Tuesday, December 31, 2013

Why I'm Not on Linked-in (even though I am on Linked-in).

If you send me a message on Linked-in, I won't get it.


I have an account with Linked-in.  Why?  Because it is handy for tracking down people.   When a Patent issues, the maintenance fees are due at 3, 7, and 11 years.  Eleven years is a long time, and people move and don't send me their new addresses.

On more than one occasion, I have been able to find "lost" people through Linked-in.  So I have an account there.   Unlike Facebook and MySpace, I have not cancelled my account - yet.   But I do not log in there on a regular basis, I do not respond to linking requests, requests for endorsements, or whatever.  Why?

Because Linked-in is as fake as Farmville.   Sorry, but I had to say it.

In Farmville, everyone is nice to one another, and people "find" cows and fuel and stuff on their farms, which of course, never happens in real life, unless you bought these things and somehow lost them on your farm.  It is a fake, ersatz, cotton-candy world where every day is sunshine, and crops never fail.  It is idiotic and a waste of time.

Linked-in ain't much better.   On Linked-in, everyone is your associate, co-worker, or pal, and everyone is an expert in their field.   Everyone endorses everyone else's skills - even if they have little idea of what your skills are like.  And the endorsement thing is sort of a joke - friends endorse each other, with the quid pro quo being that if I endorse you, you endorse me, right?

There are folks who spend a lot of time on Linked-In.  It is sort of the Facebook for grownups or professionals.   You secretary may waste countless hours updating her Facebook page, but you, the professional, are making important connections on Linked-in!  Right?   Well, maybe not.

Like with Facebook, Linked-In takes your entire e-mail contacts list and then SPAMs all your friends with invitations to join - invitations that at first sound personal, until you get 100 of them and realize it is just a 'bot spamming people with messages.   And this is the beauty and genius of Social Networking - when you can use people's e-mail lists to send out invitations (that sound personal) you can expand your network exponentially, in a matter of a few months.

But the problem with Linked-In is that you are "linking" only to people you already know.   And while it is possible to link to others through existing links, meeting strangers on Linked-In is about as likely as meeting strangers on Facebook - the whole thing is set up in terms of existing links.   So as a means of generating new customers and business, it may not be very effective.

And if you link to other people who you hardly know - except online - is that really a real link?  Or is it like a "Facebook Friend" who you never meet, but you've seen pictures of their dog and their last vacation?  Is a virtual acquaintance a real acquaintance?  

And the problem I have is not finding new customers and business, but completing the work I already have on my desk.  This blog is time-bandit enough.  I need Linked-In like a hole in my head.

Yes, it is possible to "groom" your image on Linked-In, and you might generate some business that way.  If you answer technical "questions" you may gain a reputation on the site (and it helps to have lots of links and endorsements - it is like being popular on Facebook, or in High School).   But I for one would question the idea of choosing an Attorney, an Accountant, an Investment Adviser, and Employee, or an Employer, based on some Internet site.

But then again, I've been out of the "job market" since 1994, and don't expect to get back into it, ever again.   Once they let you out of the cage, well, it ain't easy going back.  As one of my draftsmen said to me once, "At this point in my life, being self-employed for two decades, I am virtually unemployable."   And it is true, too.  The people running cubicle-farms don't want a lone wolf stirring up the sheep.   It causes nothing but trouble.  It is a good thing I have saved up enough to retire - I have no other choice, really.

So as a personal matter, I don't need or want Linked-In in terms of getting a job or getting clients.   It just is not worth my while to spend time on there.   I tried it for a few weeks, but quickly got tired of it.   I do go on there occasionally (like once a year) and find dozens of unread messages, friend requests (or whatever they call them), requests for endorsements (or endorsements themselves) - all unanswered.  I probably pissed everybody off.  Oh, well, the perils of "Social Networking" - once you start, you can never, ever stop, without causing a lot of misunderstandings among friends (real ones, not the Facebook kind).

Speaking of jobs, the process of job-hunting today is a totally different animal back when I applied for my last "job" back in the 1990's.   Frankly, I would not even know how to go about it, today.   Typing up resumes and cover letters is probably old hat, as everything is done online now.  And perhaps if you are in the job market today, Linked-In and Monster and other sites may be of use to you.

But you know, if I was a hiring manager at a company, I would still want to see that typed cover letter and resume, mailed in to me.   Why?  Because I would want to know that the person applying for the job really wants it - and didn't just click on some link or SPAM his resume to 1,0000 companies.  When you have to go to physical effort to do something, it means you want it badly.  Just clicking on a link between downloads of Russian Porn, doesn't strike me as much of an effort in job-hunting.

This fellow, who claims to be a "career coach" suggests that all contacts should be made via Social Networking, as in "today's world" no one can think beyond 140 characters, and making a "personal contact" via Linked-in is the key to success (In the comments accompanying that article, many strenuously disagree).  However, an e-mail is hardly a personal contact, is it?

I think I would take a different approach.  Sure, use that social media thingy, but also send a resume (more than one page, please, if you have the experience!), cover letter (detailed, letting the reader know you have researched the company and know a little about their products and operation), as well as a photo.  Yea, it doesn't hurt for them to put a face with the name, right?  Send it by Priority Mail (flat, not folded) and it gets to their desk faster.  Yea, even today, people get a rush pulling that zip-tie on an "overnight" package (which Priority Mail ain't, but we won't tell them) and treat the contents differently.  Hell, throw in a DVD with a video resume.  Why not?   Show them that you want the job, and didn't just mass-mail out resumes, hoping one would "stick" somewhere.

Just some thoughts.  If you want to "stand out from the herd," as our career coach suggests, then perhaps sending an e-mail on Linked-In isn't quite enough - particularly when a hiring manager gets an inbox of 1,000 such e-mails, blasted from everyone on Linked-In or Monster.com, hoping the shotgun effect will work (which it sometimes does).

But again, since I am not in the job market - or trolling for clients, anymore - I really have little use for Linked-In, at least at the present time.

Hmmm..... as the baby-boomer generation retires, I wonder how that will affect the growth rate of Linked-In?

UPDATE:  I deleted my Linked-In account.  Like with Facebook, it pays to delete all of your CONTENT first, and then close the account.  I went on there and found that I was being endorsed by people I didn't even know, for skills I didn't even know I had.  Some of the "skills" listed were apparently taken from my resume (or whatever they call it, Profile or whatever).   Linked-In had me promoting myself as a "Litigator" which I am not.  This is not acceptable.

The other thing is that I was "linked" to a number of people I don't know at all.   I am not sure what this Linked-In website is supposed to accomplish, but it ain't doing it for me.   Like I said, I think it is little more than Facebook for grown-ups (and I use that latter term loosely!).

Monday, December 30, 2013

It's just ONE GUY?

This douchebag can't even spell his own name right.   What is it with people who spell their names funny?  It seems to be a pattern - a pattern to watch out for.


In a recent Atlantic Monthly article, they detail the life of an Internet "entrepreneur" who by the age of 26 has made and lost fortunes of over $100 million dollars.   He made his money through some shady online dealings, and lost it again, through fines from the FTC and through litigation.

One of his schticks was to put up these ads for "one trick of the tiny belly" and other Pavlovian Response Ads, and then lure people to sign up for "free" trial services which then charged their credit cards perpetually, using the Negative Option technique.

What floored me about this article was that it made it seem that all this internet flim-flammery (is that a word) was due to ONE GUY.   Is that at all humanly possible?

Perhaps not.  Because when one person figures out a scam or system, others will surely follow.   But it does illustrate that all it takes is for one guy to piss on the seat, to really screw up a good deal.

I reported before about the graffiti problem on the freeway between Fremont and Oakland, back in the 1990's.    A brand-new freeway, covered with ugly "tagging" from one end to another.   Gang activity?  Urban decay?   

No.  It was ONE GUY - some spoiled rich kid - with his Dad's credit card, a new car, and a lot of time on his hands.

It is like that Penny Stock Dump Scam - which turned out to run by a teenager in New Jersey in his bedroom.   When the SEC fined him millions of dollars, he said, "who do I make the check out to?"

Why do we put up with this nonsense?   Well, what he is doing isn't really illegal - or if it is, it is hard to prove.   You put up obnoxious ads for "one trick of the tiny belly" to sell Acacia Berries (or some such bullshit - like a tooth whitener) and then have the chumps click through to a "free trial" link.   They cough up their credit card numbers and you sign them up.   But, using negative option techniques, you make it hard to cancel these services.

From a legal perspective, they are doing nothing wrong - or at least not anything that is easy to prove.   You can't prove a negative, as they say.   So you can't prove that you cancelled your service, particularly if you didn't sent a certified letter to that effect.

And the FTC finds it hard to prove fraud, unless you can gather thousands of people together to show that they all sent certified letters cancelling their free service - which ain't likely to happen on the FTC's budget, anyway.

One or two people?   The company can always claim "computer error" or "clerical error" or "we lost the paperwork!"   So sorry, Ma'am, we'll refund your $39.95 right away!   But we'll keep the $100 million we got from the other chumpsters, thank you.

The FTC tries hard to rein all of this in, but their budget is miniscule, and the number of flim-flammers out there is huge.   As I noted before, I testified for the FTC in a disbarment hearing at the USPTO - going after a Patent Attorney who was in cahoots with an Invention Broker (yet another in a laundry list of scams going on out there).

The FTC tries hard, but they can only annoy these sort of folks - and rarely put them out of business for good.

Of course, it doesn't help any that "legitimate" online players like Google, Facebook, Yahoo, and others, all take advertising dollars from scam artists or people doing illegal things.   As I noted in an earlier posting, Google displays ads for sites that download malware into your computer - sites that mimic the look and names of legitimate online site.   And as the Atlantic article cited above notes, Google has been fined a half-billion dollars for knowingly taking blatantly illegal ads.

So what does that leave?   Well, in all of these schemes, it takes two to tango.   You can't get sucked into a penny stock scam if you don't buy the penny stocks*.    You can't get caught up in a negative-option cancellation nightmare if you don't sign up for "Free" trial subscriptions.   You can't get taken in by an Invention Broker if you don't give him your money.  You won't get ripped off by a scam advertised on the internet if you never click on an internet ad, ever, ever, ever, EVER!

And it is not hard to figure out these things, with a little searching online and a little skeptical thinking.   But of course, most people in this country don't think rationally.   They go to a church and think that what some guy said 3,000 years ago, was the last word on anything - a guy who wiped his ass with his hands and wore a sheet.    They believe everything they hear about on the television (and increasingly, on Facebook or whatever) without any skepticism.  And if you try to tell them the real deal, they refuse to believe it.

I gave up on trying to "save" people from invention brokers a long time ago.   A guy called me up with an invention and told me than the invention broker wanted $20,000 from him and that his invention was the cat's ass.   While on the phone, I downloaded several Patents that described the same invention - and mailed them to him, free of charge.   I explained to him that he can't Patent an invention that was already Patented, and steered him to some websites that explained how invention brokers worked.

At first, he was happy that I saved him $20,000.   But a couple of weeks later, after the constant nightly phone calls from the invention broker wore him down, he called me and proudly proclaimed that he had sent them $20,000 to "Patent and market his invention."   He told me that I was "unnecessarily pessimistic" about his invention, and that the brokers said it was a sure thing!   After all, they kept calling him, night after night, making him feel so important - and they told him that his invention was all they could talk about at their meetings!   I wished him luck and hung up - they had his money at this point, and there was nothing he could do about it.

Several months later, he calls again - haranguing me for not "warning him" about the invention broker.  "I sent them all my money, and you never warned me!"   When I pointed out that I told him his invention was unpatentable and that invention brokers just take your money and do little else, he was unfazed.  "You should have stopped me!" he said.

Sadly, that is the ultimate nature of the beast.   People act irrationally, and then expect other people to bail them out - and blame not their victimizers, but the people who try to help them, for their plight.  You can't save people from themselves, so don't even try.  The best you can do is vote for the candidate who doesn't think the FTC is "unnecessary regulation" of "legitimate businesses" and wants to cut their enforcement budget down to zero.   But even then, I wonder.   The folks who are most often victims of these scams are the ones most likely to vote Republican (let's face it - they'll believe anything, right?  That's how the tea party got started).

The best you can do is take care of yourself and fulfill your obligation under the unwritten social contract.   Act rationally in an irrational world, and you will prosper - without having to resort to scams and dodges or get-rich-quick schemes.

And as for the scammers?   Well, sometimes it seems like they win.   But the wheel of Karma does spin around pretty fast - and usually these sorts of folks never end up happy, in the long run, no matter how much money they make in their schemes.   Making a million bucks is a fine and wonderful thing.   But when you have to be constantly looking over your shoulder, it certainly isn't relaxing.

* * *

* With regard to Penny Stock Pump-and-Dump Scams:  One wily fellow I read about recently, was able to profit from these scams, on the sidelines, by watching for large buys in penny stocks, and then figuring out which stock would be the subject of the next pump 'n dump.  He would buy in, and then sell out before the peak - piggybacking off the scammers in a perfectly legal manner, as he was not the one hyping the stocks.

Friday, December 27, 2013

No Mortgage = huge raise in pay

Owning your home free and clear is like getting a huge raise in pay - the money you save is more than just the annual interest rate.


My investment adviser at Fidelity is a nice guy and pretty smart and all.   But he thinks I'm an idiot for paying off my mortgage, instead of keeping the house in hock and of course investing the $400,000 with him.   You can't blame him for that - he gets paid based on how many assets he handles, and my paid-for house doesn't count toward that goal.

Of course, he's in his 30's, and has a wife and two kids, a hefty mortgage, car payments, and the whole bit.  The idea of actually owning anything at this stage in his life is alien to him.  And it was to me, when I was 30.

His argument is that the interest on the mortgage is only about 5% or so, these days, and you can make more than that in the marketplace.   But it is a flawed argument.

I pointed out to him that not having a mortgage payment is like getting a huge raise in pay.  And for people who are retired and living on their savings - or for self-employed people who would rather work less, it is an argument that makes sense.

What do I mean by this?   Well., a $400,000 mortgage, at 5% interest, comes to about $2147.29 per month, just for principle and interest.  As I noted in another posting, the other costs of owning this home, including utilities, taxes, and insurance, come to another $1000 a month.  (And it goes without saying that getting a 5% interest mortgage these days is getting harder and harder to do - and let's not even talk about the fees involved).

In order to earn the $25,767.48 every year needed to pay this mortgage, I would have to earn far more than that, in order to pay the Federal Income taxes, Social Security and Medicare Taxes (the self-employment tax, in my case) as well as State Income Taxes.   The self-employment tax alone is 18%.  Throw in 25% for the feds, as well as another 6% for the State of Georgia, and I need to make 49% more money just to net the amount for the mortgage payment, or $38,383.54.

There are two things to note here.  First, this extra income needed might actually push me into a higher income bracket - from the 15% rate to the 25% rate, so we end up paying more in taxes.   If you are retired and taking money out of your 401(k) or IRA to pay a mortgage, you may end up paying out at rate higher than you paid in, or at the very least, not much lower than you paid while earning.

The whole point of the 401(k) and IRA system was to take a deduction while you were in a high bracket (25% or more) and than pay out at a lower bracket (15%) and thus save on taxes.   If you retire with a mortgage, and your income needs are high, you negate this advantage of the IRA and 401(k).   If you have no house payment, when retired, you can live on very little money, and thus end up in a lower tax bracket - by taking out less from your IRA or 401(k) plan.

But speaking of deductions, my calculations above did not factor in the home mortgage interest deduction.  And this brings up an interesting point from a number of angles.   When you buy a home, the first few years of payments are nearly all interest - so your home mortgage deduction is high.   As the mortgage winds down, you end up paying mostly principle and little interest - to the point that in the last few years of a mortgage, the deduction may not be higher than your standard deduction.  So, if you retire with five to ten years left on your mortgage, you may end up not getting the advantage of the home mortgage interest deduction.

But let's look at it from the flip side.  Suppose you just bought a retirement home, and encumbered it with a 30-year mortgage, rather than just pay cash to buy the place outright.  Your financial adviser (like mine) says this is a swell idea, as you can "invest" this money in his mutual funds, which is swell for him, as he gets a commission.   And if the market is going gangbusters, like it is today, that is swell for you, too, provided the market keeps going like gangbusters.   If it doesn't, well, you lose it all - and still have a mortgage to pay.

And that is why most financial advisers (the good ones, anyway) suggest you put your money into safe harbors as you get older.   A 70-year-old has no business playing the market that late in life.

But getting back to the Interest deduction, the first year of that mortgage, out of the $2,147.29 payment, $1,666.67 is pure interest, and less than $500 goes towards principle.   Granted, this means you can deduct that amount from your income, and avoid paying the extra taxes.   However, very few people stay in their homes for 30 years, and thus taste that sweet spot at the end of the mortgage, where most of every payment goes to pay off principal.

(Note that when you pay 5% in interest, it is not on the amount of your payment, but on the overall balance, so the beginning of any loan is almost all interest).

The average home is bought and sold about every five years in America.   If you buy a $400,000 home today, and mortgage it at 5%, you will pay nearly $100,000 in interest payments, over five years, before you sell the home for not a lot more than what you paid for it, plus the closing costs.   Yea, yea, yea, that amount is deductible and all, but again, you can't deduct your way to wealth.   Regardless of whether it cuts your tax bill, you still have to pay the $100,000.   And for a retiree, the tax bill being cut is the one increased in the first place by the need to withdraw that $100,000 from the IRA.  It is a null-sum game.

Going into retirement with high income needs is never a good idea - not only will you drain your retirement funds more quickly, but you will pay the highest tax levels doing so.

For example, take Fred.  He's old enough to retire and collect Social Security, but he still works and makes good money.   Good enough money to put him in the 28% bracket.   He hasn't touched his 401(k) or IRA money - regularly - although he can withdraw from both accounts, now, without tax penalty.

But then trouble strikes - as it is wont to do, when you are retired.  The house needs repairs, and he has to take out $50,000 from his IRA to pay for it.   The problem is, in order to pay the taxes on that untaxed income, he has to take out at least $75,000 to cover Federal and State taxes.   It may even boost him into the 33% marginal bracket!

Fred notes that using his IRA money this way was wasteful.   He wishes he put the money into a Roth IRA instead (where he could now take out the money, tax-free).   Paying taxes at 28% or 33% is certainly wasteful - and higher than the 15% Capital Gains taxes he would have paid if this were after-tax money invested.

Of course, back when he was 30, those tax deductions were awfully sweet - and there is no way that age-30-Fred would have started a Roth IRA back then.   So the point is moot.  Age-62-Fred is stuck with the decisions that age-30-Fred made.  And they hate each other - that's typical.

So what's the solution?   Well, in retirement, it makes sense to keep your income needs low.    If you need a lot of money to maintain your "lifestyle" in retirement, then you end up having to pay a lot of taxes to do so.

One approach, which in the past was typical of most retiree's strategy - was to downsize.   Once the kids are grown and gone, there is no need to keep a five-bedroom house in a high-tax district.   Sell the house and use the equity to buy a retirement home, free and clear.   And Florida and Arizona and other retirement States are full of such homes, often selling for under $200,000 - often even far, far less.

Without that monthly "nut" to crack, one doesn't need huge amounts of money to survive.   So the IRA and 401(k) last longer, and you can take out money at a lower tax rate - benefiting from the design of these plans.

Speaking of withdrawals, Fred's situation illustrates why it is a good idea to take money out of your 401(k) or IRA after retirement, over time, and put it into an after-tax account.   If you are in the 15% bracket ($36,250 solo taxable income or less) but use less than the maximum amount for your bracket, then it makes sense to take out the difference, at the end of the year, and put it in an after-tax account.   That way, in a subsequent year, when you need a lump sum for a home repair to to buy a car, you have that money, already taxed, and don't have to worry about being pushed into a higher bracket.

You have only so many years left to live, so it makes sense to take out the maximum amount, in your bracket, and pay the lower tax rate, than to take out lump sums later on, and pay higher tax rates.

The goal of retirement should be to live on less.  Every dollar you don't have to spend is a dollar un-taxed.  And not having to pay a monthly mortgage leaves your life open to other possibilities.

Not having a $2000 a month mortgage payment is like getting a $40,000 a year raise in pay!

Thursday, December 26, 2013

Gift Cards

It's the time of year for Gift Cards.   Are these a good deal?  For merchants, they are!


Well, Christmas has come and gone, and if you are like most Americans, you have at least one or more gift cards to deal with.  And if you are like most Americans, you probably look at gift cards as an unnecessary hassle.

We are told that we should 'Never look a gift horse in the mouth'.   But a gift card bears looking at.  There are a number of reasons these things are a raw deal for consumers, and why merchants love them so much.

The main thing is, on average, for every dollar spent on a gift card, less than a dollar is purchased.  Some statistics suggest that 10% of all Gift cards money issued is never redeemed - a whopping $2 Billion a year in windfall profits for retailers and gift card providers.

Why is this?  A number of factors.    Many people (including my spouse) look at Gift cards as something "special" to be "set aside" for a "special occasion" - and as a result, they are lost, never used, or they expire before they can be used.   Others simply lose the cards, put them in a desk drawer, or never use their entire value.

As a result, the gift card remains un-cashed  - in whole or part - and the retailer has a windfall profit as a result.  When you can get people to pay you for nothing that is a pretty sweet deal.   And that is why you see so many gift cards offered at stores - it is a raw profit monster for retailers.

Gift cards are profitable in other ways, as well.   For example, Mark's employer gave him a gift card to a local restaurant for $25.   That's fine and all, but an entree at that restaurant is at least $15, so you can see than "dinner for two" will result in spending more than the gift card amount.   And since it is a restaurant we don't normally go to, this will result in a restaurant meal we didn't plan on spending money on, and thus increase our consumption, not decrease it.

So gift cards end up priming the pump on consumption - getting people to spend money when they might not have spent it at all.   If Mark's boss had simply given him $25 in cash (which seems so crass, but is really the same thing) he might have spent it at a lesser restaurant, used it to buy groceries, or put it in his IRA.  He would have a choice on how to spend.   With the gift card, not only is the choice made for you, but it entices you (or requires you) to spend some more of your own money as well.

Note that gift certificates can work the same way - or not.  At a recent raffle charity, one prize offered by a local restaurant was "Dinner for Two" which included appetizers, entrees, a bottle of wine, and dessert.   Other than tipping the waitress, there was no additional expense required for the recipient of this "gift".   A fixed-money value card, however, at less than the price of a meal, is merely an invitation to spend more.

So what do you do if you get a Gift Card?   My take on it is this:  Spend it - right away.   You don't need some gift card sitting around in your desk, being forgotten or lost, and adding complexity to your financial situation.   If you are going to use the Gift Card, use it - and use it before you forget about it.

Don't want to use the gift card?   Re-use it by re-gifting it to someone else!   It is like a game of hot potato.   Pass it on, or use it, but don't hang onto it.

Gift cards have a host of other problems as well.   Some folks use them like credit cards (and some can be used, nearly anywhere, like a credit card).    But often fees are applied to the cards, if you check the balance on the card, try to add money to a card, or the like.   Banks love these cards because they are sure money-makers - they collect credit card fees when they are swiped, or they charge the purchaser a fee for buying the card, or they charge the recipient for using the card.

Gift cards have fraud issues as well.   Some cards had PIN numbers printed on the back.   Shoplifters would take a card off the rack, scratch off the coating and write down the card number and PIN number, and then put the card back on the rack.  If someone bought the card, failing to notice the PIN number was revealed, the card could be activated.  The thief could then go online and use the card and PIN number to purchase goods - using the unwitting consumer's money to do so.  The recipient of the gift card is chagrined to see that the gift card has a zero balance and zero value.

So why do people give gift cards instead of cash?  (and mea culpa here, I have given gift cards in the past as well).   The reason is purely emotional or status.  We view giving cash as crass and low - and even insulting.   You give money to someone, particularly a friend, and they act offended - as if you spit in their hand.   

And movies and television promote this idea.   The grizzled old fellow helps the tourist fix a flat on his car, and the tourist offers him money in exchange.   The oldster demurs, and even acts offended that he was offered something plebeian as money, in exchange for labor.   The message is clear:  giving people money is an insult - as if they were prostitutes or something!

But oddly enough, money is the one thing that most people do enjoy getting.   People line up to buy lottery tickets - hoping to "win big" and have a huge pile of money.   In any action-adventure movie, there is always an aluminum suitcase full of money shown, in at least on scene, which the audience salivates over.  Lookat all dat money!  Yee-Haw!

So yea, we all want money, particularly the people who say they don't want money.   And yet giving money to someone is considered tacky or tasteless.   At least in modern times.

When I was a kid, my Grandmother would send me a check for my birthday - or a $5 bill in a birthday card.  Cake and candy and toys were nice and all, but often this was the present a child looked forward to the most.   As I noted many times in this blog, money represents power and control, and as a kid, you don't have a lot of that.   Even a few dollars is a big deal - a chance for you to make purchase decisions and make others do your bidding, even if it is for a 10-cent candy bar.

Sadly, gift cards are not going to go away anytime soon.   They represent yet another escalation in the complexity of our personal finances.   In addition to tracking our bank accounts, credit cards, mortgage, taxes, investments, and the like, we now have to dick around with these gift cards and their own arcane set of rules and regulations.  It's like discount coupons - being thrust upon us.

And that's why I try to use them - and spend them fast - or get rid of them.   Nothing worse than cleaning out a desk drawer and finding a "lost" gift card from years past - a gift card that has since expired.

When does your gift card expire?  Beats me.  We received one from "Mercury Gift Cards" which supplies the restaurant industry.   Their site will tell you the balance on the card, but not much else.  They do have a FAQ aimed at retailers, which discusses reports provided, which include expired cards, but no information is provided to the consumer.

Another site shows how the cards can be programmed by the retailer with expiration dates.  The default is "no expiration" but the consumer has no way of telling whether the retailer set this to default, or to a number of months for expiration.

"The more complicated you can make any financial transaction, the easier it is to rip-off the consumer," a great man once said.   Gift cards are just another unnecessary level of complexity.

Wednesday, December 25, 2013

Negative Option - what it is, and why it is dangerous


Negative Option deals can turn into scams, if the merchant is not trustworthy.

I have written several times before about "Negative Option" deals and why they are generally a bad idea.  But I realized I have not written a dedicated posting about Negative Option, what it is, how it works, and how scammers use it to steal money from people.

Negative Option is a term used to describe payment plans and subscription services, where a merchant or organization (bank, lender, etc.) debits your checking account or charges your credit card, periodically (monthly, usually) until you say "Stop".   In other words, the charges go on and on until you say no.

If you have a pulse in live in North America, chances are, you are signed up for one or more negative option deals.   And if they are with reliable merchants and businesses, you have little to worry about.   Chances are, you may be signed up in a Negative Option deal with your utility company, your mortgage holder, your phone company, cell phone provider, cable television provider, car loan company, or the like.   Every month, their bills come due, and every month, they automatically charge your credit card or debit your checking account.   It's no big deal, right?

Well, first understand the difference between negative option to your checking account and your credit card account.   When you hand over the account number and routing number of your checking account to a merchant, and authorize them to charge your account, you are authorizing them to make a demand draft which when automated, is called an ACH debit.

A demand draft is basically a check, and the concept goes back for ages.   In the olden days, a merchant could go to your bank and submit a demand draft for money, without your signature on the check.   The demand has to be legitimate, of course.   But it comes as a big surprise to many that a third party can just waltz into a bank and take money out of your account, provided they know your name, account number, and routing number.

So, when you give the mortgage company your checking account number and routing number and authorize them to deduct the mortgage payment from your account, you are handing them a lot of authority over your finances - and trusting them with the family jewels.

And it can go wrong - even in legitimate situations.  I recounted the story where I had a mortgage through Key Bank, and they sent me a letter suggesting I sign up for automatic payment by ACH debit (demand draft) which I thought was a swell idea.   I set it up with Riggs Bank (a real nasty bank, by the way) and everything was fine.   But like most mortgages, it was sold to another bank, and since Key Bank was doing an ACH debit on my account, they took out the money for the month of February, but did not forward the money to the new lender in time.  The new lender, meanwhile, was dunning me for the mortgage payment, and putting a "late payment" on my credit history (which really kills your credit score).  It took months to straighten out, and it wasn't until years later that I realized my credit score was affected.  A simple phone call to the bank straightened that out, however.

Since then, I am told by lenders that they do not report late payments when a loan is transferred, for at least a month, if not two months, as they realize that checks can be sent to the previous lender, or that ACH debits may take months to catch up to the new lender.

But it does illustrate how even a "legitimate" ACH debit can go awry.

Negative option with a credit card is a similar scenario, only instead of debiting your checking account, they charge your credit card.  A provider of online services, for example, will charge your credit card monthly, or annually, for online e-mail or whatever, unless you explicitly say "no more" and tell them to stop.

Are negative option deals a bad thing?   Well, not necessarily, if the merchant is trustworthy.   Regardless of whether it is an ACH debit or a Credit card you are using, you have to trust the merchant involved, not to mess up your accounts.   And if the merchant is basically a scam artist, well, they will mess up your accounts.

How does the scam work?    Like this:

1.  The scam artist offers you a service online, such as premium membership on a website, or even internet service, e-mail or whatever.   Or it could be a subscription service or magazine.

2.  The merchant requires a credit card for negative option billing, telling you that you can "cancel at any time!"

3. You sign up for the service and use it for a while.  Eventually you decide you no longer want to use the service and try to cancel.

4.  You go to the merchant's website to cancel and find that you are required to CALL to cancel.  Or, they have a link to cancel that does not work, or when you fill it out, they claim not to have received your submission.

5. You call and try to cancel.  They send you to a "cancellation specialist" who tries to convince you not to cancel the service - often browbeating you in the process.   They finally concede and say they will cancel your service.

6.  You get a bill next month for the service.  You call again, and they claim never to have received notice of cancellation.   This can go on for months, even after you have sent them registered letters.

7.  In some instances the charges eventually stop, but only after months of excess charges, which are never refunded.  In some instances, the charges stop - but mysteriously re-start after a few months.   In other instances, the only way to get them to stop is to cancel your credit card and get a  new one.

In every case, the fraudulent merchant says "mea culpa!  Our computer broke down!  So sorry!"  And this is how they get away with it.  If someone really pushes the matter - by calling the Attorney General, or suing them in court, the merchant will claim that (a) they never received the earlier cancellation notices by phone, e-mail, or online, and (b) their computers "went haywire" and an innocent mistake was made.

And from an evidentiary point of view, you can't prove them wrong.   And for a $13.95 a month charge, chances are, you aren't going to court anyway.

Moreover, there are a number of people in this country (I used to be one of them) who never check their bank statements or credit card statements carefully and thus never figure out they are still being charged, until months after the fact.   Many of these people end up paying for service fees until their credit cards expire (the merchant can't charge unless he knows the expiration date of your new card - but they can always guess at that, too!).

In other words, for a con artist, this scheme works well, as you can claim you are doing nothing illegal and also rake in a ton of dough.   A few bucks here and there really add up, over time.

Yes, you can call your credit card company and try to dispute the charges.  Guess what?  The merchant will dispute your dispute - and claim they never received your cancellation notice.  Who is the credit card company going to believe -the merchant who charges millions of dollars a month on their cards (and generates a 2-5% fee for them with every charge?) or you, Mr. Schmuck who can only "take his business elsewhere!"

And even "legitimate" companies do this - when they start hitting the skids.   Middle managers, pushed to keep retention rates high, will simply tear up cancellation requests, to boost their own personal numbers.  It is a system that encourages fraud.

In a way, it is like magazine and newspaper subscriptions.  When I lived in an apartment in Fairfax County, Virginia, I started receiving the County newspaper at my door (as did all my neighbors).  At first, I thought this was a free promotion.  But then a bill came in the mail.   I called the publisher and found out that they had hired kids to go door-to-door to sign up people for subscriptions.  The kids were paid based on how many people they signed up.   So more than one clever kid figured out that if you just wrote down the names and addresses of all the people in the apartment building, you could game the system, make a ton of dough, and walk away before it all blows up.

In other instances, however, I am not so sure that Negative Option abuses are accidental.  Some companies appear to plan these gags as a means of making money.

What sort of companies are abusing Negative Option?

Well, the grandaddy of them all was AOL, just as it started losing subscribers by the thousands, tens of thousands, and then millions.   The internet back then was rife with complaints by people who claimed that AOL continued to bill them, even after they called several times to cancel.  And of course AOL claimed innocent error in the matter.

But if you go online today, you will see complaints from others regarding Negative Option difficulties.  Angie's List is one of them.  People allege that they sign up for Angie's list and then try to cancel with little success.

Webshots apparently took this whole idea to a new level by re-instating their website (which was converted to something called "Smile!" earlier) and then digging up the names of their old subscribers from previous years and then charging the $2.99 premium membership fee.   Many people assumed that since the site went dark, they did not need to cancel their membership.   Apparently not....

Should you avoid all negative option deals?  Of course not!   But limit them to legitimate merchants, such as your utility company, mortgage company, and the like - and not for some fly-by-night Internet website operator.

How do you tell if a Negative Option deal is going to be raw?  There are a number of ways:

1.  Is the service for something as dubious as a "premium membership" on a website or some other unnecessary expense in your life?  If so, just walk away.

2.  Do they offer "30 days free trial!  Cancel at any time!"?  If so, it probably is a con-job.   You may eventually get them to cancel - but long after the 30-day period.  They will get you.  Remember that FREE ISN'T and whenever someone dangles out "FREE" in your face, you should run away as fast as possible.

3.  Is the Merchant a nationally recognized "legitimate" company?  This is not always indicative, as companies such as AOL and wireless companies (and cable companies) have all been accused of using this gag.

The main things to ask are this:  Is this service or subscription really necessary?   Do I trust the parties involved?  Is it worth the hassle of getting something for "free" to have to jump through hoops?

Chances are, unless it is something major in your life, like a mortgage payment or utility bill, the answer is "Hell No!"
And in this era of online bill payments, you could argue that using negative option for anything is really unnecessary.

Monday, December 23, 2013

Permanance and the dot-com world

Things wear out, over time, including cars, homes, buildings, and factories.
We should not be surprised by this.


As I noted in an earlier post, when I was a kid, I thought things like cars were permanent, rather than the disposable consumer appliances that they really are.   I thought, as a kid, that if you could just "take care" of a car, it would last forever.  And while this is theoretically true, it really makes little or no economic sense, as eventually, the cost of maintaining a car far exceeds its value - and it becomes more expensive to own than a new one.   And this is why most people buy a newer car, over time, rather than try to keep an old jalopy alive.  There is an end game to everything.

Houses and buildings, as I noted before, also have a design life - and often it is better to tear down and start anew, rather than try to patch and repair a building, over and over again.   Moreover, as time progresses, the desired use of the land a building sits on may change over time.   A cornfield might be plowed under for tract homes in 1950, as that is a more profitable use of the land - at that time.  But by the year 2000, those tract homes may be run-down and the land now so valuable that it makes better sense to tear down the post-war crackerboxes and build anew.   And that is what happened to my home in Virginia, as land values soared with the population.

And the same is true of industries and factories.  Many in the labor movement decry the closing of American factories, and they will say idiotic things like, "Well, we've lost that investment in the factory when they closed it and sent all the production to China!"   But the reality is, even a factory - which may seem permanent - has a design life.  Over time, a factory may become obsolete, or the products it may make become obsolete.   Eventually, it is time to rip it all out and start over - or close the doors, or send the work elsewhere.

All across America, you see remains of old factories and industries, some dating back from the 1700's.   Old mills, forges, ironworks, or the like, were abandoned by our ancestors as newer technologies came about, making these small works unprofitable and useless.   Canals were abandoned in favor of railroads, and even railroads left abandoned when there was no need for them.   We move on, with time, as products become obsolete, or newer industries are more efficient.

In my own life, I have seen a number of factories bulldozed or closed.  My Dad's old clutch plant is no more.  The ball-bearing factory I used to work in, is now a warehouse.   The air conditioning company I used to work for has closed most of their buildings up North and moved production elsewhere (those buildings themselves were re-used WWII tank factories).   Times change, and in a very short time, these things are shut down, torn down, re-used, sold, or whatever.   It is rare for a factory to last more than a few decades.  The oldest are less than 100 years old.

What made me think about this was my previous posting about Facebook.   In researching this online, I started to see a pattern with a number of companies - Webshots, AOL, Bebo, MySpace, etc., where a new Internet start-up becomes wildly popular - and then becomes the darling of Wall Street (or is bought out by a big media company or private investors).   In a few short years, the company loses its touch, and its products become obsolete and customers leave.   The founders buy back the old company for pennies on the dollar, and instead of trying to run it as a profitable venture, just bulldoze it into the ground and try to "start over" with a new idea - often with mixed results.

This is such an identifiable pattern that they should have a name for it.  Call it Webshots Syndrome.

But it got me to thinking - if things as permanent as factories are bulldozed to the ground - after decades of productivity - what is the value of the underlying company?

Traditionally, in the "brick and mortar" world, someone would decide to start a company to make things - for example, kerosene lanterns.  In order to do this, they needed capital to start the business and build the factory.  So they incorporated and sold stock - to raise money -  and then built the factory, hired workers, and made the lanterns, which they sold for a profit.   And some of those profits were paid back to the shareholders in the form of dividends, and some was used to improve or expand the factory.

(Contrast this to the dot-com IPO, where they sell stock to cash out, not to raise money!)

And over time, if you bought the stock, you would make back your investment in terms of dividends.   But eventually, the factory would have to close - or the company find a new line of work.   Electric lights would replace kerosene lanterns, and if the company did not change with the times, it would have to fold up its business and close.   And at that point, the worn-out factory building and its fixtures (designed to make kerosene lanterns) would be worth very little - pennies on the dollar - in bankruptcy.

At that point, as a shareholder, your "investment" would be wiped out.   But presumably, you made enough money in dividends to more than compensate your loss in capital investment.  Or, hopefully, you sold out in time, perhaps seeing the writing on the wall about electric lamps, and then got some sucker to pay you good money for a stock that was going nowhere.

Of course, other companies morph themselves into new businesses.   For example, a large kerosene lantern manufacturer morphs into an automotive lighting supplier.   IBM goes from making computers to doing some kind of "enterprise software" thingy.   A maker of computer display chips becomes a maker of A/D converters.  AOL goes from an online portal into a content provider. The list goes on and on.  Companies re-invent themselves and often end up in totally different lines of work.  The successful ones, that is.

The interesting thing about this phenomenon is that there are two ways of looking at such transitions.   For example, if you are running an old kerosene lantern factory, and have a bunch of shareholders to satisfy, as well as a unionized workforce to placate  - and you see the writing on the wall with regard to the emergence of the electric lamp, you have two real choices.

 A first approach would be to try to re-make your company into an electric lamp company, by revamping your antiquated factories with new machinery and tools.  However, this would require a lot of capital to do.  So you have to hope there is enough residual business in kerosene lanterns to support this change, or you'd have to borrow money or sell more stock to move forward with this modernization.

A second, and arguably more profitable approach, would be to let the kerosene company go bankrupt - or find some chump to "buy you out" - a chump who doesn't realize that the kerosene business is not going to be around much longer.   You then go out and form a new company and raise money for a whole new factory in a new city - preferably one without unions, and without your prior pension liabilities - and start anew.   It is a more profitable venture, as you are not saddled with the legacy of old shareholders to pay off, or old factories that are expensive to modernize (often costing more to modernize than to build anew) as well as past liabilities.  You wonder why more people don't do this.

But regardless of the company involved, eventually, all companies go bankrupt.   There was a statistic being batted around the other day about how of all the Fortune 500 companies in 1960, only a few are still around today.   People acted shocked about this, as if it were some weird anomaly.  But in 50 years, most businesses - even old-school brick-and-mortar businesses - go belly-up.  Companies are dynamic, not static.  They come and go like the weather - they are not cast in stone.

So, you have to wonder why someone would buy stock in a company that pays no dividends, has no intention of ever paying dividends, and is something as trendy and ethereal as an Internet dot-com start-up.  You can almost guarantee that eventually, down the road, the company will end up on the rocks, and the stock price will be a fraction of what it once was.   And not having been paid any dividends, you will be left with nothing.  

That is, unless you can buy low and sell high - to some other chump.   But that is not investing, is it?  It's just gambling, right?

Anyway, that's what I was thinking when I saw an abandoned factory.

Friday, December 20, 2013

2013 - A Bad Year for Gold!

As this Kitco chart shows, gold has been hammered in 2013, going from nearly $1700 an ounce to about $1200 - a drop of nearly 29% in value.  As the economy goes up, gold goes down, and vice-versa.
I have mentioned earlier in a number of posts that buying gold is a bad deal.  Why?

1.  Idiots like Glenn Beck and "G" Gordon Liddy are hawking it.   Need we say more?

2.  There is no fundamental reason why gold should shoot up in value, other than fear and greed, which are emotional reasons - and the worst reasons to invest.

3.  Gold costs about $500 an ounce to mine.   $1700 an ounce represents a 340% markup - a hefty one in any business.

4.  As demand goes up, so does incentive to produce more supply.  From the mountains of the Carolinas, to the strip-mined rainforests of the Amazon - to your grandmother's jewelry box - everyone is finding more gold.

5.  Sudden peaks in prices of any commodity are, historically, eventually followed by sudden valleys.

6.  Analysts "projections" of $5000 an ounce were based on nothing more than wishful thinking - and no real underlying analysis or reasoning.


But of course, the gold-bugs would have none of this.  Gold would keep going up in value, well, just because it would.   We were told that gold had magical values as a "precious metal" and that it was somehow different from other commodities because of this.   There was only so much gold to go around, we were told.

Yet, millions of ounces are mined every year.


This next chart is pretty depressing, if you bought gold in recent years:


If you bought gold any time after July 2010, your investment is equal what you paid for it.   This of course, does not include the effects of inflation (minor) or the gains you could have realized in the booming stock market of the last four years.  If you bought gold after July 2010, you lost money, no matter how you slice it.

Yes, if you had the foresight to buy gold before the recession of 2009, you might be still ahead of the game - but not by much.  You see, as I noted in an earlier posting, the stock market has been going like gangbusters since February of 2009.

You might think the economy is in the tank, if you watch television.  However, the Dow Jones Industrial Average has more than doubled in the last five years.

The DJIA has gone from about 6600 in February of 2009 to nearly 16000 today.  This is not to say that stocks are the greatest thing to invest in - only that they have beat the snot out of gold since the recession started.  Gold, in contrast, has gone from about $1000 an ounce to nearly $1700, and then back down to $1200.   Even if gold had stayed at $1700 an ounce, it would still not have beat stocks.
  
But since it has gone down, well, the portfolio of the gold-bug has really taken a hit.
______________________________________

Gold is a fear metal that people buy because
they are worried about the economy.  Take away 
the fear and the price always plummets.
______________________________________

Consider Stan Goldberg, who sold his stocks (at a huge loss) in February of 2009 and bought 100 ounces of gold for $1000 an ounce, for a total of $100,000 in his portfolio.  Today, he has $120,000 in his account (a gain of 20%) or a gain of less than 4% a year over five years.

 
Now, Fred Stockman, on the other hand, had $100,000 in an indexed mutual fund, which he left alone in February of 2009.   Today, that account is worth an astonishing $266,666  (the mark of the beast!) - a 166% gain over five years, or about 33% per year.  Not bad.

So you see the problem with "investing" in gold - at least over the last five years.

But of course, it depends on the window of time you choose.

Suppose we go back a whole decade?  If you bought stocks in 2004, the DJIA was at about 10,000, meaning you had a 60% gain over a decade, or about 6% a year.  Gold was at $400 an ounce, and about $1200 today, a gain of 200% or about 20% per year.  If you had the foresight in 2004 to invest in gold, you would have done OK.   But back then, no one was hyping gold.  The "little people" who bought gold during the recession, on the other hand, got creamed.  If you listened to the hype, you always come out behind.

Does this mean stocks are better?  Heck, no.   Only that investing in all of one thing, particularly one thing that has already shot up in value based on fear and greed which makes no sense at all is probably a bad idea.  Gold is a fear metal that people buy because they are worried about the economy.   Take away the fear and the price always plummets.  Look at the last three gold bubbles, and you will see a correlation to times of economic uncertainty - the recession of 2009, the recession of 1980, and the Arab Oil embargo of 1973.  Interestingly enough, the peak in the price of gold trails each major event by about a year - and then drops to the floor.

Diversification is the key.   Have investments in a number of things.  If one goes up, another goes down.  Overall, you may do well.   But gold?  I would not put much into it - if anything.   It is just a commodity, and predicting prices of commodities is a tricky thing.

But what about 2014?   We'll have to see, as my time machine is again out of order.   However, economic indicators are looking up.  The European monetary crises is not over by a long shot, but it appears to be on the mend.  We've had four years of growth, albeit slow.   And Congress seems to be able to even agree on a budget (and notwithstanding all the doom-and-gloom, even shutting down the government and threatening to default on the national debt seems not to affect the markets one iota).

Stocks have had a good run.  And it is possible they may level off in 2014.   But with each piece of good news about the economy, gold gets hammered.   And 2014 may be the year gold drops down below $1000 an ounce.   And once that starts, well, a psychological barrier is breached, and you may see a sell-off at the point.

Why?  Because gold is bought on emotion not analysis.  I bought my Altria stock because it pays a good dividend and because poor white trash will always smoke, no matter how expensive it gets.   I didn't buy it because Glenn Beck said it would hit $5000 a share for no reason at all.

So when milestones in gold prices are reached, you can bet that gold-bugs will panic and sell, "before it goes any lower!"

The media doesn't talk about gold much anymore.  Notice that?  Well, not the mainstream media.  A few places have noticed it.  When it was shooting up in value, the media "notices" things.   So they talk about hyped stocks and the price of gold - when they go up.   But when they quietly tank, well, that is not a story - until it hits one of those magic  numbers.  And $1000 an ounce will be a magic number.

2014 might be the year of the panic sell-off in gold.
 
The moral of the story?   Not that gold is bad and stocks are good.   Rather that anything hyped in the media is usually a very poor bet

Nut Cracker Suite - An American Industrial Story

Chances are, you have one more of these in your kitchen drawer - or know someone who does.   Did you ever wonder where they came from?


We tend to take for granted a lot of things in our lives.  We buy consumer goods and never bother to think of how they were made, where, and by who.   That is, of course, unless you are an Engineer.

The nutcracker or lobster cracker shown above was invented by a fellow name Henri Quackenbush, who ran a factory in Herkimer, New York.  And the story of this nutcracker crossed my life in two ways, at nearly the same time.

When my Father was laid off from his job as Vice-President of a failing Auto Parts company (making truck clutches in the rust-belt city of Syracuse, New York) he looked around for something to do.  Jobs were hard to come by in 1982, and no one was hiring managers who were over 50.  So he thought about becoming an entrepreneur.

One of the opportunities he looked into, was buying the old Quackenbush factory in Herkimer, where they made these nutcrackers.   I am not sure where he thought he would get the money to do this, but he looked into it.   His description of the place was pretty interesting.

"They have two little old ladies assemble these things and pound the rivets into place," he said.   The handles were heavy steel with nickle plating.   Apparently, these two little old ladies have been assembling these things since World War II, and if you have one of these old nutcrackers in your kitchen drawer, one of these two women assembled it.  And they are probably long in the grave at this point, or perhaps retired in Florida.

(By the way, I have a set of these crackers, with picks, in a nice tartan plaid nylon pouch.  And no, you can't have it.   Very retro.  Very cool.  The Originals are apparently stamped HMQ if you have one).

Well, the problem was, these two little old ladies were going to retire soon.   And no doubt, they were union workers, and their wages were pretty steep - as well as their retirement and health benefits.  So the management of the place decided that it was time to look into automation.

Now, at the time this was going on, I was spending my waylaid youth hanging out in biker bars and drinking beer and smoking as much pot as I could get my hands on.   It seemed like the thing to do at the time.  And one of my friends was a machinist who lived above one of the bars, and we smoked a lot of dope and would talk about work and stuff.

One of the projects he was working on was an automated rotary assembly machine, which would take the two arms of these nutcrackers (fed in from a hopper), place them in a die, then insert the stamped metal hinge elements and spring, and in a final stage, insert and hammer the rivets that hold it all together.  The whole point of the machine was to put these two little old ladies out of a job.

Sounds pretty simple, but the machine, even back then, cost well over $100,000 - perhaps far more.  And it was a monster of a machine, too.   When they completed it, it was loaded onto a flatbed tractor-trailer, and hauled to the factory with a wide-load permit.   No door in the place was big enough for the machine to pass through, so they knocked a hole in the wall so it could be installed.

My Dad took a pass on the nutcracker factory.  Chances are, he couldn't afford it.   But he probably was smart to do so.   Competition in a business like this is murder.   It would have been a business of margins, and trying to run a factory in a high-wage and high-cost area like New York State (not to mention having to pay off the mafia) would have bankrupted him in short order.

The nutcracker business was sold from Quackebush to M.E. Hueck, Co., in Cincinnati, Ohio.  They still make these things, although I am not sure if they still made in the USA.  Of course, there are a host of copycat nutcrackers on the market now - the Patent has long since expired.  An most of these copycat crackers are made in China.  You can tell the new ones, as they bars are thinner (made from turned rod stock) and the plating isn't as nice.   But let's face it, you aren't about to spend $20 for a set of lobster or nut crackers, are you?  And that's about what a really nicely made set, made here in America, with union labor, would cost, if they made them today.

This Quackenbush nutcracker set is available on Amazon for $6.99 for the set.  It says "Made in USA" on the card.   Is the automated machine my friend made still running?  Or are two new little old ladies hammering these things together?


It's funny, but a lot of things you see every day used to be made in small cities and towns in places like Central New York.  Do you have a "pencil" type tire gauge in your toolbox?  If so, it was called a "Syracuse" gauge back in the day.  But like anything else, that plant closed long ago, and production moved to China.   Yea, the new ones are cheap - and cheaply made, too.   Appropriately, the company now makes electronic tire pressure monitoring systems.   After all, who checks their tire pressures anymore?

Video Ads - the Beginning of the End for Facebook?



Facebook has announced that it will embed video ads in your "feed" (an interesting word for media kibble if there ever was one).   Is this the beginning of the end for Facebook?


There used to be a website call Webshots.  Long before Picasa and Facebook, you could upload photos to the site and have them hosted for free in "albums" with captions.   People could comment on your photos and even rate them:

By 2001 Webshots became a profitable company with a combination of revenue streams that included advertising, freemium service, and merchandising. By 2004, Webshots was grossing $15M/year, had more than 200,000 paid subscribers, and was the #1 photo sharing site and top 50 media property per ComScore.n the same year, Alexa ranked Webshots the second largest English language privately held Web media property (behind weather.com). The company was sold to CNET Networks for $71 million in cash.
 In other words, for its time, it was a pretty big deal.  Yea, $71 Million seems pretty paltry compared to what today's websites are selling for.   But back then, it was a major player on the Internet.

Webshots is no more.   What happened to it?   Well, to begin with, offering free services on the Internet is tricky.   You can't make money on "free" unless it has some hidden charges.   Many sites start out as "Free" and then discover that they aren't making any money - or not making as much as they think they should be.

So they try different ways to "enhance revenues" and almost all of these end up screwing the pooch - killing off the underlying website.   Webshots offered a "premium" service for a nominal fee.  Not surprisingly, not many bit on that tidbit.  Who wants to hand over a credit card number and pay a few dollars a month for what was previously free?

Then they tried advertising.   Pop-ups, sidebars, banner ads - you name it.  Problem is - or was - back then, the only people who would pay for such ads were (and still are, for the most part) con artists.   Various dubious sites promising you bargains or to get you out of debt, would pay for advertising on Webshots - and Facebook, as well.

These ads didn't generate a lot of revenue, as not many clicked on the odious deals offered.   And of course, associating yourself with con-men and rip-off artists is no way to enhance the reputation of your site.

They then tried selling t-shirts and mugs with your pictures on them.   A lot of sites, like Zazzle, do this, and I even ordered a few (from Webshots and Zazzle) with mixed results.  If you are running a photo hosting site, selling the photos seems like a natural.   But today, few folks pay for paper photos anymore (everything is on the ubiquitous smart phone) and the coffee-mug and t-shirt printing places are pretty competitively priced.

They tried reformatting all your photos to a proprietary format - and then making you pay to download your own photos.  That seemed to backfire, as they went back to standard JPEGS in short order.

Finally, they put in video ads in the sidebar.   And it was obnoxious.

To begin with, it meant the pages became very slow to load - and every time you clicked on "next picture" the video ad (or a new one) would start again, at full volume.   You learned quickly to "mute" your speakers on your computer, lest you be blasted with a full-volume ad for God-knows-what.  The ads were annoying and obnoxious and turned people away from the products being advertised, which in most cases, were more rip-offs and junk like Quibids or something like that.

(At the same time, of course, other photo sharing sites were popping up, such as Picasa, and of course, Facebook.  Facebook, today, is the largest photo-sharing site on the Internet, with something like 140 Billion photos hosted on the site.   Competition from other sites offering additional services was the other key to the puzzle.  Uploading photos on Facebook used to be a PITA, too!)

So what happened next?   Webshots went dark, basically.   They sold the company to "the original founders" who apparently HATED all their users.  They renamed the site "Smile" and then erased everyone's photo albums, including captions and comments, and then put all the pictures into a big dumpster with your name on it.

Gee, thanks!

At that point, I deleted my photos and closed my account and learned a valuable lesson:  NEVER, EVER, EVER trust your content to an online site, if you wish to keep it.  Everything online can be erased, at a moment's notice, and there isn't much you can do about it.

Since then, the Webshots domain name was apparently sold again to a site selling professional screen savers.

Smile is trying to capture the smart phone photo-bugs, who want to snap a picture and instantly upload it, social-media style.   However, like Webshots, without the social media component, it is unclear how they can accomplish this.   And it does not appear they are.   And of course, pissing off your existing user base is no way to get started, is it?

This site alleges that the new owners of "Smile" are now "reactivating" the $2.99 per month accounts that people had on Webshots - and charging the credit cards on file for this "service".   However, they are not reactivating their photos or albums or all the other data that was DELETED when Smile took over Webshots.   Needless to say, this is pissing a lot more people off (Moral:  NEVER sign up for a website that requires a monthly fee!).

In a way, this is proof that Smile has already failed.  When companies resort to charging people's credit cards indefinately, it is a sign the company is going down the tubes.   AOL did this toward the end, and according to one New Yorker article, a significant portion of their income today comes from people who don't realize they don't need AOL to access the internet - people who still pay the monthly fee, without question.

The Webshots saga is an interesting one and illustrates how a once-dominant pioneering website (Webshots was launched in the 1990's) can wither and die on the vine - and be utterly destroyed by the people who run it.   Over its tortured history, Webshots was bought and sold and re-sold, often by the same people.  It is not clear whether it ever made any significant amount of money for anyone.

But what is most interesting is how the owners of Webshots really destroyed their own business, by trying to commercialize on its users too much, and finally alienating everyone by dumping all their photo albums into a wastebasket.  If you go online, there are discussion groups galore from people who despise what the "Smile" people did to Webshots.  And ironically, many of these discussion groups are on Facebook.

Facebook, it could be argued, killed Webshots.   But it could also be argued that Webshots killed Webshots.  I can tell you from a personal perspective that once Webshots went to obnoxious video advertising, I stopped uploading photos there, and started using Facebook and PicasaWeb to host photos.  Why?  Because it became embarrassing to send someone a link to my Webshots photos - when noxious video ads would pop up.  I even tried migrating some photos from Webshots to Facebook and Picasa.  But of course, site owners make that difficult to do.  Again, lesson learned - never assume anything you put on the internet is permanent (unless it is embarrassing, of course).

I went to Webshots less and less, and when I received notice that "Smile" was taking over Webshots, my only regret was losing all my old photos and captions and albums.   I had already stopped using Webshots when it became obnoxious.   And its noxiousness was the only reason I migrated to other sites.

The Webshots tale is a cautionary one for anyone trying to make money on the Internet.   The site was no doubt heavily over-valued during the various dot-com frenzies we have had - going for $70 Million one day, to $2 Million the next.    Pay too much for a site and if it fails to make the money you were hoping to make (as I am sure American Greetings thought they would) you will be more than pissed off.

And trying to commercialize such sites is not an easy endeavor.  If you over-do it, you drive away you core base of customers, and suddenly your are advertising to no one, much as MySpace is (or was).

Video ads are a tricky thing, as they turn the Internet into television.   And the younger people of today have turned to the Internet and away from television, mostly because television (like radio) has made itself so noxious, boring, repetitive, and distasteful, that it is actually painful to watch.

The Facebook video ads are launching without sound, which will be muted until a user clicks on the ad.   I guess that is something.   But the distraction of seeing moving images in your feed will  be like the dancing mortgage guy on the sidebar ads in days of old - distracting and obnoxious.

And it remains to be seen if adblockplus or other ad-blocking software will be able to block these video ads - thus negating any financial advantage Facebook hopes to get out of it.

If you annoy your users enough, they will start to drift away.   I think this is a basic rule of the Internet.