Wednesday, October 31, 2007

Product Placement

Think back to the last time you were at the movies, and one of the characters was holding or using a product that you recognized; a food item, a laptop computer, a car, doesn’t matter, so long as it was a product that you could purchase for yourself if you had a mind to. Did it make you want to go out and buy the same product? Well, if not, somebody just blew a large amount of money for nothing. Product appearances like this are called Product Placements, and companies pay big money to have their product be the key item that James Bond uses to sold the puzzle, catch the bad guys, save the world, or just get the girl – in the hopes that you will believe that if you buy the same product you can get the fame, fortune, glory and/or sex.

In recent times, Product Placements have begun turning up in television shows, video games, even on the Internet, as audiences become more and more jaded (and therefore more and more immune to normal advertising stunts). In a straightforward business sense it’s a very clever idea – if your product is seen by all of the people who have tuned in to a hit television show, you’ve effectively reached the same number of people who would have seen a commercial placed in the same program slot, if you’d bought one. Even better, people won’t be out of the room getting a snack or going to the lavatory when your product placement hits the screen. Of course, you will only get a fraction of the screen time, but you’re probably not paying quite as much for the placement as you would for an ad.

An especially good example of this turned up on the Food Network’s program The Next Iron Chef over the weekend. Now, I know I promised to stop writing about reality TV, and about the Food Network in general, but this one was so good I’m going to forget that I did. This series follows eight competitors who are vying for a spot on the Iron Chef America program – a kind of “American Gladiators” meets “Survivor” contest in which a guest chef attempts to prepare better food than one of a group of champions who regularly appear (the “Iron Chefs” of the title), given a surprise secret ingredient and only one hour to perform.

To those of us who still eat food ordered by yelling into a clown’s head, this may seem a bit fantastical, but the title of “Iron Chef” is apparently taken quite seriously in the business. The eight competitors in the “Next Iron Chef” show have all be on the main program before, and in fact are all competitors who won. The Food Network therefore knows that they are good enough to compete and win (at least once) and telegenic enough to appeal to the television audience. How much of this spin-off is an actual competition and how much of it is just an extended audition I couldn’t tell you; I’m not sure anyone short of the Network executives really knows. What I do know is that in the last episode they had one of the best product placements I’ve ever seen.

The challenge was to come up with a new airline meal suitable for the best first class service in the world, featuring an Airbus A380 (the newest, biggest and fanciest airliner ever built) in service with Lufthansa (the airline generally considered to have the best food in the sky). The product placement was an actual A380, in Lufthansa colors, in which the competitors had to prepare their offerings for the judges. I’m not sure if it was Lufthansa or Airbus who came up with this, but either way it was brilliant. Airbus got to show off their newest (and most expensive) creation and have the show gush over how fancy it was, and Lufthansa got to preen about how good their food was. I suspect that both companies were in on it; certainly, they both got terrific value for their advertising dollar…

Sunday, October 28, 2007

The Ethics of Mediocrity

The subject of motivational theory came up at lunch the other day, when the comment was floated just before the entrees arrived that perhaps the reason so many people appear to be just barely passable at their jobs is that most people will only put forth the minimum effort necessary to avoid being fired, and no more than that. This led almost immediately to a brisk discussion of just what, exactly, that minimum level would be, and how you would determine it across the huge range of job and performance requirements in the workplace. This is going to vary quite a bit, depending on which employees we are discussing and what their job actually requires of them.

For example, a CEO’s job is technically to maximize stockholder value, and anything less than that will probably get him or her fired – except that what, exactly, the maximum possible value of a given stock actually is at any given time is a matter than can be (and usually is) endlessly debated by everyone who monitors the stock market, shareholder or not. By the same token, the hostess running the front desk at a restaurant has only one job function: greet incoming customers, make them feel welcome, and get them a table or other place to sit. What exactly constitutes “feeling welcome” will vary a bit, but if the hostess is scowling and unfriendly (like the one who had “greeted” us at lunch that day), she’s clearly not doing the only job function she has.

My question is this: suppose that you have completed all of the tasks assigned to you, and met every performance target your superiors wanted you to meet. Do you, at that point, have any ethical responsibility to work even harder, accomplish more tasks and exceed those performance targets? Some employers, as is so amply parodied in the Dilbert comic strip, believe that the employees owe them every waking second (and sometimes the contents of their dreams at night, as well), to the point that even having a personal life is like “stealing from the company.” Such organizations would be appalled at the very idea of an employee not working to the absolute utmost edge of their ability, punish anyone they feel is not in fact doing so, and thereby almost guarantee that everyone working for them will slack off whenever possible.

At the opposite end of the spectrum are companies where working more than you are assigned to work is frowned upon, because it makes everyone else look bad, rather like the legendary Post Office branches where coming back from your assigned 4-hour delivery route in less than four hours is considered at sin, even if your route only involved delivering two envelopes and a mail-order catalog. Such companies are unlikely to suffer heavy turnover, but they’re not likely to experience much growth, either. Some organizations will offer performance incentives, such as bonuses for doing more work, or else base raises and promotions on performance targets, but this doesn’t really apply to the question I’m asking; working more in order to get paid more isn’t a matter of ethics, just common sense.

Suppose your pay will be the same if you do 100% of your work, or 110% of the workload assigned, or 250% of your workload. Let us further assume that you can accomplish the extra work without unbalancing the rest of your life (working nights and never seeing your family, for example) or other extreme measures, and that no financial incentives will ever be offered and promotion will not come this side of the grave. Do you have a purely ethical responsibility to give your employer more than they have asked for? Or at least inform them that you are seriously underemployed? And if not, are you in any way to blame if the organization as a whole fails to meet its performance goals?

It’s worth thinking about…

Thursday, October 25, 2007

How Far Is Too Far?

The age-old question of how far should we go in order to advertise a product came around again this week, with the revived controversy over the use of “ball girls” at the Madrid Master’s tennis tournament. You can check out some of the pictures on MSN/Fox Sports if you want to. But you already know the story: a pack of models is rounded up from agencies in Spain, asked a few questions about tennis and then issued skimpy dresses with the sponsor’s name and logo on them (and even skimpier instructions about what to do) and stationed at courtside.

Almost as obvious was the immediate response from just about all quarters. People who take the sport of tennis too seriously claimed that having scantily-clad models working on the court made a mockery of the tournament. Easily-offended people claimed that having scantily-clad models working on the court was sexist, exploitive, offensive, or otherwise discriminatory, and some of the players (almost always those who had just lost a match they were expected to win) claimed that having scantily-clad models working on the court distracted them from the game at critical moments.

I should note that the WTA event held in the same venue employs male models in the same role, so it’s hard to make any charge of sexism stick. And the female players certainly don’t appear to have had any trouble keeping their minds on the game. Personally, I have to add that if you can’t keep you mind on a game that allows you to earn millions of dollars a year, travel the world, and generally do whatever you want, you need professional help, not less attractive ball girls. But from a business standpoint, the question this post is actually about is a lot more basic: Is the sponsor employing the models (in this case it’s Hugo Boss) going too far in their efforts to promote their product line? And if not, then exactly how far is too far?

Basic management theory tells us that if an advertising measure brings in more business than the total cost of producing the advertising (including any business lost from people who are too offended by the ad to purchase the product), then the ads were effective. In this particular case, Hugo Boss may appear to be losing a fair amount of business from the easily-offended demographic, but since their key market segment (single males 18-36) is unlikely to be offended by having scantily-clad models police up balls at a tennis match, the business loss isn’t all that high. The cost of employing a pack of models for the duration of a tennis tournament will certainly cost them a fair amount, but when you factor in all of the free publicity generated by the controversy over this advertising measure, I’d have to say it looks promising. And there certainly aren’t any other costs involved; no space to buy in print, no airtime for television to purchase, no billboards to produce, rent and install.

Of course, if you are the sort of person who is offended by the idea of skinny young women in short dresses running around in public, you’d probably say that the overall cost to society is too great to justify whatever profits Hugo Boss makes from sponsoring the “ball girls” in Madrid. But from a purely business standpoint, I’d have to say that the measure is drawing huge amounts of attention from the media and the public, getting the sponsor’s name and logo seen all over the world, and not actually costing very much to produce. It’s hard to see how it could be any better for Hugo Boss. As for the male tennis players, perhaps a dose of saltpeter before each match would be in order…

Wednesday, October 24, 2007

Stakeholder Theory

I was in the Library this week working on something else when I ran across several articles about Stakeholder Theory. It’s another one of those ideas that is so simple that you could probably design an entire Master’s class around it; there are certainly a large number of articles in management journals that deal with the concept. It takes a special sort of person to attempt to explain something that big in 600 words or less; I’ll let the reader decide if I’m arrogant or just crazy for trying.

The first thing to keep in mind is the definition of a stakeholder. Although there is some debate over how broad to make the definition, in general, a stakeholder is anyone affected by a specific company’s operations, including their employees, shareholders, suppliers, and customers, but also including political groups, trade unions, the communities in which the company’s products are made, sold or used, prospective customers, and so on. Stakeholder theory basically states that in order to be strategically sound, a company’s plans should take all of the stakeholders into account, not just the ones who own shares in the company.

This is, of course, a complete departure from the older theory of management, which holds that a company’s primary duty (some would say its only duty) is to generate revenue, and that the management team’s job is to maximize shareholder value. Since the shareholders are literally the people who own the company, and since they can (at least in theory) fire the CEO and the board and replace them, it would seem to behoove the top management personnel to look after the interests of the shareholders; it can also be argued that they have a fiduciary duty to do just that. On the other hand, the stakeholders include many people with no ownership position in the company and no way to punish or reward the management team; in some cases, even the company’s competitors are considered to be stakeholders. So why should the management team attempt to do right by them?

Let me give you two concrete examples. In 1971, Ford Motor Company decided to bury the reports about the Pinto, thus maximizing their share value and the stockholder’s investment at the expense of anyone who owned a Pinto or happened to run into the back of one. They were eventually exposed, vigorously sued, and lost even more money than they would have spent to fix the faulty gas tanks. However, even worse was the loss of the company’s reputation; the public was less confident in the safety of their cars, and investors were less confident in the management of the company. The fallout from that blunder is STILL being felt within the company, none of it good.

By contrast, in 1982 someone managed to put poison into bottles of Tylenol, killing seven people and starting a nationwide panic. The Johnson and Johnson company responded by doing everything it could to help the families of the victims and starting a drive to create tamper-proof packaging that eventually became the industry standard. Now all over-the-counter drugs (and many other products) come with the same tamper-resistant packaging Johnson and Johnson came up with to protect its stakeholders. As a result, their company is widely regarded as being responsible, taking care of its customers, and most importantly of all, being intelligently run. The money spent on the tamper-resistant packaging and in the cleanup after the poisoning scare have been made back many times over by the improved public perception, and the shareholders’ overall value is far higher than it would have been if the company had attempted to stonewall, blame the victims, or deny responsibility.

In other words, the ultimate outcome of stakeholder theory is that if you run your company in a responsible manner, taking into consideration all of the people affected by your operations (and not just the ones who own your common stock), you can expect to do better in the long run than if you cling to the concept of maximizing shareholder value at the expense of everything else. Or, if you like, the argument in favor of stakeholder theory is simple, enlightened self-interest…

Tuesday, October 23, 2007

Scalping and Hacking

Earlier this month, I had occasion to comment in this space about the Major League Baseball playoffs and the issue of ticket scalping; you can see my entries on Lovable Losers? and Getting Scalped respectively, if you missed either of them the first time. But today, I am pleased to bring you a story that combines both of these themes with the always-vexing subject of computer hacking.

As you may know, the World Series starts this week, and features the teams from Colorado (the Rockies) and Boston (the Red Sox) in what some are calling a classic duel between a club that has one only one world series title since trading Babe Ruth to the Yankees nearly a century ago, and a club that has only been around 12 years and has never won anything of significance in that time. What you may not know is that within an hour or so of the tickets going on sale over the Internet, the Rockies’ ticket sales web site crashed, preventing any of the 8.5 MILLION people who attempted to purchase tickets from getting anything, even access to the site. You can read the Associated Press story about these events if you missed it.

Now comes the news that the crash was not caused by the high volume of people clamoring for tickets. Rockies officials are announcing that their site was the target of a direct, external attack that required shutting it down until the early hours of this morning. Officials from Paciolan Inc., the company that runs the Rockies’ online ticket sales site says the attack had affected their entire North American network, causing a shutdown of every system they run. The company assured the AP that none of this was the Rockies’ fault, and that the system would be back up shortly.

Meanwhile, in Colorado, Rockies fans have been completely frantic, trying anything they can to get onto the site and purchase their tickets at face value before the scalpers get hold of all of them and jack up the price by the usual $300 or $400 per ticket. Locals have reported long lines of people waiting to get into the public library and use the high-speed terminals there (in the hopes of getting onto the ticket site faster), only to be disappointed at having no greater success than they had at home.

I think the situation makes several interesting business points, which is why I’m wasting both my time and yours (if you’re bothering to read this) making this entry. First, this is the biggest business opportunity the Colorado ball club has ever had, and if their success in the last month really does turn out to be the fluke the statisticians are calling it, Denver may never see the like of it again. That being the case, screwing up the ticket sales, alienating your loyal fans, and (worst of all!) failing to take their money is, well, stupid. Second, outsourcing your ticket site only makes sense if the company you’ve outsourced it to can take care of you ticket sales BOTH more cheaply and more reliably than you could have in house. Otherwise, this was also stupid.

But I think the most important point to be made here is that during the past year, we have witnessed giant, multi-billion dollar companies suing people without a dime to their names over illegal music downloads that don’t actually cost the music companies anything (since these people would not have been able to afford the files they “shared” in the first place; it’s not that they had the money and chose not to spend it), yet nothing is done about large ticket brokerage companies snapping up thousands of tickets and then screwing every possible cent out of the people who would have paid the face value of those tickets – if they were allowed to. Meanwhile, the company being paid large sums of money to ensure that ordinary people get a fair chance to purchase tickets for their own personal use has just about guaranteed that the ticket brokers will get all of the available tickets sometime between midnight and dawn tomorrow, and spend the rest of the week happily putting the screws to the baseball fans in Denver.

Somehow, “stupid” seems far too mild a term for this. The only thing I can imagine that would be worse would be actually shelling out $450 for tickets with a face value of $8. But I’m pretty sure that someone will…

Sunday, October 21, 2007

Ethics and Liability

Ever since the Ford Motor Company people chose to fight the product liability lawsuits instead of paying the extra few dollars a copy to put a safer gas tank on the Pinto in 1971 – and were caught doing so and subsequently taken to the cleaners – everyone has known the risks of making such decisions, and the importance of not putting all of the details into a “smoking gun” memo signed and countersigned by all of the company’s top executives if you do. That hasn’t kept many additional companies from making the same kind of unsound choices, but I’m not going to write 500 words about why you shouldn’t do something that is ethically reprehensible as well as stupid; I’m going to assume that anyone smart enough to operate a computer already knows that.

A rather more complex question that does come up these days is what to do about such a situation if you are the one who stumbles upon it, as opposed to the one who created it in the first place. Of course, every criminal attorney has a sworn duty to turn in his or her client if the client confesses, and every citizen has a duty to report crime (including criminal conspiracy) if they have knowledge of one, but unfortunately, not all of these cases are that simple. In the movies, characters like Michael Clayton or Erin Brockovich can expose the reckless or greedy criminal actions of the evil corporation and walk away as heroes, but in real life there are consequences for the “good guys” as well – sometimes even worse ones than the “bad guys” will suffer.

Blowing the whistle on your employer’s actions could easily destroy your career; it might lead to criminal charges against you if the government feels that you were culpable for whatever wrongdoing was involved, and it will almost certainly lead to civil suits against you on the part of any corporate officials not convicted of anything serious. Even worse, if your whistle blowing does bankrupt the company, or even seriously reduce its value, you will have cost the stockholders vast sums of money, possibly destroying the lives of people whose only crime was investing in the wrong mutual fund. If the company was the primary employer for a community, you may have turned that community into a ghost town and destroyed the lives of all of the people who worked there, sold things to the people who worked there, provided services to the people who worked there, and so on.

Now we all know that it isn’t the whistle-blower him or herself who is responsible for all of these consequences; it’s the corporate executives who made the original decision against the public interest who caused all of this hardship. But while the executives may or may not suffer the consequences (they may be able to avoid personal financial responsibility in the civil trials – and it’s always possible they will beat the criminal charges if any are ever brought), the person who blows the whistle will almost always have to live through the fallout that results. And while there are laws on the books that are supposed to protect the whistle-blower, they can only protect you from overt actions by your employer; they can’t save you from never getting another job in your industry, never receiving the assignments you want, or from having the people whose lives you have inadvertently destroyed spit on you in the street.

My question of ethics for the day is this: If in real life, the person blowing the whistle will receive no reward, and may very well give up their career, their fortune, their home, their freedom or even their life, can we blame them for not having the courage to make that stand and blow that whistle? If they have spouses and children, can we blame them for not being willing to hazard their families in order to do the right thing? And if we can, then don’t we, as a society, owe those people something more than the lame, weak, useless excuses for protection that the current “Whistle Blower” statues provide? If we fail to enact real protections for such people, isn’t it all of us who are responsible for this?

It’s worth thinking about…

Friday, October 19, 2007

Cylinder Deactivation

One of the new technologies that’s come up in the current debate over fuel economy, Cylinder Deactivation isn’t really going to change much about the way passenger cars are built. It’s not a shift away from fossil fuels, or toward renewable energy sources, or even to a new kind of machinery, really; at best it’s a stopgap until ethanol, solar or fuel cell technology becomes economically viable. But it’s an ingenious short-term innovation that may have larger implications in the future, and that makes it worth a closer look.

Basically, the idea is that in a V6 or V8 engine, you don’t actually need all of the cylinders working when the vehicle is cruising down the highway or rolling down a hill. So you can equip the engine to detect these lower demand conditions and shut down some of the cylinders, leaving enough to provide power to maintain the forward rate of speed. Then, when the driver needs to accelerate or otherwise needs more power, the engine can reactivate the cylinders and restore full power. Here’s an AP News story, by way of Yahoo News, about how this all works. A similar technology is available that will actually shut off the engine while you are waiting for a light to change, and start it up again when you need to move.

The effect of these systems really isn’t all that impressive – the cylinder deactivation systems introduced by Honda for some of the 2005 and 2006 models show an improvement in gas mileage by about 4 or 5 miles to the gallon – about 12% to about 20%, depending on the vehicle. It certainly doesn’t compare to the dramatic increase in mileage offered by hybrid power systems, let alone fuel cell engines. But what makes this technology so interesting is that it should, at least in theory, be applicable to any type of engine, in any vehicle design, without the adoption of new fuel technologies, creation of new fuel production facilities, modification of gas stations or disposal problems involving huge banks of lead batteries. It isn’t even particularly expensive, especially when compared with hybrid systems (which can add $3,000 or more to the price tag, plus a dealer premium fee because the hybrid vehicles are so popular).

The other reason these are interesting is that they represent a perfect example of the business concept called Incremental Increase, or Incremental Improvement. The basic idea is that while making a single change in your business that increases your profits by 10% would be good, making five changes that each add 2% to your profits is just as good, and making five changes that each add 3% to your profits would be much better. In this case, perhaps the same cylinder deactivation technology could be used to produce cars that use 20% less E85 ethanol fuel, or the same concept could be used to extend the efficiency of electric motors or hybrid power systems. But even if the only thing that happens is that all of the larger vehicles sold from this point forward use 20% less fuel to travel the same distance, that’s still better than nothing.

And while that’s going on, maybe we can work on the next incremental increase…

Tuesday, October 16, 2007

Something New

Unless you are a fan of alternative rock music from the 1990s you may not have heard about the band Radiohead and their new album, which is being offered for download from the band’s own website. It’s one of the first new ideas to come along in business in a long time, and has been called both “dumb” and “a possible solution to the illegal downloads epidemic.” Even more remarkable, it’s a possible solution that might work for both the downloaders and their recording industry adversaries – assuming that it would work at all. It’s worth thinking about.

Basically, the idea is that the new Radiohead album, called “In Rainbows,” is available for download at whatever price the person downloading it feels is reasonable. If you go to the “order” page on the website you will be prompted with an empty “price” field and allowed to input whatever amount you like, including zero. You can read the New York Times story about it here if you want to. Several of the experts interviewed for the various news stories about this venture claim that this is the recording industry’s worst nightmare, even worse than iTunes allowing people to buy the one really good track on an album for a dollar without having to shell out the other $17.99 to get the stuff that the band only recorded because they had a contractual obligation for an album with 10 or 12 tracks. Because this is, in effect, legal file sharing…

All right, so Radiohead is just giving their work away for free? Not quite. According to some of the follow-up stories, while about a third of the downloaders are not paying anything, the average price (voluntarily paid!) by the downloaders is about $8 US – which means a lot of people are paying $20 or more, because that average includes all of the people paying nothing. There’s no word yet on how many people have downloaded the album, but some of the Internet stories are claiming it’s as many as 1.2 million…

Or, if you like, something along the lines of $10 million US in sales. In less than three weeks total, since the “album” was released for download on September 30, 2007. Even better, since the band released this album without a record company, they don’t have to share any of it. It remains to be seen if the album will make as much money as some of their more traditional releases did, but it seems highly likely that the band itself will earn more on this venture than they would putting up with all of the “promotional fees” and “creative accounting” a record company would have subjected them to. But most importantly of all, there will be no losses to illegal file sharing. It is functionally impossible to pirate this album…

Needless to say, the record labels will try to dismiss this venture as a “fluke” or a “meaningless stunt” and then do everything they can to prevent anyone else from trying it. And in fairness, it will be difficult for any band that does not have six previous releases and legions of fans to duplicate this feat. What I am suggesting is that the record companies themselves are the ones who should try this. If it can be proven that the total amount paid through these voluntary downloads is equal to or greater than the amount made by selling an album through conventional channels, then the free downloads (the people who refuse to pay for the privilege) will make no difference – these are the same people who would share the files illegally in the first place. In fact, if you factor in the money that the recording industry will not have to spend trying to prevent illegal downloads, there’s a chance that this might actually be much more profitable than going through conventional channels…

And as of the end of last month, there IS something new under the sun…

Sunday, October 14, 2007

Another Fine Line

I’m not sure how many people have been following the situation in Aurora, New York over the past six years, but I found the story from the Associate Press via Yahoo News to be most interesting – and an illustration of how hard it can be to find the line, sometimes. Since I work on the non-profit side sometimes, and philanthropy is most definitely a business function, I thought it might be interesting to take a closer look at this issue. Especially since it has ramifications far beyond the events in Aurora…

Up until about six years ago, the story goes, Aurora, New York was just a small college town in decline. A community of about 700 residents, Aurora’s largest employers were Wells College (founded by Henry Wells of Wells Fargo and American Express fame), which was having trouble attracting students, and MacKenzie-Childs Ltd., a pottery and home furnishings center that was actually in bankruptcy, threatening to take 240 jobs with it. Into this troubled community came Pleasant Thiele Rowland, the founder of the American Girl doll company and a Wells College graduate. Ms. Rowland told the townspeople that she had always loved Aurora, and was going to put up the money to restore the town to its 19th Century glory, replacing worn-out old businesses with upscale versions, restoring the historic older buildings, buying the MacKenzie-Childs center out of receivership, and refurbishing the college.

This she proceeded to do, taking no profit at all from any part of the project. Since there is no public money involved, no one really knows how much was spent on this project, but we know that Ms. Rowland sold the doll company to Mattel for roughly $700 million, so clearly she had the finds to spend. Sprucing up the college generated no controversy; wealthy donors do this all the time, and while the faculty grumbled about money being spent on decorating instead of instruction, no one really took umbrage until she began working on the town itself. Some of the townspeople felt that their “patron” was trying to make over their town into some phony, idealized vision of itself that would replace its actual historic buildings and artifacts. Others believed that the makeover and the financial support were vital to restoring the town’s frayed economy. There were, perhaps inevitably, lawsuits and counter-suits; placards and bumper stickers; arguments and bad feelings on both sides.

My question is this: If someone is willing to put up their own money to restore a community, and is willing to purchase buildings, businesses, and real estate at fair market value to do so, does the community have an ethical responsibility to permit this? Or do they have a responsibility to respect the wishes of the residents who want the town to stay the way it was? Clearly, this is a situation where compromise will be difficult, as the anti-renovation side wants nothing to change, and the pro-renovation side wants to give the town’s new benefactor a free hand to change anything she wants to – on the grounds that the town was dying before, and any change has to be for the better.

All across the United States (and probably many other places in the world) there are other small communities that will not be fortunate enough to be offered such a choice – small towns where the primary employer has been forced to shut down, most of the families have drifted away, and only a handful of service businesses (gas stations, taverns and the like) remain to live off of the occasional out-of-town traffic. Any of these communities would trade places with Aurora in a heartbeat – and would probably tell the people in Aurora that compared to watching your community turn into a ghost town, being remade in some faux 19th Century splendor is nothing to complain about.

I just wonder how they would feel about things if their town was the one being turned into a giant dollhouse…

Saturday, October 13, 2007

Getting Scalped

I suppose it was only a matter of time before the whole online scalping business exploded. For some years now, companies that acquire large blocks of tickets from online sources (and sometimes telephone sales, too) have been creating a huge secondary market for tickets to concerts, sporting events, and anything else that required tickets for admissions – and driving the prices of these activities up dramatically as a side effect. Many cities and counties, and even a few states, have laws that prohibit scalping, but since the companies doing business in this fashion are based somewhere else, they’re effectively immune to these ordinances. Unless the Federal government becomes involved, there isn’t much anyone can do about this.

Up until now, the controversy has mostly surrounded businesses snapping at each other – concert promoters and agents who represent the recording artists claiming that they deserve a share of the money made in the secondary market by the ticket brokers, and the brokers pointing out that they are legally acquiring the tickets at the price the promoters are charging, and accepting all of the risks associated with selling those tickets. This is all perfectly true, by the way – a few years ago, one of my cousins and I were able to get $100 luxury skybox tickets to a baseball game for only $25, because the game was starting in half an hour and the ticket broker we went to had been unable to sell any of these super-premium seats at face value, or even half of face value. He eventually sold them to us for $25 each just so he wouldn’t have to eat the entire cost.

All of this appears to be changing now, thanks to the flap surrounding the ”Hannah Montana” concert series. For those who don’t follow such things, Hannah Montana is a fictional character on the Disney Channel series of the same name, played by Miley Cyrus, 14-year-old daughter of country star Billy Ray Cyrus. The show has been so popular that the Disney people have decided to field a 51-city tour, with the young star performing both as herself and as her television persona. Fans of the series and the singer (primarily pre-teen girls) have made this one of the hottest tickets in recent years, and parents all over the country have been promising to take their children to see the concert tour when it reaches their location.

Ticket brokers, sensing huge amounts of money to be made, immediately snapped up all of the tickets they could get their hands on, and started jacking the prices up to whatever the market would bear. A quick look at the Hannah Montana page on Stub Hub shows asking prices as high as $9,630 (for the Staples Center in Los Angeles), and well over $1,000 even for marginal seats in some of the smaller venues on the tour. Parents who had expected to purchase tickets at the $25 to $40 face values commonly charged have been left with the choice of laying out several months’ salary, or eating their words and breaking their promises. Needless to say, the outrage is spreading like wildfire.

From a business standpoint, it would appear that the brokers have not broken any laws. One could argue that charging whatever the market will bear is bad for their public image, but dealers in a commodity product generally don’t have a public image to begin with, and certainly not enough of one to impact their sales. No one is going to do business with a brokerage firm just because they like it, whether they’re brokering tickets or securities. And it’s hard to blame someone for selling something for the best price they can get for it; that’s how a free market is actually supposed to work. At the same time, this sort of markup is what generates situations like athletes charging $50 for an autograph and World Series Tickets that cost more than my car.

In this case, the Disney people could have stopped the whole thing right at the beginning by using the same online ordering system they use to sell tickets to Disneyland and the other parks. Disneyland tickets can only be used by the person who purchased them (and his or her party), and they carefully check identification before they let you into the park. Of course, making this work would have required Disney to operate the concert tour themselves (instead of using a promoter) and sell the tickets themselves (instead of using Ticketmaster), and do heaven only knows how much additional work. The question is, will the amount the corporation saved farming out those functions equal the amount of bad public relations they are going to incur over this?

And how bad does this industry have to get before the Federal government DOES decide to step in…?

Friday, October 12, 2007

Power From Space

If you’ve ever played any of the popular “Sim City” games, you’re already familiar with the concept of Orbital Power or Microwave power, as it is sometimes called. For those who don’t waste their time playing video games, Microwave power systems use large banks of solar panels placed in geostationary orbit, which then beam down power to the Earth’s surface in the form of extremely high frequency microwaves. It’s an old idea – it has turned up in Science Fiction stories and novels repeatedly since the first solar panels went to space in the 1960’s – but until recently the technology has not been available to make this sort of thing a reality. There have also been persistent (and usually fatuous) scare rumors that the microwave beam might “wander” from its receivers and accidentally charbroil large patches of the Earth’s surface. Today’s story on MSNBC suggests that both problems may now be in hand

Curiously enough, it would appear that the U.S. Military is the key customer who could make all of this go – an ironic twist, given that the initial exploration of space that led to the use of solar panels to power long-duration spacecraft was made using rockets adapted from military ICBM designs. It turns out, however, that the Pentagon really likes the idea of getting between 10 and 50 megawatts of energy (enough to operate a small military base, including things like radar and motion sensors) beamed directly to wherever it wants to put a base, without inconvenient details like having to ship in electrical generators and then keep them supplied with ridiculously expensive and absurdly vulnerable fossil fuels.

The story cited above notes that today’s solar power cells are about three times more powerful than those of only 10 years ago, and the experience obtained from building and operating the International Space Station should make construction of the first power satellites feasible, if still not exactly cheap. Construction cost on the first unit is projected to cost on the order of $10 billion, which sounds pricey until you realize that unlike a fuel-burning power plant, the energy from the orbital system is effectively free once you’ve completely the construction. By my calculations, the system described would take about 20 years to pay for itself (assuming 50 megawatts generated, and using California pricing for electricity), but with no onboard reactor and no moving parts there is no reason to believe that these systems wouldn’t live up to the typical 50-year service life of long-duration space systems. If the price of fossil fuels continues to rise (and it’s a fair bet it will) that breakeven point comes a lot faster.

More to the point, perhaps, larger power arrays in orbit would be much more powerful (as much as 10 gigawatts per unit) and considerably more efficient. And, unlike terrestrial power technologies, orbital power units do not create air pollution, water pollution, noise pollution, or radiation hazards, or take up large patches of environmentally sensitive real estate. There are still a lot of details to be worked out, of course, but once we get the defense contractors on board, the rest should be a slam-dunk. Face it, folks, in this country the Military-Industrial Complex generally gets what it wants, and there’s no denying how useful this would be for national defense, both directly and in the strategic reduction in reliance of foreign oil production.

Now if we can just get the Pentagon interested in funding breakthrough technologies in other useful areas, like education or healthcare…

Thursday, October 11, 2007

Loveable Losers?

I’m not going to do a lot of baseball commentary in this space, because in real life there are actually very few similarities between business and our national pastime. This post is about the Chicago Cubs, but it’s actually about a business topic involving the Cubs; specifically, it’s about the pending sale of the Cubs, the fact that being swept out of the postseason was actually good for them, and something called the “ego premium.”

First, let’s take the financial part. In the story on MSNBC Online we find the interesting note that following their three-game swan dive in the postseason, the Cubs market price has risen from about $600 million to at least $660 million, and probably a lot higher. It doesn’t make a lot of sense on the face of it, until you realize that the one home game held at Wrigley Field last week brought in well over $5 million in revenue for the team. A full run through the playoffs and the World Series would mean at least 5 and possibly 10 such home playoff games, raising another $30 to $60 million in tickets, parking, concession sales, souvenir sales, and so on. Even without a championship (or even a pennant), the team’s success is building (they did win their division in 2007 after a miserable 2006 season) and their revenue should continue to improve next season.

Now, no one is suggesting that losing the first round was actually a good thing in itself; the team’s value would doubtless have increased even more if they’d actually won the first round series. But it seems very clear that just having been to the postseason has boosted the team’s value by 10% or more. But what’s really mind-blowing about this story is the note about the “ego premium” on page 2. Basically, the idea is that while owning a manufacturing company or a meat-packing plant has only minimal status associated with it, owning a sports franchise – particularly a century-old franchise with a 90+ year old stadium like the Cubs – immediately makes the owner a public figure; a sort of balance-sheet celebrity. A team owner who managed to bring a championship back to the Cubs faithful after 100 YEARS without one would simply be a king in the North Side of Chicago.

Sounds like an attractive proposition, doesn’t it? At least, if you have $660 million to spend, plus the funds you will need to operate the team. The problem is that this is not a sound basis for purchasing a business. There is no way to insure success in baseball; consider for example that the New York Yankees, who had the highest payroll in baseball in 2007 ($189,639,045) were beaten in the first round by the Cleveland Indians, who spent less than one-third as much on payroll ($61,673,267) according to USA Today. If you’re interested in looking up other pay-for-performance statistics, you can take a look at their MLB Payroll database for yourself, but the point is that the owner can never be sure of on-field success, which in turn drives the team’s financial success.

“Why do I care about this?” I hear some of you asking. “I don’t have $660 million to spend, and if I did, I’d never blow it on something as goofy as a baseball team that hasn’t won a championship in a hundred years.” Probably not, but I regret to say that baseball owners aren’t the only people to fall victim to this sort of thinking; many lesser financiers are taken in by the “ego premium.” I’m not going to dismiss the potential value of being a public figure; things seem to have worked out well for George Steinbrenner, just to take the obvious example. And I’m certainly the last person to advocate against doing something you love for a living, whether it’s spending $660 million for the Cubs or $6,000 for your own hotdog cart. What I’m saying is that if you make any business decision based solely on what it does for your ego, you’d better be prepared to lose your money…

Tuesday, October 9, 2007

Why Bother?

Some of you may have noticed last week when Google decided to honor the 50th anniversary of the historic Sputnik 1 launch by modifying the logo on their home page. It’s certainly not unusual; the company has put up over 140 modified logos over the years to celebrate various obscure holidays, historical events, world happenings, and so on. As an amateur historian (and an amateur flight historian, at that) I quite enjoyed the recognition, just as I enjoyed the article in the Smithsonian’s “Air and Space” magazine last month, which finally revealed the names and career details about the scientists who made the first Soviet space launches happen.

Unfortunately, my enjoyment does not appear to have been shared by certain ultra-right wing groups, as reported by The Chicago Tribune this morning. It seems that they feel that celebrating the achievements of a “totalitarian regime that was our Cold War enemy” is wrong, and the fact that the company did not give equal times to patriotic holidays like Veteran’s Day and Memorial Day is intolerable. Please note, by the way, that these same groups that are calling on Google to censor its support for scientific pioneers are the same groups that have condemned the firm for working with the Chinese government to restrict content.

The key point that people on both sides of this issue appear to be missing is that Google is a private company, not a government agency or a non-profit guardian of the public knowledge. There may indeed be people in our country who believe that everything they see on Google came directly from God, but those same people are probably crafting their management policy based on the contents of their Snapple™ cap information blurbs. As a private company, Google has no obligation to submit to anyone’s ideas of what their site should look like; they also have the legal right to do business anywhere they like (except in cases where US or UN trade embargo or similar conditions exist). If the ultra-right wing groups do not like this, they are free to take their Internet searches (and indeed, any other business they might have considered doing with Google) elsewhere. Yahoo, Alta Vista, Ask, About, Netcrawler, and a dozen other Internet search engines will be more than happy to take up the slack.

One could make a similar point about the boycott of television stations and newspapers by conservative groups, and it fact I have, but in this case there is really no comparison; unlike a conventional media outlet, Google is not a content provider. People who do not wish to see television programming they find offensive can always avoid that channel, or (better still) turn off the set, but in the case of Internet searches, the exact same content is available to users who do not wish to see Google’s hippy, left-wing logo art over a host of alternative channels.

Which brings me to the point of this tirade. In our current, easily offended society, it generally isn’t possible to wake up in the morning without offending someone’s ideas of how the world should be. Every conceivable social, ethnic, religious, political and cultural group has its own ideas about what you should do, and will boycott, flame, sue, lobby, legislate, denounce or declare jihad against your company if you step across any of its particular lines, most of which they will not trouble to explain to you even if you do ask (you’re supposed to know them already).

Fortunately, there’s a management solution to this sort of drivel. My question to the senior management of Google would be, are you still making money despite the disapproval of the ultranationalist groups that consider you unpatriotic? If the answer is yes (and Google just set up a $90 million company foundation to work on social causes, so I’m willing to bet the answer IS yes), then why bother worrying about who you’ve offended today? Just get on with your business…

Monday, October 8, 2007

Why Written Policy is Important

By now you’ve probably seen it on the news: Southwest Airlines has had another incident where one of their crew told someone flying aboard one of their airplanes to change his clothing. If you haven’t seen it, you can check out the MSNBC account of these events. If you’ve been following the story, I imagine you’ve found it somewhere between amusing and exasperating (unless you’re a shareholder in Southwest, in which case I’m deeply sorry for you). “Boy,” you’ve probably chuckled. “What a bunch of clowns! My people would never pull something like that!”

That may be true, but unless you’ve actually written policy that covers this type of situation, it is difficult to be certain. The story notes that like most airlines, Southwest has language in its carriage contract (it’s printed on your ticket or E-ticket in the fine print) that states that the airline reserves the right to refuse service to anyone whose clothing is "lewd, obscene or patently offensive." The problem is, they don’t appear to have disseminated any guidelines on what, specifically, constitutes "lewd, obscene or patently offensive” clothing (the end of the article mentions that management is considering doing so now). It would seem that up until now, that decision has been left to the judgment of individual employees – some of whom appear to be easily offended.

Clearly, you wouldn’t want people traveling in anything too risqué, as it would annoy and/or offend some of the other passengers, but anything that extreme would probably get the wearer arrested for public lewdness before they ever got to the gate. Clothing that would cause fist fights in the aisle of the plane is probably bad idea, but it’s hard to imagine anyone committing battery over a t-shirt, especially one like the one in this case. And it’s hard to imagine anyone considering the outfit the woman in the first incident was wearing to be “obscene,” let alone “patently offensive.” But you can easily understand why the Southwest employees were not willing to take chances with it.

I don’t want to rag on the cabin crew, especially in the post-9/11 era, where everything about their jobs has gotten to be a bit more stressful than it really should be. In addition to their customer service, public relations and food/beverage service duties (which were already fairly absurd), they are now being asked to provide security and keep order in a work environment in which there’s a nonzero chance that someone aboard may be trying to kill them and all the other passengers – and there’s a near certainty that the other passengers will beat someone to death if they think there’s a chance he or she is trying to bring the plane down. What I am saying is that these people are busy enough already; they shouldn’t be trying to set corporate policy while also trying to get everyone into their seats so the plane can take off.

Any time you tell you employees to “use their discretion” you are, in fact, allowing your company policy to be written on the spot, in real time, by whoever happens to be around. That might work if you are a small professional partnership, but if your firm is a large company with people of different backgrounds and education levels, you’d better be sure that you are comfortable with your lowest-ranking people making decisions that could alienate your customers, make your company a laughingstock, and subject you to both unwanted media scrutiny and even more unwanted lawsuits – because that’s what will eventually happen.

Unless, of course, you take the time to sit down and write out your company policy in detail, with specific examples…

Sunday, October 7, 2007

The Ethics of Brown-Nosing

In any social group, whether it has a larger function or not, you are going to encounter some cross-section of suck-ups, lickspittles and brown-noses doing what they do best, which is curry favor with those more powerful than themselves on some dimension. It seems to be a hard-wired part of human behavior, and only the most principled of people are completely immune to it. But while the debate as to whether this behavior represents a defect of character or merely the ruthless drive to do whatever is necessary for personal success (and whether that sort of ruthlessness is itself a defect of character) may never be settled, it does seem clear that there is a line between working hard as a means of advancing one’s career and sucking up to the boss in order to avoid doing any hard work while still advancing one’s career – and that this line is sometimes finer than we realize.

Let me give you a scenario that my MBA instructor on human resources topics and ethics, Professor David Mathison gave our class in 1994. Let’s say you’ve just taken a new job, and you decide to put in a few extra hours of work each day, just to make the right impression. Everyone else goes home right at 5:00, but you stay until 6:30 or 7:00 every day, plugging away. Finally, one night, your boss comes back to the office to get something, and finds you still at your desk two hours after everyone else has left. Surprised to see you, he asks if anything is wrong.

This is your big moment. You smile and say, “Nothing’s wrong; I just wanted to get a few more things done before I left!”

And your boss frowns, and asks, “Are you having problems with your job? Everyone else seems able to finish all of their assignments by the end of business.”

And you realize that you’ve painted yourself into a corner. No, there’s no reason you couldn’t finish everything and go home on time. You’re actually doing more work than is necessary, either making the job more complicated than it has to be or taking on other people’s assignments, or both, simply because you wanted to look good. But there’s really no way to tell the boss that without looking like a complete suck-up, because that’s actually what you’ve been doing. You’re behaving in an unnatural or at least non-standard way in order to gain favor with those in power. It’s certainly more useful than complimenting the boss on his hideous fashion sense or offering to take his dry cleaning in for him, but it’s still currying favor. If your boss is the type who dislikes brown-nosing, you’ve probably generated the opposite result from the one you wanted.

Dr. Mathison’s point (and mine here, too) is that no matter how benign your sucking up behavior is, you are still doing something inherently unethical – lying about your actual work ethic and trying to make yourself look exceptional at the expense of your co-workers. You would never do these things openly or blatantly; the suggestion that you would lie to your boss or undermine your more experienced co-workers probably offends you – but that’s exactly what your apple-polishing behavior was doing, albeit more as lies of omission than anything else.

Now I’m certainly not advocating that you avoid extra work right after taking a new job, or at any other time, or for that matter, suggesting that you don’t let your superiors know what you are working on and how much you are accomplishing. I’m suggesting that the next time you do anything other than your regular duties at your normal pace during a standard-length day (standard for whatever job you do, that is) that you make sure you know where that line between normal conduct and brown-nosing is – and whether or not you’ve crossed it…

Saturday, October 6, 2007

Meat and Tech

I noted another counterintuitive news story today, or more accurately, three of them. Two of these stories were about meat recalls, and the other was about investment in technology sector stocks. Now, I realize that these may not actually have anything to do with each other, but I found the juxtaposition of the stories to be an interesting comment on our current business climate.

First, the meat recall stories. These are scary to anyone who eats meat, and particularly to anyone who eats hamburger patties commercially available in the US. The first of these is about the Tops, Inc. recall, which has now bankrupted the company and resulted in the shutdown of their only meat packing plant. You can read the Associated Press story about it if you like. The recall affected mostly the sort of ready-made hamburger patties you buy in bulk frozen, and has now grown to include more than 21.7 million pounds of meat. The bankruptcy and shutdown will cost 87 people their jobs, and the contaminated product involved has already made 32 people sick; meanwhile, the FDA is still not sure what caused the problem in the first place.

The other meat recall was from the Sam’s Club warehouse store chain, and involves ground beef patties made for them by Cargill, Inc. So far, this outbreak has only made 4 people ill, and the situation is unlikely to get any worse, because Sam’s Club has pulled all of the affected product off the shelves and recalled any that was purchased. You can read the story, also from the AP if you want. It doesn’t really compare to the Tops recall, which is the second largest beef recall in US history, but coming as it does during the same time period, it has made a lot of people who either eat ground beef patties or invest in companies that made and/or sell them a bit nervous.

By contrast, the story about people who invest in technology stocks was remarkably upbeat. That story deals with current trends in mutual funds and other large investors, but it talks about how the technological innovations made by Google, Apple, Cisco, and other high-tech companies have created a lot of investor confidence. Despite ongoing problems in the stock market and worries about negative economic indicators, particularly lack of investor confidence generated by the ongoing mortgage lending crisis, technology investors are confident that these companies will continue to invent and innovate their way out of trouble, not matter what happens to the nation’s economy in general.

Given that meat-packing companies have been around for a century or more, and that people will always need to eat, you would think that investing in companies that package meat would be fairly safe, wouldn’t you? Especially in a time when so many people are living on high-protein, low-carbohydrate diets in which large amounts of lean red meat are more popular than ever. By the same token, technology companies have always been risky investments, both because there is no way to predict where the next ingenious invention will come from, and also because there is no way to predict which ingenious invention will become the next hot-selling product and which one will bankrupt the company that insists on taking it to market. We are living in the age of both the Atkins Diet and the dot-com crash, and you would think these things would affect investor confidence. Yet, they don’t seem to be.

It just goes to show that things are not always as simple as they might appear…

Friday, October 5, 2007

Made Where, Exactly?

By now you’ve probably heard about all of the toy recalls going on over the past few weeks – mostly about lead paint used on toys made in China, although there have also been toys recalled for choking hazards (small pieces that can fall off or be gnawed off and then swallowed by a toddler), sharp points or edges, and other problems. This has driven a lot of people who had never given the first thought to the subject of outsourcing to start thinking about it. I can’t help wondering if this is going to be like waking up one morning and finding a six-ton elephant living under your bed. You’d think people would notice before this…

According to the article on USA Today Online, something on the order of 80% of all toys sold in the United States are made in China, and another 10% or so are made in other parts of Asia and Europe, leaving only 10% that are actually made in the US – and the majority of those are the so-called “nostalgia” toys like the Slinky and wooden blocks, and so on. This will make things rather difficult for all of those alarmed parents who are swearing to only purchase toys made in the USA for Christmas this year. Especially since all of the really “cool” toys (e.g. the ones with effective marketing) are made in China, and the kids are unlikely to warm to “nostalgia” toys instead.

Even worse, there’s some debate as to how much of the problem is in the manufacturing, and how much is simply in the design. The affected toy companies swear that they specified safe, non-toxic, non-leaded paint, while the Chinese manufacturing people say they were just following the specifications given to them by the toy companies. And you can’t blame the rest of the problems on the manufacturing plants; they aren’t the ones who designed toys with small, easy-to-gnaw-off-and-swallow parts in the first place. The Consumer Product Safety Commission website tracks all of the recalls, but it notes that about 10% of all of the toy recalls are on toys made in the USA, or in other words, a number proportional to the percentage of toys on the market that were made here in the first place.

At the heart of the problem is the debate over outsourcing, or more accurately, the remarkable ability of people to stick their heads in the metaphoric sand and ignore the debate over outsourcing, at least until it affects their jobs, home lives, or something they were going to purchase. One of the side effects of a global economy is that it’s not always possible to purchase the products you want and still buy goods made in your country of origin. There was a minor blip in the news last year when it was discovered that Ford Mustangs actually had fewer American-made parts in them than Honda Civics made in the Honda Plant in Ohio, but that drew very little attention, except from those people who wanted to buy a Mustang…

The bottom line is that the American dominance of the world’s manufacturing sector, if it ever existed to begin with, has gone now, and will not be returning. If you want to buy goods such as a television set, a home computer, a cellular telephone, or an automobile, any of these things will almost certainly contain parts that have been outsourced to some overseas manufacturer, and some of them will not be available from US factories at all. You could simply swear off all of these, and all of the other goods made overseas, and live on antiques and products made in the USA if you want to, but I wouldn’t expect the kids to be all that happy with your decision come Christmas morning…

Thursday, October 4, 2007


In other news this week, I noted that Ford Motor Company was having a really bad quarter, and in particular a terrible September. Here’s one of the news stories about their situation. What I found puzzling about this account was the mention that while Ford’s sales are down 15% (I’ve seen other news agencies estimate as much as 30%, but the AP is a bit conservative here), the company is cutting sales to rental fleets by more than 30% this year (over 130,000 cars total) as part of its long-term restructuring plan. This seemed a bit counterintuitive to me.

According to the company’s spokesman, rental sales are bad for the corporate image and actually hurt sales. But they don’t say how that could possibly be. One of the other articles I turned up suggested that people renting really beat-up Ford vehicles might come to associate those well-worn cars with the company in general. Others have suggested that it’s actually the rental sales programs – where car rental companies dump their much-used cars onto the used car market – that result in this negative consumer view. What’s odd is that both of these claims would appear to fly in the face of both the company’s advertising claims and common experience.

For a lot of people, renting a car represents their only opportunity to try driving another car (or another brand of car) over a long period. Some people will actually rent a car for a few days to see how they like it; others will have a car randomly assigned to them and find that they like it enough to purchase one. Ford itself has been advertising a “Ride Swap” program on their television commercials, where unsuspecting consumers agree to exchange their own cars for the Ford equivalent for a week, by which time (in the commercials, at least) the participants usually want to keep the Ford car in place of their existing vehicle. In either case, it seems unlikely that any bad experiences that rental customers might have would outweigh the advertising advantage of actually having them drive one of your cars for a few days.

Then there’s the fact that, whatever its effect as a means of advertising the product, sales to rental car fleets account for more than 130,000 additional sales each year. If each new car is between $10,000 and $20,000 (allowing for price discounts for fleet sales), then this loss of business represents between $1.3 billion and $2.6 billion all by itself. It is possible that the long-term positive effects on the Ford brand will compensate for the (quite literally) billions of dollars the company is flushing away now, but this seems like a risky strategic move when you sales are declining and foreign competition is nipping at your heels.

Of course, it may turn out that there’s some far more subtle factor in play here, that the Ford people will ultimately prove to be completely right, and that their strategy is just too subtle for me to grasp. But I still say this strategy seems a bit counterintuitive…

Wednesday, October 3, 2007

The Triplecast

In my last post, I mentioned the Olympics Triplecast, an experiment in pay-per-view programming attempted by NBC and Cablevision for the 1992 Summer Olympic Games. Not a lot of people remember this venture today, where pay-per-view sports, movies and events have become commonplace, but back in the early 1990’s when I was working in cable, pay-per-view was really cutting-edge stuff (even though the equipment we were using to provide it wasn’t) and the Triplecast was the most ambitious project attempted to that point in this new medium. That it failed utterly, and more to the point, WHY it failed utterly, make it worth remembering.

The mechanics of the program seemed simple enough. NBC and Cablevision were offering three channels (the Red, White and Blue channels) of Olympics coverage, live and uncut, over what we would today refer to as cable pay-per-view. There were three levels of coverage available, called the Bronze, Silver and Gold packages in a modest bit of subliminal advertising (the Gold Medal is for the winners of each event, so if you bought the Gold Package, you were a winner, too. If you bought the Silver or Bronze packages you were still World Class, but not the Gold Medalist…). The Bronze sold for $95 on most cable systems, while the Silver was about $130 and the Gold was $170. In theory, if you purchased the Gold package and had three VCR units and a lot of tape, you could have watched every minute of every Olympic event. With the other two packages you would still get more coverage than anyone could possible watch in three weeks or even three months.

The failure of the experiment is usually blamed on the price. NBC was still broadcasting a lot of Olympics coverage over their broadcast channels for free, and while they cut around to different heats on different events, you could still see most of the more popular Olympic sports without having to pay for them. Some observers have also blamed the failure of the Triplecast on the unfamiliarity of pay-per-view services, customer distrust of the network to provide content worth paying for on the pay channels, or even nationalism (Americans will only tune in to watch American athletes, it was said, and all of those will already be shown on broadcast television). The truth, however, is that the project was doomed from before its inception, when the consumer surveys were still being tabulated.

It turns out that several senior executives at NBC and its parent company (I’m not going to name names; I’m not the litigious type) had become rather enamored of the Triplecast, and felt that their personal prestige would be threatened if the project was scrubbed. So when the surveys came back indicating that not enough consumers would “definitely purchase” the Triplecast, one of the network executives ordered that all of the “might purchase” and “uncertain” responses be counted as “definitely” results. The project was green lighted, the contracts were signed, a huge amount of money was spent, and the packages were offered to the consumers.

Of course, when the time came, all of the “maybe” results turned into “No” results, just as any who has ever studied consumer behavior or statistics could have predicted. It didn’t help that the consumer surveys had not specified a price, or that the price finally offered was considered exorbitant (in 1992, on the cable system I was helping to run, $170 plus tax would have paid your basic cable bill for SIX MONTHS), but the simple fact is that there had never been a sufficiently large market for this product – and the people who should have realized that were blinded by their own arrogance and pride.

It has been estimated that the parties involved lost something on the order of $100 million on the Triplecast – not a lot of money by current standards, perhaps, when we have grown accustomed to the idea of a single movie losing more than that, but back in 1992 that was considered a lot of money, even in the television industry. On our cable system (of perhaps 5,000 customers) only one (yes, 1!) person ordered the Gold package, and perhaps a dozen others ordered silver or bronze. This ratio (a “buy rate” of considerably less than ½ a percent) was recorded all across America. In the long run, pay-per-view has matured into a very profitable business, and most of the early “bugs” in both the technical and business aspects of the product have been ironed out. But there’s still no fix for either arrogance or pride, let alone stupidity…

A Good Idea?

I saw a notice on television last night that said NBC was breaking off its working relationship with Apple, and would no longer be offering its programming for sale through the iTunes store. Instead, NBC will be offering its programming free of charge on its own new download site, called NBC Direct. You can try it out for yourself if you want to; just go to

Obviously, the network is hoping to attract a huge number of new viewers to its downloadable content, since people will be able to get all they want for free. It’s an attractive offer on its face, but there are a couple of things they don’t mention up front. For one, the “free” downloads are actually supported by advertising, just like broadcast television. That means that when you download a show off of NBC Direct, it comes with commercials as part of the download, and they’ve rigged the files so that you can’t fast-forward through the commercial part of the file when viewing it. You could still get up and go to the toilet during the commercials (thus not watching them), but short of actually leaving the room, you’re stuck with them.

Early reports also claim that if you don’t watch the download for two days, you will have to re-download the files before you can view them. This is supposed to assure that NBC can send you the very latest commercial content. And each of these “free” downloads is supposedly viewable for 7 days only, after which the file content erases itself (and is presumably not available for future downloads). No one has said what good that is supposed to do anyone, but I suppose if you have to keep downloading new files, that would give the network continual opportunities to deliver new commercial content.

Again, I’m not going near any of the 1st Amendment or Privacy issues here. From a business standpoint, the question is, does this constitute a sound management decision? It is possible that the number of people willing to put up with all of these restrictions and commercials in order to get free content will generate enough viewings for NBC to meet its contractual obligations to the sponsors of these shows, and thus make more money than they would selling the same content on iTunes. It’s also possible that they’ve misjudged the demographic of people who download television shows onto their iPods (many of whom could afford to pay for content in the first place, and many of whom will not stand for this kind of interference).

For the moment, the whole concept is mostly being mocked – I first picked up on this story on The Colbert Report, who were not what you would call merciful in their treatment of the mandatory commercials in the file. But it occurs to me that if NBC is not getting enough takers to make their new download site a going concern (e.g. not enough downloads to interest their advertising customers) it would be easy for them to return to selling the content. All they would have to do is add another “download now” button to their NBC Direct web site – one button that says “free – with commercials” and another that says “commercial free – three dollars” or however much they charge for content you can get for free over the airwaves anyway. They could even come up with an “enhanced” version of each show (commentary, extras, games, whatever) for a few dollars more, and add a third download button.

The possible downside is that the number of people who actually download television shows to watch on their iPods is small enough and those people resent the network’s attempts to control their viewing enough that they lose these viewers altogether. Which might not seem likely at first, but remember, this is the network that brought you the Olympic Triplecast…

Monday, October 1, 2007

A Time To Worry

This morning’s financial news included a modest-looking notice that Wal-Mart is starting its Christmas sales early this year, having already lowered prices on what its forecasters believe will be the most popular toys and games. You can catch the story on CNN online here if you want to. Not really anything ominous, at least not in an age where the headlines often include war casualties, erosion of our Constitutional rights, global warming, terrorist threats and Paris Hilton. Yet, if we take a closer look at the story, I’d have to say that anyone in the retail, consumer products or wholesale sectors should be feeling a little uneasy this morning – as should anyone connected to those industries as vendors, suppliers, customers or investors. Which means pretty much everyone but the military…

First off, let’s consider the effect of Wal-Mart lowering prices on these product categories just in itself. Every time they do this, Wal-Mart is taking market share away from other companies, particularly when they lower the prices to the point where there is no remaining profit (a “loss leader” strategy – see my post about those here). This is bad for other retailers, of course, especially general merchandise stores, which will also lose the sales they would have made of non-toy merchandise that the people who came in to buy toys won’t purchase now because they’ve gone to Wal-Mart instead. For stores that have no other product categories (e.g. toy stores) this Wal-Mart sale could intercept all of their holiday sales, and eliminate as much as half of their annual revenue. For an independent toy store, this could easily mean bankruptcy.

The effect isn’t limited to retail stores, either. My contacts in the toy industry tell me that Wal-Mart gets a lot of its deep discounts by putting the screws to their suppliers – effectively telling the manufacturers that unless they give Wal-Mart a special, favorable price on these key products, Wal-Mart will refuse to carry ANY of their products. Wal-Mart is also ruthless about returns, credits, shipping policies, and famous for its indifference to vendor relations. In effect, they will treat their vendors as badly as possible – because they can.

But as bad as this is for business in and of itself, the projected cause of this Wal-Mart toy bonanza is the really chilling bit of news in this story. CNN speculates that retailers may be nervous about weak holiday sales because of weak consumer confidence and the inability of many consumers to get or maintain credit – both side effects of the ongoing mortgage crisis and the weakening housing market. With quite literally half of the year’s revenue anticipated in the next three months, and as much as 80% of the year’s toy sales expected during the same period, any major breakdown of consumer spending – now – will have a massive ripple effect in the economy.

Of course, Wal-Mart and the other major retailers (Target, Toys “R” Us, K-Mart, etc.) are already worried about all of the toy recalls in the past few months, which may already have undermined confidence in some toy categories, not to mention the downturn in the economy already being caused by the failure of mortgage companies and lending institutions. I don’t know if the smaller retail companies, vendors and investors are frightened yet; I only know that if a behemoth like Wal-Mart is running scared, it’s time to worry…