Wednesday, March 27, 2024

Zing! Went the Strings of My Heart!

There's something happening in the world, at least the world as I see it, that's quite disturbing.

It's the structural elimination or evisceration of the profit margin. Worse, the actual ability to make profit.

We've heard about for decades the American malady of living paycheck-to-paycheck. Or choosing between paying rent and paying for food. Or being unable to buy a home because you already have $250K of college debt.

But now, thanks to the vagaries of plunder-economics, investment banking, private equity or rapine-capitalism, profit for many leveraged companies is more ephemeral than ever.

Here's what I mean.

Back in my waning days at Ogilvy, I was asked by an eminence gris who was really eminent (though she dyed her gris) to do some work for Boeing. As a passenger air-craft manufacturer, Boeing is a near monopoly. Boeing and Airbus split--roughly 50-50--the West's passenger jet market.

Boeing, however, makes its real money as a defense contractor. They make jets, rockets, drones and missiles for the United States' trillion dollar military.

Some years ago, Airbus, which is based in Europe and owned by a group of European countries, was given a subsidy by European governments. They covered part of the costs of Airbus' nut. In other words, for every dollar (or Euro) that went into a plane, Airbus only had to pay eighty-five cents. Friendly governments covered the rest.

Boeing asked for the same from the US government. But our government said no. It's enough to let Boeing jack up prices for billion-dollar bombers.

In the world's passenger jet business, Boeing had to price their aircraft the same as Airbus. But because they received no subsidy, they cost about fifteen-percent more to make. Boeing couldn't raise prices--that would send people to Airbus in droves. So they had to find fifteen-percent costs savings or corner cuttings to compete.

That's why their planes are crashing, or doors are blowing off, or there are more delays because of mechanical issues. They have to compete, though structurally they can't, so something has to give.

The same phenomenon is happening, I believe in advertising. 

The Holding Companies, in their greed, overpaid for all of the literally hundreds of agencies they bought.

Twenty years ago, IPG paid $200 million for Deutsch. Earlier this year, they sold half of Deutsch, packaged with Hill Holliday and sold it for $20 million. That's like buying a new car for $60,000, putting it together with another $60,000 new car, and selling both together for $10,000.

The Holding Companies are in a hole of their own digging. So the money they charge what had been independent agencies for the privilege of being held goes up each year. They've got to, somehow, make up for the loss incurred from the initial expenditure. Further, the holding companies, have lowered prices for their services. When you stop competing on quality of product, the only thing left to compete on is price. Ergo, a race to the bottom.

The only way the individual agencies can hope to pay their vig to their owners is to cut their operating costs. So more and more experienced people gets leavified by their agencies every day. In turn, the prices agencies can charge get lower and lower. So their costs have to get decrease so as not to outstrip their lower prices. Quality can be sacrificed. People fired. The physical plant uglified. Margin reigns supreme.

Soon, no one's left to do the work who's ever done the work before. Soon, agencies says "AI will make it ok." But AI is, like electricity, a commodity. My ones and zeros and yottabytes of data are exactly the same as yours. The first mover might have an advantage for a short time, but it's like getting your dinner first at a restaurant. Before long, everyone else is served.

What happens next is a vicious circle. Prices are lowered, quality sinks. Because quality sinks, prices are lowered. And so on.

What's happened isn't anything but a structural economic commitment to failure.

Everything crumbles.

But share price. 

Executive compensation.

And scowling press-releases.

Next time you hear about a door blowing off a 737, or a near miss, or a wheel plummeting to earth after takeoff, take a deep breath and say, "that could be us."

Because it is.

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