The Good, The Bad, and The Ugly: Corporate Marketing during the London 2012 Olympics

Alongside the fantastic sport and athletics, I have been both impressed and irritated by the corporate marketing associated with the London 2012 Olympics. In the run up to the games the overall corporate involvement was excessive, in particular the corporate floats that preceded the torch procession all around the country. But at the venues themselves it was heartening that the presence of logos was limited and the focus was entirely on the athletes.

Some companies, both Olympic sponsors and non-sponsors, ran clever advertising campaigns based around the Games. For others, the campaigns were so bland, dull or ‘in-your-face’ that they served only to annoy. And worst of all some sponsors used the Olympics as a licensed monopoly for their products, which has backfired in ironic style for some! Here is a summary of the best and worst corporate Olympic associations, based on both my opinion of their adverts and on the newspaper and social media views on the campaigns.

Gold Medals (Sponsors)

British Airways

BA’s witty, self-deprecating tagline ‘Don’t Fly. Support Team GB’ is probably the most memorable piece of advertising I’ve seen associated with these Olympics. It shows a very British sense of humour, and resonates Virgin Atlantic’s famous ‘fly BA,’ campaign of 1986*. What’s more, BA's ads used the #homeadvantage hashtag, which perhaps helped psyche-out foreign athletes as they arrived. It was risky at the time, but has been vindicated by Team GB’s epic performance.

Cadbury

Not necessarily the most prominent of the sponsors, but Cadbury punched above its weight with its poster campaign on London buses and Tube stations, with some humorous comparisons between athletics and chocolate bars. I, for one, was amazed to learn that cycles in a slipstream are ‘only one Twirl bar apart.’ These ads raised a smile – and Cadbury seems to have avoided being tainted by the ‘junk food’ brush that harmed McDonalds and Coca Cola (see below)

Gold Medal (Non-sponsor)

Nike

Nike has had such a phenomenally successful campaign that more people think Nike is an Olympic sponsor than Adidas**. Nike’s campaign, based on the theme of ‘greatness’ and the places called London that aren’t London,UK, cleverly side-stepped the prohibition on mentioning London 2012 and the Olympics in ads, while capturing the spirit of globalism and inspiration The Games represent.

Silver and Bronze Medals (Sponsors)

Samsung

Samsung’s campaign was solid, but not exceptional, and avoided leaving a bitter feeling in the mouth as some other sponsors did. It was certainly more prominent than Panasonic, the other electronics-supplying sponsor!

Adidas

Lots of sponsors tried to associate themselves with Team GB’s athletes, but non more successfully than Adidas, which helped make several up-and-coming competitors household names before the Games even began.

Silver and Bronze Medals (Non-sponsors)

Jack Daniels

Mainly for its cheekiness, I really liked Jack Daniel’s adverts which focused on its history of winning Gold Medals at international spirits expositions. It included interesting trivia (JD has won seven golds, then stopped entering competitions as seven is its lucky number) and associated itself cleverly with The Games at relatively low cost.

Wooden Spoon (Sponsors)

Visa

Lots of things were wrong with Visa’s campaign, but above all its insistence that everything Olympic can only be paid for by Visa really took the biscuit. You knew it was going too far when it switched off regular cash machines from Olympic venues, and replaced them with just a handful of Visa-only cash machines. Hilariously, its payment systems actually broke down at Wembley stadium early on in the Games. It managed to get blamed in ‘empty-seatgate,’ its adverts were boring and in-your-face, and it is pretty-much lacking in consumer credibility anyway. We do not, in general, get to choose to have Visa or MasterCard, we just take whichever is issued by our bank!

McDonalds, Coca-Cola

These two companies were mentioned in the press a lot, but mostly as part of commentary / incredulity at how two of the unhealthiest foodstuffs around feature so prominently in a festival of sporting prowess. Their products taste nice – but are so calorific they are fuelling an epidemic of obesity, which is what sport and athletics should be trying to fight, not cosy up to. What’s more, McDonald’s insistence on a monopoly over serving chips in Olympic venues (with the notable exception of Fish’n’chips) seemed petty, and Coca-Cola unwittingly brought its ownership of Innocent Smoothies to greater attention by making Innocent ‘the official smoothie of London 2012-’ not so Innocent after all, eh?

Do you agree or disagree? Share your thoughts in the comments box below!

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*Richard Branson describes the episode in his book Screw It Let’s Do It: “On 10 June 1986, BA ran a promotion to give away 5,200 seats for travel from New York to London. Immediately, we ran an advertisement that said, ‘It has always been Virgin’s policy to encourage you to fly to London for as little as possible. So on June 10 we encourage you to fly British Airways.’”

**Thanks to Ad Age Global / Toluna for the research, and thanks to Private Eye magazine where I first read about this amusing survey!

Oversupply, Collusion, or Petrodollars: What drives London's property market?

As a renter in London, I have a natural interest in the capital’s unusual property market. Rents in London seem decoupled from the rest of the country, 3 or 4 or 5 times as high, due to the demand created by London’s proximity to well-paid jobs. I don’t have much insight on which way the residential property market is going to go, but this fascinating article from Buttonwood at the Economist suggests UK house prices and rental rates are out of step and may be due for a correction.

One thing that has puzzled me is the resilient prices for commercial property. I haven’t found a good source of data on office rents but piecing together a few datapoints suggests rents have risen gradually and are apparently just 15% off their peak in 2008.

My insight on this comes from two simple observations. Firstly, there is a vast amount of vacant space in the City of London. Near my office in the Monument area there is a sparkling new development, The Walbrook Building, that has been vacant since it was completed in 2010. Streets near where I work and where I used to live in the East London area have a proliferation of empty space and ‘To Let’ signs.

Secondly, there is huge amount of new office space coming on to the market based on new completions. The Heron Tower in Bishopsgate, and St Botolph’s in Aldgate are ‘prime’ examples. The Shard, which opened this month in an impressive ceremony is the epitomy of this, with some reports suggesting barely any space in it is let. The Cheesegrater, the Pinnacle and the Walkie Talkie are all still under construction.

Sooner or later economics ought to catch up with this glut of new capacity and cause a crash in the commercial property market. One apt question, then, is why have prices remained resilient so far?

With respect to rents, I think this may be a case of weak competition. Most of the properties are owned and/or managed by a handful of developers (Land Securities, Canary Wharf Group, British Land) and property brokers (Knight Frank, CBRE, Cushman Wakefield, JLL, DJD). They each have such a large exposure to rental rates overall that they would rather let properties go vacant than let them at lower rates (the natural course of events in a competitive market).

With respect to capital prices, it is no secret that London property has become a magnet for foreign cash. Two of the highest profile developments (The Shard, Battersea Power Station) have backers from Qatar and Malaysia respectively (indeed, Qatar has also recently bought the Olympic Village, Credit Suisse HQ and Harrods.) These buyers are able make high bids for these assets because they have petrodollars which they need to recycle, on which they are willing to accept lower rates of return than other investors. It’s an interesting reversal of 20th century neocolonialism. While all this investment is superficially good for the UK economy, it has the effect of inflating property prices when arguably the economy would benefit from a correction. It also leaves prices vulnerable to capital flight, with the possibility of a full on crash (akin to the 1997 Asian Financial Crisis).

Having made all these bold predictions I shall eagerly wait and see how things play out. In the meantime, I shall not be investing in commercial property in London any time soon!

When Genius Failed: LTCM and the Flawed Assumptions of Modern Finance

 

The story of Long Term Capital Management, a hedge fund that collapsed dramatically in 1998, is instructive to anyone with an interest in modern finance. Roger Lowenstein gives the definitive account of the rise and fall of LTCM in his book ‘When Genius Failed’, now part of the business-lit canon.

When it was founded in 1994 LTCM was notable for the outstanding pedigree of its partners, a mixture of experienced traders and renowned academics, including Myron Scholes and Robert Merton, two professors who helped invent option pricing theory and would later share a Nobel Prize. The premise was simple: they would identify small anomalies in bond prices, then make massively leveraged bets that the anomalies would disappear. Relying on economic theory and past data on market movements they could identify theoretical mis-pricing in the market and profit from the correction in market prices.

The fund initially made terrific returns, peaking in April 1998 with a 300% profit, a sum of over $4bn. Between that point and September 1998, the fund managed to lose a spectacular $4.5bn, reaching the point where its imminent bankruptcy threatened the whole financial system. How did such smart people lose so much money? Leverage and bad luck both played a part. But fundamentally the fund based its trades on the same assumptions that underlie much modern financial theory, assumptions that have repeatedly proved to be untrue. Here are three:

1. Governments debt is ‘risk-free’
   Until recently it was expected that powerful governments would never default on their debt. This belief was eroded by various crises, and in the mid-nineties the conventional wisdom was only that nuclear powers would never default. LTCM expected this to hold and was seriously caught out when Russia stopped paying its creditors in 1998. Nowadays it is accepted that even developed nations may default (they have simply accumulated so much debt), but nevertheless the US Government is still considered a ‘risk-free’ borrower. The concept of the ‘risk-free rate’ indeed lies at the heart of the equations used for investment decisions – so accepting that there is no such thing would require a new ‘relativistic’ framework at the heart of finance. With the US deficit out of control and its politics in paralysis, maybe the invention/adoption of a new framework is overdue.
    
2. Markets are efficient, or tend towards being efficient*
   
   While it is generally accepted that markets stray from being efficient in the short run, many economists still believe that in the long run prices always converge with intrinsic values. Many investors, including LTCM, base their investment decisions on this assumption. In LTCM’s case, it served them well for several years – but backfired massively in 1998 when prices became more volatile than any of the ‘fundamentals’ would suggest they should have. Instead of cutting their losses when markets moved against them, the managers of LTCM were so confident that they increased their positions. The ‘Efficient Long-Run’ is a dangerous myth, and while many academics recognise this (and are working out why prices move irrationally) it is a myth that endures.
3. Your trades do not move the market
   
   Finance theory is based on the perspective of a small investor whose individual actions do not affect market behaviour. One corollary of this is that there will always be a buyer for one’s assets, at the market price. LTCM was a long way from this theoretical ideal. With over $100bn in assets placed on a fairly small number of trades, it was like a whale in a swimming pool: the slightest move could make waves in the markets. It entered into trades so large that it could not exit them without prices in the market dropping. When liquidity in its markets (mostly exotic derivatives) dried up, it was left with no means of ‘cutting its losses’ on losing trades.

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Perhaps astoundingly, these assumptions are still widely believed and still guide much of the financial industry and government policy. The implosion of LTCM should have been a wake-up call, but instead it was patched up and things returned to business-as-usual, sowing the seeds for the 2008-09 financial crisis. Many prominent investors and academics have been openly questioning these assumptions for decades (Soros, Buffett, Stiglitz and Shiller to name a few) but as yet the core of the finance establishment is yet to change. Perhaps the absence of a convincing and functional alternative theory is holding back change? Perhaps, herein lies an opportunity to come up with something new?

*'Market Efficiency' is the idea that prices of assets reflect all available information about the current and future value of the asset and as a result all assets are properly priced (i.e. price = intrinsic value)

Learning from our mistakes: a review of Jared Diamond’s book Collapse

I am getting towards the end of a fantastic book: ‘Collapse,’ by Jared Diamond (who is also the author of one of my all-time favourite books, ‘Guns, Germs and Steel.’) 

Collapse is both a historical discussion of past societies that have collapsed due to the environmental damage they caused, and a forward-looking discussion of how to utilise what we know about the past to prevent similar things happening in the future. Like ‘Guns, Germs’, Collapse draws upon Diamond’s wealth of knowledge across a wide range of disciplines as diverse as ornithology, anthropology, social psychology and marine biology. It is written with the wise perspective of someone who ‘sits outside of time’ and is able to place today’s problems in the context of what has happened in the past and may happen in the long-term future.

Collapse is primarily concerned with environmental problems. It recounts how the once thriving population of remote Easter Island continued to fell their trees until there were none left. The knock-on effects were devastating for their society, as agriculture failed and the population shrank to a fraction of its former size through starvation and violence. The Anasazi Indians and Greenland Norse perished in a similar way because they failed to anticipate the effects of their mining and farming on the environment. But it is not all bleak tales of failure. Diamond describes several positive stories of proactive response. For example, the Tokugawa shoguns of Japan realised that land was being used unsustainably and instituted wide-ranging laws which successfully reversed the damage.

Diamond analyses the reasons why some societies failed and others survived, and how the decision-making apparatus of various societies proved disastrous or essential for their prosperity. He goes on to relate this analysis to environmental problems today, in a discussion that every government today should make note of.

His writing reminded me of the disastrous way we as a society seem to fail to learn from our mistakes, not just ecological ones but in many walks of life. This year is the hundredth anniversary of the sinking of the Titanic – and yet we still manage to have an unthinkable maritime tragedy, the sinking of the Costa Concordia, caused by navigational error combined with failure to evacuate a ship safely. 2008 saw the collapse of Lehman Brothers, which was directly related to the use of ‘off-balance sheet’ finance mechanisms that should have been prevented following the failure of Enron (for structurally similar reasons) in 2001.

A failure to learn from the past seems to be an all-too-common feature of both historic and modern societies, but in Jared Diamond’s book we have an excellent tool to help us adopt thought-processes and decision-making processes that are more robust and less prone to failure. If every decision-maker was as keen to learn from historical mistakes as Diamond is, the world would be considerably better off.

How Long Before we see the World’s First Trillionaire?

In the news in the UK last week was the latest Sunday Times Rich List, which highlighted the widening gap between the super-rich and the average person. Amongst the one thousand wealthiest British citizens, wealth, on average, rose by 5%. Meanwhile, average incomes are falling. A similar pattern is seen in the US. The growth of wealth among the super-rich is a global phenomenon. And the extremes of wealth are extraordinary: the 5 wealthiest people in the world collectively own $252 billion, equivalent to 10% of the UK’s GDP.

An interesting question, I thought, is how long before we see the first trillionaire? So with a bit of help from Forbes and Wikipedia, I’ve done some research and very simple modelling on the subject.

The first dollar-billionaire was apparently John D. Rockefeller, who made a fortune in the oil industry, surpassing the billion dollar mark in 1916. As of 2012, there are 1,226 billionaires with a collective wealth of over $4.6 trillion. Having examined historical data, the evidence points to an exponential trend in the wealth of the very rich, which shouldn’t surprise us as compound interest and GDP are both (exponential) driving factors.

How might we forecast the year in which the first trillionaire will appear? I’ve taken three simple approaches. The first involves just two data points: Rockefeller’s first billion, occurring in 1916, and the record for individual wealth, set in 1999 by Bill Gates at $101 billion. In 83 years, ‘Max Wealth’ went up two orders of magnitude. To reach a trillion, it only needs to go up one more, so let’s say this takes 41 years from Gates’ 1999 record and we’re left with 2040, i.e. as soon as 28 years’ time.

My second approach is to use compound annual growth on today’s ‘Max Wealth’, which is $69bn belonging to Carlos Slim. Historical rates of growth of the wealth of the billionaires are highly variable, but smoothed ten-year CAGRs range from c.3% to c.9%. Taking the midpoint of 6% as my compound growth rate suggests a trillionaire will appear in c.2058, though of course volatility means it is more likely to happen before this.

Thirdly, I have run a simple exponential curve-fitting analysis on the data published by Forbes for the world’s richest person over the last 25 years (shown above). Extrapolating the trend this produces into the future suggests the first trillionaire can be expected in 2052, though again volatility will likely bring this forward (and I haven’t tried to model volatility here).

This is just theoretical number-crunching, so can we validate or sense-check these numbers? How about thinking about sources of wealth. Some of the most frequent sources of wealth are natural resource stakes, software and ecommerce, fund management and telecoms. Something these all have in common is ‘scalability’ as I explained in an earlier blogpost. Importantly, most billionaires gained their wealth through the growth and flotation of a large business. 

The largest listed companies are now worth several hundred billion and their founders tend to be multi-billionaires, so before we see a trillionaire we will first likely have to see a company with a multi-trillion-dollar valuation, with an individual still owning a substantial stake in it. This is would be eminently possible if the Saudi Arabian National Oil Company ARAMCO ever decided to list. Alternatively, a trillion-dollar company might be the result of pushing a new technological frontier. When this occurs, a company can grow so fast that competition law can’t keep up, and hence it can build a de facto monopoly as Microsoft and Facebook have each done in turn. Each tech boom is generating new companies with higher flotation values, so the first multi-trillion dollar IPO could occur within the next 2 or 3 tech cycles.

Can we conclude anything useful from all this hypothesizing and number-crunching? I have five key observations. The first is that the super-wealthy are likely to get richer faster than the average person, unless something fundamental changes in the way our economies or taxation systems are organised, or a systemic financial disaster/ bout of deflation effectively ‘resets’ the world economy. Second: the world might produce a trillionaire sooner than most people would probably guess, inside of 2 to 3 decades. Third, that traditional macroeconomics does not include the super-rich as a variable, even though the wealth of a few individuals is now comparable to the size of entire economies. Fourth, that the ever swelling wealth of the ‘top 1%’ will structurally change how of the top end of most consumer industries run, as huge buying power is concentrated in a few hands (think luxury apartments, hotels, flights, education). Fifth, that the ‘bottom 99%’ will become increasingly dismayed at the rising disparities – and the sentiment of the Occupy movement will reach the political mainstream across the world.

If you liked this post please leave comments below 

You can follow me on twitter: @david_clough1

Three simple policies to nudge the UK economy back to growth

Yesterday the news broke that the UK’s GDP shrank in Q1 2012, meaning the country is back in recession. Given the scale of public sector spending cuts a double dip recession was rather predictable. Put in perspective, the 0.2% decrease in GDP represents stagnation more than serious decline, but it is worrying nonetheless. However the negative growth was so small that even some relatively small policy changes might be able to reverse it. 

While I often write about quite abstract ideas, in this post I will put forward three concrete, low-cost, easy-to-implement policy proposals which would help to improve the economy. 

1.) Regulate the Scrap Metal Industry 

To me, this one seems like a ‘no-brainer.’ When a scrap metal thief steals electrical cable from a railway to sell for £60 to a scrap metal merchant, he causes thousands of commuters hours of delays. The economic value of that lost time is tens of thousands of pounds, plus thousands more for repairs. These thefts happen all over the country on a daily basis, costing the economy tens of millions every year in lost productivity. Furthermore, scrap metal thieves desecrate our monuments, our churches, our public artwork, destroying our cultural heritage as well as costing large sums of money. Some thieves stoop so low as to rip cables from a generator at a hospital, thereby endangering lives. 

Much of this damage could be swiftly curtailed if we required scrap metal merchants to keep records of the origin of all the material they buy and who they buy it from. Stolen goods could be traced to their seller, and strict enforcement would, I believe, deter many would-be metal thieves. Any metal thieves who persist should be subject to severe legal penalties. 

The increased burden of this system would fall largely on scrap metal dealers, and given the trouble that this industry causes for the rest of society, I would see it as completely justified. 

2.) Accelerate the issuance of licences for 4G mobile spectrum*

Why is the UK set to be one of the last countries in Europe to get 4G mobile? Why are we so far behind the USA and Japan? Norway and Sweden have had LTE since 2009. Up to the end of 2011 there were over 40 deployments of LTE worldwide, in 24 countries, including Uzbekistan, Belarus and the Philippines. In the UK, the auction of 4G spectrum has not even occurred yet, after repeated delays. The valuable spectrum which is being freed up by the switch-off of analogue TV will be sitting mostly idle for at least a year. 

 Issuing licences would have multiple economic benefits. First of all, it would trigger a wave of private sector investment in telecoms infrastructure (and Vodafone’s purchase of Cable & Wireless will start to look pretty smart). Second it would increase the productivity of people (such as myself) who use mobile broadband as their main internet connection. Third it would position the country for the next generation of mobile handsets and tablets, which will be powered by 4G technology and be capable of things that will make the iPhone4 look like a 1980s ‘brick.’ Fourth, it would position the country for an explosion in Machine-to-Machine (M2M) communications which could revolutionise our power grids, our roads, our medical devices and much else (much of which has yet to be invented). 

The next generation of smartphones will make the iPhone4 look like this

3.) Deregulate Sunday trading hours for shops 

This may be the most controversial of my three suggestions, but I believe a review of our archaic laws on Sunday Trading Hours is long overdue. For any readers from overseas, I should mention that British stores larger than a local corner shop are currently allowed to open for no more than 8 hours on a Sunday. 

At one level, my views on this are guided by personal frustration at going out to shop on a Sunday and having to head home at 6pm when I’m only half done because everything has closed. But I doubt if I am alone in my frustration. There are plenty of people who Monday to Friday at their desks, for whom Saturday and Sunday are the only opportunities for ‘shopping as leisure,’ who would welcome longer hours. I believe that if stores opened longer, people would buy more, and stores would make more income.

The major resistance to longer trading comes from shop workers themselves. The unions believe Sunday evenings should be ‘family time’ and resistance to changing the rules is so strong that even a temporary waiver during the Olympics caused an outcry. 

But retail workers who oppose change are being short-sighted. The retail industry is in crisis. High streets up and down the country are becoming increasingly deserted as retailers go bankrupt. Tellingly, new shops are not taking their place. It’s important to remember that by freeing up the rules the government would not be forcing any shops to open longer than they currently do, just giving them the choice whether or not to. And business flexibility is something retailers need more of if they are to increase their contribution to the economy instead of continue in their decline.



A lot of options for stimulating the economy are bigger, bolder and more expensive than the ones I’ve outlined. But the strength of these three is that they require little cost to implement: they simply unlock the potential of the economy that was there all along. 

*I realise that accelerating the auctions at this stage may be impossible, in which case the key point is that the auctions must not be delayed again, as they have been many times in the past 

The Infrastructure Dilemma: How a shock for visitors to London hints at greater changes to come

The hot weather in London the weekend before last got me thinking about how unpleasant the London Underground can be at the height of summer, and what a surprise this might be to visitors coming to London for the first time to attend the 2012 Olympics. The London Underground is one of the oldest subsurface railways in the world, with deep and narrow tunnels that are impossible, as yet, to keep cool. The carriages are not equipped with air-conditioning and even if they could be, the existing tunnels don’t allow sufficient ventilation to dissipate the heat to the surface.

In contrast, many ‘developing’ countries have modern metros with fully functioning air-conditioning. They also have wider tunnels and wider trains, which do not require that tall passengers stoop to fit in. Unlike the London underground, many of these metros also support underground mobile phone reception. Visitors from Beijing, Bangkok, Kuala Lumpur and Shanghai may get a shock to find themselves disconnected and in sweltering conditions as they travel on the Central and Bakerloo Lines this summer.

This particular example seems to me to be part of a broader problem facing the ‘developed’ world. Countries in Western Europe and North America were comparatively early in building a lot of the core infrastructure that supports our daily lives. Roads, railways, water networks, sewerage networks, and electricity grids were installed decades or centuries before the rest of the world. This is a big part of the reason ‘developed’ countries got a headstart on the rest of the world in developing industrialised economies. Economic growth theory suggests that a country’s asset base is a key determinant of its labour productivity, so a large asset base (of both physical assets and knowledge) has a positive feedback effect. A classic example is factory tools: investment of capital can improve the tools, which makes the factory more productive and so increases the capital available for further investment.

For most kinds of physical and knowledge-based capital, this dynamic allows whichever country is in the lead to stay at the forefront. However with infrastructure things are different. Unlike other kinds of assets, such as factory tools, computers or science textbooks, infrastructure cannot simply be ripped out and replaced when a new, better version becomes available. Our roads, railways and water networks are in constant use, and in the case of water pipes and the London Underground are buried beneath our streets so that they are costly or impossible to access. For this reason, countries which put in place infrastructure later will have a distinct advantage: they will be able to build better networks than we have. As a result they will gain greater productivity advantages from it – and since they can also upgrade non-infrastructure assets, the ‘emerging’ countries which are currently underdogs could end up leapfrogging the West. They may end up with higher productivity, higher GDP per capita and higher standards of living than what we currently call the ‘developed’ countries.

This process has already begun. Already, Singapore has among the highest GDP per capita in the world. And already, the high costs of maintaining and upgrading hundred-year-old infrastructure are weighing heavily on the city of London. As I’ve previously argued, developed countries need to come up with innovative solutions to their infrastructure dilemma. Furthermore, government planners and civil engineers in less developed nations must learn from what is happening in the West, and design their infrastructure with future change in mind.