Category: Finance

‘Steve Jobs would walk in, say ‘this is far too big’ and walk out…’ MusicMatch, the iPod and the Dell DJ (repost)

This is a repost of the post that appeared a couple of days ago over on my other blog, The Rivals, where I’m asking questions, posting stuff and so on for the book I’m writing about Microsoft, Apple and Google – to be published by Kogan Page, delivery date July. Let me know what you think, and contribute too over on the other blog.

In case you’re interested in how the book will read, here’s something that I wrote last night. It’s looking at one of the key stages in the iPod’s development: the very early stages. So here’s some draft content. It’s got notes and repetitions and things that need to be tweaked, and the name of the main interlocutor has been removed because, well, that’s for the book, isn’t it?

Comments welcome (eg “you left out the bit where…” or “just as important in 2002 was…”). And I’m really interested in hearing from anyone who:
– worked for/with Microsoft around the time it was trying to get Windows Media Player/Audio/Janus implemented

– worked for/with Microsoft on its “online services” system – MSN – while it was being passed by Google in 2002-4 for revenues and market share: what did Microsoft think, internally? (I’d be just as interested in talking to someone who mentioned this to Microsoft as an ex-Microsoftie.)

– worked for/with Google pre-IPO who could talk about its thinking over whether it wanted to confront Microsoft.

And pretty much everything else on Microsoft/Apple/Google. Get in touch, or tell the people you know who know and ask them to get in touch.

Text starts below. Nice picture!

Photo by Olivier Bruchez on Flickr. Some rights reserved

The launch of the iPod in 2001 intrigued MusicMatch, and soon they were talking to Apple about the possibility of tweaking their software so that the millions of Windows users – a huge, untapped market for the iPod – could use it with their machine. At the time the iPod’s iTunes software only worked on Macs, and required a high-speed Firewire connection – which every Macintosh since 1999 had, but which was comparatively rare on Windows machines. Even so, enough had it (because the Windows PC market was so big and various) that it made sense for MusicMatch to offer it.

In July 2002, Apple introduced its second-generation iPod, with up to 20GB of storage – and introduced “iPod for Windows”, which used MusicMatch’s software to connect to Windows PCs.

BBB knew that the relationship with Apple was on borrowed time: “we could see that if it took off then they would write iTunes for Windows and steamroller us,” he recalls. But the experience was fascinating, and there was always the possibility that MusicMatch might be able to engineer some way to hold on to Apple – or perhaps to get Apple to hold onto it.

He had a number of meetings which Jobs attended: “generally he would walk in, say ‘this is shit’, and walk out,” he recalls. “Or he would say ‘this is far too big. It’s too bulky.’”

At the time the music business was in flux. The original incarnation of the file-sharing network Napster had been downed in the courts, but that had led to a hydra-headed decentralised sharing system called Gnutella, which had no central index as Napster had had. The record labels had nothing to aim at.

Since they were unable to shut down those networks, the record labels’ logical next move was to prevent music being ripped from CDs onto computers; that would prevent new songs being uploaded and shared, and should tamp down piracy. “Sony had had success in Japan with the MiniDisc format, which prevented you from copying songs back and forth,” said BBB. “Together with Sony Music, they seemed to have the formula. And Sony Electronics was huge in those days.” So the labels pressed for similar copy-prevention technology – known in the business as “digital rights management” software – to be included in music players and ripping software, and separately on CDs.

BBB adds his own context to the labels’ drive to get DRM instilled everywhere: “in the record business, everyone feels that they got screwed in their last deal. So in the next one they’re always looking to get the best possible deal. Songs will have different publishing rights in different countries. And the record labels and the publishers don’t see eye to eye. It’s a recipe for disagreement.” And for stalemate.

But Microsoft was listening to the record companies’ calls. It was a company full of skilled programmers who would be able to write software that would implement DRM to prevent copying. It quickly devised a strategy: using its Windows Media Audio format (which “independent” tests suggested gave better listening results and smaller files than MP3 at the same compression ratio). Files ripped on PCs using Windows Media Player, the default system, would be transferred with DRM onto digital music players so that the songs could not be copied onto another PC. That would tie the player to its owner’s computer. And uploading WMA files protected in that way to file-sharing networks would mean they wouldn’t work on the PCs of anyone else who downloaded them.

It was a brilliant strategy, except for two things. First, CD-ripping was still a minority sport limited to people who understood how to do it and what its purpose was; that meant they were specialists who were wise to Microsoft’s machinations especially the DRM,. (The high profile of Microsoft’s conviction in the antitrust case had eroded user trust that it was really acting in their best interests, rather than the interests of its partners.) They instead downloaded other programs – such as MusicMatch – which could play WMA files but could also rip songs into MP3 format.

The second problem was Microsoft overcooked the software, says BBB: “it was just too hefty for the hardware. It didn’t quite work right. There would be glitches, and the drivers didn’t quite work right, and the transfer was really slow.” That was because they relied on USB 1.1, rather than Firewire, connections. Firewire was about ?20-40 times faster[how much faster Firewire than USB] and USB 2.0, the faster standard that was comparable in speed, wouldn’t arrive until XXX[when USB 2 released?] and would take some time to become widespread in consumer electronics devices – particularly digital music players.

Then there was the industrial design aspect. BBB recalls seeing the prototype for the third-generation iPod during a discussion with Apple executives; Steve Jobs made an appearance – “he would kind of drift in and out”, is how he puts it – to pick the prototype up and criticise it for being too thick and then walk out.

A month of so later BBB was at the headquarters of Dell Computer in Austin, Texas. Dell was eager to get into this burgeoning market: it reasoned that it could use Microsoft’s software, and design its own hardware (as it did with PCs) but that unlike Apple it would be able to use its buying heft to drive down costs and so undercut Apple. The market was there for the taking.

BBB was handed a prototype for the Dell DJ player, which like the iPod used a 1.8” hard drive. “Jeez, this thing us HUGE!” he blurted out.

It was indeed noticeably deeper than Apple’s existing iPod, and substantially more than the forthcoming iPod – which MusicMatch knew about but about which its team had been sworn to secrecy, on pain of extremely costly legal action. “One of the Dell designers explained that that was because the Toshiba version of the hard drive had its connector on the side, and the Hitachi one had it on the bottom, but because they were dual-sourcing they could get the price down by 40 cents,” BBB recalls. “That was the difference in a nutshell. Apple was all about the industrial design and getting it to work. Dell was all driven by their procurement guys.”


In September 2003 Apple launched its third-generation iPod, supplanting the one that Dell’s engineers had been comparing their design against. This one was notable for two features: four touch buttons just below the screen, instead of being embedded into the scroll wheel – a feature that was abandoned in the next generation as unwieldy – and a proprietary 30-pin dock connector on the bottom of the device. That allowed it to connect to a Firewire or USB 2.0 port, via a cable. (The buyer had to specify which cable they wanted.)

more to come….

Why Ryanair will not implement – or will withdraw – its toilet charge: because it will cut profits

It is annoying to see the annoying company Ryanair – whose motto I imagine to be “if they’re stupid enough to fly with us, they’re on a mental level with sheep and should be treated as such” – given occasional credibility over ludicrous ideas without anyone asking the straightforward question.

Such as: would implementing that idea actually cost Ryanarse money, or profits?

When Michael O’Leary makes a stupid pronouncement, the media seems happy to repeat it. None seems happy to examine it and throw it back at O’Leary to ask whether he has lost his mind and is trying to annoy his shareholders as well.

For instance: charging people to use the toilet. (That’s a Google search link: the top link at the moment is to an April 2010 story saying that Ryanair is going ahead with it… and the third link is from February 2009, with “pilots aghast at proposal to bring in £1 charge”, which shows you how long this story has been bing-bonging around the mediasphere.

Let’s examine this the way it should be examined: from a business standpoint. If Ryanarse starts charging for access to the toilet, I think it will lose money. Here’s why.

1) emptying the toilet reservoirs (known, charmingly, as the “honey tanks”) is a fixed cost. It’s done at the end of every flight. And the toilets are on aircraft are never in a wonderful state.

If Ryanarse starts charging for the toilet, fewer people will use it. Obviously. It may also have to do more cleanups from parents of young children who run out of money. It’ll also have to get staff to watch over the toilet to make sure people don’t hold doors open for each other – which will be unpopular with the aircrew, since nobody like to be toilet cop.

So it will get a bit of money from people paying to use the toilet, though there will be fewer visits – meaning that the fixed cost, cleaning the toilet reservoir, will only be slightly offset by the takings. And aircrew will have two new grievances: cleanup and toilet cop rota.

But while Ryanarse makes some money from selling toilet access, it will lose money from sales of coffee, tea and other liquids. This is stupid, because it already has the highest prices for coffee and tea and food according to a 2008 survey by Which? Holiday:

The Irish airline charges £2.50 for a bottle of water and £2.50 for a cup of coffee while a small bottle of red wine costs £5.00.

Why will it lose there? Because people will think “Hmm, if I drink this coffee I’ll have to pay for letting it out too.” So the passengers won’t buy the coffee or use the toilet. Ryanarse is suddenly losing money: the profit it used to make on coffee/tea sales. And that is pure profit: apart from heating the water, pretty much everything that it buys for coffee/tea – instant coffee, teabags – can be reused on another flight if it isn’t used. Whereas the toilet reservoirs have to be emptied every time; it is actually more efficient to encourage their use – that way, you get your money’s worth for the cleaning services.

Michael O’Leary – who I think is despicable; if you want to think of the future driven by his credo, imagine Adam Smith’s invisible hand slapping the human face forever – ought to be able to see that charging for access to the toilet is a stupid move, economically. It would actually make better business sense to announce that the “toilet charge” will be rescinded – and raise the price on coffee and tea. In fact, expect it.

And if O’Leary is too stupid to see it, then perhaps his shareholders could show him this blogpost.

And finally, to the business press: next time O’Leary puts forward a stupid idea like this, ask whether it can make business sense. Think about fixed costs and operating costs. And quiz him. When he can see he’s going to lose, he caves in. I think if this is implemented, it will be a money-loser. But you’d need to ask the hard questions – how many drinks are sold per flight before, how many after, what’s the take – to know whether, when Ryanarse announces it’s not implementing (or is withdrawing) these charges, precisely why it’s doing it.

My suggestion: it won’t be because of an outbreak of warmth in O’Leary’s heart, which I imagine as a coal-black thing that would make Lord Voldemort shudder.

Linkage: Murdoch on Google, what paywalls lose, what comes after newspapers, and where all the US’s money went

  • Murdoch Wants A Google Rebellion –

    In a recent interview with Charlie Rose, Wall Street Journal Managing Editor Robert Thomson drew a bead on Murdoch’s beef: “Google devalues everything it touches,” he said. “It divides content quantitatively rather than qualitatively.”

    Interesting – Murdoch’s is one of a rising number of voices. But then one also thinks “he would say that, wouldn’t he?” Rose’s comment is very incisive, though

  • Paying for online news: Sorry, but the math just doesn’t work. » Nieman Journalism Lab

    Are these viewer retention assumptions valid? Granted, they come from the top of my head. If you disagree, make your own assumptions; the math is simple. We don’t have a lot of real-world before-and-after figures from news sites that have imposed fees. But we know, for example, that the New York Times’s 2005-2007 Times Select experiment drew 227,000 paying customers at an average of about $3.70 a month (based on reported revenue of $10 million a year), at a time when the Times’s free content was drawing 13 million unique visitors a month — a conversion rate of less than 2 percent. Or consider that the Wall Street Journal has about a million paying subscribers at $8.66 a month, versus 14 million monthly UVs at the free New York Times site. Print circulation for the two are roughly equivalent, but the Journal’s fee cuts its online audience to just 7 percent of the Times’s.

    Based on this, retention rates as high as those I’ve modeled don’t look attainable, and retention high enough to increase net revenue is plainly not in the cards. (To get a net gain at a seemingly reasonable $5 a month rate, retention would have to be about 45 percent.)

    A simple tollbooth approach at any price cuts out the vast majority of the audience, and would mean that newspapers were retrenching to print — saying in effect, “If you want our news online, it’s there, just pay the fee, but we’re no longer investing much energy in developing our sites, because there’s no money on that side of the fence.” A newspaper industry retrenchment to print would mean a withdrawal from competing online. The game would be to squeeze the remaining profits out of print while the clock runs out; while readers continue to migrate online, now to non-newspaper online-only sources; and advertisers follow the audience to the Web.

    And then you do the maths.. we do need to see some better modelling on this. But he has a good case.

  • Michael Kinsley – Life After Newspapers –

    It is tempting, but too easy, to say the problems of newspapers are their own fault. True enough, the industry missed a whole armada of boats. If newspapers had been smarter, or moved faster, they might have kept the classified ads. They might have invented social networking. But that’s all hindsight. I didn’t think of these things, nor did you. Judging from Tribune Co., for which I once worked, the typical newspaper executive is a bear of little brain. Until recently, little brain was needed. Even now, to say the newspaper industry has no problems that a busload of geniuses couldn’t solve is essentially saying that the industry’s problems are insoluable. Or at least insoluable without help.

    Insoluable? When did the Washington Post dispense with subs or a dictionary? The trouble with this article, though, is that it’s saying “there will be news after newspapers”. I think we’ve heard that.

  • AlterNet: This Crisis Is Way Bigger Than Dead Banks and Wall Street Bailouts

    For the first time since the 1930s, millions of American households are financially ruined. Families that two years ago enjoyed wealth in stocks and in their homes now have neither. Their 401(k)s have fallen by half, their mortgages are a burden, and their homes are an albatross. For many the best strategy is to mail the keys to the bank. This practically assures that excess supply and collapsed prices in housing will continue for years. Apart from cash — protected by deposit insurance and now desperately being conserved — the American middle class finds today that its major source of wealth is the implicit value of Social Security and Medicare — illiquid and intangible but real and inalienable in a way that home and equity values are not. And so it will remain, as long as future benefits are not cut.

    US social security and health care are what they really have? Scary. Oh, and the author of the piece? James K Galbraith. You may have heard of his father, John?

Linkage: How to build bridges (to somewhere), and the death of free

  • Rands In Repose: The Makers of Things
    How do you sink the foundations of a bridge underwater without submarines? You build a giant watertight box. Simply terrifying and amazing at once. Rands’s point though is about how you need to think the impossible to enable enormous change – like we need now in all sorts of industries
  • Freeconomics 2.0 – or how Pay! is the New Free! – broadstuff

    Which brings us to the core issue for new content creation – artists may starve in garrets for art, but they still starve. Others just exit and do something else, The main reason that Freeconomics has survived to date is that copying other people’s stuff is the lowest form of content creation going. Problem is, as YouTube is finding, its hard to attract paying customers or advertisers to such content. Without significant Google subsidy, YouTube would collapse in months.

    So where does that leave us?

    Simple – Freemium will work in some cases, there is about $50bn for Ads to subsidise stuff (it will grow, but not rapidly in recessionary times as Ad spend is tied to GDP) and there are some last pools of risk capital left among the rocks.

    But that is not going to fund Teh InterWebz. In Google we (may) trust, but for many of the others we’ll be paying cash.

    Alan Patrick (aka @freecloud) on how the Free model is in collapse. Hey, isn’t everything these days? And how many of these Web 2.0 companies really are self-supporting, outside of V(enture) C(apital) money?

Back and forth on the paywall argument

Yes, it’s a scene from Season 5 of The Wire. It’ll make sense if you read to the end.

Paywalls. We ought to talk. Please note that I’m not talking from any knowledge of any plans that commercial people in the Guardian have; I am far too lowly to know what they’re thinking about. I’m just saying that with the collapse of papers all over the place, largely caused by a collapse in print advertising that isn’t seeing a concomitant rise in online advertising spend, newspapers are going to have to think of all sorts of ways to generate revenue. Perhaps it’s selling links. Perhaps it’s buying readership. Whatever: but put everything back on the table, baby, because all those optimistic predictions from the first and second dotcom booms now look frayed and careworn.

Which makes it interesting to see Tim Burden slagging them off. Go visit his site, it’s interesting. But first, he has a post from February (see how remiss I am) which offers ten reasons why you shouldn’t have paywalls.

Let’s take them on then. (I’ve put this into an ordered list so you can see the numbers – on his post he’s done it just in paragraphs, which I think makes it hard to follow the rebuttals in the comments.)

So here we go. Here’s his assertions, his (usually shortened) arguments; click back for the full ones; and my response.

  1. Paywalls annoy people
    The hapless reader has found a link in Google or a blog or some other site. Worse, in his RSS feed. He clicks, waits, and finds he must sign up or pay money. He clicks back, angry for having wasted the time. If he clicked from your blog, he’s angry at you.
    That’s tough. Perhaps it depends on how the blog presents it: a must-read piece? How hard is it to sign up? Does the paywall take Paypal? Does Paypal take penny payments? It’s not a foregone conclusion. And the FT, for example, lets you read a certain number of stories per month, then puts up the paywall.
    Consider this too: if you get enough of those situations where you click the link, and find a paywall, eventually you’ll think to yourself that damn it, you’re going to pony up.
  2. Paywalls discourage links
    Because paywalls annoy people, I for one won’t link to a site that has them. People shouldn’t: it’s disrespectful of readers.
    You might think it’s disrespectful now, but you’d find it a lot more disrespectful if the site you used to link to shut down, wouldn’t you? You used to think its content was worth someone’s time, but not their money. What if it turns out that wasn’t a fair exchange?
  3. Paywalls are anti-web
    The web is built of documents, and links between documents. No links, no web. It’s a tautology. So if paywalls discourage links, they must be anti-web.
    Does that make the iTunes Store and the iPhone App Store and eMusic and Napster and Netflix and all those other sites that charge for content they hold anti-web, too? Or are you “pro-web” (as opposed to anti, right?) if you have a shopfront that anyone can browse but only charge them to get the content? I thought that’s what a paywall was.
  4. Paywalls must fail
    Anybody can make content and get it to me for free. And they will. Put up a paywall and watch them storm the ramparts.
    Yes, anyone can make content. If you’d like to read my children’s analysis of the world news they heard on the radio, you’re welcome. In fact, if you want to write one, go right ahead. You may find it eats into the time you have to actually work, or rest, but hey, it’s free, and everything wants to happen for free, doesn’t it? Except, for some peculiar reason, the mortgage/rent and the food in the parlour. And that computer on the desk.
    On the other hand, if you want to read the work of people who have had to overcome evasion and stonewalling to find original content that could have some relevance to you (eg government or corporate misspending or malfeasance), or just things that you’d like to know about but haven’t the time to find, then you might consider that if those people – let’s call them “journalists” – can’t get paid via advertisers, they might look to you to help with those mortgage/rent/food/computer payments.
  5. Paywalls cause war
    If you are actually successful at having content no one else has, and charging for it, someone will find a way to get it free. And then your programmers will get overtime to fix it.
    Yup, someone will find a way to get it for free. Probably by copy/pasting it. Then their credit card will get zonked, or similar. But that isn’t the key problem. It is already possible to get most major films on DVD for much less than is charged in shops; yet people buy the real thing. If you trust that most people will behave honestly, given the chance, the problems of people taking content for free becomes more of an edge case.
  6. Paywalls are a scam
    Because readers can get the content free elsewhere, and you can deliver it for free, you are trying to charge for something that has a value of…FREE. Rip-off!
    This is a repeat of No.4 above. And it’s also a syllogism. The content doesn’t have a value of “free”. As gets mentioned below, papers have survived for a long time by delivering readers to advertisers (a thread that is being frayed). Thus the content has a value: the value implicit in being a method of getting readers and advertisers together. In the past, that’s been quite high. Problem now is that advertisers think they have better ways to find “readers”. Which may be true. The question then becomes (which doesn’t get dealt with in this debate) what the implicit value of the content is. But on its face, if it’s stuff that people will seek out, it’s higher than zero.
    How can I state this so confidently? Because I know what the web used to be like. I can promise you that I didn’t spend much of the day trawling the web when the best thing on it was Yahoo’s Site of the Day.
  7. Paywalls limit readership
    Anyone in the content business knows that their product is not newspapers, or broadcasts, or magazines, or even news, or even content, or even information. No! It is readership. Your product is readership, which you sell to advertisers.
    True. But maybe the model is going to have to change. In which case we also sell readers to each other: the thing that becomes valuable is the other readers who are prepared to cross the paywall and discover each other’s shared knowledge and interests arising out of the content they find there. I suspect the FT’s Most Read stories give a useful indication of something.
  8. Paywalls hurt ad revenue
    Follows from above, paywalls reduce readership. Someone will be quick to say, “Oh, but it will be a qualified readership, more valuable.” Bullshit. You can get the same qualification by having users sign up to comment/upload/post on forums etc. There are two types of readers: one hit wonders from Google and locals. Your job is to get locals to participate, not try to squeeze every last dime out of them.
    Participation is nice. Money is a lot more useful. And if the “locals” think they’re getting something of value, might they not be persuaded to pay for it? Which then means that objection (1) at the top, about random readers clicking through, becomes less of a problem.
  9. Paywalls are old-think
    In the olden days, newspapers had monopolies. Those monopolies can now die with a WordPress install. In days of yore, you could force people to pay your price. Now, the only price is…FREE.
    Haven’t we gone over this a couple of times already? I’ve considered spending a couple of days really researching what really happened to lead to Saffron Walden’s town square getting dug up. It would require interviewing market traders, shopkeepers, council officials, people representing the company that put up the money that was used for the development, and the company that is doing the construction work. Three days total work, probably. Then I could write it up. It might stop it happening again; it might expose flawed thinking among those involved. That would be useful. But it doesn’t happen for free.
    The idea that truly useful content generates itself is the grand misconception of those armed with a web browser and a WordPress installation. It’s not true. Oh, sure, you can tell us what your cat ate and link to a story about Obama or Gordon Brown and give us the benefit of your knowledge. That ain’t useful, though. It’s not even free; it costs your time that you could be spending learning something useful, like how to program the iPhone and write a kick-ass app.
  10. Paywalls don’t work
    Oh right…we don’t have to argue from principles. We can just gather empirical evidence.
    Good links, all of them. But circumstances change. And the WSJ hasn’t abandoned its paywall. The New York Times is wondering quite how to monetise its content again (because things are getting tight there). So we all thought that free was the only workable model? Sure, and we used to think that a phone without a keyboard would be a flop. Times change.

Does any of my arguments make paywalls inevitable? No. Do any of this make paywalls utterly rebuttable? I don’t think so. We’re going to see a time of huge experimentation pretty soon, and paywalls are definitely going to be in that mix.

Oh, bonus link: David Simon interviewed in the Guardian plus the shorter news story in which he says that the death of newspapers in the US will mean, in the short term, more corruption:

“The internet does froth and commentary very well, but you don’t meet many internet reporters down at the courthouse.”

(And yes, I’m aware of the irony in linking to his argument about the need for paywalls on the Guardian’s site which has no paywalls.

Oh yeah, apart from its digital archive. To point that out would be supererogatory.)

Links: an IMF warning, and why financial journalists missed it

  • The Quiet Coup – The Atlantic (May 2009)

    Big banks, it seems, have only gained political strength since the crisis began. And this is not surprising. With the financial system so fragile, the damage that a major bank failure could cause—Lehman was small relative to Citigroup or Bank of America—is much greater than it would be during ordinary times. The banks have been exploiting this fear as they wring favorable deals out of Washington. Bank of America obtained its second bailout package (in January) after warning the government that it might not be able to go through with the acquisition of Merrill Lynch, a prospect that Treasury did not want to consider.

    The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.

    Scary article by a former head of the IMF – in 2007/8. Basically, unless the US (and UK?) can end their capture by the financial markets, they’re not going to be able to get out of the cycle of incomplete bailouts of the banks. How to fix it? Tough medicine: nationalise and/or break up the banks into “not too small to fail” units.

  • Audit Interview: Mark Pittman : CJR

    Q: So what’s your prescription for business journalists? What do they need to know and do? Not everybody’s going to have a $20,000 a year Bloomberg terminal to play with.

    Mark Pittman: Hardly anyone has a Bloomberg machine and the ones that do don’t know how to use it.

    But you know what? The government needs to make this kind of data much more publicly available than it is now. We purchase a lot of this. But, for instance, a lot of the bond deals were (not subject to disclosure). And all the CDO’s were private placements. We know why—because they placed them with themselves. The number of secret deals going bad is astounding, it’s probably 90 percent of them were secret deals.

    Intriguing: Mark Pittman of Bloomberg on how hardly anyone understood what was going on – but he did. Who was listening, though?

So how good is the CEBR at predicting things, given its prediction of a 3% shrinkage in 2009?

As the post-Christmas sales got underway, the story was about all these shoppers coming through the door. But that’s not going to satisfy a newsdesk hungry for bad news. Oh no. So the Radio 4 news mixed in the good news – all those people buying stuff! – with some bad: an outfit called the Centre for Economics and Business Research, saying that the British economy will shrink by 3% next year.

OMG!! 3%!!

Except.. who is this CEBR? I’d never heard of it before, and nobody on the programmes which quoted it (BBC, most newspapers, ITN – does that leave anyone out?) seemed prepared to give us any idea of its bona fides. It had given a juicy bad news forecast; why trouble to ask about it?

OK, so I will, since they won’t.

Here’s the CEBR site. And here’s its “newsroom” – where it puts out its press releases – after a time. (You have to “sign in” to get its latest press releases, it seems.) Except it doesn’t seem to have updated with the gloomy statement quoted by all and sundry.

Still, that’s OK: we can look back at previous things it has said. Are they any good?

Here’s what it thought about the purchase of Fannie Mae and Freddie Mac in September:

Is the Freddie and Fannie bail out good news for the United Kingdom housing market? First, this will mean a stronger United States economy. Second, and perhaps more importantly, the Federal government is demonstrating leadership by example. The move will up the pressure on Alastair Darling to be as radical with our mortgage markets. Two of the options being considered by the Treasury are: providing a similar guarantee for mortgage-backed securities; and extending and expanding the current special liquidity scheme to help banks increase their mortgage lending. We await the publication of Crosby’s final report – but the nationalisation of Freddie and Fannie increases the odds of government underwriting of new mortgage-backed security issuance in the United Kingdon. In our view, this represents the best chance of the United Kingdom housing market recovering in 2009.

Yeah, well, some of the mortgage-backed stuff happened, but housing market recovery in 2009? Unlikely, and certainly not triggered by FM/FM’s takeover.

It goes on like this. Basically, I can’t see any clear reason why CEBR would be quoted so highly – except that it had the publication nous to put out its doom-mongering release on Boxing Day.

And newsdesks love a bit of doom-mongering. Who cares whether it’s accurate? Who cares whether the think tank has any sort of track record? It’s bad news, and we love some of that.

But you have to wonder about whether we aren’t sometimes talking ourselves into recession. Hear enough of those sorts of predictions, and of course you’ll be scared of your shadow. No matter that it comes from people whose predictions have been about as good as those that I could make.

We’ll put a marker and come back to the CEBR next year. After all, why not? We could find we praise them, not bury them.

Why credit goes bad, and how bankers make it happen

Joe Nocera, at the New York Times, gets told by a banker what’s wrong with the current method of offering people credit:

As a banker, let me describe what we do wrong when we accept and review an application for a credit card. First, we don’t verify income. The first ‘C’ of credit: Capacity to repay, is completely ignored by the banks, just as it was in when they approved subprime mortgages. Then we ask for “household income” — as if other parties in the household could be held responsible for that debt. They cannot. And since we don’t ask for any proof of income, the customer can throw out any number they think will work for them. Then we ask if they rent or own and how much they pay. If their name is not on the mortgage, they can state zero. If they pay $1,000 in rent, they can say $500. (Years ago we asked for a copy of the lease to verify this number.) And finally, we don’t ask how much of a credit line the consumer is looking for. The banker can’t even put that amount into the system. There isn’t any place on the application for that information. We simply put unverified information into a mindless computer and the computer gets the person’s credit score and grants them the biggest line that score and income (ha!) qualifies for.

The trouble though is that as people get made redundant – did you notice the US had one of its biggest layoffs in a single month just now? – they can’t pay those bills. Credit card bills? Screw ’em. We’ll pay the mortgage (if we can). If the credit isn’t secured (which in these cases it won’t be), that means it comes back onto the lender’s books as a bad loan.

Back to the banker:

I recently had a client apply for a credit card. She is a homemaker, with no personal income. The house she lives in is in her husband’s name. She would have asked for a $3,000 credit line, just to pay miscellaneous expenses and to establish some credit on her own. So the computer is told that her household income is $150,000; her mortgage/rent payment is zero. The fact is that her husband’s mortgage payment is $7,000 a month (which he got with a no-income-verification loan). She had a good credit score, but limited credit since she has only lived in this country for the last three years. The system gave her an approval for a $26,000 line of credit!

(No-income-verification loans are also known as “liar loans”, in case you hadn’t noticed.) But there’s a law in the US which lets you opt out of being sent credit offers. Wait – why is it opt-out?

I think Congress did this backwards. Perhaps it could amend the law. The regulation should have required the consumer to opt in, if they so desire, instead of opting out. That would mean that no one would get an unsolicited credit card offer. If a consumer needs a credit card he or she could be given an option to call an 800-number to opt in. Or the consumer could go to their local bank and apply for a credit card in person. Or the consumer could go online and apply for a credit card. The consumer can also view all the best credit cards, nationally, at is an invaluable tool for consumers.

At the time of this writing, the article has 716 comments spread over 29 pages: that’s on a par with Charlie Brooker letting rip at Macs vs PCs.

Some are interesting – especially this one, reading in part:

My wife got confused in a double-cycle billing trap and paid a credit-card balance a day late (technically the day it was due). The bank jacked the interest rate to 30%. I told them “forget it — we’re not paying.” After a few phone calls down went the interest rate to 4%, at least by phone, but when I called for paperwork the bank told me the department that does that is overwhelmed with calls.

Hmm, that sounds like a penalty fee, doesn’t it?

The interesting question will be which banks are the most exposed to credit card debt. Bank of America is rumoured to be at the head of the line. Perhaps Hank Paulson will give them an unbeatable offer to pay it off at 0%, rising to 29% if the balance isn’t paid off in six months…

Told you so (finance), told you so (more finance), didn’t tell you so (Wikipedia)


Peter Schiff, the man who told them it was all going to end in tears. Here in a series of clips where he’s telling them so, and they wouldn’t listen, dating back to 2006.

Next: BusinessWeek, which is one of only four magazines I read each week (since you ask: the New Yorker, New Scientist, the Economist), which was the first – that I’ve known of – to point to all the toxic mortgages and their possible effects. And this was back in September 2006.

That’s Nightmare Mortgages:

The option adjustable rate mortgage (ARM) might be the riskiest and most complicated home loan product ever created. With its temptingly low minimum payments, the option ARM brought a whole new group of buyers into the housing market, extending the boom longer than it could have otherwise lasted, especially in the hottest markets. Suddenly, almost anyone could afford a home — or so they thought. The option ARM’s low payments are only temporary. And the less a borrower chooses to pay now, the more is tacked onto the balance.

The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules — often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can’t count on rising equity to bail them out. What’s more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.

There was plenty more going on behind the scenes they didn’t know about, either: that their broker was paid more to sell option ARMs than other mortgages; that their lender is allowed to claim the full monthly payment as revenue on its books even when borrowers choose to pay much less; that the loan’s interest rates and up-front fees might not have been set by their bank but rather by a hedge fund; and that they’ll soon be confronted with the choice of coughing up higher payments or coughing up their home. The option ARM is “like the neutron bomb,” says George McCarthy, a housing economist at New York’s Ford Foundation. “It’s going to kill all the people but leave the houses standing.”

You’ll recall I’ve written about the hangover from ARMs before. That’s some bill. And BusinessWeek wrote about Ralph Cioffi – now on bail, I believe.

Finally, don’t trust Wikipedia for your pharmaceutical advice:

Entries were often missing important information, for example the fact that the anti-inflammatory drug Arthrotec (diclofenac and misoprostol) can cause pregnant women to miscarry, or that St. John’s wort can interfere with the action of the HIV drug Prezista (darunavir).

It would be nice if the press release didn’t contradict itself within two paragraphs

Excited press release arrives in inbox.

Tens of thousands of teenagers set to invest in shares it says.

This, I feel instantly, is Not True. First, teenagers don’t care about shares. They care about who they might have sex with next, and whether they’ll be hot, and where it’ll be.

Second, teenagers don’t have the money to invest in shares.

Third, teenagers who might be interested in shares and know enough about them to do things with them will have noticed that the stock markets are impossible to pick at the moment. Up! Down! Sideways! Up and then down!

So let’s continue reading.

Financial education charity, the ifs School of Finance, today confirmed that record numbers of 14-19 year olds will take part in the 2008-9 ifs Student Investor competition.

Well (leaving aside the Unnecessary Comma of Evil) that seems unequivocal. Could it be that I was wrong with points one, two and three? Let’s continue reading on.

Thousands of school and college students across the UK will invest a fantasy £100,000 in the stock market over a four month period when the online trading competition starts later this month

Oh. Right. Fantasy money. Not real money.

The competition has proved more popular than at anytime in its fourteen year history with more than 30,000 teenagers expected to take part when the competition starts on Monday 24 November.

Apart from the fact that the grammar in this press release is just diabolical – are they ignoring the wavy green lines? – that’s quite a lot of teenagers. But as to whether it’ll turn any of them into hedge fund supremos – well, I don’t think so. And the headline is a lie. They’re not “investing” in shares. They’re playing with fantasy money. It’s like saying “thousands of teenagers to manage football teams” when you run a Fantasy Football site. It’s a lie.

And people wonder why journalists find PR stuff annoying? It’s because it wastes our cognitive effort on junk like this.