Public Relations and Profit Maximization in the Washington Redskins Trademark Dispute

There are a lot of interesting business questions surrounding the NFL these days.  One is the recent "discovery" that the NFL is organized as a non-profit.  Many were shocked by the fact that the NFL received the same tax treatment as Habitat for Humanity, but there was not a significant movement to revoke this status.

Probably the most interesting recent dilemma has been the reaction to the controversy surrounding the name of the Washington Redskins.  After 80 years of using the name "Redskins", seemingly out of nowhere, there has been a huge groundswell of support for changing the name, citing insensitivity.  Lacking a viable legal option, the government has taken its first step towards forcing a name change: the patent office has cancelled federal trademarks on the name.

So what does this action really mean?  What is the effect of cancelling trademarks for an NFL team?

First of all, it's important to note that the Washington Redskins are ranked by Forbes as the #3 most valuable NFL team, worth over $1.7 billion.  This was even before the recent offers for the LA Clippers of over $2 billion, so that valuation may be out of date.  But what drives this valuation?

Unfortunately, the NFL and the Washington Redskins do not release detailed financial numbers.  However, economists and market researchers have estimated the magnitude of NFL revenue from various sources:

1. Ticket and concession sales.  This should be obvious enough.  In the past, this was probably the majority of the revenue.  Today, it is very small compared to other sources.
2. Media and television rights.  With the creation of the NFL Network and the gradual transition to internet streaming video, this could become even larger than it already is.  Soon, there will be no barrier to watching every one of your team's games no matter where you are.
3. Sponsorships and advertising.  From banners in the stadium to the name of the stadium itself, the NFL is not short on opportunities for advertisers.  The cost of Super Bowl commercials is legendary and ever-increasing.
4. Licensing and merchandising.  The NFL is notoriously litigious on this.  This is the reason that so many Super Bowl parties refer to "The Big Game" rather than the Super Bowl, due to fear of being sued.  It is also the revenue stream that the government would no longer protect for the Redskins.

While broadcasting rights appear to be the lion's share of revenue, the value of the brand for the Washington Redskins (on which all merchandising is based) is believed to be around 8.4% of the total valuation of the team.  Assuming the Redskins lose protection for their name, it would open the doors for third-party merchandise to flood the market with Redskins hats, shirts, jerseys, glasses, bumper stickers, etc.  Without having to pay licensing fees for the name, producers of these products would have extremely low costs and therefore be able to offer them for significantly cheaper than licensed merchandise.  When consumers are faced with an abundance of inexpensive merchandise, the demand for official Redskins products would decline drastically.  This could be particularly damaging to the Redskins, as they have the fourth highest merchandise sales of any NFL team.  Combine this with the fact that, should the team continue with the name "Redskins", there will be extreme pressure on politicians to not attend games or support the team.  For a team in Washington D.C. (technically in Maryland, but close enough), this could further exacerbate the lost revenue from merchandise.  In essence, Dan Snyder now has to accept drastically lower returns on his investment or change the name of the team.  If he decides the former, the NFL may intervene or the government may take more forceful action.

Personally, I think that Dan Snyder will eventually have no choice but to change the name.  As an organization, the NFL is in the middle of a firestorm of negative media attention.  Whether it is the non-profit status, the increasing reports of playing football leading to long-term health problems, or this issue with the Redskins name, the NFL is hanging on for its life as America's most popular sport.  I think that the NFL commissioner will eventually force Snyder to change the name, which Snyder will do.  In the short term, this will, ironically, create a huge windfall for the Redskins, as every fan with Redskins gear will have to go out and buy gear with the new brand (the Washington Filibusters?  Just a thought).  It will be interesting to see what the repercussions are for other teams with controversial names or logos and what will be determined to be controversial in the future.

Mozilla and the New Political Executives

Recently appointed CEO of Mozilla, Brendan Eich, resigned this past week.  His resignation was under significant pressure due to his support of California Prop 8 in 2008, which sought to amend California's constitution to ban gay marriage.  It seems strange now, but Prop 8 actually passed at the time with 52% of the vote.  So why is something that a majority of Californians supported 6 years ago now so offensive that support of it disqualifies you from leading a technology company?

Well, part of the answer is California demographics.  Even though 52% of California voted for Prop 8, suffice to say that very few of these voters were in San Francisco, where Mozilla is located.  Also, public sentiment on gay marriage has shifted pretty drastically in recent years.  But let's ignore these issues.  What does it say that a CEO's political donation is enough to be pressured to step down?

On the face of it, support or lack of support for gay marriage doesn't say much about an executive's ability to lead a technology company.  We have always thought these issues important for politicians, but politicians (sadly) have the ability to strip away rights.  Under federal anti-discrimination laws, a CEO really has very little ability to discriminate without facing lawsuits, even if he or she wanted to.  As far as coercion, employment is completely voluntary, as is use of a company's products.  If you don't like a CEO's politics, don't work at the company and don't use the products.

On the other hand, the CEO does represent the company to investors, employees, and the public.  In the area with the highest concentration of homosexuals in the entire country, it might be difficult to recruit top talent when none of these people want to work at the company.  In a state where government regulation can be stifling for any company without connections, it's probably bad to have a CEO that no politician would want to be photographed with.  When a lot of the promotion for a CEO comes from speaking engagements (graduations, conferences, etc.) and interviews, missing this opportunity would require a greater marketing budget.  In other words, a CEO needs to be popular.  People don't just buy products that they like; they buy them from people that they like.

So Eich stepping down as CEO was the right move for the company, given the situation.  It is unfortunate that political or religious beliefs could have such an effect on a career in the private sector, but Firefox is absolutely right to realize that retaining Eich as CEO would have been devastating for the company.

Full disclosure: this post was typed on Mozilla Firefox 28.0.

The Smoke and Mirrors of Executive Compensation

Tim Cook, CEO of Apple, recently announced that he received $4.25 million in salary and bonus for the fiscal year ended Sept. 28.  Now, Tim doesn't exactly need to be shopping the discount rack at the Dollar Tree, but the compensation actually does seem a little low given that he is CEO of one of the most visible and valuable companies in the world.  After all, it is reported that Oracle CEO Larry Ellison made $96 million in 2012.  So what gives?

First, most people know that CEOs are not compensated in the same way as most employees.  Whereas the average employee receives most of their money from salary and then possibly a small bonus, the proportions are generally flipped for executives.  The majority of their compensation comes from profit-sharing or bonuses that are based on the stock price or some other metric of performance for the company.  In this way, it's somewhat easy to obfuscate their real earnings by saying that a CEOs salary was fairly low by comparison.

If you look at the fine print, Tim Cook received Apple stock valued at $376 million in 2011 when he signed on as CEO.  $376 million!  Not a bad signing bonus if you ask me (I'll bet they threw in a free iPad too).  It's difficult to say how much that stock is worth now, but as the price has only increased, it is probably worth $450 million or so.  So Tim Cook clearly has a huge interest in making the financial decisions that will guarantee the greatest value to Apple shareholders.  Makes sense, right?

Maybe not.  Apple has been criticized in the past for hoarding cash, being forced to finally issue a dividend in mid-2012 which has continued into 2013.  What does a dividend do to the stock price?  With a price that is the net present value of expected future cash flows (in an efficient market), issuing a dividend means there is less cash to distribute later, which means that the price goes down.  Since Tim actually owns the stock (and presumably receives the dividend along with all other shareholders), he may be personally indifferent.  However, many executives are given a bonus tied to stock price that does not take dividends into account.  In this way, CEOs are incentivized to not distribute dividends even when it is the right move for the business.

What about recent news that Carl Icahn wants Apple to have buy back as much as $150 billion worth of stock?  When stock buybacks occur, there are fewer shares publicly traded.  These shares are still vying for the same overall profit, however, which means the overall pie is bigger.  When the pie is bigger, the share price goes up.  Assume a CEO is compensated based on share price and his or her company is sitting on spare cash.  Instituting a stock buyback immediately increases his or her compensation without actually adding value in any way to the company.  Sounds like a sweet deal for the opportunist executive.

Not only are the incentives for executives skewed towards certain financial decisions that may or may not be in the best interest of the company, but the magnitude of the incentives are nearly impossible to discern.  A very common compensation tool is deferred compensation, whereby an executive is still paid for years after leaving the company.  This can further hide the real compensation of a CEO and provide the executive with a lower tax bill.  Benefits such as use of corporate jets, dinners, etc. make things even more complicated.  Taken as a whole, executive compensation has been made deliberately difficult to comprehend for one simple reason: companies want executives to be attracted to their company due to the high compensation, but don't want the negative publicity that comes from paying these executives so much more than their average employee.  If there was a legal and moral way that Apple could pay Tim Cook $100 million a year and report that paid him $1 million, I'm sure it would do just that (and that's not an Apple-specific criticism; most other companies would do the same).

So next time you see numbers about how much money a CEO made, think twice about it.  Aligning compensation with incentives in a transparent way is much more complicated than it first appears, yet attracting and retaining top executive talent is (arguably) the most important role of the board of directors of a company.  Only companies that do it well will continue to thrive under new leadership.

Breaking Bad and the Obsession with Product

"Are we in the meth business...or the money business?" - Jesse Pinkman, Breaking Bad

Like basically every other American male, I recently watched the Breaking Bad series on Netflix.  I won't waste much time summarizing the plot, but, suffice to say, a former chemistry teacher, Walter White, decides to start cooking and selling crystal meth, which gets him wrapped up in a whole world of crime.  What makes his business so successful is the fact that he is something of a chemical prodigy and is able to manufacture crystal meth at a purity level that is unsurpassed by any other producers.  His focus on purity borders on obsession, even causing him to destroy entire batches due to small anomalies.  At the end of the day, however, isn't the purpose of the business to make money by selling meth?  Isn't the crystal meth market in Albuquerque such that 95% purity, at lower cost, would be more economical than 99.1% purity?  Also, does this behavior sound like any other prominent (non-fictional) business men or women?

In fact, there are numerous CEOs that seem to view profitability as a secondary concern to making great products.  Marissa Mayer, CEO at Yahoo, is renown for her meticulous attention to detail when it comes to design, even drawing the ire of some of her former reports: "I had a recent debate over whether a border should be 3, 4 or 5 pixels wide, and was asked to prove my case. I can’t operate in an environment like that." (from Digital Trends)  Jeff Bezos, CEO at Amazon, runs a business that has very high revenues and very thin margins.  He is almost notorious for making very long-term decisions seeking to further gain revenue and customer trust at the expense of short-term profitability: "Percentage margins are not one of the things we are seeking to optimize." (from Business Week).  Of course, any modern discussion of product would be incomplete without mentioning Steve Jobs.  The PC market was highly competitive and with very low margins.  Essentially, computers had become commodities sold 100% based on specs such as storage, processor, RAM, etc.  Steve Jobs realized that the only way for Apple to succeed was to differentiate based on design.  The design of both the hardware and software products became paramount at Apple, though this required significantly more capital investment than churning out bland-looking computers (remember that only 14 years elapsed between the first Macintosh, in 1984, and the original iMac, which was released in 1998).

So what is the purpose of business?  Is it to make great products or is it to make money off of products?  Clearly, in a business such as crystal meth distribution, there are very few people in the business for the innate love of providing customers with a valuable service.  But in businesses like organic grocery stores, fitness centers, or musical instrument lessons, the pendulum may swing more towards offering great products to customers rather than profit maximization.  In the long-term, these two goals are not in conflict and are actually complimentary, but this is certainly not the case in the short term.  As Walter White finds out, his obsession with perfect quality in his meth generates a great deal of attention in his business.  Fortunately, in legal businesses, this will not lead to the continual attempted murders that Walt must face from his competitors and business partners.

So, at the end of the day, are you in business to make perfect products or to make money?  Determining the balance might be the most important decision a company makes.

AmazonSmile and the State of Corporate Charitable Donations

Amazon recently announced the launch of AmazonSmile.  The gist of it is that Amazon will now donate 0.5% of the purchase price of goods on Amazon to the charitable organization of your choice.  Lots of companies donate a certain amount of revenue or profits to charity, but generally the company selects which charity.  So why is Amazon doing this?

First off, Amazon is claiming that the prices of goods will not increase.   Fantastic, but let's assume that the price of goods did increase by 0.5% and Amazon simply donated the extra portion to charity.  In this case, there would be only one difference between Amazon making the donation and the customer personally donating the money outside of Amazon: in this case, Amazon would get the tax deduction and the customer would get nothing.  Basically, Amazon would have tricked customers into handing them millions of dollars in tax benefits for the reward of less freedom in being able to determine the amount of money they wish to donate to charity.  In fact, Amazon is crystal clear on their page about the tax consequences of these donations:

From the AmazonSmile Program Details:

Can I receive a tax deduction for amounts donated from my purchases on AmazonSmile? 
Donations are made by the AmazonSmile Foundation and are not tax deductible by you.

So it's good news that the price of goods will not increase.  In that case, however, where does the money come from?  I think that a lot of people assume the money comes straight from the bottom line; in other words, Amazon just donates some of their profit.  There's a problem with this interpretation though: Amazon doesn't make profit!  In the most recent quarter, Amazon lost 9 cents per share.  Also, Amazon doesn't actually sell many of the products listed on its site.  Through their affiliate model, other companies can complete transactions through Amazon.  So what is Amazon thinking?

Here is my take.  First, Amazon received a great deal of positive publicity for this, which is good for Amazon.  These days, people seem to want to only do businesses with companies that care about people.  Donating to charity is a great way to do that, especially if it makes the company less of a target to boycotts.  Presumably, this increases Amazon sales in the long term.  But what about the cost?

Notice that, for the charitable donation to be valid, the user must start their shopping at smile.amazon.com.  How many people will actually do this?  Probably very few.  Even of those who do, not all of the products are eligible for the donation.  Amazon states that only products that state “Eligible for AmazonSmile donation” will be valid.  When the benefit of this program is supposed to be effortless charitable donation, Amazon sure seems to be requiring a lot of effort on the part of customers.

So in effect, Amazon is generating a lot of positive publicity at very little cost.  This may increase overall charitable donations, and that is commendable.  However, there is little question that this move will be beneficial to Amazon's business.  But what do you think?  Am I being cynical and is Amazon making a genuine, selfless attempt to making donations to society?  Or is this a calculated move that Amazon's finance department has projected as improving long-term shareholder value?

Big Data and the Future of Analytics

"Big Data" has all of the characteristics of your typical business buzz word: fairly new, widely used, and almost universally misunderstood.  So what is big data and how is it useful?  In order to investigate, I read the book that seems to be the definitive guide for business people, Big Data: A Revolution That Will Transform How We Live, Work, and Think by Viktor Mayer-Schonberger and Kenneth Cukier.

Unfortunately, even this book admits that there is no formal definition of big data.  There are, however, some guidelines.  The idea is that data collection has become so ubiquitous that the volume is great enough that traditional database management systems cannot handle it.  From a technical standpoint, new technologies are needed just to extract basic information from this data.

The main focus of the book is the three shifts of mindset that must occur in this new world of data.  First, is the ability is there for vast amounts of data to be analyzed about topics, rather than small subsets, prior to making decisions (seems intuitive enough, right?).  The second is a willingness to settle for less precision in data collection with big data, as these small mistakes presumably will not matter as much as in the past.  And the third is an understanding that correlations, rather than causality, might be the best conclusions we can draw.

Overall, the book is a fairly short read with plenty of examples.  It does not purport to be evangelizing big data.  The simple fact is that big data is available and smart companies are already using it, so being familiar with it is imperative for data-driven decision making.  As a former database administrator, I found the sections describing "noSQL" very interesting.  Essentially, this requires no preset structure in order to work (easy to see why they titled it "No structured query language").  There are also some serious privacy concerns that are raised.  Keep in mind, this was written prior to information of NSA e-mail reading was made public.  Though the focus of big data is drawing overarching conclusions about groups of people rather than individuals, the point is taken that almost everything we do is now being recorded and stored.  The book even hinted at a future similar to Minority Report, where big data is used to predict crimes before they happen.  Somewhat scary to think about; at least, I'm assuming that was the thrust of Minority Report.  I saw it in theaters a decade ago and can barely remember.

I definitely recommend the book for anyone working in business analytics.  In some ways, big data does make me very excited (even though it may render my SQL skills useless).  I love doing things more efficiently and intelligently and big data provides that ability for marketers and business people.  However, the risks are great and the privacy concerns associated with data collection and potential for use by governments is of great concern.  Let's hope it's more of the former than the latter.

5 Rules for Undercover Viral Marketing

With the internet and social networks being what they are, companies have begun to pour more and more money and effort into making content go viral.  The idea behind this is that, assuming the company can generate appropriate content, distribution of it is essentially free.  Companies are absolutely salivating for customers to like, tweet, and favorite their content.  But when this content is deliberately deceptive, where is the line?

For me, one of the best examples of this was from baseball's Double-A New Britain Rock Cats.  If you haven't seen the video, the company paid two employees to stage a fake marriage proposal; one that goes horribly wrong when the woman rejects the man posing as her boyfriend.

Was this successful?  Definitely.  The video received over 600,000 views on YouTube and the only cost was the wages for probably an hour of two employees' time.  So is this something that all companies should be doing?

Marketing in this way is similar to negative political ads; everybody claims to hate them, but they wouldn't be produced if they didn't get results.  Nobody wants to be deceived by a Minor League team.  However, how many of the 600,000 people that watched the video had even heard of the Rock Cats prior to the video?  And, of those who hadn't, how many of those will remember the name after the video?

For companies considering going undercover and trying to get content to go viral under deceptive pretenses, here are some rules to ensure the desired result is achieved:

1. Ensure the concept of undercover viral marketing is consistent with your brand identity.  Customers may be more willing to forgive being deceived by a brand known for a playful culture than one that is more straight-laced.  In other words, customers might expect something like this from Virgin Atlantic or Boston Brewing Company, but probably not from Lexus or Charles Schwab.
2. The content should be humorous, but not offensive.  Giving people a light-hearted chuckle based on something that turned out to be staged is very different from emotional exploitation.  So the content should be harmless and humorous.
3. The content needs to be very believable.  Your sales force is essentially the entire networks of Twitter, Facebook, etc. who are spreading links.  When it is revealed that the content was fake, these people will feel foolish for having not been able to see this beforehand.  Therefore, they need the plausible denial of content that seemed real in every possible respect.  Otherwise, you will have left a sour taste in their mouth about your brand (and these are the last people you want to offend).
4. Be timely with admitting the ruse.  Of course, content that is obviously fabricated will not go viral as easily, so companies shouldn't admit their plans immediately.  But the longer you wait, the more you risk insulting your customers.  Fess up early and people will be more forgiving.
5. Do it infrequently.  If you cry wolf all the time, even legitimate content will go unnoticed.  By making this a small, infrequent part of your marketing strategy, companies can generate an enormous amount of brand recognition for very low cost.  But the risks are high if it is not done carefully.