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lundi 28 février 2011

The non-ideological age

I've mentioned a few times in my previous posts that current revolts in the Arab world are non-ideological, I'd like to come back on this point.

Yesterday, I was for the first time disappointed by a Nial Fergusson piece in Business Insider. In this article, the Harvard historian and economist warns against revolutions that start by generating enthusiasm both at home and abroad but end awry. His basic point is that America being born out of a successful and relatively bloodless revolution tends to get fired up too fast about other people overthrowing their own governments. He then goes on to draw from past examples that include France, China, Russia and the likes to show that most revolutions fail to live up to the expectations people had of them and end up in sclerosed dictatorships at best and bloody genocide at worst. The bottom line is: we shouldn't get our hopes up about Arab revolutions since history teaches us that popular uprisings rarely end up as we had hoped them to.

I certainly don't think that we should be naive and expect revolutions in the Arab world to produce the stable, liberal, democratic regimes we would like them to. There are still too many unknowns in the equation and nobody can real predict what the region will look like when the dust finally settles.

But still, comparing the Jasmine revolutions to those in Russia and China is misleading (France is another, more complex matter) in many ways. Here are, in my view, the two key differences between them:

1- The Jasmine revolts are remarkable non-ideological. The wave of protests was triggered by a mundane, if tragic, event (the self immolation of a Tunisian street vendor) and carried demands that were highly pragmatic. Other revolutions such as those mentioned by Nial Fergusson were deeply ideological. They came with a "ready to think" theory about economy and world affairs along with a pre-packaged set of enemies (which explains why they were usually followed by international conflict). They were radical and uncompromising in nature and thus prone to spark conflicts within the country or with surrounding powers. As a matter of fact, the Arab revolts are more similar to the American revolution in that they are based on pragmatic aspirations rather than ideological nonsense.

2- As a result of their ideological roots, the revolutions Ferguson uses to illustrate his point were well structured . They had their leaders, their thinkers, their models and their objectives. The Jasmine revolutions, on the contrary, are diffuse and loosely organized to say the least. They bring together individuals and organization from various social and ideological backgrounds and use punctual demands as a mortar rather than immutable ideologies. They rely on the power of individuals, not on the magnetic appeal of a few leaders. They are an embodiment of the "Many to many"organizational model and thus are unlike anything we have ever seen before.

dimanche 27 février 2011

The Iran question

One of the big questions in the air right now is the Iran one. What consequences will current events in the Arab world have on the Islamic Republic? On this matter, two schools of thought compete:

- Team realism: whatever comes out of the current turmoil, Ahmadinejad will be a big winner. A recent Foreign Policy paper makes this case quite convincingly and predicts that a year from now, Iran will be in a stronger position both domestically and internationally than it is today. At first glance, that Iran should benefit from popular uprisings in the Arab world makes little sense. After all, the regime nearly crumbled not too long ago when people took it to the streets to protest against the rigged re-election of President Ahmadinejad. The country's economy is in the toilets, inflation and unemployment are rampant and the regime has gotten more authoritarian over the last few years with the Bassidjs and Revolutionary Guards playing an increasingly important role in the political and economic spheres. However, as the aforementioned paper stresses, the Green Movement may not be as representative as we hope and the regime still enjoys widespread popularity. Most importantly, its followers are hard core fellows that are ready to die protecting the Islamic Republic. Furthermore, nearly all of the countries experiencing turmoil have long maintained staunchly anti-Iran positions to satisfy their Western backers. With these puppet-governments gone, the Iranian regime will be able to extend its networks of allies, isolate Israel and strengthen its position at home.

- Team optimism: with Mubarak, Bin Ali and Kadhafi gone, Ahmadinejad is next in line. Protesters in the Arab world have set an example that their Persian counterparts will dutifully follow. George Sorros is maybe the most famous promoter of this narrative. On the last edition of Global Public Square on CNN, the billionaire investor told host Fareek Zakaria that a year from now, the Islamic Republic would be gone, swept away by the unstoppable wave of popular uprising that is hitting the region. Deposed dictators may be replaced by somewhat less anti-Iran regimes but let's not forget that the current protests are remarkably non-ideological in their nature, making a repetition of the 1979 scenario impossible. It may takes weeks or months, but the mullahs will quickly be sent packing.

I think that there is some truth in both scenarios. Right now, it is absolutely impossible to predict how the Jasmine revolutions will affect Iran. There are two many unknowns in the equation:

- What is the real level of Ahmadinejad's internal support? Bin Ali, Mubarak and Kadhafi went down in large part because they could not rely on widespread popular support. Will Ahmadinejad follow the same path? Many in the western world tend to see him as a textbook dictator that survives only thanks to brute force and the squashing of opposition groups. Things are more complicated. The president enjoys very real, and extremely fervent, popular support, especially in rural regions. How big that support is is another question. I think nobody can accurately gauge how popular the regime really is. Furthermore, the regime's supporters are not the type to defect or keep their heads down. Even if they are greatly outnumbered, they will fight until the very end and it will take an equally fired up opposition to confront them. My personal position is that Ahmadinejad's mishandling of the economy has strongly eroded his support. Don't count on large crowds to support him. If he ever were to be threatened by popular revolts, he will rely on his core of fervent, baton-wielding supporters to defend him.

- Is the Green movement really representative? Being skeptical about the regime's real popularity does not lead me to overestimate the real representativeness of the green movement. One of the reasons why it didn't manage to overthrow the regime in 2009 was that its could not claim to represent a majority of Iranians. The movement is young, mostly urban, liberal and centered on Tehran. I believe that even though Ahmadinejad is unpopular, many Iranians are still uncomfortable with explicit attacks towards the Islamic Republic itself and supreme leader Khameini. I don't think that a revolution that has the Green movement as its primary representative can gather the necessary popular support to be successful.

- Will new regimes in the Arab world be as pro-Iranian as we fear? Short answer: no. To be sure, whatever government comes to power in Egypt, Bahrain and Yemen will start developing normal relationships with the Islamic Republic. Is that such a bad thing? I don't think so. We should look forwards to more governments in the region starting to emulate Turkey's attitude towards Iran (engage in a realistic manner). Such governments could help find realistic solutions to the region's problems (akin to the Iran-Turkey-Brasil nuclear fuel swap proposed in May 2010). The revolts in the Arab world are non-ideological, I don't believe that they can give birth to ideology-driven governments that would support Iran's reckless behavior and nuclear ambitions.

- Does the Islamic Republic enjoy real popular support in the Arab world? I strongly doubt it and always have. Alarmists often point to the fact that opinion polls in the region show that Iran enjoys a better image than the US. This may be true but you don't see many Arabs immigrating to Tehran. People that live under western backed autocrats may support the general idea of a somewhat Islamic state that counterbalances western influence in the region. But being vaguely in favor of an abstract idea does not mean wanting to import the model at home. In the latest edition of GPS, one of the participants likened Arab support for the Islamic Republic to that of western intellectuals for the USSR during the cold war. Sure, Sartre and the likes were ardent defenders of the Soviet Empire but you didn't see them emigrate to Moscow. As regimes propped up by the West crumble and are replaced by democratic and diplomatically independent governments, I am convinced that the Islamic Republic will loose its appeal.

- Will the west intervene? If the west intervenes in Lybia or any other country, chances of a popular uprising in Iran will be completely destroyed. Western meddling in the region is a key part (if not THE key element) of the Islamic Republic's narrative. The more the western powers are active in the region, the stronger the legitimacy of the Iranian regime.

So what's my take on the question? In short: I don't believe in an Egyptian scenario in Iran. I think that the regime might crumble in the next year or so but wouldn't place a large bet on it. Most importantly, if the regime falls, it will be worsening economic conditions that will give a popular uprising the necessary amplitude to have a real impact.

vendredi 25 février 2011

Credit rating agencies: modern magicians

As I said, I'm trying to make up for the Twilight article. So here is an article I wrote a few months ago about a more serious topic.

“There are two superpowers in the world,

the USA and Moody’s bond rating division

and it is sometimes unclear which of them is more powerful”


Turning lead into gold. What alchemists sought to do with alembics and test tubes, Credit Rating Agencies (acronym: CRAs) have done with the help of complex algorithms and an exotic approach to risk assessment. These modern time magicians now facing a heavy fire of critics have for years held the key to the magic formula that kept mortgage-based derivatives markets running and money flowing into their coffers. With a stroke of their pen, a combination a 2 or 3 magic letters, these agencies had power of life and death over thousands of financial products. They were the conductor of this great crazy orchestra that suddenly stopped playing one fateful autumn day of 2008.

How did we end there ?

But how did it all come to this? How can thousands of experienced investors and dozens of venerable institutions have all been fooled into blindly trusting the underlying solidity of assets they had little understanding of? How did the mortgage-based derivative disease spread across the financial system like wild fire without anybody ringing the alarm bell before well after it was to late?

As after every major crisis, an army of self proclaimed experts now glorify their egos by subscribing to the easy, populist view: It is all the market’s fault. Liberalism, deregulation and unfettered competition are to blame. Credit Rating Agencies are the ugly child of the free market. Their role should be assumed by the state. They and they only have made possible the crisis we now have to fight with taxpayers’ money.

Unfortunately, these allegations are based on little more than an ideological allergy to free markets that runs deep in the minds of our intellectual elites. The sheer facts and numbers tell a radically different story. This essay will aim at showing how credit rating agencies, despite their flawed methods and incompetence, could only enjoy such importance because of red tape and regulations. It will highlight how banking regulations gave these intrinsically imperfect organizations a completely disproportionate role and how governments are to blame for what many are too happy to attribute to reckless liberal ideology.

Historical look

Before Credit Rating Agencies’ power could rival those of the USA (in the words of Thomas Friedman, quoted above), these actors were somewhat marginal players and enjoyed a reputation of grumpiness, seriousness and honesty. Before regulations came and changed the rules of the game, credit rating agencies got their money from investors who subscribed to their ratings and advices. Their ratings were strictly informational, had no legal force whatsoever and investors were free (and indeed often did) to ignore them. In such a context they only provided markets with what might well be considered their most precious fuel: information. By releasing information about financial products and their issuers, they added transparency and helped investors take informed investment decisions.

And then came government and its foolish aim to put an official stamp on everything. In 1975, the SEC, wanting to control the risk banks and other investors took sought to establish an official definition of risk. To do so, they recognized three official credit rating agencies: Standard and Poor’s, Moody’s and Fitch ratings whose ratings were now to enjoy legal force. Since the enactment of the law, other agencies have joined the club but the “Big three” retain their pre-eminence and now appear as the most powerful actors in the financial system. The consequences of this legislative move are numerous and far reaching.

These regulations created an oligopoly for the selected agencies and guaranteed them a steady stream of revenues. It also created a de facto obligation for issuers of financial products to have said products rated since capital requirements and the structure of investors’ portfolios depended on these ratings. Indeed, the lower the risk of assets on a bank’s portfolio, the less capital it had to carry and the more money it could invest. Holding high rated assets allowed banks to free up capital, which made them seek actively such assets. What’s more, pension funds were barred from holding anything below AA and similar restrictions were placed on the structure of mutual funds and other such investors’ portfolio.

As a result, a product’s worth depended more than ever on its rating and issuers were forced to submit their products to the all-powerful agencies. The consequence was a radical change in these agencies’ business model. Whereas they previously received their money from investors who trusted their ratings, they were now paid directly by the issuers of financial products. In the words of Johan Norberg, “This amounted to buying a house which value had been assessed by an agent paid by the seller”. I strongly doubt whether any sane home-seeker would ever do that…

Many self called financial experts claim that credit rating agencies enjoyed their power and actively pushed governments to expand their influence. In reality, high-ranking executives of these agencies were among the most vocal critics of the above-described regulations. The words of Thomas Mc Guire, Moody’s chief of corporate ratings are eloquent: “ Rating agencies are staffed by ordinary people with families to support and bills to meet and mortgages to pay. Government regulators are inadvertently subjecting those people to improper pressure and share accountability for any scandal which may result ”.

Current role and legal status

Despite the controversy surrounding them, credit rating agencies have an important function: they provide markets with information. They issue ratings of both financial products (assessing the risk associated to them) and issuers of financial products (evaluating their solvency and the likeliness of default).

Their ratings influence the price of financial products. This is especially true for the most complex products for which no liquid market exists (which was the case for many complex derivatives such as CDOs until the creation of the ABX.HE). They also influence investors’ trust in issuers of financial products and thus the cost of borrowing of governments and companies alike. The recent downgrading of Greece and Spain’s ratings, which triggered a sharp rise in both the interest rate of their treasury bonds and corresponding CDS is truth of that.

The ratings issued by CRAs also contribute to shaping the structure of investors’ portfolio. As previously showed, many mutual and pension funds are barred from holding anything below AA or in some cases AAA. The European Central Bank itself cannot hold Treasury bonds rated below BB.

According to the Basel II agreements, capital requirements for banks depend on the risk-weighted composition of their portfolio. The complex formulas used to calculate the appropriate amount of capital banks are to hold used ratings from CRA to assess assets’ risk. The amount of capital banks must hold thus depends on the letter apposed on the assets they own, which makes CRA all the more powerful and influential.

Controversy and role in the financial crisis

Much had been said and written lately about CRA’s chronic failure to properly accomplish the mission they were trusted with. A look at their recent history indeed shows a worrying incapacity to foresee major financial earthquakes and a troubling tendency to react a posteriori. For instance, Enron’s notation remained at investment grade until 4 days before what remains one of the greatest bankruptcies in history. CRA’s also failed to foresee the 97 Asian crisis and the 2001 Argentinean debt crisis. Furthermore, it today appears that CRA were out like bandits stamping AAA CDOs that turned out to be worth nothing.

The incompetence was apparent in the way they attributed notations to CDOs.

CDOs are structured financial products based on financial assets. In their most common form, they are made of mortgages packaged and are then divided into tranches according to the level of risk. It should be noted that no mortgage is actually owned by one investor. Holding the safest tranches does not mean owning the soundest mortgages, it simply means that you will be the last one to be hit if things go awry.

Government's interventions hiding actual risks

The solidity of a CDO thus logically depends on the solidity of the mortgages it is built with. But in reality, things are much more complicated since CDOs are believed to be removed from the actual housing market. Indeed, the mortgages after being granted by companies such as Countrywide were bought by the two government sponsored enterprises Fannie Mae and Freddie Mac (as part of government’s scheme to increase home ownership) who guaranteed to buy virtually any mortgage however bad it was.

The intervention of these two government sponsored enterprises made investors treat anything they touched like treasury bonds (the safest investment in the world) and blinded them to the risk associated to the products they created. Fannie and Freddie then proceeded to create an Asset Backed Security (which they guaranteed) composed of mortgages from all over the country (to diversify risk exposure). This ABS was then divided into tranches much like a CDO and these tranches were bought by investors (mainly banks) who in turn packaged them into a CDO.

Getting rid of the original mortgages allowed mortgage lenders such as countrywide not to have to wait for 10 or 20 years to get their money back. Reselling mortgages allowed them to free up money to grant more loans and thus generate more revenues. The downside was that since Fannie and Freddie guaranteed to buy the loans, lenders paid little attention to the solvability of borrowers and granted loans on incredibly favourable terms to households who didn’t deserve even a credit card. When times were good, households could in many cases take out a loan without even having to provide the lender with such basic information as credit history, detailed household income etc… Lenders often had little clear idea of whom they were lending money to and little did they care. Nor did investors seek to know more about the solidity of the mortgages since the intervention of government sponsored enterprises and the guarantee on the ABS they created made everybody blind to risk.

Mortgage securitization: a cash cow

All this brings us back to our CRAs. When a bank wants to create a CDO, it needs to have it rated by an agency and had better get a good grade if it wants anybody to buy it. Originally, CRAs estimated that no CDO consisting solely of mortgages could be given an investment grade notation because the degree of risk diversification was way too low and the product was too exposed to the fluctuations of a single market. But as CDOs became more and more popular and the government inflated the housing market with its three giant pumps that were the FED, Fannie and Freddie; CRAs came to realize how much money they could make by re defining their grade attribution criteria. The aim was to make customers come to them rather than their competitors and for that, bringing out the AAA stamp was necessary.

Mortgage securitization was a cash cow, and CRAs were milking it as if there were no tomorrow. Even Moody’s, the most conservative of them, abandoned its diversification requirement in 2004. As its CEO explained “it was a slippery slope. What happened in 2004 and 2005 with respect to subordinated tranches (the riskiest tranches of CDOs) is that our competition, Fitch and S&P, went nuts. Everything was investment grade”. The strategy could not be any more profitable, a single rating could generate over $200 000 of revenues and took little more than a day (in some cases a few hours were enough). In 2005, securitization accounted for over 40% of Moody’s sales.

At a hearing at the House of Representative, one document (an internet chat between two S&P analysts) was produced that shows the extent of the CRAs’ foolishness.

1- By the way, that deal is ridiculous

2- I know, right, model definitely does not capture half the risk

3- We should not be rating it

4- We rate every deal. It could be structured by cows and we would still rate it

Financial journalist Roger Lowestein investigated how Moody’s rated CDOs. To preserve confidentiality, the CDO was given the name “Subprime XYZ”. It was a package of 2939 mortgage loans made in the spring of 2006 at a total value of over $400 million. The bank that engineered the package provided Moody’s with general information about the borrowers but Moody’s did not seek to consult individual files or confirm the data. “We are not loan officers, our expertise is as statistician on an aggregate basis” explained Claire Robinson from Moody’s.

Indeed, Moody’s Modus Operanti is simply to assess the likeliness of default based on average historical data and information about similar products. The structure would be inspected but the underlying assets (the real mortgage loans that made up the package) would never be looked at. Nobody was in charge of assessing the underlying risk, except the loan officers who has little incentive to do so since they knew that the mortgage would be sold and that they wouldn’t have to support the risk.

Bad behaviour supported by bad statistics

In the end, CRAs were just statisticians, and bad ones with that. Their data was outdated at best and misleading at worst. They based their models on the way house prices reacted to the 2002 downturn. But this downturn was unique in that the Fed had pushed interest rates as far as they would go and house prices kept rising.

Furthermore, they were over reliant on opaque statistical models and algorithms derived from the Gauss law. The Gauss law when applied produces the well-known bell curve whereby the number of individuals decreases as we move away from the average. But the Gauss Law (which is the foundation of many of the algorithms and formulas used in the financial world) is flawed in that it over-emphasizes the average and underestimates the probability of extreme events. As we can see on the bell curve, the number of subjects associated to extreme (meaning very far from the average figure) figures is fairly low.

All in all, CRAs underestimated the likelihood how extreme events such as a sharp decline in home prices. They assumed that times would always be good and that home prices could only rise in the foreseeable future.

What now?

The CRAs question raises a number of issues that are as much philosophical as they are economic and financial. The regulations surrounding them and the power governments gave to them stem from an insane desire to regulate the behaviour of thousands of investors and to define the indefinable.

Defining risk is impossible. Risk is multiform and in constant evolution. Giving a fixed, official definition of risk will just make investors focus on a certain kind of risk and blind them to new forms that are beyond the scope of the official definition. By forcing investors to refer to notations given by inherently imperfect organizations staffed with normal human being, regulators have highly increased the probability of the current financial disaster.

In the end, it is all about the kind of capitalism we want. Do we want a system in which free and responsible investors do their own research and take a careful look at the solidity of the assets they buy or do we want a system that sees investors stripped of their responsibility by the nanny state being pushed to blindly trust the findings or a handful of government mandated agencies? Had regulators not tried to rigidly define risk in the first place, investors would have had to do their own math, check for themselves the risk associated to certain assets and decide of the appropriate level of capital they had to carry.

CRA were governments’ way of crating a fictitious impression of security and stability. Liberalism is about separating government from business and making it as small as possible. What regulators have done is old fashion dirigism with the connivance of private actors. Strict regulations laying out what you may or may not do, which assets you may or may not hold only exacerbate economic cycles and make investors behave like sheep and follow the herd. While having all investors act the same way because regulators mandates them to (be it via direct intervention or by forcing them to act according to CRAs ratings) might be comforting for politicians and the general public whose understanding of financial market is imperfect at best, it makes crisis all the more serious.

When times are good and the AAA stamp is hot, investors all run after the same assets and trip over each other to get into the same markets. But when things go wrong and the train goes off the tracks, everybody in the market gets clobbered. These repeated attempts to use government intervention to make the system risk proof do nothing but make us more vulnerable to small changes in the market that would otherwise have been quickly absorbed. In the words of John Norberg, “Every attempt at diversification or adaptation has been wiped out by precautionary principles” and investors have come to resemble a sad herd of sheep because of government regulations. Investors should not act the same; this is not what the free market is about, this is not how we will build a stable and efficient financial system.

Government is the problem, not the solution

So what now? Many call for governments to take over the job of CRA and would like to see the creation of an official state run rating agency. But the underlying problem would remain. Companies (especially state owned ones) are prone to mistakes and nothing guarantees that a state run agency would do any better a job than private ones, especially if governments’ interests (for example not having their own grade lowered) come into play. State run companies do not have a good track record of honesty and reliability. The issue is not that agencies have done a bad job. If regulators had not forced investors to subscribe to their ratings the problem would have been much less acute. They would just have lost their credibility, some people would have lost money and life would have gone on. The problem is that giving legal force to CRAs (be them public or private) has simply made investors stupid.

The real solution is to strip CRAs of their legal status and come back to a freer model of capitalism. CRA have a future, just not as government-mandated structures. Their ratings should again become informational and investors should be free to ignore them. Then we will have a capitalism of smart human investors instead of a capitalism of sheep. As Hayek said, “Economics is about showing people how little they know about what they imagine they can control”. Governments and regulators should remember that.

Twilight for guys

I feel kind of ashamed for posting an article about Twilight and I will make up for it by publishing two very serious and long articles. Don't worry, this blog is not going downhill after only a week of existence. LOL cats and stupid Youtube videos are not next!

During my stay in Shanghai, I had the occasion of discussing at lengths with my roommate the reasons for which Twilight was so successful. Said roomy had bought the book out of curiosity and described the experience as "excruciating and altogether useless. Seriously dude, Twilight made playing Robot Unicorn look like a productive and stimulating occupation ".

Recently, my friend sent me a very interesting analysis that offers valuable insights about Twilight's quasi mystical appeal:
BTW, let's think about why Twilight is so interesting to girls by making a male version of it.
You meet one girl, which is a mix between Hayden Pannetiere and Mila Kunis. At the start, you think she doesn't like you, but actually she's crazily in love with you and keeps asking you to be with her. Then you discover she's a f****** PIRATE. And her whole family is pirates. And they loot treasure and s*** and bring you along. And you want to be a pirate too!

But then here comes another girl, who's a mix of Elisha Kuthbert and Megan Fox. And she's also crazy for you. And she's a NINJA! And now you have to decide which girl you want, and also whether you want to be a Pirate or a Ninja.

This is the first real understanding I have had of the Jacob vs. Edward conflict. It all seems so clear to me now.
Good stuff.

jeudi 24 février 2011

Why Justin Bieber is awesome

I sure hope that this tittle will help my Google Rankings because getting my fingers to type this sequence of words was no small achievement...

As a business student with experience in corporate and brand strategy consulting, I think that Justin Bieber deserves my praise. There a many reasons why Bieber is awesome: you can always turn to him when you need a good laugh, his songs make for great drinking games and, most importantly, he is a very talented brand strategist.

It might be a little unsettling to go from historical comparisons between Napoleon and modern China to business strategy, but hey the tittle above says "random thoughts about random things" so don't be surprised if I abruptly hop from one topic to another.

There are many things Bieber does very well from a brand strategy point of view:

  • A compelling story: storytelling is very hip right now. We easily forget names, logos, slogans but what we remember are stories. Stories may be the most powerful and cost effective way to convey a brand message. They are easily memorable, often aspirational or entertaining and encapsulate the brand essence. They are what stays when everything else is forgotten. Most great brands are, to varying degrees, supported by compelling stories: Nike, Apple, Microsoft, Zara, Nespresso, Budweiser etc... Justin Bieber knows that stories speak volumes and is careful to capitalize on his (young boy who started by posting videos of himself singing on YouTube and was later discovered by RnB superstar Usher) as much as possible. Hence his movie "Never say never" (although I can say with absolute certainty that I will NEVER watch it) that is essentially a 1h30 long biography meant to strengthen his brand image. Good move JB!
  • A clear target audience: Bieber does not try to give something to everybody. He knows that his music and attitude are unbearable for people over 16 and yet he sticks to his message because he knows who he is talking to. Well done little man!
  • Strong symbols: Bieber does not keep his hairstyle because it looks good, he keeps it because it is his logo, the visual representation of the Bieber brand. How many brands do you know who have their logo on other people's heads? 祝贺你小朋友!
  • An image that is aspirational without being unattainable: the tittle pretty much says it all. Maintaining an aura of superiority without seeming aloof and out of touch is a fine line to walk. But for now Bieber is walking it just fine. He maintains an image that is perfect enough to create scenes of riot everywhere he goes but he is also careful to stay in contact with his fans (mainly via social networks) and seem "down to earth". To his fans, he is almost like one of them, kind of like the most popular guy/girl in high school: he walks amongst you and yet lives in a different world you hope you could enter but really can't.
Beat THAT Mc Kinsey!

But what really makes Bieber great is the way he relies on his fans to air his brand message. As any brand manager knows, getting a brand message across is a difficult exercise. Success is expensive and customers tend to regard official messages with skepticism. The best kind of media is thus not owned media (media that is paid for) but earned media (media that customers or other persons of influence willingly create).

Just look at what JB is doing on Twitter. Despite the fact that the micro-blogging tool enjoys little popularity with teenagers, Bieber is one of the site's hottest "trending topics". What's more, his fans are entirely devoted to the promotion of his persona. Many of them include his name in their Twitter ID (notable examples include Bieberworld 16, Bieber4eva and 1bieberloveyou) and tweet almost exclusively about their idol. All in all, they represent thousands of touch points that dutifully spread the Bieber brand message at a total cost of 0 dollars!

Furthermore, Bieber has an active profile on Twitter and fans can ask to be followed by him. The lucky few that are chosen by JB (or the intern his agent hired to manage the account) see their own followed base expand exponentially. In show business terms, that means even more people likely to catch Bieber fever. In brand strategy terms, that means higher brand awareness and a proselyte customer base.

Obviously, Achieving Bieber's pop star appeal is no easy exercise, but like Bieber, brands can generate the right conditions and create the right tools to transform their user base into an army of ambassadors. And while attraction between the average brand and its consumer pales in comparison to that between Bieber and 14-year old girls, that doesn't eleminate the potential for earned media. Not every brand can be it's industry's pop-star, but it's high time brand managers took a look at the Bieber playbook.

So let's recap. What is the "3 step Bieber recipe for earned media" ?

1- Generate a desire to talk about your brand by uncovering deep seated customer needs that go beyond customer benefits

2- Catalyze this desire by creating the right tools to turn fans into ambassadors

3- Participate in the discussion and give back

mercredi 23 février 2011

What Napoleon and Chinese leaders have in common

History often allows us to better understand our own times. I have been reading quite a bit about Napoleon Bonaparte's empire lately and found interesting parallels between it and modern China.
  • Constant expansion: Napoleon Bonaparte's rule rested on expansion. Military conquest was the regime's essence and raison d'être. Napoleon rose to fame after the first campaign of Italy where the young corsican crushed the mighty Austrian armies at Lodi (amongst other places). He then strengthened his aura during the famous campaign of Egypt during which he defeated the fearsome Mamelukes and from which he came back a hero (despite the fact that his fleet was destroyed by the British at Aboukir and that Napoelon was subsequently effectively trapped inside Egypt). During his reign, military expansion was what made Napoleon's legitimacy. Granted this is as much a personal point of view as it is an historical fact (I recently had a heated debate with a good friend of mine about precisely this question) but I strongly believe that military expansion and the Napoleonic regime were consubstantial. Expansion allowed Napoleon to keep is enemies at bay, secure the necessary support at home to implement his domestic reforms and make people accept the authoritarian aspect of his rule. Like the first empire, communist China depends on expansion, albeit of a different kind to survive. To stay relevant, the party needs growth. Lots of it. Without economic growth, people may be less prone to tolerate corruption and inequalities and without a sense of nationalism generated through a hawkish military and diplomatic stance, the party's popularity could suffer. But this reliance on expansion at all costs could one day cause trouble. For Napoleon, it led to poorly planned campaigns in Spain and Portugal and the downright foolish campaign of Russia. In China, reliance on growth no matter of what kind or at what cost leads to unsustainably high levels of investment as a share of GDP, artificially cheap capital, environmental disasters, high inequalities and bank lending policies that make Ben Bernanke look cautious. Even on the micro level, you can see the consequences of this reliance in the way infrastructure projects are managed (excellent article illustrating my point just here). In the long term, China's hawkish foreign policy could alienate its neighbors and lead them to coalesce against it (just like Napelon's enemies did). In many ways, we are already seeing that happening with South Asian countries (along with the US, South Korea and Japan) implementing what I like to call a "reverse string of pearls" strategy to contain the middle kingdom. Bottom line: regimes that rely on constant expansion encounter difficulties at some point or another.
  • The "aura". I struggled to find a term to refer to the second parallel between Napoleonic France and Communist China. "Aura" seems the best one. By aura, I refer to the psychological component of power. In the glory days of the empire, military expansion rested largely on fear. France's enemies' feared Napoleon, the great general turned emperor seemed invincible on the battle field. His military genius gradually became a self fulfilling prophecy. We are seeing the same thing with modern China. To be sure, China's achievements have been absolutely remarkable and I have no doubt that it is destined to be one of the great economies of this century. However, in some respects, China is a Potemkine country. Its growth rates are remarkable but are the fruits of an unsustainable and inefficient investment-fueled economic model. Many of its technological achievements merit our praise but it still has a long way to go towards creating an environment that truly fosters innovation and out of the box thinking. Its political model appears to be working fine for now but still has much to prove. I could go on for hours. The point is that the way we think about China lacks nuance. Because of it's strong aura, everything China does or says is magnified, exaggerated and blown out of proportions. Most recent example: the unveiling of the J-20 stealth fighter. As of today we know that this plane is black, can fly for 15 minutes and that its technology is most likely drawn from parts of a American F-117 that crashed in Kosovo in 1999 (good article on that here). And yet papers are full of grim reports predicting that China will threaten the west's military supremacy. I'm not saying that we should not take this entire affair seriously and maybe the J-20 indeed is a remarkable achievement that deserves our attention. But as far as we know, the J-20 is still a question mark. I also remember reading a very long report a few years ago about China's indigenous TD-SCDMA mobile phone standard. The report predicted that the standard would be a huge success because well... it was China and that it would be exported to western markets within 10 years. China, the report said, was now leading the way and sheer numbers would force the world to adopt its standard. A few years later, TD-SCDMA is a huge (and very expensive) failure. It was so unpopular that the government backtracked and allowed two of the three state owned operators to use other, foreign, standards. But I digress. My point is that China seems great because we do our best to make it look greater than it really is. This is regrettable since it not only leads us to overestimate certain aspects of the Chinese model but also prevents us from seeing potential where it really is. China is indeed a country with a bright future but anybody that takes the time to look at things with a cool head and an objective mind will be forced to nuance his point of view. When Napoleon lost his aura, he lost everything. His enemies ceased to be scared and his reign ended in disgrace. Obviously the chances that modern China will go the same way are virtually non existent but once the facade of our completely unrealistic expectations about the Middle Kingdom starts to show cracks, many people will lose their shirts and the country may be in some some tough times economically speaking.

lundi 21 février 2011

Our Berlin wall moment

I spent hours trying to figure out which subject should have the supreme honor of being covered in my very first blog post. It should be complex without being obscure; accessible without being simplistic; smart without sounding douchy and pretentious. Man, blogging is way harder than people make it look.

My dad told me that our generation is going through it's own "Berlin wall" moment. At first I found the comparison a little far fetched but after giving the matter some thought, I found 3 interesting parallels between the downfall of the USSR and current events.

1: Caught by surprise. Back in the 1980s, few people saw the collapse of the USSR coming. Sure, post facto analysis rationalized the phenomenon, as it surely will with the current Arab revolutions, and we are now all taught in history class that the Soviet collapse was the logical culmination of a succession of events that started with the invasion of Afghanistan. But with hindsight, rationalization is an easy exercise. The truth is that the mighty empire's fall caught people by surprise. For governments and political scientists, the Soviet Empire was an immutable reality and was there to stay. As it was back then, it is today. Who would have thought as 2011 started that the geopolitical scene in the Middle East, Maghreb and Machrek (Ps: I am always horrified by how often journalists and scholars regroup these 3 regions and 3 completely different realities under the name "middle east") would be forever changed by the ousting of some of the world's most powerful dictators. In less than 3 months, the winds of change swept away some of the planet's most well-entrenched autocrats. To say that we were caught with our pants down is a lovely euphemism. As the surprise passes, it will leave place to the usual finger pointing and rationalization exercise that inevitably ensues when such events occur. (Good article on that here). In the end, our children may learn that the collapse of Arab dictators fits neatly into a coherent timeline of events but the truth is that we are like deers in the headlights right now and no amount of post-facto analysis can erase that reality.

2- Uncertainty about the future. People of my generation (ie: those for whom the Soviet Union has never been more than a historical curiosity and the subject of history exams) tend to forget the climate of uncertainty that accompanied the fall of the Soviet Union. What would come next? Would the satellite states regain their independence? Will civil war break out? Would the Communist Party keep a tight grip on power or will a free-for-all liberalization process ensue? Who would step in and rebuild these devastated countries? What would a post-communist Russia look like? It seems to me that we are now getting a taste of that uncertainty. We know what we are leaving but the road ahead is foggy. For decades, corrupt autocrats such as Bin Ali and Mubarak (as I write these lines Kadhafi clings to power but it looks increasingly likely that he, his colorful tents and gaudy tunics will be sent packing) ruled their country with an iron fist, controling every aspect of economic, administrative and social life and leaving little place to other organized groups. The post-autocratic societies in these countries are fragmented, chaotic and lacking in structure. What's more, the revolutions' vectors and catalyzers are more powerful than anything we have seen before, adding to the uncertainty. However hard we try to predict, nobody can really know what will come out of all this. There a numerous questions still waiting for an answer. Will there be a peaceful transition towards liberal democracy or will it be 1979 2.0 (I don't really believe in that scenario but we can't rule it out)? What about the new regimes' attitudes towards Iran and Israel (amongst others)? How many countries will follow the example set by Tunisians, Egyptians, Libyans, Algerians, Iranians and Bahrainis ? (even China is experiencing unrest now). We are on standby, waiting to see how things unfold. The unease of diplomats the world over is almost palpable. Nobody knows how to act anymore and fears finding himself on the wrong side of history when the dust settles.

3- America should stay out of it. George H Bush is one of the most underrated US president in history and America could use a man like him right now. During his only term in office, Bush 1 was lambasted for being to timid and not doing enough to promote American interests abroad. But it was precisely this cautiousness and capacity to know when to keep silent and let events unfold that made his success. During the crumbling of the Soviet Empire, he resisted the temptation to aggressively influence the course of events and, as he put it, "dance on the ruins of the Soviet Empire". He and his secretary of state James Baker understood that the transition was an European issue and let Europe take the helm while quietly promoting their agenda in the background. The result was what historian Nial Fergusson calls a "soft landing" and an Eastern Europe that is today relatively stable, globally democratic and staunchly pro-american. Granted, the similarities between the collapse of the Soviet Empire, an event that marked the triumph of US policy and ideology, and the downfall of Arab dictators, that marks quite the opposite, only go so far. But the temptation to meddle in interior affairs, especially in Egypt and Bahrain, is as strong, if not stronger now. All over Washington people are calling for the state department to make sure that Egyptians elect the right people (ie: not the Muslim Brotherhood) and "use democracy responsibly". But what America should really do is shut up and keep its head down.

So it turns out that my old man's comparison was not all that far-fetched after all. Obviously, one can probably find much more differences than similarities between the fall of the Soviet Empire and the ousting of Mubarak and Co. But still, history has a fascinating way of repeating itself and people looking for a way to manage the current crisis might want to look back for some valuable insights.

Why this blog?

Ayn Rand once wrote that thought must precede and serve action.

I have spent many years thinking about many things and annoying the people that surround me with passionate speeches about subjects ranging from the totalitarian essence of central banks to the superiority of red M&Ms over yellow ones.

Now, it feels like it's time to let the wider world know about my thoughts on the world that surrounds us. It may not be the kind of action that Ayn Rand referred to in Atlas Shrugged but hey, it's close enough.

Hope you like it