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Wednesday, 25 April 2012

SEC considers civil case against Egan-Jones, an independent CRA

Egan-Jones is a relatively young, independent credit rating agency (CRA), one of few such institutions where investors pay for the agency's services not the institutions whose securities are being rated. As I have written many times before, this difference is important as it has been shown that the conflict of interest so fundamental to traditional large CRAs (like Moody's, Standard & Poor's, etc.) has been one of the reasons for the recent financial crisis and previous stock market bubbles.

I am not sure what the charges are (according to the April 20, 2012 issue of the WSJ they concern the provision of misleading information about the number of ratings provided and the amount of time Egan-Jones performed such ratings) but the possible consequences may essentially mean the (temporary) suspension of Egan-Jones' license as a CRA.

As we have no details about the evidence it is not possible to decide whether the SEC is right or wrong. Nevertheless, I find the case extraordinary. Despite broad criticism of the leading CRAs and their obvious role in the financial crisis no case was ever brought against them. Conflict of interest together with the lack of competition have been clearly identified as the main issue with the CRA industry, yet the SEC never really went after any of the top three firms, which together control the ratings industry in a tight oligopoly. In this context, making such a strong move against a small, barely 5-year old, independent agency that prouds itself not to be plagued by the fundamental problem of conflict of interest is a major statement and casts doubt on the SEC's willingness to reform the industry. We'll see -the SEC may well have a case. But given its behavior over the last decades in this matter, and in particular, its incapacity to foster competition I see little hope for fundamental change.

Tuesday, 3 April 2012

On the media by the media

Kaifu Zhang, a doctoral student at INSEAD has highlighted a great article in the LA times that laments about the opposing perspectives that various media outlets gave on Trayvon Martin's tragic death: see 
The article is a great testimony of classic media bias with quite surprising levels of divergence in the expressed views.  But it is not just that. It is also a great testimony of agenda setting: media's capacity to focus hundreds of millions on a particular issue. 

Monday, 2 April 2012

Social publishers: a new paradigm for online media

Many of my recent readings of the business press give the impression that a consensus seems to emerge among professional content providers (also called "content mills") - online newspapers (e.g. Huffington Post, The Business Insider), online tabloids (e.g. BuzzFeed) or blogs. The consensus is: "the thing to maximize is Facebook Likes!". This is interesting because it acknowledges a shift in the way people consume or "use" online media content. Under the previous paradigm, the idea was to build a portal where people spend time because the portal represents a large bundle of their online information needs. The bundle is designed to maximize the time spent or page views on the site, which then provides higher advertising revenues. Customer acquisition often meant search-engine optimization with the objective to become the "go to place" for a certain topic or fashionable buzz word.

The new paradigm sees the consumer as a social player on the Web rather than someone searching for news, entertainment or other information. People use social networks to promote themselves with an inherent need to build "relevance" in their community. Much more attention is given to the generation of content than to the consumption of content. In this context, the goal is to provide raw material for people to share. The content generated by online publishers - increasingly called social publishers - is an invaluable source for people to find material to share. If we manage to grab the attention of our peers and generate buzz around a piece of funny or touching content or news, we promote our relevance and eventually our social status. But, it is hard to do this with the pictures of our dog or cat or the random experiences that we report on our life. Breaking the news on a good story or a gossip just buys us so much more relevance.

Clearly, if this is the purpose of content search on the Web then the social publisher's objective is to generate as many "Likes" or positive feedback as possible with the posted content pieces. This will make the content pieces viral in social media (mostly Facebook) with the potential to reach a huge crowd. Each visitor spends little time on the social publisher's page but there will be many of them. Moreover, this viral phenomenon might also work for a new form of advertising where instead of showing banner ads to people, brand-specific content (that entertains) is shared between members of the community. There is evidence that ads seen in a social context (e.g. recommended by a friend) work much better than ads "on the periphery" of other content.

But, is it true that our social media use is essentially based on our 'narcissism' with the goal of promoting ourselves? Aren't we just trying to stay in touch and interact with our friends? Research indicates that our inherent tendency to compete for relevance is in many ways the essence of our humanity. The newest theory (by Jean-Louis Dessales) on the origins of human language - arguably one of the top candidates to define our uniqueness as humans - convincingly suggest that speech has evolved to improve individuals' capacity to build coalitions. Speech is a medium to advertise the person in an eternal competition for relevance with other members of the community. More relevance provides us with more capabilities to build useful coalitions. In this sense, similarly to our jokes at a party, our Facebook posts are 'performances' with the aim to build social capital (and at the risk of losing it). Social publishers pretend to help us by providing the raw material.....