Casting the digital equivalent of a message-in-a-bottle into the Internet’s vast sea of content, many people start Web sites or blogs hoping that they will find an appreciative audience for their precocious parrot videos, cupcake recipes or pithy commentary on everyday life. The dream, of course, is that they will develop a large and loyal following — and potentially profit from it.
While most of these self-publishers don’t attract the attention of anyone other than indulgent family and friends, there are those who find wider recognition and some income. What the successful have in common is a passion for their subject and a near-compulsion to share what they know. Advertising, merchandising, offline events, book deals, donations and sometimes sheer luck also play a part.
“My advice is to choose a topic you’ll never get tired of,” said Stephanie Nelson, 47, of Atlanta, a homemaker who founded CouponMom.com in 2001 to share tips on saving money by using coupons. “The first three years I made no money at all, so I had to love what I was doing to keep going.”
Ms. Nelson said her Web site now has more than 3.8 million visitors a month, and the income it generates supports her family of four — allowing her husband to retire early from his corporate job five years ago. “I’m still not tired of it,” Ms. Nelson said.
Half of the site’s revenue comes from Google’s AdSense service, and the other half is from companies like Groupon and LivingSocial that buy ads directly from her. AdSense generates ads based on the words that appear on Web pages. For example, if a blog post is about dogs, ads for dog food or dog grooming might appear beside it.
Many of the Google ads generate income only if people click on them — usually yielding a fraction of a cent per click. It’s also possible to get paid every time a Google ad appears on a page. Rates are determined in part by advertisers bidding in an online auction.
Other companies like BuySellAds.com and BlogAds allow self-publishers to determine what they want to charge for placing an ad on their sites. They then match sites with eager advertisers for a percentage of ad sales — 14 to 30 percent is typical.
Federated Media, which is a sort of Web talent management company, is more selective, negotiating rates on behalf of independent content creators it agrees to represent. In general, online ad rates vary widely, from $54,000 a day for an ad on a popular blog like PerezHilton.com to $10 a month for an ad on the cartoon blog The Soxaholix. (The New York Times Company is an investor in Federated Media.)
Clayton Dunn, 32, and Zach Patton, 31, the bloggers behind The Bitten Word, make around $350 a month from pay-per-click Google ads, and in commissions from Amazon.com when readers follow links to cooking gadgets, books and magazine subscriptions they recommend. Mr. Dunn and Mr. Patton, who live in Washington and blog about recipes they have tried from popular magazines, started the site in 2008 and now have about 150,000 visitors a month.
“It more than pays for the groceries,” said Mr. Dunn, who added that they are further compensated by readers who may give them delicacies like fresh avocados and Hawaiian ginger syrup.
For those who want to generate more income through advertising, Jonathan Accarrino of Hoboken, N.J., founder of the technology news and how-to blog MethodShop.com, advises having contextual ads, which are highlighted words in posts that provide a link to the vendor of a relevant product or service. A commission is paid on resulting sales.
Adding video to a post is another strategy that Mr. Accarrino said contributes to his blog’s six-figure yearly income: “I’ll record video walk-throughs of my tutorials and upload them to Blip.tv,” a video sharing service similar to YouTube. And like YouTube, Blip.tv gives users the option to run ads with their videos. These generate $1 to $10 for every thousand views, depending on the advertiser.
Indeed, many video bloggers, or vloggers, make money this way. Sheila Ada-Renea Hollins-Jackson, a 22-year-old makeup artist in Farmington, Mich., makes up to $200 a month from the 63 videos about beauty treatments she has posted on YouTube since 2008. “It pays my cellphone bill,” she said. Vloggers either apply or are invited by YouTube to display ads based on demonstrated viewership or outstanding content.
Selling merchandise on a vlog, blog or personal Web site can bring in even more cash. Darren Kitchen, 28, of San Francisco said he makes $5,000 a month selling stickers, T-shirts, baseball caps and computer hacking tools on his Web site, Hak5.org, which offers a weekly video show about computer hacking.
“It’s crazy how many people want the stickers,” said Mr. Kitchen, who started Hak5 in 2005 and says he has 250,000 monthly viewers.
Book deals are the ultimate goal for many bloggers who are aspiring writers. Molly Wizenberg, 32, of Seattle, started her blog, Orangette, in 2004 as a way to hone her writing skills after dropping out of a Ph.D. program in anthropology.
Her musings about food and life attracted 350,000 visitors a month and the attention of Simon & Schuster, which led to the publication last year of her book, “A Homemade Life: Stories and Recipes From My Kitchen Table.” Last month she signed a contract to write another book. “It’s beyond what I ever imagined,” Ms. Wizenberg said.
Some people simply ask their fans and followers to make donations to support their creative efforts. Kelly DeLay of Frisco, Tex., said he gets $200 to $400 a month from visitors to his Web site, The Clouds 365 Project, where he posts a daily photograph of cloud formations. “People can be very generous,” said Mr. DeLay, who began taking pictures of clouds after he was laid off from his job as an interactive media director in 2009.
Charging for content is also an option. Collis Ta’eed, 31, of Melbourne, Australia, founded FreelanceSwitch.com, which gives practical advice to freelancers, and Tuts+, which offers technology-related tutorials. He said he brought in $150,000 a month from his sites, most of it from premium content — primarily tutorials and e-books.
“People will pay for content if you offer them something of value that is authentic and is generally useful,” said Mr. Ta’eed, who said his two blogs together have 6.4 million visitors a month. One example of useful content is FreelanceSwitch’s job board, which brings in $7,000 a month, he said. Job posters pay nothing; job seekers pay $9 a month.
And sometimes people will pay to attend events organized by bloggers they admire. Steve Pavlina of Las Vegas said he made $40,000 from weekend workshops that were an outgrowth of his blog, StevePavlina.com, which focuses on issues related to personal development. He started the blog in 2004 and says it has 2.5 million visitors a month. Besides workshops, he said he made about $100,000 a month in commissions from sales of products like speed-reading courses and high-speed blenders that he recommends on his blog.
“I tell people if they want to start a blog just to make money, they should quit right now,” Mr. Pavlina said. “You have to love it and be passionate about your topic.”
http://www.nytimes.com/2011/05/26/technology/personaltech/26basics.html?partner=rss&emc=rss
Sunday, May 29, 2011
Thursday, May 26, 2011
Why Middle Managers May Be the Most Important People in Your Company
Wharton management professor Ethan Mollick has a message for knowledge-based companies: Pay closer attention to your middle managers. They may have a greater impact on company performance than almost any other part of the organization.
In other words, says Mollick, "the often overlooked and sometimes-maligned middle managers matter. They are not interchangeable parts in an organization." His view upends the long-held belief that performance differences between firms are due mainly to organizational factors – such as business strategy, management systems and HR practices -- rather than to differences among employees.
The importance of individual skills and characteristics can be especially significant when measuring firm performance in industries and fields that value innovation, like computer games, software, consulting, biotech and marketing, according to Mollick, who recently completed a paper on this topic titled, "People and Process: Suits and Innovators: Individuals and Firm Performance." It is in these knowledge-intensive industries where variation in the abilities of middle managers – the "suits" he refers to in his paper -- has a "particularly large impact on firm performance, much larger than that of individuals who are assigned innovative roles," he says.
The influence these suits exert, he suggests, stems from their key role in project management, including such tasks as resource allocation and supervision of deadlines – responsibilities often perceived as the bureaucratic, more routine and less glamorous side of the business. Middle managers also can play a key role in fostering innovative and creative environments.
A Look at the Gaming Industry
One challenge Mollick faced in his research was a lack of studies that measured the relative contribution of middle managers vs. innovators. He addressed that gap by analyzing the computer game industry, which not only is typical of many knowledge-driven industries, but also "represents a case where the tension between the firm and the individual should be at its most visible." The industry, he notes, is populated by companies that are relatively established, have clear product strategies and yet depend to a great extent on the "innovative output of key individuals." In addition, he writes in his paper, "success in the game industry relies not just on managers in charge of innovation, but also on project managers capable of organizing dozens of programmers and coordinating budgets that often reach into the tens of millions of dollars."
He does not include top managers in his analysis although his paper cites an earlier study showing that the impact of CEOs, CFOs and other top-level executives on large firms is limited. Indeed, these top positions explain less than 5% of the variation in firm performance among Fortune 800 companies – a finding that Mollick says is in line with other research in this area. In large, established organizations, "the top managers, at least, account for relatively little of why some companies perform better than others."
Mollick acknowledges that top management plays a significant role in setting the overall direction of the company. "But they don't have a big part in deciding which individual projects are selected and how they are run. At least for the computer game industry – and no doubt for a lot of knowledge-based industries – it is all about the middle managers."
His research differentiates knowledge-based companies from traditional industries where "economies of scale are critical, such as manufacturing, and where there seems to be little need to take individuals into account to explain performance." Toyota is an example. "With a six-layered bureaucracy, cross-trained workers and clearly delineated departments, Toyota built a manufacturing powerhouse that integrates workers in a complex mechanism to produce cars efficiently," Mollick writes. "Individual workers are ultimately replaceable and interchangeable with others who have received the same extensive training." The process "does not rely on any individual worker's skills but rather firm-level processes to hire and train the appropriate individuals for the appropriate roles."
Emerging industries, however, rely more on knowledge and innovation than on process and assembly lines. Given that model, what can be said about the effect of individual middle managers on firm performance? A number of studies suggest that "their success is heavily dependent on the structure of the organizations … and their impact on performance is determined by firm structure and culture, rather than individual differences."
Mollick's analysis of the game industry comes up with a different conclusion.
Good Skills Are Portable
In describing the focus of his research, Mollick notes that within the game industry, each game has a team of creators -- including designers, programmers and artists -- who work for firms of varying sizes. "Because accurate credits at both the individual and firm level are available for many games developed within the industry, it is possible to trace precisely both the individuals and firms responsible for innovation and entrepreneurship within the industry," Mollick writes.
The game industry can be broken down into producers – similar to project managers in the software industry – and designers. A producer (middle manager) has to ensure that the project meets its deadline, gets the right resources and conforms to industry standards. He or she must communicate effectively with the rest of the company and with outside vendors such as promoters and public relations firms, among other responsibilities. The designer (innovator), by contrast, comes up with ideas and helps the development team turn the idea into a game, paying attention to story lines and characters, but also to logic, sequence and interaction. The producers fill the managerial roles, and the designers fill the innovative roles, according to Mollick, who focused his research on PC games as opposed to console games like those that run on the Nintendo, Xbox or Sony systems.
Using a Multiple Membership Cross-Classified Multilevel Model (MMCC) analysis of 854 games across multiple companies, he measured, over 12 years, "how performance changes as you combine different people in different companies in different ways." He uses the revenue of each company, controlling for costs, to measure firm performance.
The games he analyzed accounted for about $4 billion of revenue and included 537 individual producers, 739 individual designers and 395 companies. With the MMCC model, he was able to determine which project success was due to individual designers as opposed to producers or the firms.
Mollick found that it was middle managers, rather than innovators or company strategy, who best explained the differences in firm performance. Managers accounted for 22.3% of the variation in revenue among projects, as opposed to just over 7% explained by innovators and 21.3% explained by the organization itself – including firm strategy, leadership and practices. "Far from being interchangeable," Mollick writes, "individuals uniquely contribute to the success or failure of a firm…. Additionally, even in a young industry that rewards creative and innovative products, innovative roles explain far less variation in firm performance than do managers."
Or, as Mollick later writes: "High-performing innovators alone are not enough to generate performance variation; rather, it is the role of individual managers to integrate and coordinate the innovative work of others." So while innovators may come up with new games and new concepts, managers play the more crucial role of deciding which ideas are actually given resources. It is this "selection ability" that Mollick measures.
The best managers are able to work closely with the innovators to turn their ideas into realistic project plans, he adds, and they are effective at motivating the team and facilitating "collective creativity."
In order to see if these skills were portable, Mollick re-examined the data, looking only at individuals who moved between companies. He found that middle managers who switched employers had an even larger impact on performance than those who remained within organizations. "This is not about a person being a good fit in just one specific organization. Their skills are useful anywhere." It's more evidence that managers are not "cogs in a machine. There is something innate in them that makes them good at what they do."
Beyond Dilbert
"It's amazing that the effect of these middle managers on a project is not only larger than the creative people, but larger than the rest of the organization," Mollick says. "We tend to think of companies as all about systems and not enough about people." He suggests that companies pay more attention to filling middle levels of management, figuring out who the best ones are and rewarding them appropriately.
Middle managers, he adds, "have a tough job." They are managing a finite set of resources, they don't have control over everyone's actions, they can frustrate people around them who are not interested in changing direction when necessary, and they must go in a direction – even if it's an unpopular one -- that ensures the project's success. Finally, the project has to fit in with the goals of the company. "It's always easy to think about the worst manager you have had, the ones you see in the Dilbert cartoons," Mollick says. "But it's important to recognize the vital role these middle manages play in making sure that information flows and that creativity happens."
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2783
In other words, says Mollick, "the often overlooked and sometimes-maligned middle managers matter. They are not interchangeable parts in an organization." His view upends the long-held belief that performance differences between firms are due mainly to organizational factors – such as business strategy, management systems and HR practices -- rather than to differences among employees.
The importance of individual skills and characteristics can be especially significant when measuring firm performance in industries and fields that value innovation, like computer games, software, consulting, biotech and marketing, according to Mollick, who recently completed a paper on this topic titled, "People and Process: Suits and Innovators: Individuals and Firm Performance." It is in these knowledge-intensive industries where variation in the abilities of middle managers – the "suits" he refers to in his paper -- has a "particularly large impact on firm performance, much larger than that of individuals who are assigned innovative roles," he says.
The influence these suits exert, he suggests, stems from their key role in project management, including such tasks as resource allocation and supervision of deadlines – responsibilities often perceived as the bureaucratic, more routine and less glamorous side of the business. Middle managers also can play a key role in fostering innovative and creative environments.
A Look at the Gaming Industry
One challenge Mollick faced in his research was a lack of studies that measured the relative contribution of middle managers vs. innovators. He addressed that gap by analyzing the computer game industry, which not only is typical of many knowledge-driven industries, but also "represents a case where the tension between the firm and the individual should be at its most visible." The industry, he notes, is populated by companies that are relatively established, have clear product strategies and yet depend to a great extent on the "innovative output of key individuals." In addition, he writes in his paper, "success in the game industry relies not just on managers in charge of innovation, but also on project managers capable of organizing dozens of programmers and coordinating budgets that often reach into the tens of millions of dollars."
He does not include top managers in his analysis although his paper cites an earlier study showing that the impact of CEOs, CFOs and other top-level executives on large firms is limited. Indeed, these top positions explain less than 5% of the variation in firm performance among Fortune 800 companies – a finding that Mollick says is in line with other research in this area. In large, established organizations, "the top managers, at least, account for relatively little of why some companies perform better than others."
Mollick acknowledges that top management plays a significant role in setting the overall direction of the company. "But they don't have a big part in deciding which individual projects are selected and how they are run. At least for the computer game industry – and no doubt for a lot of knowledge-based industries – it is all about the middle managers."
His research differentiates knowledge-based companies from traditional industries where "economies of scale are critical, such as manufacturing, and where there seems to be little need to take individuals into account to explain performance." Toyota is an example. "With a six-layered bureaucracy, cross-trained workers and clearly delineated departments, Toyota built a manufacturing powerhouse that integrates workers in a complex mechanism to produce cars efficiently," Mollick writes. "Individual workers are ultimately replaceable and interchangeable with others who have received the same extensive training." The process "does not rely on any individual worker's skills but rather firm-level processes to hire and train the appropriate individuals for the appropriate roles."
Emerging industries, however, rely more on knowledge and innovation than on process and assembly lines. Given that model, what can be said about the effect of individual middle managers on firm performance? A number of studies suggest that "their success is heavily dependent on the structure of the organizations … and their impact on performance is determined by firm structure and culture, rather than individual differences."
Mollick's analysis of the game industry comes up with a different conclusion.
Good Skills Are Portable
In describing the focus of his research, Mollick notes that within the game industry, each game has a team of creators -- including designers, programmers and artists -- who work for firms of varying sizes. "Because accurate credits at both the individual and firm level are available for many games developed within the industry, it is possible to trace precisely both the individuals and firms responsible for innovation and entrepreneurship within the industry," Mollick writes.
The game industry can be broken down into producers – similar to project managers in the software industry – and designers. A producer (middle manager) has to ensure that the project meets its deadline, gets the right resources and conforms to industry standards. He or she must communicate effectively with the rest of the company and with outside vendors such as promoters and public relations firms, among other responsibilities. The designer (innovator), by contrast, comes up with ideas and helps the development team turn the idea into a game, paying attention to story lines and characters, but also to logic, sequence and interaction. The producers fill the managerial roles, and the designers fill the innovative roles, according to Mollick, who focused his research on PC games as opposed to console games like those that run on the Nintendo, Xbox or Sony systems.
Using a Multiple Membership Cross-Classified Multilevel Model (MMCC) analysis of 854 games across multiple companies, he measured, over 12 years, "how performance changes as you combine different people in different companies in different ways." He uses the revenue of each company, controlling for costs, to measure firm performance.
The games he analyzed accounted for about $4 billion of revenue and included 537 individual producers, 739 individual designers and 395 companies. With the MMCC model, he was able to determine which project success was due to individual designers as opposed to producers or the firms.
Mollick found that it was middle managers, rather than innovators or company strategy, who best explained the differences in firm performance. Managers accounted for 22.3% of the variation in revenue among projects, as opposed to just over 7% explained by innovators and 21.3% explained by the organization itself – including firm strategy, leadership and practices. "Far from being interchangeable," Mollick writes, "individuals uniquely contribute to the success or failure of a firm…. Additionally, even in a young industry that rewards creative and innovative products, innovative roles explain far less variation in firm performance than do managers."
Or, as Mollick later writes: "High-performing innovators alone are not enough to generate performance variation; rather, it is the role of individual managers to integrate and coordinate the innovative work of others." So while innovators may come up with new games and new concepts, managers play the more crucial role of deciding which ideas are actually given resources. It is this "selection ability" that Mollick measures.
The best managers are able to work closely with the innovators to turn their ideas into realistic project plans, he adds, and they are effective at motivating the team and facilitating "collective creativity."
In order to see if these skills were portable, Mollick re-examined the data, looking only at individuals who moved between companies. He found that middle managers who switched employers had an even larger impact on performance than those who remained within organizations. "This is not about a person being a good fit in just one specific organization. Their skills are useful anywhere." It's more evidence that managers are not "cogs in a machine. There is something innate in them that makes them good at what they do."
Beyond Dilbert
"It's amazing that the effect of these middle managers on a project is not only larger than the creative people, but larger than the rest of the organization," Mollick says. "We tend to think of companies as all about systems and not enough about people." He suggests that companies pay more attention to filling middle levels of management, figuring out who the best ones are and rewarding them appropriately.
Middle managers, he adds, "have a tough job." They are managing a finite set of resources, they don't have control over everyone's actions, they can frustrate people around them who are not interested in changing direction when necessary, and they must go in a direction – even if it's an unpopular one -- that ensures the project's success. Finally, the project has to fit in with the goals of the company. "It's always easy to think about the worst manager you have had, the ones you see in the Dilbert cartoons," Mollick says. "But it's important to recognize the vital role these middle manages play in making sure that information flows and that creativity happens."
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2783
Tuesday, May 24, 2011
Three Smart Moves Brought LinkedIn This Far
I joined LinkedIn in 2007. I can't remember why. After connecting to a few dozen people, I still couldn't fathom what the purpose of LinkedIn was, especially for an already-established professional. Yes, I knew these people, but to what end were we connecting on this site? But for some reason I stayed on for the ride, more as an experiment than in any effort to gain value. I was fascinated with the platform this company was building and wondered what its business model might be. Even after I gave up wondering, I kept adding links.
Fast forward four years and LinkedIn is a public company with a market cap of more than $9 billion and revenues of about $400 million. I'm shaking my head at how lucky its founder Reid Hoffman turned out to be. At the same time, I'm beginning to appreciate how he and his colleagues were smart.
First, why lucky? LinkedIn didn't create the very quiet tech market it was born into, but it definitely benefited from it. In 2003 there were no tech IPOs at all. The bubble had burst and no one was watching the young startup. Facebook was not a commercial entity until a year later. This gave the company time to stay under the radar as it figured out what it wanted to be when it grew up. To understand how valuable that can be, note the very different experience of Netscape, which went public in 1995. As I describe in more detail elsewhere (in my new book, Smart or Lucky?), Netscape had little time to plan its future before embarking upon one of Silicon Valley's most spectacular public offerings — and that's a big part of why it suffered one of tech history's most spectacular falls.
But LinkedIn's luck is only part of its story. There were lots of companies who started around the same time and never found a sustainable business model. Three smart moves in particular kept it from being a flash in the proverbial pan. They might even enable it to become a truly important company:
Smart Move #1. It shifted the focus quickly to infrastructure, relationships, and planning. Startups usually have their basis in a novel idea, and often the visionaries behind them want to keep coming up with cool ideas. LinkedIn's Reid Hoffman was not that kind of founder. In his previous role as an executive vice president of PayPal, he was the guy in charge of external relationships and the payment infrastructure that was the heart of PayPal's intellectual property. He came to LinkedIn with an understanding of what really matters to execution.
Smart Move #2. It drew up, and followed, a roadmap. In LinkedIn's early days, no one really understood what the company was all about. Again, it preceded Facebook. This was before the world went crazy with social networking. But it is clear that there was a well-defined roadmap in place. Hoffman and his team understood that there was a need for a real business-focused connection model, since in business, success is often driven by "who you know." And they had thought through what it would take to create a network to translate what people do in the physical world to the digital world. Revenue would come from advertising and from people subscribing to a tool for finding new business contacts. Certain steps would have to be taken to attract a critical mass of participants to the network, at which point its value would be easily recognizable and self-sustaining. The business plan behind LinkedIn would use this critical mass to build payment based services and advertising. It sounds obvious to say a startup should have a well thought out plan, but in fact this distinguishes LinkedIn from hundreds of other social networking companies that might have been just as lucky in other respects.
Smart Move #3. It stuck with its target market. Fast-growing companies often succumb to the temptation to expand into too many markets, rather than miss an opportunity. There were probably many helpful critics who told LinkedIn executives that they should add in a consumer play — after all, Facebook was growing like a weed. LinkedIn didn't do it. Sticking to the business plan of targeting the business market was the smart move.
Even the smartest moves, unfortunately, can't buy a company enduring success in a complex and volatile market. LinkedIn will have to make sure the next moves it makes are just as good. Now that it has cash in the bank, it will have to acquire the right companies that will help it expand its services and market reach. (It would do well to focus on businesses that are already well accepted inside enterprises highly concerned with security and privacy.) And it will have to integrate these acquisitions effectively — always a dicey proposition, and not to be left to luck.
Judith Hurwitz is President & CEO of Hurwitz & Associates and focuses on the business benefits of emerging enterprise technology including cloud computing, service management, and information management. She is the author of five books, including the recently published Smart or Lucky? How Technology Leaders Turn Chance into Success.
Fast forward four years and LinkedIn is a public company with a market cap of more than $9 billion and revenues of about $400 million. I'm shaking my head at how lucky its founder Reid Hoffman turned out to be. At the same time, I'm beginning to appreciate how he and his colleagues were smart.
First, why lucky? LinkedIn didn't create the very quiet tech market it was born into, but it definitely benefited from it. In 2003 there were no tech IPOs at all. The bubble had burst and no one was watching the young startup. Facebook was not a commercial entity until a year later. This gave the company time to stay under the radar as it figured out what it wanted to be when it grew up. To understand how valuable that can be, note the very different experience of Netscape, which went public in 1995. As I describe in more detail elsewhere (in my new book, Smart or Lucky?), Netscape had little time to plan its future before embarking upon one of Silicon Valley's most spectacular public offerings — and that's a big part of why it suffered one of tech history's most spectacular falls.
But LinkedIn's luck is only part of its story. There were lots of companies who started around the same time and never found a sustainable business model. Three smart moves in particular kept it from being a flash in the proverbial pan. They might even enable it to become a truly important company:
Smart Move #1. It shifted the focus quickly to infrastructure, relationships, and planning. Startups usually have their basis in a novel idea, and often the visionaries behind them want to keep coming up with cool ideas. LinkedIn's Reid Hoffman was not that kind of founder. In his previous role as an executive vice president of PayPal, he was the guy in charge of external relationships and the payment infrastructure that was the heart of PayPal's intellectual property. He came to LinkedIn with an understanding of what really matters to execution.
Smart Move #2. It drew up, and followed, a roadmap. In LinkedIn's early days, no one really understood what the company was all about. Again, it preceded Facebook. This was before the world went crazy with social networking. But it is clear that there was a well-defined roadmap in place. Hoffman and his team understood that there was a need for a real business-focused connection model, since in business, success is often driven by "who you know." And they had thought through what it would take to create a network to translate what people do in the physical world to the digital world. Revenue would come from advertising and from people subscribing to a tool for finding new business contacts. Certain steps would have to be taken to attract a critical mass of participants to the network, at which point its value would be easily recognizable and self-sustaining. The business plan behind LinkedIn would use this critical mass to build payment based services and advertising. It sounds obvious to say a startup should have a well thought out plan, but in fact this distinguishes LinkedIn from hundreds of other social networking companies that might have been just as lucky in other respects.
Smart Move #3. It stuck with its target market. Fast-growing companies often succumb to the temptation to expand into too many markets, rather than miss an opportunity. There were probably many helpful critics who told LinkedIn executives that they should add in a consumer play — after all, Facebook was growing like a weed. LinkedIn didn't do it. Sticking to the business plan of targeting the business market was the smart move.
Even the smartest moves, unfortunately, can't buy a company enduring success in a complex and volatile market. LinkedIn will have to make sure the next moves it makes are just as good. Now that it has cash in the bank, it will have to acquire the right companies that will help it expand its services and market reach. (It would do well to focus on businesses that are already well accepted inside enterprises highly concerned with security and privacy.) And it will have to integrate these acquisitions effectively — always a dicey proposition, and not to be left to luck.
Judith Hurwitz is President & CEO of Hurwitz & Associates and focuses on the business benefits of emerging enterprise technology including cloud computing, service management, and information management. She is the author of five books, including the recently published Smart or Lucky? How Technology Leaders Turn Chance into Success.
Needed: Plain Talk About the Dollar
AT a recent news conference, Ben S. Bernanke, the Federal Reserve chairman, was asked about the falling dollar. He parried the question, saying that the Treasury secretary was the government’s spokesman on the exchange rate — and, of course, that the United States favors a strong dollar.
Listening to that statement, I flashed back to one of my first experiences as an adviser to Barack Obama. In November 2008, I was sharing a cab in Chicago with Larry Summers, the former Treasury secretary and a fellow economic adviser to the president-elect. To help prepare me for the interviews and the hearings to come, Larry graciously asked me questions and critiqued my answers.
When he asked about the exchange rate for the dollar, I began: “The exchange rate is a price much like any other price, and is determined by market forces.”
“Wrong!” Larry boomed. “The exchange rate is the purview of the Treasury. The United States is in favor of a strong dollar.”
For the record, my initial answer was much more reasonable. Our exchange rate is just a price — the price of the dollar in terms of other currencies. It is not controlled by anyone. And a high price for the dollar, which is what we mean by a strong dollar, is not always desirable.
Some countries, like China, essentially fix the price of their currency. But since the early 1970s, the United States has let the dollar’s value move in response to changes in the supply and demand of dollars in the foreign exchange market. The Treasury no more determines the price of the dollar than the Department of Energy determines the price of gasoline. Both departments have a small reserve that they can use to combat market instability, but neither has the resources or the mandate to hold the relevant price away from its market equilibrium value for very long.
In practice, all that “the exchange rate is the purview of the Treasury” means is that no official other the Treasury secretary is supposed to talk about it (and even he isn’t supposed to say very much). That strikes me as a shame. Perhaps if government officials could talk about the exchange rate forthrightly, there would be more understanding of the issues and more rational policy discussions.
Such discussions would start with some basic economics. The desire to trade with other countries or invest in them is what gives rise to the market for foreign exchange. You need euros to travel in Spain or to buy a German government bond, so you need a way to exchange currencies.
The supply of dollars to the foreign exchange market comes from Americans who want to buy goods, services or assets from abroad. The demand for dollars comes from foreigners who want to buy from the United States.
Anything that increases the demand for dollars or reduces the supply drives up the dollar’s price. Anything that lowers the demand for dollars or raises the supply causes the dollar to weaken.
Consider two examples. Suppose American entrepreneurs create many products that foreigners want to buy, and start many companies they want to invest in. That will increase the demand for dollars and so cause the dollar’s price to rise. Such innovation will also make Americans want to buy more goods and assets in the United States — and fewer abroad. The supply of dollars to the foreign exchange market will fall, further strengthening the dollar. This example describes very well the conditions of the late 1990s — when the dollar was indeed strong.
Now suppose the United States runs a large budget deficit that causes domestic interest rates to rise. Higher American interest rates make both foreigners and Americans want to buy more American bonds and fewer foreign bonds. Thus the demand for dollars increases and the supply decreases. The price of the dollar will again rise.
This example describes conditions in the early 1980s, when President Ronald Reagan’s tax cuts and military buildup led to large deficits. Those deficits, along with the anti-inflationary policies of the Fed, where Paul A. Volcker was then the chairman, led to high American interest rates. The dollar was very strong in this period.
Both developments — brilliant American innovation and troublesome American budget deficits — caused the dollar to strengthen. Yet one is clearly a positive for the American economy, the other a negative. The point is that there is no universal good or bad direction for the dollar to move. The desirability of any shift in the exchange rate depends on why the dollar is moving.
It also depends on the state of the economy. At full employment, a strong dollar is good for standards of living. A high price for the dollar means that our currency buys a lot in foreign countries.
But in a depressed economy, it isn’t so clear that a strong dollar is desirable. A weaker dollar means that our goods are cheaper relative to foreign goods. That stimulates our exports and reduces our imports. Higher net exports raise domestic production and employment. Foreign goods are more expensive, but more Americans are working. Given the desperate need for jobs, on net we are almost surely better off with a weaker dollar for a while.
Fed policy is determined by inflation and unemployment in the United States. But if Mr. Bernanke could discuss the exchange rate openly, he would probably tell you that one way any monetary expansion helps a distressed economy is by weakening the dollar. That is taught in every introductory economics course, yet the Fed is asked to pretend it isn’t true.
Likewise, fiscal policy is determined by domestic considerations. But trimming our budget deficit, as we should over the coming years, would also weaken the dollar. And that, in turn, would blunt the negative impact of deficit reduction on employment and output in the short run.
STRANGELY, every politician seems to understand that it would be desirable for the dollar to weaken against one particular currency: the Chinese renminbi. For years, China has deliberately accumulated United States Treasury bonds to keep the dollar’s value high in renminbi terms. The United States would export more and grow faster if China allowed the dollar’s price to fall. Congress routinely threatens retaliation if China doesn’t take steps that amount to weakening the dollar.
But in the very next breath, the same members of Congress shout about the importance of a strong dollar. If a decline in its value relative to the renminbi would be beneficial, a fall relative to the currency of many countries would help even more in the current situation.
To say this openly risks being branded not just an extremist but possibly un-American. Perhaps it is time for a more adult conversation. The exchange rate is the purview of market economics, not of the Treasury or strong-dollar ideologues.
http://www.nytimes.com/2011/05/22/business/economy/22view.html?pagewanted=2&_r=2
Listening to that statement, I flashed back to one of my first experiences as an adviser to Barack Obama. In November 2008, I was sharing a cab in Chicago with Larry Summers, the former Treasury secretary and a fellow economic adviser to the president-elect. To help prepare me for the interviews and the hearings to come, Larry graciously asked me questions and critiqued my answers.
When he asked about the exchange rate for the dollar, I began: “The exchange rate is a price much like any other price, and is determined by market forces.”
“Wrong!” Larry boomed. “The exchange rate is the purview of the Treasury. The United States is in favor of a strong dollar.”
For the record, my initial answer was much more reasonable. Our exchange rate is just a price — the price of the dollar in terms of other currencies. It is not controlled by anyone. And a high price for the dollar, which is what we mean by a strong dollar, is not always desirable.
Some countries, like China, essentially fix the price of their currency. But since the early 1970s, the United States has let the dollar’s value move in response to changes in the supply and demand of dollars in the foreign exchange market. The Treasury no more determines the price of the dollar than the Department of Energy determines the price of gasoline. Both departments have a small reserve that they can use to combat market instability, but neither has the resources or the mandate to hold the relevant price away from its market equilibrium value for very long.
In practice, all that “the exchange rate is the purview of the Treasury” means is that no official other the Treasury secretary is supposed to talk about it (and even he isn’t supposed to say very much). That strikes me as a shame. Perhaps if government officials could talk about the exchange rate forthrightly, there would be more understanding of the issues and more rational policy discussions.
Such discussions would start with some basic economics. The desire to trade with other countries or invest in them is what gives rise to the market for foreign exchange. You need euros to travel in Spain or to buy a German government bond, so you need a way to exchange currencies.
The supply of dollars to the foreign exchange market comes from Americans who want to buy goods, services or assets from abroad. The demand for dollars comes from foreigners who want to buy from the United States.
Anything that increases the demand for dollars or reduces the supply drives up the dollar’s price. Anything that lowers the demand for dollars or raises the supply causes the dollar to weaken.
Consider two examples. Suppose American entrepreneurs create many products that foreigners want to buy, and start many companies they want to invest in. That will increase the demand for dollars and so cause the dollar’s price to rise. Such innovation will also make Americans want to buy more goods and assets in the United States — and fewer abroad. The supply of dollars to the foreign exchange market will fall, further strengthening the dollar. This example describes very well the conditions of the late 1990s — when the dollar was indeed strong.
Now suppose the United States runs a large budget deficit that causes domestic interest rates to rise. Higher American interest rates make both foreigners and Americans want to buy more American bonds and fewer foreign bonds. Thus the demand for dollars increases and the supply decreases. The price of the dollar will again rise.
This example describes conditions in the early 1980s, when President Ronald Reagan’s tax cuts and military buildup led to large deficits. Those deficits, along with the anti-inflationary policies of the Fed, where Paul A. Volcker was then the chairman, led to high American interest rates. The dollar was very strong in this period.
Both developments — brilliant American innovation and troublesome American budget deficits — caused the dollar to strengthen. Yet one is clearly a positive for the American economy, the other a negative. The point is that there is no universal good or bad direction for the dollar to move. The desirability of any shift in the exchange rate depends on why the dollar is moving.
It also depends on the state of the economy. At full employment, a strong dollar is good for standards of living. A high price for the dollar means that our currency buys a lot in foreign countries.
But in a depressed economy, it isn’t so clear that a strong dollar is desirable. A weaker dollar means that our goods are cheaper relative to foreign goods. That stimulates our exports and reduces our imports. Higher net exports raise domestic production and employment. Foreign goods are more expensive, but more Americans are working. Given the desperate need for jobs, on net we are almost surely better off with a weaker dollar for a while.
Fed policy is determined by inflation and unemployment in the United States. But if Mr. Bernanke could discuss the exchange rate openly, he would probably tell you that one way any monetary expansion helps a distressed economy is by weakening the dollar. That is taught in every introductory economics course, yet the Fed is asked to pretend it isn’t true.
Likewise, fiscal policy is determined by domestic considerations. But trimming our budget deficit, as we should over the coming years, would also weaken the dollar. And that, in turn, would blunt the negative impact of deficit reduction on employment and output in the short run.
STRANGELY, every politician seems to understand that it would be desirable for the dollar to weaken against one particular currency: the Chinese renminbi. For years, China has deliberately accumulated United States Treasury bonds to keep the dollar’s value high in renminbi terms. The United States would export more and grow faster if China allowed the dollar’s price to fall. Congress routinely threatens retaliation if China doesn’t take steps that amount to weakening the dollar.
But in the very next breath, the same members of Congress shout about the importance of a strong dollar. If a decline in its value relative to the renminbi would be beneficial, a fall relative to the currency of many countries would help even more in the current situation.
To say this openly risks being branded not just an extremist but possibly un-American. Perhaps it is time for a more adult conversation. The exchange rate is the purview of market economics, not of the Treasury or strong-dollar ideologues.
http://www.nytimes.com/2011/05/22/business/economy/22view.html?pagewanted=2&_r=2
Sunday, May 22, 2011
Genneva gold - for Singapore only
IN THE last few months, netizens and investors have puzzled over a number of so- called gold investment schemes that aim to pay you regular returns. Are they scams? Gold, after all, does not pay any income, so how are the firms able to pay out as much as 24 per cent per annum?
Two firms with such schemes have been put on the Monetary Authority of Singapore's (MAS) Investor Alert list. The latest on the list is Genneva Pte Ltd.
Late last year, The Gold Label Pte Ltd was put on the list. The company has filed to wind up its operations, reportedly due to cash flow problems. MAS' Investor Alert list reflects persons who are unregulated, and 'may have been wrongly perceived as being licensed or authorised by MAS'.
There are similarities in The Gold Label and Genneva. They appear to be Malaysian in origin, or at least have Malaysian directors. Both were investigated by Bank Negara on suspicions of illegal deposit taking and money laundering.
Genneva Sdn Bhd was investigated in 2009. Three of its directors - who are also directors in the Singapore company - will stand trial in April in Kuala Lumpur on charges of alleged money laundering.
Bank Negara's investigation of The Gold Label started last year, and is ongoing, based on information on Bank Negara's website.
What exactly is the firms' investment proposition? Information on The Gold Label isn't widely available; its Singapore website has been taken down. The firms straddle a fine line between investment and a retail business.
Genneva, for example, has a police licence that enables it to sell second-hand jewellery, gold, and white gold. The fact that customers take home physical gold in the form of bars or coins suggests that the firm isn't taking a deposit or acting as investment manager.
Here's how the scheme appears to work: Customers buy gold from Genneva at a fairly substantial premium to the market of about 22 to 25 per cent. This is based on a comparison of prices quoted by Genneva of roughly $75 to $76.50 per gram against the price quoted by UOB and other retail gold dealers of roughly $61.
Genneva tells customers that it sells the gold to them at a so-called 'discount' of between 1.5 and 2 per cent. It extends an option to customers: it will buy back the gold after 30 to 36 days or after 90 days depending on the scheme, at the original full purchase price. Those who exercise this get to keep the 'discount' of 1.5 to 2 per cent.
Customers may rollover the purchase, and hence they could potentially pocket as much as 18 to 24 per cent a year, from an asset that actually doesn't pay any yield.
How is this done? Genneva has declined to answer questions for now, citing the pending court case in Malaysia. It adds in an e-mail that it expects a 'positive outcome' from the court case.
There are a number of aspects that should cause scepticism. First, the firm illustrates its buyback option on its website in a rather disingenuous fashion. It says customers buy gold at a 'discounted market price'.
But the truth is customers buy gold at a sizeable premium to the market. The firm also does not explain what it does with the premium that it pockets. Presumably commissions are paid to the sales people.
Its website says it has a 'proprietary trading platform' which enables it to 'adopt an active hedging and leveraging strategy' that makes the buy-back option possible.
On whether the scheme is Ponzi in nature, The firm's Malaysian counterpart told a Malaysian paper in 2009 that it is 'obvious' that it is not a Ponzi scheme.
What is likely to transpire is that the firm takes the 22 to 25 per cent premium that it gets from customers' purchases, and after paying off costs and commissions, it could buy and sell options on gold, through which it hedges its exposure.
As long as the gold price rises or is steady, it can continue, and even thrive, as it sources for gold at substantially lower prices on the open market. If gold however drops on a sustained basis, it could face a cash crunch if investors rush to sell back their gold in substantial numbers. This is because it is obligated to buy back the gold from clients at a high price.
Those who enter the scheme are likely to be enamoured of the so-called return, but they face two major risks - price and counterparty risk. As long as gold rises enough to cover their cost, they could sell their Genneva gold in the open market. Over the last year, gold has risen some 26 per cent, based on spot prices.
If gold falls substantially, however, the counterparty risk becomes a material one, as you can recover your cost only if Genneva stays solvent. Those who roll over their purchases must reckon that the potential return far outweighs the risk of loss. Genneva agents tell investors that the worst loss they may suffer is about 20 to 22 per cent, roughly the premium they have paid.
Effectively, Genneva has sold investors a put option along with gold, charging them a premium for it, and sweetening that by sharing some of that premium at the end of the contract period of a month or three months. As the put option writer, Genneva's risk is potentially unlimited if it has not hedged its exposure.
Rollovers, by the way, incur price risk - that is, you re-purchase the gold at the price Genneva quotes you which is presumably pegged to the market price. If gold rises, as it has over the last year, you end up investing larger amounts.
So, who is Genneva? According to filings with Acra (Accounting and Corporate Regulatory Authority), it was registered as a business in 2008 dealing in gold bullion. It has an issued and paid-up capital of $500,000.
Three shareholders are Malaysian, and they are the same ones who will have to fight money laundering charges in Malaysian court. There is one Singapore shareholder. Attempts to contact him were unsuccessful as he was reportedly travelling or in meetings.
There are clearly more transparent ways to invest in gold, without dealing with a counterparty which could shutter its operations as The Gold Label did.
UOB offers a gold investment account, for instance, where you can hold physical gold and re-sell it to the bank. Those who need not buy physical gold but want a piece of its price action can get it through the SPDR Gold ETF. The latter is exchange listed and is easily traded through a broker.
gen@sph.com.sg
Two firms with such schemes have been put on the Monetary Authority of Singapore's (MAS) Investor Alert list. The latest on the list is Genneva Pte Ltd.
Late last year, The Gold Label Pte Ltd was put on the list. The company has filed to wind up its operations, reportedly due to cash flow problems. MAS' Investor Alert list reflects persons who are unregulated, and 'may have been wrongly perceived as being licensed or authorised by MAS'.
There are similarities in The Gold Label and Genneva. They appear to be Malaysian in origin, or at least have Malaysian directors. Both were investigated by Bank Negara on suspicions of illegal deposit taking and money laundering.
Genneva Sdn Bhd was investigated in 2009. Three of its directors - who are also directors in the Singapore company - will stand trial in April in Kuala Lumpur on charges of alleged money laundering.
Bank Negara's investigation of The Gold Label started last year, and is ongoing, based on information on Bank Negara's website.
What exactly is the firms' investment proposition? Information on The Gold Label isn't widely available; its Singapore website has been taken down. The firms straddle a fine line between investment and a retail business.
Genneva, for example, has a police licence that enables it to sell second-hand jewellery, gold, and white gold. The fact that customers take home physical gold in the form of bars or coins suggests that the firm isn't taking a deposit or acting as investment manager.
Here's how the scheme appears to work: Customers buy gold from Genneva at a fairly substantial premium to the market of about 22 to 25 per cent. This is based on a comparison of prices quoted by Genneva of roughly $75 to $76.50 per gram against the price quoted by UOB and other retail gold dealers of roughly $61.
Genneva tells customers that it sells the gold to them at a so-called 'discount' of between 1.5 and 2 per cent. It extends an option to customers: it will buy back the gold after 30 to 36 days or after 90 days depending on the scheme, at the original full purchase price. Those who exercise this get to keep the 'discount' of 1.5 to 2 per cent.
Customers may rollover the purchase, and hence they could potentially pocket as much as 18 to 24 per cent a year, from an asset that actually doesn't pay any yield.
How is this done? Genneva has declined to answer questions for now, citing the pending court case in Malaysia. It adds in an e-mail that it expects a 'positive outcome' from the court case.
There are a number of aspects that should cause scepticism. First, the firm illustrates its buyback option on its website in a rather disingenuous fashion. It says customers buy gold at a 'discounted market price'.
But the truth is customers buy gold at a sizeable premium to the market. The firm also does not explain what it does with the premium that it pockets. Presumably commissions are paid to the sales people.
Its website says it has a 'proprietary trading platform' which enables it to 'adopt an active hedging and leveraging strategy' that makes the buy-back option possible.
On whether the scheme is Ponzi in nature, The firm's Malaysian counterpart told a Malaysian paper in 2009 that it is 'obvious' that it is not a Ponzi scheme.
What is likely to transpire is that the firm takes the 22 to 25 per cent premium that it gets from customers' purchases, and after paying off costs and commissions, it could buy and sell options on gold, through which it hedges its exposure.
As long as the gold price rises or is steady, it can continue, and even thrive, as it sources for gold at substantially lower prices on the open market. If gold however drops on a sustained basis, it could face a cash crunch if investors rush to sell back their gold in substantial numbers. This is because it is obligated to buy back the gold from clients at a high price.
Those who enter the scheme are likely to be enamoured of the so-called return, but they face two major risks - price and counterparty risk. As long as gold rises enough to cover their cost, they could sell their Genneva gold in the open market. Over the last year, gold has risen some 26 per cent, based on spot prices.
If gold falls substantially, however, the counterparty risk becomes a material one, as you can recover your cost only if Genneva stays solvent. Those who roll over their purchases must reckon that the potential return far outweighs the risk of loss. Genneva agents tell investors that the worst loss they may suffer is about 20 to 22 per cent, roughly the premium they have paid.
Effectively, Genneva has sold investors a put option along with gold, charging them a premium for it, and sweetening that by sharing some of that premium at the end of the contract period of a month or three months. As the put option writer, Genneva's risk is potentially unlimited if it has not hedged its exposure.
Rollovers, by the way, incur price risk - that is, you re-purchase the gold at the price Genneva quotes you which is presumably pegged to the market price. If gold rises, as it has over the last year, you end up investing larger amounts.
So, who is Genneva? According to filings with Acra (Accounting and Corporate Regulatory Authority), it was registered as a business in 2008 dealing in gold bullion. It has an issued and paid-up capital of $500,000.
Three shareholders are Malaysian, and they are the same ones who will have to fight money laundering charges in Malaysian court. There is one Singapore shareholder. Attempts to contact him were unsuccessful as he was reportedly travelling or in meetings.
There are clearly more transparent ways to invest in gold, without dealing with a counterparty which could shutter its operations as The Gold Label did.
UOB offers a gold investment account, for instance, where you can hold physical gold and re-sell it to the bank. Those who need not buy physical gold but want a piece of its price action can get it through the SPDR Gold ETF. The latter is exchange listed and is easily traded through a broker.
gen@sph.com.sg
Thursday, May 19, 2011
How to fly Private Jets at Airline Prices
For the first class crowd, a private jet is the ultimate upgrade. But buying or chartering is too expensive for all but a few. So how do you get to fly on a business jet for business-class prices?
Fly empty sectors
The first option is to buy a seat on a ‘deadhead’ positioning flight. After a chartered plane has delivered its VIPs to their destination it has to fly empty back to base or onto its next pick-up point. Some charter companies offer seats on these flights at surprisingly low prices.
Around 40 percent of all private jet flights operate empty so there are rich pickings if you’re savvy about it.
Of course, you lose the flexibility of picking the time and route but you get all the other amenities like private terminals, comfortable seats and the ‘master of the universe’ feeling.
Check out AirPartner’s Empty Sector site. (They have a royal warrant to fly the Queen so you could be sitting in her seat one day.) They have flights from Van Nuys to Nice, France, Amsterdam to Kieve as well as shorter European hops for up to 75% off. A quick online search for ‘empty leg’ or ‘deadhead flights’ will reveal many other providers.
My own experience of this was exciting and disappointing in equal measure. My wife and I took a deadhead flight from Biggin Hill to the South of France a few years ago. The plan was to fly to Nice, which is where we booked our hotel but at the last minute, the plane had to go to Genoa and so we had to take a two-hour trip on a grotty Italian train to get to our final destination. It was like a glamorous night out that ends in the gutter. But for a few hundred pounds, the adventure was worth every penny. (But I prefer to fly myself when I can.)
Resurrect DayJet
A second option disappeared in 2008, when DayJet stopped trading. They were using Eclipse 500 very light jets to fly from smaller airports in Florida. They promised ‘pay-per-seat, on-demand’ travel. Members could request a flight from point a to point b and they would get confirmation and a price. However, if other members bought empty seats on that flight, the cost would go down. A clever booking system orchestrated the schedule, prices and availability. It’s a good idea. James Fallows wrote a great article about it in The Atlantic. The technology lives on and perhaps this business model will reappear.
Social flights
What happens if you combine Groupon or Facebook with jet charter? You get Social Flights. Organise a group of friends or join an existing group to book a private jet at a lower price. Or at least, that’s the theory. Fast Company wrote about them recently. The site today listed 22 flights with seats starting at $150 each. If they get enough trips and enough members to make it viable, it could be a great way to experience private aviation.
http://blogs.forbes.com/matthewstibbe/2011/05/19/deadhead-flights/
Fly empty sectors
The first option is to buy a seat on a ‘deadhead’ positioning flight. After a chartered plane has delivered its VIPs to their destination it has to fly empty back to base or onto its next pick-up point. Some charter companies offer seats on these flights at surprisingly low prices.
Around 40 percent of all private jet flights operate empty so there are rich pickings if you’re savvy about it.
Of course, you lose the flexibility of picking the time and route but you get all the other amenities like private terminals, comfortable seats and the ‘master of the universe’ feeling.
Check out AirPartner’s Empty Sector site. (They have a royal warrant to fly the Queen so you could be sitting in her seat one day.) They have flights from Van Nuys to Nice, France, Amsterdam to Kieve as well as shorter European hops for up to 75% off. A quick online search for ‘empty leg’ or ‘deadhead flights’ will reveal many other providers.
My own experience of this was exciting and disappointing in equal measure. My wife and I took a deadhead flight from Biggin Hill to the South of France a few years ago. The plan was to fly to Nice, which is where we booked our hotel but at the last minute, the plane had to go to Genoa and so we had to take a two-hour trip on a grotty Italian train to get to our final destination. It was like a glamorous night out that ends in the gutter. But for a few hundred pounds, the adventure was worth every penny. (But I prefer to fly myself when I can.)
Resurrect DayJet
A second option disappeared in 2008, when DayJet stopped trading. They were using Eclipse 500 very light jets to fly from smaller airports in Florida. They promised ‘pay-per-seat, on-demand’ travel. Members could request a flight from point a to point b and they would get confirmation and a price. However, if other members bought empty seats on that flight, the cost would go down. A clever booking system orchestrated the schedule, prices and availability. It’s a good idea. James Fallows wrote a great article about it in The Atlantic. The technology lives on and perhaps this business model will reappear.
Social flights
What happens if you combine Groupon or Facebook with jet charter? You get Social Flights. Organise a group of friends or join an existing group to book a private jet at a lower price. Or at least, that’s the theory. Fast Company wrote about them recently. The site today listed 22 flights with seats starting at $150 each. If they get enough trips and enough members to make it viable, it could be a great way to experience private aviation.
http://blogs.forbes.com/matthewstibbe/2011/05/19/deadhead-flights/
Tuesday, May 17, 2011
Education Is The Key To Innovation
Alexander Pasik, the chief information officer of the IEEE, a professional association for engineers, recently sat down with Qualcomm founder Irwin Jacobs to talk about education and innovation. Pasik notes that Jacobs pursued a career in science and engineering despite being advised by a high school guidance counselor to explore other lines of work. As for science and engineering, the counselor told Jacobs there was no future in it.
Here is an edited version of the conversation between Pasik and Jacobs.
Pasik: Where and when did you first develop your interest in science and technology?
Jacobs: I graduated from high school in 1950, shortly after World War II, and I was always interested in math and science. Unfortunately, my guidance counselor advised me to apply to the hotel management school at Cornell. It was at Cornell that I saw that technology could indeed transform our world, and I decided to switch majors.
Pasik: What was an outstanding feature of Cornell’s program for you?
Jacobs: Cornell was sufficiently flexible to approve my transfer to electrical engineering and to encourage me to enter the engineering co-op program. I would spend one semester learning theory and the next working at Cornell Aeronautical Laboratories applying my classroom theory to real world engineering. The world was changing and change, rather than being feared, would open new opportunities.
Pasik: Linkabit was the first company you founded following 13 years as a Professor at M.I.T. and UC-San Diego. It has since fathered over 100 successful offshoot companies in San Diego. To what do you attribute Linkabit’s innovative success?
Jacobs: We quickly adopted a strategy of innovation, looking for ways in which we could make not just small improvements in a product but rather substantial changes that might open a new market, often involving theory that was just being taught at research universities. We also moved quickly from consulting to manufacturing products ourselves, including the first microprocessor-based satellite terminals for the military.
Pasik: Qualcomm is the company you are most popularly associated with, and which you co-founded after you retired from Linkabit. What drew you out of a comfortable retirement?
Jacobs: I retired from Linkabit in 1985, but I quickly found retirement was not sufficiently stimulating. I co-founded Qualcomm in July 1985, and we believed that in a world of rapid change, wireless and digital would drive many opportunities and we rapidly came up with several ideas, including CDMA, which would revolutionize modern cellular communications.
Pasik: CDMA is the primary world standard for cellular communications, but is it true this almost didn’t happen?
Jacobs: Qualcomm’s first success was OmniTRACS, a satellite tracking and communication system for the trucking industry. It was only after OmniTRACS’ success that we were able to develop CDMA. The delay was almost fatal, since the industry had voted to standardize on TDMA. We worked exceptionally hard to convince operators in the U.S. and abroad of the great value of CDMA.
Today, all the world’s third generation cell phone networks use CDMA, but it only won out because of the change created by overwhelming subscriber demand. It also showed that innovations do not automatically succeed, since many will resist change, so that persistence and leadership are critical.
Pasik: You say that leadership and persistence are critical to overcome resistance to change, but what are the greatest barriers to change?
Jacobs: Joan [his wife] and I were traveling in India, where we witnessed the large masses of very poor people. We realized, that here, there probably was an Einstein who would never have the opportunity to contribute to the world due to lack of education and opportunity. Innovation demands a curious mind, but it is an education which fuels that burning desire to understand more. If we fail to educate and excite our young people over the possibilities which innovation provides, we are cutting ourselves off from our own future.
Pasik: Does any country hold a monopoly on innovation today?
Jacobs: Innovation is not peculiar to one nation alone, nor has is it ever been loyal to any culture or creed. For example, Einstein was not born or educated in the United States, but he chose to work here after being forced from Europe to enjoy our freedom of expression and because it provided the crucible for technological creativity and free thought.
The greatest limiting factor is the availability of highly educated, curious and talented people. We must have a highly effective and inclusive educational system to continue to nourish the innovative spirit of our country.
Pasik: Why is education such an important part of this process?
Jacobs: Education provides the opening spark for young minds. Education awakens people of all ages to the possibilities and opportunities in front of us. It is not the sole responsibility of schools and universities to foster the attitude that science and math are important, but also of industry and government. For instance, the IEEE’s TryEngineering.com program, in conjunction with IBM, is a good example of how industry can get involved and provide students with the opportunity to gain hands-on participation in engineering projects. The response to the IEEE Presidents’ Change the World Competition demonstrates how receptive students are to pick up the challenge, provided they are given the right guidance and support.
Project K-Nect, an 8th Grade school project involving four high schools in North Carolina and sponsored by Qualcomm, which introduced smart phones 24/7 to students taking algebra classes and other subjects, is also an excellent example of how government, industry and schools can work together to produce exceptional student results.
http://blogs.forbes.com/ciocentral/2011/05/17/education-is-the-key-to-innovation-a-qa-with-qualcomms-irwin-jacobs/
Here is an edited version of the conversation between Pasik and Jacobs.
Pasik: Where and when did you first develop your interest in science and technology?
Jacobs: I graduated from high school in 1950, shortly after World War II, and I was always interested in math and science. Unfortunately, my guidance counselor advised me to apply to the hotel management school at Cornell. It was at Cornell that I saw that technology could indeed transform our world, and I decided to switch majors.
Pasik: What was an outstanding feature of Cornell’s program for you?
Jacobs: Cornell was sufficiently flexible to approve my transfer to electrical engineering and to encourage me to enter the engineering co-op program. I would spend one semester learning theory and the next working at Cornell Aeronautical Laboratories applying my classroom theory to real world engineering. The world was changing and change, rather than being feared, would open new opportunities.
Pasik: Linkabit was the first company you founded following 13 years as a Professor at M.I.T. and UC-San Diego. It has since fathered over 100 successful offshoot companies in San Diego. To what do you attribute Linkabit’s innovative success?
Jacobs: We quickly adopted a strategy of innovation, looking for ways in which we could make not just small improvements in a product but rather substantial changes that might open a new market, often involving theory that was just being taught at research universities. We also moved quickly from consulting to manufacturing products ourselves, including the first microprocessor-based satellite terminals for the military.
Pasik: Qualcomm is the company you are most popularly associated with, and which you co-founded after you retired from Linkabit. What drew you out of a comfortable retirement?
Jacobs: I retired from Linkabit in 1985, but I quickly found retirement was not sufficiently stimulating. I co-founded Qualcomm in July 1985, and we believed that in a world of rapid change, wireless and digital would drive many opportunities and we rapidly came up with several ideas, including CDMA, which would revolutionize modern cellular communications.
Pasik: CDMA is the primary world standard for cellular communications, but is it true this almost didn’t happen?
Jacobs: Qualcomm’s first success was OmniTRACS, a satellite tracking and communication system for the trucking industry. It was only after OmniTRACS’ success that we were able to develop CDMA. The delay was almost fatal, since the industry had voted to standardize on TDMA. We worked exceptionally hard to convince operators in the U.S. and abroad of the great value of CDMA.
Today, all the world’s third generation cell phone networks use CDMA, but it only won out because of the change created by overwhelming subscriber demand. It also showed that innovations do not automatically succeed, since many will resist change, so that persistence and leadership are critical.
Pasik: You say that leadership and persistence are critical to overcome resistance to change, but what are the greatest barriers to change?
Jacobs: Joan [his wife] and I were traveling in India, where we witnessed the large masses of very poor people. We realized, that here, there probably was an Einstein who would never have the opportunity to contribute to the world due to lack of education and opportunity. Innovation demands a curious mind, but it is an education which fuels that burning desire to understand more. If we fail to educate and excite our young people over the possibilities which innovation provides, we are cutting ourselves off from our own future.
Pasik: Does any country hold a monopoly on innovation today?
Jacobs: Innovation is not peculiar to one nation alone, nor has is it ever been loyal to any culture or creed. For example, Einstein was not born or educated in the United States, but he chose to work here after being forced from Europe to enjoy our freedom of expression and because it provided the crucible for technological creativity and free thought.
The greatest limiting factor is the availability of highly educated, curious and talented people. We must have a highly effective and inclusive educational system to continue to nourish the innovative spirit of our country.
Pasik: Why is education such an important part of this process?
Jacobs: Education provides the opening spark for young minds. Education awakens people of all ages to the possibilities and opportunities in front of us. It is not the sole responsibility of schools and universities to foster the attitude that science and math are important, but also of industry and government. For instance, the IEEE’s TryEngineering.com program, in conjunction with IBM, is a good example of how industry can get involved and provide students with the opportunity to gain hands-on participation in engineering projects. The response to the IEEE Presidents’ Change the World Competition demonstrates how receptive students are to pick up the challenge, provided they are given the right guidance and support.
Project K-Nect, an 8th Grade school project involving four high schools in North Carolina and sponsored by Qualcomm, which introduced smart phones 24/7 to students taking algebra classes and other subjects, is also an excellent example of how government, industry and schools can work together to produce exceptional student results.
http://blogs.forbes.com/ciocentral/2011/05/17/education-is-the-key-to-innovation-a-qa-with-qualcomms-irwin-jacobs/
Sunday, May 15, 2011
Faith in Vietnam Falls With Shipmaker
Frustration over Vietnamese state-run shipbuilder Vinashin's failure to repay loans it defaulted on last year is intensifying among creditors, potentially jeopardizing Vietnam's plans to draw more investment to improve its infrastructure and reduce the bottlenecks that threaten its growth.
The problems at Vinashin point to the risks of investing in what, on the face of it, is one of the world's most attractive emerging markets. Vietnam's Communist-run government built up the firm, formally known as Vietnam Shipbuilding Industry Group, to be a major player in the global shipbuilding market to compete with heavyweight manufacturers in China, South Korea and Japan. The entire $750 million proceeds of the country's first-ever sovereign bond were channeled to Vinashin in 2005.
In 2007, the government provided a letter of support for the company to enable it to secure an additional $600 million syndicated loan to make the most of a rapid economic boom in the country.
But when Vinashin defaulted on that debt last December in the aftermath of the global economic crash,, the government refused to step in to help pay off the debt, which, in an indication of the boom in emerging markets, had been bought by investors around the world. Dozens of financial institutions invested in the loan, including, among others, Standard Chartered PLC, Credit Suisse AG, Depfa Bank PLC and hedge fund Elliott Advisers Ltd.
Some of Vinashin's lenders now complain that they have been deceived. For many, the government's letter of support was the only reason they felt sufficiently secure to lend to the company. This month, a group comprising just over half the lenders' group sent a letter to Vietnam's government demanding payment on the first $60 million, which was due in December.
"This was always a government-supported loan as far as the lenders are concerned," one person familiar with the situation told The Wall Street Journal. "Going forward, capital won't go to places where it isn't treated fairly."
Officials with Vinashin and the Vietnamese government didn't respond to requests for comment.
The problems with Vinashin highlight the risks investors take when they invest in these small markets. U.S. investors seeking higher yields have poured $5.6 billion into funds that invest in emerging-market bonds so far this year, though that is about half of last year's pace.
The standoff could pose a significant threat to Vietnam's prospects. The government already is struggling to come to grips with worsening inflation. The increase in Vietnam's consumer price index hit 17.51% in April and could reach further peaks in the months to come, complicating the immediate economic outlook for the country.
At the same time, analysts say Vietnam needs to attract more foreign investments to build up overburdened road and rail networks and to build power plants to provide the energy Vietnam needs to keep its economy briskly expanding. Deputy Prime Minister Hoang Trung Hai said earlier this month at the annual Asian Development Bank meeting in Hanoi that the country hopes to attract as much as $300 billion in investment and aid to fund an infrastructure effort that he said is needed to push the country onto a more robust growth path.
Some economists say the government is trying to get its macroeconomic policy in order to help revive confidence, setting to one side its customary pro-growth policies to better combat the loss of confidence which inflation can bring. Vietnam last week scaled back its growth target for the year to 6.5% from 7% to 7.5% in an effort to focus more tightly on restraining credit growth to better contain inflation.
The authorities also are trying to restore faith in their beleaguered currency, the dong, after a series of devaluations wiped off a fifth of the Vietnamese unit's value since mid-2008. To encourage people to cooperate, black-market trade in U.S. dollars and gold, once tolerated and widespread, has been severely curtailed in recent months to force people to save and invest in dong instead.
Citigroup economist Johanna Chua notes that the dong has risen by around 2% against the dollar over the past month and that the central bank appears "on track" to meet its target of keeping credit growth below 16% this year, compared with nearly 30% in 2010. UBS, meanwhile, still includes Vietnam among its most favored frontier markets.
The Vinashin crisis, though, is an ongoing drag on Vietnam's prospects, damaging both its reputation among international lenders and potentially slowing the inflow of foreign investments that have helped drive the country's economy in recent years.
Prime Minister Nguyen Tan Dung's goal was to turn Vinashin into a manufacturing powerhouse that would keep the shipbuilding industry in state hands, but the project fell apart when the global economic crisis hit in 2008, leaving Vinashin with around $4.4 billion in debts. The company's order book was slashed, crippling its cash flow. Last summer, police investigators arrested several top officials, including former chief executive Pham Thanh Binh, and accused them of falsifying financial statements to mask the true extent of the company's problems.
Moody's Investors Service, Standard & Poor's and Fitch Ratings have all downgraded Vietnam's credit ratings in recent months, in large part because of the problems at Vinashin. The prime minister apologized for his role in Vinashin's mismanagement in a nationally televised session of the country's legislature.
Investors involved in the $600 million syndicated loan say they have been surprised by the unresponsiveness of the Vietnamese government to their concerns. Lenders have tried numerous times over the past several months to get an idea of what is happening at Vinashin. Among other things, the government has transferred some Vinashin units to other state-run enterprises without seeking the approval of the company's creditors.
The government, though, has repeatedly said that Vinashin's debts aren't the state's responsibility, leaving Vinashin's lenders unclear on how to get their money back.
In the meantime, the financial situation at Vinashin itself appears to be growing more precarious. "They're not making any money on the ships and the government is asking local banks to extend more loans and asking suppliers to lend more support," says the person familiar with the situation at Vinashin. "But you just can't tell what's going on. It's so opaque."
Write to James Hookway at james.hookway@wsj.com
http://online.wsj.com/article/SB10001424052748703864204576321241877911856.html
The problems at Vinashin point to the risks of investing in what, on the face of it, is one of the world's most attractive emerging markets. Vietnam's Communist-run government built up the firm, formally known as Vietnam Shipbuilding Industry Group, to be a major player in the global shipbuilding market to compete with heavyweight manufacturers in China, South Korea and Japan. The entire $750 million proceeds of the country's first-ever sovereign bond were channeled to Vinashin in 2005.
In 2007, the government provided a letter of support for the company to enable it to secure an additional $600 million syndicated loan to make the most of a rapid economic boom in the country.
But when Vinashin defaulted on that debt last December in the aftermath of the global economic crash,, the government refused to step in to help pay off the debt, which, in an indication of the boom in emerging markets, had been bought by investors around the world. Dozens of financial institutions invested in the loan, including, among others, Standard Chartered PLC, Credit Suisse AG, Depfa Bank PLC and hedge fund Elliott Advisers Ltd.
Some of Vinashin's lenders now complain that they have been deceived. For many, the government's letter of support was the only reason they felt sufficiently secure to lend to the company. This month, a group comprising just over half the lenders' group sent a letter to Vietnam's government demanding payment on the first $60 million, which was due in December.
"This was always a government-supported loan as far as the lenders are concerned," one person familiar with the situation told The Wall Street Journal. "Going forward, capital won't go to places where it isn't treated fairly."
Officials with Vinashin and the Vietnamese government didn't respond to requests for comment.
The problems with Vinashin highlight the risks investors take when they invest in these small markets. U.S. investors seeking higher yields have poured $5.6 billion into funds that invest in emerging-market bonds so far this year, though that is about half of last year's pace.
The standoff could pose a significant threat to Vietnam's prospects. The government already is struggling to come to grips with worsening inflation. The increase in Vietnam's consumer price index hit 17.51% in April and could reach further peaks in the months to come, complicating the immediate economic outlook for the country.
At the same time, analysts say Vietnam needs to attract more foreign investments to build up overburdened road and rail networks and to build power plants to provide the energy Vietnam needs to keep its economy briskly expanding. Deputy Prime Minister Hoang Trung Hai said earlier this month at the annual Asian Development Bank meeting in Hanoi that the country hopes to attract as much as $300 billion in investment and aid to fund an infrastructure effort that he said is needed to push the country onto a more robust growth path.
Some economists say the government is trying to get its macroeconomic policy in order to help revive confidence, setting to one side its customary pro-growth policies to better combat the loss of confidence which inflation can bring. Vietnam last week scaled back its growth target for the year to 6.5% from 7% to 7.5% in an effort to focus more tightly on restraining credit growth to better contain inflation.
The authorities also are trying to restore faith in their beleaguered currency, the dong, after a series of devaluations wiped off a fifth of the Vietnamese unit's value since mid-2008. To encourage people to cooperate, black-market trade in U.S. dollars and gold, once tolerated and widespread, has been severely curtailed in recent months to force people to save and invest in dong instead.
Citigroup economist Johanna Chua notes that the dong has risen by around 2% against the dollar over the past month and that the central bank appears "on track" to meet its target of keeping credit growth below 16% this year, compared with nearly 30% in 2010. UBS, meanwhile, still includes Vietnam among its most favored frontier markets.
The Vinashin crisis, though, is an ongoing drag on Vietnam's prospects, damaging both its reputation among international lenders and potentially slowing the inflow of foreign investments that have helped drive the country's economy in recent years.
Prime Minister Nguyen Tan Dung's goal was to turn Vinashin into a manufacturing powerhouse that would keep the shipbuilding industry in state hands, but the project fell apart when the global economic crisis hit in 2008, leaving Vinashin with around $4.4 billion in debts. The company's order book was slashed, crippling its cash flow. Last summer, police investigators arrested several top officials, including former chief executive Pham Thanh Binh, and accused them of falsifying financial statements to mask the true extent of the company's problems.
Moody's Investors Service, Standard & Poor's and Fitch Ratings have all downgraded Vietnam's credit ratings in recent months, in large part because of the problems at Vinashin. The prime minister apologized for his role in Vinashin's mismanagement in a nationally televised session of the country's legislature.
Investors involved in the $600 million syndicated loan say they have been surprised by the unresponsiveness of the Vietnamese government to their concerns. Lenders have tried numerous times over the past several months to get an idea of what is happening at Vinashin. Among other things, the government has transferred some Vinashin units to other state-run enterprises without seeking the approval of the company's creditors.
The government, though, has repeatedly said that Vinashin's debts aren't the state's responsibility, leaving Vinashin's lenders unclear on how to get their money back.
In the meantime, the financial situation at Vinashin itself appears to be growing more precarious. "They're not making any money on the ships and the government is asking local banks to extend more loans and asking suppliers to lend more support," says the person familiar with the situation at Vinashin. "But you just can't tell what's going on. It's so opaque."
Write to James Hookway at james.hookway@wsj.com
http://online.wsj.com/article/SB10001424052748703864204576321241877911856.html
Monday, May 9, 2011
CEO pay - You may think it is Ridiculous, but it is really TRUE
I just read a CEO compensation report in WSJ. I captured a screenshot in WSJ's website. It is really interesting when you look at my red square box. Will you invest in a company whose CEO only earns less than 10k per month and whose profit is billion dollar, or in a company whose CEO earns a million dollar but whose profit is just in million?
Macroeconomic Uncertainties
AFTER more than a quarter-century as a professional economist, I have a confession to make: There is a lot I don’t know about the economy. Indeed, the area of economics where I have devoted most of my energy and attention — the ups and downs of the business cycle — is where I find myself most often confronting important questions without obvious answers.
Now, if you follow economic commentary in the newspapers or the blogosphere, you have probably not run into many humble economists. By its nature, punditry craves attention, which is easier to attract with certainties than with equivocation.
But that certitude reflects bravado more often than true knowledge. So let me come clean and highlight three questions that perplex me. The answers to them may well shape the economy in the years to come.
How long will it take for the economy’s wounds to heal?
When President Obama took office in 2009, his economic team projected a quick recovery from the recession the nation was experiencing. The administration’s first official forecast said economic growth, computed from fourth quarter to fourth quarter, would average 3.5 percent in 2010 and 4.4 percent in 2011. Unemployment was supposed to fall to 7.7 percent by the end of 2010 and to 6.8 percent by the end of 2011.
The reality has turned out not nearly as rosy. Growth was only 2.8 percent last year, and the first quarter of this year came in at a meager rate of 1.8 percent. Unemployment, meanwhile, lingers well above 8 percent, and according to Ben S. Bernanke, the Federal Reserve chairman, is expected to keep doing so throughout this year.
Economists will long debate whether President Obama’s policies are to blame or the patient was just sicker than his economists realized. But there is no doubt that the pace of this recovery will come nowhere close to matching the one achieved after the last deep recession, when President Ronald Reagan presided over a fall in the unemployment rate from 10.8 percent in December 1982 to 7.3 percent two years later.
Looking ahead, an open issue is whether the recession will leave scars that prevent a return to jobless rates that were considered normal just a few years ago. A striking feature of today’s labor market is the rise of long-term joblessness. The average duration of unemployment is now almost 40 weeks, about twice what it reached in previous recessions. The long-term unemployed may well lose job skills and find their future prospects permanently impaired. But because we are in uncharted waters, it is hard for anyone to be sure.
How long will inflation expectations remain anchored?
In 1967, Milton Friedman gave an address to the American Economic Association with this simple but profound message: The inflation rate that the economy gets is, in large measure, based on the inflation rate that people expect. When everyone expects high inflation, workers bargain hard for wage increases, and companies push prices higher to keep up with the projected cost increases. When everyone expects inflation to be benign, workers and companies are less aggressive. In short, the perception of inflation — or of the lack of it — creates the reality.
Although novel when Professor Friedman proposed it, his theory is now textbook economics, and is at the heart of Federal Reserve policy. Fed policy makers are keeping interest rates low, despite soaring commodity prices. Why? Inflation expectations are “well anchored,” we are told, so there is no continuing problem with inflation. Rising gasoline prices are just a transitory blip.
They are probably right, but there is still reason to wonder. Even if expectations are as important as the conventional canon presumes, it isn’t obvious what determines those expectations. Are people merely backward-looking, extrapolating recent experience into the future? Or are the expectations based on the credibility of policy makers? And if credibility matters, how is it established? Are people making rational judgments, or are they easily overcome by fear and influenced by extraneous events?
Mr. Bernanke and his team may learn that, in turbulent times, expectations can become unmoored more easily than they think.
How long will the bond market trust the United States?
A remarkable feature of current financial markets is their willingness to lend to the federal government on favorable terms, despite a huge budget deficit, a fiscal trajectory that everyone knows is unsustainable and the failure of our political leaders to reach a consensus on how to change course. This can’t go on forever — that much is clear.
Less obvious, however, is how far we are from the day of reckoning.
Winston Churchill famously remarked that “Americans can always be counted on to do the right thing, after they have exhausted all other possibilities.” That seems to capture the attitude of the bond market today. It trusts our leaders to get the government’s fiscal house in order, eventually, and is waiting patiently while they exhaust the alternatives.
But such confidence in American rectitude will not last forever. The more we delay, the bigger the risk that we follow the path of Greece, Ireland and Portugal. I don’t know how long we have before the bond market turns on the United States, but I would prefer not to run the experiment to find out.
•
So those are the three questions that puzzle me most as I read the daily news. If you find an economist who says he knows the answers, listen carefully, but be skeptical of everything you hear.
http://www.nytimes.com/2011/05/08/business/economy/08view.html
Now, if you follow economic commentary in the newspapers or the blogosphere, you have probably not run into many humble economists. By its nature, punditry craves attention, which is easier to attract with certainties than with equivocation.
But that certitude reflects bravado more often than true knowledge. So let me come clean and highlight three questions that perplex me. The answers to them may well shape the economy in the years to come.
How long will it take for the economy’s wounds to heal?
When President Obama took office in 2009, his economic team projected a quick recovery from the recession the nation was experiencing. The administration’s first official forecast said economic growth, computed from fourth quarter to fourth quarter, would average 3.5 percent in 2010 and 4.4 percent in 2011. Unemployment was supposed to fall to 7.7 percent by the end of 2010 and to 6.8 percent by the end of 2011.
The reality has turned out not nearly as rosy. Growth was only 2.8 percent last year, and the first quarter of this year came in at a meager rate of 1.8 percent. Unemployment, meanwhile, lingers well above 8 percent, and according to Ben S. Bernanke, the Federal Reserve chairman, is expected to keep doing so throughout this year.
Economists will long debate whether President Obama’s policies are to blame or the patient was just sicker than his economists realized. But there is no doubt that the pace of this recovery will come nowhere close to matching the one achieved after the last deep recession, when President Ronald Reagan presided over a fall in the unemployment rate from 10.8 percent in December 1982 to 7.3 percent two years later.
Looking ahead, an open issue is whether the recession will leave scars that prevent a return to jobless rates that were considered normal just a few years ago. A striking feature of today’s labor market is the rise of long-term joblessness. The average duration of unemployment is now almost 40 weeks, about twice what it reached in previous recessions. The long-term unemployed may well lose job skills and find their future prospects permanently impaired. But because we are in uncharted waters, it is hard for anyone to be sure.
How long will inflation expectations remain anchored?
In 1967, Milton Friedman gave an address to the American Economic Association with this simple but profound message: The inflation rate that the economy gets is, in large measure, based on the inflation rate that people expect. When everyone expects high inflation, workers bargain hard for wage increases, and companies push prices higher to keep up with the projected cost increases. When everyone expects inflation to be benign, workers and companies are less aggressive. In short, the perception of inflation — or of the lack of it — creates the reality.
Although novel when Professor Friedman proposed it, his theory is now textbook economics, and is at the heart of Federal Reserve policy. Fed policy makers are keeping interest rates low, despite soaring commodity prices. Why? Inflation expectations are “well anchored,” we are told, so there is no continuing problem with inflation. Rising gasoline prices are just a transitory blip.
They are probably right, but there is still reason to wonder. Even if expectations are as important as the conventional canon presumes, it isn’t obvious what determines those expectations. Are people merely backward-looking, extrapolating recent experience into the future? Or are the expectations based on the credibility of policy makers? And if credibility matters, how is it established? Are people making rational judgments, or are they easily overcome by fear and influenced by extraneous events?
Mr. Bernanke and his team may learn that, in turbulent times, expectations can become unmoored more easily than they think.
How long will the bond market trust the United States?
A remarkable feature of current financial markets is their willingness to lend to the federal government on favorable terms, despite a huge budget deficit, a fiscal trajectory that everyone knows is unsustainable and the failure of our political leaders to reach a consensus on how to change course. This can’t go on forever — that much is clear.
Less obvious, however, is how far we are from the day of reckoning.
Winston Churchill famously remarked that “Americans can always be counted on to do the right thing, after they have exhausted all other possibilities.” That seems to capture the attitude of the bond market today. It trusts our leaders to get the government’s fiscal house in order, eventually, and is waiting patiently while they exhaust the alternatives.
But such confidence in American rectitude will not last forever. The more we delay, the bigger the risk that we follow the path of Greece, Ireland and Portugal. I don’t know how long we have before the bond market turns on the United States, but I would prefer not to run the experiment to find out.
•
So those are the three questions that puzzle me most as I read the daily news. If you find an economist who says he knows the answers, listen carefully, but be skeptical of everything you hear.
http://www.nytimes.com/2011/05/08/business/economy/08view.html
Thursday, May 5, 2011
Is your emerging-market strategy local enough?
The diversity and dynamism of China, India, and Brazil defy any one-size-fits-all approach. But by targeting city clusters within them, companies can seize growth opportunities.
Creating a powerful emerging-market strategy has moved to the top of the growth agendas of many multinational companies, and for good reason: in 15 years’ time, 57 percent of the nearly one billion households with earnings greater than $20,0001 a year will live in the developing world. Seven emerging economies—China, India, Brazil, Mexico, Russia, Turkey, and Indonesia—are expected to contribute about 45 percent of global GDP growth in the coming decade. Emerging markets will represent an even larger share of the growth in product categories, such as automobiles, that are highly mature in developed economies.Figures like these create a real sense of urgency among many multinationals, which recognize that they aren’t currently tapping into those growth opportunities with sufficient speed or scale. Even China, forecast to create over half of all GDP growth in those seven developing economies, remains a relatively small market for most multinational corporations—5 to 10 percent of global sales; often less in profits.
To accelerate growth in China, India, Brazil, and other large emerging markets, it isn’t enough, as many multinationals do, to develop a country-level strategy. Opportunities in these markets are also rapidly moving beyond the largest cities, often the focus of many of these companies. For sure, the top cities are important: by 2030, Mumbai’s economy, for example, is expected to be larger than Malaysia’s is today. Even so, Mumbai would in that year represent only 5 percent of India’s economy and the country’s 14 largest cities, 24 percent. China has roughly 150 cities with at least one million inhabitants. Their population and income characteristics are so different and changing so rapidly that our forecasts for their consumption of a given product category, over the next five to ten years, can range from a drop in sales to growth five times the national average.
Understanding such variability can help companies invest more shrewdly and ahead of the competition rather than following others into the fiercest battlefields. Consider Brazil’s São Paulo state, where the economy is larger than all of Argentina’s, competitive intensity is high, and retail prices are lower than elsewhere in the country. By contrast, in Brazil’s northeast—the populous but historically poorest part of the country—the economy is growing much faster, competition is lighter, and prices are higher. Multinationals short on granular insights and capabilities tended to flock to São Paulo and to miss the opportunities in the northeast. It’s only recently that they’ve started investing heavily there—trying to catch up with regional companies in what is often described as Brazil’s “new growth frontier.”
As developing economies become increasingly diverse and competitive, multinationals will need strategic approaches to understand such variance within countries and to concentrate resources on the most promising submarkets—perhaps 20, 30, or 40 different ones within a country. Of course, most leading corporations have learned to address different markets in Europe and the United States. But in the emerging world, there is a compelling case for learning the ropes much faster than most companies feel comfortable doing.
The appropriate strategic approach will depend on the characteristics of a national market (including its stage of urbanization), as well as a company’s size, position, and aspirations in it. In this article, we explore in detail a “city cluster” approach, which targets groups of relatively homogenous, fast-growing cities in China. In India, where widespread urbanization is still gaining steam, we briefly look at similar ways of gaining substantial market coverage in a cost-effective way. Finally, in Brazil we quickly describe how growth is becoming more geographically dispersed and what that means for growth strategies.
Targeting the right city clusters in China
By segmenting Chinese cities according to such factors as industry structure, demographics, scale, geographic proximity, and consumer characteristics, we identified 22 city clusters, each homogenous enough to be considered one market for strategic decision making (Exhibit 1). Prioritizing several clusters or sequencing the order in which they are targeted can help a company boost the effectiveness of its distribution networks, supply chains, sales forces, and media and marketing strategies.
For additional detail from the authors about this exhibit, see “A Better Approach to China’s Markets,” from the March 2010 issue of the Harvard Business Review.
More specifically, this approach can help companies to address opportunities in attractive smaller cities cost effectively and to spot opportunities for, among other things, expanding within rather than across clusters (Exhibit 2)—a strategy that requires a less complex supply chain and fewer partners. Companies that nonetheless want to expand across clusters may find it easier to target 50 to 100 similar cities within four or five big clusters than cities that theoretically offer the same market opportunity but are dispersed widely across the country.
Another major benefit of concentrating resources on certain clusters is the opportunity to exploit scale and network effects that stimulate faster, more profitable growth. Because most brands still have a relatively short history in China, for example, word of mouth plays a much greater role there than it does in developed economies. By focusing on attaining substantial market share in a cluster, a brand can unleash a virtuous cycle: once it reaches a tipping point there—usually at least a 10 to 15 percent market share—its reputation is quickly boosted by word of mouth from additional users, helping it to win yet more market share without necessarily spending more on marketing.
Here are four important tips to keep in mind when designing a city cluster strategy for China.
Focus on cluster size, not city size
It’s easy to be dazzled by the size of the biggest cities, but trying to cover all of them is less effective for the simple reason that they can be very far from one another. Although Chengdu, Xi’an, and Wuhan, for example, are among the ten largest cities in China, each of them is about 1,000 kilometers away from any of the others. In Shandong province, the biggest city is Jinan, which is barely in the top 20. Yet Shandong has 21 cities among China’s 150 largest, which makes the area one of the five most attractive city clusters. Its GDP is about four times bigger than that of the cluster of cities around and including Xi’an, as well as three times bigger than the cluster of cities surrounding Chengdu.Look beyond historical growth rates
The growth of incomes and product categories is another variable that must be treated in granular fashion. Extrapolating future trends from historical patterns is particularly suspect—however detailed that history may be—because consumer spending habits change so rapidly once wealth rises.In some clusters, many people are starting to buy their first low-end domestic cars; in others, they are upgrading to imports or even to luxury brands. We expect sales of SUVs to increase at a 20 percent compound annual growth rate nationwide in the next four years, for example, but to grow as quickly as 50 percent in several cities and, potentially, even to decline in some where penetration is already deep. Similar or even sharper variance held true in almost every service or product category we analyzed, from face moisturizers to chicken burgers to flat-screen TVs. Yogurt sales in some cities are growing eight times faster than the national average.
The Shenzhen cluster has the highest share (90 percent) of middle class households—those earning over $9,000 a year. In other clusters, such as Nanchang and Changchun–Harbin, more than half of all households are still poor. As a result, people in the Shenzhen cluster are already active consumers of many categories, and the potential for growth is fairly limited. In the poorer clusters, many categories are just emerging, as larger numbers of people pass the threshold at which more goods become affordable. From a strategic viewpoint, the richer cluster could still be a major growth market for premiumgoods but not for most mass-market ones.
Don’t be fooled by generalities
Talking about Chinese consumers and how they shop is a bit like talking about European consumers. While some generalizations may be fair, certain very strong differences, even within regions, go well beyond the already significant economic variance. Guangzhou and Shenzhen, for example, are both tier-one cities, located in the same province and just two hours apart. But Guangzhou’s people mainly speak Cantonese, are mostly locally born, and like to spend time at home with family and friends. In contrast, more than 80 percent of Shenzhen’s residents are young migrants, from all across the country, who mainly speak Mandarin and spend most of their time away from their homes. To be effective, marketers will probably have to differentiate their campaigns and emphasize different channels when reaching out to the people in these two cities. That’s why we suggest managing them in different clusters, despite their proximity.The need to localize marketing activities also results from the limited reach of national media. China has over 3,000 TV channels, but just a few are available across the country. In some areas, only around 5 percent of consumers watch national television. Other media, such as newspapers and radio (and of course billboards), are even more local.
Very few companies can craft their entire strategy at the level of a cluster—those that do are usually its regional champions. But with differences such as the following common, some tailoring is critical:
- Every second consumer in Shandong believes that well-known brands are always of higher quality, and 30 percent are willing to stretch their budgets to pay a premium for the better product. In south Jiangsu, only a quarter of consumers preferred the well-known brands, and only 16 percent were willing to pay a premium for them.
- In the Shenzhen cluster, 38 percent of food and beverage shoppers found suggestions from in-store promoters to be a credible source of information, compared with only 12 percent in Nanjing.
- In Shanghai, 58 percent of residents shop for apparel in department stores, compared with only 27 percent of Beijing residents.
Allow your clusters to be flexible
Some companies may want to merge or divide clusters for strategic-management purposes. A company could, for instance, merge geographically nearby clusters, such as Guangzhou and Shenzhen or Chengdu and Chongqing, if its supply chain was well positioned to manage these proximate clusters as one. Other companies, highly driven by the media market, would find it sensible to split the Shanghai cluster into subclusters, because some markets within it are still quite different in their TV habits and other choices. By contrast, people in certain clusters, such as Chengdu or Guangzhou, watch similar TV shows across the entire cluster, so intracluster expansion allows companies to make more effective use of the media spending needed to attract consumers in the big cities.The actual number of submarkets a company opts for will depend in practice on its needs. That number should be manageable—most likely, 20 to 40. Fewer wouldn’t be likely to produce the required degree of granularity, though a company might have logistical reasons for taking this approach. More would probably be too many to run effectively.
Cost-effective market coverage in India
Often, the challenges of accessing consumption growth cost effectively are even greater in India than in China because India is less urbanized and at an earlier stage of its economic development. Companies would need to reach up to 3,500 towns and 334,000 villages, for example, to pursue opportunities in the 10 (of 28) Indian states that by 2030 will account for 73 percent of the country’s GDP and 62 percent of the urban population.To allocate financial and human resources smartly and make things more manageable, companies need to walk away from averages and adopt more granular approaches. Some companies will be well served by focusing on 12 clusters around India’s 14 largest cities. Those clusters will provide access to as much as 60 percent of the country’s urban GDP by 2030, when the 14 largest cities are likely to account for 24 percent of GDP.
True, India’s major clusters won’t cover as much of the economy as those in China, where they will encompass 92 percent of urban GDP by 2015. Yet a hub-and-spoke approach in India should provide similar opportunities to optimize supply chains, as well as sales and marketing networks. An established technology player formerly operated in 120 cities all over India, for example. Recently, it shifted to focusing on eight clusters with a total of 67 cities, which still gave it access to 70 percent of its potential market. One benefit: customer service costs fell from a rapidly growing 9 to 10 percent of sales to a more acceptable 5 percent (Exhibit 3).
Alternatively, a company might improve the economics of its Indian business by focusing on a handful of states, an approach recently adopted by a retailer that had previously been pursuing a national footprint. Another company, this one in the consumer goods sector, recently decided to pursue opportunities in eight cities where consumers earn over $2,500 a year—more than twice the average for India—and the retail infrastructure suits its products nicely. Without this more granular analysis, the multinational would have stayed on the sidelines in the mistaken belief that Indian consumers weren’t ready for its products. It would therefore have missed the opportunity to challenge a competitor rapidly gaining the lead in those markets.
Seizing new regional opportunities in Brazil
In contrast to China and India, Brazil has been open to multinationals for decades. But during much of that time, most large companies in sectors such as consumer packaged goods focused on the southern (and most affluent) parts of the country. With just over half of the national population, this region includes São Paulo city and state, Brazil’s financial and industrial center.As economic growth accelerated in recent years, many consumers started upgrading to more sophisticated products. But growth has also been moving beyond the south and a few large cities, becoming more geographically dispersed. In the populous northeast, for example, income per capita is only half of its level in São Paulo, but the economy is growing faster than it is elsewhere in Brazil. Succeeding in new regions like the northeast requires a fresh approach for many companies. Consider the following:
- Many global companies still make the mistake of doing their consumer research in São Paulo when they are designing new products or national marketing campaigns for Brazil. They don’t realize that cosmopolitan São Paulo probably has more in common culturally with New York than with any other city in Brazil.
- Modern-format stores account for 70 percent of retailing in Brazil overall, but for only 55 percent in the northeast. To reach thousands of small (and often capital-constrained) outlets spread all over the region, packaged-goods companies must develop third-party networks specializing in frequent deliveries of goods and small drop sizes. What’s more, in Brazil as a whole, many consumer goods companies found that they had focused too much on hypermarkets when designing assortments and promotions. One company, for example, discovered that Brazil’s expanding drugstore chains were the fastest-growing channel for personal-care and beauty products. Some leading consumer goods companies have now created specialized organizations that execute distinct channel strategies in different regions and categories, with tailored product portfolios and displays.
- Many packaged-goods companies see detergent powders as a developed category in Brazil. But relatively affluent consumers there are upgrading to larger and more sophisticated washing machines, and many consumers in the northeast are buying their first fully automated machines. New detergent formulas therefore have enormous potential—annual consumption in the northeast is less than half of what it is in the south. Seizing this opportunity requires an understanding of the regional consumer, however, particularly pack size preferences (Exhibit 4). Consumers in the northeast also want a strong perfume and great quantities of foam but care less about whitening power.
There is no one-size-fits-all strategy for capturing consumer growth in emerging markets. What’s clear, though, is that traditional country strategies and other aggregated approaches will miss the mark because they can’t account for the variability and rapid change in these markets. As the battle for the wallet of the emerging-market consumer shifts into higher gear, companies that think about growth opportunities at a more granular level have a better chance of winning.
McKinsey on Finance on iPad
https://www.mckinseyquarterly.com/Is_your_emerging_market_strategy_local_enough_2790
'Spousonomics': All's Fair in Love and Economics
In Spousonomics: Using Economics to Master Love, Marriage, and Dirty Dishes, Paula Szuchman and Jenny Anderson offer an amusing attempt to solve some of love's stickiest issues by applying the precision of economics to the messiness of relationships.
"At its core, economics is ... the study of how people, companies, and societies allocate scarce resources," Szuchman and Anderson say, "which happens to be the same puzzle you and your spouse are perpetually trying to solve: how to spend your limited time, energy, money, and libido in ways that keep you smiling and your marriage thriving.... The trick is to a) boost those precious resources and b) allocate them more intelligently. Do that, and before you know it, you'll be on your way to a better return on your marriage."
The authors don't just make things up. Szuchman, a page one editor at The Wall Street Journal, and Anderson, a New York Times reporter who spent years covering Wall Street, logged countless hours interviewing economists, psychologists and hundreds of couples coast-to-coast. They thank United Sample for helping them survey roughly 1,000 people nationwide to come up with what they refer to as their "Exhausting, Groundbreaking, and Very Expensive Marriage Survey." And they clearly did their homework -- on everything from Holland's tulip craze to the Cuban missile crisis.
Whether the book's insights could save a faltering marriage is up for debate, but it is a fun read. Economists "turned out to be a surprisingly romantic bunch," the authors write, and they discover that economics offers "dispassionate, logical solutions" to "thorny, illogical, and highly emotional" domestic disputes. "When it was all over, we were convinced: Economics is the surest route to marital bliss."
To prove it, the authors structure each chapter around a different economic theme and then use case studies to show how various economic principles apply to marriage. Some attempts, such as plotting sex along a supply and demand curve, come off as a bit of a stretch. Other juxtapositions spark fresh insights and might even inspire a practical solution or two. Szuchman and Anderson use division of labor, for example, to take a clear-eyed look at how couples should most effectively divide household chores. They remind us that being loss averse may lead to irrational or unproductive decisions and that trade-offs are part of life -- get used to it.
In both language and concept, the book ricochets from economic jargon to down-and-dirty dishing about sex, sometimes struggling to connect the two. Case in point: Do Szuchman and Anderson really believe that sex is "merely a function of supply and demand" and that couples can boost the amount of sex they have by bringing its cost down?
"By the 'cost' of sex, we don't mean the literal cost of paying for sex," they say. "We mean what it costs you, as in what you have to give up to get it -- the fifteen minutes of sleep you'll miss out on, the emails you won't have time to reply to, the last-minute run to the supermarket to make sure little Johnny's lunch is stocked with organic applesauce." From an economic standpoint, when the cost of sex goes up, the demand for it goes down, they argue. The solution: "Lower the costs. Do that, and the quantity demanded will rise almost instantly."
Likewise, there is a chapter comparing economic bubbles to new love's giddy infatuation. In economics, bubbles occur when the price of something rises far above its actual worth. This is exactly what couples do early in their relationship, Spousonomics argues: They over-value each other. They become blind to each other's faults. They don't heed warning signs that, in hindsight, should have been obvious.
Marriage as a Business
Still, even when the analogies are a reach, the unexpected comparisons provide surprising food for thought. In the chapter on bubbles, for example, Szuchman and Anderson offer one economist's views about how to approach recovery after the bubble bursts. Austrian economist Joseph Schumpeter argued that bubbles are necessary for the economy, opening it up to a cycle of "creative destruction" that allows the economy to revitalize itself and become more vibrant and productive. So bubbles are actually a good thing. The same principle could be applied to marriage, the authors argue. Disillusionment is painful, but sometimes a process of death and rebirth is required for a relationship to grow. "In other words, you can't spackle the holes in the wall and cover them with pictures," they write. "Sometimes you need to tear the wall down entirely and rebuild it from scratch."
Occasionally, Spousonomics offers economic insights that not only make sense but might actually help a marriage work better. The chapter on division of labor, for example, points out that couples who divide household chores using the theory of comparative advantage might be better off than those who split duties straight down the middle.
Comparative advantage is the cornerstone of free trade. It says that countries should specialize in whatever good they produce most efficiently and trade for the rest. Marriage can also benefit from such division. "Think of marriage as a business comprising two partners," the authors write. "You're not only business partners in the sense that you work together for the good of your company, you're also trading partners who exchange services, often in the form of household chores. How should you decide who does what?"
For centuries, marriage divided its labor and thrived from specialization, the authors assert. Husbands and wives had very specific roles and a very clear division of duties. But as the economy changed, technology advanced, and women entered the workforce, the balance changed. According to Wharton business and public policy professors Betsey Stevenson and Justin Wolfers, marriage began to shift from "a forum for shared production to shared consumption."
Of course, that shift has made it difficult to decide who should do the dishes. In one case study, a couple named Eric and Nancy decided it would be fair to divvy up all the housework 50/50. They rotated everything: walking the dog, paying the bills, doing the laundry, cleaning the bathroom. They both did it all -- and resented each other as a result. Finally, after the bickering and score-keeping became unbearable, they decided to divvy up the chores based on comparative advantage -- and both saved time as a result.
"Like two countries, married people also exchange goods and services, and each also brings to the table a different set of abilities and interests. By figuring out which of them has the comparative advantage in a range of tasks, from dishes to dog walking to bulb planting, Eric and Nancy could then decide who would specialize in what," Szuchman and Anderson write. "Life need not be a fifty/fifty split for each person to be happy. It could be sixty/forty, or seventy/thirty, or even ninety-nine/one, depending on the people, the situation, and the willingness to put away the calculator and give and take based on what really works best rather than what we think should work best."
Loss aversion is another economic concept the authors tie successfully to marriage. Economists have found that people act irrationally in the face of loss -- even the possibility of loss. In fact, people hate losing more than they love winning, the authors write: According to economists, losing hurts twice as much as winning excites. Look no further than the stock market for proof: The financial press is filled with tales of hapless traders who make risky bets to recoup small losses.
"Here's the punch line," Szuchman and Anderson write: "Loss aversion is messing with your marriage. When loss aversion kicks in, you're liable to stay up all night arguing because you don't want to lose a fight. You'll refuse to compromise because it means giving up what you want. You won't apologize because you don't want to lose face. And you'll fail to appreciate the good stuff that's right in front of your because all you can think about is how much more fun married life used to be."
Making Trade-Offs
Sometimes people may feel that they are losing something based simply upon how a choice is presented. In an experiment, psychologists Daniel Kahneman and Amos Tversky found that people would make different choices depending upon how a question was asked.
The researchers created a scenario about a disease outbreak that was expected to kill 600 people, and asked test subjects to choose between two plans: Plan A had a 100% chance of saving 200 people; Plan B had a one-third chance of saving 600 lives but a 2/3 chance of saving no one. Seventy-two percent chose Plan A.
Then the researchers offered two new plans: Plan A had a 100% chance that 400 people would die; Plan B had a 1/3 chance of no one dying and 2/3 chance that everyone would die. The plans are exactly the same, but in the second round, 78% of test subjects chose plan B.
"The first presents the options in terms of who lives and the second in terms of who dies -- in other words, as potential gains or potential losses. Invariably, subjects gravitated toward the gains," the authors write. For marriage, the conclusion is clear. "Frame a choice differently and you might change your mind about which path to take. You might also feel more open to compromise. That's because our willingness to compromise has a lot to do with whether we think we're losing or whether we see the potential for a gain."
Reframing one's perspective on marriage is hard, especially when both parties have invested heavily in their own positions. But again, there is an economic fix. "Economists would argue that fixating on past investments -- or what's known as 'sunk costs' -- when weighing what to do in the future is a waste of time," Szuchman and Anderson point out. "Sunk costs are just what they sound like: sunk, buried, kaput, finito. Let them go, a wise economist would say, focus on future costs and benefits, not money you've spent and can't get back."
Ultimately, both marriage and economics are filled with trade-offs. The classic example is the choice between guns and butter. The more a country spends on national security, in other words, the less it has to spend on goods. Marriage is also a game of trade-offs, and sometimes they aren't fair.
In one case study, Gus seethes about having to take on all of the housework and parenting duties while his wife Abby goes through medical school. The nine-year haul seemed unfair to Gus, but he stuck it out because he knew that long-term it would pay off. In other words, he managed to think like an economist.
"Economists say that in a market economy, people inevitably face trade-offs between equity -- or what's fair -- and efficiency, or the optimal allocation of resources," the authors write. "The problem with fixating on life's unfairness is that it precludes our ability to think clearly about trade-offs, which can lead to very inefficient outcomes. The solution: Get over it. Not exactly a high-concept solution, but the only way to tackle inequity aversion is to will it away -- to recognize that the more time you spend in an it's-not-fair mentality, the less time you have to calculate the long-term benefits of a trade-off, for tallying up the short-term costs, and, ultimately, for finding solutions."
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2766
"At its core, economics is ... the study of how people, companies, and societies allocate scarce resources," Szuchman and Anderson say, "which happens to be the same puzzle you and your spouse are perpetually trying to solve: how to spend your limited time, energy, money, and libido in ways that keep you smiling and your marriage thriving.... The trick is to a) boost those precious resources and b) allocate them more intelligently. Do that, and before you know it, you'll be on your way to a better return on your marriage."
The authors don't just make things up. Szuchman, a page one editor at The Wall Street Journal, and Anderson, a New York Times reporter who spent years covering Wall Street, logged countless hours interviewing economists, psychologists and hundreds of couples coast-to-coast. They thank United Sample for helping them survey roughly 1,000 people nationwide to come up with what they refer to as their "Exhausting, Groundbreaking, and Very Expensive Marriage Survey." And they clearly did their homework -- on everything from Holland's tulip craze to the Cuban missile crisis.
Whether the book's insights could save a faltering marriage is up for debate, but it is a fun read. Economists "turned out to be a surprisingly romantic bunch," the authors write, and they discover that economics offers "dispassionate, logical solutions" to "thorny, illogical, and highly emotional" domestic disputes. "When it was all over, we were convinced: Economics is the surest route to marital bliss."
To prove it, the authors structure each chapter around a different economic theme and then use case studies to show how various economic principles apply to marriage. Some attempts, such as plotting sex along a supply and demand curve, come off as a bit of a stretch. Other juxtapositions spark fresh insights and might even inspire a practical solution or two. Szuchman and Anderson use division of labor, for example, to take a clear-eyed look at how couples should most effectively divide household chores. They remind us that being loss averse may lead to irrational or unproductive decisions and that trade-offs are part of life -- get used to it.
In both language and concept, the book ricochets from economic jargon to down-and-dirty dishing about sex, sometimes struggling to connect the two. Case in point: Do Szuchman and Anderson really believe that sex is "merely a function of supply and demand" and that couples can boost the amount of sex they have by bringing its cost down?
"By the 'cost' of sex, we don't mean the literal cost of paying for sex," they say. "We mean what it costs you, as in what you have to give up to get it -- the fifteen minutes of sleep you'll miss out on, the emails you won't have time to reply to, the last-minute run to the supermarket to make sure little Johnny's lunch is stocked with organic applesauce." From an economic standpoint, when the cost of sex goes up, the demand for it goes down, they argue. The solution: "Lower the costs. Do that, and the quantity demanded will rise almost instantly."
Likewise, there is a chapter comparing economic bubbles to new love's giddy infatuation. In economics, bubbles occur when the price of something rises far above its actual worth. This is exactly what couples do early in their relationship, Spousonomics argues: They over-value each other. They become blind to each other's faults. They don't heed warning signs that, in hindsight, should have been obvious.
Marriage as a Business
Still, even when the analogies are a reach, the unexpected comparisons provide surprising food for thought. In the chapter on bubbles, for example, Szuchman and Anderson offer one economist's views about how to approach recovery after the bubble bursts. Austrian economist Joseph Schumpeter argued that bubbles are necessary for the economy, opening it up to a cycle of "creative destruction" that allows the economy to revitalize itself and become more vibrant and productive. So bubbles are actually a good thing. The same principle could be applied to marriage, the authors argue. Disillusionment is painful, but sometimes a process of death and rebirth is required for a relationship to grow. "In other words, you can't spackle the holes in the wall and cover them with pictures," they write. "Sometimes you need to tear the wall down entirely and rebuild it from scratch."
Occasionally, Spousonomics offers economic insights that not only make sense but might actually help a marriage work better. The chapter on division of labor, for example, points out that couples who divide household chores using the theory of comparative advantage might be better off than those who split duties straight down the middle.
Comparative advantage is the cornerstone of free trade. It says that countries should specialize in whatever good they produce most efficiently and trade for the rest. Marriage can also benefit from such division. "Think of marriage as a business comprising two partners," the authors write. "You're not only business partners in the sense that you work together for the good of your company, you're also trading partners who exchange services, often in the form of household chores. How should you decide who does what?"
For centuries, marriage divided its labor and thrived from specialization, the authors assert. Husbands and wives had very specific roles and a very clear division of duties. But as the economy changed, technology advanced, and women entered the workforce, the balance changed. According to Wharton business and public policy professors Betsey Stevenson and Justin Wolfers, marriage began to shift from "a forum for shared production to shared consumption."
Of course, that shift has made it difficult to decide who should do the dishes. In one case study, a couple named Eric and Nancy decided it would be fair to divvy up all the housework 50/50. They rotated everything: walking the dog, paying the bills, doing the laundry, cleaning the bathroom. They both did it all -- and resented each other as a result. Finally, after the bickering and score-keeping became unbearable, they decided to divvy up the chores based on comparative advantage -- and both saved time as a result.
"Like two countries, married people also exchange goods and services, and each also brings to the table a different set of abilities and interests. By figuring out which of them has the comparative advantage in a range of tasks, from dishes to dog walking to bulb planting, Eric and Nancy could then decide who would specialize in what," Szuchman and Anderson write. "Life need not be a fifty/fifty split for each person to be happy. It could be sixty/forty, or seventy/thirty, or even ninety-nine/one, depending on the people, the situation, and the willingness to put away the calculator and give and take based on what really works best rather than what we think should work best."
Loss aversion is another economic concept the authors tie successfully to marriage. Economists have found that people act irrationally in the face of loss -- even the possibility of loss. In fact, people hate losing more than they love winning, the authors write: According to economists, losing hurts twice as much as winning excites. Look no further than the stock market for proof: The financial press is filled with tales of hapless traders who make risky bets to recoup small losses.
"Here's the punch line," Szuchman and Anderson write: "Loss aversion is messing with your marriage. When loss aversion kicks in, you're liable to stay up all night arguing because you don't want to lose a fight. You'll refuse to compromise because it means giving up what you want. You won't apologize because you don't want to lose face. And you'll fail to appreciate the good stuff that's right in front of your because all you can think about is how much more fun married life used to be."
Making Trade-Offs
Sometimes people may feel that they are losing something based simply upon how a choice is presented. In an experiment, psychologists Daniel Kahneman and Amos Tversky found that people would make different choices depending upon how a question was asked.
The researchers created a scenario about a disease outbreak that was expected to kill 600 people, and asked test subjects to choose between two plans: Plan A had a 100% chance of saving 200 people; Plan B had a one-third chance of saving 600 lives but a 2/3 chance of saving no one. Seventy-two percent chose Plan A.
Then the researchers offered two new plans: Plan A had a 100% chance that 400 people would die; Plan B had a 1/3 chance of no one dying and 2/3 chance that everyone would die. The plans are exactly the same, but in the second round, 78% of test subjects chose plan B.
"The first presents the options in terms of who lives and the second in terms of who dies -- in other words, as potential gains or potential losses. Invariably, subjects gravitated toward the gains," the authors write. For marriage, the conclusion is clear. "Frame a choice differently and you might change your mind about which path to take. You might also feel more open to compromise. That's because our willingness to compromise has a lot to do with whether we think we're losing or whether we see the potential for a gain."
Reframing one's perspective on marriage is hard, especially when both parties have invested heavily in their own positions. But again, there is an economic fix. "Economists would argue that fixating on past investments -- or what's known as 'sunk costs' -- when weighing what to do in the future is a waste of time," Szuchman and Anderson point out. "Sunk costs are just what they sound like: sunk, buried, kaput, finito. Let them go, a wise economist would say, focus on future costs and benefits, not money you've spent and can't get back."
Ultimately, both marriage and economics are filled with trade-offs. The classic example is the choice between guns and butter. The more a country spends on national security, in other words, the less it has to spend on goods. Marriage is also a game of trade-offs, and sometimes they aren't fair.
In one case study, Gus seethes about having to take on all of the housework and parenting duties while his wife Abby goes through medical school. The nine-year haul seemed unfair to Gus, but he stuck it out because he knew that long-term it would pay off. In other words, he managed to think like an economist.
"Economists say that in a market economy, people inevitably face trade-offs between equity -- or what's fair -- and efficiency, or the optimal allocation of resources," the authors write. "The problem with fixating on life's unfairness is that it precludes our ability to think clearly about trade-offs, which can lead to very inefficient outcomes. The solution: Get over it. Not exactly a high-concept solution, but the only way to tackle inequity aversion is to will it away -- to recognize that the more time you spend in an it's-not-fair mentality, the less time you have to calculate the long-term benefits of a trade-off, for tallying up the short-term costs, and, ultimately, for finding solutions."
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2766
Wednesday, May 4, 2011
How new Internet standards will finally deliver a mobile revolution
As the Web experience evolves, smartphones may soon live up to their name, and every business’s mobile strategy will grow in importance.
An arcane-sounding change with potentially significant implications for consumers and businesses is under way on the Web: the shift to a new generation of HTML,1 the programming standard that underpins the Internet. Senior executives, regardless of industry, should take note; like the exponential growth of device-specific applications, this evolution of HTML will further boost the power of mobile devices, accelerating changes in the way people consume content and the potential use of smartphones and tablets as both a marketing platform and a productivity tool.The next generation of the Internet standard essentially will allow programs to run through a Web browser rather than a specific operating system. That means consumers will be able to access the same programs and cloud-based content from any device—personal computer, laptop, smartphone, or tablet—because the browser is the common platform. This ability to work seamlessly anytime, anywhere, on any device could change consumer behavior and shift the balance of power in the mobile-telecommunications, media, and technology industries. It will create opportunities and present challenges. This article seeks to provide a primer on these changes for senior executives, who may feel the effects of the move toward “Web-centricity” much sooner than they think.
Web-centricity
In some ways, the evolution of mobile technology resembles the battle among PC makers in the 1980s. While we today take it for granted that Microsoft’s Windows operating system underpins hardware from countless manufacturers, it wasn’t always that way. Remember the operating systems that powered the Commodore 64, the biggest-selling PC of all time, or the Apple II? Before the emergence of Microsoft’s DOS and then Windows, PC users faced a tough decision about which technology to adopt, because that determined the games and utilities they could use, as well as the general usefulness of their computers. The same occurs today with mobile devices. Users must weigh the hardware and software merits and commit themselves to a technology, whether it’s a device from manufacturers such as Apple or Research in Motion, the ever-increasing array of tablets and smartphones running Google’s Android operating system, or, soon, offerings from Nokia running on Microsoft’s Windows Phone 7 operating system.The next generation of HTML, known as HTML5, may narrow these differences between mobile devices. HTML5, the most significant evolution yet in Web standards, is designed to allow programs to run through a Web browser, complete with video and other multimedia content that today require plug-in software and other work-arounds. In theory, this will make the browser a universal computing platform: without leaving it, users could do everything from editing documents to accessing social networks, watching movies, playing games, or listening to music. Not only would any device with a Web browser have these capabilities, but consumers would also have access to all content stored remotely “in the cloud,” independent of locations and devices.
That’s the first reason Web-centricity holds particular promise for mobile devices. The second is that it helps overcome the relatively weak processing power of smartphones and tablets compared with PCs and laptops. It’s partly this lack of horsepower that has fuelled the explosive growth in applications (or “apps”) to optimize the performance of specific devices: the average smartphone user now spends more than 11 hours a month using apps, more time than either Web browsing or talking, according to a March 2011 study by research firm Zokem. HTML5 has the potential to improve the mobile experience—its specifications enable browsers to locally store 1,000 times more data than they currently do, so users can work when offline—writing e-mails, for example—and their devices will automatically update when a network becomes available. What’s more, programs and applications run faster because complex processing tasks are handled by network servers, although mobile-network capacity must go on growing to deal with heavier data demands.
Of course, not all programs are suited to running through browsers, nor is HTML5 the first would-be universal platform to emerge: Sun Microsystems (purchased by Oracle in 2010) promised that with its Java language, programmers could “write once, run anywhere.” Things haven’t worked out that way. And there’s never a guarantee that one kind of standard will prevail (see sidebar, “Winning the Web standards battle”). The rate at which developers are writing apps and consumers buying them is dizzying, and ingrained behavior can be hard to change. Web-centricity may raise security fears among users because programs are no longer installed on specific devices and because data are stored remotely. And there could be fragmentation issues with both the standard and the browsers—after all, existing ones, such as Google’s Chrome, Microsoft’s Internet Explorer, and Mozilla’s Firefox, don’t all treat the current standard, HTML4, the same way.2
Despite these possible headwinds, the number of HTML5 Web sites is increasing by the day. Hardware manufacturers are lining up behind HTML5, and the development community is undertaking efforts to safeguard data in the cloud at a very fast pace. We therefore estimate that more than 50 percent of all mobile applications will switch to HTML5 within three to five years—and the rate of transition could be considerably higher and faster. No matter how quickly the shift occurs, it will affect both consumers and businesses significantly.
Consumer impact
Consider a simple task many consumers currently use mobile devices for: reading news headlines. Today, that requires accessing a specific Web site—often a sluggish exercise in frustration—or separately installing an application on every device used and, for those that charge a fee, paying each time. With Web-centricity, a single application can theoretically be accessed from any device through a browser—pay once and you’re done. And because all content is stored in the cloud, billing information and preferences can be seamlessly shared and accessed, and all devices remain in sync. A consumer can start reading an article on a tablet and then switch to a laptop, picking up where she left off. In a more advanced example, she could start an instant-messaging or video-chat conversation on her desktop computer and continue it on her smartphone. The bottom line for consumers: Web-centricity represents a major step toward genuinely “smart” devices that offer the same simple, relevant, and personalized experience everywhere.Industry impact
These changes to consumer behavior may affect the economics of industries ranging from telecommunications and media to technology and even advertising. As Web stores selling applications that can be used across devices proliferate, for example, cutthroat competition may leave ad agencies reminiscing wistfully about the days when they could claim up to 40 percent of every dollar of mobile-advertising revenue. Consider, briefly, the implications for the following players in a world where content is everywhere and the relative importance of operating systems and Web browsers for creating and distributing programs and applications is shifting.Software developers. Application developers currently pay a fee of up to 30 percent to device makers, telecommunications operators, or operating-system developers whenever an application is sold to a consumer. In a Web-centric world, developers can avoid these intermediaries: not only can the same application be sold across all devices but anyone can set up a Web store and sell directly to users. Google, for instance, is already charging application developers a distribution fee of about 5 percent through its Chrome Web store.3 In addition, the emergence of an open platform will probably motivate bigger enterprise software companies to introduce—and quickly—mobile-based programs for managing customer relationships, marketing, and supply chains.
Telecom operators. Web-centricity may be a double-edged sword for telecom players. On the one hand, it will spur demand for mobile-Internet services, create opportunities for operators as consumers seek applications that work across multiple devices, and loosen the grip of native app stores. On the other hand, there’s no guarantee that operators can make money with new apps, the likely surge in data traffic will require significant investments in network infrastructure, and operators may face increased competition from companies offering Web-based mobile-voice and -video services.
Content providers. Web-centricity should provide revenue and savings opportunities for content providers. On the revenue side, the ease with which consumers can access Web-centric content on the go should stimulate their interest in more relevant, timely material. Moreover, the seamlessness with which consumers can access HTML5 content across devices could create more opportunities for providers, such as television and movie studios, to offer consumers programming directly or to work through aggregators such as Apple’s iTunes. Finally, advertising could support additional mobile content. Fragmented mobile platforms today make it hard for online publishers to manage ad inventories across a broad range of users. Advanced features such as consumer targeting and measurement may migrate to the mobile-Web environment. Of course, this development will no doubt attract entrants and intensify competition, making the new environment as challenging as it is dynamic.
Savings, a secondary benefit, come from avoiding the cost of converting an application from one platform to another (today, typically around 50 percent of the original development cost). Newspapers and magazines, for example, should be able to create content once and deliver it seamlessly across multiple devices, lowering production costs and increasing reach.
Device makers. Web-centricity will probably make consumers more “device agnostic,” and that will in turn reduce the ability of players to control an ecosystem of developers and could accelerate the commoditization of mobile devices. The shift does, however, create opportunities. Manufacturers will be able to better and more easily integrate software and hardware experiences within and across devices. They can try to develop compelling cross-device applications and speed up the push to make synchronizing and storing data across devices easier. Finally, they have some control (along with operators) in choosing the default set of Web-centric services and applications embedded in devices.
What it means for senior executives
Consumer uses propel many innovations associated with Web-centricity. Yet it could ultimately provide a range of benefits for companies as information technology moves to Web-centric platforms and away from the current hard-wired infrastructure and applications. These are enterprise-level issues, and any CEO who isn’t confident that the organization is grappling with them should start pushing the senior team to understand their importance.The CMO
The emergence of the “m-dot revolution”4—the increasingly strong tendency of consumers to use mobile devices to access company and product information—will have its greatest impact on chief marketing officers. Many companies are already experimenting with innovative smartphone applications; Volkswagen, for instance, has released a popular racing game for the iPhone. Companies will be able to continue taking advantage of the enhanced power of mobile Web browsers to create compelling experiences directly for users. In addition, CMOs will need to push their teams to develop compelling mobile-advertising strategies that go well beyond merely inserting ads into applications, as many do today. HTML5 should create opportunities to use video advertising more often, for example, and the development of robust mobile capabilities may spur the evolution of marketing tactics such as the monitoring of shopping activity to deliver real-time, location-specific coupons.The CIO
Web-centricity puts additional pressure on organizations to invest in corporate cloud infrastructure. Chief information officers should, for example, prepare for the day when consumers, employees, and suppliers all communicate and interact through the use of mobile devices that run Web applications. This phenomenon will not only extend the reach of the enterprise but also place a premium on analytics and possibly improve the competitiveness of companies that can exploit the new information and interactions a Web-centric environment provides.CIOs will have to decide whether costs can be cut and productivity increased by introducing rich applications both horizontally, across industries (for example, enterprise customer-relationship-management systems such as Salesforce.com), and vertically, within industries (say, mobile electronic medical records in health care or smartphone-based claims processing in insurance). Web-centricity also promises smaller productivity improvements, such as allowing users to store content locally for later uploading. Employees will therefore be able to work without being connected to the Internet—for instance, when they’re on airplanes.
The CEO
From the perspective of the chief executive officer, Web-centricity should be part of a broader imperative to elevate the importance of mobile marketing in corporate strategy. CEOs will need a response when, as must inevitably happen, they are asked how their companies are dealing with the m-dot revolution, which introduces a mobile element into everything from commerce to advertising to public relations. What’s needed is not just the coordination of mobile initiatives from functional offices, however. CEOs must take a big-picture approach to the collective implications of Web-centricity, the way it redefines a company’s interactions with employees and customers, and the challenges and opportunities it presents.Of course, Web-centricity will require spending money to make money. Organizations will have to make IT investments, particularly for cloud-based computing and mobile platforms. Employees, especially in sales and operations, will need training in the art and science of mobility if companies are to maximize cost savings and productivity improvements. Yet Web-centricity also promises to make the mobile-Internet experience more open, complex, and dynamic. It may change the way consumers and enterprises behave. Even if companies don’t understand the technical aspects of this transition, they must master the technology’s potential and possible ramifications.
Winning the Web standards battle
HTML5 offers many advantages, from a better video experience to easy access to programs when users are offline. But history tells us that the better platform doesn’t always win. Consider how Betamax foundered during early efforts to set a standard for home videos, although it was widely considered to be better technically than its rival, VHS.The critical issue in platform competition is whether a new technology can create a vibrant ecosystem of large and small players. In the case of HTML5, this means providing an environment that not only enables a better user experience but also makes it possible for innovative new Web programs to scale rapidly and for industry players to gain significant benefits. Web companies that rely on advertising revenues, for example, may want to use HTML5 to help expand their reach, making mobile devices and even TV screens frictionless portals to the Web. Apple and Nokia would want the new platform to enhance the user experience in ways that stimulate sales of their smartphones and tablets.
Recent research on standards-based competition highlights four issues, unrelated to the consumer experience, that will help determine the platform of the future.1 Executives should keep a careful watch on them to find out whether HTML5 will reach its potential or be stymied by the difficulties that sometimes block the progress of new standards.
1. What developers do. A winning platform needs to capture the hearts and minds of the best developers. HTML5’s flexibility should be a strong selling point for many, but sheer numbers aren’t enough. To create compelling value, a platform must also encourage collaboration among talented programmers and content developers. This leads to greater innovation and to applications that excite a critical mass of new users.
The preferences and goals of developers will also affect the pace of change. Some may be quite satisfied with the returns they currently get from app stores. For others, the allure of wider reach, multiscreen access, and, potentially, a more significant distribution and marketing platform could make HTML5’s open standard more attractive.
2. How the economics evolve. The actions of developers and companies will reflect the economics of paid applications and advertising. Apple, through its App Store, has demonstrated that the paid mobile-content model can succeed. It’s also clear that mobile advertising finally has taken off as smartphones have improved. Mobile Web search now spins out revenues from paid keyword advertising, much as the PC-based Web does. Still, analysts remain uncertain about which of these two models will gain ascendancy. How much will customers be willing to pay for apps? (If demand for paid ones hits a wall as users resist paying for specialized, “long-tail” programs—which don’t have mass appeal but seek to attract niche users beyond the first wave of hits—that would be a boon for HTML5.) Will advertising revenues grow in line with rising numbers of mobile users? (If not, Web-based HTML5 applications might be less attractive for developers than apps they can charge for.)
The answers to such questions will determine whether the mobile Web ultimately looks more like today’s PC-based market (advertising and paid content are about equal in importance) or today’s mobile-Internet market (paid-content revenues are more significant). They also will have major second-order effects: if the economics start tilting one way or the other, developers will probably steer ever more of their innovative efforts toward the winner—paid applications or advertising-supported content. A similar virtuous cycle could affect the decisions of advertisers, whose returns on mobile digital-marketing investments will increase along with the size of the audience consuming ad-supported content.
3. How platforms fare. At present, the mission of Google’s Android platform may simply be to become a broadly accepted mobile-Web operating system that ensures the successful transition of Google’s core search business to smartphones. An open-source model can help maximize reach, with revenue coming not from traditional licensing deals but from alternative sources such as mobile advertising. But what if ad growth hovers below expected targets? Similarly, if the mobile environment becomes more open—more like today’s PC-based Internet—will Apple and others continue to nurture their walled-garden operating platforms?
4. How the technical issues play out. When hardware and software producers, as well as service providers, can easily incorporate elements of a platform, momentum for the standard increases. Interfaces—the specifications that allow diverse systems and hardware to interact readily—are often the key. In the PC world, a powerful impetus toward standardization was BIOS, which provides rules for how Intel processors handle instructions from software programs and communicate with other components and devices. On today’s mobile battlefield, complexity reigns. Apple’s mobile interface ties the iPhone’s operating system to custom-built processors. Android and Windows Mobile systems interface with chips designed by Intel, Qualcomm, and Samsung. While this fragmentation could slow down HTML5’s adoption, it could also set up a healthy competition for a faster, more robust HTML5 interface that will enhance the standard, leading to greater innovation and, ultimately, to higher sales of chips.
https://www.mckinseyquarterly.com/Telecommunications/Broadband/How_new_Internet_standards_will_finally_deliver_a_mobile_revolution_2788
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