What is a Fair Price?

When I was about 8 years old, I started to collect coins. The collection was nothing special as I look back on it, but it taught me a very valuable lesson. I went with my dad to a coin shop and paid $6 for a coin. Some two years later, I looked the coin up in the “Red Book” which placed a value on coins and saw that my original purchase was listed as $12.00 in uncirculated condition which mine was. I excitedly told my father that I had doubled my money. He smiled and said, “Not so fast, Don.” Then he proceeded to explain to me that the Red Book price was close to what a dealer would charge me if I wanted to BUY the coin now. If I were selling it to him, I would be lucky to get $8 and more likely $6 which is what I had paid for it. The lesson that I learned at my tender age was that a coin, a house, a used car, a collectible, or a stock was only worth what someone else was willing to pay for it.

In Consumer Behavior, theorists often refer to a phenomenon known as the endowment effect. If something is owned by you, you endow it with a value that is often distant from marketplace realities. People who think their home is worth a million dollars are shocked when their realtor places it at $650,000 and even then the bids that arrive are lower. The used car that you have pampered for 12 years does not fetch nearly as much as the price you envision for it. Learning that things are only worth what others are willing to pay for them was a great lesson to learn when very young.

Over the years, I have  been shocked by people who survived in the advertising and media business not realizing the simple truth of auction market pricing. I would suggest a bid on a property or a sponsorship and a colleague might say, “We can’t offer that. The station will not make any money on it.” I would often respond simply that such a low amount was what the property was worth to our client and add that, if the price was truly too low, they would not sell it to us. You did not have to be abrasive or obnoxious about it. Simply state that our offering price was all that the client could pay or what we were willing to pay.

Another sales tactic that always really amused me was when a rep would say, “We have worked so hard putting this together. You have to pay more than your offer.” Once, sitting across from a particularly odious salesperson, I smiled and said, “I didn’t know that you were a Marxist.” He looked wounded at first and then slowly became angry. I outlined Marx’s long discredited labor theory of value which briefly described that the value of a commodity can be objectively measured by the average number of hours required to produce that commodity. Think about that for a moment. Let’s say that I decided to knit a sweater. I assure you, my friends, that I could spent 1,000 hours working on it and, at $15 per hour as a wage, no one would want to buy the ugly sweater that I had produced at any price—but especially not at $15,000. Well, I use that absurd example to make the point that it mattered nothing to me that someone had spent a lot of time putting a proposal together. If it did not reach the people whom the client needed to reach at the right price in the right environment, we would go elsewhere.

In the years to come, prices for advertising or  program or event sponsorships will fluctuate depending on market conditions and competitive demand. There is no intrinsic value to media time or space across any platform. It is only what someone is willing to pay for it. Ideally, both sides get a win-win in an important negotiation. Pricing to me has always been something of an economic miracle. Sometimes dozens of people in many countries contribute to putting a product or service together. Each makes some money every step of the way. The finished product, however, is only worth what the consumer thinks is a fair price and one hopes the producer can make a profit at that level.

The little boy with the shiny uncirculated silver quarter is now almost 60 years older. He has not forgotten the lesson he learned so long ago.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Netflix, Disney and Cable

I have been away for a few weeks with somewhat limited access to e-mail and some of my normal business news sources. Opening up the mail last night, I found a number of statements about the state of the media world. Those that I can repeat included:

“Netflix is toast. Disney’s moves will take a few years but Netflix will be crushed.”

“Say goodnight, Comcast and Time Warner. AT&T’s purchase of Time Warner will prove to be one of the biggest blunders in American business history.”

“A freestanding ESPN is going to drag cable down, down, down.”

“Disney does not get it. They clearly have no idea how hard it is to start a streaming service from scratch.”


What is all the hysteria about? On August 8th, Disney Company CEO Bob Iger announced several things. First, Disney will end its partnership with Netflix in 2019. After that, Disney content will not be found on Netflix. Also, Disney will launch it own streaming service in 2019 which will be the only place where one can watch new Disney material including action and animation. Content from the Disney Channel, Disney Jr. and Disney XD will be available on this entity as well.

Separately, ESPN, a Disney property, will begin a streaming service in 2018. It will feature 10,000 events a year including much live programming. Simultaneous to both announcements, Disney revealed that they will have a majority stake in BamTech, which is a significant streaming as well as marketing service.

So, the Disney changes are what precipitated the four quotes that I received from Media Realism readers and friends. Are the above comments correct? What is going to happen?

Here is my quick take on what appears to be going on:

1) Over the last couple of years, ESPN, until recently, a spectacular cash cow for Disney, has been struggling a bit. They were bidding up the rights fees for various sports properties which they were trying to pass on to advertisers. As more people cut the cable cord and young people used many online properties to get sports news, ratings began to sag a bit. ESPN, in a belt tightening move, laid off a number of on air personalities, some of whom were making seven figures in compensation.

2) For years, many pundits were saying that a large group of people ONLY were cable subscribers to obtain ESPN and its sister channels. If ESPN went freestanding, Disney could earn more money than now. Anecdotally, a number of young men in their 20’s told me that they would definitely dump cable if they could receive all ESPN platforms on line for $15-18 per month.

3) Cable has definitely lost some penetration in the recent past due to cord cutting and cord-nevers. As part of an experiment, I used Netflix, You Tube and Apple TV as a surrogate for a cable subscription about 18 months ago and had 95% of my video needs met admirably.

4) Netflix—the August 19th edition of BARRON’s, a Dow Jones publication, cautioned stock investors about Netflix. It is selling for over 200 times earnings, has high debt and, as they put it, are a “hit renter” rather than a “hit owner.” It would require them to spend massive amounts on content to keep growing. The author suggested that with such a high market cap they could easily float some new shares to either pay down debt or finance new programming. I agree but have a different take on Netflix than most. Several years back, I thought that Netflix had arguably the best business model that I have ever seen (Single exception! I grew up outside Providence, RI so the mob may have had a better one in the 1950-70’s given the high cash nature of their business interests). To me, as a consumer, Netflix is an outstanding product. I absolutely love it. As an old movie buff, I have over 100,000 films to choose from and also their made for Netflix properties, a few owned and others rented which are often of excellent quality. The pricing to me is a steal. Consumers these days are sensitive to price increases so they may have to move subscription rates up slowly. Outside of the US growth is still fairly strong and they now have an eye popping 100 million + subscriber base. My problem is that movie making and TV shows are generally a pretty crappy business. Over my active media career, I tracked that 72% of new televisions shows were cancelled in the first year (I would assume that today a similar statistic would be operative). And, most films lose money. So, Netflix had a wonderful model but now that they have become a programmer they have added a lot to their risk exposure. Also, people tend to forget a vital thing about Netflix growth. For years, they were competing against hapless Blockbuster. I am certain that in the future, the Harvard and Wharton MBA programs will be using Blockbuster as a preeminent case study on how NOT to run things. Netflix shrewdly hopped on the digital train as it left the station and Blockbuster continued to build brick and mortar stores as one new CEO replaced another. Blockbuster also refused to consider a bid to buy a substantial hunk of Netflix went Reed Hastings (founder of Netflix) went to them hat in hand.  Also, Netflix is now facing direct competition from Amazon Video and will soon have another deep pocketed competitor in Facebook. And, do not forget that Alphabet (Google) has a sleeping giant in YouTube if they choose to get in the mix in a much bigger way.

So, what is going to happen over the next 36-48 months? I do not know and anyone who tells you they do is as sensible as those talking heads that I see on CNBC or Bloomberg telling you precisely what is going to happen to the Dow Jones Industrial Average over the coming week. Clearly, while no one knows how the media merry-go-round is going to develop, there is certain to be some upheaval. Disney has content and Comcast and Time Warner (likely to soon become AT&T) have both scale and buying power. Netflix has consumer preference but not the deep pockets of a Facebook or Alphabet. So, on balance, I would have to say that Netflix which I love as a consumer may well be the most vulnerable when I look at it unemotionally as a media analyst.

Frederick the Great of Prussia once famously said that “God is on the side of the big battalions.” Directionally, that is where my bet would be as well for 21st century media.

If you would like to contact Don Cole directly, you may reach him at doncolemedia.blogspot.com or leave a message on the blog.

Malcolm Gladwell's 10,000 Hours

Since its publication in 2008, many of us have read Malcolm Gladwell’s bestseller,  OUTLIERS: The Story of Success (Little Brown and Company). Gladwell gets a lot of criticism for being something of a pop psychologist who is selective with his research but I always find him to interesting and fun to read.

When OUTLIERS had been on the bestseller list for many weeks, an aggressive young salesperson visited me. He asked me if I had read the book and I said yes. We discussed it for a few minutes and he then said, “I will know as much about media as you do in another four years.” I smiled and said maybe you are right. Annoyed, he replied, “No, I will. I have been in the business a year working 40 hours per week so that makes 2,000 hours. When I have five years under my belt, I will have my 10,000 hours in and be an expert just as Gladwell said.” I tried very hard not to laugh and responded, “I think that you are taking Gladwell a bit too literally. You get stuck in meetings and sales calls daily where you do not learn anything new. Also, you drive to a few appointments a day in Atlanta traffic. Those 2,000 hours per year are not all solid gold in terms of learning the business.” He was clearly not happy with me.

In my life, there were two examples that illustrated my point that I tried to articulate to the young lad but he failed to accept. The first happened in college. I was interested in a young woman and she told me that she saw that famous pianist Van Cliburn was performing the following Sunday. The problem was that he was performing in Providence. I said no problem, I had a car, I was from Rhode Island, and I knew the venue well. Off we went and I must say I enjoyed being with her more than the recital. After the performance, she asked “Don, can we go backstage and meet him?” I said sure thing but was a bit nervous.

About a dozen people were there and I asked him to sign the program and he was most gracious and my young lady friend was thrilled. Then, a stage mother pushed a nervous 10-11 year girl up to the great man. She said, “Van, my daughter practices four hours per day."

Van Cliburn gave a pained smile and said “When I was young my mother was working so I would come home from school alone and work on my music. Sometimes, she was late coming back from work. She never asked me how long I played. Always, she asked what did you do? Learning to play well is all about focus. The only valuable time is when you are totally in to what you are doing. Very often, it does not take as long as you think some days.” That really impressed me.

Some 35 years later, I was playing in a golf junket at Pebble Beach with my brother.  Two time PGA champion Dave Stockton did a clinic for us before the tournament. He echoed Van Cliburn by asking us how often we practiced at the driving range and how many balls we hit when we did. He stressed that we should never stand in the practice area and hit one ball after another. Rather, we should watch the flight of each ball hit, especially the bad ones and try to access what went wrong. The number hit was not nearly as important as trying to discern what went right or wrong with your most recent swing.

Over the years, I have unknowingly practiced the 10,000 hour drill. There is a particular topic about which I have read 700 books. Literally. I do not consider myself an expert but I know more than most. In recent years, I have devoted with few exceptions an hour a day to another topic. Before I die, I hope to be near expert level in that discipline as well.

Interestingly, Gladwell gets some criticism from the originator of the 10,000 hour theory. He was Professor Anders Anderson of the University of Colorado. The concept was developed in a paper he wrote entitled, “THE ROLE OF DELIBERATE PRACTICE IN THE ACQUISITION OF EXPERT PERFORMANCE.” Unlike Gladwell, he stressed that the QUALITY of practice was important. So, both Van Cliburn and Dave Stockton were saying the same thing to me before OUTLIERS was published.

The morale? Be wary. Just because someone has been in a business for 10, 20 even 30 years does not guarantee that they are a true expert nor does it mean that they have kept current with what is going on. This is especially true in today’s world of media and marketing.

I have played golf since 1958. An invitation to play in next year’s Masters Golf Tournament is not in the cards despite my extensive practice!

If you would like to contact Don Cole, you may reach him directly at doncolemedia@gmail.com or leave a comment on the blog.