Opinion

Felix Salmon

How the movie studios caused Netflix’s problems

Felix Salmon
Jul 15, 2011 20:20 UTC

Adam Knight has a smart take on why Netflix is unbundling its DVD service from its streaming service:

The Internet’s memory is short so let’s go back a week ago to when Netflix lost the Sony movies and almost lost Starz. Why did that happen? Netflix WI subscribers passed a certain number specified in the contract with Starz and Sony and so they lost the right to stream that content. After some talks they came back online and now, one week later, Netflix is breaking apart their WI subscribers from their DVD subscribers. I find it hard to consider this a coincidence.

Having a ton of DVD viewers that are not using WI artificially inflated their WI subscriber numbers and almost invalidated a content contract. The only way to lower that number is to remove their access and only let people that want WI subscribe to it and pay into the service. So now WI isn’t a bundled service but one you ask for and pay for. This way, Netflix lowers their perceived WI subscriber count, keeps their content deals without renegotiations, and generally carries on.

This is all incredibly similar to the debate over cable-TV pricing, where the status quo is that you pay a flat fee for a bundle of channels, and there’s a vocal constituency — in which I include myself — saying that we should move to an a-la-carte pay-only-for-what-you-watch approach.

Netflix has always been about convenience, and a flat monthly fee, buried on your credit card statement somewhere, is certainly more convenient than paying for movies one at a time, as you have to do on say iTunes. But just because Netflix charges consumers on a flat-monthly-fee basis doesn’t mean that’s the best way for it to make deals with movie studios.

Up until now, it seems, Netflix has paid the studios a flat monthly fee, linked to the number of subscribers it has with access to their content. And when that got too expensive, it wound up cutting off streaming from its DVD subscribers to save on its own library-subscription costs.

Netflix paying a flat monthly fee for a bundle of movies is a bit like a cable-TV subscriber paying a flat monthly fee for a bundle of channels. The idea is that you pay the same amount each month whether you actually watch any movies or not; people who only use the DVD service and who never use the thrown-in streaming service are still very expensive for Netflix. (This is a big departure from the old business model, where people who barely used the DVD service were Netflix’s most profitable customers.)

It makes sense, under this model, for Netflix to unburden itself of DVD customers who barely stream any movies but who still cost Netflix itself lots of money in subscription fees. But that just means that everybody would be better off under a different model — for instance, one in which studios got paid every time one of their movies was streamed. (That kind of system would also be wonderful for independent filmmakers, who could upload their movies to Netflix at no charge and then get a stream of payments as and when Netflix’s subscribers started watching their film.)

Such a system would probably be better for the movie studios, too, since it would align their incentives with those of Netflix: they would get more money when people watched more movies and used Netflix more. As the studios and Netflix teamed up to persuade people to stream their movies, everybody would win.

So why isn’t this happening? Because the media business is calcified, and has to be dragged kicking and screaming into any kind of new business model. The studios have a reliable revenue stream from Netflix right now, and they have no real incentive to swap that for something less reliable, even if that would make them more money. It’s short-sighted, but Netflix certainly doesn’t have the power to make them change their minds. And so we end up with Netflix removing the streaming option from a large proportion of its subscribers — something I’m sure it absolutely hates to do. People are blaming Netflix here, but it’s surely more likely that the real villains of the story are the studios.

COMMENT

I suspect the studios are quite keen to balance out their performance-based cinema revenue with revenue from other channels that is uncorrelated to whether anyone likes their films.

This must be one of the key benefits of TV deals for the studios – that it lets them use their market power and distribution control to guarantee revenue streams for films which might not otherwise get any. I assume this helps them sign stars (effectively by providing minimum guarantees) and maybe even to make films which might not otherwise get made.

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Readers won’t share ads

Felix Salmon
Jul 14, 2011 23:05 UTC

Is there a company in the world which isn’t trying to “harness and leverage the power of social media to amplify our brand” or somesuch? I’m a pretty small fish in the Twitter pond, and I get asked on a very regular basis to talk to various marketing types about how they should be using Twitter. A smart organization with a big Twitter presence, then, will naturally start trying to leverage its ability to leverage Twitter by putting together sophisticated presentations full of “insights to help marketers align their content-sharing strategies” and the like. Which is exactly what the New York Times has just done.

The slideshow can be found here, and it’s worth downloading just to see how many photos the NYT art department could find of good-looking young people looking happy in minimalist houses. But it actually includes some interesting insights, too, which were spelled out at a conference yesterday by Brian Brett of the NYT Customer Research Group.

The survey claims to be the first of its kind on why people share content, which is a very good question. A large part of how people enjoy themselves online these days is by creating and sharing content, which is both exciting and a little bit scary for anybody in a media organization. And the NYT methodology was fun, too: aside from the standard surveys and interviews, they asked a bunch of people who don’t normally share much to spend a week sharing a lot; and they also asked a lot of heavy sharers to spend a week sharing nothing. (“It was like quitting smoking,” said one, “only harder”.)

The first striking insight is about the degree to which the act of sharing deepens understanding. It’s not at all surprising to learn that 85% of people say that they use other people’s responses to help them understand and process information — in fact 100% of people do that, and they’ve been doing it for centuries. We always react to news and information in large part by looking at how other people react to it.

But more interesting is the fact that 73% of people say that the simple act of sharing a piece of information with others makes them likely to process that information more deeply and thoughtfully. It’s like writing things down to remember them: the more you engage with something, the more important and salient it becomes to you.

This has interesting implications for anybody including sharing functionality on their website. Something like the Huffington Post Twitter module, when it works, makes such sharing unbelievably easy: it comes pre-loaded with a comment and a link, all you need to do is press the button and the content is shared. If you click on a share button and then click the “tweet this” button, that’s two clicks — a bit harder. If you edit the content of the tweet, that’s more engagement still. If you select a passage to share on Tumblr, that’s even more; if you write a long blog entry about the piece, then you’re really engaged. The easier you make sharing, the more sharing there will be — but you’ll be paying a cost in terms of the strength of the relationship you have with the people who do share your stuff.

Another implication here is that people who share content in laborious ways are more engaged than power users. If you copy a URL, paste it into TinyURL to shorten it, copy the shortened URL, go to the twitter.com website, paste it into the box, add a comment — that’s a lot of work going into sharing, compared to someone who has all that kind of thing automated in a toolbar button. And the greater the amount of effort involved, the stronger the relationship between site and sharer, as a rule.

Up until now, most of the emphasis, when it comes to sharing, has been on sharing as a distribution mechanism — if I tweet a link, thousands of people might see it and maybe even follow that link, so publishers love it when I tweet their stories. It’s still very early days, however, in terms of sharing as a relationship-building mechanism — the way in which when I tweet a link, I strengthen my relationship with whatever or whoever I’m sharing. One thing very few sites do, but which should be much more common, is to automatically include the twitter handle of the author of a story in the auto-tweeted text, along with or even instead of the twitter handle of the site the story comes from. After all, social media is about person-to-person relationships, and that kind of thing can do wonders for a writer’s relationship with the people tweeting their stories.

Brett mentioned at the end of his presentation that email was still the most common form of content sharing — not in terms of the number of people reached, but in terms of the number of people reaching out to others. That’s important too, and has been underemphasized up until now. It’s great to reach new people who see your stuff only after it’s shared with them. But it’s equally great to have such fantastic content that people want to share it, even if it’s just by email. Anybody sharing your content is an especially precious user, who loves your stuff and who should be thanked and cultivated as much as possible. (It should go without saying, of course, that it’s downright idiotic to antagonize those people and accuse them of breaking the law.)

The main theme running through the NYT report is the decidedly unsurprising conclusion that social media is social — people use it to define themselves to others, to stay connected to others, to influence others. Human relationships are vastly more important than brands, which is why it’s hard to build a corporate brand on Twitter, and the companies which manage to do so generally do so in a highly labor-intensive manner, one @-reply at a time.

Which is why it’s fascinating to me that this report is aimed at, and was commissioned in service of, the companies which use the NYT for their brand advertising. Brand advertising is important and powerful, but it’s not particularly social; not all brands can or should be fighting to become the rare Old Spice or Volkswagen with a viral ad campaign. And if you do have a viral ad campaign, you don’t really need or want it on nytimes.com. The press release, however, makes it clear that the findings are aimed very much at advertisers, as opposed to the editorial-technology people who would probably find it much more useful:

“The New York Times has invested heavily in social media across our organization, both in our own business and to create industry-leading integrated opportunities for our valued advertisers. As online sharing continues to grow as a tool for marketers, we saw an opportunity to add value to the conversation, by studying why people share online,” said Denise Warren, senior vice president and chief advertising officer, The New York Times Media Group, and general manager, NYTimes.com. “These findings are part of our ongoing commitment to help advertisers effectively reach and communicate with consumers through engaging, successful and creative campaigns.”

It seems to me that the NYT, here, is going along with the fiction that high-profile brand advertising in the NYT can and should be social. If that’s what the advertisers think they want, that’s what we’ll give them. But the smart advertisers will ignore all this — just as they ignored other useless distractions like click-through rates. We know that only idiots click on ads; what makes us think that people who not only click on ads but actively share them will be any smarter?

Viral videos — the rather fabulous K-Swiss one being just the latest example — are all well and good. But high-end websites like nytimes.com are no place for viral videos, or for sharing tools embedded in ads. Those are a bit like the QR codes you see on posters: a sign of fad-following desperation and a good sign that the advertiser doesn’t have faith in the creatives they’ve hired. Brand advertising isn’t and shouldn’t be transactional. And I’m a bit worried that the NYT is enabling those who think it can be.

COMMENT

Just looked through the presentation. While interesting, I have to note that only the NYT can believe that in-person interviews (phase 1) in New York, Chicago, and San Francisco would give them a broad spectrum of data.

Posted by Curmudgeon | Report as abusive

Will the virus claim Rupert Murdoch himself?

Felix Salmon
Jul 14, 2011 19:33 UTC

The News Corp hacking virus is proving both virulent and highly contagious. Rupert Murdoch tried to treat it with amputation, by closing down the News of the World, but the surgery came too late, and he couldn’t prevent the virus from spreading to the Sun and the Sunday Times. At that point, the virus was unstoppable: its next victim was Murdoch’s $12 billion bid to take control of BSkyB. Now, with the UK police investigation barely having started, the virus has managed to jump over the Atlantic: the FBI is getting involved, looking into allegations that Murdoch’s papers tried to hack the phones of 9/11 victims.

This isn’t the investigation under the Foreign Corrupt Practices Act that Eliot Spitzer was calling for, although that might well come next. Both of them would normally seem like a bit of a stretch — it’s far from clear that anybody at News ever successfully hacked into voicemails on US phones, and it’s hard to use the FCPA when there’s no clear financial benefit for the company doing the bribing. But these, of course, are not normal times, and the more the virus spreads the more harmful and powerful it becomes. On this side of the pond, Les Hinton in particular is looking vulnerable; he’s currently running the Wall Street Journal, and if he ends up falling victim to the virus, there’s a chance the WSJ could get infected by association.

This is not an existential crisis for News Corp, a $42 billion behemoth which will continue to exist in one form or another whatever happens. But it’s much more damaging to Rupert Murdoch personally, and to his son James. Both of them are now going testify in parliament on Tuesday, and there’s no way that the experience is going to be a pleasant experience for either of them. They can’t lie — the truth is going to come out sooner or later, and neither will want to risk a criminal perjury trial. But at the same time it will defy credulity if Murdoch claims to have had no knowledge of his newspapers’ techniques, or if James claims that he genuinely thought the illegal activities were confined to one royal reporter at the News of the World.

Amid all the talk, over the years, about who will succeed Rupert as head of News Corp, no one seriously considered the possibility that Rupert might be forced to step down and hand over control to a non-relation. But there’s no doubt that Rupert Murdoch is now a serious liability to News Corp, and that liability wouldn’t go away if he were replaced by James.

Murdoch has always been more interested in power than money, and so the fact that resigning would make his net worth soar means very little to him. (It’s not like he’ll ever spend his billions in any case.) But Tuesday’s grilling will only be the first of many very difficult situations: the UK and US investigations are going to go on for the foreseeable future, and the headlines will continue to come out in a damaging drip for a long time yet.

Rupert Murdoch turned his father’s small media company into a global empire; it has always been his dream to keep News Corp in the Murdoch family for generations to come. But that dream has never looked less likely than it does right now; the virus is closing in on the Murdochs, and their immunity to the virus, which was weak to begin with, is rapidly disappearing. It’s a story fit for the movies: even after huge triumphs like acquiring the WSJ and releasing Avatar, Murdoch could be doomed by his first love — the love of aggressive tabloid journalism. He’s tough: he’ll try to hold out for as long as he can. But he’s human, too. I wouldn’t be at all surprised if someone within News Corp weren’t working right now on a face-saving exit for one of the most successful media moguls of any era.

COMMENT

There is a moment here when formal professional journalism can regain some credibility and relevance. News Corps’ pattern of behavior goes far beyond phone hacking. Can the news media report on the news media. Are there investigative reporters that are willing to report that their associates broke the law, and identify them by name. Not sure I buy the ‘I was only following orders’ defense that some of the News Corps types are pushing.

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The new dynamics of Netflix

Felix Salmon
Jul 13, 2011 14:15 UTC

I’ve received some very interesting reactions to yesterday’s post on Netflix, including David Leonhardt reminding me about his profile of the company five years ago.

There are three parts of that article which are particularly interesting today. The first is the thesis that Netflix’s success is based in large part on a long-tail model.

Every day, almost two of every three movies ever put onto DVD are rented by a Netflix customer. “Americans’ tastes are really broad,” says Reed Hastings, Netflix’s chief executive. So, while the studios spend their energy promoting bland blockbusters aimed at everyone, Netflix has been catering to what people really want.

The second is the idea that the economics of Netflix were far from obvious:

The stock trades for about $27, down about $12 from its 2004 high. One fifth of its shares are on loan to short sellers betting it will fall further.

You can understand the doubts, too. At a time when cable and phone companies are running fat data pipes into homes, Netflix can seem a lot like the Sears catalog of the early 21st century.

And the third is the look forward to Netflix’s own streaming offering:

The company has been hiring engineers to build its own download site, which, with a familiar brand name and all that information about what people like to watch, may be formidable.

But it could be years — 5? 20? — before downloading approaches the size of the DVD business.

Netflix’s stock, of course, has turned out to be a veritable wonder over the past five years: it’s currently at $291 per share, more than ten times its level when Leonhardt was worried about its prospects. It turns out that while people were worried about Netflix at $27 per share when it was based on a long-tail model, they’re much more excited about Netflix at $270 per share when it’s based on a live-streaming model.

The people who still think of Netflix as a queue-and-DVDs site, I think, are a bit like the people who think of Amazon as a bookstore, or of Apple as a computer maker. The whole reason that Netflix is at $270 a share rather than $27 a share is streaming, and if you have a subscription-only account at Netflix, the famous queue, which I loved, disappears entirely.

The queue was a great way of putting together a list of movies you really wanted to see, and then going through them slowly, at your own pace. Sometimes certain movies weren’t available, but that was OK — there were always other movies that were available, and you knew that sooner or later the ones that weren’t available would show up.

With a streaming-only account, however, all of that goes away. Let’s say you’re having a dinner conversation about arthouse thrillers featuring an A-list actor and a much less well-known but very beautiful female co-star, where nothing much happens amidst lingering shots of beautiful scenery. With the old Netflix, you could put The Passenger and The American into your queue next to each other, and probably watch them back-to-back, if you had four hours to spare. With streaming-only Netflix, you wind up being faced with something unhelpful like this:

passenger.tiff

There’s no option to add either movie to your queue; instead, your only choices are to sign up for the DVD option at $8 per month, or to watch something completely unrelated. If and when Netflix does manage to get either of these movies into its streaming library, you’ll never know.

Which is one reason why Netflix is going to serve up many fewer highbrow films on instant streaming — that’s what happens when you kill the queue. The long-tail business model turned out not to be the salvation of Netflix after all; rather, all that matters is convenience. The Passenger‘s not available? Never mind, let’s watch Frankenstein Must Be Destroyed instead.

What does this means for the future of Netflix? Probably a small minority of arthouse types will defect to GreenCine, but they won’t be numerous enough that anybody at Netflix will care. There’s always a tension between quality and and convenience — Kevin Maney wrote a whole book about it — and there’s no doubt which one wins in the marketplace: convenience, every time.

Netflix got its toehold in the market by being more convenient than Blockbuster; it’s now doing to its DVD business what it initially did to DVD-rental shops. The wonderful long-tail qualities turn out to have been an incidental benefit more than a core value proposition. The streaming service will be the main part of Netflix; the DVD service will be kept on by the arthouse long-tail lovers who don’t go to GreenCine.

The big questions is what will happen to the people wanting to see blockbuster recent releases. Will they sign up for Netflix DVDs? Will they move to Redbox? Or will they just make do with whatever happens to be available on streaming? Any ideas?

COMMENT

As the COO of Fandor (a new streaming service for people who love great independent movies), we’ve been seeing signs of this change for over a year from Netflix’s behavior in the film acquisition market. About a year ago they started backing off on streaming licenses for independent movies, and about six months ago started curtailing their purchases of long-tail DVDs.

So Felix is right — and it’s now becoming clear to everyone the shift in Netflix’s business model to mainstream content (tv and movies) and away from long-tail (or even mid-tail) independent, documentary, and international films. It’s a sensible business move – for one reason, it lets them free ride on all the marketing dollars that Hollywood puts behind their content.

The Independent published a great interview with Netflix on this subject in January. (http://www.aivf.org/magazine/2011/01/ne tflix_distribution_independent_diy_filmm akers) They’re only interested in content with proven “queue demand.” Query what that means anymore if they’re moving away from the queue for streaming customers?

That’s fine with us — it creates opportunity for companies like Fandor to help out customers who are looking for interesting, thought-provoking movies beyond what Big Hollywood has to offer.

Our belief: on-line delivery is critical to the success of independent and international film because it directly attacks the biggest obstacles people face to discovering and watching those movies: easy access, risk-free exploration, and ability to spread the word about great movies via word-of-mouth.

That’s what we built Fandor to do. I invite your readers to check us out at http://www.fandor.com!

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Did Netflix just kill its long-tail model?

Felix Salmon
Jul 12, 2011 21:00 UTC

Back in 2009, Chris Anderson posted this chart, showing how Netflix’s consumers were embracing the long tail of its offerings. As the number of movies in Netflix’s library grew from 4,500 to 18,000, the top 500 movies in the library went from constituting more than 70% of demand to less than 50% of demand.

tail.png

This is the wonderful thing about online retailers: they can offer vastly more inventory than their local-store counterparts. And this is the wonderful thing, too, about Netflix streaming, at least as it existed until today. The big problem with Netflix, for many of us, before streaming came along, was always that we would stock up on highbrow ambitious fare which we knew we really ought to see, and then not be in the mood for something highbrow and ambitious when finally we had some spare time to watch a movie. With streaming, you could get the best of both worlds: a selection of fabulous rare DVDs, and instant access to something popular and brainless should you be so inclined.

Those days, however, are now over. You can buy the DVDs-by-mail service, or you can buy the online-streaming service, but to get them both you have to buy them separately: Netflix won’t give you even a single penny discount for getting both together rather than one or the other. In unscientific polls, more than a third of subscribers say they’re going to cancel; I doubt that anywhere near that many will follow through on that threat, but the fact is that Netflix offers much worse value going forward than it has done up until now. Streaming is great, but the selection is still extremely limited, and sometimes it doesn’t work at all for people with spotty internet connections. Having a few DVDs in familiar red envelopes was quite lovely, just in case there were problems with the internet, or you were about to go on a long journey with a laptop, or you needed to watch something only available at the end of Netflix’s long tail.

In shoving people out of their DVDs-by-mail schemes and into the streaming-only option, Netflix is reversing the trend seen in Anderson’s chart: the proportion of demand accounted for by its top 500 titles is almost certainly going to reach new all-time highs. At the margin, this move might well help encourage movie studios to allow their long-tail films to be available for streaming, but that process is going to take a long time and we might never have as much inventory available for streaming as we currently do in the DVD store.

Theoretically, of course, the long-tail model works even better with streaming than it does with physical DVDs, since all the physical problems associated with finding and managing the inventory of pieces of plastic go away, and filmmakers can upload their films for streaming even if they don’t have a DVD distribution model. But it’s going to take many years to get there, and in the mean time I think it would make sense for Netflix to allow its streaming customers to take out on physical DVDs any titles which aren’t available for streaming. That might give Netflix a bit less of a bully pulpit when it comes to negotiations with studios. But it would be much more consumer-friendly.

(Incidentally, is there a reliable number out there for the number of movies available on Netflix streaming? I’ve looked but can’t find one.)

COMMENT

Are you really willing to go on record suggesting a $7.00 increase in a monthly service that was ridiculously low will destroy it?

You really think that $16 is too much for endless streaming content and all the movies you can order a month?

In 2011?

You can barely buy bread, milk and sugar for $16 these days. Gimme a break.

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Dispatches from the new news landscape, Univision edition

Felix Salmon
Jul 12, 2011 13:00 UTC

Univision is a massive television network in the United States, which has had a lot of success providing popular programming in Spanish. It’s had a news operation for a while, but nothing investigative — and up until now it has made a point of telling only upbeat and positive stories about the hispanic population in the US.

And that’s only the beginning of why this story is so interesting. Univision has done a great job of providing it in a range of formats: there’s Spanish-language video, of course. But there’s also a detailed Spanish-language web story, complete with supporting documents, as well as an English-language version of the video and a clearly-written story, in English, posted on Univision’s excellent Tumblr.

The news here is that Senator Marco Rubio of Florida has a brother-in-law with a rather embarrassing past:

Cicilia was convicted and sentenced to 25 years in prison for conspiracy to distribute cocaine and marijuana belonging to a crime ring implicated in the death and dismemberment of a federal informant, as well as the bribing of several Miami police officers.

And there’s a meta-story, too, about the way in which Rubio’s office refused to respond to Univision’s enquiries, instead trying to quash the story entirely by going above the head of the news department and complaining directly to Univision’s CEO.

“Quite simply, the pursuit of this story and the targeting of the Senator’s relatives, who are private citizens, is outrageous,” said Alex Burgos in a letter to Univision CEO Randy Falco seeking to kill the story. “They do not hold public office and are unrelated in every way to his service in the United States Senate… This is not news. This is tabloid journalism.”

The lesson here is that as the number of investigative reporters on local newspapers continues to shrink, this kind of news will increasingly come from brand-new outlets, which include not only blog networks like Gawker but also hybrid creatures like Univision Investiga. This increasingly-diverse news ecosystem raises interesting questions for the likes of Rubio spokesman Alex Burgos, who refused to deal with Univision Investiga in the same way that he would deal with an English-language national news network, or for that matter the Miami Herald, where the author of the story, Gerardo Reyes, won a Pulitzer. Instead, Burgos decided that the best response was an aggressively adversarial one, where the full power of the Senator’s office would be used to try to ensure that the story never got out at all.

I don’t think that tactic was wise. Very few of the newer media outlets are subsidiaries of companies which are open to political coercion in this manner — and of course Burgos’s attempts here didn’t work very well either. Rubio and Burgos may not be happy about the increasing diversity of news outlets covering them, making it harder for them to control the flow of news. But outfits like Univision Investiga are entirely legitimate, and have to be treated that way.

COMMENT

I’m no Rubio fan, but I don’t think “Senator’s brother in law was arrested for drug activity twenty years ago” is a legitimate “investigative” story without more. It feels like an attempt to just embarass Rubio or tarnish him by implication. (Unless Rubio has supported attacking other people’s relatives – turnabout is fair play).

I’m fine with investigative reporters looking into it, because it might become a story with more facts (i.e., if Rubio was somehow tied to the drug gang or spent so much time at his sister’s place that he must have known) but it is kind of tabloidy to publish it at this stage.

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What damage could Rebekah Brooks do to News Corp?

Felix Salmon
Jul 8, 2011 20:12 UTC

The implosion of the News of the World, and of News Corp’s bluster surrounding hacking and bribery allegations, comes less than a week after the Bribery Act of 2010 finally became law in the UK. The Bribery Act had an unbelievably long gestation — a distant relation of mine, Cyril Salmon, headed up the Salmon Commission on Standards in Public Life and put forward recommendations on the subject as long ago as 1976.

Today, the Bribery Act — which finally came into force on July 1 — is considered the toughest anti-corruption legislation in the world. And it’s one of the few pieces of UK legislation under which a company itself can be convicted of criminal activity, as opposed merely to its executives individually. There’s a new corporate offense now, of failure to prevent bribery, which is relatively easy to prove. If News International executives are ever found approving bribes to the UK police, then a conviction under the Bribery Act would be extremely easy.

For the purposes of the current investigation, however, News International looks as though it’s in the clear. The alleged bribes all happened long before July 1 of this year, and the act isn’t retroactive. The UK doesn’t have an equivalent to RICO, in the US, where a corporation’s very existence can hang in the balance if it’s convicted of corporate criminal acts. And even the tough new Bribery Act is relatively toothless in that regard: the worst that can happen is generally that the company in question has to pay a fine. (Many thanks to Barry Vitou of Pinsent Masons for helping me to understand the Bribery Act; I should emphasize that the speculation you’re about to read about News International is very much mine and not his.)

News International, then, is extremely unlikely itself to be convicted of any crime, and if it is convicted, then News Corporation will surely be able to afford any fine. Which in its own way gives News International the leeway to continue acting as a criminal corporation would — not in terms of bribing police officers, perhaps, but more in terms of protecting the people who know where the bodies are buried.

One thing that’s undeniably true about the troika of Les Hinton, Rebekah Brooks, and James Murdoch — and Rupert Murdoch himself, for that matter — is that all of them are extremely smart and capable executives. I personally believe that all of them knew about the hacking and the bribery — and it’s also fair to assume that if Hinton or Brooks were fired and decided to tell everything to the police, they could do enough damage to the Murdochs that News Corp might easily be declared not fit and proper to own a media company in the UK. (There is some precedent for former Murdoch editors telling expensive tales out of school; think of Judith Regan.)

In the grand scheme of things, News International is a very small part of the News Corp conglomerate; it could disappear entirely and the financial impact on News Corp would be small. The political clout which News International gives News Corp in the UK, however, is extremely valuable. And if malfeasance at News International ends up poisoning News Corp’s ambitions with respect to BSkyB, or results in criminal charges against either of the Murdochs, then at that point this scandal really could do serious damage to one of the world’s most powerful and notorious media organizations.

So it’s easy to see one reason why Rebekah Brooks might still have her job: News wants her on the inside, working for them, rather than on the outside, turning witness against them. And the same goes for Les Hinton, too. I still can’t really believe that Brooks is going to survive this scandal. But I can easily believe that the Murdochs will fight very hard indeed to try to keep her in her current position, at least until the police investigation is over.

COMMENT

I’m sure that Rupert and James will be well advised on the UK Bribery Act. After all they own their own Anti-Corruption business
http://www.dowjones.com/nl/riskandcompli ance/

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Brand and crisis management, Murdoch style

Felix Salmon
Jul 8, 2011 00:01 UTC

For a man who’s spent his entire life in the media business and understands it as well as anybody who’s ever lived, Rupert Murdoch is quite astonishingly inept at crisis management.

The News of the World hacking scandal was broken by the Guardian two years ago, and has been getting worse for him ever since; he’s had all the time in the world to do what every crisis-management professional has at the very top of their list: get out in front of the story, take full control of the situation and full responsibility for all mistakes made, and demonstrate in as public and visible a manner as possible that such things can and will never happen again.

Instead, what we’ve seen from Murdoch and his top executives is lies, obfuscation, pushback, bluster, dissembling, and generally the unedifying spectacle of extremely rich and powerful people doing their very best to never be called to account.

Today’s decision to shutter the News of the World in no way means that Murdoch is finally in control of the story. It’s a business decision, mainly: the NotW brand was fatally tarnished, to the point at which it would have been more expensive to keep it going than to shutter it. The advertising dynamics were poisonous and inescapable: there was little upside and significant downside for any brand which continued to advertise in the paper. On top of that, there would probably have been a reader boycott, too. The newspaper business is all about selling readers to advertisers, and the NotW suddenly had many fewer of the former and almost none of the latter. It was toast.

Murdoch’s axe is falling, tragically, on a group of journalists almost entirely unconnected to the scandal which brought down their paper. None of this is their fault, they don’t deserve this at all, and they didn’t get so much as a “sorry” from James Murdoch, in his official statement, who talked only of how unfair the decision “may feel” and how he intended to “communicate next steps in detail and begin appropriate consultations”.

And as if to prove that he still Doesn’t Get It, Murdoch is — for the time being — standing by Rebekah Brooks, the chief executive of News International, a former editor of the News of the World, and someone whose position is clearly untenable.

Murdoch, then, is being sensibly ruthless when it comes to the News of the World brand. Yes, it’s venerable — 168 years old — but it’s also a liability, and there’s literally nothing he could do to resuscitate the newspaper’s reputation. That explains what happened to the NotW journalists: like it or not, brands still matter, a lot, in media. Think how much more likely you are to get any given call returned if you’re working for the New York Times. Murdoch knows from first-hand experience that once a newspaper brand is sullied, it’s sullied for decades: The Sun’s Liverpool circulation never recovered from the boycott following its atrocious coverage of the Hillsborough disaster. In media, one dreadful mistake really can redound for generations.

And while the NotW’s journalists are sadly necessary collateral damage from the closure of the newspaper, Murdoch is being self-defeatingly sentimental when it comes to Brooks in particular and his News International executives in general. In contrast to the seemingly heartless treatment of the frontline hacks, Murdoch is extremely loyal to his most senior executives, and especially to Brooks. And it’s also worth noting that if James Murdoch weren’t Rupert Murdoch’s son and heir apparent, his job would be on the line as well.

The moral of this story, for anybody observing from the outside, is that it’s very, very bad idea for a company to circle the wagons and try to protect its senior executives when they get into trouble. If a handful of senior heads had rolled two years ago, and if News International had volunteered information about how far over the line the NotW had transgressed, then the newspaper would still be a cash cow for Murdoch. Instead, the closing of the NotW, plus the inevitable launch of the Sun on Sunday, is surely going to cost him a significant nine-figure sum.

As for the idea that the Sun on Sunday is just going to be the News of the World under a different name, I’m not sure I buy it. The name of a newspaper is the single most important part of its identity: it can’t simply be changed at will while maintaining its identity, in the way that Rebekah Brooks used to be Rebekah Wade. The Sun on Sunday will perforce be a very different beast from the News of the World, and the staffing will look very different too.

What’s more, insofar as the Sun on Sunday is similar to the News of the World circa 2011, remember that the NotW’s current staff are the innocent victims in this story. If many of them can get their jobs back, that’s a good thing, not a bad thing. Is the NotW in its current incarnation purer than the driven snow? Of course not — and neither are most of the other newspapers in the UK. The NotW was not the only newspaper to hack into telephones. Unless you want to see pretty much every UK tabloid shuttered, the Sun on Sunday rising like a Phoenix is something all newspaper lovers should welcome. Even if they shudder to think that Rebekah Brooks could yet keep her job and be the person in charge of launching it.

COMMENT

I wouldn’t mind terribly if this BSkyB obfuscation and flimflammery brought down both Murdoch and Cameron. They’re in cahoots as it is.

Posted by RalfW | Report as abusive

Bringing sense to business-method patents

Felix Salmon
Jul 5, 2011 15:16 UTC

It’s rare that I consider Andrew Ross Sorkin too harsh on Wall Street, but today is one of those times.

Sorkin’s thesis, narrowly considered, is undeniable. Wall Street has clout in Congress; because of that clout, it can get bank-friendly provisions inserted into legislation. But the broader thrust of the column is I think misguided: that the legislation is a bad thing, and that it unfairly benefits banks to the detriment of civil society and the rule of law.

It’s worth reading the column in full to feel the force of Sorkin’s disapproval. He quotes five different people in the column, of whom four are fiercely opposed to the legislation. The fifth, Chuck Schumer, is quoted with the construction “has said” — a phrase dripping with condescension and disbelief. (Schumer’s opponents are given the much more straightforward “according to,” “said,” “said,” and “wrote”.) This might be the first and last Sorkin column to ever treat Maxine Waters with more respect than Chuck Schumer.

The provision in question makes it much harder for financial-services firms to enforce what’s known as “business method” patents. These are relatively new animals, and not particularly welcome ones, either. There’s no good reason why financial innovations should be patented, and there’s every reason why they shouldn’t be. Patents are a way of skewing the playing field and giving one player an artificial advantage over everybody else — the exact opposite of how financial markets are meant to work.

There are far too many patents in general, and enforcement of them often resembles a multi-billion-dollar lottery. But at least outside the financial sector there can be good reason for such things to exist: without them, much R&D expenditure would simply cease. But financial companies don’t have R&D budgets, and given the sorry track record of financial innovation that’s probably just as well. What’s more, the more successful financial innovations — mutual funds, say, or venture capital, or even coco bonds, should they turn out to actually work — are very much in the public domain, open for anybody and everybody to copy.

Sorkin’s attempts to defend the idea of financial business-method patents ring pretty hollow. Some companies’ patents might be “put into jeopardy”, he writes, while others will have to spend money on lawyers trying to defend them. Well, yes. That’s the whole point.

The banks “are attempting to write into law what they have been unable to achieve in litigation,” Representative Maxine Waters, Democrat of California, wrote in a letter to colleagues…

Admittedly, it seems somewhat preposterous that simply processing scanned checks, as DataTreasury does, could be a patentable business method. But we have courts, which have upheld these patents, for a reason…

Experts like F. Scott Kieff, a professor at George Washington University Law School and a senior fellow at the Hoover Institution at Stanford, worry that the law is too broad…

He is worried about the law’s impact not just on investors in the United States, but also about even broader implications. “When word gets out that intellectual property rights are not being taken seriously in the U.S., especially for any class of patents that can be a convenient political target of powerful, well-heeled interest groups like banks, our voracious international competitors will pounce,” he said.

Sorkin never explains why the law might be bad for “investors in the United States”. Given that investors are the foremost consumers of financial services, one imagines they will be very happy if they no longer have to pay rents to patent holders in order to use those services.

As for those “voracious international competitors”, I have absolutely no idea who they are, what they are going to be pouncing on, or even who they’re supposed to be competing with. This is pure rhetoric, unsupported with any actual analysis; Sorkin does wave his hand at an article published in “a Hoover Institution journal”, but without any kind of link it’s impossible to follow the thread any further.

And Sorkin seems to have forgotten that it’s Congress’s job to make laws, which courts then enforce. If the existing law has gone astray — as patent law clearly has — then Congress has the obligation to set it back on its right and proper path. Section 18 isn’t too broad, it’s too narrow.

But that’s not how Sorkin sees it:

Section 18 represents a much larger issue: It is perhaps the most blatant demonstration of the lobbying power of Wall Street and, just as important, the willingness of Congress to support the interests of the banks, even in the face of clear evidence that the law has no purpose other than to benefit the financial services industry.

Well, yes, the law will benefit the financial services industry. No one is arguing that point. And it will hurt rentiers with patents. The important question is whether it’s a good idea from a public-policy perspective. Sorkin ducks that question entirely. But the fact is that if we want a level playing field in financial services, getting rid of business-method patents is an extremely good idea.

Update: Kevin Drum agrees that business-method patents are a bad idea, but still opposes this bill, in much the same way that some free-trade advocates oppose bilateral trade agreements. I see the point; where you stand on this issue is likely a function of how likely you think wholesale patent reform is.

COMMENT

Nothing that helps Wall Street is good policy. Full stop.

Posted by libarbarian | Report as abusive
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