Tag Archives: Business

A New American Sense of Responsibility?

Posted on August 20, 2008 | 2 comments

Over the past few months I have seen more and more data indicating that Americans are cutting back their consumption in the face of the deteriorating economic situation. Retailers, restaurants, car companies, airlines – it seems as if everybody is feeling the pain. Just last week the Wall Street Journal called the trend “U.S. Retools Economy, Curbing Its Thirst for Oil.”

I am wondering if maybe this trend will last beyond the current economy and represent a new, or renewed, sense of responsibility in America. The past few decades have been an orgy of consumerism in America (and much of the developed world, but I’ll focus on America simply because I know it best), as people lived beyond their means, purchasing things they didn’t need and couldn’t afford. Possibly the best quote I have heard on this trend came from Art Wong, a worker at the port of Long Beach, who was on NPR’s Marketplace:

You know, we’re being stretched, and I turn to my kids every so often and I ask them, how many more pairs of jeans do they need? How many more handbags can they buy? And how much room do they have in their closets? And they keep going, and they keep buying, and the port keeps seeing more and more cargo coming through here.

This consumption frenzy brought with it a number of problems. There were environmental considerations, both from the production of consumer goods and from the gasoline sucked down by the SUVs that were a major outlet of purchasemania. There were price dislocations from people purchasing items (homes, Tiffany bracelets, fancy meals) that they couldn’t afford. There were macroeconomic impacts as we financed our purchases with overseas capital. Finally, I think there were moral and psychological consequences (not surprising to regular readers of this blog) from an entire population giving up on any sort of self-restraint or thought for the future.

With gas prices above $4 per gallon and economic growth stagnating, our reduced consumption is not surprising. But maybe, just maybe, this decline in purchasing represents a broader change, a sense that untrammeled consumerism is simply unsustainable. Perhaps people were jolted awake by the impact on the environment, or the national security ramifications of our addiction to oil, or the deflation of the housing bubble. Are Americans now looking beyond their own material wants?

Maybe, and maybe not. Perhaps there is no broader sense of responsibility, but rather the inexorable force of economics. Maybe people still don’t care about the environment or national security, and all they really want is a bigger Jet Ski, but they simply no longer have the money to satisfy their wants. That is certainly what the economists think. “We’re going back to the good old days of living within our means,” said David Rosenberg, chief North American economist for Merrill Lynch. Adds another:

“We’re seeing the birth pangs of a new economic structure,” said Neal Soss, chief economist for Credit Suisse First Boston. “The next year or two or three will be about the transition to a new equilibrium. Consumption by households will grow more slowly than their incomes, which is the exact opposite of the last 25 years when consumption grew faster than incomes.”

Although I would prefer to think that we are getting more responsible, and that issues larger than our checkbook are driving these new spending patterns, I suspect that A) the economists are right; and B) it may not really matter. Even if economics are behind the change, those economic conditions show no signs of changing in the near future, or possibly the medium future. There is even a theory that this shift is permanent, and that America’s days of being an economic powerhouse are over. “The world has become multipolar,” according to UC Berkeley economist Barry Eichengreen. “Our dominance will decline.” Jared Diamond, of Guns, Germs & Steel fame, even says that the developed world only has 30-50 years of first world living before we outstrip our own resources.

Either way, this change in spending, this “retooling of the economy,” looks like it will be with us for a while. This has tremendous implications for companies that sell to consumers. Think about:

  • Utilities dealing with decreased demand for energy
  • Car companies finally forced to produce smaller cars
  • Construction with a focus on energy efficiency and green materials
  • Appliances that are cheaper, smaller and use fewer resources
  • Consumers actually turning down credit card offers because they aren’t buying things
  • Retailers changing their product assortment
  • Discounters (Wal-Mart) gaining market share at the expense of stores that catered to the overreachers (Neiman-Marcus)

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Posted in Business, Environment, Pop culture, Trends

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Convenience Consumption

Posted on August 6, 2008 | 4 comments

Many people are familiar with conspicuous consumption, Thorstein Veblen’s brilliant term from Theory of the Leisure Class for describing how upper classes consume as a way of displaying wealth.

But it seems like now we are seeing a new form of consumption where people are consuming for convenience instead of conspicuousness. Of course, people have always paid for convenience – that’s why last minute plane flights are so much more expensive than advance fares – but the convenience consumption I’m seeing has certain differentiators:

  • there is a cost to society
  • the gain in convenience is marginal
  • the consuming seems driven by appearances as much as convenience.

Bottled water started me on the path to this theory, like a spring feeding a Fiji bottling plant. The growth in bottled water consumption in the U.S. has been dramatic, growing to 9.4 billion gallons and $12.6 billion in 2008 from 4.7 billion gallons and $6.1 billion in 2000. On a per capita basis, this represents growth to 29 gallons per year from 13. That’s a lot of water. Everywhere you go, people are swigging from plastic bottles of water: in the car, on the bus, walking down the street.

The cost of all those plastic bottles, however, transcends the $1.50 that the consumer paid. Only two out of ten water bottles consumed in the U.S. are recycled, with the rest going to the dump. That adds up to 38 billion bottles tossed into landfill every year. In addition, it takes 17 million barrels of oil to produce the water bottles consumed in the US every year. Finally, it takes thrice the clean water put in every bottle just to produce that bottle. Combine the garbage generation with the natural resource consumption, and drinking bottled water clearly has a cost to society.

Carrying your drinking water in a bottle is convenient, but not significantly more convenient than getting water at your destination. This is America, where virtually all tap water is safe to drink, and virtually all houses and offices have sinks with taps. It is challenging to imagine a circumstance where an urban or suburban American is more than 30 minutes from a source of clean drinking water.

So why the billions of bottles of water? Proper hydration has clear health benefits but I question that as the root cause. It feels more like people want to show – to themselves and to others – how busy they are. Realistically, nobody is so thirsty on their bus ride to work that they have to drink water from a bottle. We can all wait until we arrive at our office and fill our water glass then. But drinking from a bottle demonstrates to our busmates how busy we are, and how hip to hydration.

If nobody is so thirsty that they have to drink on the bus, much like nobody has such an important phone call that they can’t delay it while waiting in line at Starbucks, why are we doing both? By paying for unnecessary convenience, we can demonstrate to the world how much we NEED that convenience, how important we are. The parallel to Veblen is clear. But in a green world, conspicuous is out, convenience is in. In the modern world, you prove your worth not by owning a mansion in Newport, RI, but by being so busy that you need to drink, talk and eat on the run.

If I’m right about convenience consumption, what are the implications for the future? I predict that food will continue to be conveniencized. There is already Go-Gurt and Lunchables for kids, but I think that package food for adults on the go will continue to expand. Because lord knows, when people are hungry they have to eat…NOW! And if it’s gourmet, that’s all the better, since after all, we live in Veblenland.

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Are They Trying to Get Caught?

Posted on July 31, 2008 | Leave a comment

Merrill Lynch executives had incriminating emails revealed in a lawsuit filed by the Commonwealth of Massachusetts regarding the shutdown of the auction rate security market. Probably the best one:

“Come on down and visit us in the vomitorium.”

This was from a managing director in the auction rate group at a time when Merrill was pushing clients to buy these securities.

I’m happy that these emails were found, since I love nothing more than seeing a highly-paid yet morally-suspect investment banker do a perp walk, but I have to wonder why any person who can read the newspaper still sends messages like that via email. They always get discovered, people!

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Why Are Taxpayers Helping Tomato Growers?

Posted on July 25, 2008 | Leave a comment

There was an article in today’s Wall Street Journal about how the tomato industry is asking for $100 million cash to make up for lost revenue during the recent salmonella scare, and Congressman Tim Mahoney, a Democrat from Florida, where many tomato growers are based, is introducing legislation to make it happen.

This is today’s example of privatizing profits while socializing losses. This is a topic I will return to many times since it features several of my pet peeves:

  1. Greed in the private sector
  2. Venal politicians
  3. A system which benefits the powerful and well-connected at the expense of the average taxpayer

To be honest, this is not the best example ever. A legitimate case could be made that since government shut down the tomato industry to protect the health of all Americans, all Americans should pay for the damages. I reject that case because the food industry has long rejected government efforts to improve safety. I further reject it because if the government had done something that temporarily increased tomato industry profits (eg. FDA announces that tomatoes cure obesity, and then takes it back) you can be certain that the industry would not return its windfall profits to the taxpayers.

With that case summarily dismissed, like so many Lotharios in so many bars, let’s turn to why this tomato cause vexes me so. Tomato farmers and packers are in business to make money, so their incentive to recover losses is understandable, especially since it appears that their product was not the salmonella vector. But on the other hand, theirs is a risky business. Produce is susceptible to weather, to bugs, to the whims of the market – should the taxpayers pay whenever something goes wrong? The food industry in the US has had ample opportunity to clean up its act, but has chosen instead to save money. And now, because the food industry caused disease, they expect us to pay. My view: this is the cost of doing business.

As for Congressman Mahoney, representing the tomato district of Florida, in the 2007-2008 election cycle he has received nearly $95,000 in campaign contributions from agricultural concerns, making them his fifth largest donor base. He has a national debt clock on the front page of his web site, showing $32,525 in debt per citizen as I write this, but that isn’t preventing him from giving $100 million of taxpayer money away to a few connected tomato producers who provide campaign contributions which allow him to remain in power. That’s what I call venal.

Part of the problem – beyond greedy people and venal politicians – is that the system encourages this behavior. The greedy people with significant capital at stake have heavy incentives to apply their resources toward a leverage point. The venal politician who wants campaign contributions is that leverage point. And the average taxpayer has no say in the matter. Until there is some stronger system of campaign finance reform, or an organization with major dollars to deploy on behalf of the common citizen, we are going to have to rely on corporations not being greedy or politicians not being venal and power hungry. Good luck with that.

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Eventually We’ll All Be Environmentalists

Posted on July 22, 2008 | 1 comment

Environmentalism is generally represented as some version of dichotomy: conservative v. liberal or business v. environmentalists or republican v. democrat. Probably the most common characterization is that corporate executives don’t want to spend money to clean up while liberals want businesses to be clean and green: in other words, profit v. the environment

This dichotomous presentation has historically made sense, and if you look at environmental battles in the past, this is how the lines have often been drawn. For examples, see loggers v. the spotted owl or coal mines v. health advocates.

Health advocates, however, are the crux of a coming change. As the environment degrades and as science discovers more links between pollution and health, environmentalism will be seen less as an earth and animal issue and more as a human health issue. Many companies are perfectly happy to prioritize profits above trees or animals or scenic views, but they are much less likely to put profits ahead of human lives.

As the science become clearer and activists get better at using that science, the link between corporate actions and human health will become more explicit. This will cause corporate chieftains to look at things differently: they are, for the most part, decent people, and they don’t want to kill or injure other humans. And even those chieftains who might choose profit over the lives of others (they’re the ones who make great movie villains) certainly don’t want to get caught valuing money over human lives – that would be bad for business.

To use a concrete example, coal mining creates pools of toxic sludge. In West Virginia, some of these pools sit near schools. One mine, owned by Massey Energy, has a 2.8 billion gallon sludge pool sitting 400 yards above an elementary school. If science were to demonstrate that the fumes from this pool are damaging to the health of the school kids, I reckon that Massey CEO Don Blankenship would look into doing something about it. Mr. Blankenship probably doesn’t want to kill kids, and he definitely doesn’t want the world to know if he does kill kids.

Moreover, as global warming become more widely accepted as fact, this problem will hit closer and closer to home for corporate chieftains. Because if the climate starts to change, it won’t be random kids being hurt; it will be the chieftains’ kids, or grandkids. And NOBODY wants to hurt their own grandkids.

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Content is King, and Always Will Be

Posted on July 18, 2008 | 2 comments

Here in Silicon Valley, folks like to believe that technology demolishes all old business models. And if those old business models are based in New York or Los Angeles, then the Valley partisans love it even more.

Which is why we continue to hear talk about how the internet will destroy old media, with YouTube replacing television and record companies falling by the wayside. There is a modicum of truth to this talk: old media companies definitely have to change their business models, and some will be unable to adapt.

One thing the internet won’t change, and can’t change, is that content is king. Ultimately, people care about content. Music, video, the written word: in all cases, consumers care about the content itself, not the business model behind it, not the distribution technology, not even who owns it. Users want material that entertains or informs them; how it gets to them is purely a matter of convenience.

Take iTunes and the iPod, for example. Yes, they are wreaking havoc on the traditional music business. But if Apple had not convinced record companies to sell their music on iTunes, it wouldn’t have been successful. No matter how cool the iPod looks, and how easy iTunes is to use, they would have flopped if nobody could listen to their favorite music on them. An iPod without music is a white paperweight.

Or you might recall back in May 2000, when Time Warner, the cable company in New York, dropped ABC from the cable system in a dispute with Disney over money. Who backed down? Time Warner. Why? Because their customers went ballistic when they couldn’t watch the ABC show Who Wants To Be A Millionaire, which was the hot show back then. Viewers didn’t side with ABC or Time Warner – they just wanted to watch their show.

Even in user-generated content – the current revolution – my thesis holds true. On YouTube it is the funny or sexy or interesting videos that rise to the top. People watch that which entertains them. Likewise on blogs. The blogs that have grown from one guy’s ideas (i.e. this one) to actual media companies (i.e. DailyKos) did that because they were popular. Readers liked the content, shared it with friends, and boom – the blog is a hit. Nobody cares that it’s a blog per se, only that it’s interesting.

Digression: please note that this process of good bloggers rising to the top is not so different from the old media process. The classic career path in newspapers was that a writer would start at some small local paper, and if they were good, they might move to a larger paper, and then to a large market paper, and then to the NY Times or Washington Post or some other top paper. In that process, though, the promotion decisions were made by editors. In the blog world, promotion decisions are made by the readers.

What are the implications of content’s primacy? First, it means that the owners and producers of content have more leverage than Silicon Valley thinking gives them. The ability of distribution systems to restrict access to content is limited, whether the distribution system is cable companies, as in the example above, or telephone companies or Google. However, that is true only of content that users already know they want, like American Idol or the latest 50 Cent song. For undiscovered content, the story is different. Like a tree falling in the forest, content in some ways doesn’t even exist until people watch it (or hear it or read it). So for new content, a distribution network that can discover or promote appealing content has great leverage. This is what traditional TV networks do so well: find or create compelling content (CSI, Survivor, etc.) and introduce it to a wide audience.

This theory does not mean that great content is invincible. Fundamental business rules still apply, namely that your content must generate revenues greater than your cost of creating that content. Newspapers are an interesting case. People have clearly demonstrated that they want local news; although circulation is dropping, most newspapers are still widely read in their home towns, and newspapers’ internet sites are generally growing. Revenue streams, however, are disappearing, as internet players siphon off the lucrative classified ad business and major display advertisers (department stores, car dealers) suffer through their own problems. But the cost of producing that content – paying journalists, printing papers – is not going down at all. So even though readers want the newspaper content, the question is whether newspapers can generate sufficient revenue to cover the costs of collecting and distributing their news content. The head of McClatchy newspapers has laid out this dilemma best (full disclosure: I am friends with McClatchy’s CFO), but is still struggling to find a workable solution.

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