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In the meantime, you can “white list” — i.e. authorize as an acceptable sender — the following address:  frederic.filloux@mondaynote.com by adding it in your address book

Thank you  –FF

Media: the big squeeze

Last week, the most quoted terms in conversations with media people were: “budget revision”, “looming cost cutting program” (in France, many newspapers just underwent serious ones), “plunge in advertising revenues by year end”, and so on. Of course, not all media outlets will have a bad year; some have done well in the first semester — at least in Europe. But everyone is bracing for a tough 2009. Many media execs, though, think the last thing to do is act like a deer caught in the headlight; they claim to be — still — moving forward with developments. Indeed, this is the time for more carefully managing our businesses — not for panic or paralysis.
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Looking at a broader picture, newspapers and online medias are likely to be squeezed in two ways. First: the advertising exodus. Short terms ad contracts are the easiest ones to cancel; in some markets, buying habits further exaggerate this predisposition. There, media buyers rely very little on analysis, mostly on the flavor of the day; they tend to follow the crowd. I’m still perplexed by the abysmal gap between the deep research media invest in and the superficial ad buying process — I’m told Latin countries are more affected by such behavior. Anyway, the ad depletion won’t necessarily be in line with the demand for news, substantially higher in these troubled times.
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Second: the impact of the credit crunch on an industry already in a painful transition. Going from traditional to new media requires large amounts of capital. At this time, fresh capital and credit are scarce and expensive (1 month LIBOR is now at 4.14% compared to 2.49% a month ago). This is a big problem for a media group such as Tribune Inc.; it is likely to default on some of its huge $13bn debt, a result of Sam Zell’s ill-timed LBO.  As for Gannet, it had to borrow €1.2bn from a $3.9bn unsecured revolving credit line in order to repay $2bn of commercial paper reaching maturity (and issuing fresh commercial paper is highly uncertain now).
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European media will feel that same pinch. In Spain, Prisa group (publisher of El Pais), wants to recapitalize itself for  €2bn ($2.7bn) via subordinated debt or warrants. The Polanco family, owning 70% of the group, will have to give up its current control — assuming the recapitalization goes through, which is less certain than ever. In fact, Prisa was in the process of selling its Digital+ unit for an expected €3.5bn. That, too, is now up in the air. In any event, Prisa won’t be in the best of moods to help rescue the French Groupe Le Monde facing a similar predicament. Le Monde expected to unload its biggest magazine, the cultural weekly Telerama, but potential bidders have evaporated since the cost of capital is now certain to exceed cash flow from the asset. (But Le Monde is almost sure to find some capital by selling junk securities to friendly banks or state-backed thrift institutions. So, why worry?).
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One thing is sure: American medias will emerge faster than European ones from the two crises, lower demand for advertising and higher cost of capital. For the structural challenge, see a previous Monday Note: The J-Curve of Global Print Press. More than ever, I believe the swiftness of the turnaround (which, unfortunately, goes along with corporate brutality) will prove to be decisive. One anecdotal illustration is a conversation recounted on Alan Mutter’s blog, in which an acquaintance calls him to float the idea of scrapping a daily’s worst day of the week. A weird concept to which Mutter responded: “How about trying something less drastic, more creative and potentially far more profitable?
— Like what?
— Like turning the paper into a themed edition aimed at a carefully targeted audience of untapped readers and advertisers… ”
And it goes with his ideas about modernizing newspapers. Definitely worth reading. (We are all working around the same ideas: slicing up an audience — that is structurally and increasingly erratic –  to get smaller but more valuable target groups).  No doubt: from a pure product adjustment perspective, the English speaking press is moving fast to reinvent itself. No doubt, again: casualties will be much higher than expected — especially after last week’s tailspin.
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The coverage dilemma
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The current crisis is not an easy one to cover. It is complicated, full of credit mechanisms technicalities, and macro economic considerations. On top of this, providing an overly pessimistic analysis could amplify the panic. For questions of cultural approaches to the market economy as well as editorial resources, coverage is much more thorough in the Anglo press than in the French one. In France, coverage is mildly adequate but stays too close to the surface: indexes (stock crash: good fodder), and the ritual “Are our deposits safe?” (Yes, absolutely).
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But, curiously, important questions get low coverage. For instance: European banks are no less vulnerable than American ones. Get this: in the US, outside Wall Street institutions, banks have lent 96 cents for each dollar of deposit, in continental Europe the level is €1.40 for each euro of deposit. The same goes for debt to equity ratio: European institutions are in worse shape than the biggests US bank. An eerily unpleasant similarity: the French minister of Finances, Mme Christine Lagarde, has the same depth of knowledge regarding the true exposure of their respective banking system as Hank Paulson does. None. As a matter of fact, BNP Paribas doesn’t have a clue on the real balance sheet of the Belgian bank Fortis it hastily acquired for a respectable €14.5bn ($20bn). When I asked a banking/insurance expert why BNP Paribas took such risk, he retorted: “They apply the following rationale: if they don’t go for it, one of their competitor will, and the market will penalize BNP Paribas for being too cautious. If it turns sour, BNP Paribas will go under as everybody else.  In the ensuing blame game, they won’t be singled out “.  Ah, the shared warmth of manure…
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Another subject receives almost no coverage in France: the upcoming collapse of the pension system. Slowly, painfully, over the last few years, the debate over shifting from an exhausted distribution-based pension system (today’s salaried workers pay for the retired ones) to a capitalized one (retirees get their pensions from their savings) had begun to gain traction. Even Left thinkers were about to convert and accept the notion the old system was no longer be viable. After last week’s world markets’ crash, this heated debate is gone for good: no one will defend a pension system tied to the financial markets.  Right or wrong, it’s a fact. For the public debt, consequences will be catastrophic. Which leads to another question: as Mexico experienced 20 years ago with the dollar, French public debt is now denominated in a global currency (the Euro). This makes a big difference: France (like any other Euro zone member) is no longer the issuer of its “own” currency.  In other words, it can no longer use the old trick of printing more money.  This will lead to cries of Lost Sovereignty.  But, consider this: California, an economy approximately as large as France, can’t print currency either.
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On the positive side, though, the crisis is doing an otherwise impossible job of educating the public on financial as well as macro-economic issues. Audiences of business papers and websites are skyrocketing. The spread of this knowledge will be invaluable to policymakers when the time comes to face an angry electorate and to defend the unpleasant choices we will all be facing.  The old demagoguery was: Less taxes, more programs.  This is now out of fashion.  At least for a while…  –FF
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“Cloud Computing is bad for you”…

So says Richard Stallman the father of the Free Software Foundation. He makes a simple argument: By using Cloud Computing applications you surrender your life (data) to some big company you can’t trust.  You’re no longer in control.  Conversely, if you keep everything on your (Linux) desktop, you’re the master of your own destiny.
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This is, to say the least, countercultural. The new and improved wisdom is “everything”, every application, every service will be delivered from the Cloud, a “server farm” somewhere in the world.  To be a little more precise, yesterday’s difference between the e-mail client application and the e-mail service is going away.  The browser becomes your OS (Operating System) through which the e-mail service (Gmail or Outlook Web Access) is delivered.  Even Photoshop will go this way: you store the original image in the Cloud and, through your browser, you navigate the universe of editing features.  You give an order, say crop a part of the picture, Gaussian blur, twist a color.  Then, the order is executed on the server, in the Cloud.  This uses much faster computers than your laptop and your browser gets the rendered result.
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This is exactly what Photoshop Express does. The old way local processed the image locally because you couldn’t count on the network bandwidth (speed) to ship back an updated image from the server each time you made a modification.  The local processor had fast access to local memory, performed the image rotation and the screen had similar fast access to the modified image residing in memory.  The ‘everything local’ (storage, processor, display) advantage hasn’t disappeared, but networks are faster, servers have more muscle (in most cases) than my laptop and we use smarter ways to pick which part of the image we want to send from the server to the browser.  Put another way, Photoshop in the Cloud isn’t a universal solution: graphics professionals will want a 30”screen, eight processors and 16 gigabytes of local storage.  But ‘the rest of us’ will find the Cloud solution satisfactory, especially if we can walk to any computer in the world, upload, edit and e-mail polished pictures without a local application, using Photoshop (or its competitors) as a service, not a desktop application.
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This is both an actual example and a valid metaphor for the new genre of application software delivered as a service (SaaS) from enterprise servers or from a Cloud Computing provider such as Google or Microsoft Live. Stallman will have none of this.  Interviewed by The Guardian, he counters: “It’s just as bad as using a proprietary program. Do your own computing on your own computer with your copy of a freedom-respecting program. If you use a proprietary program or somebody else’s web server, you’re defenseless. You’re putty in the hands of whoever developed that software.”
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The gentleman is opinionated, to say the least. A Google search on his name will produce a rich trove of strongly worded rants revolving around one idea: software ought to be free.  This hasn’t made him friends in companies such as Microsoft but Linux and its cousin FreeBSD, all related to AT&T’s Unix, have become indispensable components of modern computing.  Richard Stallman knows very well that, without the free software movement, there would be no Cloud Computing.  Amazon, Yahoo!, Google and most others run on free Unix relatives.
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Going back to the argument Stallman just made against Cloud Computing, it’s hard not to find parts of his statement either naïve or disingenuous. If you use proprietary software, he says, “You’re putty in the hands of whoever developed that software.”  The idea is that free, Open Source software, protects people against dirty deeds, manipulations from the authors of proprietary software.  Sounds ominous but, regrettably, Stallman forgets to offer examples of such bad actions.  Higher price, perhaps?  But the cost of ownership, that is training, maintenance and the like, dwarfs the initial price tag of software, be it on the desktop or on servers. Unlike an extraordinarily gifted programmer such as Stallman, most users cannot inspect the source code of their word processor or e-mail program.  As a result, the ‘protection’ afforded by ‘freedom-respecting’ programs isn’t as good for me as it is for him.
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There is more.  We no longer live in a disconnected computing world: we get e-mail, we look up Richard Stallman on Wikipedia. So, even if we sagely run spreadsheets or photo-editing programs on our desktops (the Cloud Computing giant Google offers a neat desktop Picasa 3 on Linux…), we have to communicate and we have no way to inspect the software that runs on the network.  Like it or not, we have no choice, we trust others with our data.  Bad things happen from time to time, but not to the point of killing the system.  Cloud Computing may or may not be The Future but doing everything on the desktop is definitely passé.
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Richard Stallman forgets a statistical truth: Trusting people get screwed sometimes.  Paranoid people get screwed all the time. –JLG
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Making €100 per inhabitant per year

Against all odds: In theory, there was no way for Frettabladid (the free Icelandic newspaper) to make its business model work. When its publisher (a local media group) launched the paper in 2001 it settled for two things that are the opposite of the conventional wisdom of the free press business: home delivery and copies shipped by plane to their destination. These choices where dictated by peculiar local conditions. The 300,000 Icelanders are mostly concentrated around the capital Reykjavik and a couple of significant cities are several hundreds kilometers away, with unpredictable road conditions. On the top of this, almost everyone is commuting by car. Early on, the managers decided their product has to be as good as the paid one — and better than pre-existing free dailies. “We stuck to the basics, said its editor in chief Jon Kaldal at last week Free Press Congress in Madrid. It’s about journalism, and scooping the competition.” Which the paper did.
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Now, the key figures:
-    103,000 copies of Frettabladid are distributed every day (weekend included), which is more than one third of Iceland’s population
-    the bulk of it is delivered in 82,000 homes, i.e. 87% of the 94,000 homes in Iceland
-    10,000 copies are distributed in what is called “neighborhood boxes”
-    11,000 copies in shops and gas station
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Advertisers understood quickly the potential of such penetration rate. From 24 pages in 2001,  Frettabadid has now 64 pages (half of it is editorial). Most of the ads (65%) are general brand type, 20% are classifieds and 15% are real estate and jobs.  “Our classifieds pages are more read than our sport pages”, jokes Jon Kaldal. With a 60% market share for print advertising, Frettabladid’s position seems robust.
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Or is it, really?
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In 2007, Frettabladid pulled-out a revenue of €30m — that is a hefty €100 for every man, women and babies leaving in Iceland — the country enjoys the sixth GDP per capita among the OECD members. (As a comparison — for what it worth — a dominant free newspaper such as 20 Minutos in Spain gets about one euro per citizen). In terms of profit, even though the owner of Frettabladid doesn’t breakup financial results, the 2007 margin was about 11%.  Was. Enter the financial crisis. Iceland, with a highly leveraged financial system, is hard hit.  Just to get an idea: the total assets of the banking sector have grown from 96% of the gross domestic product in 2000 to eight times Iceland’s GDP at the end of 2006. And the largest local bank is seven times more likely to default than the typical European bank. Predictably, the impact has been dramatic for Frettabladid: 50% of its ad revenue has evaporated since the beginning of the year. This year, the paper’s P&L will bleed red ink.
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The looming recession is likely to jolt all kinds of medias, whether they are free or paid for. In the United States, predictions for the fourth quarter are gloomy. TNS is forecasting the weakest holiday season in 17 years as all sectors cut ad spending According to Ad Week, money spent by Procter & Gamble, the nation’s top buyer, was down 8% to $1.6 billion; AT&T is down 16%; Time Warner, down 9%; Johnson & Johnson, down 12%; Walt Disney, down 9%  and Kraft Foods down 7%. And remember, contrary to the Euro zone, the US is not (yet) in recession.
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Media resilience will vary. The global downturn is likely supplemented by a flight to the performance-based advertising model. More than ever, brands will seek to maximize the bang for their rarefied buck. Media that will be good at measuring yields will do better than “shot in the dark” kind of. In that context, Google will suffer less thanks to its affordable text-based, traceable ad system. At the other end of the spectrum, TV is more likely to plunge. As for the print, paid-for newspapers are not good at measuring ad performances. In surveys, they tend to inflate their audience by multiplying the number of readers per copy. (In France for instance, there had been so much tweaking and twisting of audience measurement that absolutely no one gives any credit to the most recent official figures.  This, according to ad execs, will push down the prices even further).  Overall, a decline of 15% to 20% in ad revenue is not unlikely for 2008.
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The free press is in a peculiar situation. As Pr. Piett Bakker (by far the best specialist of the trade, see his blog here)  recalled at the Madrid conference, several markets (Italy, Spain, France) are already saturated with sometimes four or more titles in a single city. “A recipe for disaster” he said.  (He mentioned that, for the first time, the circulation of free papers is actually declining in Europe).
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Undoubtedly, the upcoming recession will accelerate the necessary consolidation of the sector (in other words, the weakest both economically and editorially will fold, some will merge, etc). Having said this, I tend to believe the free press has two assets that could attenuate the effect of a recession — only for the best of them. One is (again) the ad performance: much better that in the paid press (each time I’ve seen an advertiser doing a test based of performance, it scored high). The second asset being the distribution/logistic system. It not always known, but in many instances, free newspapers are much better at targeting and tracking audiences that the paid ones (which have a sick 30% rate of unsold papers every day). This has a tremendous value in itself and advertisers will certainly bet on it.  Having said this, I won’t follow the PressGazette website when it states that “Free papers defy downturn”.  OK, some British free papers such as City AM (in my view one of the best of its league) or TheLondonPaper are still in expansion mode (the former is launching new cities, and the latter enjoys record ad revenue), but 70% of the free titles are still not making profits, and will face hard times, as everyone else will.

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The Inimitable Gallic Way

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In France, press barons and the government are loading the guns for an upcoming offensive against the free press. On October 2nd, president Nicolas Sarkozy launched a national conference on print press. This event is called “Les Etats généraux de la presse écrite” (an historical reference to the times when French kings held public debates to address a national crisis).  The overall purpose is to rework a set of laws and directives issued in the aftermath of WWII. At the time, industrial resources (printing presses, newsprint) were scarce and the government had to step in order to guarantee an equal access to all publishers. What should have been a temporary stimulus plan became a sixty plus year-old de facto system.  Distribution was guaranteed for any publication (French kiosks are swarmed by mediocre unprofitable, short-lived publications) and above all, a closed-shop system has been granted to the main union, the Syndicat du Livre. Indisputably a generous social grant for its membership: in a French printing plant, the median salary for an unionized worker is  €46,000 € a year against €33,600 for a journalist (who is going to work twice as much). To make things worse, staffs are about twice what’s needed to operate a printing press. Altogether, French newspapers suffer from the most expensive production system in the world. The last decade of decline in the French newspaper sector has not seen any major evolution.  In return for the status quo, the main union has become quite cozy with the heads of media groups. Instead being agents of change, media moguls have secured long tenure in exchange for slow motion reforms. Now that the crisis has unfolded, everybody is turning to a government, which spend roughly one billion euro a year (10% of the industry’s revenue) in various aids.  And in the starring role, president Nicolas Sarkozy himself, with his usual demagogue posture.
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In his introductory speech, Sarkozy a set the stage against the free press (which, in passing, is also “free” of any subsidy): “It’s insane to believe that advertising revenue will one day pay for all information: free, is an abstraction, a figment of the imagination. It is the death of the paid press”. As a matter of fact, what is not an abstract view is Sarkozy’s carelessness with the topic. Had his staff done a fraction of the homework required for the subject, this is what they would have found:

-    Many of the best and most respected newspapers in the world such as the New York Times or the Times of India get most of their money  from advertising (respectively 80%and 90%).

-    The reunion of whiners invited last week at the Elysée Palace is giving away an increasing number of free copies. A rate of 30% of free distribution is not uncommon even for the national press.

-    The very same people are conspicuously sneaking a peek at a “hybrid model”, mixing the paid and the free, as do La Republicca in Italy or El Pais in Spain. (In Paris, if you happen to have lunch in the business district, chances are great you’ll have your free copy of Le Figaro).

-    A market without free papers doesn’t necessarily mean a healthy paid press sector. Take Germany for instance who forcefully rejected free newspapers: the average circulation of dailies and weeklies newspapers decreased from 31.4 million in 1997 to 26 million in 2007, a 17% decline. Furthermore, unlike countries that have significant readers (i.e. young) of free papers, young German readership is simply non existent.

-    Again, according to Piet Bakker, publishers of paid papers in fact control 55% of the worldwide circulation of the free press.
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And if any doubt remains about the anti-free press bias of this consultation, the chairman of this workshop is no one else than the fiercest opponent of the free newspapers concept. Bruno Frappat is the chairman of Bayard Presse group and the former publisher of La Croix, an excellent general news daily that enjoys both the highest level of public subsidies of any French paper (quite a competitive field in itself) and the oldest readership (above 65). Welcome to the new world.  –FF

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The Big Meltdown: an unauthorized view

I’m good at predicting yesterday’s weather, or impersonating the 6 pm TV announcer solemnly attributing today’s fall in airline stocks to the rise in oil prices. As for future events, I need a little more time.  You sense where I’m going: Where were the sages who tell us, today, why the financial markets collapsed?  The rearview explanations abound: CDS (Credit Debt Swaps), regulators looking the other way, subprime mortgages seducing homeowners into using their house as ATMs and, above all, the obligatory, populist and escapist: Wall Street Greed.
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I beg to differ, not by 180 degrees, more like 60 or 90. And I’ll hasten to say I don’t propose to really explain (as opposed to describe), let alone propose remedies to the crisis.
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Why?  Because we’re dealing with mysteries, not secrets.
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A secret is like a combination lock. With time, accomplices who procure the blueprint to the safe, harder tools, faster computers, the lock can be picked, the secret revealed.
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A mystery, on the other hand, is just that, a mystery, there is no combination, no code to be broken. Who created the Universe?  God, some will say .  Fine, but who created  God?  The Meaning of Life?  42 — according to Douglas Adams.  Mysteries do not lend themselves to syllogism, to deduction, only to metaphors for their contemplation.
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For example: Wall Street Greed.
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Consider mutating bacteria such as E. Coli or clostidrium difficilis. Why blame them for nosocomial (contracted in hospitals) diseases, for the weakening arsenal of antibiotics?  They multiply, they evolve, they adapt, they survive.  And, consider their last name, Coli, because they live in our colon.  It’s not a given we’ll ever eradicate them and, if we did, that their disappearance would benefit our species.  Instead, we evolve tools, chemicals and practices, to keep them under control.
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The metaphor is a little obvious. Wall Street is an ever-evolving life form of practices, deals, dealers and their inventions, their financial instruments.  They can’t, they mustn’t be eradicated.  We can’t live without credit, leverage, currencies and insurance.  Just like we need to use antibiotics judiciously, to invent new ones and to worry about prophylaxis, we have no choice but continuously evolve financial regulations and policing organizations.
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Contrary to what easy-thinking ideologues claim, we don’t need less regulations. Societies cannot be ruled by the Law of The Jungle.  Try deregulating traffic intersections.  Yes, too much regulation leads to old style central planning, gosplan, to a Soviet economy, even more corrupt in the end.  The real difficulty is evolving regulations and police as Wall Street evolves.
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I realize saying this is just about as helpful as the famous weight-loss regiment: Eat less and exercise more, for ever.  Another kind of mystery.
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But wait, it gets worse, the metaphor is incomplete, full despair in a moment. There is another ever-evolving life form at work: the three branches of our government with its stubborn resistance to change, to accounting prophylaxis,  transparency.  To say nothing of a sickeningly complex, always growing, smellier and smellier tax code.  If our government can’t be cleaner than Wall Street, how will this life form control the other?
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More black to this bleak picture.  Another mystery: models.
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In this context model means a set of equations.  Models are used by economists, businesses, Wall Street traders or governments, they have become both devilishly complicated, thousands of equations — and immensely valuable.  If Southwest Airlines makes good predictions for passenger traffic and oil prices, they can buy insurance for their fuel purchases and price tickets correctly and generate profits and make shareholders happy and, as a result, help pension funds pay benefits to retirees who, in turn, buy goods and services from businesses who…  And this is a laughingly oversimplified example.  Fine, but we have the finest math PhDs and the biggest computers in the world.  Probably true for a few more years.  The mystery lies deep inside the models.  They cannot deliver because their equations are, in layperson’s parlance, non linear.  Put another way, they are unstable.  The smallest error in the input data quickly results in gross deviations.  If this sounds crazy, please turn to weather forecasting.  An immensely valuable activity for agriculture, travel, insurance, war…  In the past twenty years we’ve made no substantial progress.  We always knew winters were colder than summers but we can’t predict next week’s weather with any accuracy.  And we won’t.  Counterintuitive as the statement might sounds, it results from properties of what some call Dynamical Systems or Chaos Theory, I prefer non-linear systems because the name addresses the nature of the mystery.  (A good read on the topic is James Gleick’s Chaos: making a new science.)  This has nothing to do with basic randomness found in quantum physics.  The mystery of real-life complex systems is they’re both deterministic and unpredictable. [I’ll skip over the competition between models trying to outguess one another.  Mathematically inclined readers will subsume those into an even more unstable meta-model.] .
We like to believe we can influence the course of events; this is how we’re built.
But, more often than we’d like, we have no say.  It’s a Law of Nature: financial markets will defy prediction and will explode from time to time.
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Is this nihilistic or defeatist?  Not in the least. Even if we know we can’t guarantee stability, we can make the system less dangerous, the bacteria less lethal.  And we can listen more serenely to the charlatans. -JLG
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The economics of moving from print to online:
lose one hundred, get back eight

Let’s kill a myth. The dream of a compact newsroom, able to output a high-intensity general news website doesn’t fly. Numbers simply don’t add up. And here is why.
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First, the cost structure of a daily. In a typical operation, the biggest costs are industrial ones: around 25%-35% for paper and printing; another 30%-40% for distribution; around 18-25% for editorial; the remaining 10-15% are for administrative and marketing expenditures. It varies from country to country but we can safely assert most of the costs — at least 60% — are industrial in nature. Evidently, that part disappears when going online.
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Now let’s compare three numbers:
a) the cost of an online newspaper,
b) the audience needed to absorb costs
c) the audience of the biggest website
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Journalists make up most of the costs of a pure digital newsroom. As an example, assume the “loaded” (salary, benefits, expenses, overhead) cost of one journalist is about 60,000 € per year.  If the objective is to provide a general news site, the starting point for a comparison is the print press. As an high end instance, a newsroom such as the New York Times’ still counts 1400 journalists, paper and digital operations included (they tend to merge).  The Los Angeles Times now has 720 after the deep cuts demanded by its new owner (10 years ago, the headcount was 1300).  The Washington Post has a staff of 600.
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These are extremes. As a credible metric, we can take a big national European newspaper with an editorial staff of 400 to 500 people. For today’s demonstration, we’ll assume many people are involved in print-related production such as sub-editing, graphics, layout, etc. Plus, we all now those newspapers newsrooms are not exactly hallmarks of productivity. In short, I am certain we can produce good quality general news coverage with one hundred full-time equivalent dedicated journalists. (For their opposite reasons, editors and bean-counters are going to yell at me, that’s a good sign). I’m including writers, reporters, editors, photo and graphics editors, part-time specialized free-lance and front page editors.  Annual personnel costs: €6m. To this, let’s add an arbitrary $1m for technical and infrastructure costs, €2m for marketing and another €1m for administrative costs and misc. Total: €10m per year.
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Question: how many unique visitors do you need to cover €830,000 every month? Well, based on an analysis of some news websites (plus couple of business plan on my hard disk), the average revenue par unique visitors per month appears to range from  €0,10 to €0,25 (let’s forget the euro/dollar conversion for a moment, and assume both currencies have the same purchasing power in their respective countries). Let’s be conservative and stick with the lower number. No need for a calculator, then:  Translated into Unique Visitors per Month, a €830,000 monthly burn rate requires a hefty 8.3 million UV per month to break-even (and I’m not even talking of remunerate the cost of capital, paying back the shareholders, and forget about arousing analysts).
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Now  let’s turn to the table below; it shows recent traffic data (as much as we can reasonably get some — see Monday Note #51 for comments on this issue).
I’ve excluded websites tied to a major newspaper.
- The Huffington Post:  4m UV (Nielsen) 6mUV (claimed)
- Slate.com:   <3 mUV
- Tech Crunch:  3.2 mUV (claimed)
- The Drudge Report:  3 mUV (Nielsen)
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Now, big newspapers with great brands (Nielsen figures):
- New York Times online:  21 mUV
- USA Today :  11 mUV
- WashingtonPost.com:  9 mUV
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And in France:
- LeFigaro.fr:   4.2 mUV
- LeMonde.fr:  3.5mUV
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You get the picture: We are not here, yet.
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In the world’s biggest market (the US), if the goal is the online equivalent of a daily newspaper, no independent, pure player, general news website is able to achieve even half of the break-even revenue required to just stay afloat. Only big news brands, powered by (still) immense newsrooms are able to pull in decent audiences (remember, we are talking of audience goals able to support a newsroom set at a fifth of big newspaper’s).
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Let’s now compare the revenue per Unique user on a annual basis –  i.e. between €1,2 and €3 — and the revenue of big, quality free newspapers such as 20 Minutos in Spain and 20 Minutes in France. (I gave up doing a comparison model with the paid press, too many variables, too different models). Both are n°1 in their market with more than 2.5m readers per day. Their revenue comes only from ad pages, there is no distortion coming from the copy-sale revenue.  20 Minutos made €46.8m in 2007 and the French 20 minutes €45m. It means that each reader brings more than €18 per year. Compare this to € 1,2 per year per UV for online sites above.  By switching online for general news, we are trading euros (or dollars) for cents, literally.
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Still, this is no reason to hang on to an inexorably shrinking print media. Yes, there are ways to slow down, not reverse, the decline of newspapers: combining online and offline operations, adjusting  variables such as distribution (volume, distribution, timing), pricing to audience expectations and structure, etc. But the future lies in drawing the picture of a news organization compatible with the new economics describe above.
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Therefore, what does a sustainable online news organization look like? One thing is sure already: news is no longer able to sustain itself. The game becomes finding “alternate subsidy” streams. In the old newspaper model, Sports section advertisers subsidized the political columnist, or the classified pages paid for our guy on the ground in Iraq. Now, Sports coverage has migrated to a sports-site (and even disseminated on sub-specialized outlets), and classifieds moved to a vast array of highly profitable sites. Politics content finds refuge on the Huffington Post or on Slate. (And the guy in Iraq can only be afforded by big news organization). In passing, this dissemination is a response to the question of separate sites/brands for specific target groups: the answers seems to be yes — as long as we can: a) take advantage of specialization to charge higher CPT and b) build a network of sites arranged to benefit from massive economies of scale (back-offices, tech, sales, administration).
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This is similar to the transformation forced onto the music industry: it had to find other sources of revenue to compensate for the erosion of its core product.  Media have to find other income streams derived from their core competencies. The tech niche for instance, thanks to its peculiar DNA, is doing well. On the US market, many sites enjoy high CPT, a reasonable independence vis-à-vis their subjects, and are good at finding other sources of income: TechCrunch for instance is making more money from its yearly conferences than from its page views, although the scale remains small.
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My guess is corporate money will inevitably percolate into news economics through service contracts, requests for expertise, corporate communication assignments. The boundaries between sectors will blur. It already happened in the universities where contract-based private grants co-exist with fundamental research — and to some extent subsidizes it. The same mechanism will occur in the news business. We might not like it, but we better get used to it. Within ten years from now we’ll see respected online news organizations drawing half of the revenue form business-to-business type of activities. The tricky challenge will be erecting unbreakable Chinese wall between activities. Something similar to what Wall Street firms do: investment banking are separated from trading activities, they are not to talk to each other. This will require strong enforcement of corporate governance aimed at the protection of editorial independence.  It also implies decisive mindset changes in union and corporatist circles.  (In France, newspapers will be extinct long before such an evolution.)
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Another question comes up: How will hybrid news organizations stand up to pressure from financial markets? Analysts don’t like subsidized business units, even if the overall profitability is in acceptable range. Sooner or later, they come back with a vengeance, beat the stock price down until the business jettisons the unprofitable units.
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Take the Washington Post Company ($4bn in revenue in 2007, $477m in operating profits). The flagship products, the main brands are its publications : the Post itself and Newsweek. But its Kaplan Inc. unit, an education services company for students and professionals acquired 15 years ago is the big cash-cow: in 2007, it accounted for 49% of revenue (annual growth of 21%) and in 2008, it will surpass all other business units combined (publishing, TV, broadcasting).  The newspaper operation accounts for less than a quarter of the total revenue but, even if it remains marginally profitable, it is ailing. Two figures summarize the problem: in 2007, the Washington Post lost $77m in print ad revenue and got for a slim increase of $6m in online advertising. That’s a 100:8 ratio! Fortunately for the group, most its shares (60%) are controlled by insiders. But Wall Street punished the stock, it dropped by 30% in a year. Even though the group presents itself as “a diversified education and media company” (in that order), analysts sees “media” as a red flag.
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This leads to the final question: is the publicly traded form compatible with the massive shifts we are facing in the media business? As Alan Mutter reported on his blog early September, McClatchy group (stock: -78% in a year) might go private. So could do Gannett, Lee Enterprises and the New York Times Co, wrote Mutter in July. Some of these media groups combined a collapsing stock price with a heavy debt burden. Even when news media groups are not in such dire state, they all realize the label “media” (or worse “newspapers”) is stamped on their brand.  As a result, they will be punished by the stock markets — that is quite an incentive to consider a privatization. –FF
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That word again: Open

The Other Steve, Microsoft’s Ballmer, just treated us to another paean to open systems. This was last week at the Churchill Club, a Silicon Valley schmoozing institution.  There, we meet, gossip, drink, dine and watch a never ending and never boring parade of industry figures submitting themselves to soft-ball interviews by local notables of suitable rank.  (Next week, it’ll be Nokia’s CEO, coincidence, just on the eve of launching a new touch-screen music smartphone. Olli-Pekka Kallasvuo will be grilled by Walt Mossberg, the Wall Street Journal’s gadgetmeister.)
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For Ballmer, the interviewer was Ann Winblad, a respected venture investor who once dated Bill Gates, co-founder of Hummer-Winblad, one of the best Valley firms. Her genuinely inspiring life story is here, not in the surprisingly sterile Wikipedia piece.  The edited text of Steve’s remarks can be found on Microsoft’s site and if you search for “Ballmer Churchill Club” on YouTube, you’ll see bits of the Q&A session, often the more interesting part of such event.
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One the themes Microsoft’s CEO harped on was open systems, not open source, he’s not crazy about that kind of openness. Also referred to as “choice”, it is Microsoft’s mantra: With us you have a choice of  manufacturers, processors, peripherals, software.  We’re so used to the PC we tend to forget its industry has achieved the most remarkable ascent to the top of economics and culture the world has ever seen.  In three short decades it has become a trillion dollar ecosystem worldwide with Microsoft alone featuring an enterprise value of about $220 billion and operating margins in the high 30 percents.  (We thought we’d never see anything like this again and we now have Google…)
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Ballmer correctly opposes Apple’s closed control of hardware, software (and distribution) layers of its computers to the more open PC model where manufacturers offer a choice of hardware and software components thus covering a wider range of configurations, applications and prices.  Still, there is little choice outside of Microsoft Office and, for manufacturers, a PC open to both Windows and Linux installed at the factory is still verboten.  Jesuits once used what they called Holy Effrontery in defending their faith (or their power).  Never mind the contradictions, the Microsoft PC model is alive and well.  Which leads Ballmer to extend its open/closed discourse to smartphones where both Windows Mobile and Google’s Android, a nod from Steve, incarnate open choice and Apple behaves in its usual closed ways.  True again.
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But…
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There is a tricky combination of reality and perception, one that resists Ballmer’s forceful (and often very intelligent) assertions. First, for more than five years now, Microsoft’s stock has been essentially flat, a little below $30 a share most of the time.  Then we have Google.  Some call it the next Microsoft, all see its dominance of the search and advertising markets as well as its leadership in Cloud Computing developments.  This can explain the flatlining stock: for investors, even if today’s numbers are very healthy, Microsoft is no longer the king with the attendant ability to “tax” the market, to translate dominance into ever-rising profit streams.
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And we have Vista.  Never before in Microsoft’s history have we seen customers balking at the new version, Vista, and downgrading back to the older one, Xp. Today, if the effect on Microsoft’s profits isn’t clear, the impact on its credibility is inescapable.  Most of Vista’s ills are attributed to driver problems.  In plainer English, drivers are software modules that graft the many different hardware choices onto the core of the operating system.  But don’t think simple graft on a tree, connecting hundreds of delicate synapses is more like it, with many surgeons, hardware manufacturers, operating simultaneously.  Operating systems, all of them, end up with layers upon layers of additions and corrections.  The extensions and patches are needed for new versions to stay compatible with past ones and also to fix old and new bugs.  They look like Babylonian archeological digs with strata of debris marking each generation.  What Ballmer won’t say is this: the open model adds choices and opportunities; the price is higher complexity, fragility.  For Windows, the cost/reward ratio isn’t as good as it used to be when Windows 95 succeeded Windows 3.11 thirteen years ago.
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But, wait, there is more!  For all the preaching of the open/choice Gospel, Microsoft actually uses the closed model as well. I’m a man of principles, tell me the ones that the market doesn’t like and I’ll change them.  Microsoft’s game console, the Xbox?  A closed system, just like Nintendo and Sony.  The first iterations of the company’s open music players platform won’t sell against the closed iPod?  Never mind, Microsoft’s Zune is now an Apple-like platform.  Microsoft bought Danger, a closed smartphone company.  For its hardware, the Sidekick?   For its non-Windows Mobile software platform?  To build a ZunePhone?
Microsoft’s clarity of mind is admirable: it does not confuse what to say and what to do. — JLG
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Android Week

Something to keep our mind off the Wall Street catastrophe. Who knows, we might be on the verge of a “nuclear winter” as the Bush administration wakes up to another consequence of its intellectual shallowness, of its inability to understand that for markets to be really free they need to be regulated with an effective, uncorrupted police to enforce regulations.
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So, turning to saner pursuits, this coming Tuesday September 23rd, T-Mobile is slated to announce their first Android phone. What does this mean, how will this impact the smartphone market and the cellular carriers?
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Android is the name of the Open Source smartphone OS developed by Google’s engineers. What we think T-Mobile will introduce is a set built by HTC, running the Android OS and applications.  In advance of the launch, T-Mobile appears to be upgrading its network, or parts of it, to 3G connectivity.  In addition, T-Mobile plans an on-line store for Android applications, the rumor being it won’t impose the kind of restrictions Apple is known for.  In other words, T-Mobile welcomes Android developers with open arms.  Predictably, prices, handset and service, will be iPhone-like.  What appears to be not at all iPhone-like is a slide-out keyboard to be used with the screen in landscape mode.
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If all of the above is close enough to the upcoming facts, this will add a considerable amount of energy to the already lively smartphone market. Many, yours truly included, are happy to see more competition for the iPhone and his imperious maker.  As I was documenting my iPhone’s numerous crashes, one Apple individual expressed happiness: There was only one “real” OS crash, you see, the rest being processed “killed because they started to use up too much memory.” It’s a relief to know my rudely interrupted Safari browser connections or Maps searches are not real crashes.
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But, more competition is a vague phrase. Nokia has been around a long time, Windows Mobile is about 10 years old, RIM (Blackberry) too, to say nothing of Palm, Sony Ericsson and Motorola.  The iPhone has had competition for more than a year, what changes now?
Not the operator situation.  T-Mobile is a good company, with good customer service, they’re part of the big Deutsche Telekom konzern, arguably smaller but more solid than Sprint.  Curiously, neither Verizon nor AT&T, nor Sprint appear to be interested in Android.  Is it because they fear Google will have too much power on them because of the openness of the platform, because it could lead to Android VoIP applications bypassing their network billing system?  T-Mobile, in a challenger position, has no such fear.  On Blackberries, they offer what is known as WiFi Mobile Calling, that is VoIP over WiFi at home or at the office.  In other words, carriers don’t like Google pushing them towards their pre-ordained destiny: becoming wireless ISP.  Verizon talks the Open (that word again) Network talk but doesn’t really walk the walk, that is allowing anyone to bring their handset to their network.  They and Motorola got sued, and had to settle, for removing Bluetooth features allowing too much data exchange between a laptop and a phone.  Such exchange was bad: it reduced billable network traffic.  A bigger threat to the iPhone would be Verizon embracing the Android platform.
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What about the product itself?  I’ll get one as soon as possible, I already have a T-Mobile subscription. I suspect the keyboard-based UI will be well received and I’m sure we’ll see good applications on the handset, if only native Google apps, games and utilities.  The technophile is excited, and so is the venture capitalist as Android will help more applications developers make more money, resulting in new opportunities to finance interesting companies.
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And there is Google. Not the Android team, some members are ex-accomplices of mine, I admire what they do, but Google the search and advertising and Cloud Computing company.  Will Google help the still very timid smartphone advertising market?  Will a better keyboard enable more mobile applications?  For example, even as a long-time Blackberry user, I would not write this column on it.  And I won’t do it on my iPhone either.  But, will I use Google Docs on the T-Mobile handset because of its (rumored) horizontal keyboard?
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Moving to content, will the T-Mobile Android phone run all YouTube videos, will it run a version of Flash?  The iPhone doesn’t, a topic of muddled technical and industry politics debate, Apple and Adobe aren’t working too well together of late.
Still on content, imagine this: Google makes a deal with Amazon and all the Kindle content becomes available on Android phones.  Or, not at first but in a future iteration, the video downloads Amazon sells become available on Android.  And why not start sooner with the music (MP3) files Amazon sells.
You see why I’m curious.  I’m lucky, the T-Mobile office in Palo Alto is about 100 yards away from my office.  –JLG
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How the Web talks to us

The uses of Web-based lexical profiling for news and business decisions
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Every morning, Stephane Levy is poring over his “cron”, an automatically generated email that monitors a vast network of sites affiliated to Weborama, an agency specialized in behavioral analysis on the Internet. Working together with Isabelle Cabrera, a linguist lifted from the French computer lab Inria, and Rodolphe Rodrigues a PhD in physics, Weborama’s lexical profiling manager  he has has created a unique Web analysis tool. With real-time monitoring of 200,000 websites yielding 8 million unique visitors a day, “Le Lab” feeds an enormous database of usage patterns, behaviors and habits. The “Lab” performs a real-time analysis in terms of page content and request structure.  A true gold mine.
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One morning last spring, Stephane Levy (himself an computer science engineer with a math degree) looked at the previous night’s log analysis, he noted a new entry in the lexicon at the core of the system. The word “eeepc” had been flagged by the system because of a spike in the Internet search “noise”. The system decided to enter “eeepc” into the 350,000 words lexicon. The ultra-portable, netbook wave had not yet reached the Gallic shores and, even in an Internet company such as Weborama, no one had heard of the “eeepc”. With one Google search, everybody did. A few weeks later, the term became mainstream
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The experience repeats itself in various ways. Suddenly, something pops up from the Internet background noise. Here, we’re not looking at a ranking of the most searched terms, this is about occurences and co-occurences, associations of words that become meaningfull — they call it clusters.  A cluster is way more precious than isolated terms. For instance, a cluster analysis shows that a growing number of people do connect cosmetic products to health hazards and cancer.
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When Stephane Levy, along with his brother Alain (Weborama founder and CEO) discussed lexical profiling, two things struck me:
-    the potential use as an advanced probe of “what will be next” in terms of newsworthyness,
-    and the ability to perform a quantitative distinction – fact-based, no guess — between the media noise (what you read, hear and watch on your favorite sources) and the “true” noise, what people are really talking about, on a much broader scale, outside of “medias.
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Before going further, let’s set the record straight. As a journalist, I’m convinced that our biggest collective mistake is to have allowed our newsrooms to become dominated by a top-down culture: we decide what is and isn’t newsworthy today for our readers, hoping they will agree. In the last few years, the Internet, and its offspring the blog culture, has corrected this error. Even the Wall Street Journal now offers an online community to its white-collar (and now very nervous) audience. Yes, it helps to have readers yelling at you, but it will be much more useful to know, in real time, or even before they know it, what is on the masses’ minds.
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Hence the “quant journalism”. I wouldn’t go as far as Chris Anderson, Wired magazine’s chief editor, who told me last May  “If I had the opportunity to run this magazine the same [quant] way as a hedge fund, I would do it without hesitation” (see Monday Note #38). But Chris is right on one key point: we definitely should feed a measure of “quant” data into the day to day management of our news organizations. Don’t get me wrong: I’m not advocating front page content decisions based on what the “crowd” wants. I truly believe a news organization has a built-in duty of education. On occasion, the organization ought to provide information that will perform poorly in ratings, but is a component of democratic awareness.  For example, an analysis of the fiscal policies of the two American presidential candidates won’t be a hit; the same is true for an account of key decisions at the European Council.  Still, these news items must be delivered to the public simply because they are an important component of the political process. Having said that, the duty of the editorial team is clear.  It must “stay on top” of what is or is will soon be on the public’s mind. Or it, the team, will be soon out of the public’s mind.
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Let’s return to the gap between “offline” noise (media originated) noise, and “online”. The massive sample analytics techniques we just discussed are priceless. Take for instance the Beijing Olympics. European medias were filled with human rights stories, Tibet repression, etc. That’s the “offline” noise. On the “online” seismograph: zip, nada (almost). People were solely (and massively) passionate about sports performances and medals. It doesn’t necessarily mean news outlets should have lowered the pitch on political issues, but it is nonetheless actionable knowledge. You really want to help? Keep the human rights stories for a time when readers’ minds are more open.
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Just for the fun of it: Weborama’s logs show clusters of words associated with French president Sarkozy have nothing to do with politics or policies. Actually, the Internet crowd discusses his wife (the whispering singer and former model Carla Bruni) and other idiosyncrasies. For this article, I asked Stephane Levy to run a search on “Edvige”, a highly controversial police database that will record sexual and religious proclivities, among other things. The press (Left leaning, especially) went ballistic. Verdict of “Le Lab”: no online noise at all. The word had not even entered the lexicon. Does it means that media should keep quiet? You be the judge.
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Now, let’s zoom out, and look at applications for brands and business. Let’s say you are Orange. As my co-writer Jean-Louis reported last week, you are facing irked iPhone users because you are “throttling” your 3G network. Question: should you go for an expensive communication campaign or just wait for the storm to fade as you slowly upgrade your cell network? That is a several millions Euros question. Judging by the media noise, you better act fast and summon your communication agency for a brief. Now, have a look at a cookie analysis of millions visitors of 200,000 sites. Chances are you’ll see the anger is fading fast — faster than a classic media analysis leads you to think.
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Same thing if you are in the entertainment business: think about the buzz generated by a TV series targeted to a 20 year-old audience. You can’t expect a clear idea of its performance from traditional medias run by middle-age people.
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Such tools are still in infancy (Weborama’s “Lab” is merely eight months old). Again — sorry to repeat myself — I don’t think a news organization should be run solely by such methods. Unfortunately, it turns out that mainstream media are, by and large, out of touch with their audience (just look at newspapers circulation figures and audience of the evening news if you have any doubt).  More than ever, we need numbers, we need probes to understand fast moving, fluid, widespread audiences. –FF
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By the numbers (2)

An occasional look at industry data and miscellaneous other items. See the previous compilation here.
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Web monetization
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$100,0000 a day. This is the price tag for an advertiser to appear on Wall Street Journal’s home page. Rupert (Murdoch) smiles: WSJ.com can generate $100m just in ad revenue, in addition to its million subscribers.
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$500,000 a day, that’s the rate for MySpace, another of Rupert’s properties.
(Source for both: Dow Jones.)
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170 million web sites today. Just to bear in mind: in 1994, they were less than 4000.  Google is pending $2bn a year in datacenters to keep up with the growth of the internet.
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The financial crisis
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$20 trillion of debt. The Credit Default Swap market is seen as largely responsible of the current crisis. CDS are a form of insurance contract tied to underlying debt supposed to protect the buyer in case of default. The market has almost doubled every year for the past five years, reaching $20 trillion in notional amount outstanding. (Source: Bank of International Settlements in the Economist.)
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$200bn left in the Fed’s bank account. The US Federal Reserve System is running out of ammunition. A year ago, the Fed had $800bn in Treasury Securities. Taking all pledges and commitments of last week, the central bank lost three quarter of its reserve. (Source: Wall Street Journal)
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Half-billion dollars in salary. Between 1993 and 2007Richard Fuld former CEO of the now bankrupt Lehman Brothers took home this sum as a total compensation.  “That amounts to $17,000 an hour to obliterate a firm”, notes New York Times’ columnist Nicolas Kristof.
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3 pages to surrender. This is the length of the term-sheet laid out by Timothy Geithner the president of the Federal Reserve of New York and by Treasury staffers in Washington, to take control of the insurance conglomerate AIG. The document was hand delivered to AIG head office.  (Source: WSJ) –FF
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