“I’m so bored. I hate my life.” - Britney Spears

Das Langweilige ist interessant geworden, weil das Interessante angefangen hat langweilig zu werden. – Thomas Mann

"Never for money/always for love" - The Talking Heads

Saturday, January 28, 2006

Enron, the Washington Post, Oprah

“On August 27, 2002, the LAUSD board voted unanimously to ban the sale of soft drinks on its campuses, which included 677 schools with 748,000 students.” Which is the center of a case study on trust done by Jagdip Singh, Jean E. Kilgore, Rama Jayanti, Kokil Agarwal and Ramadesikan Gandarvakottai and published in the Journal of Public Policy and Marketing.

Actually, there are two case studies described in “What Goes Around Comes Around: Understanding Trust--Value Dilemmas of Market Relationships,” but the Coke case is more fascinating to me, simply because Coke’s struggle to retain its “pouring rights” in schools was a sorta typical 'we want to own your soul" corporate ploy. As the authors put it:

“Although Coke attracts a wide variety of consumer segments, our focus is the youth segment, especially school-going children. Children ages 5-14 spend $35 billion each year and influence the spending of approximately $200 billion annually (Harvey 2000; Rosenberg 2001). In an aggressive effort to reach school-going children, Coke entered into exclusive 5-10 year contracts that involved large, up-front, and distributed payments to school districts over the contract period. In return, the schools stocked their vending machines exclusively with the company's products and guaranteed exposure to the company's advertising in schools. Referred to as "pouring rights," these contracts include a comprehensive strategy to attract children with logos on school equipment, Channel One, and the Internet, as well as advertising, contests, free samples, and coupons (Nestle 2002, p. 202). As Coke's spokesperson noted, "Our strategy is to put soft drinks within arm's reach of desire and schools are one channel we want to make them available in" (Pear 1994, p. A15).”

In order that the arm’s reach of desire would be just in dollar distance of the third grade math class, Coke would grant school districts money – and in fact set up very cute programs to get the school districts (who were, in the nineties, busy putting up signs that read “drug free zone”) to actually push the stuff on the kiddies.

“A particularly troublesome aspect of pouring-rights contracts for parents and consumer advocates was the bonus incentives tied to soda sales (Kaufmann 2001). For example, Coke offered the schools a commission of 30% for each soft drink can sold compared with 15% for each noncarbonated drink sold (Day 2003). Higher commissions for soft drink sales coupled with bonus incentives for exceeding quotas resulted in many schools' initiating their own aggressive efforts to boost soft drink consumption on school premises. For example, in 1999, a widely publicized memo from a Colorado school administrator who signed himself "The Coke Dude" admonished the school district for not doing its fair share to attract more funds and offered prizes of $3,000, $15,000, and $25,000, respectively, to his elementary, middle, and high school principals. His memo read:
We must sell 70,000 cases of product … at least once during the first three years of the contract. If we reach this goal, your school allotments will be guaranteed for the next seven years…. If 35,439 staff and students buy one Coke product every other day for a school year, we will double the required quota. Here is how we can do it…. Allow students to purchase and consume vended products throughout the day…. I know this is "just one more thing from downtown," but the long-term benefits are worth it. (Bushey 1999, p. 1)”

Well, with Coke dudes in various districts, everything seemed to be working when the Gov'mint, and parents looking down at their children growing fat as pigs and insulin deficient, started coming around. What Singh, et al. were trying to trace is the network of trust nodes, as they call them, that activated as Coke was shoved out of the neighborhood of some lucrative little desiring units.

“… we approach a firm's diverse market relationships through a lens of simultaneity and interactivity. Specifically, we draw on the work of Drumwright (1996), Hutt, Mokwa, and Shapiro (1986), Menon and Menon (1997), and Wilkie and Moore (1999) and focus on four nodes of a firm's key market relationships: (1) consumers who are, have been, or will be end users and/or buyers of a firm's products/services; (2) regulatory and institutional agencies that are entrusted by society to act as "guardians" of the marketplace; (3) commercial intermediaries that participate in vertical arrangements with the firm to create time and place value for the latter's products/services; and (4) noncommercial intermediaries that act as independent gatekeepers and/or activists and thus influence access (e.g., parents of schoolchildren, media, scientific community) and/or provide value through information (e.g., consumerist agencies, activist organizations) to end users and buyers. A distinctive aspect of our study is that we extend previous research by examining explicitly how a firm's market relationships across the preceding four nodes intersect and interact.”

I like the authors’ model, even if it does lead to pretty complex mappings of the ‘diverse market relationships…” They trace the various factors that went into the LA school districts decision using the lens of trust, and in particular the way the sugar lobbyists and their allies in the food industry tried to filibuster legislation that would ban or regulate Coke and other sweets from being sold in schools. Coke, in 2001, began to realize it had a huge problem on its hands, and so was backpedaling from exclusive pouring rights contracts – but its bottlers were angry in turn, since they made a lot from those school venues in a market that had long reached saturation.

All of which brings us to the issue of media trust. LI has long maintained that the media fallout from the great media depression of 2001-2004 has concentrated way too much on a simple quantitative explanation: it was all an advertising shortfall, the result of the Net crash. We think that is bs. In fact, the pumping strategies that had fed the market in the late nineties was assiduously abetted by the media. I was looking back to newspaper and magazine articles about Enron, thinking of putting up a couple of where are they now posts for the likes of Rebecca Marks, and I was amazed, again, to be reminded about what was being published back in the nineties. For instance, I found something called Success Magazine – I haven’t checked to see if it is still around – and it published an article in Success magazine 1998 extolling “Visionaries. (profiles of five innovative business leaders) (includes related article on eight visionary entrepreneurs)” Of the five visionaries Stephen Rebello was awestruck by, one has now gone to jail and one, Bernie Ebbers, is almost certainly going to jail. And of course, where would visionaries be in the 90s without Ken Lay and Jeff S?

“Kenneth Lay CEO, Enron Corp. Houston, Tex. Number of employees: 14,000 worldwide Revenue: More than $13 billion yearly Lesson: One good idea can break the stranglehold of a monopoly
Most of us grew up with this impression: Flick on a light switch or fire up the furnace, and you're trafficking with a friendly monopoly -- the local utilities company, regulated by the fed. After all, what were our alternatives? A battery pack and a cache of firewood?
Kenneth Lay wanted to rearrange all that. In 1985 the former deputy undersecretary for energy of the U.S. Department of Interior helped forge Enron Corp. from two gas-pipeline firms. In short order, Lay pushed Enron to became something bigger -- a gas-marketing company that, by the '90s, was servicing Argentina, India, and the Philippines. With deregulation fervor brewing, Lay envisaged expanding to exploit an even bigger potential gold mine: freemarket electricity.
Open to competition the nation's $215 billion retail-electricity market? Sell electricity directly to homeowners, businesses, and industrial users? Sounds like a great idea -- unless, of course, you're a deeply entrenched utilities supplier.
"We simply made a commitment to providing consumer choice and competition for retail natural gas and electricity, much like what we've seen in the telecommunications industry," asserts Lay, who manages to sound like an underdog David tackling a monopolistic Goliath despite his power company's output's recently having jumped by 286 percent in one quarter alone.
What took him, md others, so long? "The electricity utilities, which, by the nature of their business, are very skilled at working the political regulatory process," he fires back, like a born zealot. "Few of the larger electricity facilities are pushing for consumer choice and competition."
Okay, so the gloves are off for a fight to die finish, but once the dust settles, how will die services provided by Lay and other free-market suppliers be any different?
The differences between a market and a monopoly will finally mean innovation," he explains, with contagious enthusiasm. "Consumers are going to save $60 million to $80 billion a year, more than $200 million a day. We won't use antiquated analog meters, and there'll be no more guys jumping over fences and fighting dogs to read meters. Digital meters and instantaneous readings will mean that consumers can start making choices as to when to turn on the washing machine or die dishwasher, taking advantage of lower rates that can save them 40, 50 percent."
I’m sure the people of California appreciated that.
But it wasn’t just fly by nights like Success. Fortune, in 1996, published perhaps one of the unintentionally funniest tongue baths of all Lay’s pleasure centers. It begins with that hoary but always good profile grabber, the CRISIS. In this one, our intrepid Lay is on the ski slopes when disaster seems to threaten:
“Kenneth Lay skied down Ajax Mountain in Aspen, Colorado, on a cold dark afternoon last December, blissfully unaware that the stock of his Houston-based energy conglomerate was taking an even steeper plunge. The Enron chairman returned to his vacation home on Roaring Fork River to find an urgent message from President and Chief Operating Officer Richard Kinder: "We've got a major problem, and we've got to talk."
That afternoon, Enron's stock had lost 2 7/8 points, or roughly $750 million in market capital, amid rumors that the company's natural gas marketing arm, Enron Capital & Trade Resources, was shorting the market even as the January futures contracts expired and a pre-Christmas cold snap was sending prices up the chimney. The crisis of confidence was compounded by rumors that Jeffrey Skilling, the 42-year-old wunderkind chairman of Enron Capital & Trade, had been led off the company trading floor in handcuffs.”

Imagine that. And of course the crisis, here, is all about stock prices. Which it might have behoved the author of the article to ponder.

These and a zillion other articles not only got things wrong – they actually got in the way of getting things right. They obstructed rationality and made skepticism into a “contrarian” stance – when of course skepticism is just the way one should approach a narrative involving a lot of money and people with an interest in skewing your perception of the narrative in a certain way.

The business press articles percolated through the four nodes of Singh, et al.'s article in peculiar and depressing ways…

About which, more tomorrow.


Patrick J. Mullins said...

Roger--yes, this is some interesting stuff.

Charlotte Beers, Under Secretary for Public Diplomacy and Public Affairs--appointed by Bush, I just googling found, inspired by your advertising thoughts and yesterday finding myself researching the big conglomerates because I used to do temp work in some of them. I saw the most vicious employer I ever had anywhere yesterday at Rite-Aid, completely unchanged from her successful pushiness when head of one of the WPP groups; she is so horrible you see I am even careful in not mentioning specifics, as she'd love nothing better than a lawsuit, since ordering up the manager to correct clerks is not very gratifying.

Anyway, the last I heard of Ms. Beers was one Peter jennings end-of-year 'hero choices' and she was one of them. In the paper, she posed in her Ogilvy and Mather office with a picture of herself on the wall behind her in the same pose.

There is a strange hypnosis about the advertising industry. I know, because I was a REAL temp in order not to stay too long anywhere, and I worked in about a hundred (literally) different companies--and there was something always very seductive at JWT or McCann-Erickson that you would not find at Merrill Lynch or what used to be Shearson Lehman.

(I may be a little off-topic again, but there may be some relation as I had originally thought.)

roger said...

Patrick, if we are going to have a topical rule, the first person fired from LI would be me...

I well remember the ever comic Ms. Beers, who traveled through the Middle East in a state of complete befuddlement that reflected that of her boss.