Incumbents Beware

Percent of Labor Force Unemployed for 27 weeks or more

This November will be an especially challenging time to be an incumbent with long-term unemployment at a post-war high. With those unemployed for more than 27 weeks representing 4% of the workforce, we are in uncharted territory when it comes to voter dissatisfaction with the status quo. There will be lots of commentary about Democrats vs. Republicans vs. Tea Party extremists, but the overriding theme will be "throw the bums out."

It's well-known that recessions are generally not kind to incumbents; and according to the NBER, the recession officially ended in  July 2009.  But a quick glance at the chart above shows that rising levels of the long-term unemployed were associated with the incumbent party losing the White House in 1960, 1980 and 1992.

Incumbents can take some comfort from the slight tick down in the long-term unemployment rate over the past few months, but with the absolute level nearly double the '80 - '81 peak,  November 2 promises to be a bitter night for incumbents from both parties.


Source: St Louis Federal Reserve

AXA's Asteroid

Gizmodo has published a wonderful photo of asteroid P/2010-A2 taken by the Hubble telescope that shows a striking similarity to AXA's corporate logo.

Maybe readers can help here. Didn't AXA previously use a logo of a stylized archer that looked even more like asteroid P/2010-A2?

Or am I remembering someone else's logo?

Google Image Search has been of no use identifying the logo I seem to recall.

Keeping up with the News Cycle

More than a week has passed since the release of the "Report of the Examiner in the Chapter 11 proceedings of Lehman Brothers Holdings Inc" so naturally coverage of the report is moving beyond reaction to reflection.

I have a few thoughts on the report -- and the reporting on the report -- that I'll write up in separate posts as they're of interest to different audiences. This post offers my thoughts on the "reporting of the report" and the changing media landscape.

It remains popular within the mainstream media to dismiss the blogging community as mostly commentators rather than reporters. What's more, according to the MSM types, most of the fodder for the blogosphere's ruminations comes from reporting in the mainstream media.

The clear implication is that without the mainstream media to painstakingly investigate, write, edit and publish the news in the first place, the blogosphere would be reduced to self-indulgent opinionating and bloviating, like, for example the content you'd expect to find on MySpace.

Even worse, according to the extreme form of the argument, the lack of professional standards and good editing in the blogosphere can lead to reckless "reporting" with potentially costly consequences.

So I was puzzled last weekend when the NYT's editorial page asserted that Lehman Brothers, in the last quarters prior to its September 2008 bankruptcy filing, engaged in repo transactions that removed "troubled assets" from its balance sheet.

My surprise arose not from Lehman's conduct (although the Times professed to being "dumbstruck" and "blindsided") but from the fact that I quite specifically recalled the report, right on page 796 saying:

...the vast majority of securities Lehman utilized in Repo 105 transactions were investment grade, with all but a few of the securities falling within the A to AAA range.

Curious how the Times editors were so perfectly misled on this point, I went back to the paper's original story on the Lehman report, only to find the following correction.

Correction: March 13, 2010

An article on Friday about an examiner’s report detailing accounting maneuvers used by Lehman Brothers to conceal its perilous finances described incorrectly in some editions the assets that were temporarily shuffled off its books. They were mostly high-quality securities that could be easily accepted by other banks, according to the examiner’s report; they were not “troubled” and “mostly illiquid real estate holdings...”

So here we have a Times story, written under deadline, that gets a key fact exactly wrong, followed by a correction. Okay, stuff happens. But what must be especially embarassing to the Times is that the newsroom appears to have noticed and corrected its error before the editorial page went to bed with the wrong fact 24 hours later... kinda like a blogger spouting off his opinion about something he read online, without checking the veracity of the story.

Even worse, a week later (March 17) the New York Post, which apparently gets its facts from old copies of the Times, publishes this:

Among Valukas' findings is that Lehman used an esoteric accounting practice known as 'Repo 105,' which allowed the firm to move toxic mortgage assets off its books in order to make it seem healthier. (emphasis mine)

Update, March 22:

And Wiliam D. Cohan, who apparently has annotated the Examiner's Report, asserts in a March 18 NYT column:

...we now know that one executive after another at the firm signed off on the now infamous “Repo 105” trick in order to move some $50 billion of squirrelly assets off Lehman’s balance sheet at key moments. (emphasis mine)

Don't these guys have time to read the financial blogs?

No doubt the authors of these stories are bright and industrious and take pride in their work. Which makes me think the underlying issue is structural. When it comes to reporting complex news stories, the mainstream media's reporting conventions may leave it competitively disadvantaged versus the blogosphere.

For example, the "inverted pyramid" approach to a traditional news article gives short shrift to second- and third-level details, which may be summarily discarded if the 'news hole' that day is too small. At the margin, this may act as a disincentive to fully vet details that may not get printed.

The need to present both sides of the story "objectively" requires time-consuming phone and email contacts for "On the one hand... on the other hand..." quotes from so-called expert sources who likely possess less knowledge about fast-breaking news than the reporter himself. (Michael Kinsley has written and Kara Swisher has spoken (a little past the 10:00 minute mark) far more eloquently about this issue, so I'll refer you to them.)

Finally, for print journalists, the need for a "static" version of a story to meet the circadian publishing cycle creates constraints that a living story on a blog doesn't face.

Not so long ago, a "Report of the Examiner in the Chapter 11 proceedings of Lehman Brothers Holdings Inc" would have been released in a small press conference in New York City, where a smattering of lawyers and business journalists would lug their 2200-page copies back to the office to research potential lawsuits or the news angle. But the public at large would not have had convenient access to the source materials until they arrived at the local library, if at all. So journalists of yesteryear enjoyed quasi-monopolistic access to much of the source material for the important stories of the day.

A recent Pew Research Center study of news dissemination in Baltimore found that 63% of news stories originated with government entities. News organizations originated 14% and the remainder were largely from interest groups. This suggests that 86% of the "news" is originated (that is to say, "published") by government and private non-journalistic organizations. Increasingly, these stories are being published online, where they're immediately available to all interested readers. And for a story of any complexity, the party most qualified to comment may in fact be some guy (a former Lehman repo trader, perhaps) posting in his pajamas from his basement office.

If you've read this far, you deserve a reward, so I'll give the last word on the subject to the writing team on NBC's hit comedy,"30 Rock," who nail the topic with brutally efficient satire. Currently, No longer, Once again available, on Hulu (4:30 into the show).

In the scene, Avery Jessup a fictional, on-air reporter for CNBC (played by the adorable Elizabeth Banks) calls her lover, Jack Donaghy (played by Alec Baldwin) a senior executive at NBC, about a rumored takeover of NBC.

Phone rings in Donaghy's office.

Jack Donaghy: "Hello?"

Avery Jessup: "Answering your own phone on the first ring... It's all hands on deck over there, huh?"

Jack Donaghy: "Whaddya mean?"

Avery Jessup: "C'mon the NBC buyout... what's happening today?"

Jack Donaghy: (Increduously) "I'm sorry... You're calling me as a source? How are you going to explain your unnamed executive to your producer."

Avery Jessup: "I'll tell him it's a guy I'm having sex with... It's a 24-hour news cycle here, Jack. We really don't have time to do it right any more."

Anton R. Valukas, Speed Reader

Anton Valukas is not only the Chairman of Jenner & Block and author of the recently released report on the failure of Lehman Brothers, but he may be the world's fastest reader.

According to the New York Times, in preparing his Lehman report, Mr. Valukas " ...reviewed by his own estimate about 34 million pages of email."

Since the the appointment of Mr. Valukas was mandated on January 16, 2009 and the report itself is dated March 11, 2010, it appears Mr. Valukas had exactly 419 days to prepare his report.

419 days

x 24 hours per day

x 60 minutes per hour

x 60 seconds per minute

= 36,201,600 seconds, or about 1.065 seconds per page.

I don't question Mr Valukas' stamina or work ethic, but I assume he must've taken some time to sleep and eat and run his law firm during the past year, so we're using the word "review" pretty liberally when we're discussing 34 million pages.

It's unlikely that Mr. Valukas had any time to chuckle at the occasional joke, admire a well-turned phrase or marvel at some prescient prediction that he uncovered in his reading.

Sadly, the Times article fails to reveal whether the 34 million pages were delivered to Mr. Valukas electronically or on paper. If it was on 20 pound paper, Mr. Valukas's pile of "evening reading" would've been 3,060 meters high, roughly seven times taller than the Sears Tower in Mr. Valukas's hometown of Chicago, and it would've weighed about 170 tons.

If he carried it home in equal parts each night, his briefcase would've weighed 800 pounds.

Addendum: The Lehman report is exceedingly well-researched and written. Give Mr. Valukas's team credit for reading the mountain of emails more thoroughly than a number of journalists read the final report. See my related post.

(The first version of this post missed a decimal point and claimed Mr. Valukas reading assignment would've been merely 306 meters high. The math is 9 cm per 1000 pages x 34,000 / 100 = 3,060 meters. And I know the Sears Tower has been renamed the Willis Tower, but call me old-fashioned. I still call the MetLife building in NYC the "Pan Am Building" and nobody is confused.)

Apple Introduces the iPad iPod Classic

Are Newstands Hazardous to Newspapers?

International Business Times reports on an Outsell study with the headline, "Nearly half of Google News users just skim headlines.

According to the IBT article, "The findings give further ammunition to publishers who insist that Google and other news aggregators are linking to their stories without paying any advertising revenue."

I'm not entirely sure why publishers need "further ammunition" to establish a stipulated fact. Yes, Google links to news stories. And no, Google generally does not pay for linking to news stories, just as it does not pay me to link to this blog. But the conclusion above is a non sequitur teetering on a counter-factual.

What would indeed be interesting and relevant is understanding whether Google is generating significant ad revenue from the 44% of users who scan headlines without clicking through to the underlying stories.

Here's an "above the fold" screenshot I just took of Google News (click to enlarge). If I come to this page to skim the news, it's hard to imagine there's much revenue associated with my visit. In fact, I'm at a loss to find a revenue-generating ad element on this page at all.

"But wait," claim the publishers, "If Google wasn't aggregating these links, then headline-skimming readers would come directly to our websites, where we'd make money by loading our landing page with display ads that these readers rarely notice." Well, maybe... but that's an easy experiment for any publisher to conduct; and if it were demonstrably true, publishers would be opting out of Google's indexing service in droves.

There's an alternative experiment that anyone can conduct. Stand next to a newsstand in a busy office building or subway station. Count the number of passers-by who glance at the papers ("stealing the headlines" as it were) as they pass. Exclude paying customers. At the end of the day, calculate the ratio of headline-glancers to newspaper buyers. Is it higher than 44%?

Extra credit: Calculate the revenue from the non-paying commuters who skim the headlines as they pass using two different methodologies:

(1) How much did they actually pay?

(2) How much additional revenue would you make if every one of them bought a newspaper?

If your answer to question (2) is greater than your answer to question (1) do you believe you can sell more newspapers by putting them in brown wrappers that hide the front page?

Alternatively, do you believe newspaper circulation would increase if newstands were abolished?

Was Wall Street Deriving While Impaired?

In the aftermath of the 2008 global financial crisis (at least I hope we're in the aftermath) observers of the financial markets continue to debate its underlying causes. Some point to executive compensation, which supposedly encouraged excessive risk-taking. Others blame excessive leverage (the most basic form of risk-taking) and finger the Federal Reserve for maintaining artificially low interest rates from 2002 to 2005. Other critics believe that a surge in esoteric and poorly-modeled derivatives allowed banks to pretend that a substantial increase in risk and systemic co-dependence was safely hedged.

But an article in "Science Translational Medicine" offers a simpler hypothesis consistent with lowered inhibitions, excessive risk-taking and impaired judgment: Wall Street was three (spread)sheets to the wind.

Now I'm not suggesting that investment bankers were drinking at work... at least not more than usual. But 100-hour workweeks are not uncommon on Wall Street, and as Bloomberg quotes the study, "Staying awake for 24 hours straight equals having a blood alcohol concentration of 0.10 percent, beyond the 0.08 percent legal limit for driving in the U.S."

You wouldn't give your car keys to a sleep-deprived, cognitively-impaired twenty-two year old, but bet a billion dollars (levered 10:1) on the AAA-rated tranche of a 30-layer, collateralized debt security that he modeled at four in the morning? No problem.

Memo to AT&T: Help Me Help You

This summer I wrote about AOL and how widespread service failure can actually be a bullish signal for a company, if the company responds correctly.

This week, AT&T Mobility Chief Executive Ralph de la Vega disclosed that AT&T was considering "incentives" to encourage customers, especially data-guzzling iPhone users, to reduce the amount of wireless bandwidth they consume. To which, Dan Lyons, in the persona of Fake Steve Jobs, responded in a typically humorous and profanity-laced post:

"So let’s talk traffic. We’ve got people who love this goddamn phone so much that they’re living on it. Yes, that’s crushing your network. Yes, 3% of your users are taking up 40% of your bandwidth. You see this as a bad thing. It’s not. It’s a good thing. It’s a blessing. It’s an indication that people love what we’re doing, which means you now have a reason to go out and double or triple or quadruple your damn network capacity. Jesus! I can’t believe I’m explaining this to you. You’re in the business of selling bandwidth. That pipe is what you sell. Right now what the market is telling you is that you can sell even more! Lots more! Good Lord. The world is changing, and you’re right in the sweet spot."

This is the "America Offline" problem all over again. Consumers on a flat-rate bandwidth plan with a choice of 100,000 apps to run on their iPhones want to take advantage of all the cool stuff they can do with what is essentially a pocket-sized computer. When it faced a similar problem, AOL responded by aggressively adding bandwidth and signing up 27 million households at its peak. True, things eventually went south for AOL... but come to think of it, if AOL had figured out how to offer even more bandwidth by offering its customers a migration path from dial-up to broadband, it might not be the shrunken colossus it is today.

It's been a rough week for AT&T. Mr. de la Vega's disclosure of AT&T's thinking absent any specific proposals led to a groundswell of online suspicion, complaints and rants about AT&T's wireless service at a time when Verizon is aggressively attacking AT&T's 3G wireless coverage in a series of pointed and amusing ads. What's worse, when Dan Lyons (half?) jokingly suggested that subscribers should engineer a "chokehold" on the AT&T network by using bandwidth-intensive applications at a coordinated time, the meme spread via Twitter and Facebook and was picked up by the mainstream media, ensuring that by the end of the week, every sentient American was aware, at a minimum, that lots of other people thought AT&T's wireless service sucks.

The Verizon marketing guys are undoubtedly enjoying an extra round of drinks at happy hour this evening.

AT&T, here's what I'm willing to do to help.

Send me one of those 3G Microcell devices you've announced but seem to be testing only in Charlotte, North Carolina. I'll hook it up to my home network and it'll route my iPhone calls from my home over my DSL service instead of your wireless network.

Admittedly, this isn't going to free up much existing bandwidth on your wireless network, because -- ahem -- I don't make too many calls from the one window on the third floor where I can actually get two bars of service. But at least my cell phone will work in my house and you won't have to put up another tower in the vicinity, so we'll both be ahead.

Oh, and when the 3G Microcell arrives, I don't want to pay $150 for it, nor do I want to pay an additional $19.99 or even $9.99 per month to use it on top of the $100 per month I already pay for my cell phone service. After this week, do you really want to deal with the PR implications of that pricing model? "Unhappy with your cell-phone service? Now you can pay more!" Trust me, you really don't want to go there.

But I'm a reasonable guy, so let me know what your marginal cost is for the millionth unit you manufacture, and I'll pay that.

Now comes the good part. If you build appropriate security into the device, I'll let strangers in my neighborhood route their calls through it too! That will free up bandwidth on your network, provide more coverage and save you money. Even better, you could offer the same deal to my neighbors and pretty soon, you might not see any wireless traffic on your network at all in this neck of the woods. Hell, if y'all want to have some real fun, pay me to switch to Comcast high-speed internet and together we'll route your traffic over their network. This net neutrality stuff is delicious with irony if you just work at it a little.

Admittedly, I didn't think this up all by myself; engineers and entrepreneurs have been talking about wi-fi mesh networks for awhile, but now you have an economic incentive, a user base and a compelling business reason to make it happen.

Rarely in business do you get an opportunity to see the future so clearly because the past provides such a compelling example of how to act.

Let's make this happen, whaddya say?

Can Newspaper Ad Revenue Recover in 2010?

This is a short excerpt of a longer post I am preparing on newspaper print advertising trends, but a post today by Alan Mutter encouraged me to publish this small excerpt.

Mutter expresses skepticism about the rosy advertising scenario presented by U.S. newspaper executives in a survey conducted by Kubas Consultants. As this table from the Kubas report shows, newspaper executives are hoping for flat advertising revenue in 2010, with a 15% increase in online (approximately 10% of 2009 revenue) offsetting small declines in every print category.

I am particularly curious about the poll's findings regarding retail advertising, which after the steep declines in classified advertising over the past few years, will account for just over 50% of total print ad revenues in 2009, making it the biggest driver of the overall results.

The following graph (click to enlarge) plots retail ad revenue per subscriber against per capita personal consumption expenditures (PCE) for 1952 - 2009. Both the ad revenue and PCE data have been adjusted to constant 2008 dollars using the consumer price index (CPI-U).

Presumably there is a relationship between the amount of goods and services companies sell to consumers each year (represented by PCE) and the amount those companies are willing to spend to reach each consumer or household by advertising in newspapers.


And indeed there is a relationship, or more accurately, several relationships. From 1952 through 1990, newspapers sold retail advertising equal to about 1.76% of personal consumption expenditures on a predictable basis. Coming out of the 1990 recession, however, there was a clear downward shift in the relationship and for the next decade, retail ad sales ran at about 1.52% of personal consumption. (see note 1).

After the 2001 recession, there was another shift down in the relationship between ad spending and personal consumption; and for the next five years, retail ad spending in newspapers was basically flat in real terms. It's worth noting that in real terms, retail ad spend actually peaked in 2000.

Finally, since 2006, real retail ad revenue has plummeted as the recession took hold (in December 2007) and consumers abandoned their free-spending ways.

Recessions often act as antidotes to inertia by making households and companies (link added 04/15/10) reassess how and where they spend their money. Advertisers almost certainly used the past two recessions to reassess their spending in newspapers, and it's a fair bet they'll do the same as the current recovery unfolds.

A slavish reading of the most recent trend suggests that retail ad spending will simply continue to plummet like a rock falling off a cliff. This could happen, but I doubt it. Ad spending, even in newspapers, should respond to an eventual recovery. But making economic predictions around recessions and recoveries is notoriously difficult since prior recessions and recoveries provide limited relevant precedent. To paraphrase Tolstoy, if periods of prosperity are all alike, every recession unfolds in its own way.

But I'll take a stab at it. In a related analysis, I have compared changes in retail ad spending to changes in PCE on a quarterly basis. This analysis suggests that it will take real growth of 3.2% in per capita PCE just to keep retail ad spending per subscriber flat. It would take a sharp "V-shaped" recovery to reach that level of growth, but the WSJ has published a consensus estimate of 3.8% for GDP growth for 2010.

If GDP does grow at 3.8% and per capita PCE matches this growth, retail ad spend per subscriber could come in at +1.5% in real terms. Add 2.0% for inflation if you believe that newspapers will have any pricing power, then subtract 3% for subscriber attrition and you get 0.5% growth.

More pessimistically, if you assume GDP growth (and PCE) come in at 1.7% (the average from the 1992 and 2002 recoveries), retail ad spend per subscriber could come in at minus 4.0%. Assume no pricing power and subscriber attrition of 5% and overall retail ad spending would shrink by 9%

The precision of the numbers should not mislead about the confidence of the forecaster, but for my money, I think a range of flat to down 10% for newspaper print advertising feels about right.

note 1. A more precise, but likely less clear statement about the relationship would say, "From 1952 to 1990, for every $1,000 increase in real consumption expenditures per capita, spending on retail ads (per subscriber) in newspapers increased by 1.76% of this amount, or $17.60." For each of the regression lines, the intercept terms are small enough to make me comfortable with statement in the text.

note on data sources. Annual retail ad spend and paid circulation data comes from the Newspaper Association of America website. Personal Consumption Expenditure data, Consumer Price Index - All Urban and Population data are from the St Louis Federal Reserve Bank's FRED database.

Rupert Murdoch has penned a refreshingly sensible post on his blog, The Wall Street Journal op-ed page.

Mr. Murdoch makes four generally agreeable points:

• Newspaper publishers should stop whining about technology and figure out how to use it.

• Quality content is not free.

• The old ad-supported newspaper model is "dead", so paid content is the future.

• Government funding of newspapers is a supremely bad idea.

There's more of course, and publishers without the breadth of News Corp's resources may find Mr. Murdoch's prescriptions for success elusive or unattractive.

True, Mr. Murdoch's Wall Street Journal successfully charges for its online content, but it's the exception that proves the rule. And when Mr. Murdoch writes, "media companies need to give people the news they want," I can hear some publishers harrumphing he's got it backwards: real journalists want to give people the news they need.

I wholly endorse Mr. Murdoch's sentiments regarding government funding of newspapers (Is there anyone who remembers Pravda as a model of independent journalistic achievement?) I'm even sympathetic to his predictable plea for less media regulation, although he's so wrapped in the flag of his adopted thirteen colonies as he calls for relaxation of the FCC's cross-ownership rules his detractors will undoubtedly recall Samuel Johnson's observation about patriotism and scoundrels.

Mr. Murdoch's candid acknowledgement that the old business model for newspapers is broken is a welcome change from the chorus of "blame Google" laments that have turned "Future of Media" confabs into the conference circuit equivalent of Japanese Noh theater.

But Mr. Murdoch is not prepared to let bloggers and online news aggregators off easily. He writes:

"[T]here are those who think they have a right to take our news content and use it for their own purposes without contributing a penny to its production. Some rewrite, at times without attribution, the news stories of expensive and distinguished journalists who invested days, weeks or even months in their stories—all under the tattered veil of 'fair use.'"

"These people are not investing in journalism. They are feeding off the hard-earned efforts and investments of others. And their almost wholesale misappropriation of our stories is not 'fair use.' To be impolite, it's theft."

"Right now content creators bear all the costs, while aggregators enjoy many of the benefits. In the long term, this is untenable. We are open to different pay models. But the principle is clear: To paraphrase a famous economist, there's no such thing as a free news story, and we are going to ensure that we get a fair but modest price for the value we provide."

In a nutshell, Mr. Murdoch asserts the same argument made by Supreme Court Justice Mahlon Pitney in the 1918 case International News Service v. Associated Press. In that case, a 6-2 majority upheld a lower court injunction prohibiting International News Service from "bodily appropriation" of freshly published Associated Press news stories, which were often telegraphed westward and published simultaneously in competition with AP-affiliated newspapers on the U.S. west coast. In the case, Associated Press prevailed on a theory of unfair competition (copyright was not an issue because it was generally unavailable to news stories at that time) in a case that established "misappropriation" as a form of unfair competition.

Over time, the force of International News Service v. Associated Press with regard to the original issue has faded, in part because subsequent jurists and legal scholars concluded that the formidable dissenters in the case, Justice Holmes and Justice Brandeis, had the better arguments, but also because of changes to copyright law in the intervening decades.

Lately, however, David and Daniel Marburger have circulated a paper advocating an amendment to copyright law that would effectively reinstate publishers' rights to enjoin aggregators from republishing without consent. What's more, current Associated Press CEO, Tom Curley, has been floating the notion of a licensing "head start" for cooperating publishers and aggregators, a central theme in the 1918 case. This idea seems to be gaining traction among publishers, and the threat may be partly responsible for some of Google's recent conciliatory gestures toward the publishers.

But in a wonderful irony, while Mr. Murdoch's argument reads like the majority opinion he favors, his words echo Justice Brandeis's right up to the conclusion:

"Plaintiff further contended that defendant's practice constitutes unfair competition because there is 'appropriation without cost to itself of values created by' the plaintiff, and it is upon this ground that the decision of this Court appears to be based. To appropriate and use for profit, knowledge, and ideas produced by other men without making compensation or even acknowledgment may be inconsistent with a finer sense of propriety, but, with the exceptions indicated above, the law has heretofore sanctioned the practice." (emphasis added).

For a fascinating, detailed and eminently readable overview of the case, I recommend University of Chicago Law School's Douglas G. Baird's "Property, Natural Monopoly and the Uneasy Legacy of INS v AP".

Murdoch's Sun Encourages File-Sharing, Deep Linking

The theme's been done before, but News Corp's tabloid, The Sun is running an advert touting the paper as "The UK's Best Handheld for 40 Years."

The spot is cute, if a bit predictable; but what struck me was the message, "This is how easy it is to share content with friends" (at the 0:38 mark).

Newspaper Circulation

The Audit Bureau of Circulation's report last month showed daily newspaper circulation plunging 10.6% from year-ago levels, a dramatically steeper decline than the historical trend. Not surprisingly, many commentators see the accelerating decline as the end (or at least the terminal stage) of the newspaper format. And they'll be right in less than a decade if circulation continues to drop by the current pace of 4-5 million subscribers per year. On the other hand, Daniel Gross over at Slate is not so sure and he recommends that we all just "chillax". In Gross's view, the recent decline may be largely explained by general economic conditions.

"... there's nothing ipso facto shocking about a decline in patronage of 10 percent in six months... In case anybody has forgotten, we've had a deep, long recession, a huge spike in unemployment, and a credit crunch. Consumers have cut back sharply on all sorts of expenditures.... Many other components of consumer discretionary spending—hotels, restaurants, air travel—have fallen off significantly. Do we draw a line from trends over the last few years and declare that in 15 years there will be only a handful of hotels? I'm not sure why we would expect consumption of a purely discretionary item that costs a few hundred dollars per year not to fall in the type of macroeconomic climate we've had."

Gross also reminds us that many publishers took steps that predictably reduced circulation, including raising prices and discontinuing home delivery to outlying suburban areas that could no longer be served economically.

Extrapolating from two data points is a highly uncertain business so Gross is right to recommend caution, especially when current cyclical factors may greatly exaggerate secular trends. For his part, Gross declares, "At some point in the future, newspapers may disappear. But count me in the later rather than sooner camp." But a peek at longer-term trends suggests that difference between "sooner" and "later" may be shorter than one might think. The chart below plots total daily circulation from 1940 through 2009 (the shaded areas indicate recessions).

(click chart to enlarge)

These circulation numbers come from the Newspaper Association of America (spreadsheet available here). For 2009, I have reduced the NAA's 2008 statistic by the Audit Bureau of Circulation's estimate that April-September 2009 average circulation was down 10.6% from the prior year period, resulting in an average daily circulation estimate of 43.4 million for 2009. (Over at his Newsosaur blog, the estimable Alan Mutter extrapolates a 2009 estimate of 39.1 million, but without his underlying data, I cannot reconcile that number to the NAA historical estimates, which are probably counted differently from the ABC numbers anyway).

The long-run trend is unmistakable. Circulation peaked 36 years ago, in 1973 but remained relatively stable until the 1990's when it began a steady downward trend, which accelerated in 2003, and appears to have accelerated even more in 2009.

The data provide some support to Gross's thesis: in the 1974 slowdown and the 1980-82 "double-dip" recession, circulation declined temporarily, but rebounded with economic recovery. By my calculations, those recessions caused circulation to decline about 2.2% vs. the trend from the five years preceding the recession.

More recently, during the two relatively mild recessions of 1990 and 2001, if the recessions caused any decline in circulation, there was no subsequent recovery. In fact, the decline in circulation accelerated as the economy emerged from those two recessions. So I suspect Gross is right that the current recession has accounted for some of the circulation decline; but if past recessions are any guide, the measured 10.6% decline reported by the ABC might be only 8.0-8.5% in a healthy economy. This is hardly reassuring news for the industry and recent history argues against a significant post-recession rebound. Even ignoring the recent plunge, if the trend from the past five years (excluding 2009) were to continue, total daily newspaper circulation would fall to 33 million by 2020, which seems optimistic in light of the manifest challenges faced by the industry.

It's also useful to consider newspaper circulation per household. By this measure, newspaper circulation has been declining steadily since World War II with most of the decline coming from the near-extinction of the afternoon daily. Over half a century, circulation per household has declined by 1.4 percentage points per year with remarkable consistency.

(Click chart to enlarge)

No doubt the introduction of evening newscasts on television 50 years ago reduced the perceived value of the afternoon paper, but even in 1980, the year CNN was launched, afternoon circulation actually exceeded morning circulation. Since then, afternoon circulation has all but disappeared. Morning circulation, which trended up in the 1980's (presumably as afternoon subscribers switched) and was relatively flat during the 1990's, has been dropping steadily since 2000, around the time that household penetration of high-speed internet access began in earnest.

(Click chart to enlarge)

As with the raw data, extrapolating the current year's trend suggests that newspapers would cease to exist by 2017. This is the "breathless" conclusion Gross warns us against, and his caution is warranted because (if for no other reason) as marginal subscribers quit, the remaining subscriber base is, by definition, the most loyal to the medium.

Still, longer-term trendlines based on the full data set and the period since 1999 yield very similar predictions, namely that circulation will fall to about 20% of U.S. households by 2020 (I'm ignoring the fact that some households may take multiple papers). Against the backdrop of the long-term trend, and with the internet acting as an obvious catalyst for further declines, this prediction seems entirely plausible.

But even if a loyal subset of households want their morning newspaper, the bigger question is whether the business model will continue to work at decreasing scale. As I have argued elsewhere, the newspaper industry historically enjoyed enviable returns to scale. As the industry shrinks, it may fall through a threshold level of scale (call it the "Tripping Point") below which the model is irretrievably broken and the publishers themselves pull the plugs on the presses.

Where might this threshold be? The approximately 40% decline in advertising revenue over the past 18 months put many papers through a near-death experience. Even if ad spending returns to pre-recession levels, a 40% reduction in circulation from today's levels (which would occur in 2018 according to the long-term trend) might be unsustainable if it implies a corresponding 40% reduction in ad revenue.

Further, if only two out of ten households take the morning paper at some point in the next decade, can home delivery continue to be justified? At some point, route density starts to work against the industry and the paper-boy may go the way of the milkman.

Chicago Trib to AP: "Cancel my subscription"

The Chicago Tribune is testing whether it can live without Associated Press content.

Is Virtual Farming Bigger than Actual Farming?

The NYT has an article today that claims 62 million people have signed up to play Farmville on Facebook.

I am not one of these 62 million, so you'll have to read the NYT article (or ask any random 5 people in the U.S., one of them is likely a Farmville player) how the game actually works. But I am fascinated by the economic effort expended on Farmville.

According to the Bureau of Economic Analysis (see page 9) the total economic contribution from U.S. farming in 2007 was $137.3 billion. Dividing $137.3 by 62 million Farmville registrants equals $2,215 per user per year. Divide $2,215 by the current minimum wage ($7.25 per hour) and you get 305 hours. Divide 305 hours by 52 weeks and you get roughly six hours per week.

If Farmville players are spending six hours per week on this game, the opportunity cost of the Farmville economy may be larger than the actual U.S. agricultural sector.

And, no, I will not adopt your lost cow.

Monkeys, Typewriters and The Odds of the Governor's Hidden Message

Everyone's heard the theory that with enough chimpanzees, typewriters and time, you'd eventually produce "Hamlet."

Shakespeare it's not, but California Governor Arnold Schwarzenegger's office today released a letter to the California State Assembly vetoing Assembly Bill 1176. A number of commentators have noticed a sub-textual message composed by the first letter of each line. The governor's office has called it "unintentional" and a "weird coincidence."

How weird? What are the odds that seven lines of a note could just happen to spell out this particular message? Would you believe less than one in 2.7 billion?

The math is surprisingly simple. Assume that each of the seven important lines of the letter have to start with a word (no hyphenation) that itself begins with a specific letter. The odds of randomly coming up with the Governor's message is then the product of the odds of each of the seven letters occurring as the first letter of all the words in the English language.

Surprisingly, a quick scan of the web didn't uncover a complete list of beginning-of-word letter frequency for English (how 'bout some help here, Google?) but I did find this top ten list.

Letter	Frequency
T	0.1594
A	0.1550
I	0.0823
S	0.0775
O	0.0712
C	0.0597
M	0.0426
F	0.0408
P	0.0400
W	0.0382

Source: Top 10 Beginning of Word Letters

So here's the math (using < 0.0382 for "u", "k" and "y" which don't make the top ten.

f = .0408 x
u < .0382 x
c = .0597 x
k < .0382 x

y < .0382 x
o = .0712 x
u < .0382

<= 3.693 x 10^(-10) or approximately one in 2.7 billion.

Some coincidence... the governor may have some especially talented chimps on his staff.

Does Barry Diller Watch "The Office"?

Barry Diller, a very smart guy and CEO of IAC/Interactive Corp, once famously dissed "user-generated content" (a progressively meaningless phrase) by suggesting that there's a limited audience for videos of "... a cat throwing up on your grandmother."

A few minutes ago, I finished watching NBC's one-hour episode of "The Office" featuring Pam and Jim's wedding, now, no longer, again available at www.hulu.com. It was, as always, charming and brilliantly executed. But most notable was the closing five minute sequence which was a lovely homage (fair use?) to "Jill and Kevin's Big Day" on YouTube, which features Chris Brown's song, "Forever".

Here's "The Office" version.

Art and reality reflect each other in infinite recursion. And tonight's episode of "The Office" may cause Mr. Diller to re-think his cat vomit thesis. Somewhere out there in UGC-land, Jill and Kevin had an inspired idea, arguably violated Sony BMG's copyright, choreographed five very special minutes of their lives, posted it on the internet, and created a sensation (28 million views!) Now that NBC has picked up the theme (in a show that ironically poses as documentary) it will probably drive another 50,000 iTune downloads for a guy currently serving six months of community service in Virginia.

Is this a great country, or what?

P.S. Even if you don't usually watch the show, check out the opening 1:45 below. For a more ham-fisted use of the vomit theme, check out Microsoft's online ad (since pulled) for Internet Explorer 8.

Lost in Transition?

The WSJ website has a nice interactive on the anniversary of Lehman Brother's bankruptcy, which displays the WSJ front pages from that momentous week. For those of us who followed the markets and the story, the series of images captures the urgency and drama of the Lehman collapse and its aftershocks in the financial markets.

But for me, what is most striking about these headlines is that until yesterday, I had never seen them. I'm a regular reader and have been a WSJ subscriber for twenty-five years, but gave up the print edition several years ago. Consequently, I consume my WSJ one story at a time and unless I see the print edition at a newsstand or on someone's desk, I generally don't see the front page the way the editors pasted it up.

One thing that newspapers do well (that Google hasn't automated... yet) is to make editorial decisions about how the day's most important or interesting stories are laid out, with subtle emphasis conveyed by position, allocation of space and type size. So it's somewhat surprising that as newspapers wrestle with the transition from print to online, their websites (well at least the WSJ, New York Times and San Francisco Chronicle) don't feature the front page more prominently on their home page.

As readers inevitably gravitate to the web, it would be a shame if we lose the shared recognition of those iconic front pages that mark the major news events of our lives.

What Hath Tech Wrought?

Here's a paragraph from today's WSJ that neatly captures some of the themes I've been exploring about technology's impact on business models, corporate life-cycles and investment horizons.

"Kodak spent $3.4 billion from 2004 through 2007 converting the bulk of its 129-year-old business from high-margin film to more competitive electronic technology. It is in the midst of cutting 3,500 to 4,500 jobs, which could reduce its work force to a 1930s-era low of 19,900 from a 1988 peak of 145,300."

It's worth noting that the enterprise value (equity value plus net debt) of EK is a little under a billion dollars today (at roughly $3.00 per share.) Including pension liabilities of $2.4 billion in the net debt calculation increases the enterprise value to roughly $3.4 billion, equal to the amount Kodak invested over four years to convert from a film-based to an electronic imaging company.

Under the most generous interpretation, the market is valuing Kodak's 129-year history at zero right now, despite it's highly recognized brand and long tradition of technological innovation.

Steve Jobs' Health is None of My Business

Bloomberg today reports the non-news that, "...disclosures about Steve Jobs’s health remain under scrutiny by U.S. Securities and Exchange Commission investigators over how his condition went from 'relatively simple' to 'more complex' in nine days" according to an unnamed source.

It must be vacation season if Bloomberg is trotting out a "situation remains the same" news story, which then recycles lots of commentary from legal experts not involved in the situation and doctors not treating Jobs. Predictably, nobody actually involved in the situation provided any on-the-record comment.

For the ultimate phone-it-in vacation season news story, go read this parody by Andy Borowitz. Like Mike Royko's traditional New Year's Day column or the Wall Street Journal's annual Thanksgiving editorial, Borowitz piece deserves to be republished every July 4th and Labor Day weekend.

Back to Steve Jobs' health.

Here's a simple fact that seems to get overlooked by the breathless journalists on this story: Like every other CEO I've ever met, Steve Jobs is mortal. Presumably rational investors in Apple factored this into their investment decisions years ago. Bloomberg is especially aware of this fact, having already published an obituary for Jobs back on August 28, 2008.

Here's another simple and widely reported fact. Steve Jobs announced to Apple employees that he had been diagnosed with islet cell neuroendocrine cancer of the pancreas back in 2004. Investors in Apple who previously overlooked his mortality probably factored this into their investment decisions then.

Now here's a more complex fact. Cancer, in all its forms, remains a complex disease. Nobody, including Steve Jobs and his doctors, knows what tomorrow will bring. As anyone who's had a close friend or relative battling cancer knows, the prognosis can swing from high to low and back again in mere days. Any near-term prediction about the course of someone's cancer is inherently speculative and as likely to mislead as to inform. If this were any other risk factor and any other company, it would suffice to include boilerplate language in the 10-K along the lines of "We maintain key man life insurance on certain of our senior executives but there can be no assurance that recoveries under these policies would fully compensate the Company for the loss of the executive's services."

Surely the SEC staff has better things to investigate, journalists can find more newsworthy stories to report, and we can all just say a silent prayer for Mr. Jobs and his family and leave them alone in this difficult time.

Buzzword Beat -Mark Cuban on "Free"

Mark Cuban has published a new post on his weblog entitled,

When you succeed with Free, you are going to die by Free.

In the post, Cuban argues,

"Lets look at the rule that eventually KILLS all freemium based content plays:

There will always be a company that replaces you. At some point your BlackSwan competitor will appear and they will kick your ass. Their product will be better or more interesting or just better marketed than yours, and it also will be free. They will be Facebook to your Myspace, or Myspace to your Friendster or Google to your Yahoo. You get the point. Someone out there with a better idea will raise a bunch of money, give it away for free, build scale and charge less to reach the audience. Or will be differentiated enough, and important enough to the audience to maybe even charge more. Who knows. But they will kick your ass and you will be in trouble."

Any thesis in the sphere of economics that includes the words "rule", "kill" and "all" is inherently suspect, and Cuban's post reads like a breezy attempt to join the buzz-fest around the publication of Chris Anderson's new book, "Free, The Future of a Radical Price". The giveaway is Cuban's strained "BlackSwan" reference from Nassem Nicholas Talleb's book of the same name.

(Anderson's book is an expanded version of this Wired magazine article.)

As a number of commentators have already noticed, Cuban's thesis says nothing about "free" or "freemium" business models that is not equally applicable to any business. Yes, business is a hyper-competitive sport, someone will eventually -- no time frame given -- come up with a faster, better, cheaper version of what you do and "kick your ass." A vague and generally agreeable prediction -- hedged by the inclusion of "eventually" so not falsifiable in the abstract or the concrete -- is not worth arguing about.

Here's my take.

"Free" business models like Google's search engine, MySpace and Facebook are predicated on low, arguably zero, marginal costs. Facebook can afford to be the digital bulletin board for 225 million worldwide users only because the marginal cost of storage and bandwidth is very small. Equally important, the capital costs of storage and bandwidth decrease predictably in general accordance with Moore's Law. So even as Facebook's user base explodes, its technology costs (per user) are likely dropping by 15-20% annually.

What Cuban should have said about "free" business models is that the low marginal costs and declining capital costs of these technology-intensive businesses go hand in hand. And if the infrastructure cost of MySpace or Facebook declines by 15% per year, a competitor can replicate that infrastructure four years later at 52% of the original capital cost. With half the capital cost, a new competitor is tempted to compete on price (more, better stuff for "free") and win away the business. Even if the new entrant fails, it will likely compete away some of the incumbent's profits.

In his article Cuban seems to be thinking of social media businesses -- Friendster, MySpace and Facebook-- although he includes Google (which deserves an asterisk if only for its multi-year history of handsome profits). What's economically interesting about these social media businesses, allowing them "to raise a bunch of money" is often explained in terms of "network effects", a popular buzz-phrase for what economists call a positive externality.

According to Wikipedia, the concept of "network effects" was introduced in the early 20th century in the context of emerging telephone systems. The positive network effect (you have a phone, making it more valuable for me to have a phone) helps drive adoption of the new technology. But in the early 20th century, adding those additional phones meant stringing expensive wires to each house or place of business. And after the first entrant incurred that sunk cost, there was little incentive for a competitor to incur the same cost to compete for the same customers with the same service. Even if some of the installation costs declined over time (cabling, electronics, e.g.) the costs of rights-of-way, telephone poles and labor likely increased, allowing the first-mover to build a long-term competitive advantage based on network effects and sunk costs. This is why most telephone systems in 20th century became regulated monopolies.

Facebook's current membership, at 225 million registered users, testifies to the potency of network effects in social media. And with the physical infrastructure of the internet already in place, a network that would have taken decades to build in the last century can arise in mere months today.

That's what's frustrating Rupert Murdoch as Facebook has surpassed MySpace in popularity. It probably keeps Facebook CEO, Mark Zuckerburg, up at night as well. Network-effects businesses on the internet generally don't enjoy the additional competitive advantage of high and rising capital costs to keep new entrants on the sidelines. And the glue that holds the network together and preserves its value may be nothing more than "community," an economic intangible that's as fragile as it is powerful. If a new entrant gains sufficient traction through differentiation or well-funded patience (think Microsoft), it too will eventually enjoy network effects. As users defect from one community to another the winner's positive externality is the loser's negative one. If your friends have stopped updating their MySpace profile in favor of Facebook, you'll probably stop looking for them on MySpace. If your friends start posting their updates on Twitter, you'll spend less time on Facebook. After enough defections the market may reach a "tipping point" (buzz-phrase alert!) as yesterday's market leader becomes tomorrow's also-ran.

Clever entrepreneurs understand the fragility and potentially transitory nature of their competitive advantage if it's based primarily on network effects. Successful ones use their early competitive advantage period to build potentially more durable advantages based on technology and intellectual property. This is an important point where Cuban and I disagree, especially with regard to Google. At December 2008, Google's 20,000 worldwide employees included more than 7,000 engineers. Not a lot of venture capital money is flowing into startups to take on that army of programmers. Google's R&D investment strikes me as a rational strategy while Cuban sees it as a costly act of desperation.

Chris Anderson seems like a smart guy, so maybe he's covered all this in his new book. I'll have something to say about that when it's available at my public library where I'll check it out... for free.