Opinion

Felix Salmon

When airlines don’t compete

Felix Salmon
Nov 18, 2013 16:00 UTC

James Stewart is not happy about the settlement which allows American Airlines and US Airways to merge.

A bit of context: Historically, the US government has smiled on the national airlines, allowing them to merge when they want to, and bailing them out in times of trouble. (They got $15 billion, for instance, after the 9/11 attacks.) But in August, all that changed, quite suddenly and unexpectedly. The Department of Justice, along with a smattering of state attorneys general, sued American Airlines’ parent company AMR and US Airways, saying that their proposed merger would cause “substantial harm to consumers”. At the heart of the suit was the idea that American and US Air currently compete head-to-head on “thousands of heavily traveled nonstop and connecting routes”, which benefits consumers; and that consolidation in the airline industry more broadly “would make it easier for the remaining airlines to cooperate, rather than compete, on price and service”.

The final settlement, however, as Stewart notes, fails to address any of those concerns. Instead, the merger will basically be allowed to go ahead as planned, in return for the merged airlines giving up 104 landing slots at National airport in Washington DC, as well as a smattering of other airport assets. This is not a huge concession: US Air is currently the largest airline at National, and after the merger and divestitures it’s going to be even bigger there than it is right now.

Stewart’s narrative is a perfectly reasonable one: the normally-supine regulatory apparatus briefly raised an eyelid and snarled, but just as quickly rolled over and went back to sleep. This constitutes, says Stewart, a “baffling about-face”, although in reality it’s more like two about-faces, with the Justice Department pretty much ending up exactly where it started.

The question is, which position is preferable? There are basically two ways of looking at airline competition, and it’s pretty clear that Stewart prefers the one in August’s Justice complaint, which is admittedly the more intuitive one. Under this view, the amount of competition can be measured pretty easily, by looking at two numbers: how many big airlines there are, and how many routes they compete on. Looked at that way, there’s less competition in the US airline industry now than in living memory: Delta merged with Northwest, United with Continental, and now American with US Air. Even Southwest bought AirTran. Once the latest merger is complete, the four merged companies between them will control some 80% of domestic air service — and there’s very little indication that the three largest carriers have any particular inclination to compete on price.

But in a way, that’s exactly the point lying behind the other way of looking at airline competition. The big legacy carriers don’t compete on price at the moment, when there are four of them, and they won’t compete on price in future, when there are only three. In fact, big legacy carriers rarely compete on price. The only airlines which are built to compete on price are so-called “low cost” carriers — and the only way to encourage the formation of such creatures is to open up landing slots for them, in deals like the one that Justice just did. Those 104 slots at National, for instance, can’t go to Delta: they have to go to smaller upstarts — the kind of airlines who can and will compete on price. Under this view, the only way to create real competition in the airline industry is for there to be a lot of new airlines. Think Europe. Some of those new airlines will fail, but as a group, they will provide downward pressure on prices in a way that legacy airlines never could — especially given their legacy obligations.

I’m inclined to pessimism on both fronts: I think that merging US Airways and American will surely mean less competition and higher prices, at the margin — and I also think that the national dominance of the big legacy carriers makes it very difficult for any new airline to succeed. If you look at the history of airlines like JetBlue and Virgin America, they tend to start off with high hopes, but it doesn’t take long for their prices to start rising up to big-carrier levels. At that point, they compete mainly on service rather than price, which doesn’t make it any easier to attract the millions of travelers who feel locked in to a big carrier’s loyalty program. (Indeed, the economics of the airline industry are a bit like the economics of gas stations: where gas stations lose money on gasoline and make all their profits on convenience-store sales, legacy airlines lose money on the actual flights, while making all their profits from their loyalty programs, selling miles to credit-card companies and the like.)

The American-US Air merger, then, is surely going to be bad for prices, overall, especially out of airports other than National and LaGuardia. And the concessions aren’t going to be remotely enough to kick-start a new wave of low-cost airline startups.

The real problem here is that the root-cause bad decision was made in 2001, when the US government decided to bail out the legacy airlines rather than letting them fail. If they had failed, there would have been a period during which flying around the country would have been a lot more difficult. But it wouldn’t have taken long for a lot of smaller airlines to be created in order to fill that need. And we’d all be in a much better place right now. At this point, however, the chances for real competition in the airline industry have never been lower — regardless of what the Justice Department does.

COMMENT

Your last paragraph warms my heart.Do you hold the same position towards the auto company bailouts and federal assistance.

Posted by TomLindmark | Report as abusive

The financial-media rollup strategy

Felix Salmon
Nov 15, 2013 19:34 UTC

Financial news is a classic ripe-for-disruption industry. It generally makes its money by selling expensive subscriptions to the price-insensitive, but that model won’t last forever: it’s never been harder to find anybody under the age of 40 who pays for such things. The trick, for anybody looking to navigate the industry, is to create products which will have a much greater chance of gaining broad traction in a mobile-native world — and which can generate profits through as many revenue streams as possible.

If you’re ambitious, it’s easy to see an enormous opportunity here. The FT and the WSJ are both billion-dollar brands; Bloomberg and Reuters are worth much, much more. All of them have very substantial subscription revenues, which they can’t afford to endanger. (Well, Bloomberg probably can afford to endanger them, but it won’t.) As a result, if an aggressive digital financial media company starts going after their customers, the big guys are not going to fight back by lowering their prices.

Now, with today’s news that Deutsche Bank has been hired to sell Forbes Media, it looks as though the opportunity to create just such a company has arrived. Forbes is being sold relatively cheap: Bloomberg’s Edmund Lee reports that the asking price is in the $400 million range, while US ad sales alone were $275 million last year. Add in international sales, events revenue, and licensing revenue from software deals and things like Forbes Media Tower and the Forbes School of Business, and you’re talking about a sale price which is barely above 1X revenues.

Forbes is not the only digital financial-media property going cheap. TheStreet.com is publicly listed, and has a market cap of $75 million on annual revenues of $50 million. Chances are, any takeover offer would be taken very seriously.

Meanwhile, Andrew Edgecliffe-Johnson reports that Henry Blodget, the CEO of Business Insider, is “in full pitch mode”, saying that BI “would actually be perfect for a merger”. Blodget has been preaching the roll-up gospel for a while now, and would surely jump at the opportunity to get involved in one. He has revenues of about $20 million right now; BI is valued at much higher multiples than Forbes or TheStreet, but still surely less than $100 million.

Throw in a bit of extra cash to bring it all together, then, and for say $700 million — significantly less than it would cost you to buy the FT on its own — you could buy Forbes and Business Insider and TheStreet, and probably Seeking Alpha as the cherry on top. At that point, you have the makings of a real digital powerhouse.

The companies are complementary in many ways. Forbes has a big ad-sales base, as well as a storied brand name, a large events business, and a valuable network of thousands of editorial contributors; it is also furthest along in terms of building a strong native-advertising franchise. Business Insider has growth, attitude, aggression, speed, and by far the most web-native newsroom in financial media. It knows what people want to read, and it is extremely good at providing exactly that. TheStreet, meanwhile, has an enviable list of stock-market investors who are willing to spend serious amounts of money on newsletter subscriptions; it also has a very sophisticated video setup, and last year spent $6 million buying The Deal, which reaches pretty much everybody who matters in the New York financial industry. And Seeking Alpha has managed to build up an extraordinary base of reader-contributors, who between them provide some of the most timely and sophisticated stock-market analysis on the web.

The big question is, of course: who has $700 million to spend on such a roll-up, as well as the managerial and technological nous to get them all to play nicely together? The facile answer is: anybody who can afford to spend $400 million on Forbes alone can afford to spend $700 million on something which is much more likely to make a real impact. But still, we’re talking about real money here. Which means that one company in particular springs to mind as the place which could put a deal like this together: Yahoo.

Yahoo already owns Yahoo Finance, which is by far the most valuable financial property on the web. (It’s also, for my money, the single highest-quality product that Yahoo owns.) Yahoo is also in acquire-and-expand mode right now, buying up anything with buzz. $700 million is less than two-thirds what Marissa Mayer paid for Tumblr; she has $1.8 billion in cash alone, and might well come into even more, depending on what happens with Alibaba. On top of that, Yahoo Finance could provide the kind of readership and quality data services that all of the rolled-up companies would kill for: it has the makings of a great platform on which to build a truly formidable financial-media competitor.

Of course, getting all these different properties to work well together would not be easy, especially given geographical obstacles: Yahoo is in California, while Seeking Alpha is in Israel. Most mergers subtract value, rather than adding it. But we’ve reached a point, in financial media, where nimble digital companies have finally managed to build up the ability to constitute a real threat to the incumbent giants. That will take growth, and substantial investment. This isn’t the world of startups any more — these are real companies, with real revenues. There’s a strong case for a deep-pocketed player to roll them up and make them substantially greater than the sum of their parts.

COMMENT

to be a useful mobile-native news experience, it has to be linked to a trading platform. i don’t think yahoo could do that. or rather, if someone wants to do it, they can do it better building from the ground up.

forbes may have revenues but it has no future. it’s been devouring its own reputation for years.

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How the NYT neglects business journalism

Felix Salmon
Nov 15, 2013 06:52 UTC

Brian Abelson has a fantastic post about the performance of NYT articles. The main gist is that it’s possible to predict with surprising accuracy how many pageviews any given NYT article is going to receive, given just a few variables like the amount of time that article spent on the home page, and whether or not it was tweeted by the main @nytimes Twitter account.

There’s a lot of information in the post, however, and a couple of other things jumped out at me, seeing as how I’m a business journalist for a wire service. The first is the almost hilarious way in which the NYT seems to go out of its way to ensure that readers do not read wire stories on the NYT site, despite the fact that they make up the overwhelming majority of the content on the site.

Abelson put together a database, for this post, of 21,006 stories published on nytimes.com between July and August of this year. Of those 21,006 stories, 15,269 — or 73% — came from wire services (either Reuters or the AP); the other 5,737 were original content. But get this: any given piece of original content had a 21% chance of being tweeted out by @nytimes. A wire story, on the other hand, had only a 0.6% chance of being tweeted by @nytimes. Or, to put it another way, @nytimes tweeted out 1,273 different articles over the course of those two months — and of those articles, just 89 came from wire services.

Abelson says that these numbers make intuitive sense, on the grounds that “stories from the wire should not receive the same promotional energies as those that come from journalists working at the Times”. But I’m not sure what kind of work the word “should” is doing in that sentence. Is he saying that wire stories don’t deserve to be brought to the attention of the NYT’s readers? That, to a first approximation, only 0.6% of wire stories are likely to rise the exalted standards of @nytimes, while a full 21% of original stories do? Is he saying that the NYT has a good business reason to promote its own stories over those which originated elsewhere? Or is he just saying that news organizations should look after their own, and that it would be somehow disloyal for @nytimes to tweet out many stories which were written by wire journalists, even if those tweets were links to the NYT website?

Instead of trying to guess what Abelson means, though, we can just look at this chart that he put together instead.

pred-vs-actual.png

What you’re looking here is a scatter chart of actual pageviews, on the y-axis, against the number of views that you’d predict any given story would receive, given variables like how much time it spent on the home page, whether it was tweeted by @nytimes, the number of section fronts it appeared on, etc. By using nine such variables, Abelson is able to explain 90% of the variance in pageviews. He explains one way to read this chart:

In the graph, the straight gray line signifies the threshold of a perfect prediction. Articles that fall above this line can be thought to have exceeded their expected number of pageviews while those below the line have underperformed. Computing the error of the model, or the difference between actual and predicted pageviews, allows us to calculate the degree to which any given article has performed in relationship to its “replacement”  —  or a hypothetically similar article which received the same level of promotion.

The interesting thing for me, looking at the chart, is the large number of outliers in the bottom-left-hand corner. This grouping is overwhelmingly wire stories which, according to Abelson’s formula, should get very few pageviews — and yet, despite that, and despite the fact that they were receiving no real promotion at all from the NYT, they did surprisingly well on the actual-pageview front. Indeed, it seems pretty clear from eyeballing the chart that wire stories are, in aggregate, significant outperformers when it comes to what Abelson calls his “pageviews above replacement” metric, which is an attempt to judge how many pageviews a story gets after controlling for the amount of promotional oomph it received from the NYT.

One way of looking at this is that the readers have spoken — and they’ve shown, quite clearly, that the NYT has made the right choice to pay Reuters and the AP for the right to run their wire stories. Another way of looking at this, however, is that the NYT systematically underutlilizes the wire stories it’s paying for. To be sure, those stories are available elsewhere on the internet: they’re not exclusive to the NYT. But readers don’t care about exclusives — even if they’re genuine exclusives, which, most of the time, they’re not. Readers just want to know what’s going on in the world — and the wires can do a very good job of telling the thousands of stories that a newsroom with finite resources can’t cover.

What’s more, from a business perspective, it would make sense for the NYT to put more promotional muscle behind the stories above the grey line. When a wire story starts performing surprisingly well — something which seems to happen quite frequently, according to this chart — then that’s a pretty good sign that the NYT should start putting it on more section fronts, tweeting it out, and generally giving it substantially more prominence. Given the limited space available on section fronts and in the NYT’s Twitter feeds, doing so would help to maximize pageviews and would deliver more of what the NYT’s readership is demonstrating that it wants to read. One of the great weaknesses of news organizations in general is that they don’t give nearly enough respect to stories they didn’t write themselves. That weakness costs valuable pageviews, if you’re already paying to be able to run those stories on your own website.

And then there’s the business-news perspective. Here’s another of Abelson’s charts:

par-by-section.png

This one’s a bit harder to read, but in the first instance, just look at the blue circles. The size of the circle shows how many articles there are in each section, while the position of the circle, from left to right, shows how many pageviews the average story in that section receives. The magazine and the dining section, for instance, don’t run a lot of stories, but the stories which do run tend to get a lot of pageviews. And then there’s the business section — which runs a large number of stories, but whose articles get fewer pageviews, on average, than any other section.

Now it’s not that the NYT’s readers don’t want to read business stories. The left-right positioning of the red circles shows how well each section’s stories are doing, given how much promotion they receive. On this basis, the magazine outperforms; the dining section does the worst. And the business section is right there in the middle, performing just as well as any other section. Give business stories a bit of promotion on the home page and on Twitter, in other words, and they’ll get you just as many pageviews as anything else, on average. But it turns out that the business section is systematically shortchanged by the people making those promotional decisions. Maybe (I’m not sure) because it has a higher concentration of wire stories.

Again, this looks like strategic short-sightedness. Business-news pages are some of the most valuable on the website, in terms of the amount that the NYT ad-sales team can charge for them. (They’re so valuable, in fact, that the entire Dealbook section remains outside the NYT paywall, in an attempt to garner it as many pageviews as possible.) By promoting more business stories, even if they are (horrors!) wire stories, the NYT could make more money, and everybody wants that — including the readers, who have shown that they have more interest in such things than the NYT’s editors think that they do.

What would be lost by such an approach? Very little: a few dining and metro stories might get viewed less often, if their promotional muscle started getting transferred to the business section. And maybe a few NYT egos might get a little bruised, if they discovered that their snowflakes weren’t quite as precious, to the outside world, as they liked to think, at least in comparison to the wire. But the website should be run for readers, not for journalists. And improbable as it might sound, it looks very much as though those readers would be best served if the NYT made it significantly easier to find wire stories, business stories, and — especially — business wire stories.

COMMENT

Btw, this snapshot analysis also missed the interdependence (over time) between disproportionately popular wire stories and the promoted exclusive content. I think it not debatable that readers like the NYT for its exclusive content. While they’re there, they check out interesting stories that happen to be wire stories. Take away the promotion that draws them to exclusive content and soon enough the so-called high-performing wire stories will also fall…

Posted by FDum | Report as abusive

Cat bonds wouldn’t have helped the Philippines

Felix Salmon
Nov 13, 2013 07:24 UTC

Super Typhoon Haiyan might well have been the biggest and strongest storm in recorded history, with wind speeds exceeding 200mph and hurricane-force winds extending more than 50 miles from the storm’s eye. Moody’s estimates that half of the Philippines’ sugar cane crop has been destroyed, along with a third of its rice-growing fields. Most devastatingly, thousands of people were killed by the storm. In other words, Haiyan is the very model of a modern environmental catastrophe.

At the same time, however, Haiyan is not a particularly devastating financial catastrophe. For all that the afflicted areas had the bad fortune to get hit just as the storm was at its peak strength, they were a long way from Manila, the commercial heart of the Philippines. The loss estimates of about $14 billion are large, but not crazily so given that the Philippines generally suffers about $5 billion per year in storm damage. And the IMF’s mission chief in Manila, Rachel van Elkan, says that the economic prospects for the country are just as rosy as they were. After all, all the money coming in to the country to help rebuild the devastated areas will end up making a positive contribution to the country’s GDP.

Like most natural disasters, then, this one is not a huge economic disaster. And while all developing countries can make good use of financial inflows, it’s not clear that the Philippines needs money right now more than it normally does. The national accounts are strong, and Haiyan won’t hurt them significantly. Which means it’s probably no big deal that all those talks back in 2011, about the Philippines issuing some kind of catastrophe bond, never amounted to anything. If the Philippines had issued a cat bond back then, the value would have been for some tiny fraction of $14 billion, and even if it paid out in the wake of Haiyan, the money wouldn’t actually help a great deal — after all, Haiyan is already causing a huge influx of capital into the country.

More to the point, there’s no good reason to believe that a cat bond would have paid out in the wake of Haiyan. Cat bonds tend to pay out only under certain narrowly-prescribed conditions, and those conditions would probably have drawn the geographical area to be protected much more narrowly than the entire Philippine archipelago. (Remember that after the Japanese earthquake, most Japanese cat bonds did not pay out. “Typically, for a cat bond to trigger, you need a bull’s-eye to be hit instead of a general shot in the right direction,” explained JP Morgan’s Tom Keatinge at the time.)

Haiyan, then, far from demonstrating the need for catastrophe bonds, actually does the opposite: it’s a pretty clear example of a case in which cat bonds would have been superfluous.

Still, Haiyan does raise an interesting question: if it’s one of many cases in which a country didn’t have insurance it didn’t need, then what’s with all the press, all of a sudden, about how cat bonds have become a big thing? Bloomberg, last month, had a story about how cat bonds constitute “the biggest change to the reinsurance sector’s capital structure in the last 20 years”, in the words of one quoted expert; Matthew Klein followed up with a column worrying about how such a phenomenon “might lead to overbuilding in risky areas and laxer enforcement of building safety codes”. And the Economist, in an article headlined “Perilous paper”, uses words like “frothy”, and warns that cat bonds might cause a “man-made disaster” which could be “just as frightening” as a natural disaster.

It’s all very odd, seeing as how the cat-bond market, in reality, is going pretty much nowhere. In 2007, total issuance of cat bonds was $7 billion; this year, that number is finally going to be surpassed for the first time, with $8 billion in new cat bonds being issued. In both cases, cat-bond issuance is still just a drop in the total insurance bucket: AIG alone writes more property and casualty insurance than that every quarter. Global net written premiums, meanwhile, are running at more than $450 billion per year: it’s hard to believe that such a huge industry is likely to be significantly disrupted by the tiny cat-bond market.

There are deeper reasons why the insurance industry need not feel threatened by cat bonds: insurance protects against losses, while cat bonds don’t. A cat bond pays out a set amount, or doesn’t, regardless of the losses incurred: it’s a binary thing, which is triggered by a specific event. And the fact is that there’s precious little demand out there for such a product. I don’t want insurance which will pay out a certain amount if I fall off my bicycle while riding down 9th Avenue during the hours between 5pm and 7pm. I want insurance which will pay out if I wind up incurring significant losses after falling off my bicycle. Cat bonds can do the former, but they can’t do the latter: in jargon, they cover parametric risk rather than indemnity risk.

So, please, enough of the concern-trolling about what might happen if cat bonds take over the world. They haven’t, and they won’t. They’re an idea whose time will never come, even if they exert a weird perpetual fascination on a certain breed of financial journalist.

COMMENT

QCIC – I think it’s a (fairly strange) reference to modern major general

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Content economics, part 4: scale

Felix Salmon
Nov 11, 2013 08:05 UTC

The big blog news of the day is that Vox Media has acquired Curbed Network. Why is the news so big? Because, until now, if a major blog property was sold, it was always sold to some media giant — more often than not, AOL — which wanted to add another bloggy arrow or three to its massive content quiver.

This time, by contrast, the likes of AOL (which bought Weblogs, and Techcrunch, and Huffington Post); Condé Nast (which bought Ars Technica and Reddit); Disney (which bought Babble); and Turner Broadcasting (which bought Bleacher Report) were either outbid or were not in the running at all. The buyer here is native: Vox doesn’t need the Curbed team to understand the world of online publishing, since it has been even more successful at that game than Curbed has. (Vox, with more than 40 million unique visitors per month, has raised some $70 million to date; Curbed is being acquired for somewhere in region of $25 million.)

Rather, the Vox-Curbed combination is the beginning of a phenomenon that Henry Blodget has been anticipating for a while. Last month, he talked about a “digital equivalent of Time Inc”, where various standalone publications would operate under a larger corporate umbrella. Last week, at a now-notorious breakfast with Gawker Media’s Nick Denton, the two CEOs talked about a possible merger of their companies. And on Friday, in a Google Hangout hosted by Howard Lindzon, I took the opportunity to ask him to elaborate. Could Business Insider and Gawker Media continue as independent sites while sharing back-end technology and sales teams? Here’s what he said:

I do think that over the next five years, what you’re going to see is a lot of consolidation. The fact is, there are way too many digital news and media organizations out there right now. There will be a lot of consolidation. As they come together, you will get huge economies of scale on the sales side, on the tech side, and on some of the other areas as well. And then you’re going to see these companies produce good profits…

Right now there are 30? 50? 100? news organizations online that are effectively just general news sites. Do all of those brands have to exist? I would say no. I would say a lot of them could be combined under a big brand. We like brands. And I think ultimately companies like Huffington Post, or maybe it’s BuzzFeed, maybe it’s CNN, will build a global news organization that is vastly larger than anything that’s out there now. Now, basically, if you don’t have 100 million uniques as a general news organization, you might as well mail it in, because that’s the size that most of them are now. Over time, that will be 500 million uniques. It will be just inconceivably large audiences. Because they will bring a lot of what other sites are doing onto their one platform. They will be much easier for advertisers to deal with, because advertisers don’t actually want to do deals with 75 tiny little sites: they’d actually much rather work with a big site with much more reach…

Somebody’s going to build the Time Inc of digital media. There are going to be a few big properties, and they are going to hang on this central platform that will have the same technology, the same international sales layer, the same administration. Each publication will be very big and successful unto itself, but they’re sharing some of these services. That will work very well… Many, many companies have a shot at this. AOL. Glam. Vox Media is going after this aggressively.

Little did Blodget know, as he was saying that, that Vox Media was putting the finishing touches on its deal with Curbed — the first in what will surely be a string of acquisitions aimed at creating exactly the behemoth Blodget is talking about. Indeed, Business Insider might, conceivably, be next on Vox CEO Jim Bankoff’s shopping list — it shares a similar demographic to sell to advertisers, and Bankoff has chosen Business Insider’s Ignition conference as the venue from which to formally announce the acquisition.

The Blodget vision — which is clearly shared by Bankoff — is of a publishing platform on which any number of websites can be built. That vision isn’t a new one: both Gawker Media and Weblogs Inc were based on pretty much the same idea. But neither of them ever managed to expand by acquisition. And it’s notable that while Denton was an angel investor in Curbed Network (which in turn means that he’s now a small shareholder of Vox Media), no one ever gave serious thought to building the Curbed sites on the Gawker platform.

Similarly, while BuzzFeed is a traffic monster, its content management system — the all-important technology which in large part drives the success or failure of any online publishing operation — is so narrowly optimized to the unique BuzzFeed voice that it’s hard to see it being extended across a broad swathe of different sites.

It’s almost impossible to overstate the importance of the CMS when it comes to the question of who’s going to win the online-publishing wars. As Blodget said on Friday, if you’re going to make serious money in this business, you need serious scale. If you want serious scale, you have to be able to expand not only organically but also by acquisition. And if you want to be able to scale up through dealmaking, you need to have a technology and sales platform which can support large-scale acquisitions.

Vox Media’s platform, called Chorus, fits the bill — it does everything well, from video to real-time storytelling to sophisticated ad integration. AOL, too, has an excellent CMS. In fact, when Jim Bankoff, in an earlier incarnation, acquired Weblogs Inc for AOL, he did so in large part for its CMS, rather than for any of the site brands. But other potential players are seriously hobbled on this front. Off-the-rack CMSs like WordPress and Drupal are OK for small-to-medium sites, but aren’t particularly well suited to be the framework for a major publishing operation*. Narrowly bespoke CMSs like BuzzFeed’s or Gawker’s Kinja can be very good at what they do, even while they’re less well suited to powering a broader range of sites. And if you’re a legacy media company of any description — be it in newspapers, or TV, or radio, or even financial-information terminals — then a large part of your CMS is going to be devoted to integrating digital content with your legacy product, and is therefore going to be a little bit clunky and unwieldy if you try to use it for any pure-play digital operation.

My feeling, then, is that there’s a strong argument that a franchise like Business Insider belongs on a platform like Chorus. Business Insider is like Curbed Network in that it is pushing up against the limits of its current CMS, and faces a decision point. Should BI to make a large investment in product and technology, to support its future growth? Or would that just be an exercise in reinventing the wheel, given that Chorus already exists? And while BI might be able to afford to invest heavily in technology and sales, other small-to-medium-sized blog networks, like Gothamist, as well as standalone sites like Salon, probably can’t. For them, a move to Chorus, or something like it, could be the only way to grow.

The question from Vox Media’s point of view, however, is a bit different. There’s an enormous number of websites out there which would become significantly more valuable overnight if they simply moved to Vox’s sales and publishing platform. So the arbitrage is clear: buy those sites at a relatively low multiple (Curbed Network sold for less than four times revenues), turbocharge them with Chorus, and then reap the benefits of seeing those sites’ revenues increased substantially — and being valued at significantly higher multiples than Vox paid in the first place.

On the other hand, as the NYT notes in its article about the Curbed acquisition, “Vox has earned a reputation for high-quality content, producing sleekly photographed articles that integrate multimedia in a smooth and sophisticated manner.” It’s that reputation which helps it maximize its ad rates — and if it becomes a company selling a hodge-podge of random sites, it’s going to find it difficult to maintain its premium pricing and desirability among advertisers.

What’s more, Bankoff seems to want to build or buy sites which have a realistic chance at dominating their respective fields — he doesn’t seem particularly interested in building a stable of sites which compete with each other, although that might change over time. After all, Condé Nast didn’t have a second food magazine to compete with Gourmet, until it bought Bon Appetit in 1993. In principle, if you have two similar sites and can therefore offer a potential advertiser twice the inventory and a significantly greater reach, that should be good news for all concerned.

Which brings me to the company which has been executing the publisher-as-a-platform strategy more successfully than anybody else for longer than anybody else: Glam Media. Glam is the publishing behemoth that non-insiders are least likely to have heard of, because it does a good job of hiding its own light under a bushel. Instead, it allows the sites on its network to build their own followings.

Glam started out as an ad network, basically. It would find publishers, mainly in the women’s-lifestyle space, and would do deals with them whereby it would sell ads on their sites. By aggregating a large number of sites, and starting a few of its own, Glam managed to achieve the kind of scale which advertisers demanded.

Along the way, Glam acquired an enormous stable of bloggers and writers — who were not only micro-publishers in their own right, but who were also creating some great content which deserved to be placed in front of a much larger audience. So Glam created a system whereby writers, photographers and other content providers could see their work appear on sites throughout the Glam network — and get paid every time that happened.

The difference between the Glam view of the world, which comprises thousands of publishing brands, and the Blodget view of the world, which involves only a relative handful, is that while it’s true that consumers like brands, it’s no longer true that one big brand is going to beat thousands of small brands. Smaller websites can feel much more targeted and personal, and can build up a much more loyal following, than sites which have millions of users. If advertisers can get their ads onto that kind of site, and reach just as many people as they would buying one huge site, they’re better off for it.

Glam, then, turned publishers into curators: they could produce their own content, or they could source content from elsewhere within the Glam network. If they hit a nerve and managed to gain serious traction with a niche audience, they could make good money from what they were publishing — and then they could make even more if their original content was used on other Glam sites. Best of all, none of the publishers had to worry about technology or ad sales — all of that was taken care of by the Glam mothership.

In many ways, Glam represents the ultimate triumph of technology over content. It does own valuable websites, but that’s not where the real value of the company lies. Instead, Glam has managed to build a system which controls more of the advertising stack than any other company, so that it can implement campaigns with more effective targeting and reach than just about any other online publisher.

And Glam isn’t stopping there. In 2011, Glam bought Ning for a reported $200 million — and now, finally, we’re beginning to see why. Look at Foodie, Glam’s shiny new recipe site — it’s powered entirely by Ning, and works a bit like Pinterest for recipes and restaurants. It’s a social discovery platform: it’s a place not only to find your favorite recipes, but also to collect them, to publish them, and to broadcast them to others. Glam, meanwhile, provides the technology which makes the whole thing incredibly intuitive and easy to use and navigate — both for individuals and for brands.

Foodie is still tiny — much smaller than Glam’s existing network of sites. But it also has significantly higher margins than classical publishing plays, partly because the cost of content is so much lower: like Pinterest and Yelp and Twitter, the content is often provided, gratis, by users. It’s a publishing platform which is open to anybody, a bit like Kinja — but it’s much easier to use than Kinja, and it’s naturally social in a way that Kinja isn’t.

Importantly, Foodie shares with the rest of Glam Media’s sites the fact that it doesn’t really do journalism, or news. Glam Media is a lifestyle publisher, specializing in things like fashion and beauty. That’s extremely attractive to advertisers, who in general don’t particularly like news: the reason that newspapers split themselves up into lots of sections is precisely because advertisers are much happier when their ads don’t appear next to hard, gnarly news.

Vox Media, too, is not really a journalistic organization; it breaks little if any news*. And in that respect Curbed Network is a good fit. As Bankoff told Jessi Hempel, he wanted Curbed because of its status in “consumer categories” — things which people want to go out and spend money on. His CMS is actually extremely well-suited to supporting a news site: it was designed to power SB Nation, his network of sports sites, and a sporting match is, in a manner of speaking, an exercise in continuously breaking news. I would love to see Business Insider powered by Chorus: I think that such a site would be much friendlier to both readers and advertisers, and could really come into its own on, say, the first Friday of the month, when the jobs report is released.

The question, however, is whether Bankoff would want Business Insider to be part of Vox. News is always a tougher sell, but at the same time it confers priceless legitimacy: BuzzFeed, for instance, is investing an enormous amount of money in its journalism, not because that’s a particularly cost-effective way to generate traffic, but rather because it means that both readers and advertisers take the site much more seriously as a result.

And with his most recent acquisition, Bankoff has proved that he’s OK with buying lower-multiple businesses. The reason that Curbed sold for less than four times revenues is that a very large chunk of those revenues is attributable not to advertising but rather to events. Eater, in particular, has a thriving events business, but events revenues are always going to be valued on a lower multiple than advertising revenues are. Still, events are a great way of adding a new revenue stream to an existing franchise, and of helping to take brands off the internet and into the real world. Don’t be surprised to see the existing Vox Media franchises doing many more live events now once the Curbed team is in place.

Vox Media and Glam Media, then, both clearly have a good shot at becoming Blodget’s digital version of Time Inc. AOL does too, especially if CEO Tim Armstrong can wrest his attention away from Patch: AOL’s publishing technology is excellent, and the way that HuffPo is expanding internationally is a great model for companies which have always struggled to monetize their non-US traffic.

Other, bigger, companies would love to enter the competition. Yahoo has made many attempts at doing so, but they always seem to end in bureaucratic suffocation. Disney has many digital powerhouses of its own, from Babble to Club Penguin to ESPN, but they’re too big and too disparate to form the nucleus of a publishing network. Condé Nast put a huge amount of money and effort into making a success of Conde Net, but at heart it simply isn’t a technology company; while it might be a perfectly good quiet minority investor in the forthcoming site from Kara Swisher and Walt Mossberg, it’s not good at running sites itself. And of course soon-to-be-spun-out Time Inc has every intention of becoming the digital version of Time Inc itself. But it’s too slow-moving, and its fiefs are too politically entrenched, for that to happen.

On the other hand, maybe Time Inc isn’t the right metaphor. If you look at these slides over at the Glam Media site, which date back to August 2012, you’ll find the company comparing itself not to any print publisher, but rather to cable channel operators, like Disney or Viacom, which sit in the middle between advertisers, content providers, and content distributors. Glam, it seems, is interested in developing relationships with everybody in its ecosystem. It was even there at the beginning for Refinery 29, which has now become a major competitor.*

No one knows what the digital-publishing platform play will ultimately look like. I’m convinced that owning a first-rate CMS, one which makes publishing both compelling editorial and beautiful advertising a breeze, is a necessary precondition for success. Beyond that, it’s still far too early to tell what’s ultimately going to work. I’m fascinated by the Medium experiment: I think it has a lot of potential, especially if it starts to support custom domains, like Tumblr did early on. Looking at Medium, along with Vox, and Glam, and even AOL, I think I can begin to discern the vague outlines of how digital publishing might eventually be able to deliver the kind of scale and impact that brand advertisers demand from TV and glossy magazines. I don’t know who the winner is going to be. But I do think that Blodget is right about one thing: whoever the winner is, they will have to have some very deep pockets. Winning this game won’t come cheap.

(This is part 4 of an irregular series; it comes in the wake of part 1: advertising, part 2: payments, and part 3: costs.)

*Update: A few things worth adding/clarifying here. First, I shouldn’t have said that Vox “is not really a journalistic organization. That’s wrong: it does a lot of very good journalism. What it doesn’t do a lot of is the kind of investigative/breaking news which advertisers tend to shun.

Second, on WordPress and Drupal, there is an argument to be made for WordPress VIP, where improvements made for one client automatically apply to all other clients, and a tech company is in charge of tech rather than a media company. The problem is that they don’t integrate with the advertising stack as easily as they should, and they remain at heart blog CMSs, based on the idea that you basically have a single template which displays individual posts/articles in a standard manner. I think the web is moving on from there.

And finally, here’s something I had completely forgotten about, or never knew in the first place: Vox and Glam actually announced a significant partnership back in 2009. I wonder what happened to that.

COMMENT

This is basically about offering a lazy media buyer the opportunity to a) write a single check and to b) be able to tell the client what he/she is buying in a single sentence.

There’s nothing terribly exciting about CMSs from the perspective of competitive differentiation, absent good people and process. As long as you have good developers, building and supporting a great internal CMS is not especially difficult.

What’s not easy is getting the same great CMS to work on more than one site (or in innovating in UX if you have a third-party vendor offering). Given the context of an acquisition, CMS migrations are even less easy, just as migrating from one ad server (and migrating all of the other supporting systems and processes like ad trafficking systems) is expensive and disruptive for ad sales and editorial. The bigger the companies, the harder this gets.

So I am personally not sure that I see a genuine scale advantage here, barring a massive improvement in their ability to command higher rates.

Posted by David4321 | Report as abusive

The GIGO jobs report

Felix Salmon
Nov 8, 2013 14:25 UTC

This is undoubtedly the most distorted jobs report in living memory. Scroll down a bit, and you get to a whole box entitled “Partial Federal Government Shutdown”, which explains that for a multitude of reasons, the amount of “nonsampling error” in this report is going to be much bigger than it normally is — and yet, the BLS also made the correct decision that for the sake of “data integrity”, it was not going to try to correct for any of those nonsampling errors.

The markets, however, are hard-wired to take the payrolls report seriously, especially right now. We had a very strong GDP report yesterday, which was itself subject to all the same errors and omissions, and there’s something more generally febrile about the broader atmosphere: yesterday alone saw an unexpected rate cut in Europe, as well as a decidedly frothy first-day valuation for Twitter. On top of all that, we’re still in the very heart of good-news-is-bad-news territory, where traders only care about when the famous Taper will begin. The stronger the data, the more worried they become, and the more that stocks and bonds sell off.

Put it all together, and you have a recipe for volatility. News organizations have a largely unspoken rule of thumb that the bigger the market move, the more important the news must be; their readers, certainly, have an inexplicably insatiable appetite for stories which try to answer the “why did the markets move so much?” question. But today of all days, the right reaction is to take a deep breath and try not to pay too much attention to any of the numbers coming out of Washington and New York.

For one thing, it’s possible (anything’s possible) that, thanks to the strength of this report, Ben Bernanke, at the very end of his final term in office, will decide to kick off the last full week before the Christmas break with a tapering announcement. But it’s not very likely. The report is unreliable, thanks to the shutdown; the timing would be perverse, needlessly constraining his successor’s option space; and, most importantly, the Fed just isn’t seeing the kind of increased inflation which would cause it serious concern. Just this morning, we saw the release of inflation data for personal consumption expenditures — that’s the number the Fed likes to concentrate on most, even more than CPI. And the number came in at just 0.1%. Nothing to worry about there.

So be very wary of anybody saying that in the wake of this morning’s release, markets now “think” that there’s a significantly increased chance of a taper in December, or even January. (Janet Yellen doesn’t take over from Bernanke until the February meeting.) You can try to back out implied probabilities from market prices if you like, but the more volatile the markets, the less informative those implied probabilities will be.

This is a GIGO jobs report: garbage in, garbage out. In fact, its doubly GIGO. The first GIGO is the way in which all those incorrectly-completed questionnaires resulted in much larger, and much less quantifiable, error bars than we normally see in the jobs report. And the second GIGO is the way in which the unreliable jobs report created significant market moves.

So unless you’re a trader working on a time horizon of minutes, it’s best to ignore all of today’s noise, both in the data and in the markets. These things will resolve themselves eventually, but it could easily take until well into 2014 for them to do so.

COMMENT

Great article. I have studied Economics for over 40 years and laugh at the modern day economic statistics.

About forty years ago I read a book called “How to lie with statistics”. Most modern day Economists are corporate owned like the politicians.

The western world needs a revolution, and I will join it.

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The definitive Twitter value play

Felix Salmon
Nov 7, 2013 07:29 UTC

Twitter is about to raise more than $2 billion, on a valuation of more than $18 billion, in its IPO. At some point on Thursday morning, an opening price for the stock will be set — a price which will almost certainly be north of the official IPO price of $26 per share — and after that, it’s off to the races. Will Twitter stock go up? Will it go down? Is it a buy? Is it a sell? Is the company worth what the market says it’s worth? It’s a pretty silly game to play, at heart, since no one has a clue what the answers are, not even Twitter’s underwriters, who had to raise the valuation of the company twice.

Still, silly games are often the most fun, so, go knock yourself out with the official Breakingviews Twitter valuation calculator! Or, you can use Lex’s version, which is a relatively pure discounted cash flow model, not dissimilar to the back-of-the-envelope calculations by which the Economist managed to come to a “reasonable” valuation of $18 per share. Anything north of that level, intones the venerable weekly, constitutes “a poor long-term investment”.

But the fact is that when it comes to valuing a technology stock, it’s stupidly easy to get any number you want. Here’s one extreme: the valuation of any company should be equal to the net present value of its future dividends. Twitter is going to pay no dividends for the foreseeable future, therefore, its value is zero. Or, here’s another extreme: Twitter should easily be able to generate $5 billion a year in revenue pretty soon, and grow to that level very quickly, which would justify a multiple of, I dunno, 12X revenues. Which would mean a capitalization of $60 billion, or about $110 per share.

The point is that any valuation for Twitter is a result of guess upon guess upon guess. Take Henry Blodget’s attempt, for instance. We know with reasonable certainty that Twitter is going to generate about $625 million in revenue this year, so why not treble that number, and declare that its revenues are going to grow to $2 billion in 2015. Then, multiply that number by 10, since that’s more or less where Facebook and LinkedIn are trading — and you get a valuation of $20 billion, or about $35 per share.

If you wanted to get a bit more sophisticated, you could try using probability distributions instead of hard numbers — but we have no more insight into the probability distribution for Twitter’s 2015 revenues than we do into a single forecast for those revenues. And there are certain valuation metrics, like “the amount of money Twitter might get bought for”, which are even more tenuous — yet clearly important.

So if anybody has any real conviction, one way or another, with regard to whether Twitter’s stock is overvalued or undervalued, you can be pretty sure that they don’t really know what they’re talking about. It’s going to be a trading vehicle for the first few days, with investors jockeying to get in or out at the best possible price. All of which is going to make the price-discovery process even more drawn-out and unreliable than it normally is. We are living, after all, in a world where a single bitcoin is worth more than $250, even though it has no cashflows at all.

So how is the individual investor supposed to navigate these treacherous waters? It’s actually incredibly easy. And it works like this. Twitter’s profits, if and when they ever appear, are going to be some fraction of its revenues. Its revenues, in turn, are going to be some fraction of the value it provides to its users. I have personally already extracted many thousands of dollars in value out of Twitter, over the past five years, and it hasn’t cost me a penny. On an ROI basis, I’m doing unbelievably well — and my returns are only going to keep on growing into the future.

Here’s my advice, then: take the amount of money you were thinking of investing in Twitter, and divide it by the rate at which you value your own time. So, if you were going to invest $5,000 and you value your time at $50 per hour, then you’d end up with a figure of 100 hours. Then, instead of spending the $5,000 on Twitter stock, spend 100 hours on Twitter: the cost is the same. The value you get from being on Twitter — from interacting with people you admire, from learning new things, from being able to express yourself so easily and concisely — will be much greater than the value you’d ever get from buying $5,000 of Twitter stock. And you’ll still have $5,000 left over to do whatever you want with, whether it’s putting it into some other investment or spending it on something awesome — a holiday, perhaps, or a gift to a friend, or even some fine wine.

Twitter is an amazing platform, where nearly all of the value ultimately accrues to the people who use it. If you don’t use it, you’re missing out. And maybe you think that it’s a silly distraction, and that you don’t have the time for such things. If you do think that way, then go ahead and buy yourself that time, with the money you were thinking of investing in Twitter stock. Leave the noise trading to others: you’ll be on to a much more certain thing.

COMMENT

From my experience every moment of interaction with Twitter is a net loss, so this investment heuristic doesn’t work very well for me.

I am going to buy (correction: just bought in the middle of composing this) some Twitter stock to hold for the long term. It seems like it’s more likely to go the way of Google/Amazon than disappear or be supplanted.

If the people to whom it’s best targeted–like our esteemed host–are extracting thousands of dollars of value, I expect that it will find a way to capture some of that.

Posted by TWAndrews | Report as abusive

When bonds don’t trade

Felix Salmon
Nov 5, 2013 22:12 UTC

In the September issue of Euromoney, Peter Lee has a huge investigation into what he calls “the great bond liquidity drought”. The landing page for the story features subscriber-only links to the whole thing, as well as free-to-access links to various sections. But it also neatly summarizes the problem a single paragraph:

Liquidity is drying up across the bond markets. Regulations designed to curtail banks’ leverage have had the unintended consequence of also sharply reducing their ability and willingness to make markets in corporate and even government debt. New regulations on the leverage ratio that will reduce banks’ repo funding books threaten to make matters even worse and to spread the drought from credit markets to rates, the underpinning of all financial markets. Secondary markets are close to a breakdown that will soon imperil the primary markets on which companies and sovereigns depend for funding. All that is masking the decay is the extraordinary actions of central banks.

Here’s a chart from Citigroup which helps show at least part of the story:

Loss of Shock Absorbing Capacity.jpg

This chart doesn’t just cover Citigroup, it covers all bond broker-dealers. They massively increased their inventory of bonds during the 2000s bubble — but so did everybody else: total credit assets were raising substantially over that period. Then, after the financial crisis, came the great divergence. Broker-dealers retreated from the market, even as investors continued to seek the safety of bonds. So while broker-dealers were about half the size of the credit mutual fund industry in 2007, according to the quantity of assets they owned, today they’re only about 1/20th of the size. And those broker-dealers are still the only real liquidity providers in the market. If you want to buy or sell a bond on the secondary market, there’s really only one way to do it: phone a bunch of broker-dealers, ask them to make you a market, and either accept the best price you find, or don’t.

Lee’s article makes a very strong case that the only way out of this problem is for buy-side institutions to start trading directly with each other, since the broker-dealers have enough to be able to provide good service only to their very best clients. But neither of the two buy-side bond market giants (Blackrock and Pimco) seem to have been able to make such a system work, and although the MarketAxess system is growing fast, there isn’t going to be any fundamental change unless and until bond investors start making buy/sell markets of their own. Which is simply not going to happen: bond investors don’t tend to think in terms of opportunistic trading, precisely because their portfolios are so illiquid. What’s more, the ability to make a two-way market is contingent on the ability to buy one name when you sell another, which is not something anybody can reliably count on being able to do any more.

In other words, we’re living through a vicious cycle: the less liquid the market gets, the less ability there is for anybody to make markets, which in turn just worsens the liquidity problem. And things are only going to get worse still if and when QE goes away.

The implications, as Lee says, are enormous. The whole point of bonds is that they’re tradable: you don’t need to hold them to maturity. But increasingly you do need to hold them to maturity, since finding a buyer for your inventory is extremely difficult — especially if you’re investing in size. This is one reason why the two big bond investors arguably pose a systemic risk: if either one of them were to suffer substantial withdrawals, the selling pressure on the market would be so enormous that the entire bond market could pretty much cease to work. It’s already extremely difficult for bond funds to grow without changing their risk profile: while it’s possible to buy large positions in the primary market, it’s basically impossible to continue to add to those positions as your fund increases in size.

Part of the problem is the degree to which the market is fragmented: GE has more than 1,000 separate bond issues, while Citigroup has almost 2,000. (Both of them, of course, have only one equity security outstanding.) But there’s little incentive for companies to issuer fewer separate bonds, since the primary market is the one place where the bond market actually seems to work. And besides, if the bond market becomes harder to navigate, companies always have the option of going to the loan market instead, or raising equity instead of debt.

For sovereigns, however, the fate of the bond market is of paramount importance: they have to be able to issue debt, even as major banks are withdrawing from the markets entirely. And sovereign bonds are being hit just as badly as corporate bonds by the liquidity drought:

Traders say that without moving the price the markets might still absorb a large customer order for €250 million in German Bunds, maybe €100 million in French government bonds, perhaps €50 million in Italy and €25 million in Spain.

In Portugal, which has no direct market access of its own, Lee adds, it’s almost impossible to buy a position of any size at all without moving the market, with even the benchmark 10-year bond gapping out as much as 100 basis points on minimal underlying volume.

The result is that the bond market is going to have to contend with more than just rising rates over the next few years: it’s going to have to deal with rising illiquidity premiums as well. A bond yield will be the benchmark rate, plus the credit spread, plus the illiquidity premium, and it’s going to become impossible to disentangle the last two variables, especially when benchmark government bonds themselves are often quite illiquid. The effect on aggregate global borrowing costs could add up to trillions of dollars, and severely crimp the ability of the bond markets to finance growth.

Still, over time, those extra trillions of dollars are going to find their way into the pockets of bond investors: an illiquidity premium is still a premium. It’s never nice to see rates rise, but once they’ve risen, the extra yield will surely be very welcome to savers. And for the time being, at least, borrowing costs are not really a problem for most issuers with market access. If companies have to pay an extra 50bp to borrow money, so be it — they’ll live.

Sovereigns, however, are another story — they need to borrow in size, and they have historically relied on liquidity issues to ensure that they get the cheapest possible rate. (That’s the main reason why US Treasury bonds have the lowest yields in the world, on a swapped-into-dollars basis: it’s all about the liquidity, not the credit risk.) The great bond liquidity drought is arriving at the worst possible moment for G20 sovereigns which are already struggling with unprecedented levels of bonded debt. It’s always liquidity that kills you, not insolvency: it’s the inability to roll over your debts as they come due. Which means that the next wave of sovereign debt defaults might come even sooner than many analysts currently fear.

COMMENT

What happened to the old days? There was a New York Bond Ticker that displayed bond trades on the NYSE. Amex bond trades appeared on the Amex ticker. S&P published a book with all the bond’s characteristics and their symbols. The previous day’s trades were displayed in the New York Times with prices and yields and whether they were trading flat or not. You could get a quote for a bond on the Quotron that your broker would honor. In short, what is wrong with trading bonds on an exchange?

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Is this the end of the art-market bubble?

Felix Salmon
Nov 4, 2013 07:32 UTC

One of my pet distinctions is the one between a bubble and a speculative bubble. All speculative bubbles are bubbles, but not all bubbles are speculative. In the markets, the late-90s dot-com bubble was speculative: it was based on the greater-fool theory that even if you were overpaying today, you’d be able to sell to an ever greater fool tomorrow, and make lots of money. A speculative bubble is fueled by flippers — people who don’t much care for or about what they’re buying, but who reckon that whatever it is, they’ll be able to sell it at a nice profit. So the Miami condo bubble of the mid-00s was speculative, while the current Miami real-estate market, which is nearly as hot, isn’t.

Non-speculative bubbles are often fueled by FOMO: you spend more than you can really afford on an apartment today, because you have a very rational fear that if you wait any longer, you’ll never be able to afford a place to live, no matter how much you stretch. And one way of ensuring that speculative bubbles never take place is to put lots of friction in the system: no one will ever buy-to-flip a grand NYC co-op apartment, for instance, because New York’s co-op boards are very good at preventing such activity, and making life miserable for would-be flippers.

This is one reason why I’ve long said that even if there is a bubble in the contemporary-art world (and I think there is), it’s not a speculative bubble. The people spending millions of dollars on trophy art aren’t buying to flip; the people selling aren’t selling to make a fast buck. Rather, they’re selling because of one of the “three Ds”: death, divorce, debt. The exceptions to this rule are dealers, of course, along with a small number of collectors who are so active they start becoming quasi-dealers in their own right. If you’re well connected in the art world and willing to make an opportunistic purchase, then you’ll probably be willing to make an opportunistic sale as well, when the price is right.

But right now, I’m beginning to see indications that things are changing: if you look at this month’s big contemporary art auctions, you’ll see quite a lot of art being flipped, including art being flipped by one of the biggest collectors of them all, Stevie Cohen. According to Carol Vogel and Peter Lattman in the NYT, Cohen is selling a Gerhard Richter which he bought from the Pace Gallery last year, along with “about a dozen other pieces, mostly at Sotheby’s, that he acquired in recent years at art fairs and auctions”.

On top of Cohen’s works, Vogel has found other pieces being flipped this month, including Three Studies of Lucian Freud, by Francis Bacon, which “was purchased by a consortium from a private collector in Italy within the past 12 months”; and Apocalypse Now, by Christopher Wool, which was sold by David Ganek very recently. Between them, the Richter, the Bacon, and the Wool are going to account for a substantial percentage of the total amount of money spent at auction this season, which means that auction totals are increasingly comprised of short-term trades, as opposed to sales from individuals and families who have owned the objects for many years.

(Incidentally, talking of auction totals, Vogel mentions “Christie’s record $495 million postwar and contemporary art auction just six months ago” at the top of her piece. In nominal dollars, that auction was indeed the largest ever. But the NYT now only uses the word “record” for real records, not nominal ones — and Christie’s November 2006 Impressionist and modern sale raised $570 million in today’s money.)

It’s rare for people in the art world to buy a piece and then immediately consign it to auction. It’s common for works of art to be sold in the primary market for well below their auction value — but precisely because it is so common, there are lots of rules and protocols which mitigate against such things happening. When work is being sold at below-market rates, there’s naturally a lot of demand for it, which means that dealers can pick exactly which buyers they want. And if any buyer dares to flip such a work, he knows he’ll be blacklisted from then on in. Instead, if a buyer wants to sell a work he bought from a gallery, he always asks the gallery first.

As for work on the secondary market, well, dealers do occasionally find themselves a bargain. But they normally take their time and try to find a buyer themselves, because if they consign to auction, the auction house will take about 12% of the final sale price, in the form of buyer’s commission. If you’re a dealer selling a painting, you’re much better off finding that buyer yourself, and persuading him to pay the full amount to you directly. In order for flipping at auction to make sense, the buyers at auction have to be rich naifs who are hard to find through normal channels.

So what does all this very public flipping mean for the contemporary art market? Four possibilities present themselves.

Firstly, galleries don’t have faith in their own prices. If Cohen is auctioning off works he bought from galleries, it’s fair to assume that he gave all of those galleries the opportunity to buy back the pieces first — and that they declined. On top of that, one of the notable things about Cohen’s Richter is that it is coming to auction with an estimate of $15 million to $20 million, which is below the $20 million he’s reported to have paid for it in 2012. Cohen is a trader, who marks to market: of all people, he’s going to worry the least about taking a loss. But he also wouldn’t sell now if he thought there was serious potential for price appreciation.

Secondly, we might be seeing the smart money rushing to the exits. They could make more money selling privately — but that takes time, and maybe they don’t think that they have time.

Thirdly, it’s possible that the auction houses are doing something which Dan Loeb accused Sotheby’s of in his recent letter:

Based on discussions with market participants, it is our understanding that it has been Sotheby’s who has most aggressively competed on margin, often by rebating all of the seller’s commission and, in certain instances, much of the buyer’s premium to consignors of contested works.

While it’s relatively commonplace for auction houses to charge big sellers no commission on their works, it’s very uncommon for the auction house to share any of the buyer’s premium with the seller. But if that’s happening, that might explain why the sellers are suddenly more willing to use the auction houses as a place to sell their works.

Finally, the quality of the buyers at auction might be weakening, with art-world types being replaced by — for lack of a better word — rich chumps. Auction houses, with their global reach and transparent sale system — the highest bidder always wins — are naturally better suited than art dealers to find collectors who are new to the scene and looking for trophies. And if dealers want to sell to such individuals, they might be forced to go the auction route.

What’s interesting about all four of these possibilities is that they all suggest the same thing — that the contemporary-art bubble is entering its final stages. When a bubble becomes speculative, it becomes much more dangerous, and fragile, and short-lived. This bubble is a robust one: it has been going for many years, gathering momentum all the way. Even the financial crisis barely made it stop for a breather. But if we see another record-breaking season in New York this week, don’t take that as a bullish sign. It could just be that we’re entering a period of feverish selling.

Update: Kathryn Tully wonders whether the art bubble has already started to deflate.

COMMENT

“Stevie Cohen?”

Posted by CatWeaver | Report as abusive
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