Friday, 27 July 2012

Romney misses a tap-in

US Presidential hopeful Mitt Romney kicked off his world tour on the eve of the opening ceremony first by openly questioning whether London was ready to host the Olympic Games, then forgetting Ed Milliband's name and following through with a protocol error by referring to him as "mister leader" which is neither his name nor his title, before blabbing about his secret security briefing with the head of the UK intelligence agency, MI6. And it's only Day One. Slow hand clap for Mr Romney.






The Olympics cock-up was particularly foolish because the rules for this one are so simple: when a major international sporting event is about to begin, national leaders must always, as a bare minimum, say something optimistic and bland. You can go optimistic and visionary, optimistic and inspiring, or optimistic and go-getting if you like, but optimism is the basic ingredient in any recipe because it's not about you and you shouldn't overshadow the competitors.


Presidents and Prime Minsters are often called on to make nuanced comments on controversial topics in which they must speak to several different interest groups at the same time. On foreign trips, as a bare minimum, you're talking to both your home country and your host which can create tensions, but this was not one of those times. Even if you think a problem is likely, there are no prizes for saying so. "I have no doubt that will be a great success, and I hope everyone has a wonderful time," is the correct answer. As a bonus, Mr Romney had a nice opportunity to highlight his own experience with the Salt Lake City winter games with a follow up comment on how successful that was. Lots of back-patting all round.


In international diplomacy terms, this is a tap-in. It's hard to think of an easier situation. Yet Romney contrived to slice the ball wildly into the grandstand, leaving his team with a messy but avoidable clean-up and drowning coverage of his visit in a deluge of negative press.


If his plan was to tour the world looking like a President-in-waiting, he's going to need a plan B.


As an aside, Mr Cameron's angry response in which he implied that Salt Lake City is "the middle of nowhere" was also unwise and for the same reason: insulting people in Salt Lake City and those involved with those Olympic Games is unnecessary and bound to backfire. It's not their fault that Mr Romney made a daft comment. Better to smile graciously, thank him for his advice and leave people to form their own view about Mr Romney's good grace.

Facebook update, Q2 2012

Facebook's shares hit the stock market on the 18th May 2012 at $38 per share, and at the time I wrote that it was overvalued at that price. 

The shares did go on to perform badly and lose value, spending most of the time since May hovering around $27-$33, rather than in the $40s as many predicted. However, I didn't think it was worth another post to point this out and gloat about being right, for two reasons:

1) I didn't expect the shares to do so badly, so quickly. I thought the level of mass optimism was enough to keep them flying for months to come, so their actual performance was a pleasant surprise to me*.

2) The movements over short periods are largely random and unpredictable. It's stupid to try to predict them, or to claim credit for such predictions coming true. You might as well predict the rolls of dice.

I subscribe to Benjamin Graham's maxim that in the short term the stock market is a voting machine but in the long term it's a weighing machine. That is, market prices are always potentially subject to fashion, fads, and the whims of popular opinion which are unpredictable, but in the long term true value will out: the good will pull ahead and the bad will fade away.

So here's what I expected to happen: in the short term the price would continue to defy gravity, held aloft by mass delusion, but over time the drip-drip of successive quarterly results coming in below par would eventually become unbearable and reality would break through. Each disappointing set of results would be accompanied by a plausible-sounding excuse, but eventually even True Believers would begin to spot the pattern.

It's worth reiterating that "disappointing results" for Facebook aren't necessarily bad results, even very good results would be disappointing because the valuation is so high. The valuation requires them to consistently set the world alight with amazing results, especially if those original investors at $38 are ever to see any return on their investment. That's why I am sceptical that they ever will.

They released their Q2 results yesterday, so with actual new information to work with I thought I'd have another look. Overall, these are good results: 
  • revenue was strongly up both on the previous quarter and on the same quarter last year.
  • underlying profits were up. There was an overall loss based on what we are told were one-off costs from staff bonuses resulting from the listing (did I mention that each set of results would be accompanied by a plausible excuse for under performance?), but I accept the reason given and the underlying business performance does look good.
  • the number of active users grew strongly.
  • ignoring the exceptional costs, operating margin was 43% which is very good, though it's down from 53% a year ago. 
On the basis of these good results, the share price fell 9% on the day, from what were already low levels compared with May's listing price of $38. They now stand at less than $27. In a nutshell this is the problem that Facebook investors must confront: good results are not enough, expectation is off-the-scale high, so even if the company does well (which it has) people who bought at $38 may lose money (which they have).

Back in May I suggested that PepsiCo would be a better investment than Facebook, based on the arbitrary criterion that both Facebook and PepsiCo were valued at just over $1 billion. Since I expected Facebook to do badly, almost any successful company looked a better bet, so I picked PepsiCo just for grins. Back then PepsiCo's share price was $68, today it's $71.22 and they've also issued a $0.54 quarterly dividend, so buying PepsiCo at $68 you'd have been up by $3.76 or about 5.5%, compared with a 29% loss on Facebook. Slow and steady wins the race...

Disclaimer: I don't hold shares in either Facebook or PepsiCo and I'm not suggesting that anyone else should buy them either. It's just an interesting comparison between a hyped up newcomer and a solid old-timer. I generally I prefer to invest in solid old-timers rather than hyped newcomers, mainly because I invest to make money rather than to join in a party, but I'm a bit dull like that.


* Why am I pleased the price didn't "pop" up into the $40s as many hoped? Because I don't like seeing investors lose money. The higher the price, the greater the losses that will eventually be suffered by unsophisticated investors sucked into buying them on the back of media hype. The quicker the share price gets to a fair price based on sober analysis, the better.

Tuesday, 10 July 2012

Price discrimination

The Internet has been abuzz lately with rumours that on-line retailers are wringing extra cash from anyone judged to be rich, by sniffing through their data trail to work out whether they're a big spender. Are you using a Mac? OK, then you're obviously loaded so how about these more expensive hotels...


This article in The Economist gives a flavour of the debate: how deep are your pockets?


But price discrimination is all over the place and you can make yourself a much savvier consumer by opening your eyes to it, which is what I now attempt to do.


Suppose I run a widget factory, and each widget costs me £20 to make and sell. I have two customers: Alice who's willing to pay upto £30 and Bill who'll pay upto £50. What price should I charge? 


If I charge £30 I'll sell two widgets for a total of £60, minus £40 costs leaving me £20 profit. 


If charge £50 I'll lose the sale to Alice so I only sell one widget, but with only £20 costs I make £30 profit.


So £50 looks like the more profitable price, but I've lost a potential profitable sale to Alice. Charging £30 wins Alice's business but costs me £20 in lost profit on the sale to Bill. What I'd really like to do is charge Bill £50 while finding a way to sell to Alice for £30: that way I'd make both sales and come away with £40 profit. Get in! But how?

That is the art of price discrimination, and it's going on all around you. Here are some of the ways it's done.


Packaging. Bill's widget will come in a fancy "Neil's premium widgets" box and inside, the glossy instruction sheet will be full of colour photos of beautiful people gazing into the middle distance. Alice's widget will come in a plain white box marked "Basic Widget", the instructions will look like they were photocopied by a gibbon. There will be no beautiful people. Maybe the fancy box and instructions cost me an extra £2, but I'm happy to spend a bit on paper and cardboard if I can jack the price up by £20. There's nothing to stop Bill buying the Basic Widget, but he likes the shiny box and he wants to believe that the extra £20 he's paying is for more than just the box.


Environment. The premium widgets will be sold through upmarket retailers with fancy addresses, whose shops are immaculately appointed and staffed by yet more beautiful people. All of that costs money, but Bill's paying for it so that's fine. The basic widget will be sold in supermarkets or discount shops. Bill doesn't buy his widgets in those shops, if he even goes in them, so he never sees the Basic Widgets for £30. Even if he hears about them, he prefers the fancy shops and is happy to pay extra for what he considers a higher quality experience and/or product.




Coupons. Forget the premium/basic idea. Suppose I only sell one widget and it costs £50, but if you collect 14 coupons from the local newspaper, get them rubber-stamped at 5 different places then wave them above your head while standing on one leg I'll sell you one for £30. Alice is happy to do a bit of work to save £20 so she collect the coupons. Bill can't be bothered or he thinks there's social stigma attached to using a coupon, so he pays normal price. Since £50 is normal price he doesn't feel he's paying a premium.


Special discount. One widget, one price: £50. Everyone pays the same. Oh...except if you're a student, we have a student discount. Or over 60, we have an OAP discount, too. The game here is to guess why Alice is only willing to pay £30. If it's because she's in some identifiable group of people who're generally less willing to pay high prices, we can offer a discount to that group.  For this to work the group needs to be seen sympathetically by most people, since that's how we avoid a stampede of complaints from the customers left paying the higher price.


Premium product. My widget normally has a plastic on/off switch. It costs an extra £1 to install a fancy metal switch instead. Now it's not just a shiny box, the product has been made fractionally better! That'll be an extra £20, thank you.


Instant gratification. Bill's a busy commuter rushing to work, so I'll stand right in the most convenient spot on the train platform and sell him the widget for £50. He hardly has to break stride. If he cared to walk 2 minutes round the corner he'd find my other shop which is selling the same widget for £30. Here, customers are in less of a rush and are willing to price check a bit more, so I can't get away with the higher price.


Negotiation. The price is marked £50, but if you're willing to haggle you might find that I can be persuaded to offer a discount. Though if you look like a rich tourist you might find that I don't move very far.


Accessories. The widget costs just £30, but please do take a look at my exciting range of accessories. For example, this faux leatherette carry case for just £20: you want to be able to carry your widget, don't you Bill? The price sensitive shopper is likely to ignore this overpriced tat select range of enhancements, but Bill's just paid £30 for a widget when he was willing to pay £50 so he has some extra cash looking for a home, which I am happy to supply.


Shelf position. Neil's Premium Widgets enjoy a prominent shelf position on the end of the supermarket aisle or right at shoppers' eye level. My basic widget, in the plain box, is right down near your left ankle where you may not even notice it. This means I can have both products in the same shop practically next to each other, and still maintain the price difference. Supermarkets are brilliant at this, and they charge large sums of money to suppliers who want their goods positioned on the best shelves (around eye level). Even so, Bill's paying an extra £20 for the premium widget so that should cover the shelf positioning fee.


Social status. This cuts across a number of the tactics from shiny packaging to stocking the premium widget in fancy shops, but also includes money spent on advertising. The idea is to suggest that people who pay £20 extra for the widget in the fancy box are exactly the sort of people you want to be. The people with the basic widget are...well...they're not really your sort of people, are they? If you buy the basic widget you'll look like them, which means you won't be like the sort of people you want to be like. And you don't want that, do you? What would your friends think? Yes, naturally you want the premium widget, and it's just £20 extra, which people like you can easily afford.


In general, the game is to identify people who're willing to pay extra then find a fig leaf to justify your ruse to charge them more. Alternatively, you identify people who refuse the high price then you find a way of selling to them at a lower price while keeping the big spender locked onto the higher price. Preventing the big spender noticing the lower priced alternative, or preventing him from seeing it as a valid alternative, is the big challenge. 


If you're someone who likes to buy quality, someone who's willing to pay a premium for a superior product or a brand name, it's worth asking yourself how confident you are that the premium product actually is any better: have you tried the cheaper version? Sometimes you're paying extra for better quality, sometimes you're paying extra for the exact same thing in a shiny box sold by a beautiful person in a fancy shop. Only you can decide whether that's worth the extra. If you think it is, rest assured someone will be very happy to assist you.

Monday, 9 July 2012

Troll filters

Connecting people is the Internet's biggest achievement, but also its biggest problem. The ability to assemble a huge crowd of angry idiots is not new, but the scale and severity of the problem is growing and the tools to deal with it are weak.




For example, if thousands of people start mentioning you on Twitter, it completely spams out your feed making the whole thing unusable. It happened recently to a woman whose name is similar to a UK bank: she started receiving hordes of abusive tweets. It seems to happen to most celebrities and athletes: random morons decide to send abusive, derogatory or unpleasant messages. It seems to be especially vile when directed at women. It also appears on comments at the bottom of articles, and presumably it would also be a problem on other social networks, such as Google+, if anyone were actually using them.


There are two general ways of dealing with it and both are rubbish:

  1. Make it hard or annoying for people to send you a message. So blogs can force people to register or squint at an illegible word before making a comment, Twitter users can protect their tweets so only permitted followers can see and respond, but you may not want to block all strangers, only the morons.
  2. Block specific people. If Bob is harassing you, you can block Bob. That's great if it's just Bob, but if it's a seething mass of anonymous trolls, or if Bob keeps creating new sockpuppet accounts, it becomes tedious and impractical.
The status quo seems to work for most people, but it's a serious problem for some and if it happens to randomly strike you then you may be driven completely away from social media which you've hitherto been enjoying, because you're powerless to hold back the flood.

To me, this feels a lot like email spam a decade ago: annoying but tolerable, and the tools to deal with it sometimes caused as many problems as they solved. Then in the mid noughties email spam filtering got good: now it could block virtually all the bad stuff, let through virtually all the good stuff so email spam just went away. When we implemented this new spam filter on the email system where I worked it was as if we'd flipped the spam off switch.  I was sceptical of the company's claims because I'd read it all before and seen the mediocre reality, but for once the claims were accurate and I was instantly converted: it was one of the best things we ever bought.

Similar advanced filtering technology is the only realistic way we'll be able to deal with trolls and other social media spam. We'll ditch the unworkable idea that you can individually block everyone who's spamming you, we'll do away with peering at wobbly text: we'll find that humans can happily go about their business while all the trolls, spammers and sundry mouth frothers are pinned behind the invisible electronic barbed wire. 

You may think that it can't be done, that it's too subtle a problem, but I used to think that about filtering email spam. When was the last time you received email spam? We implemented that new spam filter in about 2005 and I've seen virtually none since then. Roll on the troll filters.