Opinion

Felix Salmon

How Tina Brown is like quantitative easing

Felix Salmon
Nov 17, 2010 05:35 UTC

Nick Summers has found one reason for Tina Brown to shutter Newsweek.com:

There will be layoffs as the two staffs merge. (The incentive is to make those cuts from the Newsweek side of things, as the Washington Post Co. has agreed to cover some of those costs for up to one year.)

The merger of The Daily Beast and Newsweek is a merger of a website and a print magazine. To have two web staffs would be redundant, and Brown has carefully built up her own; meanwhile, Newsweek‘s costs nothing to fire. Easy, right?

Of course, it’s much more complicated than that in practice — and Summers reports that Brown “gets tripped up a bit talking about the future of Newsweek.com”. But the clear impression one gets from Summers is that Brown has been thrust blinking into this merger, and that she’s going to do her best, but that she has no more idea than anybody else how this combination of two rocks is conceivably going to float.

Brown has a powerful reality distortion field; if Steve Jobs is a 10, Bill Clinton is a 9, and Arianna Huffington is an 8, then she’s a 7, roughly in line with Barack Obama. Reality distortion fields can be monetized: the way Summers puts it is that “Ms Brown’s name brings in print-ad dollars all by itself”. That might be true, but it didn’t save Talk. (Which, incidentally, would be a good name for both the magazine and the website, and would also give the whole enterprise an aura of ambition which can look unblinkingly in the face of failure.)

That said, Brown did resuscitate Vanity Fair, and her career shows that she’s maybe a better turnaround artist than founder. If anybody can save Newsweek, then she can: think of her as the desperate quantitative-easing measure to Sidney Harman’s Ben Bernanke. It probably won’t work, but it’s the best chance he’s got.

COMMENT

Ideally, they’ll keep the Newsweek.com proofreaders and copy-editors.  It seems like I read at least one ‘Beast’ post per week with a paragraph that is completely unintelligible. 

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QE2 and the undead homicidal zombie market

Felix Salmon
Nov 16, 2010 21:29 UTC

I know this blog has been way too heavy on the QE of late; apologies for that. But Baruch has a fantastic new post up, which nails what I’m really worried about when it comes to quantitative easing.

Essentially, says Baruch, the stock market rally is like the cat in Pet Sematary: it looks real, but it isn’t. And in fact it’s likely to turn out very harmful indeed.

Part of the problem is that QE has become, in part, a game of “kill all the shorts”—a game which a glance at IOC or OPEN or even UTA will tell you is being played very well indeed. Correlations are high, which is always a bad sign, and that weakens the raison d’être of the entire market, which is to allocate capital efficiently. Instead, the stock market becomes a place where people park their money in the hope that it will go up and in the expectation that if it goes down, the Fed will step in and rescue them.

But Baruch isn’t reassured:

Will we crash? Will we carry on straight up? Will we pause and rally? Who can say? We’re in a period where anything is possible, as I’ve said before, a world of unintended consequences coming down the pipe. Some may be good, and some may be bad…

I’m not saying we’re in an undead homicidal zombie market, though we may be. But here’s an example of what the Pet Sematary market is capable of in terms of unintended consequences: QE inflates all asset prices, including commodities. This pressures the Chinese consumer, who we are relying on to pull us all out of this mess, who can suddenly not afford his new LCD TV because his Moo Shu pork Big Mac and fries is costing 20% more than it used to. Changes in commodity prices have a much greater impact on his consumption than Joe Schmoe in Idaho. The BoC has to raise rates to offset the inflation this is causing, hurting Chinese growth even more, and global GDP growth drops 50bp. Bravo the Bernank. With your Quantitative Easing you just killed off the only good thing in this market which was working naturally without outside interference.

Baruch doesn’t think this is going to happen, necessarily — but the point is that neither he nor anybody at the Fed is remotely able to judge its probability, or, for that matter, the probability that QE will actually work.

Kevin Drum makes the very good point that we’re not actually arguing about something hugely important here:

Despite the scary sounding $600 billion number, the actual impact of QE2 is almost certain to be fairly small. With interest rates already so low, there’s simply not enough money involved to move markets substantially.

But the key word here is “almost”: QE might well end up making very little difference either way, but there’s no doubt that it’s made the tails fatter. Global markets have ramped up a lot since QE2 was effectively announced, and a sudden unwind of that move would devastate confidence. There’s lots of things that can go wrong, and the chances that the stock market has its valuations right have never been smaller. If you’re buying stocks right now, I hope you’re able to withstand a very bumpy ride. Because there’s a substantial chance that you’re going to get exactly that.

COMMENT

But this is a daft argument. Yes, we are in uncharted territory and we don’t know what QE2 will do — but there are good reasons to think it should help, so let’s give it a go. Your argument is basically just fretting that we don’t know it all.

Does this come down to a matter of temperament? Some people are inclined to act in a new, bad situation, and some are paralysed with nerves?

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Felix TV: Why QE isn’t working

Felix Salmon
Nov 16, 2010 20:09 UTC

There are things which could go right with quantitative easing. But on the other hand, there are big things which could go wrong too. And right now corporate America seems to be more worried about the downside than it is certain about the upside. Which is why there’s a real risk that QE is going to cause more harm than good.

COMMENT

So ok the US exhuberance is cute, but I still think Robert Peston should sue

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Who deserves the credit for GM?

Felix Salmon
Nov 16, 2010 17:45 UTC

Andrew Ross Sorkin loves private equity.

Sorkin finally get around to responding to Malcolm Gladwell today, and he’s unimpressed. Here’s how he frames the question:

Can financiers ever do anything beyond financial engineering?

With General Motors planning an initial public offering for Thursday that values the once-left-for-dead company at more than $50 billion, the answer to that question is more than theoretical.

How did G.M. become one of the greatest turnaround stories, at the moment at least, in history?

You can guess where Sorkin ends up. While Gladwell gives a lot of credit for GM’s current health to Rick Wagoner, Sorkin dismisses Wagoner as the CEO under whom GM went bankrupt. Instead, he says, “the GM turnaround is ultimately an act of financial engineering”—the financial engineering that Steve Rattner takes lots of credit for in his book, and which Sorkin is happy to ratify as one of the greatest turnarounds in history.

The financial engineering at GM was difficult and impressive. But in principle it’s neither difficult nor praiseworthy to take an insolvent company, put it through bankruptcy, and let it emerge under the ownership of its former creditors and people who provided DIP funding.

Bankruptcy, in theory and in practice, is essentially just a change of ownership. It’s not easy, and it carries non-negligible costs; Rattner did a good job of minimizing those costs and therefore maximizing the value of the post-bankruptcy GM. But you don’t need PE honchos to orchestrate a bankruptcy filing and rid a company of its liabilities. And the main thing that Rattner did with GM was to lubricate the process with something over $50 billion in US taxpayer money, most of which went to pay off GM’s creditors, and much of which is unlikely to ever be repaid.

Rattner deserves praise for what he did. But so does Wagoner, and so do all the workers who have worked and who continue to work to actually make the cars that GM sells. The financial engineering might have been a necessary part of the turnaround process. But it wasn’t remotely sufficient.

COMMENT

GM is a typical example of a US company forgetting the rest of the world exists.

Once the US market had saturated, the only place to look for growth over and above replacements was the rest of the world. But what US focussed GM had not done for decades was notice that the rest of the world made cars too, and better ones than GM made.

So now GM has lost it’s early provider advantage in overseas markets. That means just one thing: there’s no more easy money. Management need to change their way of thinking fast or we’ll be revisiting this situation just a few more years down the line.

http://fifthdecade.wordpress.com/2008/12  /05/saving-the-american-auto-industry/

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The rhetoric of tuition inflation

Felix Salmon
Nov 16, 2010 17:05 UTC

Let’s say I earn $50,000 a year, and a widget costs $1,000. Then my pay goes up 3%, while the cost of the widget goes up 10%—year after year. Would you say that the widget has been getting more affordable over time? Stanley Fish would. Fish is approvingly citing a new book from Robert Archibald and David Feldman, which he quotes saying that “for most families higher education is more affordable than it was in the past”:

Here their target is a way of framing the issue. Usually the question asked is, “What percentage of a family’s income goes to the cost of higher education?” Archibald and Feldman prefer to “ask instead whether the amount left over after subtracting the cost of college is rising or falling over time.” The answer they give (buttressed by statistical tables) is “rising”: what their data show is that “over long stretches of time, college costs have been rising at a faster pace than income per worker, yet the average worker’s actual dollar income has gone up by more than the costs, leaving more resources on the family to spend on other things.”

I fear to think what statistical sleight-of-hand might be hidden in that qualifier about “over long stretches of time,” especially since in recent years real college costs have continued to rise fast even as real median incomes have gone nowhere or shrunk. But in general this approach to gauging affordability is absolutely bonkers: the percentage rise in price is completely ignored, and only the dollar rise in price matters. Using this technique, just about anything can be considered “more affordable than it was in the past.” If the widget rises in cost by $100 and my annual pay goes up by $1,500, that does not in and of itself settle the question of whether the widget has become more affordable.

What’s more, I haven’t read the book, but Fish’s take does seem to be at odds with its official blurb:

A technological trio of broad economic forces has come together in the last thirty years to cause higher education costs…

A college education has become less reachable to a broad swathe of the American public at the same time that the market demand for highly educated people has soared. This affordability problem has deep roots. The authors explore how cost pressure, the changing wage structure of the US economy, and the complexity of financial aid policy combine to reduce access to higher education below what we need in the 21st century labor market.

I’m also completely unconvinced by Fish’s explanation of the main reason behind cost inflation at colleges:

Chief among these is the change in the sophistication and cost of the technology that has at once transformed the setting of higher education and become one of the areas of knowledge higher education must impart to students. Students expect to be instructed in the new technologies, and that instruction requires their installation, and then as new refinements emerge, their re-installation. “[A] modern university must provide students with an up-to-date education that familiarizes students with the techniques and associated machinery that are used in the workplace the students must enter.”

Were colleges and universities to strike a Luddite stance and hold out for pencil, paper and blackboard instruction, they would “in effect be guilty of educational malpractice.” When it comes to incurring these new expenses, they “do not have a real choice.” In no sense, then, are changes in price “driven by any pathology in the higher education industry.

It’s true that computers are more expensive than pencils, and it’s surely true that some part of the typical college-tuition fee is spent on information technology. But we’re talking about fee inflation here: in order for Fish’s argument to hold water, IT costs at colleges would have to be rising faster than inflation year in and year out. Which strains credulity, in a world where IT is getting steadily cheaper and where a lot of IT services can now take place in the cloud. Even if the move into the cloud is only now beginning, I very much doubt that it’s ever going to result in a decrease in tuition fees.

The fact is that technology is a way of reducing the costs of education much more than it is a factor in their growth. That’s why Rupert Murdoch has just hired Joel Klein:

The likelihood that Murdoch’s education strategy will involve either charter schools or online college-diploma mills is very close to zero. Instead, it is all but certain to revolve around one of the most fertile areas of innovation today: the application of digital technology to learning. In the next few years, “what you’re going to see in educational software and new solutions and online learning is going to be game-changing,” says Klein, in terms of “the ability of new technology to both improve instruction and the quality of it through new learning platforms.”

“Archibald and Feldman,” says Fish, “allow us to say that at least in the area of costs the fault lies not in ourselves, but in the stars.” Which I’m sure is convenient for Fish, who describes himself as a “dean who encountered the rising costs of personnel, laboratory equipment, security, compliance demands, information systems and much more every day.” But it’s not particularly believable.

COMMENT

Feldman and Archibald break up their affordability measurements by income percentile in their working paper, which makes the whole thing more interesting.

http://news.yahoo.com/s/yblog_thelookout  /20101117/us_yblog_thelookout/economist s-what-college-cost-crisis

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The politics of QE2

Felix Salmon
Nov 16, 2010 14:27 UTC

Allan Sloan has a good point today: by implementing QE2, Ben Bernanke has become a politician. It’s an important development: for reasons I don’t fully understand, the debate over QE2 has divided along party-political lines, with the Republicans lining up against it and the Democrats attacking them. Globally, too, as we saw in Seoul, the QE2 debate is conducted at summit level, and this time the dividing lines are even starker: it’s essentially the U.S. vs the world.

Interestingly, this is one of those old-fashioned technocrat vs technocrat policy debates, in contrast to the technocrat vs populist debates which seem to have taken over far too much airtime of late. But it’s just as shrill. And as Sloan says, it does the venerable Fed no favors to find itself on one side of a debate generating so much heat and so little light: Bernanke “was already making a high-stakes economic bet with QE2,” he says, “and now it’s a political bet, as well”. If QE2 doesn’t work — Sloan raises the specter that it “could imperil the dollar and our financial system” — then it’s not just the economy which will be harmed, but also the Fed’s long-term credibility and pre-eminence. In fact, the politics of QE2 are already hobbling the Fed’s freedom of movement, as Neil Irwin explains:

The political maelstrom that erupted after the Federal Reserve’s decision two weeks ago to take expansive action to boost the economy has reduced the central bank’s maneuvering room as it considers how to get growth on track…

“It now looks like it’s going to be hard for the Fed to do another round of aggressive policy because they know the criticism is going to undercut some of the confidence-building impacts,” said Ethan Harris, chief economist of Bank of America-Merrill Lynch.

Bernanke, then, has every reason to want to reduce the volume on this debate: the mere existence of the debate itself can easily counteract any good which comes from QE2.

One way of doing that would be to admit that QE2 is an untried experiment: while QE1 worked as a weapon in the crisis-fighting arsenal, QE2 is being asked to do something quite different. So the Fed should define much more clearly than it has done until now what exactly QE2 is designed to achieve, and what criteria might be used to determine whether it is succeeding or failing. And if it’s showing signs of failing, then the Fed should also be explicit about how and when it might be unwound.

War-gaming QE2 in this way would make the Fed seem less sure in its actions, but it might also help mute some of the harsher criticism coming its way—and thereby actually improve the chances that QE2 succeeds. Bernanke is no Maestro: no one trusts him implicitly in the way they trusted Greenspan, pre-crash. So maybe what the economy needs is for him to become a little less Olympian and a little more human.

COMMENT

It’s obvious why QE2 is necessary. Congress is gridlocked (already was before Nov 2). So, if Bernanke is a “Politician” because he wanted to try to address unemployment, slow growth, and a threat of deflation with the only weapon he has at his disposal, then I guess that makes him a “Politician” (as if that’s become a dirty word now). I, for one, am glad he is. I wish his detractors had some positive alternatives to offer.

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Counterparties

Felix Salmon
Nov 16, 2010 06:00 UTC

Tina Brown is a hagfish — Gawker

“I’m wondering how much of the online audience is Walking Dead” — Jon Steinberg

Ryan Avent is excellent on the political economy of the deficit — Economist

Ted Kheel, RIP — Bloomberg, Komanoff, Gothamist

The value of OpenTable

Felix Salmon
Nov 15, 2010 22:00 UTC

I’m a big fan of OpenTable as a service. I’ve made 60 OpenTable reservations in total, using both the website and their iPhone app, and I haven’t had a single bad experience: the resy has never been lost, I’ve never had an inordinate wait for a table, and it’s extremely easy to share the reservation information with my fellow diners. There’s a few things I’d like to see added, like reservations I’ve been invited to showing up on my upcoming-reservations page, but in general OpenTable does one thing from the diner’s perspective and it does it extremely well.

If Mark Pastore is to be believed, however, restaurants hate OpenTable nearly as much as diners like me love it:

A few months ago I took an informal survey of several other restaurateurs here in San Francisco and in New York, all of whom offer seats through OpenTable, asking them about the value of OpenTable from the restaurateur’s perspective.

Only one of the dozen or so I spoke with said he felt that OpenTable increased the value of his restaurant and that he wouldn’t imagine opening a new project without it. The rest were less than happy. The recurring themes were the opinion that OpenTable took home a disproportionate (relative to other vendors) chunk of the restaurants’ revenues each month and the feeling of being trapped in the service… The GM of one very well known New York restaurant group, which spends thousands of dollars on OpenTable each month, put it to me this way, “OpenTable is out for itself, the worst business partner I have ever worked with in all my years in restaurants. If I could find a way to eliminate it from my restaurants I would.”

Pastore says that the economics of OpenTable can be devastating for the notoriously difficult restaurant business:

One independent study estimates that OpenTable’s fees (comprised of startup fees, fixed monthly fees, and per-person reservation fees) translate to a cost of roughly $10.40 for each “incremental” 4-top booked through OpenTable.com. To put that in perspective, consider that the average profit margin, before taxes, for a U.S. restaurant is roughly 5%. This means that a table of 4 spending $200 on dinner would generate a $10 profit. In this example, all of that profit would then go to OpenTable fees for having delivered the reservation, leaving the restaurant with nothing other than the hope that that customer would come back (and hopefully book by telephone the next time).

At this point it’s worth digging out that famous short thesis on OpenTable. In the second quarter, OpenTable seated 15.6 million diners across 14,128 restaurants, and made total revenue of $22.45 million, including revenue from installing its software in new restaurants. That’s $1.44 per seated diner, or $5.76 per 4-top, all included. (The actual marginal revenue that OpenTable gets from reservation revenue rather than fixed subscription revenue is 69 cents per seated diner, or $2.76 per 4-top.)

In order to get to a cost of $10.40 per “incremental” 4-top, you have to think that OpenTable has value only insofar as it drives diners to a restaurant who would otherwise not have dined there; that’s certainly the mindset that Pastore seems to have. But OpenTable can, should, and does have much more value than that. For one thing, it improves the quality of the diner’s experience: we diners no longer have to worry whether the reservation we thought we made will be honored when we get to the restaurant. On top of that, it’s reasonable to expect that a decent restaurant will remember if we’re vegetarian, or we’re allergic to garlic, or something like that, in a way that’s much harder when we’re just another name.

Much more importantly, however, the OpenTable software can be hugely valuable to restaurants’ own bottom line, even if they would be sold out every night without it. Dan Simons of Founding Farmers Fathers, a restaurant which spends $6,000 per month on OpenTable, says in response to Pastore that once he started taking advantage of its software capabilities, he managed to increase sales by 15%.

Simons is talking his book: he’s a principal of a company which advises restaurants on how to best use OpenTable’s software. But it makes intuitive sense that armed with the abundance of rich and restaurant-specific data that OpenTable’s software provides, a quantitavely-minded restaurant manager would be able to find all manner of opportunities to improve diners’ experience and maximize the restaurant’s sales. (These two things are much more likely to work with each other than against each other.)

On the other hand, it also makes intuitive sense that most restaurants lack quantitavely-minded managers who are willing and able to take advantage of OpenTable’s rich data. For them, OpenTable really is little more than a way of getting extra marginal diners in the door: after that, they do what they’ve always done, and they’re not going to change their ways any time soon. For those people, it’s easy to see why they might be disgruntled at paying large subscription fees for services they never use.

The best-case scenario here is that, armed with OpenTable software they pretty much have to pay for anyway, restaurateurs will increasingly find themselves making full use of it, becoming more efficient and more lucrative businesses as a result, running more enjoyable places to dine. Alternatively, as the short thesis puts it, OpenTable will find that its business “has absolutely no barriers to entry,” and copy-cats will do to it what they did to Tivo, destroying it with an inferior but cheaper product.

But the main lesson for OpenTable from both Pastore and Simons is that their software is, right now, far too difficult to use to its full potential. Now that the company is valued at over $1.5 billion, it should have no problem paying some very smart developers to improve the user-friendliness of its offering, not only for diners but also for restaurateurs. With luck, that will help to reduce the amount of resentment the company faces in the industry, by making OpenTable service something which more than pays for itself, rather than something which is an expensive necessity. After all, I’m sure that while on one level OpenTable would love to become the Ticketmaster of the restaurant world, it would love to do so without becoming nearly as hated.

Update: As proof that restaurateurs tend not to be the most web-savvy of businesspeople, one reader offers this, via email:

One thing I’ve noticed – restaurants never take advantage of the feedback features in open table.  I’ve probably submitted feedback on about 7 or 8 restaurants, writing specific notes about something I particularly liked or didn’t like, using their system that says that the info and my email address will be shared with the restaurant.  I’ve never gotten an email back – either to apologize for bad service or to thank me for the kind words.  That’s just nuts, a huge opportunity missed by the restaurants.  At the very least they should be asking me to join an email list if I said good things.

Maybe it’s the open table technology itself that’s bad, but I think it’s probably just as much that the restaurant business just doesn’t get the new online world we’re living in.  If I was a restaurant I’d be checking blogs and twitter and open table feedback every day, offering my fans invites to special dinners (with bigger mark ups) and offering the haters a discount if they come back and give it another try.  My guess is that restaurants are still living in a world where the local restaurant critic’s review matters 100 times more than anything else – just look at their awful flash-based websites that you can’t even access on an iPhone.  If I’m on foot, it’s easier to find a restaurant’s address on OpenTable than it is on their own sites.

Update 2: OpenTable itself weighs in, saying exactly what its fees are: $199 a month, and then $1 per seated diner if you book through OpenTable’s website, or $0.25 per seated diner if you book through the restaurant’s own website. And there’s also “a web-based product that caters to restaurants that don’t require all of the operational benefits of our Electronic Reservation Book”. But in any case, if you want to book a table at a restaurant, it’s better for the restaurant if you do it through their own website rather than through OpenTable.com.

COMMENT

That 5% figure probably averages in thousands of small diners and burger joints from coast to coast. I would bet my last dollar that more upscale urban restaurants (the sort that OpenTable serves) have considerably larger margins.

On a separate note, the software does need a lot of refining: log on and pick a restaurant, and then try to find the reviews!

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Video: Ben Bernanke, bubble blower

Felix Salmon
Nov 15, 2010 18:29 UTC

COMMENT

I really like bubbles, so I enjoyed it. But those hands surely are a flipping (literally )distraction. It brought a little levity, but the bubbles were too cutesy to get the point across.

An old fashioned toilet with the chain tank above it and a huge whooshing flush to follow or a train wreck might have been more appropriate, however.

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