Recession?

The noise is almost deafening — recession is all but upon us. Look at the trends.google.com chart below. The "buzz" (number of search queries) is way up. The first jitter occurred about a year ago. The news headline of the day said that according to economists, a recession was unlikely. Click on the chart to access the (most recent) chart and mull over the morphing newscape.

Recession

And then, consider this: actual data on the US GDP, available here from the Bureau of Economic Analysis. For convenience I have computed the average annual GDP growth rate in constant USD (2000). (warning : the time scales of the two charts are different. The BEA data covers the 1947-2007 time period)

Gdp19472007_2

Is the buzz picking up early signs of a weakening economy? (such as the credit crunch). Is the buzz feeding on itself to ultimately yield a self-fulfilling prophecy? (by affecting consumer/investor confidence). Could the buzz be just that — buzz?


Confirmation bias

A colleague of mine sent me an amusing powerpoint file in which it looks like the slideshow can guess your decision. You should look at it if you can understand French. (spoiler below) (serious comment further below)

Your are shown a series of playing cards, asked to mentally select one (say outloud which one it is) and then, incredibly, the next slide shows which card you have selected.

The trick rests upon the so-called "confirmation bias". See below the first series of playing cards.

T1

And now the second series.

T2

Notice that none of the cards in the first series appears in the second series. But because the pattern is similar in both series, and because you focused solely on the one card that mattered to you, you may experience a strange feeling of ESP.

I am not sure if my colleague was serious when he asked me what was the trick. Maybe he was pulling my leg, or maybe it was a challenge.

But the really very serious comment I want to make is that our profession (academic research) is littered with such (tragic) examples. There are very high profile examples of factoids (a missing card) brandished as evidence while the context is completely ignored.

If the prevalence of the confirmation bias doesn’t bother you, go back to the beginning of this post, download  the powerpoint slide show and experience it for yourself. Very powerful indeed.


Is a song like a tomato, a waterhole or the air we breathe? And why it matters.

(This is a draft. Will certainly evolve and should probably not figure under the heading of research at it stands today. But as I prefer to write this post in English and because there could be a working paper — let’s go)

I’ve just finished Fisher’s Promises to Keep. Interesting issues. The book looks at the set of legal issues pertaining to two subsets of the entertainment industry — music and movies. As we all know, the Internet is having considerable impact on these; we may argue on magnitude, but there is, and ought to be.

Fisher frames the debate in legalistic prose, examing how the set of laws regulating these sectors should evolve. He makes a credible attempt at trying to consider social interests, and those of the creators. He analyzes three frameworks: strict property rights, regulated industry, compulsory licensing. In a nutshell:

1) Strict property rights would add legal protection over tools such as encryption, to help the industry fight piracy.

He, like many other scholars, warns against negative side effects. To illustrate — a strict unregulated regime would make it possible for the industry to prevent making copies of legally purchased material, such as ripping a CD on your computer to listen to content on your computers, stereo, portable devices and so on. This may or may not be construed as fair use (to wit — iTunes prevents you from freely moving a file purchased on their store to unsupported devices). An extreme side effect would occur if every work were watermarked and every device had to comply with watermarking schemes. In one scenario, you might not be able to make a video at a wedding because the background music is watermarked and the compliant camcorder would not record! 🙂 (I believe this example belongs to Davidson but have to go back to my notes before I can confirm)

2) Regulated industry would enforce copyrights in exchange for a regulatory framework that would maintain and even expand the doctrine of fair use.

3) Compulsory licensing would in effect say that the cat and mouse game of trying to protect content is wasteful and that instead, music and movies should fall in the public domain and creators be compensated by a levy. Such levy could be in the form of an income tax or a consumption tax. the distribution of income would be made on the basis of several indicators.

The merit of Fisher was (2004) to make us more precisely aware of the evolving nature of digital entertainment: music and movies are changing profoundly — they are becoming public goods.

A public good is a good that is non-rivalrous and non excludable. (actually, there are more variants, but let’s keep it as simple as possible).

Non-rivalrous means that I may consume the good without competing against other consumers. This is important. And relatively unsusual. A tomato is a private good. If I eat a tomato, you cannot eat it. It is gone. You and I compete for tomatoes. And because tomatoes are scarce goods, it matters.

Non excludable refers to the fact that sellers can (or cannot) prevent unauthorized usage of the good. Easy for tomatoes to exclude unauthorized usage — until I sell it to you, I will not let you eat it, maybe not even touch it. Once you pay me, do what you want. But for water of air, it is more difficult. Water is (suppose for a moment) in infinite supply such that there is plenty for all and we do not compete for it. If a good is excludable, like a fenced waterhole, we can conceivably assign the management of the water supply to the private sector, because we can charge for the right to access the resource.

Non excludable goods cannot be efficiently managed by the private sector because there is no way to prevent free-riders to access the good. We cannot build fences to prevent the wind to reach anyone. We cannot let the private sector (alone) manage air, because there is no way in which the private sector will be in a position to extract resources from consumers in order to do so.

A long long time ago, things were simple. Artists would earn money through their live performances. There was rivarly (for proximate venues) and excludability (you pay your ticket and you get in). But not much money to be made because the production costs of entertainment were exceedingly high.

A long time ago, mechanical devices made it possible to store and play at will various forms of art (music and, eventually, video). Rivalry and excludability were strong, as if I have a roll, a record, a tape or a CD, you don’t. I can listen and you cannot. We compete for the right to have the token that will deliver entertainment.

And now with the digital media, there is certainly no rivalry. P2P is about sharing. Not exchanging. The market for token has vanished. Unless technology restores excludability and perversely reinstores rivalry.

So, I guess that my take on Fisher is tainted by two perspectives.

First I think that the economics of digital entertainment will dictate regulatory actions, not the other way around. My (naive) understanding of the direction taken by the industry and regulatory agencies is that the drive for strict copyright rules will collapse, has already started to. But I admit that this could be wishful thinking, or that it will definitely collapse in hundreds of years, or never, if we are myopic and condone myopic leadership.

Second I had repeated qualms on what may not amount to details.

On thing concerns the motives of artists. Fisher writes (data and comment here) that artists do not see money unless they sell 200,000 records or more. The vast majority of them. Just a few (maybe?) marginally better will be targeted by the majors for a concerted effort to push them to the level of a superstar. I would argue that this is a different business. There is a market for stars; we can design products to raise resources. Art as advertising.

The other is the utter dismissal of the retail sector. Long, convoluted calculations start with a whooping cut of 50% in consumer spending because that is what retail is charging and the Internet is a costless medium. Wrong on two or three counts. First, consumers paid 100%, not 50% of what they paid. The cash outlay for entertainment is what matters. We have no more indication that consumers are fans of Sony or Universal, than they are fans of Tower Records or Wal-Mart. Second, I would argue that the retail sector does create value. Marketing is about accumulating, sorting, assorting and allocating (Alderson, an old theorist). The point is that better ways to navigate the universe of art improve the consumers’ experience. Third, retailing is not costless.

So, let me conclude for now that I still think that the price of digital entertainment is going to come down significantly, and distribution to increase significantly. My guess would be that subscription schemes will eventually win the day.

What must be fought is the dangerous idea of watermarking everything. Burying watermarking under the guise of social/coop/free only serves to confuse by creating an unlikely coalition between vested interests with foresight, and myopic optimists.

But more importantly, I would argue that the digital entertainment industry can be thought as a collection of waterholes. Supply is abundant. Value can be added and appropriated. The private sector can do it. Better than regulators. And the price of accessing watering holes will come down. Is coming down.  


Examples of social canaries in action

In my paper I refer to the notion of social canaries. I had in mind, at the time, a more extreme kind of activism, leveraged around the rule of law, and a milder form of the type illustrated below.

The former is relatively easy to track as lawsuits are eminently public and require visible displays of threats. The latter is not. Somewhere else in my blog I point to the Kryptonite incident. Anecdotal then. Dismissed by many. But the process is becoming more prevalent as more articulate consumers find ways to interact around a common concern.

There are tools one may use to track such occurrences, but I would argue that they are difficult to implement in a forward-looking way — it is easy to trace the history of a trend looking backwards, but extremely difficult to tell if a low-level signal is the beginning of an exponential growth or just that, a low-level signal.

Link: Independent Online Edition > Business News.

Consumers’ revolt: Power to the people Consumer militancy erupts as individuals join forces on the internet to fight back against the state and big business


On responsible marketing — accepted for Consommation et Société

Joel Brée sent me a nice eMail a few days ago to let me know that my submission to the colloquium he organizes on the theme Consommation et Société has been accepted.

I will present the paper to which I refer a couple of posts below, with a few modifications. The first (generous) referee said in essence that the paper was very good but introduced the notion of quantum consumers too late (and superficially). I fully agree. As I wrote in my blurb, this was my first stab at a question I think is important, and it needs to be sharpened. I’ll get back to this.

The second referee questioned my apparent neutrality in defense of marketing and introduced two important points. First, the referee argues that freedom of choice is an illusion. The argument I believe is that the corporate world limits such freedom. Honestly, I expected this line of thinking. And am realy looking forward to the conference because such questions are indeed terribly important. I suppose that my inclination is to argue that there must be a belief in freedom of choice at the consumer level, because without freedom of choice, there is no responsibility. I certainly think that I can choose…

The second point made is that I incorrectly write that there are no model of activism and should be familiar with the abundant literature in the field. I will confess that I am not very familiar with this stream. But will add that am aware of it, and that to the best of my limited knowledge, there are no models of activism beyond very sketchy boxes and arrows. No models that we can use to manage an organization.

So, I will now try to work towards a compact version of my arguments. I see three important issues that I believe I can convey in the (assumed) 30 minutes allocated to my ideas.

1. Societal marketing is (wrongly) moralizing. We can either advocate responsible marketing or remove utilitarian ethics from the societal ethos (a difficult undertaking at best) by arguing that societal should be meant as a formal consideration of distant stakeholders. A responsible organization is motivated to work in the best interest of its proximate stakeholders who have powers of voice and exit. A sustainable strategy must consider the (increasing) power of voice of distant stakeholders.

2. Marketing has an instrumental responsibility. Even in the hands of benevolent organizations, it may cause harm. The way to think about it is the parallel with medicine where well intentioned caregivers may end-up hurting patients and relatives. This must be recognized and corrected

3. Our field doesn’t have the tools to manage tensions at the consumer level (quantum consumer) and social level (social canaries).

And I will have to confess that quantum consumers and social canaries are terms I used to entice people to read….

But more later on this. Late Spring and then Fall.


The economics of music

(this is a nugget. A more complete argument to be expected within a couple of months)

Below, a summary of various estimates of the cost of a CD. Several sources from Fisher (Promises to Keep). I’ve added three more (Rolling Stone, CNN and Bemuso) maybe partially redundant. We must also be careful because these estimates were made at different points in time (Strauss is probably the oldest, it is also the one with the highest estimate for production costs).

Costs estimates do converge and allow us to grasp the nature of what is at stake in the music industry. Two comments for now:

1) Most sources agree that the proportion paid to the artist is overstated because it does not take into consideration the fact that labels charge artists for production, promotional and touring expenses. There seems to be an agreement that artists do not see net money for titles selling less than 250 000 copies.

2) two comments on Fisher’s observations.

2.1) Although he observes that labels charge artists, he allocates 20+% to the creators. This figure is crucially important because the discourse on the future of the music industry is focused on the economic rent to the artist as opposed to other participants in the industry. If the conclusion were that artists make negligible money in the current system of music distribution, the (limited) support that public opinion gives to a tight copyright regime could be affected.

2.2) Like many observers, Fisher then proceeds in trying to identify what would be the "real" cost of an album, given the dramatic change in production and distribution technologies. I was struck by the fact that he dismissed retailers entirely.

I would suggest that the cost breakdown should be read as an indication of the vested interests rather than as an appropriate indication of the out-of-pocket costs incurred by various participants.

For instance, Wal-Mart is launching a video download service, because this is going to be a significant alternative to its traditional DVD retailing operations. If it succeeds in securing an important market share, Wal-Mart might become a key outlet and argue (quite convincingly) that digital content is interchangeable and that the true value lies in access to market.

average Fisher Rolling Stone McKinsey Strauss Sanderson cnn bemuso
Retail 32.71% 38.89% 29.33% 28.57% 35.00% 30.00% 36.69% 30.48%
Distribution 14.99% 8.33% 5.63% 10.00% 9.00% 22.00% 19.67% 30.32%
Marketing 29.89% 23.78% 43.84% 38.21% 27.00% 30.00% 21.14% 25.22%
Manufacturing 7.55% 7.89% 5.00% 7.14% 13.00% 5.00% 10.78% 4.04%
Creators 14.86% 21.11% 16.20% 16.07% 16.00% 13.00% 11.72% 9.94%
Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

On responsible marketing, quantum consumers and social canaries

This is my most recent paper (after an interruption of close to a decade devoted to the exploration of e-learning – more thoughts on this forthcoming).

The genesis for the paper came as my wife talked to me about various types of… let’s call this ‘responsible consumption’, such as fair trade (equitable) goods, ‘bio’ food products, ‘green’ or sustainable consumption. Several coincidences got me going: a screening of Gore’s Inconvenient Truth; witnessing firsthand the sorry state of several otherwise paradisiac beaches on the Aegean, littered with plastic; listening to a podcast on Polanyi’s work; my being free to explore ideas since I was on sabbatical; watching Chomsky’s ‘Manufacturing Consent’; itching again to research ideas; but above all, a call for papers for a conference that coincides fortuitously with a trip I had already planned 🙂

My first reaction has been to google ‘responsible marketing’, ending-up essentially empty handed.

I read several books, tens of papers, several podcasts. For my own education. I do not pretend that my ideas are worth reading by anyone else at this point. Yet I think that some are important.

1) Most of what is published in our field is moralizing. I argue that CSR/societal/quality-of-life approaches skate on very thin ice. These approaches appear to be fatally flawed.

2) Marketing has instrumental responsibilities. Think about medicine. This discipline is built on (presumably) good intentions. Yet pushing blindly in the direction of prolonging life creates undesirable side-effects (to put it mildly). Similarly, marketing’s obsessive focus on consumer satisfaction has side effects. In fact, It has been close to a revelation for me to take stock of the… irrational?… emphasis that our flagship journal (JM) puts on satisfaction. (a somewhat more balanced view is found in JCR for instance).

3) Our models are naive. Naive models may predict accurately at the market level, but they ignore the tension created within each individual consumer. We need a model of quantum consumers to formally capture tension between conflicting goals.

4) Similarly, social tensions are created between stakeholders. Proximate stakeholders (shareholders, customers, suppliers and local communities) may exert exit/voice in the marketing process. Distant stakeholders have more limited means of action. Voice in the hope of influencing corporate behavior and, maybe, eventually, regulation. I argue that social canaries can be used as leading indicators that something is wrong with the marketing practice.

5) This last idea is encapsulated in a more focused definition of societal marketing in which we do not worry about the desire/interest dilemmas, we do not worry about the materialistic nature of contemporary societies, but we do worry about the emergence of changes in the current social contract.

Full length paper here. (ppt en français ici)

Comments appreciated. Below or via eMail