Web Firms Find Paths To Profits: Free Vs. Fees

Consumers love a price of zero — but it can be tough on the bottom line. That has led some companies to provide a lot of free stuff and only charge for certain things. Other companies are resisting the pressure to give their products and services away. Two software firms illustrate the dichotomy.

A Gaming Company With Many Rules

Seattle-based Big Fish Games is indeed a big fish in its industry. It distributes more online games than anyone else, at about 1 million a day.

Company founder Paul Thelen says the company’s approach to customers is based on a simple idea. “We call it ‘try before you buy,’ ” he says.

You can try almost any Big Fish game for free; many remain free indefinitely. Thelen says that with games like Bubblez — in which players shoot paint bubbles, trying to match colors — users can open an Internet browser and play as often as they like.

“This game probably cost the developer somewhere between $5,000 and $20,000 to build,” Thelen says. “It can be supported by ads, and it is.”

Having a large online audience brings in advertisers, and those ad dollars cover the costs. But ads alone won’t pay for Big Fish’s cinematic and highly produced games, like Drawn: The Painted Tower.

The game cost more than $1 million to create. And since the audience is smaller, all players need to pay to support the cost.

Another game, Faunasphere, can be played for free, but there are add-ons — things like extra animals to make the game more fun — that players have to pay for.

This approach to pricing is called “freemium” — some content is free, while premium content is not.

At some companies, a small number of paying customers essentially subsidize the free riders. At Big Fish, the model is more complicated, but it works: The company has grown from one employee to 400 in the past seven years.

Note To Customers: Pay Up

In New York City, Squarespace CEO Dane Atkinson favors a more old-school approach. As Atkinson says of his company, “It’s a publishing platform on the Internet that thankfully charges all of its customers.”

That’s right. Squarespace is proud to charge businesses, bloggers and others for its publishing tools that can create Web sites — even though there are companies providing similar services for free.

“We began with a free model,” Atkinson says. “Anthony, who’s the founder, was under a lot of pressure from the community at the time that said that everything has to be free. And he quickly realized that it just seemed like the wrong equation, so we started charging — and we’ve charged ever since.

“What it’s allowed us to do is really build a model that caters to those customers, and not feel any of the pressures the free business model puts against you,” Atkinson says.

For instance, Squarespace doesn’t have to worry about appeasing advertisers who are footing the bill. And because customers pay a monthly fee for hosting and other services, the company can provide customer support 24 hours a day. Free sites supported by ad revenue can’t afford to do that.

Succeeding, Fee Or No-Fee

Atkinson says that the privately held Squarespace is very successful. But, he adds, some so-called experts still prod them to offer a free service.

“And we know the reason we are succeeding is because we don’t,” Atkinson says. “So every time a book comes out or people expound on how free is the only way to go, it gets our hair standing up. There is another alternative; there is another way to run your business.”

If these two companies illustrate anything, it’s that running a digital business is tricky — and that finding the sweet spot between free, freemium and paid may be the difference between success and failure.

***

by WENDY KAUFMAN. (WWW.NPR.ORG)

Filed under: Business , Business, fees, free, profits

Should C.E.O.’s read novels?

The question seems to answer itself. After all, C.E.O.’s work with people all day. Novel-reading should give them greater psychological insight, a feel for human relationships, a greater sensitivity toward their own emotional chords.

Sadly, though, most of the recent research suggests that these are not the most important talents for a person who is trying to run a company. Steven Kaplan, Mark Klebanov and Morten Sorensen recently completed a study called “Which C.E.O. Characteristics and Abilities Matter?”

They relied on detailed personality assessments of 316 C.E.O.’s and measured their companies’ performances. They found that strong people skills correlate loosely or not at all with being a good C.E.O. Traits like being a good listener, a good team builder, an enthusiastic colleague, a great communicator do not seem to be very important when it comes to leading successful companies.

What mattered, it turned out, were execution and organizational skills. The traits that correlated most powerfully with success were attention to detail, persistence, efficiency, analytic thoroughness and the ability to work long hours.

In other words, warm, flexible, team-oriented and empathetic people are less likely to thrive as C.E.O.’s. Organized, dogged, anal-retentive and slightly boring people are more likely to thrive.

These results are consistent with a lot of work that’s been done over the past few decades. In 2001, Jim Collins published a best-selling study called “Good to Great.” He found that the best C.E.O.’s were not the flamboyant visionaries. They were humble, self-effacing, diligent and resolute souls who found one thing they were really good at and did it over and over again.

That same year Murray Barrick, Michael Mount and Timothy Judge surveyed a century’s worth of research into business leadership. They, too, found that extroversion, agreeableness and openness to new experience did not correlate well with C.E.O. success. Instead, what mattered was emotional stability and, most of all, conscientiousness — which means being dependable, making plans and following through on them.

All this work is a reminder that, while it’s important to be a sensitive, well-rounded person for the sake of your inner fulfillment, the market doesn’t really care. The market wants you to fill an organizational role.

The market seems to want C.E.O.’s to offer a clear direction for their companies. There’s a tension between being resolute and being flexible. The research suggests it’s more important to be resolute, even at the cost of some flexibility.

The second thing the market seems to want from leaders is a relentless and somewhat mind-numbing commitment to incremental efficiency gains. Charismatic C.E.O.’s and politicians always want the exciting new breakthrough — whether it is the S.U.V. or a revolutionary new car. The methodical executives at successful companies just make the same old four-door sedan, but they make it better and better.

These sorts of dogged but diffident traits do not correlate well with education levels. C.E.O.’s with law or M.B.A. degrees do not perform better than C.E.O.’s with college degrees. These traits do not correlate with salary or compensation packages. Nor do they correlate with fame and recognition. On the contrary, a study by Ulrike Malmendier and Geoffrey Tate found that C.E.O.’s get less effective as they become more famous and receive more awards.

What these traits do add up to is a certain ideal personality type. The C.E.O.’s that are most likely to succeed are humble, diffident, relentless and a bit unidimensional. They are often not the most exciting people to be around.

For this reason, people in the literary, academic and media worlds rarely understand business. It is nearly impossible to think of a novel that accurately portrays business success. That’s because the virtues that writers tend to admire — those involving self-expression and self-exploration — are not the ones that lead to corporate excellence.

For the same reason, business and politics do not blend well. Business leaders tend to perform poorly in Washington, while political leaders possess precisely those talents — charisma, charm, personal skills — that are of such limited value when it comes to corporate execution.

Fortunately, America is a big place. Literary culture has thrived in Boston, New York and on campuses. Political culture has thrived in Washington. Until recently, corporate culture has been free to thrive in such unlikely places as Bentonville, Omaha and Redmond.

Of course, that’s changing. We now have an administration freely interposing itself in the management culture of industry after industry. It won’t be the regulations that will be costly, but the revolution in values. When Washington is a profit center, C.E.O.’s are forced to adopt the traits of politicians. That is the insidious way that other nations have lost their competitive edge.

***

By DAVID BROOKS

Published: May 18, 2009. www.nytimes.com

Filed under: Business

Halal: Buying Muslim

Khalfan Mohammed has long been buffeted by culture shock while staying in five-star hotels. As a devout Muslim he has learned to ask staff to remove the minibar’s alcohol. He loathes lobbies with loud discos and drunken guests. When traveling with his parents, it is the bikinis that rankle most. “It was quite shocking for my mother to sit in a restaurant with undressed people,” the Abu Dhabi-based businessman says. “My mom and dad are not used to seeing people in public wearing their underwear.” To avoid such embarrassment, the Mohammeds took to renting furnished apartments.

FRESH LOOK: Malaysia-based El Hajj markets skincare products such as moisturizer and facial cleanser to pilgrims headed to Mecca

No longer. On a trip to Dubai last year, Mohammed stayed in the Villa Rotana, one of a growing number of hotels catering to Muslim travelers. In the lobby — all white leather, brick and glass, with a small waterfall — quiet reigns. Men in dishdashas and veiled women glide by Westerners who are sometimes discreetly reminded to respect local customs. Minibars are stocked not with alcohol, but with Red Bull, Pepsi and the malt drink Barbican.

Time was, buying Muslim meant avoiding pork and alcohol and getting your meat from a halal butcher, who slaughtered in accordance with Islamic principles. But the halal food market has exploded in the past decade and is now worth an estimated $632 billion annually, according to the Halal Journal, a Kuala Lumpur-based magazine. That’s about 16% of the entire global food industry. Throw in the fast-growing Islam-friendly finance sector and the myriad other products and services — cosmetics, real estate, hotels, fashion, insurance — that comply with Islamic law and the teachings of the Koran, and the sector is worth well over $1 trillion a year.

One reason for the rise of the halal economy is that the world’s 1.6 billion Muslims are younger and, in some places at least, richer than ever. Seeking to tap that huge market, non-Muslim multinationals like Tesco, McDonald’s and Nestlé have expanded their Muslim-friendly offerings and now control an estimated 90% of the global halal market.

At the same time, governments in Asia and the Middle East are pouring millions into efforts to become regional “halal hubs,” providing tailor-made manufacturing centers and “halal logistics” — systems to maintain product purity during shipping and storage. The increased competition is changing manufacturing and supply chains in some unusual places. Most of Saudi Arabia’s chicken is raised in Brazil, which means Brazilian suppliers have built elaborate halal slaughtering facilities. Abattoirs in New Zealand, the world’s biggest exporter of halal lamb, have hosted delegations from Iran and Malaysia. And the Netherlands, keen to maximize Rotterdam’s role as Europe’s biggest port, has built halal warehouses so that imported halal goods aren’t stored next to pork or alcohol.

Such arrangements cost, of course, but since the industry’s anchor is food, business is booming, even in the economic crisis. “What downturn?” asks Nordin Abdullah, executive director of the Halal Journal. “You don’t need your Gucci handbag, but you do need your hamburger.”

Not just hamburgers. Drug companies such as the U.K.’s Principle Healthcare and Canada’s Duchesnay now sell halal vitamins free of the gelatins and other animal derivatives that some Islamic scholars say make mainstream productsharam, or unlawful. The Malaysia-based company Granulab produces synthetic bone graft material to avoid using animal bone, while Malaysian and Cuban scientists are collaborating on a halal meningitis vaccine.

In the Gulf, the Burooj real estate company is carving out a niche, not just because it deals exclusively with Islamic banks, but because it designs spas and swimming pools that segregate the sexes. For Muslim women concerned about skin-care products containing alcohol or lipsticks that use animal fats, a few cosmetics firms are creating halal makeup lines.

The burgeoning Islamic finance industry is using the global economic crisis to win new non-Muslim customers. Investors are attracted by Islamic banking’s more conservative approach: Islamic law forbids banks from charging interest (though customers pay fees) and many scholars discourage investment in excessively leveraged companies. Though it currently accounts for just 1% of the global market, the Islamic finance industry’s value is growing at around 15% a year, and could reach $4 trillion in five years, up from $500 billion today, according to a 2008 report from Moody’s Investors Service.

Those who define the halal market in the traditional sense — as a matter of meat, and no more — see the industry stopping at Islamic food standards. But the movement’s more bullish advocates envisage Muslim cars and halal furniture built in accordance with Muslim finance, labor and ethical principles. Citing the kosher and organic industries as successful examples of doing well by doing good, some entrepreneurs even see halal products moving into the mainstream and appealing to consumers looking for high-quality, ethical products. A few firms that comply with the Shari’a code — the religious laws that observant Muslims follow — point out that already many of their customers are non-Muslim. At the Jawhara Hotels, an alcohol-free Arabian Gulf chain run by the Islam-compliant Al Lotah conglomerate, 60% of the clientele are non-Muslims, drawn by the hotels’ serenity and family-friendly atmosphere. Dutch-based company Marhaba, which sells cookies and chocolate, says a quarter of its customers are non-Muslims, mostly people concerned not about religious edicts but about food safety. “People are always looking for the next purity thing,” says Mah Hussain-Gambles, founder of Saaf Pure Skincare, which markets halal makeup.

…

By CARLA POWER Thursday, May. 14, 2009  www.time.com

Filed under: Business

First, Know Yourself

When it comes to career reinvention, too many people make a fundamental mistake: They don’t know themselves.

So when I talk to people about making a career change, I always suggest first doing a few self-assessment exercises. Career self-assessment is the process of getting acquainted with what you like — and don’t like — in a work environment.

You can do this by simply making a list of your skills and interests, and asking yourself questions such as “What type of work would make me sit in traffic for hours just for the privilege of showing up?” and “What energizes me at work?” Increasingly, though, career changers are drawing guidance from more sophisticated tests.

Entrepreneurial Bent

After getting laid off from an investment bank in New York, 25-year-old Alan Katz worked with career counselor Claudine Vainraub to determine his next steps. He completed a 360-degree survey, in which he collected feedback about himself from friends, co-workers, and family, as well as assessments about his work behaviors and career interests.

“The assessments helped me understand my skills, specific roles I play effectively and career interests,” says Mr. Katz, who paid a total of $2,500 for the tests and professional consulting over a six-week period. “The results prompted me to investigate entrepreneurship, and I’m now developing a start-up company in manufacturing.”

Many experts agree that assessments are best used in conjunction with an experienced career counselor who can hand-select tests for you — and help you interpret the results. Ms. Vainraub, who is based in Miami, chose the 360-degree questionnaire for Mr. Katz to better define his work priorities. “We found that his personal vision of leading an enterprise forward was, in fact, quite different from his current career in finance,” she says.

People described Mr. Katz as enjoying managing and motivating others, and driven when involved in a project. “Those are very much the qualities of an entrepreneur,” Ms. Vainraub says.

Online Tests

If you can’t afford or aren’t sure you want to invest in a personalized assessment, start with free assessments online, including the Coach Compass Assessment (coachcompass.com) and the CareerLink Inventory (www.mpcfaculty.net/CL/cl.htm). Most take around 10 minutes to complete.

Ms. Vainraub recommends starting with free assessments from O*NET(online.onetcenter.org),a source of occupational information, and from Rutgers University (careerservices.rutgers.edu/OCAmain.html).

When completing these, make sure you keep your expectations in check. It’s unlikely that one test will result in career fulfillment, so take several and see if you can detect patterns in the findings. Should you need something more precise, it may be in your best interest to contact a professional.

Mr. Katz says he would go through the self-assessment process again. “Self-assessment is great for people who are unsure of the correct career move to make,” he says. “I now have a lot more confidence that I’m headed in the right direction.”

.

Alexandra Levit (reinvent@wsj.com)

CAREERS - www.online.wsj.com

Filed under: Business , assessment, recession, yourself

The 10 people most reponsible for the recession

The global financial crisis has evolved into a worldwide recession of epic proportions. Analysts fear the sudden slump which has followed the credit crunch could even rival the Great Depression of the early 1930s and lead to global stagnation.

But who is responsible?

The bursting of the housing bubble and the collapse in confidence throughout financial markets was not caused by one individual or a single decision, so pointing the finger of blame is a near-impossible task. But Times Money has given it a shot anyway. Here are ten suggestions for the nine men and one woman responsible for the mess we’re in. Once you have read our notes, vote in our poll and make your own suggestions in the comment box at the end of the piece. 

1. Dick Fuld

Multi-billionaire and US squash all-star Dick Fuld, 62, was CEO of Lehman Brothers when it went bust in September last year. Dubbed the “scariest man on Wall Street”, Dick Fuld is blamed for a litany of mistakes that include leaving Lehman Brothers heavily exposed to toxic US sub-prime mortgage debt and other assets that collapsed in value in the wake of the credit crunch.

His secretive work ethic, which rewarded loyalty over all else, has been criticised for silencing potential whistleblowers. In its final months a series of interested buyers surfaced to save Lehmans, but Mr Fuld would not sell at the prices offered. Had he acted sooner, he would have been able to avoid bankruptcy. Institutional Investor magazine named Dick “America’s top chief executive” in 2006. The collapse of Lehmans triggered the second destructive phase in the credit crunch and laid the foundations for a full blown global recession.

2. Hank Paulson

If Dick Fuld is responsible for the collapse of Lehman Brothers, Henry Paulson, the former US Treasury Secretary, is the man who let it happen. Anatole Kaletsky, of The Times, says: “The global banking collapse could perhaps be described as a bullet in the head, since its proximate cause was a conscious decision by the US Treasury to jeopardise the stability of the world economy in pursuit of an essentially political objective – to show that the Bush Administration was willing to act ruthlessly against at least one big Wall Street investment bank. Until that point, savers and investors around the world had assumed that financial institutions such as Lehman were “too big to fail” and would always be supported by their governments. By shattering this belief Henry Paulson triggered a run on every important bank in the world and caused the sudden implosion of consumer and business confidence seen in the past two months.”

Hank didn’t just let Lehmans fail. He made a series of mistakes in the run up to the Lehmans collapse. He also proposed a £700 billion package to boost the US banking system. And how did Hank come up with a figure of £700 billion? “It’s not based on any particular data point,” a Treasury spokeswoman told Forbes.com, the US financial website. “We just wanted to choose a really large number.”

 

3. Alan Greenspan

Alan Greenspan was feted for his management of the US economy while he stood in charge of the US Treasury, but has since been put under the spotlight. He was responsible for cutting interest rates to near zero in the US in the aftermath of September 11, flooding the world with cheap and easily available money. Did this pave the way for a “once-in-a-century credit tsunami”? In October last year he said: “I made a mistake in presuming that the self-interest of organisations, specifically banks and others, was such that they were best capable of protecting their own shareholders.” 

Allan Meltzer is a professor of political economy at the Carnegie Mellon University in Pittsburgh, said: “Alan Greenspan was much too afraid of a slowdown or other recession…he allowed the credit to expand too rapidly.”

 

4. John Tiner/Hector Sants

John Tiner was in charge of the Financial Services Authority, the watchdog that polices the UK ’s complex financial services industry until 2007, when it was taken over by Hector Sants. The FSA failed to keep a close eye on Northern Rock, the Newcastle-based ex-mutual which gorged on wholesale mortgage securitisation and came a cropper as a result. A key parliamentary committee has said that the FSA was guilty of a “systematic failure”. Mr Sants accepted that the organisation under Mr Tiner failed to stress-test the business model of Northern Rock and spot signs that the bank was dangerously dependent on interbank funding to remain in business. “We should have been in more intense dialogue earlier”, he has said. 

5. Fred “the shred” Goodwin

The “world’s worst banker” has brought the Royal Bank of Scotland (RBS), Britain’s second biggest bank, to its knees. Last week it announced humiliating losses of £28 billion, the biggest in British corporate history, and economists and analysts have concluded that it could soon ber fully-nationalised. In mid-January, taxpayers saw their stake in the banking giant increase from 58 per cent to 70 per cent.

Sir Fred joined RBS in 2000 and promptly embarked on a spending spree, acquiring 26 banks in seven years for more than £35 billion. These included NatWest and stakes in America and the Bank of China. In 2006, its share price stood at £13. But at the close of trading on January 28, RBS shares were trading at a near-worthless 15.9p.  

In 2000, after the takeover of NatWest, RBS’s board rewarded Sir with a £2.1 million annual salary, including a bonus of £814,000 for the takeover — more than any other UK bank chief received that year. It paled in comparison with his £2.86 million bonus in 2007. Three months ago, in October, Sir Fred left the bank under a dark cloud that has now mushroomed into a thunderstorm. On the day his departure was announced, Sir Fred said he was “sad”, adding: “Nobody will ever tell you that they feel good the day they have to step down.” The Prince’s Trust recently dumped Fred The Shred and the campaign to strip him of his knighthood is gathering pace.

6. Gordon Brown

Apparently Gordon Brown predicted the global financial crisis ten years ago, in a speech he made to Harvard students. Sadly he did little to prevent it. James Gordon Brown was Chancellor of the Exchequer during “the longest period of growth” in the UK ’s history, but economists blame Mr Brown for encouraging soaring house price inflation and the spread of credit which fuelled the years of boom and led eventually to the current bust.

In a recent speech to the London School of Economics, George Osbourne, the Shadow Chancellor, said: “Our competitors used the fat years to prepare for the lean years. Britain did not. We are the least prepared country in the developed world to cope with the current financial turbulence. Our financial reputation has been badly damaged by the only run on a retail bank in the world. Our double deficits – external and fiscal – are worse than any other European economy. Taken together, they are worse than the United States.” The blame “lies squarely and fairly with Gordon Brown”, he concluded.

7. George Bush

The former President was in charge during the boom years when the seeds of the sub-prime implosion were sown, but has failed to take any responsibility for the financial disaster which occurred on his watch. In a speech last year he blamed the bankers in New York for the problems facing his country’s economy. “Wall Street got drunk…The question is, how long will it [take to] sober up and not try to do all these fancy financial instruments?” 

8. Kathleen Corbet

The credit rating agencies have been blamed for failing to ask tough questions about the collateralised debt products containing so many toxic sub-prime mortgages, which investors traded for millions of dollars during the booming housing years. The three biggest agencies have been accused of taking the word of investors and not properly assessing the risks involved in securitisation. Mrs Corbet was head of the biggest credit rating agency, Standard & Poors, before she quit amidst heavy criticism in 2007. Critics argue that S&P and its main rival Moody’s, as well as other agencies, face an inherent conflict of interest, in that many of their clients issue securities that are rated by its analysts.

9. “Hank” Greenberg

Another Hank. This one was head of AIG, the insurance giant that had to be rescued in an £47 billion US government bailout just days after Lehman Brothers was allowed to go bust. Hank was in charge between 1967 until 2005, during which time the insurer got heavily involved in the murky world of credit default swaps. Mr Greenberg appealed to the US Government to save the company last September, saying: “It’s a healthy company financially except for liquidity. No organisation around the world has the spread of risk that AIG does. It’s a company that opens markets – letting it go down would be a dramatic mistake.”

10. Angelo Mozilo

Mr Mozilo was head of the largest sub-prime mortgage lender in the US, Countrywide, until July 2008. Sub-prime lenders in the US have been accused of using misleading marketing to push unsuitable mortgages on sub-prime homeowners who could not afford to service the debt, the root cause of the credit crunch. During the housing boom, Mr Mozilo reportedly earned $470 million in salary and other income. Mr Mozilo has also been under the spotlight for a VIP programme in which politicians and senior officials in the Government were offered favourable mortgage deals. Earlier this month Bank of America agreed to buy Countrywide for about $4 billion (£2 billion). Meanwhile, Mozilo unloaded $141m in stock options before the company’s share price collapsed.

(Money Central - January 30, 2009, http://timesbusiness.typepad.com)

Filed under: Business

Efficient market hypothesis is dead – for now

I have to report the sad passing of the efficient market hypothesis. The theory was officially declared dead yesterday at the World Economic Forum in Davos. There were no mourners.

The announcement was made at a brainstorming session that involved many of the world’s top economists, politicians and business leaders … together with a few bankers wearing dark glasses and false beards.

Asked which policy assumption had most contributed to the global financial crisis, the most popular answer by far was the belief that markets are self-correcting. (Nassim Nicholas Taleb, author of The Black Swan, said it was that markets “robustify” themselves, which amounts to the same thing … I think.)

In recent years, the belief in efficient markets has dominated economic policy and financial regulation in the Anglo-Saxon world and increasingly across the globe. Its death, if confirmed, is a momentous event. At the very least, it will cause anguish among countless MBA graduates who have paid good money, worked long hours and consumed large quantities of cold pizza to learn about something nobody now believes in.

The efficient market theory (or more precisely, the closely related efficient banks theory) has already been given a bit of a kicking by one of its greatest supporters, Alan Greenspan. The former Federal Reserve chairman has said that the big mistake he made was assuming that banks’ self-interest would prevent them doing anything that would threaten their own survival.

It was a good thing Mr Greenspan wasn’t at Davos yesterday. He would have been set upon. When it comes to the sins of bankers and regulators, the mood among Davos types is just as ugly as it is among the general population.

John Neill, chief executive of Unipart, was given one of the day’s biggest rounds of applause when he declared that bankers who were involved in developing toxic products that caused massive damage to the global economy should be punished. If you knowingly make other kinds of toxic products, you go to jail. Why should bankers be different, he asked.

Regulators also came in for a battering. But the Davos consensus on what needs to be done was concerning. Asked what the top priority should be in terms of financial regulation for the forthcoming G20 meeting, half the delegates at the session said it was addressing the lack of an international regulatory framework.

This echoes the oft-repeated call by politicians, including Gordon Brown, for better international regulatory co-ordination.

Yet, as Lord Turner, chairman of the Financial Services Authority, told me yesterday, international standards and better co-ordination would have made little difference to the course of the credit crisis. It would not have improved the Federal Reserve’s regulation of Citigroup or the FSA’s regulation of Northern Rock.

Moreover, coming up with an international regulatory framework will be extremely difficult. Unlike in trade, for example, there is no treaty-based international organisation in which such a framework can be hammered out.

It will take a very long time. So long, in fact, that it is unlikely to be finished before the efficient market hypothesis rises again from the dead. As it surely will.

 

David Wighton: Business Editor’s Davos commentary.

 

From The Times - January 29, 2009

http://business.timesonline.co.uk/tol/business/columnists/article5607960.ece

Filed under: Business , davos, efficient, market

How bad is the crisis going to get?

36 hours in September changed the world. When investment bank Lehman Brothers collapsed, the credit crunch became a global financial crisis.

But how bad is that crisis? Was it wrong to let Lehman fail? Or was Lehman just a symptom not the cause of the chaos in the global economy?

Tough questions, and the World Economic Forum had lined up five top experts (including two Nobel prize winners) to find answers.

The economists among them were Crunch Cassandras; two or three years ago they had predicted that our financial system was headed for a huge liquidity crisis – Nouriel Roubini, Nassim Taleb and economic historian Niall Ferguson.

A pity then, a participant said, that two years ago nobody had thought of inviting them to speak at the forum.

Little wonder that this session was hugely oversubscribed, with 150 people on the waiting list and probably more than that crowding into one of the cavernous dining rooms that are the hallmark of Davos hotels.

Under Davos rules this was a closed session, to encourage frank debate. So with a few exceptions I am not allowed to attribute quotes to individual speakers.

But I can report what was said, and this session was an intellectually stimulating eye opener – and utterly depressing (at least economically).

Depression 2.0?

The biggest question, of course, is how bad is it going to get, and nobody – neither on the panel nor in the audience – dared to provide any cheer.

There was talk of “Depression Lite” and “Depression 2.0″, although the experts also pointed out that it was unlikely to get as bad as the 1930s.

Back then, the US economy shrank on average 14% a year, prices fell at 8% a year and unemployment peaked at 25%.

The sharp rate cuts and fiscal stimulus packages around the world would prevent a repeat, everybody agreed.

Still, warned one of the experts, the world would have to brace itself for “a best case scenario” of at least a year of recession and a “lost decade” of low growth – and most people were still in denial about this prospect.

Nouriel Roubini warned of a credit crunch two years ago.

Root causes

But what caused the crisis? A popular theory is that Washington is to blame for the “global cardiac arrest”, because it allowed Lehman to fail.

The panellists rejected this suggestion as “tosh” and “a myth”.

 

This crisis, several economists said, started two years earlier and was “bound” to lead to a financial meltdown – whether it was a bank like Washington Mutual or the likes of Lehman and other parts of the lightly regulated shadow banking system of investment banks, hedge funds and broker dealers.

 

“How could banks be so stupid?,” several panellists asked, and allow things go so wrong so quickly?

The root causes for the economic crisis were too much debt, a culture of short-term rewards for long-term risk-taking and fatally flawed mathematical risk models. And plain old greed.

“Derivatives trading is all about how to make a bonus and how to screw your client,” said Nassim Taleb, a former derivatives trader and author of “The Black Swan,” a book about expecting the unexpected.

The result was a mountain range of “troubled assets” (one of the great euphemisms of the crisis, one expert said) that resulted in billion dollar losses and the need to bail out financial institutions like Fannie Mae, Freddie Mac and AIG even before Lehman collapsed.

Into the hurricane

Morgan Stanley, one expert ventured, was saved only because its share price bounced back when rumours emerged of Washington’s $700bn bail-out package.

Two thirds of the world’s hedge funds would collapse, suggested another. Financial institutions took on debt worth 40 times their assets – and failed to understand how risky this was. Bank’s risk models, a prominent participant revealed, were based on one year’s worth of data.

It was, another expert said, as if a pilot was assuming that he would never fly into a hurricane, because he hadn’t come across one during the past year.

Bankers had no memory, another panellist said, they had forgotten about the Asian crisis in the late 1990s, the collapse of the LTCM hedge fund, and much more.

But it is too easy to single out the bankers – a banker said.

Where were the regulators, rating agencies, corporate boards and central bankers?

What about the borrowers, who did not read contracts and had to know they could not afford these mortgages?

And what about the shareholders and investors, who did not question the business models of the companies they owned? 

 

 

By Tim Weber 
Business editor, BBC News website, in Davos.

http://news.bbc.co.uk/2/hi/business/davos/7859179.stm

Filed under: Business , Bad, Crisis, economic

Do You Want An Internship? It’ll Cost You

Faced with a dismal market for college summer internships, a growing number of anxious parents are pitching in to help — by buying their kids a foot in the door.

Some are paying for-profit companies to place their college students in internships that are mostly unpaid. Others are hiring marketing consultants to create direct-mail campaigns promoting their children’s workplace potential. Still other parents are buying internships outright in online charity auctions.

 

Even as the economy slows, internship-placement programs are seeing demand rise by 15% to 25% over a year ago. Critics of the programs say they deepen the divide between the haves and have-nots by giving students from more affluent families an advantage. But parents say the fees are a small price for giving their children a toehold in a treacherous job market. And operators of the programs claim they actually broaden access to internships by opening them to students who lack personal or political connections to big employers.

The whole idea of paying cash so your kid can work is sometimes jarring at first to parents accustomed to finding jobs the old-fashioned way — by pounding the pavement. Susan and Raymond Sommer of tiny St. Libory, Ill., were dismayed when their daughter Megan, then a junior at a Kentucky university, asked them to spend $8,000 so she could get an unpaid sports-marketing internship last summer in New York City. Paying to work “was something people don’t do around here,” says Ms. Sommer, a retired concrete-company office worker; her husband, a retired electrical superintendent, objected that if “you work for a company, you should be getting paid.”

But Megan, then 20, had already applied for 25 summer internships and hadn’t received any replies. The Sommers gave in, and Ms. Sommer says they’re glad they did. After working last summer for a sports-memorabilia auction concern, Megan has come “out of her shell. It really made her grow as an individual,” Ms. Sommer says. Megan agrees, saying the internship helped her focus her post-graduation career plans.

The program they used, University of Dreams, Los Gatos, Calif., is one of a handful of for-profit internship companies that have sprung up in the past few years. After screening out some applicants — the company won’t say how many — University of Dreams helps students polish their résumés, arranges interviews with employers that offer internships, such as fashion house Donna Karan International or public-relations shop Ruder Finn, and also provides on-campus housing and after-hours social and educational programming for the students during their eight-week internships. The company guarantees an internship placement or refunds students’ fees, which range from $5,000 to $9,500.

Other parents are paying consultants to mount the equivalent of a direct-mail campaign on behalf of their children. Sheila Miller, Albuquerque, says her daughter, Amber, couldn’t find the internship she needed to complete her degree in emergency-management planning at a Texas university; 18 months after completing her course work, Ms. Miller says, Amber was stalled working a $10-an-hour retail job that wasn’t paying the rent.

To jump-start their daughter’s career, Ms. Miller and her husband dipped into the remainder of Amber’s college fund late last year to send her to Fast Track Internships, a Highland Village, Texas, consultant founded in 2005. For $799, the firm helped her polish Amber’s résumé and cover letter, identify 133 target employers and mail them all letters and résumés. Amber soon received 15 calls from employers and last week took an unpaid internship with a city police department, writing their emergency-response plan. “She’s just thrilled,” Ms. Miller says.

Other parents are purchasing internships outright in charity auctions. CharityFolks.com, a fundraising Web site, saw a sharp rise in internships offered for sale last year at such employers as Rolling Stone, Elle magazine and Atlantic Records, says Chief Executive Kelly Fiore. Another site, CharityBuzz.com, says a one-week internship at a music-production company sold last month for $12,000.

Ms. Fiore sees internships as one way to help charities fight “an otherwise staggering downturn” in donations. Mindful of the trend, hard-pressed nonprofits are pounding the pavement to drum up internships to sell. Gina Philips, Los Angeles, a consultant to the Alzheimer’s Association, says demand from wealthy parents has led employers in the entertainment industry to create internships that otherwise wouldn’t exist, just to help raise money.

Some critics say the programs distort students’ job-seeking experience by easing the rigor of the job search. “The type of students corporate America wants are the students who can find their own internships,” says Claudia Tattanelli, CEO of Universum North America, Philadelphia, which consults with employers on recruiting. The vast majority get internships through campus career-services offices or Web sites such as MonsterTrak.com.

Others question the value of the unpaid internships the programs often provide. Another novel internship program, Brill Street & Co., Chicago, founded in 2006, places students only in paid positions and derives its profit by taking a percentage of their paychecks. Nancy Lerner, co-founder, says this is the only way to ensure applicants will get “quality work assignments.” Brill’s applicants have doubled in the past year to about 150 a week.

While career counselors warn that unpaid interns often do little more than pour coffee or run errands, several employers and interns I interviewed said the work was worthwhile. Ruder Finn, New York, has found 29 of its 36 unpaid interns since 2003 through University of Dreams and has hired at least two of them into permanent jobs, says Cathleen Graham, a Ruder human-resources executive.

The internship programs also contend they actually broaden access for students — allowing firms to recruit from lesser-known schools and distant cities. “It’s a huge misconception to say this is a program for rich kids,” says Eric Lochtefeld, CEO of University of Dreams, which operates programs in six U.S. and five overseas cities. “The average student comes from the middle class, and their parents dig deep” to pay for it. His company has begun funding scholarships and grants for low-income applicants.

Mike Esterday of Nashville, Tenn., whose daughter got photography and marketing internships in London and Hong Kong through University of Dreams, says, “it would be really tough to get anything of this caliber, unless you know somebody.”

While some fault parents for “buying your kids an ‘in,’ ” says CharityFolks’ Ms. Fiore, “I happen to feel that a foot in the door is fair, because it’s talent that’s going to seal your fate. It’s your drive and what you do once you’re given the opportunity” that determines how far kids finally get.

Criticism aside, parents see the education and experience their children gain as priceless. Teresa Hayes, Evanston, Ill., plans to pay $3,400 to the Washington Internship Program, which guarantees placement and helps secure housing for students, to secure a Capitol Hill internship this summer for her daughter Leah Barnes, 19, a Stanford University sophomore. Ms. Hayes regards this as just another of many opportunities she has provided her child, from foreign-exchange programs to teen-leadership conferences.

“People say, ‘you’re nuts, are you kidding me? You’re spending thousands of dollars on your kids,’ ” says Ms. Hayes, a pharmaceutical sales representative, who is also paying college tuition for Leah’s younger sister. But Leah “worked so hard. Whatever she wants to do, I want her to have the background to do it intelligently.” Leah, who hopes for a career in international law, says she is grateful and excited.

Without such programs, says Linda Bayer, executive director of the Washington Internship Program, the capital would be “the playground of the children of the rich, whether they were capable or not” — because snaring internships would largely be based on personal connections. But with programs such as hers, “there’s no distinction here between the uber-rich and someone whose parents are schoolteachers.” Her placements are running about 25% ahead of a year ago.

 

By SUE SHELLENBARGER (sue.shellenbarger@wsj.com)

Work & Family JANUARY 28, 2009  - http://online.wsj.com

Filed under: Business , cost, Crisis, internship

oh, cars…

Filed under: Business, Jokes , cars

Top 10 Scared Stock Traders of the Week

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October 9
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October 7
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October 10
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The S & P 500 also was down on the day, declining 21.5%.

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The day also say the Euro decline against the dollar.

time

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