PeppercomBlog

Too Big to Succeed

Posted by Gene Colter

The woes of a couple of the world’s largest companies are laid out in the newspapers today, and taken together they are proof that the bigger-is-better approach is as iffy in business as it is in life.

American International Group reported a record quarterly loss of nearly $8 billion and said it would look to add $12.5 billion in fresh capital. Just as notable among the numbers was the $9.1 billion write down in the quarter tied to derivatives linked to – you guessed it – subprime mortgages and other holdings. AIG took a big pounding from the press, analysts and shareholders earlier this year when the company confidently stated that its exposure to the credit crisis was contained. Then it figured out that wasn’t the case.

Meanwhile, Citigroup just hit the tape with news that it will look to slim down its operations and unload more than $400 billion in assets over the next few years, as newish CEO Vikram Pandit looks to remake the bank. 

Both of these financial firms are suffering in part from the very attribute that they and other companies have preached as a virtue over the years: They’re too big.

This is not a pat statement. At a certain point – especially with financial firms – size causes firmwide risk in the form of siloed business units that don’t play well together, as well as inconsistent and even counterproductive IT and risk management. Indeed, this is how a company like AIG can think its credit exposure is one number only to soon realize it’s not.

Further, the logic of all-things-to-all markets breaks down in the face of economic reality. Citigroup, under prior CEO Chuck Prince and others, was built into a “financial supermarket,” a conglomerate with every business line imaginable in retail, commercial and investment banking and in markets all over the globe. The thinking: When one business line or market isn’t doing well, others will pick up the slack.

Except that there’s the little thing underlying ALL financial businesses: The increasingly linked global economy. The businesses are tied together, even if the operating chiefs would like to believe otherwise. This is how a bank can fail to spot the risk of an asset or market failure rifling through all its business lines.

For example: a position in bonds tied to mortgages goes bad, and the trading desk gets hit. The underlying mortgages also hit the retail bank where loans are made, and the asset-management unit suffers because it holds some of those bonds. This happens to be a real example that has played at a number of banks.

Might does not always make right.

The Rupert-Uma Lovechild?

Posted by Milos Sugovic

“My Legal Cameo: Why We Convicted Thurman Stalker” appeared on the front page of the WSJ.  Does the article truly belong on the front page of one of the most respected dailies or is this material more appropriate for a Page 6 gossip column? How do the $200K household income WSJ readers feel about stories like this?

The story speaks volumes.

Papers face a normally distributed population of readers, which means, if they want to maximize appeal (code for sales) they need to target the average reader. That's the only logical explanation.

So what’s special and magical about the average reader? As George Carlin put it, “Think of how stupid the average person is and then realize that half of them are stupider than that.” To maximize readership and sales, papers avoid stories that are too many standard deviations away from the intellectually blessed mean pair of cerebral hemispheres. And that’s how dumb front page articles are born.

Should the PR business reconsider its approach? Does this mean that PR pitch angles of real importance will have to compete for WSJ editors' mindshare with Hulk Hogan's publicist? That depends on where the average IQ of the target audience falls. Ironically, understanding that same average reader helps precipitate well-targeted messages.

If this trend continues, what will it mean for the brand identity of the Wall Street Journal? Imagine a PR professional having to tell a client this: "The good news is that we got you on A3 of the WSJ. The bad news is that Dr. McDreamy is on A1...again."

Rest assured, the pipeline of Lohan, Spears, and Miley Cyrus stories will never go dry.

White (House) Washing the Economy?

Posted by Gene Colter

Good news: The White House’s top economist has given the economy the all-clear.

Well, not quite, but Council of Economic Advisers Chairman Edward Lazear’s was pretty upbeat in a meeting with Wall Street Journal and Dow Jones Newswires reporters and editors. Notably more upbeat than many private-sector and Wall Street dismal scientists.

We’re all for contrarian views – indeed, this correspondent is a registered Contrarian. But a couple of Lazear’s remarks seem to suggest that he’s not quite playing by the ostensible rules for the Council, which is supposed to give the president objective counsel.

His overarching point is that we probably aren’t in a recession – and on this point no one can disagree: Recessions by definition are two straight quarters of “negative economic growth,” so you can’t see them until they’re done. And even then they have to be officially deemed Recessions ™ by the National Bureau of Economic Research, or NBER.

But Lazear seems to put a positive spin on most every observation. Perhaps this is a function of being on the record with the news organization. Often – most of the time, in fact – Wall Street Journal editorial board meetings are off the record.

A particular eyebrow-raiser is this remark, according to the newspaper’s account: “And Mr. Lazear said just two areas of the economy are showing the type of deterioration that the NBER would consider recession range: retail sales and manufacturing.”

Given that the country began moving away from its manufacturing base decades ago, let’s leave that measure aside.

But consumer spending accounts for 70% or more of this country’s economic activity. And if retail sales are a proxy for the consumer, then shouldn’t we at least be a bit worried about the direction gross domestic product is headed, even if we’re not going to register a full-blown recession?

Greener than Thou: California (is) Dreaming

Posted by Gene Colter, Editorial Director, Peppercom

Last Friday morning I woke up groggier than usual (and I’m an insomniac) but with a tiny bit of joy at hand: The previous afternoon I had picked up a couple of tiny hand-painted goblets at the San Francisco airport, and I stumbled downstairs to wash them up and put them on the kids’ table for morning OJ. I figured the boys would enjoy the cups’ bright, bumpy San Fran skyline and the little-folk-appropriate sizing.

My heart sank as I flipped the things over and started to scrub off the tiny label: “This product will expose you to products known to be dangerous by the state of California, including lead …”

Lead.

The same stuff that helped China catch hell last year when we learned that some Thomas the Tank Engines were covered with toxic-tainted paint. The same stuff outlawed in household paint since 1978.

For anyone who doesn’t know or believe that lead is a serious neurotoxin for developing minds, please hear the story of one of the kids in my Northern New Jersey town. A neighbor had the house scraped, the old paint drifted into the room of the toddler daughter next door, and the little girl’s blood lead level shot up to seven times the normal. Her brain damage was forever, we were told.

California: Land of Concerned Environmentalists and Celebrities. And sanctioned lead products, apparently.

And, also: Smoke-filled hotel rooms. On the same trip I bought the poisonous cups – yes, they went right into the trash – my colleagues were subjected to a bank of smokers’ hotel rooms. They were told these were the only rooms available at a nice hotel near San Jose. (I was staying elsewhere and dodged the noxious bullet.) I’m not a table-pounding anti-smoker, but are you telling me you can’t get a smoke-free room in California? Can you imagine what effect these rooms had on my colleagues, who included an asthmatic and mom with a newborn?

Come on, California: Get the lead out. And get some smoke-free accommodations. And get off your Green Soap Box until you do.

Do Your Economics Homework!

Posted by Milos Sugovic, Research Analyst, Peppercom

You would think a communication-centric industry would have minimal asymmetric information. It doesn’t.

The public relations industry, like virtually all markets, is victim to information asymmetry. That’s why perfect competition will always be an idea, nothing more - and why PR firms and their clients need to do a better job understanding one another.

The paradigm for analysis: economics of information asymmetry. Several got the Nobel Prize for it because they were definitely onto something, and it’s time basic concepts start penetrating industries that are unusual suspects.

Moral hazard and adverse selection are loaded concepts with strong roots in the finance and insurance industries, but also apply to bike helmets and seatbelts, as well as lending during international monetary crises.

So here’s a quick refresher: Moral hazard is the possibility that a party insulated from risk may behave differently from the way it would if it were fully exposed to the risk. Adverse selection weeds out the risk-averse parties in favor of the risk-prone that generate higher benefits from insurance.

So how is this analogous to the public relations industry? Think of the principal-agent relationship as a client-PR firm bond, where PR activity creates a buffer between the client and market perception. In effect, a client buys “perception insurance” from a PR firm, which alters its exposure when investing, outsourcing, innovating, or even pushing on an entirely new business model. And that’s where moral hazard steps in.

But take that a step further. The client knows how willing it is to engage in risky activity, while the PR firm can only speculate. So how does adverse selection take place? With a little bit of discouragement coming from a recession, for example, the risk-averse might opt out of a PR engagement. As the trend continues, the risk-prone clients remain. 

At the end of the day, having a PR firm looking after a company’s back will alter its behavior, the only variables are extent and client stratification.

So what’s the moral for PR firms? Study clients thoroughly. Understand their business, their risk management practices, industry trends, market forces, and the intentions behind buying “PR insurance.” It’s a relationship and it can only work well with knowledge sharing. For prospective clients: pick the PR firm that does its homework.

Don’t Read All About It

Posted by Gene Colter, Editorial Director, Peppercom

“The Business of America is Business” – Calvin Coolidge

Everybody knows the newspaper business is declining. Less discussed outside media circles is the particular challenge to newspaper business sections, which apparently are about as popular among advertisers and publishers as a Metallica fan at a Grateful Dead show. Across the country, handfuls of papers have shuttered or cut back their business pages or combined them with other sections, usually metro. You can read about this development here and here.

Dollars and cents explain a lot of what’s happening here, as publishers just can’t justify a lot of space for articles – “newshole” in the industry nomenclature – without the advertising to pay for them. In the old days – the 1990s – and in prehistoric times, business sections earned their keep through printing stock prices and other “agate” copy, as well as by running traditional ads.

But the buck also should give everyone who cares about the news (that’s you, isn’t it?) pause when they read about this trend, because the economics of any article – not just business news but also local, national, political, entertainment, arts, religion, home and garden, you name it – are important. Whether we like it or not, everything flows from the balance sheet. Smart reporters and editors learned this over the last couple of decades, which is why we saw more journalism schools offer more business-reporting classes over that same period. There, and on their beats, journalists learned how the economy works, how to read financial statements, how to call BS on bad practices, how to suss out alternative sources (vendors, customers, et al) and how to scan documents for ideas, context and validation.   

To be fair, big-city business reporters often have it easier than their small-market compatriots, because the city beat-pounders more often cover public companies that leave a paper trail with the Securities and Exchange Commission. But the best practices of business journalism can work in Anytown USA, too. Unless the business pages go away and the reporter has to start pitching his stuff to another, already full section.

So now we’re going to have fewer articles informed by those business smarts. That’s not good for anyone. Except, of course, those organizations or executives looking to put one over on customers or investors.

Enjoy, America.