Opinion

Felix Salmon

#DavosToGreece

Felix Salmon
Jan 26, 2012 10:56 UTC

It’s time to move the World Economic Forum away from the Swiss enclave with which it has become synonymous, at least for one year. A Greek island — Arianna Huffington suggests Patmos, while Andrew Ross Sorkin is more partial to Santorini — would be perfect: a change of climate, a change of scenery, and an opportunity to bring the forces of global plutocracy to bear exactly where they can do the most good. Davos has billionaires, but it doesn’t have any yachts.

Patmos 2013: you know it makes sense.

Update: More recruits!

COMMENT

Patmos, the island where the Book of Revelations was written, predicting the Apocalypse with its talk of scorpion tailed locusts sounds perfect venue for the rich to gather.

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Esther Dyson’s hopes for Russia

Felix Salmon
Jan 25, 2012 18:49 UTC

In the general atmosphere here in Davos of worry and apprehension, it was great to be able to sit down with Esther Dyson this afternoon and get a dose of refreshing optimism — and about Russia, of all places. There’s an elite group of Russian technologists here — Dyson, a lifelong Russophile who’s fluent in the language and on many boards of Russian technology companies, introduced me to both Arkady Volozh of Yandex and Anatoly Karachinsky of IBS. And she’s convinced that the success of the Russian technology sector can not only make for thriving companies but also for a much improved country.

I was skeptical, but Dyson made a number of good points. For one thing, it’s really hard to build a successful software company through corruption and bribery and other dark arts — especially when you’re creating websites which are judged on their broad popularity. And while natural resources can be stolen, human resources really can’t be.

More importantly, a whole generation of Russians is growing up on the internet, freely using Russia-developed websites which are every bit as good as their US counterparts. Their life online is transparent and not controlled by large and oppressive bureaucracies, and Dyson is convinced that once they’ve experienced that much freedom online, they’re going to start demanding it in real life as well.

Not immediately, of course: Putin is going to win the next election, and he’s going to do so legitimately. But at some point a majority of the Russian population will have no memories of the Soviet era. And already that younger generation is both demanding change and driving growth.

They’re fantastic engineers, for one — look at the way, for instance, in which Boeing does a large part of its engineering work in Russia. Or, more generally, at the Israeli technology sector, much of which is powered by Russian emigres. Russia has many problems, but there’s no doubt that its computer-science colleges are churning out a lot of smart graduates, and that the likes of Karachinsky are hiring those people at a rate of thousands per year. And they’re not robots, either: these kids are creative.

Dyson is intimately familiar with projects like Digital October in Moscow, and she’s a huge fan. Meanwhile, of course, there are the much larger phenomena which get a lot of global attention — things like Mikhail Prokhorov’s bid for the presidency, or the massive Skolkovo science park. If these things fail — and there’s a good chance that both of them will — that’s not necessarily a bad thing: free and successful societies have lots of failure. And importantly, when you look at both of them, you see hope and optimism. Which are not what you might call classic Russian traits.

I’m not entirely convinced. The population of Russia has been declining for the past 20 years, and is continuing to shrink: there are 14.2 deaths per 1,000 people per year, and just 12.6 births. And if you look at the weirdly-shaped population pyramid, you can see that the post-Soviet generation is dwarfed by its more conservative elders. It’s going to take a very long time indeed before they can or will effect any real change.

Still, if there’s any hope for Russia, it’s in the idea that democracy will percolate up from youth and the internet, rather than being demanded in some kind of revolution. As Prokhorov says, “every time we have a revolution, it was a very bloody period”. Russian democracy is not going to mean a US-style free-market economy: Russia tried that, in the 1990s, with disastrous results for the broad population. But a wired country is, by its nature, always going to be a little less corrupt. And a little more hopeful.

COMMENT

Russian Total Fertility Rate has been steadily growing (from 1.16 in 1999 to 1.54 in 2009, even higher now) and mortality falling (life expectancy at birth went up from a rock bottom of ca. 65 years in early 2000es to estimated 70.3 years in 2011). Correspondingly, natural decline went from about 6.5 ppm in early 2000es to likely 1 ppm in 2011. Even with grossly under-counted migration, the population was essentially stable in the last three years. Latest Census (2010) found about 1 million more people in the country than expected (0.7% of expected population), in contrast to Latvia where Census discovered 158 thousand missing (7% of expected number). It is much more likely than not that in the next decade to population will be either stagnant or increase marginally.

While upwards of 1.54 TFR is much lower than replacement rates, in Europe this number is beaten only by Scandinavian countries, Netherlands, Belgium, UK, France, Ireland, couple of Baltic countries, and Serbia. The rest of Europe has it worse.

So, the demographic trends are unambiguously positive, unlike in many other places. On immigration – whatever the way local population looks at it, this is fact of life. Immigration-related tensions are causing the rise of right wing parties across the whole of Europe, which makes Russia not exceptional at all. A normal (and improving) country.

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Fear in Davos

Felix Salmon
Jan 25, 2012 13:24 UTC

It’s highly unscientific and anecdotal, but the winner by far of the most-talked-about-person-in-Davos award, at least when it comes to people in my earshot, is George Soros.

Soros is out of the investing game, living now as a full-time philanthropist and sage, while still keeping an eye on the fund company which bears his name and which provides him with a ten-digit income each year. Because he doesn’t have a financial book to talk, because he’s happy being brutally honest, and because he’s giving voice to the plutocrats’ darkest fears, Soros seems to encapsulate Davos 2012 like no one else.

Sitting in his 33rd-floor corner office high above Seventh Avenue in New York, preparing for his trip to Davos, he is more concerned with surviving than staying rich. “At times like these, survival is the most important thing,” he says, peering through his owlish glasses and brushing wisps of gray hair off his forehead. He doesn’t just mean it’s time to protect your assets. He means it’s time to stave off disaster. As he sees it, the world faces one of the most dangerous periods of modern history—a period of “evil.” Europe is confronting a descent into chaos and conflict. In America he predicts riots on the streets that will lead to a brutal clampdown that will dramatically curtail civil liberties. The global economic system could even collapse altogether.

No one but Soros will actually say these things, at Davos — but everybody here fears them, which is one reason why we have the slightly ludicrous sight of billionaires bellyaching about the global burdens of inequality.

Security this year is tighter than ever — the first rule of security at these events is that it can only get ratcheted up, rather than loosened at all — and there’s a besieged feeling to this Alpine town I haven’t felt before. The financial crisis concentrated minds and was seen as a big problem to be addressed and even maybe solved. But the current breakdown of trust in global institutions cuts at the heart of the World Economic Forum’s founding principle — that if you get a bunch of important people together in the same place, they can actually make a difference.

There are fewer heads of state here than there normally are; even Bill Clinton is giving Davos a miss this year. And a theme running through many of the discussions so far seems to be the question of how one manages chaos, in a world where the risk of a chaotic breakup of the European Union can be ignored no longer. To take just one example: if you’re a European bank, with loans and funding sources and depositors in many different European countries but just one unified currency, what happens if one or more of those countries decides to go its own way and leave the euro? It’s almost impossible for a bank to prepare for such an eventuality, but it represents a huge legal and financial risk.

The WEF itself, for all its efforts at internationalization, remains a very European organization, and will naturally decline in importance and relevance as Europe fractures and loses its standing on the international stage. Last year, there were crowds around television screens showing live coverage of Tahrir Square in Cairo, as delegates turned into spectators, watching the world change with no regard at all to what the plutocrats might think. This year, the feeling of powerlessness remains. Davos hubris is dissipating, to be replaced by risk management protocols. Europe risks falling apart — and there’s nothing that anybody here can do about it, if it happens. Never have the masters of the universe seemed so very human.

COMMENT

Our direct taxes (not counting corporate income taxes, business real estate taxes, sales tax, or employer FICA taxes) came in around 25% for 2010. Agreed that it would be difficult to push that to 50% through direct taxes.

Still, if total government spending at all levels is 40% of GDP, then there are likely some people who directly or indirectly end up paying 50%.

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Greece: What happens if bondholders hold out?

Felix Salmon
Jan 25, 2012 08:30 UTC

What happens if Greece puts forward an exchange offer which is acceptable to the Troika (the EU, ECB, and IMF), but unacceptable to bondholders — and only say half of them accept? In that event, there wouldn’t be nearly enough acceptances to be able to bail in the holdouts — and as a result, Greece would be paying out on its new bonds and would be forced to default on the old bonds which weren’t tendered.

Narrowly speaking, this would be good for Greece’s fiscal situation. After all, if it’s only making coupon payments on half of its private-sector debt, that saves it a substantial interest expense. But there’s no sense in which Greece actually wants this outcome — for two reasons.

Firstly, even if the ECB encouraged Greece to offer bondholders a very low coupon, it also doesn’t want Greece to be in indefinite default. Some kind of technical default which lasts for a couple of weeks, before the new bonds are accepted? That’s fine. But a protracted legal fight with bondholders trying to attach Greek assets around the world, and waving Greek obligations which are going unpaid? The ECB certainly doesn’t want that. It might be accepting just about anything as collateral these days, but even the ECB might well draw the line at lending against securities issued by a government which is clearly not paying a huge chunk of its debt.

The IMF, too, has rules against lending into arrears: it won’t lend new money to countries which are in default on old loans. This is a self-imposed rule which the IMF has broken many times, and might well break again, if it can say with a straight fact that Greece made a “good-faith effort” to keep current. But still, the bigger the number of holdouts, the harder it becomes for the Fund to continue to lend money to Greece.

The most devastating effect, however, would probably be on Greek banks. The obligations of Greek banks, pretty much by definition, are less safe than the obligations of the Greek government. Deposits in Greek banks are obligations of Greek banks. And so anybody with deposits at a Greek bank would likely move those deposits somewhere much safer, like Germany. That capital flight would weaken the balance sheets of the Greek banks and force the ECB to make a hard decision about lending not to Greece itself but rather to Greece’s banks. And even if the ECB did prevent Greece’s banks from going bust (certainly the Greek government doesn’t have the money to do that), those banks would be much weaker, much smaller, and much less willing to provide credit to Greek businesses. The Greek economy would surely be severely damaged as a result.

So it’s important, before March 20, that Greece puts together an exchange offer which a significant supermajority of bondholders will accept. It doesn’t need everybody to accept — there will be holdouts, especially when it comes to bonds issued under foreign law. But so long as those holdouts are obviously in the minority, that’s probably survivable. But Greece does need to be able to bail in all of the holders of its domestic-law bonds. Otherwise both the legal dynamics and Greece’s broader economy could become very nasty indeed.

COMMENT

Eric377 – I agree with you, and the possible answers would be either (1) an ideological opposition to CDS as “speculation” or (2) a fear that paying out on CDS would cause financial distress to banks. Commentators – I think including Felix – have pointed out that (2) is extremely unlikely based on what’s known about the relatively small amount of Greek sovereign CDS that has been written. In either case, it’s yet another reason that I think we’ll see a “lack of sound contractual law” risk premium on peripheral Euro-zone sovereign debt for years to come.

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The mortgage investigations drag on

Felix Salmon
Jan 25, 2012 07:30 UTC

The shape of a possible settlement with the banks over mortgage fraud has never been clearer. But neither has the fact that it’s not going to happen any time soon. And without a deal in hand, Barack Obama ended up making a different announcement in his State of the Union address:

Tonight, I’m asking my Attorney General to create a special unit of federal prosecutors and leading state attorney general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis. This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.

Sam Stein has the details — but suffice to say that this is a new investigation, with no fewer than five co-chairs, which will run in parallel to the existing DoJ investigation:

The unit will not supersede the efforts already underway by the Department of Justice. Instead, it will operate as part of the president’s Financial Fraud Enforcement Task Force. In addition to Schneiderman, the unit will be co-chaired by Lanny Breuer, assistant attorney general at the Criminal Division of the Department of Justice, Robert Khuzami, director of enforcement at the SEC; John Walsh, a U.S. attorney in Colorado, and Tony West, assistant attorney general in the Civil Division at DOJ.

To recap: we were meant to have a settlement by now. And instead of a settlement, we’ve got yet another investigation, where the aggressive New York attorney general looks as though he’s in the minority with respect to punishing the banks for their misdeeds.

The settlement as it looks right now has a reasonably large headline figure attached — $25 billion — but most of that is principal reductions which would make a lot of sense for the banks even if there were no settlement at all. In fact, there’s a case to be made that the settlement talks have delayed much-needed principal reductions. If you’re a bank in settlement talks and you want to do across-the-board principal reductions while removing yourself from legal jeopardy, of course you try to connect the former to the latter. After all, principal reductions plus immunity from prosecution looks much more attractive than principal reductions on their own. And the government can’t announce a big settlement figure if the banks have already reduced the principal on a lot of mortgages anyway.

But frankly any settlement now looks just as far away as ever. After all, there’s no point in setting up a new investigation to hold banks accountable, if we’re about to see a settlement which prevents any law-enforcement body from doing that.

So expect the status quo to continue, probably through 2012: banks with huge contingent legal liabilities hanging over their heads and their stock prices, and the government holding back on prosecutions as it attempts to cobble together a global settlement. It’s a recipe for uncertainty and gridlock and banks hoarding their money rather than lending it out. New investigations are all well and good, but I can’t help but think that it’s a bit late to be launching them in 2012. This should clearly have been done in 2008, or 2009 at the latest.

COMMENT

anonymous16, I think people are suggesting that there needs to be some actual evidence the claims you made are even vaguely true.

Can we also assume you are all for aggressively prosecuting every homeowner who misrepresented their ability or willingness to pay? Or all the buysides who broke their fiduciary responsibility to their investors?

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The Greek debt talks fall apart

Felix Salmon
Jan 24, 2012 09:33 UTC

The news out of Greece isn’t good. Remember here that Greece itself is basically just an intermediary, stuck between the Troika (EU, ECB, IMF) on the one hand, which is going to fund its deficits for the foreseeable future and therefore can demand anything it wants, and bondholders, on the other. And the problem is that what’s acceptable to the bondholders — a 4% coupon, basically, on restructured debt — is unacceptable to the Troika:

Euro zone finance ministers on Monday rejected as insufficient an offer made by private bondholders to help restructure Greece’s debts, sending negotiators back to the drawing board and raising the threat of Greek default…

Jean-Claude Juncker, the chairman of the Eurogroup countries, said Greece needed to pursue a deal with private bondholders where the interest rate on the replacement bonds was “clearly” below 4.0 percent.

In a way, this is a good thing, because it only serves to clarify the fact that Greece is defaulting in a way that’s going to make its bondholders very unhappy. All the talk of a “voluntary” restructuring was a way of attempting to paper over that fact, and that paper was always extremely thin. Maybe a bit of honesty will help people face up to reality in a way that they’ve been very reluctant to do until now.

Richard Barley has another idea which might help: the ECB could swap its Greek debt for EFSF debt, and then the EFSF could tender those bonds into the exchange. That, he says, could give Greece some €25 billion of extra debt relief, making the mathematics of a deal easier to work out.

I’m not entirely sure about this. The EU is already helping Greece enormously by funding Greece’s deficits going forwards. If the private sector were willing to do that, then it might not need to take such a big NPV haircut. Barley’s asking for Europe to both provide new money for Greece and take losses on the money it’s already lent, and I don’t see why Europe should have to do that now. Let’s do the private-sector restructuring first. The EU is surely going to take losses on its Greece loans at some point, but there’s no reason to do that at the same time.

No one thinks of this deal as a “one and done” restructuring. Bailing in the ECB or the EFSF at this point would just be denial: it would encourage the EU to think (or at least to say) that the Greek debt problem was solved for perpetuity, when it clearly isn’t. So let’s force the private sector to take its big NPV haircut now. And then the next step can come a few years down the road, when Greece discovers it can’t pay the Troika what it owes.

COMMENT

if the greek govt had decided to exit the euro and default on its official debts, it would have no incentive to stop a run on its own banks. a bank run would allow ordinary greeks to preserve their purchasing power in euros prior to a euro exit. the redemption of deposits by greek banks would be funded by euro money created by the greek central bank. that in turn would be funded by credits granted to the greek central bank by the other eurozone central banks via the target2 system. following its exit from the euro, the greek central bank would simply renege on its obligations under target2.

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Chart of the day, ETF size edition

Felix Salmon
Jan 23, 2012 15:12 UTC

I’m sorry I missed Devin Riley’s excellent post when I was writing about ETFs on Friday. Here’s his chart:

First-Mover_Effect_graph.jpg

What you’re seeing here is a y-axis ranking assets under management: the biggest funds are lower down. The x-axis ranks launch date: the earlier the fund launched, the further it is to the left. The correlation could hardly be more obvious. If you want to be a hugely successful ETF, by far the best thing you can do is to launch early.

Here’s Riley:

Launch rank explains up to 81 percent of an ETF’s rank in its segment. More to the point, in 71 percent of all segments, the first-mover had the most assets.

To me, that was surprising.

Given that ETF issuers compete fiercely on expense ratio, index tracking, and marketing materials to win investors, it’s a little disheartening to learn that so much of an ETF’s success is tied to its launch date.

This is surely good for consumers, at least so long as people continue to launch new ETFs. Because when they do so, they’re going to have to compete aggressively on fees, if only because that’s the only way that they’ll ever be able to gain any kind of market share. In turn, the new low-cost competitors will keep fees on the market leaders low and falling.

In theory, eventually, the supply of new ETFs will dry up, and the less successful competitors will drop out of the market. At that point, the market leaders might in theory be able to start raising their fees. But I’m not so worried about that: the best way to increase fee income is to keep your fees low and constant, while increasing your assets under management. Any hint of fees going up is only going to attract new competitors, or incentivize existing competitors to lower their own fees.

So for the time being it’s fine to just buy whatever the biggest ETF is in any given asset class, and sleep easily at night. There’s a small risk that in future you might end up invested in something suboptimal, but you’ll probably hear about it if that happens. Investing isn’t normally this easy, so let’s just celebrate the idea that this strategy seems to work so well, and concentrate entirely on asset allocation rather than spending lots of time second-guessing which of many ETFs to choose from.

COMMENT

There is an odd mixture of doubtful points in that argument. Firstly, as dWj points out, I suspect a heavy survivorship or, more to the point, selection bias. What about all the ETFs that went out of business over that time? The very early ones would rank high on the Launch scale (i.e. left) but at the bottom of the AUM scale (i.e. top). So there’s a potentially big bunch of observations missing in the upper left end of the chart.

Also, “Given that ETF issuers compete fiercely on expense ratio, index tracking, and marketing materials to win investors”, it’s a little dishartening that he doesn’t take all these variables into account when making such a strong statement. R2 of 81 percent raises more doubts than anything else in general.

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Udacity and the future of online universities

Felix Salmon
Jan 23, 2012 12:32 UTC

The most exciting (but also, in a small way, slightly depressing) presentation at DLD this year came from Sebastian Thrun, of Stanford and Google. Or formerly of Stanford, anyway.

Thrun told the story of his Introduction to Artificial Intelligence class, which ran from October to December last year. It started as a way of putting his Stanford course online — he was going to teach the whole thing, for free, to anybody in the world who wanted it. With quizzes and grades and a final certificate, in parallel with the in-person course he was giving his Stanford undergrad students. He sent out one email to announce the class, and from that one email there was ultimately an enrollment of 160,000 students. Thrun scrambled to put together a website which could scale and support that enrollment, and succeeded spectacularly well.

Just a couple of datapoints from Thrun’s talk: there were more students in his course from Lithuania alone than there are students at Stanford altogether. There were students in Afghanistan, exfiltrating war zones to grab an hour of connectivity to finish the homework assignments. There were single mothers keeping the faith and staying with the course even as their families were being hit by tragedy. And when it finished, thousands of students around the world were educated and inspired. Some 248 of them, in total, got a perfect score: they never got a single question wrong, over the entire course of the class. All 248 took the course online; not one was enrolled at Stanford.

Thrun was eloquent on the subject of how he realized that he had been running “weeder” classes, designed to be tough and make students fail and make himself, the professor, look good. Going forwards, he said, he wanted to learn from Khan Academy and build courses designed to make as many students as possible succeed — by revisiting classes and tests as many times as necessary until they really master the material.

And I loved as well his story of the physical class at Stanford, which dwindled from 200 students to 30 students because the online course was more intimate and better at teaching than the real-world course on which it was based.

So what I was expecting was an announcement from Thrun that he was helping to reinvent university education: that he was moving all his Stanford courses online, that the physical class would be a space for students to get more personalized help. No more lecturing: instead, the classes would be taken on the students’ own time, and the job of the real-world professor would be to answer questions from kids paying $30,000 for their education.

But that’s not the announcement that Thrun gave. Instead, he said, he concluded that “I can’t teach at Stanford again.” He’s given up his tenure at Stanford, and he’s started a new online university called Udacity. He wants to enroll 500,000 students for his first course, on how to build a search engine — and of course it’s all going to be free.

Udacity looks great, and I can’t wait for it to be a revolutionary success, educating and empowering students around the world, especially in places like Africa and India, and, in those places, especially women.

But I have to say I’m a little sad that it’s happening away from, rather than being part of, Stanford. If any world-class university would embrace this idea, one would hope it would be the one at the heart of Silicon Valley. And surely Udacity would only benefit if it was part of Stanford and carried the Stanford brand name. Instead, Thrun is abandoning Stanford and creating Udacity on its own. (And I’m no great fan of the name, either.)

Stanford was willing to spend hundreds of millions of dollars building a new physical campus in New York City — but it isn’t willing, it seems, to help Thrun build a free virtual campus which could reach the whole world. That’s a dereliction of its educational duty. But where Stanford has failed, surely some other elite university will step in. Thrun is taking a bold step here. Let’s hope he soon gets the support, if not of Stanford, then of some other college. Like Harvard, or Yale, or Oxford, or Cambridge. They’re exclusive places now. But they don’t have to be, in the future.

Update: Thrun posts, on his personal site:

I did on my own volition resign from my full tenured position, effective April 1, 2011. However, this was primarily to continue my employment with Google, and it predates my online classes.

COMMENT

The new mooc wave is a boon for education. For too long too many institutions have been charging too much! I reckon the Europeans push the MOOC scence even further. iversity ( https://iversity.org/courses ), is shaking things up as well. They have 3 courses where you can get ECTS credits-credits that are interchangeable between in european universities. exciting times.

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How sharing disrupts media

Felix Salmon
Jan 23, 2012 10:12 UTC

I’m at DLD in Munich, where David Karp of Tumblr and Samir Arora of Glam Media helped me understand the way that media and publishing are evolving these days, and the way in which creating, editing, and publishing are increasingly separate things which interact with each other in fertile and unpredictable ways.

There are lots of ways of publishing content onto the web, and if you look at the relative popularity of, say, WordPress vs Tumblr vs Twitter, then it’s easy to come to the conclusion that the easier you make it to publish, the more popular you’re going to be. But at Tumblr, at least, there’s something else very interesting going on: according to Karp, there are 9 curators for every creator on his site.

Reblogging, on Tumblr, is so easy that the vast majority of Tumblr sites actually create little or no original content: they just republish content from other people. That’s a wonderful thing, for two reasons. Firstly, it takes people who are shy about (or just not very good at) creating their own content, and gives them a great way to express themselves online. (As Arianna Huffington says, “self-expression is the new entertainment”.) And secondly, it acts as a natural amplifier for the people who do create original content — the average post on Tumblr gets reblogged nine times, and therefore reaches vastly more people than if it just sat on its original site waiting to be discovered by people visiting it directly.

Indeed, you don’t even need original content at all to become a reblogging monster. Pinterest is in many ways Tumblr without the original creators, just the curators, finding stuff online and reblogging it at incredibly high velocity. And it’s huge. Meanwhile, a lot of the impetus behind the way that Twitter is pushing its proprietary retweet functionality is the idea that it too might be able to build a community of retweeters, in much the way that Tumblr and Pinterest have built communities of rebloggers.

Journalists, I find, tend to come quite late to sites like Tumblr and Pinterest. For one thing, those sites are overwhelmingly visual: images nearly always do much better than words. And more generally, journalists are much better at writing than they are at reading — which means that they’re really bad at seeing the value added by curating and reblogging.

Technologists, on the other hand, intuitively understand the idea of “the stack”, which is the nerd version of “the platform” that all entrepreneurs and media gurus love to talk about incessantly. Essentially, they have spent their entire careers building things on other things. That happens in legacy media, too, sometimes: cable channels, for instance, live on a distribution platform owned by someone else. But print media in the US has historically been highly vertically integrated: the same company would create the content, edit it, print it, and distribute it directly to its customers’ front doors. Far from building things on other things, it owns everything from the copyright on the original content to the printing plants and even newspaper carriers.

Facebook and Google have become two of the biggest media companies in the world in extremely short amounts of time, precisely because they don’t have much interest in owning any content. Rupert Murdoch looks at Google and sees a pirate because he does everything: he both creates content (think 20th Century Fox), and also distributes it (think Sky TV). It’s a world of iron-clad contracts and tight control. While the social, digital world is one where the biggest media companies have a much lighter touch, and where the content creators with the broadest reach will be the ones who care the least about protecting their copyrights.

I suspect that we’re only in the very early days of seeing how this is going to disrupt just about every media organization built on the idea of hosting a website and selling ads, including highly socially-attuned ones like the Huffington Post. HuffPo is built on the idea that when stories are shared on Twitter or Facebook, that will drive traffic back to huffingtonpost.com, where it can then monetize that traffic by selling it to advertisers. But in future, the most viral stories are going to have a life of their own, being shared across many different platforms and being read by people who will never visit the original site on which they were published.

That was actually the original idea behind Buzzfeed — it would help brands create viral content which would then spread across the web. And then, somehow, buzzfeed.com became a destination site in its own right, which can and will make a lot of money by hosting and selling advertising. The old models still work. But the new, more distributed models are I think much more powerful. They’re great for brands, which just want to reach consumers directly, whatever the best way of doing that might be. But for content creators like Rupert Murdoch, they’re much scarier. Because when something goes viral, you don’t own it any more — it belongs to everyone, and no one.

COMMENT

Great post. Another way to look at the dislocation in the online publishing industry is the separation of content from discovery. It used to be that content was only discoverable at “place” where it was produced. Now content discovery, of which sharing is a part, is distinct from content creation. Google, Facebook, Twitter, Flipboard, and many others don’t create content but rather hold the enviable position of being between the consumer and the content they are looking for. We are experience a shift in value from content creators to content distributors (discovery). I suspect we are only in the 2nd inning of this profound change in the economics of content.

Gregg Freishtat
CEO VerticalAcuity

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