Category Archives: Wisdom of Crowds

Surowiecki on Newspapers

Continuing my recent rants about newspapers, please see this interesting story in the New Yorker by James Surowiecki, author of The Wisdom of Crowds, entitled News You Can Lose.

On the source of the problems:

There’s no mystery as to the source of all the trouble: advertising revenue has dried up. In the third quarter alone, it dropped eighteen per cent, or almost two billion dollars, from last year. For most of the past decade, newspaper companies had profit margins that were the envy of other industries. This year, they have been happy just to stay in the black. Many traditional advertisers, like big department stores, are struggling, and the bursting of the housing bubble has devastated real-estate advertising. Even online ads, which were supposed to rescue the business, have declined lately, and they are, in any case, nowhere near as lucrative as their print counterparts.

While I’ve always seen publishers, and newspapers in particular, as challenged with The Innovator’s Dilemma, before reading this article for some reason I’d never associated them with another of my favorite essays, Marketing Myopia (PDF for sale), by Harvard marketing guru Theodore Levitt.

From Surowiecki:

Levitt argued that a focus on products rather than on customers led the companies to misunderstand their core business. Had the bosses realized that they were in the transportation business, rather than the railroad business, they could have moved into trucking and air transport, rather than letting other companies dominate. By extension, many argue that if newspapers had understood they were in the information business, rather than the print business, they would have adapted more quickly and more successfully to the Net.

While I love Levitt’s thoughts on marketing, the usual objection to Marketing Myopia is: say Penn Central Railroads had fully envisioned the future — just because they successfully ran a railroad, do you actually believe that Penn Central Airlines would have been a big success? Even fully informed, can you get there from here? Put differently, seeing the future and having the core competencies to compete in the future are two different things.

I have a similar objection on behalf of newspapers. It’s one thing to anticipate the whittling away of your classified ad business. It’s quite another to have the skillset and Internet savvy to come up with Craigslist. In fact, if you could travel back in time and tell the Tribune Company about their future, how much do think they could have changed?

I hate to be fatalistic here and yes, they wouldn’t have let themselves get involved in a highly leveraged buy-out — but financing strategy aside — do you think it would have changed much? Even with a fully informed visitor from the future whispering in their ear, do you think they ever could have made a Tribuneslist successful? And even if they could, what about economics. Craigslist runs a nationwide classified advertising platform and does it with about 25 staff.

Back to Surowiecki:

The peculiar fact about the current crisis is that even as big papers have become less profitable they’ve arguably become more popular. The blogosphere, much of which piggybacks on traditional journalism’s content, has magnified the reach of newspapers, and although papers now face far more scrutiny, this is a kind of backhanded compliment to their continued relevance. Usually, when an industry runs into the kind of trouble that Levitt was talking about, it’s because people are abandoning its products. But people don’t use the Times less than they did a decade ago. They use it more. The difference is that today they don’t have to pay for it.

He continues with a great soundbite:

The real problem for newspapers, in other words, isn’t the Internet; it’s us.

We want access to everything, we want it now, and we want it for free. That’s a consumer’s dream, but eventually it’s going to collide with reality: if newspapers’ profits vanish, so will their product.

This argument is right in line with the “free ride” concept that I blogged about a few days ago. He concludes:

For a while now, readers have had the best of both worlds: all the benefits of the old, high-profit regime—intensive reporting, experienced editors, and so on—and the low costs of the new one. But that situation can’t last. Soon enough, we’re going to start getting what we pay for, and we may find out just how little that is

The complete New Yorker story is here.

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Intrade Prediction Markets

I’m seeing increasing blogosphere references to Intrade prediction markets, so I thought I’d cruise over to and have look. I first heard of the idea of using prediction markets in business over a decade ago from amateur economist and Business Objects co-worker Timo Elliott.

While I found the idea intriguing, Timo was way ahead of this time. In those days no “serious” business person would use anything “as random as a market” to do something important, like forecast sales. But inexplicably those same serious people were seemingly happy to have a market set a price for a share of their stock.

In any case, the whole concept was legitimized with the publication of The Wisdom of Crowds in 2004 and, seemingly overnight, using markets for predictors of all things became rather mainstream. Towards that end, businesses like Intrade appeared, allowing you to effectively buy and sell futures contracts in events, such as:

  • Will the Higgs boson be observed in 2008?
  • Will Obama win the presidency?
  • Will there be a magnitude 9.0 earthquake this year?
  • And most of all, will there be a recession in 2009?

Let’s see what Intrade has to say. On the boson, you can buy a contract that says it will be observed before the end of 2008 for only $2. (If the event happens by the date, the contract is worth $100; if it doesn’t, it expires worthless.) The price has plummeted due to the shutdown of the large Hadron collider.

On the presidential race, it seems as if the economic crisis has been good for Obama.

On the possibility of a magnitude 9.0 earthquake striking before the end of this year, while they’re only trading for $4, I’m still selling since there have only been four magnitude 9+ quakes in the last 118 years. You can buy or sell the contracts on Intrade. If you sold these at $4, the most you can make is $4/contract when it (hopefully) expires worthless on 12/31/08. By the way, buying a contract for $4 that pays $100 if an event occurs represents 24:1 odds (remember you get your bet back), which is actually quite consistent with the history (118/4 = 29.5). But remember 5/6th of the year is already past.

Finally, on whether they’ll be a recession in 2009, that contract costs nearly $80 and will deliver $100 if it happens, implying odds of 1:4. Note, that’s not 4:1, but 1:4 — i.e., a fairly certain outcome in the minds of the betters.