughout society; in socialism, buying power is centralized in the government's hands. 

    Moreover, no system is pure. Capitalism and socialism exist as poles on a spectrum, with a particular society fitting somewhere in between.

    Why is this relevant? Because the government "economic stimulus package" necessarily represents a shift on the spectrum away from free-market capitalism and towards central planning & socialism. This may or may not be a good thing, depending on how you see the world. But it is a fact.

    The real question, however, is how far will the US slide down the economic spectrum towards socialism? To what extent will the government try to preserve its commitment to free markets? Laziness_1

    While it is an imperfect solution and while Fred Wilson is right to point out that government intervention in the market will lead to some increased investor sloppiness, I offer that Reid Hoffman is really onto something here with this matching funds idea for venture capital and other entrepreneurial investment.

    The government is gonna pump billions of $$$ into the economy one way or another. Either we can put that money into proven wealth destroying firms like GM or we can dip our hand into the more uncertain waters of entrepreneurship. 

    At the very least, it would pit the masses of would-be entrepreneurs in competition against each other––a competition that would likely kill-off a higher percentage of losers and produce many more winners than the high barrier-to-entry (it costs a lot money to get a meeting with a congressman or a senator––money that startups, by their very nature, do not and will never have, but that established if dying firms usually do) game of lobbying for congressional $$$ that's being played now in Washington. 

    Startups unite!––and let's go get some of that government cheese!
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    Reid Hoffman
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  10. The Banking Bailout, Explained

    March 4, 2009 by Matt Mireles

    NPR's This American Life came out with the latest installment of their absolutely excellent series about the ongoing US and global financial crisis. Listen and enjoy this latest episode, entitled "Bad Bank."


    Listen to NPR's "Bad Bank"Site Meter

    Here's a cheat sheet on the crisis…

    --25% of all the $$$ in the global banking system is held by CitiGroup and Bank of America

    -90% of all the $$$ in the global banking system is concentrated in just 20 banks. (See "Too Big to Fail")

    -If one of these major banks collapses and runs out of money, it will set off a deadly chain reaction (aka Domino Effect) of bank failures and destroy the world economy. (See "Credit Crunch") Why? Because businesses everywhere need cash to stay alive and who holds their cash? Banks! Since cash is to a business as oxygen is to the human body, when they run out of cash, they die. Banking Collapse = Mass Business Death.

    -Reality: CitiGroup and BofA are currently insolvent, i.e. they owe more money than they're worth. They should be dead. However, to prevent the domino effect and subsequent economic collapse that their death would cause, the US government is giving them billions of dollars. (See "Bailout")

    -The real debate is whether the government should:

    a) buy just the mortgages, credit default swaps, and collateralized debt obligations (see "toxic assets") that have collapsed in value over the last year and a half from the major banks and let them go on their merry way (see "Bad Bank"); or

    b) actually invest in the insolvent banks themselves, exchanging cash for ownership and say in how the bank is managed (see "Nationalization"). 

    End goal in either scenario: Give the banks cash. Make them solvent. 

     -Why a Bad Bank? 

    a) You believe that the so-called "toxic assets" (mostly home mortgages and their derivative financial products) are actually decent investments whose price will rise again at some point in the future 

    b) You own stock in an insolvent bank and don't want to lose all your money. 

    c) You think "nationalization" is a dirty word

    Why Nationalize?

    a) You think it's unwise to buy mortgage-related "toxic assets" because they're probably still overvalued

    b) You're a taxpayer

    c) You think that the owners of a business (i.e. stockholders) that makes really bad decisions should actually have to suffer the consequences of said decisions and not receive a windfall from the US taxpayer

    d) If the we were someone other than the
    United States of America, the International Monetary Fund would step in, tell us to stop whining and (temporarily) nationalize the banking system

    In truth, both options suck, but that's where we are. I say we nationalize the banks for a bit then sell them back to the public when the time is right. This graph explains why "toxic assets" are in fact clear losers, courtesy of Robert Shiller and the New York Times: 
    As you'll notice, housing prices are still inflated! These mortgages and the financial goodies derived from them ain't gonna go up in value anytime soon unless we have another bubble. Thus, the Bad Bank idea = a Bad Deal for the taxpayers. Ironically, this idea––favored, shockingly, by the banks––is premised on the idea that the "efficient market hypothesis" that wrote about yesterday is NOT true, that the market is fundamentally under-valuing the US housing stock. Hmm… 

    Why? Because, the US govt would be buying these "toxic assets" at price above the current market value. Yes, that's right, the US government would be paying a special premium to private US banks billions of dollars for the right to buy "toxic assets" at a price no private investor in their right mind would pay. This, my friends, is insane, especially since housing prices are still inflated (and falling) relative to their long run average value. (See the chart above.) 

    At this point, we've got no good options. Nationalization, it seems, is just the least bad option. 

    Want more info? Listen to NPR's award-winning This American Life explain the Financial Crisis! 

    The Giant Pool of Money May 2008

    Another Frightening Show About the Economy October 2008

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