I wrote this for CFA Institute and first published it on the Enterprising Investor.
Just a few weeks ago, my colleagues in Charlottesville, Virginia, found their idyllic town in the global headlines. The Korean Peninsula, Yemen, and Afghanistan have all had troubles of their own lately, too. Good luck tuning out the thunder.
In the United States, the peals have taken the form of angry protests and attention-grabbing political rhetoric that are hard to ignore. We relitigate old wars and elections while shivering at the cost of future ones. It’s hard to make sense of it all.
My suggestion for this weekend — a long one in the United States — is to spend some time on slower-moving storms.
“Zombie” firms constitute roughly 10% of the equities listed on US exchanges. Advertising firms are hurting, and perhaps shrinking budgets at their key clients have something to do with it. Meanwhile, cryptocurrencies have gone from a fad to something that people are investing in through dollar-cost averaging (DCA). Sites like What If Bitcoin seem built to inspire further FOMO-driven activity.
Our profession may be sheltered from the elements, but it’s not immune. Equity researchers are being asked to work for free. Investors don’t trust their advisers to calculate fees or performance accurately. The investing public may see something in index funds that is not really there. And the context through which large asset managers market their products is diluting the value proposition of investing.
I’m glad it’s not my job to solve these problems, and the suggested first step is for you to take the same solace. The next is to concentrate on an area of economic activity that is so fundamental to our daily lives that we hesitate to think about it.
The Attention Economy
Digital advertising has long been the default business model of the internet, but subscriptions have been doing something curious recently: growing. The average reader of the allegedly failing New York Times parts with $20 a year while new media sensation Buzzfeed manages to extract just $1 per reader. It may be time to revisit our assumptions about where the attention economy is heading.
The cuts in digital ad budgets are a confounding variable. Aren’t we entering an era when advertising and content are indistinguishable? Why is it that as attention grows ever-more saleable, it becomes harder to command as a consequence?
There is a good reason my favorite book on content strategy is entitled The Content Trap: This stuff is counterintuitive.
A paper on “Measuring the Effects of Advertising: The Digital Frontier” by Google and Microsoft researchers offers a hint as to why the C-suite is turning a cold shoulder to the ad unit. There is a pervasive endogeneity challenge in advertising: You can never be quite sure if actions have been taken for their own sake or because of promotional activity. Creating the analytics to tie activity to progress is an empirical challenge at best, and statistically impossible in some cases.
Predictably, the Association of National Advertisers (ANA) has noticed. They refer to a “tech tax” of more than 40% imposed by the structure of the modern ad market that siphons funds away from publishers and promoters alike. But more importantly, that tech tax puts the 8.5% maximum front-end load charged by some mutual funds into context. The admissions fee for some areas of economic activity is just too high.
And take some time this weekend to consider the disruptor class of companies that has come to dominate the global digital advertising market and the conversation about innovation. It has been hip to wonder about their valuations more than their value proposition. It’s worth revisiting a 1996 essay by Bill Gates in which he coined the phrase “content is king” while predicting the challenges that the industry would face.
His diagnosis of the problem is still provocative:
“A major reason paying for content doesn’t work very well yet is that it’s not practical to charge small amounts. The cost and hassle of electronic transactions makes it impractical to charge less than a fairly high subscription rate.
“But within a year the mechanisms will be in place that allow content providers to charge just a cent or a few cents for information. If you decide to visit a page that costs a nickel, you won’t be writing a check or getting a bill in the mail for a nickel. You’ll just click on what you want, knowing you’ll be charged a nickel on an aggregated basis.”
We wonder when these long-rumored “microtransactions” will take hold. Chinese consumers appear willing to pay for content this way, but upset consumers are not hard to come by in the United States. There’s even a page dedicated to it on TV Tropes.
However these trends develop, now is a good time to retract an article I published almost two years ago entitled “Journalists Should Chill Out about Their Business Model.” Whether because of fake news or failures of market structure, chilling out is the wrong prescription for stormy weather like this.
Below is some further reading that I hope will brighten your weekend.
- A guide to Doomsday prepping for the sane. (lcamtuf.coredump.cx)
- A 175-year grudge match that results in excellent pencils. (BBC)
- Chinese chatbots defect to the United States. (Yahoo News)
- “The Man Who Has Focused on One Word for 23 Years” (BBC)
- Making a fake Instagram influencer for $750. (Mediakix.com)
- I would venture that Franklin Covey wins this year’s award for “Worst Return on Invested Brain Damage.” (Yet Another Value Blog)
- The Buenos Aires Herald succumbs to market forces. (The New York Times)
- A very thoughtful post on recruiting from @dsquareddigest. (Out of the Crooked Timber)
- “Why Irish Pubs Became the Biggest Food and Drink Export since McDonald’s” (Vice)
- “How A.I. is Creating Building Blocks to Reshape Music and Art” (The New York Times)
Some Good Things to Think About
- “What Will Be the ‘Turns Out Cigarettes Are Bad for You’ of Our Generation?” (Ask Reddit)
- The cost of the free economy. (Economist)
- “How a Career in Technical Communication Ruined Me as a Letter Writer” (Imgur)
- “Good News for Young Strivers: Networking Is Overrated” (The New York Times)
- “How Do I Chat Up an Economist?” (Economist)