Jun 4 2009, 2:23PM
Is Craigslist As Ruthless As Wal-Mart?
Via Matt Yglesias, Barron YoungSmith has a post over at TNR arguing that Craiglist isn't a ruthless corporate killer of newspapers because unlike, say, Wal-Mart, Craigslist isn't driven by profit maximization:
While Wal-Mart is bent on maximizing returns for its shareholders--an appropriate goal, for a corporation--Craigslist is not. [...] Craigslist doesn't even try to profit from its economic activities, because its owners are devoted to a form of libertarian ideology.
But Craiglist doesn't have any shareholders! It's a privately held company. Wal-Mart is driven by profit maximization because its managers have a fiduciary duty to maximize shareholder value. If they don't, then (in theory) they'll be fired. And if they aren't fired, then (in theory) the company will be ripe for a gruesome Carl Icahn-style takeover. Craig Newmark, on the other hand, can do whatever the heck he wants. And because Craigslist is privately held, I don't know how you'd falsify the claim that what he does isn't motivated by a desire for profit.
(But maybe a lawyer will know this: At the very least, doesn't Craigslist need to show an intent to make a profit, if it wants to claim various business tax credits?)
A related point is what this means for newspapers. Both Matt and Barron say it doesn't make sense for profit-maximixing newspapers to compete with an ideologue like Newmark. But what I find odd about this sentiment is that newspapers have never really been profit-maximizing instituttions. There's the New York Times and its two classes of stock; there's the Washington Post, basically run on the dole with money from Kaplan test prep; there's the Associated Press, with its weird not-for-profit cooperative ownership structure (sounds socialist!). And while I'm all for adding to the list of crazy hybrid ownership structures, I'm not so eager to cheer the destruction the preexisting ones.
The problem with newspapers is that they were always a bundle of different sections. They thought they were about hard news, and the rest of the paper was just filler. But they were wrong.
Now all the "filler" has left. Craigslist is a better service than any newspaper classifieds. The weather channel (or weather.com) is a better service than the newspaper weather report. ESPN is a better sports service than the newspaper could ever do. Blogs have more opinion, from more sources, than newspapers could ever have. And who looks up stock prices or TV listings or movie show times in a newspaper!?
So all that's left is the hard news, which no one else can do as well. The problem is, no one is willing to pay the price of a newspaper for just news. Pay walls and subscriptions aren't going to solve that problem. They are just going to make it more obvious.
Also, advertising is changing. Once advertising was on the net, they could use click-through rates to see what was actually working. And they probably found that no one looks at most of their ads!
We're all inundated with the stuff, and I literally don't see it anymore. Take away the web page, and I couldn't even tell you what ads it had on it. We all assume the ads are spin anyway, with no real information. If I want to buy something like a laptop computer, I'll go to a review site and see what they think. The ads won't affect my judgment at all. So for advertisers, the place to be now is on search engines and review sites, and to have word of mouth on social networking sites.
Relying on news only is a problem, and an advertiser supported business model is a problem. I don't have a solution.
"But Craiglist doesn't have any shareholders! It's a privately held company."
Huh? Privately held companies have shareholders, just like publicly held companies. The only difference is that... the shares aren't publicly traded.
Directors (and officers) of privately held companies have the same fiduciary duties to their shareholders as publicly held companies. But if the shareholders are not interested in pursuing those interests, then it doesn't make a difference.
In the case of Craigslist, I believe there are only 2 shareholders - Craig Newmark and Jim Buckmaster (the CEO). There are no venture capital firms or any other minority shareholders to whom the directors (likely also Craig and Jim) owe any duties.
Interestingly, in doing a little googling, I see that Craigslist actually DOES have a minority shareholder - eBay, which reportedly owns 25%. So the Board does owe fiduciary duties to eBay. The issue is that, generally, courts defer to the business judgement of the directors, absent special circumstances. Accordingly, if Craig Newmark thinks, in his informed business judgement, that operating Craigslist without completely maximizing revenue immediately is the best way to operate, then courts will be reluctant to second guess his judgement.
Yglesias's sentiment is a common one, yet it represents several profound misunderstanding of markets.
First, profit is not a cost. Often when casually analyzing business observers that the perspective that business's have to find a way to make enough for their to be profit left over. Definitionally this is wrong because profit IS what's leftover. Practically this is wrong because firms often have negative profits. This makes profit very much unlike wages or vendor costs. How many firms ever have negative, not just zero but negative, wages. In this case the investors are subsidizing the firms performance. The not-for-profit equivalent firm (presumably renting its capital) would have had to shut down.
Second, however, is that in a world where customers care only about prices, profit maximization becomes cost minimization. No truly cost-minimizing firm has a revenue strategy because there are no revenue strategies in a cost-minimizing world. The lowest cost strategy always wins. Its important to remember here that whichever strategy, no matter how unintuitive, that produces the lowest costs is cost minimizing.
A common objection is that in some industries firms which treats its works as valuable unto themselves and allow independent time for creativity and expression will be more efficient than one that ruthlessly minimizes costs. Yet, if that is the case the allowing independent time for creativity and expression IS cost minimizing.
The "ruthless" fails not because it doesn't recognize that some things are more important than costs but because the "ruthless" strategy fails to minimize costs. Feeling your minimizing costs is not the same as actually minimizing costs.
Third, in a world where customers care about something other than price, profit maximization differs from cost minimization only to the extent that it provides customers with something they value more than lower prices.
So some companies do have a revenue strategy. This is because they believe that their customers will be willing to pay a higher price, if they get something more valuable in return. However, for this to work the focus must be on customer value. Without providing value for this higher price you will loose customers.
So in short, profit maximization doesn't directly cost firms anything, it sometimes subsidizes the firm and is another way for saying, producing a product with either the lowest cost or providing the customer with the best value. It is hard to see how any strategy is inherently better for the market world.
What confuses people, I think, is that sometimes a firm develops a way to provide customer value that other firms have a hard time replicating. It then milks that advantage for all its worth. The common observation is that customers could do better if they were doing business with a firm that was not milking its advantage. Thus customers would do better in a world where firms did not "have to" make profit.
However, that misses the point that if any other firm could replicate the advantage, then customers wouldn't be milked even in a profit maximizing world. Its not profit maximizing that causes the problem is at issue, its irreplicable advantage. Furthermore, the fact that no one can replicate those advantages suggests that they cannot be found without investment. Investment that is made possible by profit seekers.
I will note, though not get into it, that two areas where this is not true is in advantages that come from natural resource ownership and advantages that come from genetic ability. These two cases provide unique challenges to the efficiency of profit maximization in a free market.
I love the scapegoating on behalf of the Newspapers. Cry me a river, sheesh!
Of course, its all of the innovators' fault that the papers are hemorrhaging money due to their impressive complacency, yes, that makes sense.
I was thinking the other day, what if I put myself in their shoes. With the proliferation of blogs and blog-like outlets, how is it that papers and the like may feel as if they're subject to "unfair" competition (quotes are key).
For example, myself and many of my cohort provide (mostly) free analysis and reporting on subjects upon which we (usually) happen to be more expert than traditional journalists. What is my (our) motivation? Certainly not money (although perhaps a hedge in the form of reputational capital to be rolled-into a backup career).
"Traditional" media peoples have argued that much of the blogosphere is reactionary analysis of MSM reporting; if they weren't there, the bloggers wouldn't have anything about which to blog.
This point I will partially concede, however, MSM must look squarely in the mirror as well. Far too much material in/from traditional media is regurgitated fluff, filler between ads/commercials.
My conclusion then, is that while journalism (and its distant cousin, "journalism") is an important field somewhat critical to society, newspapers and bloated news organizations are dinosaurs in a post-Yucatan world.
It sucks for many so-called journalists, reporters, and others who relied on the old paradigm for their sustenance, but as my father was/is always quick to remind me, them's the breaks, son.
Anal_yst
http://1-2knockout.typepad.com
I should have clarified the above is a (n obvious) generalization re: bloggers/journalists. Some journalist types produce remarkable work, and some bloggers produce unadulterated crap, yadda yadda, etc, etc
Really? The vast majority of Craig's List classifieds are free, with the exception of job listings everywhere and brokered apartment listings in New York. (The posting costs are even much lower than major job sites (http://www.craigslist.org/about/job_boards_compared.) How do you not even discuss this?
how could this question even be asked.....news papers are obsolete.