What Should The Role Of Government Be?

September 3, 2012

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There have been many comments on the President’s statement about businesses, that “you didn’t build that, someone else did.” The right wing talking heads claim that this is obviously a socialist statement that all is owned the collective. The left wing talking heads will defend the statement by rephrasing the lead up comments, that without the aid of government, the roads, electric, internet, educated workers would not be available for the success of the business. Both are correct and both are wrong.

Business of any kind is the action of human beings on raw materials to increase the value of a product and provide it to others for the benefit of the business. The raw material can be ideas, services or actual physical resources. Can you actually say that the government provided someone with the cleaning business that they have built up? Most would claim that the government has done almost the reverse with regulations. But again, could that business exist without the guarantees of property, the enforcement of laws and the security provide by the armed forces?

The government only took over the maintenance and building of roads in the last 100 years. Government education is also about 100 years old. Before that, individuals and businesses built the road that they needed and educated themselves through apprenticeships or the world of hard knocks. What about the raw materials? Most people do not understand that the ownership of resources has only been sure for about 300 years. Prior to the British commonwealth, the strongest person or group owned the resources, usually obtaining them through force and violence or the threat of violence.

Let’s look at the simplest form of a business, the small farm. The farmer claims some land, by his own strength, he plants seeds, raises animals and gathers his harvest. He can live off of his produce and trade is excess for goods he cannot make himself, such as better plows, stronger horses, etc. It all looks like the perfect growth plan. But he has to defend his land from predators, not all of them wild animals. If he is not well enough prepared, someone else will take what he has, and if he is fortunate enough to escape with his life, he may start the process all over again.

So both camps are right in that each can point to points that support their argument, but both are also wrong in stating it is an either/or argument. Without government programs, no business can succeed very long without becoming a government of their own (see the Mexican drug cartels or the British East India company). Claiming that the government has come claim over a business beyond the taxes paid to fund the services that make running the business easier and those government functions that allow the business to exist, is statism (whether you call if fascism, communism, socialism, despotism, does not really matter).

Now no part of this essay suggests that government has no part in business. Government is essential in providing security and restraint on business. If a business becomes too powerful, excesses can result that are harmful to the community that the government is expected to protect. In the United States, the government has stepped in to support the rights of workers from abuse. The government has also intervened when one business becomes too powerful within an industry, resulting in artificial increase in cost for what could be considered an essential product or service.

Recently (within the last 50 years), the effort to protect workers has migrated at times to punitive actions against businesses that are not for the good of the worker, but for the good of the individual political office holder or the organizational hierarchy of the labor organization. Also (within the last 25 years) the government has started to protect businesses that are “too big to fail” rather than harnessing those businesses into manageable sizes.

As examples, in the early 1900s, intervened to help workers including assisting in establishing work weeks and holidays. Now the emphasis is on increasing the minimum wage. The stated goal is to get people more money to spend, but the minimum wage is for entry level jobs, not full time careers. The result of increases in the minimum wage is the loss of entry level jobs until the market can adjust to absorb the increased costs. So the net result is a loss of opportunity, not an increase. But, there is a side effect. Most union contracts have a wage clause that pushes up the cost when the minimum wage is raised. The biggest effect is on contracts with government agencies resulting in a positive feedback.

Also in the early 1900s and as late as the 1970s, the government broke up large businesses. Standard Oil became 7 separate companies, Bell telephone was broken up, and railway crossings were regulated so that one company could not block common roads with trains to prevent their competitors from getting their raw materials. In 2010, the government was bailing out car companies and financial institutions.

As with any political action, there is some good and some bad for everyone involved. With unions, workers are protected, but now have to pay heavy dues to fund a top heavy highly paid administration. With unions, businesses cannot set the wages across and industry and have to provide certain benefits to lure skilled workers to their doors. With government interference, large businesses have been broken into smaller pieces for some short term pain for their customers, but overall better climate for all concerned. With government interference, large businesses have been “saved” to continue along flawed business plans that can only result in additional bailouts in the future.

The point of this essay is not to suggest that we return to the 1800s. The point is to expose that both the left and the right are both correct and incorrect in their interpretation of the role of government and business. We must have government protection of workers, communities, and other businesses. We must also avoid the idea of a collective. Each worker and business should be rewarded for the value of the work they do. It does not matter what you perceive the value of your effort is, only what the community determines the value is. If you have spent a lot of money on a college degree that will not get you a job, then you have prepared poorly. It is not the responsibility of the government or anyone else to assure that you effort is rewarded. If on the other hand, you build up a business that fills a need in the community, you should not be penalized. Restraint should only be applied if you are harming someone in the process of you effort.

Are Fast Food Restaurants Being Forced To Sell Burgers At A Loss?

June 16, 2010

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Every now and then, you’ll see a news story about franchisees who are up in arms about being forced to sell a cheap burger at a loss.  The situation is typically something like this: the burger is being sold for 99 cents, but the cost is $1.15 when you account for ingredients, labor, rent, etc.

I’d feel sorry for the franchisees – if it wasn’t for the fact that they are wrong.

Let’s break the situation down a bit further.  Let’s say that the Kosmo Burger sells for $1.25.  The raw ingredients for the burger (meat, cheese, bun, etc) cost 50 cents, and fixed costs (such as rent) run $500 per month.

If we sell 1000 burgers per month:

Revenue = $1,250 (1.25 X 1000)
Variable costs (ingredients) = $500 (0.50 X 1000)
Fixed costs (rent, etc) = $500
Total costs = $1000
Total cost per burger = $1
Profit = $250

Let’s say that Kosmo Korporation’s executives force the franchisees to sell a “Junior Kosmo Burger” for 75 cents.  Ingredient costs are 40 cents.  The fixed costs remain at $500, but are now spread across the flagship Kosmo burger as well as the Junior Kosmo.  The restaurant sells 200 Junior Kosmo burgers for the month, in addition to the 1000 Kosmo burgers.  The numbers for the Junior Kosmo break down like this:

Revenue per burger = 75 cents
Variable costs = 0.40 per burger
Fixed costs per burger = 0.42  (500 / (1000 Kosmo Burgers + 200 Junior Kosmo Burgers))
Total costs per burger = 0.82
Loss per burger = 7 cents

That looks bad, but let’s look at the combined numbers for both burgers:

Kosmo Burger Revenue = $1250
Junior Kosmo revenue = $150 (0.75 X 200)
Kosmo Burger ingredient costs: $500
Junior Kosmo ingredient costs: $80 (0.40 X 200)
Fixed costs: $500
Total revenue: $1400
Total costs: $1080
Profit: $320

Wait a second.  Profits have jumped $70 from the example where we were selling just the Kosmo Burgers.  How did we add the unprofitable Junior Kosmo Burger into the mix and make more money?

The problem is that allocation of costs is an artificial construct used to estimate profitability.  It’s a quick and easy method to use to estimate profitability, but it doesn’t actually reflect the reality of the costs.  Really, the true cost structure is:

Costs = 500 + 0.50K + 0.40J

(K = Kosmo Burger.  J = Junior Kosmo Burger)

It is possible to make a profit by selling the Kosmo burger at any price higher than 50 cents and the Junior Kosmo burger for any price higher than 40 cents.  You simply need to hit a high enough volume of sales to offset the $500 of fixed costs.  You’re not going to go broke selling Junior Kosmo burgers at 75 cents.

A few related notes:

  • The cost structure used in the example is artificially simplistic.  You will also have expenses like labor, which is a somewhat fixed cost.  Very few fixed costs are completely set in stone – they are simply fixed “within the relevant range”, to use the words of my Cost Accounting professor.  Even facilities costs will vary if you outgrow your location.  The labor costs will stay the same until productivity approaches 100%.  At that point, you’ll need to hire more staff.  But if your workers are only about 50% productive, there’s no marginal labor cost related to an increase in customers – as you’re currently making inefficient use of those employees.
  • The low cost items can have an effect on profits if they cannibalize sales from existing products.  In our example, the Kosmo Burger has a gross margin (revenue – variable costs) of 75 cents, while the Junior Kosmo has a gross margin of 35 cents.  If I normally buy a Kosmo Burger but decide to buy a Junior Kosmo instead, the restaurant makes 40 cents less in gross margin.
  • Many people who buy the cheap menu item will also buy a high profit item (such as a soft drink) as well.  Thus, it’s important to pay attention to the impact of the total purchase on the bottom line.

(Still confused about the math in the example and wondering how a 7 cent loss on the Junior Kosmo turned into an increase of $70 in profits?  It’s because we’re spreading the fixed costs over a broader base – the fixed cost allocation for the Kosmo Burger would also be brought down to 42 cents.  If you’re still off by $4, it’s due to rounding).

Retail Positives / Retail Negatives

December 30, 2009

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Wal-Mart Ship to Store

Wal-Mart gets a lot of negative publicity, but one thing that they get right is Ship to Store. You buy an item on WalMart.com, choose to have it shipped to a nearby store, and pick it up when it arrives at the store. The shipping is completely free.

I keep waiting for more stores to follow Wal-Mart’s lead, but there hasn’t been a big rush to offer this service. Sure, some stores will offer free shipping on purchases over a certain amount or with special coupons – but I’m unaware of other stores offering free shipping to a local store for absolutely anything purchase through the store’s web site. We recently purchased a forty pound item – I shudder at how much the shipping would have been on this item through another vendor.

I’m really confused about why more stores don’t offer this. This is a golden opportunity to have people walk into your store. When people walk into a store, they usually spend Monday. Wal-Mart also smartly locates the Ship to Store counter way in the back of the store – so that you have to walk though several aisles of merchandise in order to pick up your item.

How does is work? Wal-Mart is nice enough to explain the process on its web site. Your item is first sent from a warehouse to a distribution center. Then, it is loaded on a truck that goes to your local store. Thing about this for a minute. There’s already a truck going from the warehouse to the distribution center. There’s already a truck going from the distribution center to the local store. This means that the marginal shipping cost for Wal-Mart is very low.

Target Pricing

My wife really likes Target, so we end up there quite often. One thing that annoys that crap out of me is unit pricing of some items. The particular item that is the target of much of my ire is Charmin toilet paper. Regardless of which size is on sale in a given week, the 30 pack ALWAYS costs more per roll than at least one of the smaller sizes. I once asked a worker if they were aware of this. Yep, they were aware of it. Nothing they could do, since prices are set by corporate.

I’ve run into the same problem with bottles of ranitidine (generic version of Zantac). Some times the unit price of the larger bottles would be almost twice as much as the smaller bottles. With respect to ranitidine, the issue of “we can’t control what corporate does” reared its ugly head. Target was out of the store brand ranitidine for literally months on end. For those who aren’t aware, this is an extremely common medication. When I asked when they might be getting a shipment, the employee told me that they didn’t know – corporate just sends them a shipment, with no input from the store! So I went to Wal-Mart and grabbed some of their store brand product.

Last week, we had to pick up some Goldfish (the crackers, not the animals). On the end cap, they were prices at $3.49. Within he aisle, the exact same box was priced $3.29. Guess which price rang up on the register? Yep, you guess it, $2.59. With a cart full of items and a two year old that need to needed to get home before bed time, we didn’t point out the discrepancy. We’re not exactly sure if this was some sort of unadvertised sale … or if the correct price was $3.29, or perhaps $3.49.

News Recap

May 18, 2009

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Auto dealers

Nearly 2000 auto dealers were informed by GM or Chrylser of the manufacturer’s plans to terminate franchise agreements.  The impact to GM and Chrysler is not likely to be very large.  For example, 90% of Chrysler’s sales volume come from about 50% of their dealers.  Stand this stat on its head, and it tells you that Chrysler could terminate agreements with half their dealers and lose only 10% of their revenue.  For the dealers affected – many of them longtime family businesses – the impact will be much larger.  Some dealerships were diversified with agreements with multiple manufacturers and should be able to make up some of the shortfall by focusing on selling the other brands.  Others, however, had all their eggs in one manufacturer’s basket and will simply be unable to sell new cars unless they are able to procure a franchise agreement with another manufacturer.

Gay marriage

Gay marriage continues to be a hot topic.  California’s supreme court is set to rule on whether or not to overturn the state’s ban on gay marriage that was enacted by proposition 8.  The court overturned the previous ban on gay marriage last May.  New Hampshire’s governor has said that he would approve a gay marriage bill if the legislature changes the bill to allow certain protections for churches.  The legislature will vote on the altered bill this week.  Gay marriage is being debated in several other states.  Currently, gay marriage is legal is 6 states – California, Connececticut, Iowa, Maine, Massachussetts,and Vermont.  Once this numbers gets to about 15, I think there will be a tidal wave of states that pass bill allowing it.  With Democrats (who are bigger proponents of gay rights) in control in many states, this would be the ideal time for them to move forward with gay marriage bills, expecially with a currently high level of public support.

Governors and Senators

Republican senator Kay Bailey Hutchinson has decided resign in order to run for governor in 2010.  On the flip side, Florida governor Charlie Crist has decided to run for senate in 2010.  As critical as Florida has been in recent elections, a Democratic pickup in the Florida governorship could be just what the Dems need to tilt the balance a bit more to the left.

On the Bunning front, Kentucky Republican senator Jim Bunning has decided that he will indeed run for re-election, in spite of previous reports to the contrary.  Ron Paul’s son, Rand, may join in the fray in the Republican primary.  Circle this one as a race to watch.  Hall of Fame pitcher Bunning has become an embarrasment for his party, and his won party make seek to undermine his efforts at re-election.  Bunning narrowly won in 2004 and would likely lose to a strong Democratic challenger.

Farrah Fawcett

There’s another reason to like Farrah Fawcett.  She became convinced that someone at UCLA medical center was leaking her medical records to the press.  In order to confirm her suspicions, she intentionally withheld news from her family and friends when her cancer returned in 2007.  When the information found its way to the National Enquirer, Fawcett knew that someone at UCLA was the source.  An investigation found that employee Lawanda Jackson was responsible for the leaks.  Jackson was convicted, but died of cancer before she could be sentenced.

Fawcett’s actions have raised awareness of the seriousness of patient privacy and the need for harsh penalties for those who breach that privacy.


Note: inaccurate information regarding the California Supreme Court has been corrected.

Auto industry saga

May 11, 2009

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This week, Chrysler announced plans to file for chapter 11 bankruptcy protection.  This is not liquidation (chapter 7).  The intent of chapter 11 is to give a company time to restructure its debt.  In the case of Chrysler, it appears that it will emerge from bankruptcy under joint ownership of Fiat, the United Auto Workers union, and the United States Government.  Current majority owner Cerberus Capital Management will cede its share of the company

In another corner of Detroit, General Motors may be preparing for a bankruptcy filing of its own.  While GM’s 1st quarter loss of $6 billion was better than what industry experts had expected, $6 billion is still a huge quarterly loss.  GM’s book value (assets – liabilities) is now about -$90 billion.  Once again, Fiat is being mentioned, this time as a possible buyer for GM’s European subsidiary.

Earlier in the year, I was talking with friends and mentioned that I would not be surprised if a foreign company jumped in and bought GM and Chrysler.  My thought, however, was that it would be a Japanese company.  Mitsubishi – a huge corporation with operations in several industries – was the company that I thought was most likely.  Toyota also seemed like a possibility.  I must admit that Fiat never entered my mind.

What is Fiat, exactly?  Fiat is an Italian company that was founded in 1899.  The most stunning revelation I discovered was that I was that Fiat owns a substantial stake in Ferrari – and has since the 1960s!    Fiat has won the European car of the year award 12 times in the last 40 years, more often than any other manufacturer.  Fiat is also the second largest agricultural equipment manufacturer in the world behind Deere (Fiat owns companies such as Case IH) and third largest construction equipment manufacturer, behind Caterpillar and Komatsu.  Fiat has additional interests in several other industries.  In short, it is a huge multinational corporation that manages operations in many industries and actually turned a profit last year – a net income of 1.7 billion Euros last year on just under 60 billion Euros in revenue.

The deal Fiat made with Chrysler was that Chrysler would give Fiat a 35% stake in exchange for access to some Fiat technologies (in particular, technology related to hybrids).  Certainly Fiat gave up some competitive advantages by allowing Chrysler access to the technologies, but on the flip side, they were able to acquire 35% of Chrysler for no money out of pocket.  Don’t be surprised if they do indeed pick up GM Europe for a song – and don’t be surprised if Fiat turns the GM and Chrysler units into profitable businesses in the course of the next decade.  Interestingly, GM once owned a stake in Fiat.  Fita had a “put” option, meaning that Fiat had the option of selling itself to GM at a particular price (market value, in this case).  GM declined to honor the option and paid $2 billion to Fiat (this was a penalty that was specified in the put option).  In essence, Fiat can use some of GM’s own money to buy GM Europe..

Another company that could come out of this mess as a winner is Ford.  A portion of the country has a strong desire to buy an “American” car.  It is quite possible that there will soon be just one choice – and this could allow Ford to significantly strengthen its market share.  I’m not suggesting that they would immediately pick up the entire market share of GM and Chrysler, just that they could carve out a large chunk of it.

From the perspective of the consumer, the one good bit of news is that the US government is providing a guarantee for the warranties of any US automakers that go bankrupt.  Surely there were some people who were delaying a purchase over fears that the warranty would be worthless if the manufacturer went bankrupt – they can now buy without that fear.

From an entertainment perspective, it will be interesting to see what sort of impact this will have on NASCAR.  The auto manufacturers provide financial support for team that race under their emblem.  Will the Chevys and Dodges continue to race in NASCAR in 2010?


May 9, 2009

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In sharp contrast to the negative customer service experiences you often see on The Soap Boxers, today I happily regale you with quite possibly the best customer service experience ever.  I have purchased many items from Buy.com over the years (mostly electronics) and have never had a bad experience.  I have, however, had one great experience.

The story started, as many do, with the birth of our first child.  Soon after, I saw a keychain the held digital photos (produced by Coby).  These have exploded in availablity over the last year, but at the time, it was difficult to find them for a decent price, except online.

My wife and I each wanted one, so I hopped onto Buy.com and ordered two of them at $20 each.  They arrived shortly, and I went about the task of loading them with our favorite photos.  The software (Mac version) was a bit quirky, but nonetheless, I soon loaded the first keychain.  Then I grabbed the second one.  The computer wouldn’t recognize it.  I rebooted the computer.  I tried a different computer.  I unplugged it and plugged it back in.  I cursed.  Nothing seemed to work.  The product was defective.

I went online and very quickly found Buy.com’s information on how to return a defective item.  I printed off an RMA (return of merchandise) form from their website.  This gave me free postage to send it back.  Very cool.  I dropped the box off (I forget which shipping company) and waited for my replacement.

After a week or so, I noticed that there had been absolutely no change to my order status online – not even an indication that the return had been received.  I sent a quick email to Buy.com to ask about this.  I quckly received a reply that explained the various steps in the return process and explained why the item might still be in the return process.  At this point,  I was confident that the box hadn’t fallen off a truck somewhere in Nebraska.  I patiently waited for the replacement.

Before long, I received a perfectly functioning item as a replacement.  I was very happy with it and in fact recommended it to many friends, several of whom went out to Buy.com to buy one.  I was a very satisfied customer.

A couple of months later, I received an email from Buy.com, completely out of the blue.  They were reviewing their files.  Because they were unable to completely satisfy me (their words, not mine), they were refunding my purchase price.  Not just the $20 cost of the defective (and replaced) item, but the entire $40 order.  I must say that I was very surprised at this.  If Buy.com considered me to be an unsatisfied customer, they must set the customer service bar very high.

GM bankruptcy / Southland killer

April 30, 2009

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A couple of news stories grabbed my attention today.

GM was unable to negotiate concessions with some of its bondholders and will have to file for chapter 11 bankruptcy.  This is reorganization bankruptcy, not liquidation bankruptcy.  The prevailing thought is that GM will emerge from bankruptcy in the hands of Fiat and the UAW.  Chryler will halt vehicle production for (at least) 60 days.  Their leasing arm will be folded into GMAC finance.  They will receive and additional $8 billion in bailout funds, which hopefully the taxpapayers will see returned to them at some point.  I have not seen any word on how this may affect the money that Chryslers spends on manufacturer support of Dodge teams in NASCAR (Dodge is a Chrysler brand).

On the bright side for buyers, this might be a good time to buy a Chrysler vehicle.  Demand will likely sag on the news, but the warranties will now be guaranteed by the government.  With the recent news of GM “temporarily” closing 16 of its 21 plants and planning to buy ou 40% of its dealers, Ford looks to be in prime position to pick up some market share from the segment of the population that will only buy American vehicles.

The other story came out of Los Angeles.  A 72 year old sex offender gave his DNA sample, as required by state law.  The DNA got a match with a rape kit from murder victim Ethel Sokoloff, a 68 year old woman who was killed in 1972.  As a result,  John Thomas Jr. has been charged in two murders (Sokoloff’s and another crime in 1976).  Police believe that Thomas may be the “Southland Strangler” who may have killed more than 30 women (and raped many more) since 1955.

This has to be the mother of all cold cases.  Even if you were able to crack the case of a serial killer who began his reign of terror 54 years ago, the odds of the perpetrator still being alive are not very good.  I have an interest in crime, and I intend to write a bigger article on the story next week, after getting a chance to sesearch it a bit more.

Is GM dead?

April 22, 2009

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USA Today is reporting that GM will shut down 15 of its plants for 9 weeks between May and July.  GM has a total of 21 plants.

Clearly, by any measure, GM is in a world of hurt.  At the end of 2008, they had a book value (assets – liabilities) of  -$85 billion.  This number has been sinking even lower during 2009 as they chew through bailouts funds given to them by the government.

Here are a few things that will help put this into perspective a bit.

  1. If GM were to begin making $10B in profits annually – something they have never done in their history) -starting in 2009, it would take 9 years until the balance sheet was positive.  A more realistic (but still overly optimistic) expectation of $5 billion in profits would result in a positive balance sheet in 17 years.
  2. If you, and each of the 300 million residents of the USA, were to give GM a check for $283, this would just barely wipe out the $85 billion in negative equity.

I’d love to see GM turn things around, but they are quickly running out of time (and money).  If GM still exists at the end of 2010, I think it will either being a division of a Japanese manufacturer or it will be a much smaller GM.

Stop the auto bailout

April 1, 2009

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Today’s guest post is from Phil Ossifer (not his real name), writer of the blog Chunga goes wild. Guest posts do not necessarily reflect the opinion of The Soap Boxers.

Phil works in IT, but his journey to the world of Information Technology was interrupted by a jaunt as a chef that involved training at the prestigious Culinary Institute of America and a successful career as a chef / ice sculptor. After mastering the world of food, Phil turned his talents to computers. In the process, he logged classroom time toward his Bachelor’s degree in four different decades. Last year, he gave the university an ultimatum – grant him tenure or give him his degree.

Without further ado … “Stop the auto bailout” by Phil Ossifer.

The U.S. Government is making a big mistake by providing additional $billions in another attempt to bail out major players in our failing automotive industry.

Why do we think a few more $billion will help? These companies were losing money even during the economic boom (GM and Chrysler are over $100 billion in debt at the end of 2008, and it has gotten much worse). All of this after already supplying them with $15 billion in 2008.

We should not continue to throw good money after bad in attempts to keep the industry afloat longer, since this will ultimately make our situation worse. It adds billions to our debt, extending the depth and length of the current recession/depression. Hey! National debt is not limitless – eventually, other countries would be unwilling to buy our debt. There are indications that China is already shying away from taking on new U.S. debt. Played out, this is similar to a large auto company failing – only this time it’s a nation.

I realize that there is much pain and gnashing of teeth that will result from a failure of GM or Chrysler, but unfortunately, I think our automakers are destined to fail in the face of superior competition. That’s not an anti-American slam; it’s my objective assessment.

This is not the first time we’ve had a painful parting with a traditional industry that we needed at one time. Over the decades, we’ve had many changes (e.g. outsourcing of manufacturing, toy-making, etc) that have led to job loss and other trickle-down effects. Example: The Japanese beat us at consumer electronics manufacturing and we ended up turning away from that industry. It would have been foolish to try to keep it afloat by adding to taxpayer debt. We had to change, and we have to continue to change to compete in the global economy.

What the U.S. is good at – and has to keep doing to survive – is innovation. We invent something new, lead the pack, then inevitably a competing country beats us at our game, and we re-invent again. Doing this starts with solid education. This process is not something to be feared, because 1) it is inescapable, as more developing countries get in the game, and 2) there is a lot of good in this process – quality improves, choices improve, and prices drop.

I realize that this does not provide any help for the many autoworkers, supporting sub-industries – and trickle-down effects like adding to the mortgage default rate, reduced spending, etc, etc.and I do not have an answer for that.

But let’s not delay the inevitable. The loss of our automakers is pain that we must go through, because our alternatives are either 1) go through the pain now, or 2) go through the pain a little later, but with of billions in new debt. These continued bailouts can hasten the pace towards financial insolvency, and I for one don’t feel like learning the Mandarin language just yet.

I admit that this may be easier for me to say this since I’m more removed from the direct effects of the failing auto industry. I don’t like it, but I think that it is our reality.

Is the print media dead?

March 30, 2009

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The Rocky Mountain News recently won an award for overall excellence from the Society of American Business Editors and Writers (SABEW) in the category of large circulation newspapers. Unfortunately, the award will ring a bit hollow for the Rocky Mountain News, as the newspaper ceased operations permanently on February 27, just a bit short of its 150th anniversary.

This is an award winning newspaper with a lot of fans and a long history, unable to find a buyer. The writers of the Rocky are trying to get enough financial support from the public to continue operations, launching the site www.indenvertimes.com. The baseball writers who cover the Colorado Rockies (my favorite team) have launched their own site, www.insidetherockies.com. I like what is being done on these sites – lots of good ideas.

The plight of the Rocky is hardly unique. A number of large newspapers are in bad financial shape. Is this merely a temporary down turn due to the poor economy, or is the printed newspaper becoming the buggy whip of the 21st century?

I hate to say it, but it may be the latter.

When newspapers first became popular, they were the only way that most people could receive the news. They had a virtual monopoly on news.

The radio came along, and then the television. They provided breaking news in a timelier manner than the newspapers, but the newspapers still had a very distinct advantage. The consumer could decide when they wanted to read the news in a newspaper, whereas the radio and TV stations dictated the time of their news.

The advent of the internet was concerning to the print media, but for a while, there was relatively limited information on the internet and there were large portions of the population who did not have access.

Today, the internet has incredible coverage of almost every topics, and nearly everyone has access, often 24 X 7 access, and sometimes on their cell phone. With the popularity of WiFi, people can surf news websites while eating in a restaurant. I have not yet done this – I actually grab a physical newspaper if I am going to ready while I eat – but I have seen numerous examples of “surf and turf”.

Advertisers have been following consumers and have also flocked to the internet. In the early days, only the big sites had advertisers. Even sites with a decent following (such as my Alabama site) didn’t have advertisers because the operators were unable to navigate the hoops necessary to procure advertising.

Times have changed. Today, people will jump through the hoops for you. This little blog has advertisers (most notably, Tyson Chicken seems to pop up a lot). What did I do to see this up? Not much. I clicked a few buttons. Google (which owns blogger.com) finds advertisers via their AdSense network (they take a portion of the revenue, of course). The advertisers can bid on certain key words, and in the future they will be able to target people based on their browsing histories (see the “privacy” box on the right side of the screen if you have concerns about this).

Today’s internet advertisers can even target their ads for particular times of the day. I see the Tyson ads – on my blog and other places around the internet – very often during prime eating hours. This makes a lot of sense. Advertising a food product at 5 PM makes a lot more sense than advertising it at 10 PM. Also, most of the ads are on a “pay per click” basis, meaning that advertisers don’t pay a penny unless someone actually clicks on the ad and goes to the advertiser’s web site.

Given these factors, how can newspapers succeed? First of all, keep the customers you have. Until recently, my wife and I subscribed to a local newspaper. However, the carrier was horrible with his aim, only rarely delivering the newspaper to the doorstep. We made repeated calls to the newspaper, but the problem never went away. Finally, we got annoyed with constantly digging through the bushes to find the newspaper and canceled it. We felt that the newspaper was completely ignoring our complaints; thus we felt that it was only fair that we completely ignore the existence of their product.

Beyond avoiding alienating customers, what can the newspapers do? I’m not an expert on the industry, but this is what I see from the point of The Soap Boxers:

First and foremost, you must have an online presence of some sort. If people can’t find news stories on your web site, you’ll be perceived as a dinosaur.

You should focus a large amount of effort on the coverage of local stories. People aren’t going to grab your paper to see your version of the latest national story. There are hundreds of place where they can find this information online. Coverage of local news and local sports is different, though – people have a limited number of sources for this information.

Finally, use teasers. Perhaps you could have a three part biography of a local hero. The first part would be available online, but the rest would only be available in the print edition.