Borrowers Are Out In The Cold
It's no longer just people with bad credit who are feeling the squeeze. Americans with good credit at all income levels are now caught in a full-blown credit crunch.
By Daniel Gross
NEWSWEEK
Updated: 12:31 PM ET Feb 23, 2008
David Stoyka, a senior account executive at Marx Layne & Co., a public-relations firm in Farmington Hills, Mich., was surprised to receive a letter in January from Countrywide Financial Corp. The mortgage lender had frozen access to his $25,000 home-equity line of credit, on which Stoyka and his wife owe about $16,000. "I had never missed a payment, and have excellent credit," he says. But with housing values declining, wary lenders are turning off the spigots, even to residents of tony Grosse Pointe Farms.
Six hundred miles to the east, a drama is transfixing New York's real-estate community. Harry Macklowe, one of the city's largest landlords, was unable to refinance $7 billion in short-term debt taken out to buy a portfolio of New York office buildings in 2007. He's been feverishly negotiating with lenders to stave off default. Macklowe has put the iconic General Motors Building on the block in an effort to raise cash.
From homeowners in Michigan to Wall Street financiers, Americans at every income level are caught in a full-blown credit crunch. While problems in housing-related credit are now familiar even to casual readers of the financial pages, the rot of bad debt is spreading. "In addition to mortgages, there are also indications that people are straining in credit cards, auto loans and student loans and default rates are starting to rise," says Nouriel Roubini, professor of economics at New York University.
That's bad news for a country that already seems on the brink of recession. If America's $14 trillion economy is a high-powered engine, credit is the motor oil that helps it run smoothly. When the lubricant is in short supply, the economy—like an engine—is more prone to knocks and stalling. "A year ago it was 'no borrower left behind'," says Adam Levin, president of Credit.com, the San Francisco-based consumer-education firm. "Now it's 'no borrower is getting on the train'."
To a degree, today's credit crunch is the inevitable and entirely predictable flipside of the credit binge of the past several years. Banks that have taken 10-figure write-downs and credit losses on subprime mortgages and other soured debt are raising capital from foreign sources, and generally hoarding cash. Finance, like physics, is subject to Newtonian laws. And as Newton's third rule of motion notes, every action inspires an equal and opposite reaction. "The wild euphoria of a year ago devolved into abject pessimism and almost panic in some quarters of the credit market. It has gone from free flowing and cheap to bottled up and increasingly more expensive," says Mark Zandi, chief economist at Moodys/Economy.com.
As in past credit dry spells, high-risk corporations and homeowners with poor credit face the prospect of paying more for debt. But in this, the first debt drought of the 21st century, the impact is evident in unexpected places. Due to the well-documented subprime losses—and to the generally weak housing market—caution has spread to the entire home-lending industry. In the Federal Reserve's January survey, 55 percent of U.S. banks said they had tightened lending standards on prime mortgages in the past three months, while 60 percent had done so for home-equity lines of credit. Lenders are focusing the types of loans they can sell to Fannie Mae, or Freddie Mac, the government-sponsored entities that purchase mortgages meeting strict criteria. According to Inside Mortgage Finance, in the fourth quarter of 2007, 68 percent of all new mortgage debt was so-called agency debt. The upshot? "Anyone who doesn't have a big down payment or equity in their home or good credit may be out of luck when it comes to getting a mortgage," says Guy Cecala, publisher of Inside Mortgage Finance.
In Grosse Pointe Farms, where property values have fallen markedly, David Stoyka isn't banking on getting access to his home-equity line of credit any time soon. "I'm very concerned that housing values will never come back to where they were." Similarly, Mike and Ann Todd have also felt the crunch, despite good credit scores. Because of tighter credit and the declining value of their home in Shelby Township, Mich., the couple had a tough time getting their mortgage modified in December—they now owe more on the home than it is worth.
With their homes no longer functioning as ATMs, many Americans are looking to credit cards to finance purchases. But as defaults on credit-card debt have risen—in December, 7.6 percent of credit-card balances were either 60 days late or in default, according to Risk Metrics Group—credit-card issuers have morphed into Scrooges. "Given recent market trends, we have changed the underwriting criteria for applicants with certain mortgages and suppressed credit-line increases on accounts with high-risk mortgages," says David Nelms, CEO of Discover Financial Services. About one third of credit-card applications are approved today, down from 40 percent last year, according to Robert Hammer, chief executive of credit-card consultant R.K. Hammer. Borrowers also can expect higher late fees, rising interest rates, and caps on borrowing limits.
Higher fees aren't the only indirect impact of the credit crunch. Credit comes from the Latincredo—meaning "I believe." The now global credit markets, which ultimately dictate the interest rates a homeowner in Cincinnati pays for a $200,000 mortgage or a big corporation in Denver pays for a $2 billion bank loan, are suffering from a crisis of faith. While the credit crunch is driven in large measure by the rising real problems in mortgages and consumer lending, it has a large psychological dimension. "There's been a shift in the collective view of risk," said Zandi.
Today loans aren't simply extended from lenders to borrowers. They are packaged into securities; sliced and diced into pieces, and sold as investments to hedge funds, pension funds, mutual funds and financial institutions. But with many of these funds having been burned on disastrous subprime bets, many of the buyers who helped maintain an orderly market for debt have disappeared, while the survivors are twitchy and suspicious. They have lost faith—in the ability of borrowers to pay back debts, in the ratings assigned to debt and in the companies that insure many forms of debt.
This crisis of confidence is creating occasionally bizarre dislocations in credit markets. Municipal bonds, bonds issued by governments whose interest payments are tax free, are among the safest investments in the world. But in recent weeks, a subsection of the market—the auction-rate market, in which rates reset every week—seized up. Interest rates on the bonds of the Port Authority of New York and New Jersey, which collects tolls on the George Washington Bridge, spiked to a bizarre 20 percent. The lack of ready buyers for securities also explains why people with excellent credit who seek jumbo loans—mortgages larger than the amount Freddie Mae and Fannie Mae will buy—have to pay higher rates than they did a year ago.
Student borrowers who are not eligible for federally guaranteed loans are likewise facing higher interest rates and fewer choices. Lenders in what is known as the private market, like First Marblehead and Sallie Mae, have realized they extended too much credit to students who might not be able to pay it back. Sallie Mae is scaling back commitments to lend to students at for-profit schools like Corinthian Colleges. In a conference call with analysts, First Marblehead said it will increase "fees and rates that borrowers will pay."
The credit crunch is now spreading to the corporate world, which had held up well even as consumers suffered. According to Standard & Poor's, in 2007 there were only 16 defaults on corporate bonds in the United States; in January, there were five. As a result, risky corporations are paying substantially more for debt today than a year ago. The spread—the difference between the interest rate on a 10-year Treasury bond and the typical rate a junk-bond issuer might pay—has expanded from 3 percentage points to 7 percentage points in the past year, according to Diane Vazza, head of global fixed-income research at Standard & Poor's.
The nation's most solvent individuals—private-equity barons—have not been immune from the ill effects of the credit crunch. In recent years, banks like Citigroup and Morgan Stanley willingly committed hundreds of billions of dollars to fund takeover deals for private-equity firms like the Blackstone Group and Cerberus—with the presumption that they could sell the loans to other investors. But as buyers have evaporated, the banks are now wary of extending further credit. Steven Schwartzman, the billionaire CEO of Blackstone, suffers no personal liquidity problems. But his firm, and others like it—have had to call off a series of proposed acquisitions because they can't get financing.
How bad will it get? The volume of bad debt—consumer, auto, student loan and corporate—is still rising. In theory, the Federal Reserve's campaign of lowering interest rates aggressively, which began in September, should help. The Federal Funds rate now stands at 3 percent, compared with 5.25 percent in September. But while that can help banks gain access to capital, lower rates alone won't help people who can't pay back mortgages, or companies that are unable to pay back loans, even at lower interest rates.
Policymakers are maintaining a stiff upper lip. But the data show the engine is running at a lower speed. Testifying before the Senate in February, Federal Reserve chairman Ben Bernanke dispensed with the usually opaque Fedspeak: "More expensive and less-available credit seems likely to continue to be a source of restraint on economic growth." Thanks, Mr. Chairman. That helps a lot.
URL: http://www.newsweek.com/id/114713
23 Şubat 2008 Cumartesi
No Body’s Listening Anymore
The Monolithic Blocks of Eyeballs Are Gone
Get ready. It’s a whole new world and it’s basically this…No one is paying attention any more. There’s a marketing crisis in our digital economy that every business owner or manager must adapt to.
The ever-present marketing messages are creating this marketing crisis.
Consider these facts:
Noted in The Marketing Crisis That Money Won’t Solve by Seth Godin, each of us is being literally bombarded by as much as four hours of media messages every day.
Some 17,000 new grocery products are advertised every year.
Thousands of dollars of advertisements are mailed directly to your door.
With the advent of cable television we now have hundreds of channels, most working around the clock to get your attention.
In addition, now satellite radio is following the same route.
Of course this doesn’t mention brand names on clothes, bumper stickers, sporting events and sports venues, your local paper, and, of course, those “pop-ups” on the web.
It’s getting harder and harder to find a little peace and quiet.
This fragmentation of the media is making your marketing choices more difficult and more important at the same time. It changes the company/client balance of power by diluting the impact of your message. It empowers the individuals who seek out what they want, when and how they want it. However, it also creates many new opportunities at the same time.
Your business needs exposure. Most of the time that exposure costs big money if you want to break through the clutter…all the while leading to more clutter. It’s a “catch-22” no matter how you look at it. The more we spend, the less it works…the less it works, the more we spend.
Over the last 30 years, advertisers have increased ad spending, increased the noise level of their ads, and generally found new ways to interrupt your customer’s day.
The almost universal audience assembled by network TV has been fragmented. In the 1960s, an advertiser could reach 80 percent of its market with an ad aired on three networks or their affiliates in local markets. Today, that same ad will have to run on a hundred channels to have a prayer. This forces marketers to play an endless game of audience hide-and-seek.
The overall theme of the 54th annual marketing conference of The Conference Board was this upheaval in traditional marketing and today’s biggest marketing challenge – cutting through the clutter.
A recent study by the Wall Street firm of Sanford C. Bernstein & Co. points out that narrowcast media will grow at 13.5 percent a year through 2010. Meanwhile, traditional mass media will lag behind the GDP (projected at 5.7 percent) and grow at only 3.5 percent. By 2010 marketers will spend more for advertising via “new technologies” ($22.5 billion) than in so-called mainstream network TV ($19.1 billion).
That’s all because traditional, and now fragmented, mass marketing approaches – TV ads, trade show booths, junk mail, et al – are losing their effectiveness. There’s a new paradigm that marketers have to recognize and it’s called “Consumer Enablement.”
Specialized publications, customized information, peer-proof testimonials, and the Internet have quickly proved how well they work…often in combination with each other.
There are three dynamics governing marketing in the postmodern digital world economy. Successful marketers today must: (1) change their focus to customer retention and relationship building, (2) make the move from mass marketing to “micromarketing,” and (3) understand that “image is NOT reality”.
Get ready. It’s a whole new world and it’s basically this…No one is paying attention any more. There’s a marketing crisis in our digital economy that every business owner or manager must adapt to.
The ever-present marketing messages are creating this marketing crisis.
Consider these facts:
Noted in The Marketing Crisis That Money Won’t Solve by Seth Godin, each of us is being literally bombarded by as much as four hours of media messages every day.
Some 17,000 new grocery products are advertised every year.
Thousands of dollars of advertisements are mailed directly to your door.
With the advent of cable television we now have hundreds of channels, most working around the clock to get your attention.
In addition, now satellite radio is following the same route.
Of course this doesn’t mention brand names on clothes, bumper stickers, sporting events and sports venues, your local paper, and, of course, those “pop-ups” on the web.
It’s getting harder and harder to find a little peace and quiet.
This fragmentation of the media is making your marketing choices more difficult and more important at the same time. It changes the company/client balance of power by diluting the impact of your message. It empowers the individuals who seek out what they want, when and how they want it. However, it also creates many new opportunities at the same time.
Your business needs exposure. Most of the time that exposure costs big money if you want to break through the clutter…all the while leading to more clutter. It’s a “catch-22” no matter how you look at it. The more we spend, the less it works…the less it works, the more we spend.
Over the last 30 years, advertisers have increased ad spending, increased the noise level of their ads, and generally found new ways to interrupt your customer’s day.
The almost universal audience assembled by network TV has been fragmented. In the 1960s, an advertiser could reach 80 percent of its market with an ad aired on three networks or their affiliates in local markets. Today, that same ad will have to run on a hundred channels to have a prayer. This forces marketers to play an endless game of audience hide-and-seek.
The overall theme of the 54th annual marketing conference of The Conference Board was this upheaval in traditional marketing and today’s biggest marketing challenge – cutting through the clutter.
A recent study by the Wall Street firm of Sanford C. Bernstein & Co. points out that narrowcast media will grow at 13.5 percent a year through 2010. Meanwhile, traditional mass media will lag behind the GDP (projected at 5.7 percent) and grow at only 3.5 percent. By 2010 marketers will spend more for advertising via “new technologies” ($22.5 billion) than in so-called mainstream network TV ($19.1 billion).
That’s all because traditional, and now fragmented, mass marketing approaches – TV ads, trade show booths, junk mail, et al – are losing their effectiveness. There’s a new paradigm that marketers have to recognize and it’s called “Consumer Enablement.”
Specialized publications, customized information, peer-proof testimonials, and the Internet have quickly proved how well they work…often in combination with each other.
There are three dynamics governing marketing in the postmodern digital world economy. Successful marketers today must: (1) change their focus to customer retention and relationship building, (2) make the move from mass marketing to “micromarketing,” and (3) understand that “image is NOT reality”.
10 Şubat 2008 Pazar
Global Finance Leaders Warn of Risk From U.S. Housing Woe
By MARTIN FACKLER
TOKYO — Finance leaders from the world’s wealthiest nations warned Saturday that global economic woes could get worse from the slump in the American housing market, but offered few specific remedies.
In a statement issued after meetings in Tokyo, the finance ministers and central bank chiefs of the Group of 7 industrialized nations offered a more pessimistic view of the global economy than they did four months ago, after their last meeting. They also said the fundamental elements of the global economy remained strong and the United States was likely to avoid recession.
The finance leaders from the United States, Japan, Germany, France, Britain, Italy and Canada warned that global growth could continue to slow as a result of the credit crisis set off by America’s subprime mortgage problems. The statement also pledged joint action to calm shaken financial markets, but it was short on specifics, especially on steps to rekindle growth.
It did not press member nations to pick up the slack from the slowing United States economy by stimulating their own domestic growth. It also did not contain any dramatic joint action, like a coordinated cut in interest rates, as some had hoped.
“The world confronts a more challenging and uncertain environment than when we met last October,” the statement said. “We will continue to watch developments closely and will continue to take appropriate actions, individually and collectively, in order to secure stability and growth in our economies.”
Members urged China to absorb more imports by raising the value of its currency, which would make foreign goods cheaper for Chinese consumers. They also called on oil-producing nations to help cut energy prices by raising output. Some warned that higher fuel and food costs could cause global inflation.
Members also said their economies were expected to slow by varying degrees and there was no single fix for global economic troubles. They said they spent much time discussing the severity of housing market troubles in the United States and Washington’s efforts to respond.
The United States Treasury secretary, Henry M. Paulson Jr., said after the meeting that he expected market volatility to continue as investors try to assess the fallout from the housing market problems.
He also said the United States economy would keep growing this year and he was confident of its long-term health.
One concrete step to come out of the meeting was a call for banks to fully disclose their losses from the subprime meltdown and quickly rebuild their balance sheets. The German finance minister, Peer Steinbrück, said members agreed that write-offs at banks related to subprime mortgages could reach $400 billion, about four times estimates just a couple of months ago.
TOKYO — Finance leaders from the world’s wealthiest nations warned Saturday that global economic woes could get worse from the slump in the American housing market, but offered few specific remedies.
In a statement issued after meetings in Tokyo, the finance ministers and central bank chiefs of the Group of 7 industrialized nations offered a more pessimistic view of the global economy than they did four months ago, after their last meeting. They also said the fundamental elements of the global economy remained strong and the United States was likely to avoid recession.
The finance leaders from the United States, Japan, Germany, France, Britain, Italy and Canada warned that global growth could continue to slow as a result of the credit crisis set off by America’s subprime mortgage problems. The statement also pledged joint action to calm shaken financial markets, but it was short on specifics, especially on steps to rekindle growth.
It did not press member nations to pick up the slack from the slowing United States economy by stimulating their own domestic growth. It also did not contain any dramatic joint action, like a coordinated cut in interest rates, as some had hoped.
“The world confronts a more challenging and uncertain environment than when we met last October,” the statement said. “We will continue to watch developments closely and will continue to take appropriate actions, individually and collectively, in order to secure stability and growth in our economies.”
Members urged China to absorb more imports by raising the value of its currency, which would make foreign goods cheaper for Chinese consumers. They also called on oil-producing nations to help cut energy prices by raising output. Some warned that higher fuel and food costs could cause global inflation.
Members also said their economies were expected to slow by varying degrees and there was no single fix for global economic troubles. They said they spent much time discussing the severity of housing market troubles in the United States and Washington’s efforts to respond.
The United States Treasury secretary, Henry M. Paulson Jr., said after the meeting that he expected market volatility to continue as investors try to assess the fallout from the housing market problems.
He also said the United States economy would keep growing this year and he was confident of its long-term health.
One concrete step to come out of the meeting was a call for banks to fully disclose their losses from the subprime meltdown and quickly rebuild their balance sheets. The German finance minister, Peer Steinbrück, said members agreed that write-offs at banks related to subprime mortgages could reach $400 billion, about four times estimates just a couple of months ago.
4 Şubat 2008 Pazartesi
Fear, hope and love: the three marketing levers
here does love come from? Brand love?
The TSA is in the fear business. Every time they get you take off your shoes, they're using fear (of the unknown or perhaps of missing your plane) to get you take action.
Chanel is in the hope business. How else to get you to spend $5,000 a gallon for perfume?
Hope can be something as trivial as convenience. I hope that this smaller size of yogurt will save me time or get a smile out of my teenager...
And love? Love gets you to support a candidate even when he screws up or changes his mind on a position or disagrees with you on another one. Love incites you to protest when they change the formula for Coke, or to cry out in delight when you see someone at the market wearing a Google t-shirt.
People take action (mostly) based on one of three emotions:
FearHopeLove
Every successful marketer (including politicians) takes advantage of at least one of these basic needs.
Forbes Magazine, for example, is for people who hope to make more money.
Rudy Giuliani was the fear candidate. He tried to turn fear into love, but failed.
Few products or services succeed out of love. People are too selfish for an emotion that selfless, most of the time.
It's interesting to think about the way certain categories gravitate to various emotions. Doctors selling check ups, of course, are in the fear business (while oncologists certainly sell hope). Restaurants have had a hard time selling fear (healthy places don't do so well). Singles bars certainly thrive on selling hope.
Google, amazingly quickly, became a beloved brand, something many people see as bigger than themselves, something bigger than hope. Apple lives in this arena as well. I think if you deliver hope for a long time (and deliver on it sometimes) you can graduate to love. Ronald Reagan was beloved, even when he was making significant long-term errors. So was JFK. Hillary may be respected, but Obama is loved.
I don't think love is often a one way street, either. Brands that are loved usually start the process by loving their customers in advance.
The easiest way to build a brand is to sell fear. The best way, though, may be to deliver on hope while aiming for love...
The TSA is in the fear business. Every time they get you take off your shoes, they're using fear (of the unknown or perhaps of missing your plane) to get you take action.
Chanel is in the hope business. How else to get you to spend $5,000 a gallon for perfume?
Hope can be something as trivial as convenience. I hope that this smaller size of yogurt will save me time or get a smile out of my teenager...
And love? Love gets you to support a candidate even when he screws up or changes his mind on a position or disagrees with you on another one. Love incites you to protest when they change the formula for Coke, or to cry out in delight when you see someone at the market wearing a Google t-shirt.
People take action (mostly) based on one of three emotions:
FearHopeLove
Every successful marketer (including politicians) takes advantage of at least one of these basic needs.
Forbes Magazine, for example, is for people who hope to make more money.
Rudy Giuliani was the fear candidate. He tried to turn fear into love, but failed.
Few products or services succeed out of love. People are too selfish for an emotion that selfless, most of the time.
It's interesting to think about the way certain categories gravitate to various emotions. Doctors selling check ups, of course, are in the fear business (while oncologists certainly sell hope). Restaurants have had a hard time selling fear (healthy places don't do so well). Singles bars certainly thrive on selling hope.
Google, amazingly quickly, became a beloved brand, something many people see as bigger than themselves, something bigger than hope. Apple lives in this arena as well. I think if you deliver hope for a long time (and deliver on it sometimes) you can graduate to love. Ronald Reagan was beloved, even when he was making significant long-term errors. So was JFK. Hillary may be respected, but Obama is loved.
I don't think love is often a one way street, either. Brands that are loved usually start the process by loving their customers in advance.
The easiest way to build a brand is to sell fear. The best way, though, may be to deliver on hope while aiming for love...
3 Şubat 2008 Pazar
Better than Free
Here are his eight ways of making something worth charging for:
Immediacy -- Sooner or later you can find a free copy of whatever you want, but getting a copy delivered to your inbox the moment it is released -- or even better, produced -- by its creators is a generative asset. Many people go to movie theaters to see films on the opening night, where they will pay a hefty price to see a film that later will be available for free, or almost free, via rental or download. Hardcover books command a premium for their immediacy, disguised as a harder cover. First in line often commands an extra price for the same good. As a sellable quality, immediacy has many levels, including access to beta versions. Fans are brought into the generative process itself. Beta versions are often de-valued because they are incomplete, but they also possess generative qualities that can be sold. Immediacy is a relative term, which is why it is generative. It has to fit with the product and the audience. A blog has a different sense of time than a movie, or a car. But immediacy can be found in any media.
Personalization -- A generic version of a concert recording may be free, but if you want a copy that has been tweaked to sound perfect in your particular living room -- as if it were preformed in your room -- you may be willing to pay a lot. The free copy of a book can be custom edited by the publishers to reflect your own previous reading background. A free movie you buy may be cut to reflect the rating you desire (no violence, dirty language okay). Aspirin is free, but aspirin tailored to your DNA is very expensive. As many have noted, personalization requires an ongoing conversation between the creator and consumer, artist and fan, producer and user. It is deeply generative because it is iterative and time consuming. You can't copy the personalization that a relationship represents. Marketers call that "stickiness" because it means both sides of the relationship are stuck (invested) in this generative asset, and will be reluctant to switch and start over.
Interpretation -- As the old joke goes: software, free. The manual, $10,000. But it's no joke. A couple of high profile companies, like Red Hat, Apache, and others make their living doing exactly that. They provide paid support for free software. The copy of code, being mere bits, is free -- and becomes valuable to you only through the support and guidance. I suspect a lot of genetic information will go this route. Right now getting your copy of your DNA is very expensive, but soon it won't be. In fact, soon pharmaceutical companies will PAY you to get your genes sequence. So the copy of your sequence will be free, but the interpretation of what it means, what you can do about it, and how to use it -- the manual for your genes so to speak -- will be expensive.
Authenticity -- You might be able to grab a key software application for free, but even if you don't need a manual, you might like to be sure it is bug free, reliable, and warranted. You'll pay for authenticity. There are nearly an infinite number of variations of the Grateful Dead jams around; buying an authentic version from the band itself will ensure you get the one you wanted. Or that it was indeed actually performed by the Dead. Artists have dealt with this problem for a long time. Graphic reproductions such as photographs and lithographs often come with the artist's stamp of authenticity -- a signature -- to raise the price of the copy. Digital watermarks and other signature technology will not work as copy-protection schemes (copies are super-conducting liquids, remember?) but they can serve up the generative quality of authenticity for those who care.
Accessibility -- Ownership often sucks. You have to keep your things tidy, up-to-date, and in the case of digital material, backed up. And in this mobile world, you have to carry it along with you. Many people, me included, will be happy to have others tend our "possessions" by subscribing to them. We'll pay Acme Digital Warehouse to serve us any musical tune in the world, when and where we want it, as well as any movie, photo (ours or other photographers). Ditto for books and blogs. Acme backs everything up, pays the creators, and delivers us our desires. We can sip it from our phones, PDAs, laptops, big screens from where-ever. The fact that most of this material will be available free, if we want to tend it, back it up, keep adding to it, and organize it, will be less and less appealing as time goes on.
Embodiment -- At its core the digital copy is without a body. You can take a free copy of a work and throw it on a screen. But perhaps you'd like to see it in hi-res on a huge screen? Maybe in 3D? PDFs are fine, but sometimes it is delicious to have the same words printed on bright white cottony paper, bound in leather. Feels so good. What about dwelling in your favorite (free) game with 35 others in the same room? There is no end to greater embodiment. Sure, the hi-res of today -- which may draw ticket holders to a big theater -- may migrate to your home theater tomorrow, but there will always be new insanely great display technology that consumers won't have. Laser projection, holographic display, the holodeck itself! And nothing gets embodied as much as music in a live performance, with real bodies. The music is free; the bodily performance expensive. This formula is quickly becoming a common one for not only musicians, but even authors. The book is free; the bodily talk is expensive.
Patronage -- It is my belief that audiences WANT to pay creators. Fans like to reward artists, musicians, authors and the like with the tokens of their appreciation, because it allows them to connect. But they will only pay if it is very easy to do, a reasonable amount, and they feel certain the money will directly benefit the creators. Radiohead's recent high-profile experiment in letting fans pay them whatever they wished for a free copy is an excellent illustration of the power of patronage. The elusive, intangible connection that flows between appreciative fans and the artist is worth something. In Radiohead's case it was about $5 per download. There are many other examples of the audience paying simply because it feels good.
Findability -- Where as the previous generative qualities reside within creative digital works, findability is an asset that occurs at a higher level in the aggregate of many works. A zero price does not help direct attention to a work, and in fact may sometimes hinder it. But no matter what its price, a work has no value unless it is seen; unfound masterpieces are worthless. When there are millions of books, millions of songs, millions of films, millions of applications, millions of everything requesting our attention -- and most of it free -- being found is valuable.
The giant aggregators such as Amazon and Netflix make their living in part by helping the audience find works they love. They bring out the good news of the "long tail" phenomenon, which we all know, connects niche audiences with niche productions. But sadly, the long tail is only good news for the giant aggregators, and larger mid-level aggregators such as publishers, studios, and labels. The "long tail" is only lukewarm news to creators themselves. But since findability can really only happen at the systems level, creators need aggregators. This is why publishers, studios, and labels (PSL)will never disappear. They are not needed for distribution of the copies (the internet machine does that). Rather the PSL are needed for the distribution of the users' attention back to the works. From an ocean of possibilities the PSL find, nurture and refine the work of creators that they believe fans will connect with. Other intermediates such as critics and reviewers also channel attention. Fans rely on this multi-level apparatus of findability to discover the works of worth out of the zillions produced. There is money to be made (indirectly for the creatives) by finding talent. For many years the paper publication TV Guide made more money than all of the 3 major TV networks it "guided" combined. The magazine guided and pointed viewers to the good stuff on the tube that week. Stuff, it is worth noting, that was free to the viewers. There is little doubt that besides the mega-aggregators, in the world of the free many PDLs will make money selling findability -- in addition to the other generative qualities.
Immediacy -- Sooner or later you can find a free copy of whatever you want, but getting a copy delivered to your inbox the moment it is released -- or even better, produced -- by its creators is a generative asset. Many people go to movie theaters to see films on the opening night, where they will pay a hefty price to see a film that later will be available for free, or almost free, via rental or download. Hardcover books command a premium for their immediacy, disguised as a harder cover. First in line often commands an extra price for the same good. As a sellable quality, immediacy has many levels, including access to beta versions. Fans are brought into the generative process itself. Beta versions are often de-valued because they are incomplete, but they also possess generative qualities that can be sold. Immediacy is a relative term, which is why it is generative. It has to fit with the product and the audience. A blog has a different sense of time than a movie, or a car. But immediacy can be found in any media.
Personalization -- A generic version of a concert recording may be free, but if you want a copy that has been tweaked to sound perfect in your particular living room -- as if it were preformed in your room -- you may be willing to pay a lot. The free copy of a book can be custom edited by the publishers to reflect your own previous reading background. A free movie you buy may be cut to reflect the rating you desire (no violence, dirty language okay). Aspirin is free, but aspirin tailored to your DNA is very expensive. As many have noted, personalization requires an ongoing conversation between the creator and consumer, artist and fan, producer and user. It is deeply generative because it is iterative and time consuming. You can't copy the personalization that a relationship represents. Marketers call that "stickiness" because it means both sides of the relationship are stuck (invested) in this generative asset, and will be reluctant to switch and start over.
Interpretation -- As the old joke goes: software, free. The manual, $10,000. But it's no joke. A couple of high profile companies, like Red Hat, Apache, and others make their living doing exactly that. They provide paid support for free software. The copy of code, being mere bits, is free -- and becomes valuable to you only through the support and guidance. I suspect a lot of genetic information will go this route. Right now getting your copy of your DNA is very expensive, but soon it won't be. In fact, soon pharmaceutical companies will PAY you to get your genes sequence. So the copy of your sequence will be free, but the interpretation of what it means, what you can do about it, and how to use it -- the manual for your genes so to speak -- will be expensive.
Authenticity -- You might be able to grab a key software application for free, but even if you don't need a manual, you might like to be sure it is bug free, reliable, and warranted. You'll pay for authenticity. There are nearly an infinite number of variations of the Grateful Dead jams around; buying an authentic version from the band itself will ensure you get the one you wanted. Or that it was indeed actually performed by the Dead. Artists have dealt with this problem for a long time. Graphic reproductions such as photographs and lithographs often come with the artist's stamp of authenticity -- a signature -- to raise the price of the copy. Digital watermarks and other signature technology will not work as copy-protection schemes (copies are super-conducting liquids, remember?) but they can serve up the generative quality of authenticity for those who care.
Accessibility -- Ownership often sucks. You have to keep your things tidy, up-to-date, and in the case of digital material, backed up. And in this mobile world, you have to carry it along with you. Many people, me included, will be happy to have others tend our "possessions" by subscribing to them. We'll pay Acme Digital Warehouse to serve us any musical tune in the world, when and where we want it, as well as any movie, photo (ours or other photographers). Ditto for books and blogs. Acme backs everything up, pays the creators, and delivers us our desires. We can sip it from our phones, PDAs, laptops, big screens from where-ever. The fact that most of this material will be available free, if we want to tend it, back it up, keep adding to it, and organize it, will be less and less appealing as time goes on.
Embodiment -- At its core the digital copy is without a body. You can take a free copy of a work and throw it on a screen. But perhaps you'd like to see it in hi-res on a huge screen? Maybe in 3D? PDFs are fine, but sometimes it is delicious to have the same words printed on bright white cottony paper, bound in leather. Feels so good. What about dwelling in your favorite (free) game with 35 others in the same room? There is no end to greater embodiment. Sure, the hi-res of today -- which may draw ticket holders to a big theater -- may migrate to your home theater tomorrow, but there will always be new insanely great display technology that consumers won't have. Laser projection, holographic display, the holodeck itself! And nothing gets embodied as much as music in a live performance, with real bodies. The music is free; the bodily performance expensive. This formula is quickly becoming a common one for not only musicians, but even authors. The book is free; the bodily talk is expensive.
Patronage -- It is my belief that audiences WANT to pay creators. Fans like to reward artists, musicians, authors and the like with the tokens of their appreciation, because it allows them to connect. But they will only pay if it is very easy to do, a reasonable amount, and they feel certain the money will directly benefit the creators. Radiohead's recent high-profile experiment in letting fans pay them whatever they wished for a free copy is an excellent illustration of the power of patronage. The elusive, intangible connection that flows between appreciative fans and the artist is worth something. In Radiohead's case it was about $5 per download. There are many other examples of the audience paying simply because it feels good.
Findability -- Where as the previous generative qualities reside within creative digital works, findability is an asset that occurs at a higher level in the aggregate of many works. A zero price does not help direct attention to a work, and in fact may sometimes hinder it. But no matter what its price, a work has no value unless it is seen; unfound masterpieces are worthless. When there are millions of books, millions of songs, millions of films, millions of applications, millions of everything requesting our attention -- and most of it free -- being found is valuable.
The giant aggregators such as Amazon and Netflix make their living in part by helping the audience find works they love. They bring out the good news of the "long tail" phenomenon, which we all know, connects niche audiences with niche productions. But sadly, the long tail is only good news for the giant aggregators, and larger mid-level aggregators such as publishers, studios, and labels. The "long tail" is only lukewarm news to creators themselves. But since findability can really only happen at the systems level, creators need aggregators. This is why publishers, studios, and labels (PSL)will never disappear. They are not needed for distribution of the copies (the internet machine does that). Rather the PSL are needed for the distribution of the users' attention back to the works. From an ocean of possibilities the PSL find, nurture and refine the work of creators that they believe fans will connect with. Other intermediates such as critics and reviewers also channel attention. Fans rely on this multi-level apparatus of findability to discover the works of worth out of the zillions produced. There is money to be made (indirectly for the creatives) by finding talent. For many years the paper publication TV Guide made more money than all of the 3 major TV networks it "guided" combined. The magazine guided and pointed viewers to the good stuff on the tube that week. Stuff, it is worth noting, that was free to the viewers. There is little doubt that besides the mega-aggregators, in the world of the free many PDLs will make money selling findability -- in addition to the other generative qualities.
Is Yahoo Worth $44.6 billion?
Microsoft is paying a premium to catch up to Google.
By Jennifer Ordoñez and Brian Braiker
After what may have been a two-year flirtation, Microsoft is trying again to tie the knot. On Friday morning, CEO Steve Ballmer announced that the company initiated a $44.6 billion takeover bidfor Yahoo! It's the second time Microsoft has made a play for the online service. But its current bid is the firm's boldest move yet and is clearly designed to close the gap created by Google, which increasingly dominates the paid search and online advertising business. But in its attempt to catch up, is Microsoft paying too much?
Microsoft's announcement injected some drama into the online ad environment that in recent weeks has left both investors and advertisers worried about the effects a weakening global economy may have on the industry. Still, Microsoft's $31 per share offer amounts to a 62 percent premium over Yahoo's Thursday closing price of $19.18. Never mind that according to recent report by eMarketer, Google's share of the paid search advertising market was 75 percent last year, up from 60 percent from 2006. Yahoo's share in 2007: a meager 9 percent.
For Ballmer, Yahoo clearly seems like a relative bargain considering what he hopes to gain from the deal. "Microsoft and Yahoo should be aligned in some way to create a more effective competitor in the online marketplace," wrote Ballmer in a letter to Yahoo's board of directors. He added that "the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo can offer a credible alternative for consumers, advertisers and publishers." In response to the offer, Yahoo, which earlier this week reported a 23 percent drop in fourth-quarter profit and announced it would layoff 1,000 employees, said its board "will evaluate this proposal carefully and promptly."
Investors applauded Microsoft's bid, sending shares of Yahoo up nearly 50 percent during early-Friday trading. But the backdrop of the news is an Internet advertising market that has significant potential for growth but still faces some uncertainty. Google this Thursday reported fourth-quarter earnings that failed to meet Wall Street expectations.
Still, Google owns the lion's share of online-ad revenues. Last year, U.S. advertisers spent a total of $20 billion on the Web, a relatively small chunk of the $250 billion ad market overall. Global online advertising is estimated to reach $49.5 billion, a 22 percent increase. "Even though the Internet will likely be more resistant to a downturn than other places, it's far from immune," said David Hallerman, senior analyst at eMarketer.com, which tracks Internet ad spending. "Unless people click on the ad, there's no money. If there is a recession, and consumers pull back, people will be searching less for things to buy."
One potential bright spot in Yahoo's arsenal is a relatively strong display-ad business--those costlier banner or drop-down ads that companies use to heighten consumer awareness of a brand, considered the holy grail of advertising efficacy. "Yahoo is not an insignificant player in display advertising. Neither is Microsoft. We shouldn't bow to Google too early," said Tim Beyers, a senior analyst for Motley Fool. "You have to look at this as an arms race for most properties … to be the dominant provider of advertising in the digital world and advertising, period." Google, however, has been increasingly aggressive in broadening its reach beyond search. Last year it struck a $3 billion deal to acquire DoubleClick, a display- and banner-advertising giant. The Federal Trade Commission has approved the deal, but it will only be finalized if European regulators decide to sign-off in April. Meanwhile, on Friday, the U.S. Department of Justice said it is "interested" in reviewing any potential merger between Microsoft and Yahoo.
Complicating things, of course, is the fact that reliable ways of measuring Web traffic--and, hence, any company's ad revenue potential--is still as much art as science. As for Microsoft's valuation of Yahoo, it's about right for a high roller, some analysts say. "If you're Steve Balmer and want to be the Donald Trump of the Web, you want the most-viewed properties on the Web. Well, Yahoo's got 'em," says Beyers, adding, however, that investors might want to keep their own passion in check and think back to the last tech bubble. "I'm not a bear, but I'm careful when it comes to tech investments right now."
By Jennifer Ordoñez and Brian Braiker
After what may have been a two-year flirtation, Microsoft is trying again to tie the knot. On Friday morning, CEO Steve Ballmer announced that the company initiated a $44.6 billion takeover bidfor Yahoo! It's the second time Microsoft has made a play for the online service. But its current bid is the firm's boldest move yet and is clearly designed to close the gap created by Google, which increasingly dominates the paid search and online advertising business. But in its attempt to catch up, is Microsoft paying too much?
Microsoft's announcement injected some drama into the online ad environment that in recent weeks has left both investors and advertisers worried about the effects a weakening global economy may have on the industry. Still, Microsoft's $31 per share offer amounts to a 62 percent premium over Yahoo's Thursday closing price of $19.18. Never mind that according to recent report by eMarketer, Google's share of the paid search advertising market was 75 percent last year, up from 60 percent from 2006. Yahoo's share in 2007: a meager 9 percent.
For Ballmer, Yahoo clearly seems like a relative bargain considering what he hopes to gain from the deal. "Microsoft and Yahoo should be aligned in some way to create a more effective competitor in the online marketplace," wrote Ballmer in a letter to Yahoo's board of directors. He added that "the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo can offer a credible alternative for consumers, advertisers and publishers." In response to the offer, Yahoo, which earlier this week reported a 23 percent drop in fourth-quarter profit and announced it would layoff 1,000 employees, said its board "will evaluate this proposal carefully and promptly."
Investors applauded Microsoft's bid, sending shares of Yahoo up nearly 50 percent during early-Friday trading. But the backdrop of the news is an Internet advertising market that has significant potential for growth but still faces some uncertainty. Google this Thursday reported fourth-quarter earnings that failed to meet Wall Street expectations.
Still, Google owns the lion's share of online-ad revenues. Last year, U.S. advertisers spent a total of $20 billion on the Web, a relatively small chunk of the $250 billion ad market overall. Global online advertising is estimated to reach $49.5 billion, a 22 percent increase. "Even though the Internet will likely be more resistant to a downturn than other places, it's far from immune," said David Hallerman, senior analyst at eMarketer.com, which tracks Internet ad spending. "Unless people click on the ad, there's no money. If there is a recession, and consumers pull back, people will be searching less for things to buy."
One potential bright spot in Yahoo's arsenal is a relatively strong display-ad business--those costlier banner or drop-down ads that companies use to heighten consumer awareness of a brand, considered the holy grail of advertising efficacy. "Yahoo is not an insignificant player in display advertising. Neither is Microsoft. We shouldn't bow to Google too early," said Tim Beyers, a senior analyst for Motley Fool. "You have to look at this as an arms race for most properties … to be the dominant provider of advertising in the digital world and advertising, period." Google, however, has been increasingly aggressive in broadening its reach beyond search. Last year it struck a $3 billion deal to acquire DoubleClick, a display- and banner-advertising giant. The Federal Trade Commission has approved the deal, but it will only be finalized if European regulators decide to sign-off in April. Meanwhile, on Friday, the U.S. Department of Justice said it is "interested" in reviewing any potential merger between Microsoft and Yahoo.
Complicating things, of course, is the fact that reliable ways of measuring Web traffic--and, hence, any company's ad revenue potential--is still as much art as science. As for Microsoft's valuation of Yahoo, it's about right for a high roller, some analysts say. "If you're Steve Balmer and want to be the Donald Trump of the Web, you want the most-viewed properties on the Web. Well, Yahoo's got 'em," says Beyers, adding, however, that investors might want to keep their own passion in check and think back to the last tech bubble. "I'm not a bear, but I'm careful when it comes to tech investments right now."
Unable to fend for itself
TOKYO From The Economist print editionJapan's export-led economy still relies heavily on America
IN TOKYO'S financial markets a long-held sense of injustice is turning to rising alarm. The injustice is that the shares of Japanese companies were the first to be punished, long before other stockmarkets, when credit troubles in America broke out last summer. The alarm is partly over the effects that an American recession might have on the Japanese economy. But, equally, it is over a dysfunctional political establishment at home that is incapable of facing up to a weakening economy.
Pessimism is growing about the damage an American recession might do. Last year growth in exports to Europe and China more than offset an export slowdown to America. But the United States is still the end-market for many Japanese goods that go to China. A recent slackening of shipments of semiconductors and steel to China does not bode well.
If Japan's six-year recovery were broad-based, that would not be such a concern. Yet it has been pulled along by exports, and despite repeated predictions, household spending has failed to take off. The reason is clear: though employment has steadily increased, wages are stagnant or falling, since cash-rich companies insist on hoarding their profits—and will presumably continue to do so now that dearer oil is eating into margins.
Perhaps that hoarding is an insurance against unpredictable government. A year ago, in an attempt to crack down on predatory lending, the government all but destroyed the consumer-finance industry. Far more damaging has been a system for vetting new buildings that was hurriedly introduced last summer in reaction to architects faking data for earthquake-proofing. The housing ministry was unable to get new software up and running in time, so new-building approvals collapsed. The jaw-dropping effect has been to knock 0.6 percentage points off growth, according to Takatoshi Ito of Tokyo University, who sits on the government's advisory Council on Economic and Fiscal Policy (CEFP).
Partly as a result, the government has lowered its forecast for growth in the fiscal year to the end of March, from 2.1% to 1.3%. Some economists think Japan is already tipping into recession. But the longer-term picture is more worrying. Mr Ito argues that if Japan pursued the kind of supply-side and tax reforms that the CEFP has long proposed, the country could grow at a respectable 2% a year. Without those reforms, growth will crawl along at 1-1.4%. Hopes of sensible policy have vanished since the opposition seized control of the upper house of the Diet (parliament) last July and Yasuo Fakuda's ruling coalition appears to lack the courage for reform.
Now, the Bank of Japan (BoJ) is adding to the uncertainty. At its policy-board meeting this week, the central bank was reluctant to admit that reality was at odds with its bullish view, though it acknowledged that momentum had slowed since its last outlook in October. Insisting, once again, that monetary policy should be “forward-looking”, its governor, Toshihiko Fukui, seemed to affirm that, far from cutting rates as other central banks are doing, the BoJ still hoped to raise them from unnaturally low levels.
Mr Fukui's term ends on March 19th, and somehow Japan's warring political parties must settle on a successor. With a slowing economy, the BoJ's conduct of monetary policy is about to become intensely politicised.
IN TOKYO'S financial markets a long-held sense of injustice is turning to rising alarm. The injustice is that the shares of Japanese companies were the first to be punished, long before other stockmarkets, when credit troubles in America broke out last summer. The alarm is partly over the effects that an American recession might have on the Japanese economy. But, equally, it is over a dysfunctional political establishment at home that is incapable of facing up to a weakening economy.
Pessimism is growing about the damage an American recession might do. Last year growth in exports to Europe and China more than offset an export slowdown to America. But the United States is still the end-market for many Japanese goods that go to China. A recent slackening of shipments of semiconductors and steel to China does not bode well.
If Japan's six-year recovery were broad-based, that would not be such a concern. Yet it has been pulled along by exports, and despite repeated predictions, household spending has failed to take off. The reason is clear: though employment has steadily increased, wages are stagnant or falling, since cash-rich companies insist on hoarding their profits—and will presumably continue to do so now that dearer oil is eating into margins.
Perhaps that hoarding is an insurance against unpredictable government. A year ago, in an attempt to crack down on predatory lending, the government all but destroyed the consumer-finance industry. Far more damaging has been a system for vetting new buildings that was hurriedly introduced last summer in reaction to architects faking data for earthquake-proofing. The housing ministry was unable to get new software up and running in time, so new-building approvals collapsed. The jaw-dropping effect has been to knock 0.6 percentage points off growth, according to Takatoshi Ito of Tokyo University, who sits on the government's advisory Council on Economic and Fiscal Policy (CEFP).
Partly as a result, the government has lowered its forecast for growth in the fiscal year to the end of March, from 2.1% to 1.3%. Some economists think Japan is already tipping into recession. But the longer-term picture is more worrying. Mr Ito argues that if Japan pursued the kind of supply-side and tax reforms that the CEFP has long proposed, the country could grow at a respectable 2% a year. Without those reforms, growth will crawl along at 1-1.4%. Hopes of sensible policy have vanished since the opposition seized control of the upper house of the Diet (parliament) last July and Yasuo Fakuda's ruling coalition appears to lack the courage for reform.
Now, the Bank of Japan (BoJ) is adding to the uncertainty. At its policy-board meeting this week, the central bank was reluctant to admit that reality was at odds with its bullish view, though it acknowledged that momentum had slowed since its last outlook in October. Insisting, once again, that monetary policy should be “forward-looking”, its governor, Toshihiko Fukui, seemed to affirm that, far from cutting rates as other central banks are doing, the BoJ still hoped to raise them from unnaturally low levels.
Mr Fukui's term ends on March 19th, and somehow Japan's warring political parties must settle on a successor. With a slowing economy, the BoJ's conduct of monetary policy is about to become intensely politicised.
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