Ad-renaline rush. Amazon’s ambitious drive into digital-advertising

Building a big ad business will help the firm to keep expanding

AN AWARD-WINNING series, “The Marvellous Mrs Maisel”, follows the fortunes of a woman in the 1950s who undergoes an unlikely transformation from a typical housewife of the day into a talented standup comedian. It is produced by Amazon and can be viewed on Prime Video, the e-commerce giant’s on-demand service. Since its birth in 1994, Amazon has starred in several dramatic metamorphoses of its own. It has pushed beyond retailing into fields as varied as electronic books, private-label goods and cloud computing, as well as online video. Now it is intent on becoming a force in digital advertising.

Amazon has a long way to go before it catches up with the giants of the industry. It has 4% of an American market worth $111bn, compared with Google’s 37% and Facebook’s 21% (see chart). But Amazon started experimenting with ads only six years ago, and its young business is growing fast in a rapidly expanding market. By the end of the year it will overtake Microsoft, a software giant, and Verizon, a big telecoms firm, to rank third in America, according to eMarketer, a research firm.

Despite trailing far behind the leaders, Amazon’s ads are having an outsize effect on the company itself. Its revenues from ad sales worldwide in 2018 could hit $8bn, contributing perhaps $3bn in operating profit—over a quarter of the total. Michael Olson of Piper Jaffray, a brokerage, says that by 2021, it is “highly likely” that profits from Amazon’s ad business will exceed those from its lucrative cloud-computing unit, Amazon Web Services. Amazon loses money on its core e-commerce business, but can use the fat profits from advertising in the same way as it has used the cash from cloud computing—to push into new businesses and countries, says Brian Nowak of Morgan Stanley, an investment bank.

Closing the gap between Facebook and Google will be difficult but not impossible. Like those two, Amazon has a rich pool of data about users which it can use to aim its ads, including information about past purchases, which product reviews consumers have read, where they are and their online browsing behaviour. Amazon has a unique advantage, because consumers who are using the site usually intend to buy things right away. Some 56% of Americans start the search for any product on Amazon.

That will help it to grow as brands shift marketing dollars away from physical retailers. “Trade spending”—payments to retailers by makers of soap, mouthwash, canned food and other household basics for prime shelf space and promotional offers—adds up to around $200bn in America alone. Amazon is especially attractive to makers of such consumer packaged goods. Brand loyalty is weak and buyers are more likely to be swayed by prominent ads.

Amazon’s ads will not appeal to all businesses. Firms that do not sell goods through the site, such as fashion brands, carmakers and travel companies, will not advertise there. But online video is one potential opportunity to attract more business. Amazon allows video ads on Twitch, its online-gaming site, but it could also put adverts onto Amazon Prime to win some of the advertising spending aimed at conventional television channels.

Allowing advertising on Alexa, its voice-assistant, and Echo, its smart speakers, is another possibility. In the future, when people ask questions of Alexa or order something by voice, Amazon could incorporate advertising. Earlier this year it was reported that Amazon was in discussions with Procter & Gamble and Clorox about voice ads for their wares.

As it chases growth, Amazon will face three obstacles. First, it must consider whether its advertising will put off customers. Voice ads butting in to conversations, even ones with inanimate objects such as smart speakers, are potentially irritating. And subscribers who have paid to watch online videos are unlikely to enjoy sitting through commercial breaks. Amazon must take care to avoid alienating the people it spends so much trying to please.

Second, Amazon will have to balance its relationship with vendors and address potential conflicts of interest. Advertisers can buy space at the top of product searches or pay to sponsor products. In addition, some search results are labelled “Amazon’s choice”, which could favour important vendors and advertisers, says Matti Littunen of Enders Analysis, a research firm. (Amazon does not disclose how products get this designation.) And as Amazon becomes a manufacturer and seller of more of its own private-label items, it will have to decide how much prominence to give paying advertisers and how much to its own goods.

According to research by rbc Capital, an investment bank, of 100 product searches on Amazon’s app, in only three instances was the top ranking result not a sponsored ad. Those were for three Amazon devices: two smart speakers and a Kindle e-reader. Makers of competing products will be unhappy if it appears that Amazon is favouring its own products on its site or discouraging competition by driving up the cost of ad space on products that directly challenge its private-label goods.

Amazon will also have to contend with a more active regulatory environment. In September the European Commission announced a probe into its use of data and whether it could use information about third-party retailers on its site, which are also competitors, to boost its profits. As the inquiry progresses, advertising practices could become an area of interest.

Amazon has so far avoided a privacy backlash from customers. “Facebook uses your personal life and friend graph to target ads. Amazon has a more clearly commercial relationship” with users, says Jonathan Nelson, the head of digital at Omnicom, a large advertising agency. But as its ad business grows, so will scrutiny. Amazon gives users little control over how much information they share for advertising purposes, which could violate new data-collection and privacy rules in Europe, says Mr Littunen.

As it gathers more information about people in the physical world, including their spending habits at Whole Foods, the grocer it bought last year for $13.7bn, its dossier of data on consumers will become larger and more personal. That will propel Amazon’s rise. Just as Mrs Maisel discovers she has a new talent for cracking jokes, Amazon has a chance to thrive in a new venture. Before long it could make the digital-ad duopoly a three-way affair.


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November 1, 2018
by @theeconomistaccess

Which MBA? The world’s best MBA programmes

The Economist’s ranking of the world's leading business courses

THE FIRST MBA was taught at Harvard University in 1908. More than a century later, American institutions still dominate the business-school landscape. This year they claim 16 of the top 20 places in The Economist’s ranking of full-time mba programmes, and 53 places in the top 100.

The University of Chicago’s Booth School of Business regains first place from neighbouring Northwestern’s Kellogg School of Management. It is the sixth time in seven years that Booth has come top. The rankings weight data according to what students tell us is important. The figures are a mixture of hard numbers and subjective marks given by students and alumni in four categories: opening new career opportunities (35%), personal development and educational experience (35%), better pay (20%) and networking potential (10%).

Students rate Booth’s course the best of the 100 programmes surveyed. They also praise its world-class facilities and faculty, which includes several Nobel laureates. Job opportunities are among the best, thanks to a highly rated careers service and an alumni network of 52,500 people, one of the largest in the world. Employment outcomes are outstanding: 97% of students find a job within three months of graduation. Graduates pocket an average salary of $129,400, a 67% rise on their pre-mba pay cheques. The relationship with alumni lasts beyond graduation. The school runs refresher courses for former students on subjects such as entrepreneurship.

All this comes at a price. Fees at prestigious American schools in the top 20 now average $123,000, and have risen quickly in recent years. By contrast, European schools are cheaper because courses are generally shorter, so the return on investment is quicker. At iese, at the University of Navarra, which has the top-ranked programme outside America, students pay $96,000 for its 19-month course. The Spanish school has moved up 11 places to sixth, mainly because of a big boost in the average salary for its graduates to $123,000 and a job-placement rate of 99%. Those looking for a bargain should head to Warwick Business School in Britain. A one-year course costs just $49,400, thanks in part to the depreciation of the pound.


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October 29, 2018
by @theeconomistaccess

Virtuous spirals. DNA may soon be used to store computer data

But it is not just a question of base pairs becoming bits

DNA is the oldest information-storage system known. It predates every other, from pencil and paper to computer hard drives, by billions of years. But attempts to employ it to store data generated by people, as opposed to data needed to bring those people (and every other living thing) into being in the first place, have failed.

The reason is not so much technological difficulty as cost. Encoding a single gigabyte in dna would run up a bill of several million dollars. Doing so on a hard drive costs less than a cent. Catalog, a biotechnology firm in Boston, hopes to bring the cost of dna data-storage below $10 per gigabyte. That is still on the pricey side. But for really large storage requirements a second ratio also comes into play: gigabytes stored per cubic metre.

Hard drives take up space. Their storage ratio is about 30m gigabytes per cubic metre. Catalog’s method can store 600bn gigabytes in the same volume. For organisations such as film studios and particle-physics laboratories, which need to archive humongous amounts of information indefinitely, the ratio of the two ratios, as it were, may soon favour dna.

The obvious temptation when designing a dna-based storage system is to see the ones and zeros of binary data and the chemical base pairs (at and gc) of deoxyribose nucleic acid as equivalent, and simply to translate the one into the other, with each file to be stored corresponding to a single, large dna molecule. Unfortunately, this yields molecules that are hard for sequencing machines to read when the time comes to look at what data the dna is encoding. In particular, there are places in computer data that consist of long strings of either ones or zeros. dna sequencers have difficulty when faced with similarly monotonous strings of base pairs.

Catalog has taken a different tack. The firm’s system is based on 100 different dna molecules, each ten base pairs long. The order of these bases does not, however, encode the binary data directly. Instead, the company pastes these short dna molecules together into longer ones. Crucially, the enzyme system it uses to do this is able to assemble short molecules into long ones in whatever order is desired. The order of the short molecular units within a longer molecule encodes, according to a rule book devised by the company, the data to be stored. Starting with 100 types of short molecule means trillions of combinations are possible within a longer one. That enables the long molecules to contain huge amounts of information.

The cost savings of Catalog’s method come from the limited number of molecules it starts with. Making new dna molecules one base pair at a time is expensive, but making copies of existing ones is cheap, as is joining such molecules together. The Catalog approach also means it is harder for data to be misread. Even if a sequencing machine gets a base or two wrong, it is usually possible to guess the identity of the ten-base-pair unit in question, thus preserving the data.

Catalog’s combinatorial approach does mean that more dna is needed per byte stored than other dna-based methods require. This increases both the time and the cost of reading it to recover the stored data in electronic form for processing. Overall, though, the method promises to have significant advantages over its predecessors.

The next task is to translate that promise into reality. To this end, Catalog is working with Cambridge Consultants, a British technology-development firm, to make a prototype capable of writing about 125 gigabytes of data to dna every day. If this machine works as hoped (it is supposed to be ready next year), the company intends to produce a more powerful device, able to write 1,000 times faster, within three years. The second age of dna information storage may then, at last, begin.


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October 23, 2018
by @theeconomistaccess

The next recession

Toxic politics and constrained central banks could make the next downturn hard to escape

JUST a year ago the world was enjoying a synchronised economic acceleration. In 2017 growth rose in every big advanced economy except Britain, and in most emerging ones. Global trade was surging and America booming; China’s slide into deflation had been quelled; even the euro zone was thriving. In 2018 the story is very different. This week stockmarkets tumbled across the globe as investors worried, for the second time this year, about slowing growth and the effects of tighter American monetary policy. Those fears are well-founded.

The world economy’s problem in 2018 has been uneven momentum. In America President Donald Trump’s tax cuts have helped lift annualised quarterly growth above 4%. Unemployment is at its lowest since 1969. Yet the IMF thinks growth will slow this year in every other big advanced economy. And emerging markets are in trouble.

This divergence between America and the rest means divergent monetary policies, too. The Federal Reserve has raised interest rates eight times since December 2015. The European Central Bank (ECB) is still a long way from its first increase. In Japan rates are negative. China, the principal target of Mr Trump’s trade war, relaxed monetary policy this week in response to a weakening economy. When interest rates rise in America but nowhere else, the dollar strengthens. That makes it harder for emerging markets to repay their dollar debts. A rising greenback has already helped propel Argentina and Turkey into trouble; this week Pakistan asked the IMF for a bail-out.

Emerging markets account for 59% of the world’s output (measured by purchasing power), up from 43% just two decades ago, when the Asian financial crisis hit. Their problems could soon wash back onto America’s shores, just as Uncle Sam’s domestic boom starts to peter out. The rest of the world could be in a worse state by then, too, if Italy’s budget difficulties do not abate or China suffers a sharp slowdown.

Cutting-room floors

The good news is that banking systems are more resilient than a decade ago, when the crisis struck. The chance of a downturn as severe as the one that struck then is low. Emerging markets are inflicting losses on investors, but in the main their real economies seem to be holding up. The trade war has yet to cause serious harm, even in China. If America’s boom gives way to a shallow recession as fiscal stimulus diminishes and rates rise, that would not be unusual after a decade of growth.

Yet this is where the bad news comes in. As our special report this week sets out, the rich world in particular is ill-prepared to deal with even a mild recession. That is partly because the policy arsenal is still depleted from fighting the last downturn. In the past half-century, the Fed has typically cut interest rates by five or so percentage points in a downturn. Today it has less than half that room before it reaches zero; the euro zone and Japan have no room at all.

Policymakers have other options, of course. Central banks could use the now-familiar policy of quantitative easing (QE), the purchase of securities with newly created central-bank reserves. The efficacy of QE is debated, but if that does not work, they could try more radical, untested approaches, such as giving money directly to individuals. Governments can boost spending, too. Even countries with large debt burdens can benefit from fiscal stimulus during recessions.

The question is whether using these weapons is politically acceptable. Central banks will enter the next recession with balance-sheets that are already swollen by historical standards—the Fed’s is worth 20% of GDP. Opponents of QE say that it distorts markets and inflates asset bubbles, among other things. No matter that these views are largely misguided; fresh bouts of QE would attract even closer scrutiny than last time. The constraints are particularly tight in the euro zone, where the ECB is limited to buying 33% of any country’s public debt.

Spending ceilings

Fiscal stimulus would also attract political opposition, regardless of the economic arguments. The euro zone is again the most worrying case, if only because Germans and other northern Europeans fear that they will be left with unpaid debts if a country defaults. Its restrictions on borrowing are designed to restrain profligacy, but they also curb the potential for stimulus. America is more willing to spend, but it has recently increased its deficit to over 4% of GDP with the economy already running hot. If it needs to widen the deficit still further to counter a recession, expect a political fight.

Politics is an even greater obstacle to international action. Unprecedented cross-border co-operation was needed to fend off the crisis in 2008. But the rise of populists will complicate the task of working together. The Fed’s swap lines with other central banks, which let them borrow dollars from America, might be a flashpoint. And falling currencies may feed trade tensions. This week Steve Mnuchin, the treasury secretary, warned China against “competitive devaluations”. Mr Trump’s belief in the harm caused by trade deficits is mistaken when growth is strong. But when demand is short, protectionism is a more tempting way to stimulate the economy.

Timely action could avert some of these dangers. Central banks could have new targets that make it harder to oppose action during and after a crisis. If they established a commitment ahead of time to make up lost ground when inflation undershoots or growth disappoints, expectations of a catch-up boom could provide an automatic stimulus in any downturn. Alternatively, raising the inflation target today could over time push up interest rates, giving more room for rate cuts. Future fiscal stimulus could be baked in now by increasing the potency of “automatic stabilisers”—spending on unemployment insurance, say, which goes up as economies sag. The euro zone could relax its fiscal rules to allow for more stimulus.

Pre-emptive action calls for initiative from politicians, which is conspicuously absent. This week’s market volatility suggests time could be short. The world should start preparing now for the next recession, while it still can.


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October 17, 2018
by @theeconomistaccess

Generation gap. Established firms try dancing to a millennial tune

Some are finding it surprisingly easy

OLDER people are not the only ones to try too hard to be hip and youthful. Long-established firms can, too. Just look at Procter & Gamble (P&G), one of the world’s largest consumer-goods firms, which this year applied to America’s federal patent office to trademark LOL, NBD, WTF and FML, abbreviations commonly used in text messages and social media. If it succeeds, the 181-year-old firm plans to use the phrases to market soap, cleaners and air fresheners to young buyers. Its move is the intellectual-property equivalent of Dad dancing. But it is a sign of large firms’ eagerness to woo millennial consumers.

To many firms they are a mystery. KPMG, a consultancy, reckons nearly half do not know how millennials—typically defined as those born between 1980 and 2000—differ from their older counterparts. That may be because such differences are overblown. According to Ipsos-MORI, a pollster, millennials are “the most carelessly described group we have ever looked at”. Many claims about them are simplified or wrong. It is often said, for example, that they ignore conventional ads; in fact they are heavily influenced by marketing.

Given such misconceptions, it is little wonder that firms sometimes get it wrong. In February, MillerCoors, an American brewer, released Two Hats, a light fruit-flavoured brew the beer-maker said would suit millennials’ tastes and budgets (tagline: “Good, cheap beer. Wait, what?”). Consumers just waited; the beer was pulled from shelves after six months. But some stereotypes about millennials have roots in reality. Companies are finding that three broad approaches do succeed when trying to sell to them: transparency, experiences (over things) and flexibility.

On the first of these, transparency, younger brands have led the way. In clothing, one example is Everlane, an online clothing manufacturer based in San Francisco. It discloses the conditions under which each and every garment is made and how much profit it generates as part of its philosophy of “radical transparency”.

Some large companies have made dramatic changes. ConAgra, an American food giant, has simplified its recipes and eliminated all artificial ingredients from many of its snacks and ready meals. After years of falling sales, it is growing again; millennials now account for 80% of its customer growth. “Bringing in these folks has been absolutely critical to growing the brands,” says Bob Nolan, ConAgra’s senior vice-president of insights and analytics.

Millennials’ appreciation of experiences over “stuff” is also real. Online platforms such as Airbnb have capitalised on youngsters’ taste for splurging on holidays, dinners and other Instagrammable activities, but so too have some older bricks-and-mortar firms. In 2016 JPMorgan Chase, a bank, launched Sapphire Reserve, a premium credit card that offers generous rewards for spending on travel and dining. Touted as “a card for accumulating experiences”, the $450-a-year product has been a hit with well-off millennials, who represent more than half of cardholders.

Younger consumers also have more debt, fewer assets and less job security than previous generations. In this regard, flexibility matters. Ally Bank, a subsidiary of Ally Financial, the former financial wing of General Motors, for example, does not charge its current-account customers any maintenance fees or require them to hold minimum balances. Such features have earned it the loyalty of millennials.

Business models are being revamped to serve commitment-phobic millennials. Big carmakers, including GM, Volvo and BMW, offer subscription services for their cars, offering access to new vehicles without lengthy financial obligations.

Yet many firms still have too homogeneous a view of millennials, says Laura Beaudin, a partner at Bain & Company, a consultancy. “If you want to resonate with a group that prides itself on diversity, having a one-size-fits all solution does not make sense,” she says. Some firms do embrace customers’ individuality—in May, Gucci, an Italian fashion house, introduced customised versions of a popular tote bag and pair of sneakers as part of a campaign called Gucci DIY. Gucci reportedly maintains a cadre of under-30 staffers to advise its boss. Expect more companies of a certain age to hark back to youth.

October 8, 2018
by @theeconomistaccess
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