Although a Fabius Maximus post, The online bubble is bursting, makes a good argument that we are probably witnessing a tech bubble bursting, I think that has more to do with irrational company valuations and a subset of social media problems rather than online advertising problems. If Facebook or Twitter collapses do we stop buying goods from Amazon? Even if all of the companies described in the Kalkis Research paper, End Of The Online Advertising Bubble, collapse does that mean we stop buying goods from Amazon or stop using Google for comparison shopping? I don’t think so. Online advertising is dominated by Google and Amazon is making many forms of online advertising less valuable. When you think about the history of the Internet and online advertising, the problems are evolutionary. The biggest problem facing online advertising is the creative destruction forced on the online shopping market by Amazon. I work for a small online retailer. A couple of years ago the shopping experience consisted of a customer searching for a product and then following one or more of the ads or links on the search results page to an online retailer. In a world dominated by the Google search engine, it is not surprising that our largest and most cost effective source for orders was Google AdWords. Despite the occasional abuse and fraud from pay per click vendors and the weirdness of search engine optimization strategies, this was a pretty good business model for an online retailer to drive traffic to their site.
Today the largest and most cost effective source for orders is Amazon. Amazon has two things going for it, customers are increasingly going to Amazon for their shopping experience and Amazon has a viable alternative to the pay per click business model for online retailers. Many Amazon customers expect Amazon to have the lowest price. Our web site analytics say our customers have dramatically reduced the number of times they are using Google for comparison shopping. The most important change for online retailers is that Amazon’s unique business model says that Amazon gets paid only when they process an order. This solves several problems for retailers. Retailers do not worry about Amazon orders causing pay per click abuse, credit card fraud, or payment processing problems. Since the percentage Amazon charged us for an order was less than our pay per click advertising budget, it was an easy decision for us. To increase sales and profit we listed more products on Amazon and cut down on our online advertising. In a flat retail market our Amazon sales have gone up, our Google sales have gone down, and our profitability has gone up slightly. We live to fight another day.
Socialist governments traditionally do make a financial mess. They always run out of other people’s money.
While reading a Yahoo interview with Mr. Stiglitz in which he describes three steps to solve income inequality, I was struck with the thought that he remembers the 1980s much differently than I do. Here is a quote from the interview.
In his new book, “The Great Divide: Unequal Societies and What We Can Do About Them,” Stiglitz traces the modern divide of inequality back to the Reagan era. Though inequality was a huge problem at the turn of the last century and in the lead up to the Great Depression, Stiglitz says the income divide in the U.S. was reduced after World War II and that the country “grew at its fastest pace” and “grew together.” He says the turning point was the Reagan Administration and its rolling out of supply-side economics, deregulation, and lower tax rates. The goal of these policies was to spur economic growth overall and make everyone wealthier. Stiglitz says it caused a divide instead.
To refresh my memory about the Reagan years I went back and listened to the American Heritage podcast, “The Reagan Revolution”, by Professor Moore of Hillsdale College. I think there is a much stronger argument that the income divide was reduced after World War II because we won and they lost. There was very little foreign competition for our businesses until the mid 1960s. When the competiton heated up in the 1970s we were constantly reminded that the Japanese and Germans were making products that were not only better but cheaper and the cost for our social experiments with defined benefits and free health insurance were a burden our companies could no longer afford. I remember the early 1980s as a time filled with fear and despair. People in both the United States and Britain were concerned that the socialistic policies and practices of the past had failed to live up to their promise and were now viewed as the primary obstacle to improving competitiveness, employment, and wage growth. Desperate times call for desperate measures and the first idea to die was the idea of the paternalistic company in the United States and the state-owned company in Britain. The second idea to die was the cavalier attitude toward the importance foreign competition. The business sector needed to restructure with an emphasis on efficiency. It was a “we win, they lose” situation and America and Britain did remarkably well under pressure. The auto and steel industries in both countries started the long process of re-inventing their businesses for the new environment. Reganomics reversed the stagnant productivity during the Carter years with solid productivity gains. The Reagan Revolution is fondly remembered as the tide that lifted all ships and President Reagan was easily re-elected. Probably more amazing was the transformation of the British economy under Prime Minister Thatcher as it emphasized deregulation (particularly of the financial sector), flexible labor markets, the privatization of state-owned companies, and reducing the power and influence of trade unions. It was arguably the more difficult political task but the reforms has allowed Britain to be in a competitive position this century that is more like Germany than Italy.
When I look at the 2015 economic landscape I keep wondering whether we have become too financially efficient and complacent to innovate and grow sales. Our GDP growth is limping along primarily on gains in health care spending so is anyone surprised that wage growth has been stagnant? We need to get back to making things bigger, better, faster, or cheaper to get customers to keep coming back and arguably small and mid-size companies is the optimum organization structure to achieve it. The interesting part of this solution is that we probably fix both our middle class wage growth, income inequality, and GDP growth issues. The economic solution for today is the similar to the solution advocated by Reagan and Thatcher in the 1980s. What did the TARP bailout do besides protect bank executive paychecks? It sure looks like once again we are seeing that cronyism is the primary beneficiary of government fiddling. The most important question has always been how do you grow the economy after a liquidity crisis so how did quantitative easing become our best policy option for growth? We need to get smaller, agile, and more competitive if we want to compete in a world economy where it is likely that our the most feared world competitor is based next door in Indiana, Kentucky, or some other state with a similar attitude. It is time to unleash the animal spirits of entrepreneurs.
As a long time IT guy I am embarrassed to say how much time I wasted trying to figure out what the FCC’s version of “Net Neutrality” means? It was as if the FCC was deliberately trying to make their reasons for increasing internet regulation as difficult to understand as possible. They seem to be using the same lack of transparency tactic Jonathon Gruber made famous. Whether you are lying about health care policies or Internet regulations, it looks like political suicide on the big stage. As both a retail and commercial Internet client I have no idea what problem they are trying to solve that would not be solved faster and better via the marketplace.
I think we can agree that the Internet is a fairly, robust free market. On the other hand health care is a heavily regulated market and the additional Affordable Care Act regulations did not make health care more efficient or result in better health care outcomes. So if the government cannot wring out increased health care efficiency in a heavily regulated market like health care, what do you think the chances of continued Internet improvements are when the government is converting a robust free market into a heavily regulated market. Is this change as potentially disruptive to the internet market as the federal government’s last technology flop, healthcare.gov, was to the health care market? The government technology track record is pretty dismal. They violated practically every software development best practice known to man in developing healthcare.gov and then acted surprised that the site did not work and ran over-budget. This Administration is not technologically savvy so it is way too early to risk killing our golden goose for nothing.
May be it is best to listen to the concerns expressed by FCC commissioner, Ajit Pai. Click on this link to view the Bloomberg interview.
I am getting increasingly annoyed with the President saying that the Keystone pipeline will allow Canada to send their oil through our land where it will be sold elsewhere. Here is an example from a yahoo news story, Keystone Pipeline vote isn’t about energy.
In a press conference last week in Asia, Obama remarked that the pipeline wouldn’t add anything to the U.S. energy economy and would allow Canada to, “pump their oil, send it through our land, down to the Gulf, where it will be sold everywhere else.”
As a guy who lived in Houston for 18 years the idea that the oil will be sold elsewhere is very unlikely. What is likely is:
Refiners along the Gulf coast will see lower prices for all of their feedstocks. Most of the refiners can handle a variety of feedstocks and will switch to the feedstock that makes them the most money.
Refiners will convert every barrel coming out of the pipeline into high valued products like gasoline, diesel, jet fuel, and the chemicals used to make plastics and fibers. The Gulf coast already has an intricate web of product pipelines for the building blocks of plastics.
The United States oil and chemical industries are very, very good at capturing as much value as possible out each barrel of oil. That is what they have been doing for over 100 years. It is unlikely that Canada will get a better price exporting crude.
Almost all of these high valued products will be consumed within the United States. The State of Texas has this great summary on crude and it echoes what Keystone Pipeline folks say on the Myths & Facts page.
Lower feedstock prices will translate into higher profits and potentially into a combination of higher profits and sales since the Gulf coast will now have a competitive advantage over other countries. It is the ripple effect from lower feedstock prices that may be the most significant contributor to economic growth. If you are the low cost producer then selling value added products overseas becomes feasible again. If we continue to focus on infrastructure policies that improve productivity then we should see the result in real growth in the business sector and eventually in middle class disposable incomes.
Unique competitive strategies fascinate me so it goes without saying that Amazon’s business strategies fascinate me. They have always marched to the beat of a different drummer. One of their more unique competitive strategies has been free 2 day shipping via Amazon Prime. Two years ago I subscribed to Amazon Prime to see if I would break even on the shipping while enjoying some Netflix type video streaming. What I found surprised me. I purchased more incidental items through Amazon and rarely used the video streaming. I suspect this incidental shipping is killing Amazon’s bottom line. As an example I was repairing a computer and needed some thermal paste. Rather than going to the local computer store I ordered it I from Amazon because I had free shipping. The paste cost me $5 and was shipped to me using UPS. As a person who is real familiar with shipping costs, I am guessing that Amazon lost $5 on that transaction. I followed that up next week with a $10 purchase for a different repair. For high priced items I found that I could find lower prices that include free shipping outside of Amazon if I ran a simple internet search. Since free shipping is such a mixed blessing, I was debating whether to pull the plug on Amazon Prime this year. Now we hear this. It should be interesting to see how the Amazon’s competition respond.
Amazon also said it is considering raising the price of its popular Prime service by as much as $40 a year due to higher fuel and other shipping costs.
I think the fundamental problem is that the press chooses to tell the the economic story from a top down perspective. The administration would like the press to tell the story this way since it portrays the administration favorably and there is ample historical evidence that the economy will recover on its own. I think the press and the President are hoping we will see an economic rebound similar to the levels we saw before the 2008 meltdown. It is a hopeful story and the press continues to be very accommodating to the President. However there is also ample evidence that the economy will not recover as quickly as hoped for. According to recent polls business leaders see the economy significantly different than the political class. Business leaders view the economy from a bottoms up perspective and they see a lot of problems in their business environment. Several industries are in disaster mode and many of the “healthy” industries are looking at year to year sales drops of over 20%. If consumers continue to increase their the financial prudence and permanently reduce their discretionary spending, there will continue to be large dislocations in the job market as the economy adjusts to reduced consumer demand. In some industries customer demand has completely disappeared. I counted 13 sectors of the economy facing severe to moderate job losses. The problems in some industries are so severe that they will only be solved by job migration. With so many people looking for jobs in different industries and in different regions of the country, it is likely that it will be a long time before business leaders will see their sales rebound to 2008 levels. It is extremely unlikely we will reach 2008 sales levels until we reach 2008 employment levels. This the blind spot of the Obama administration. The prudent thing for business leaders is to hunker down and look for significant sales increases before hiring back the laid off employees. Until the press turns on the President and starts demanding accountability for job growth policies, it is unlikely the press will pay any attention to the shortfall in tax revenues.