But then I think David (or rather Marc) misses something. We’re not all in this for the money. Influence has its own reward.

This was a post about economics, not about influence. The economic question is, “How does pay-to-play become viable?” Marc Flandreau offers an answer, which I think we can learn from.

Flandreau examines situations where the cost of publication is low and a large number of nominally independent entities are providing information to the public, information which can help or hurt third parties. In these situations, the third parties are typically willing to pay to reduce the damage from adverse information.

Who profits from this willingness to pay? Flandreau finds that most of the money goes to reputable, but cooperative publishers, who are willing to say the right thing (at least the right thing from the payer’s point of view).

Essentially, the third parties find that paying off the people who publish the damaging information (true or not, scurrilous or not) isn’t a good use of their money. The best way to mitigate the damage is to pay somebody reputable to publish things that contradict or soften or distract from or simply drown out the information that would be damaging.

In the cases that he looked at, where people actually do this, the sums that the third parties were willing to pay were staggering. This wasn’t just $50 in Walter Winchell’s pocket. This was something you could build a business model on.

In fact, he said at Harvard, pay-to-play (the example he gave was Moody’s) is a natural outcome of the economics that he describes.

This surprised me, I must say. “A nominally open information market gives rise to pay-to-play,” I thought? I would have thought that low-quality, high-priced information from the pay-to-players would be rapidly squeezed out by higher-quality, lower-priced information from more objective sources.

In the examples that Flandreau studied, however, this didn’t happen. So why does pay-to-play pay? One major reason: when threats do crop up, the pay-to-players are the ones who profit, because they collect substantial sums from the people being threatened.

In one case that Flandreau studied, a third-party at substantial risk from persuasive negative information doubled or even tripled its already substantial payments to its reputable, cooperative partners. By contrast, the damage-control payments to people more inclined to talk about the damaging information were much, much smaller. And the profits to be made from actually publishing the adverse information were negligible.

There was, in other words, an asymmetry in the market, which the pay-to-players were able to take advantage of. Even though there were a lot of people out there who ought to have been willing to pay for accurate (and as it turns out, damaging) information, they didn’t have anywhere near as much ability to mobilize actual payment as the third parties did. The third parties effectively bought off the information market, by giving money to the pay-to-players.

I wrote the post because I think the situations Flandreau was studying are remarkably similar to today’s. Today, we have a cadre of independent analysts who are (among other things) trying to get the word out about the high cost of SAP and Oracle maintenance. If Flandreau’s analysis is right, though, the harder these analysts work, the more profits are gained by the reputable, but cooperative information providers who gainsay them.

Now, to comment on the comments above.

Vinnie argues that the historical analogy is wrong or that in this case, the historical outcome is different. Revenues to the analyst firms aren’t going up as a result of the threat from the independents. I’m sure he’s right, but the question is, “Why?” It could be that revenues would have gone down far more had it not been for the threat from the independents.

What I think he wants us to believe is that the situation that gave rise to the modern pay-to-players has now changed fundamentally. Flandreau acknowledges that this is possible. Clearly, the market power of the reputable, but cooperative information providers doesn’t last forever. It’s not how I read the situation, but I could be wrong. If Flandreau reads this, I’d be fascinated to hear what he has to say.

Dennis makes a similar argument, which gets right to the heart of the matter. (I am honored, by the way, by the attention he gives this.) But I don’t think the evidence he provides warrants his conclusion. Flandreau actually describes a situation closely analogous to the situation that the Enterprise Advocates find themselves in; I just didn’t have the time or space to go into that amount of detail the first time around.

In Flandreau’s example, a group of middle-tier information providers essentially muscle in on the gravy train (quel metaphor!), eventually getting some 20% of the last big chunk of money that was being doled out. So, Flandreau’s analysis says, vigorous action on the part of people who had been shut out by the reputable, but cooperative providers can get you included. But the big profits still go to the incumbents.

Dennis makes several other interesting points. I’ll have to address both Dennis’s and Vinnie’s comments more fully in a later post.

Jon points out correctly that people like him have made a difference and have become more influential over the past few years. Knowing the high quality of his work, I’m not surprised. The only thing I am surprised at is the economics of his successful efforts. These efforts, Flandreau suggests, help the reputable, but cooperative providers of influence even more than they help him.

Michael says, correctly, that he calls ‘em as he sees ‘em. I agree, and I admire him for it. From the standpoint of psychic benefits, it’s a great position to be in. All I’m saying is that the economic benefits may not be commensurate.

Frank, thanks for calling ‘em as you see ‘em. I will try to do better in the future the first time around. I hope this second try helps. The basic point, in case I still haven’t made it is that the people who profit most from the threat of damaging information are the reputable, but cooperative firms that help third parties mitigate the damage.

If you’d like to discuss this further, please give me a call.

This post was mentioned on Twitter by JohnFMoore: Thought provoking post , how the independents help Gartner: http://bit.ly/3ZPGGg...

Analysts (independent or otherwise) who gloss over shades of gray to write sensationalist reports devalue their own worth and influence.

Pay to play is pernicious, but as with all things, there are varying degrees. Good and evil tend not to be absolute, but rather manifest as shades of gray.

However, on the influence level, no question in my mind that blogging has tilted influence in favor of the independents. I follow all these bloggers you’ve cited, and also big analyst blogs, and 90 percent of the time the independent bloggers are a better read (and much more frequently linked to, discussed, and Tweeted). Their strong voices lend well to trust/credibility because they are often very transparent about how they are getting paid and whose agendas they are supporting (such as buyer advocacy). If I’m a end customer and weary of constant vendor spin, I find that commentary refreshing.

For example just today Dennis Howlett chimed in with a piece on ZDNet that reports on the latest developments on SAP maintenance, providing both opinions and context. That’s far from the National Enquirer. In some cases, independent bloggers have challenged the big analyst firms to disclose more in terms of how they are paid and whose agendas they are serving. This kind of criticism is useful for end customers to read and I don’t see how it benefits the big analyst firms – their comments certainly seem to reflect an irritation with this kind of open, transparent discussion.

Then you look at the departure of bigtime analysts to smaller firms (Ray Wang being one) and it seems to me the trend is heading to a much more diverse body of influencers. Most of the independent analysts I know realize that they are not going to topple Gartner or Forrester, and perhaps their lack of name brand and outspoken commentary prevents them from winning certain types of business. But most of them seem to be doing pretty well, albeit with business models still being perfected or in some cases invented. But that’s really no different than any media or publishing entity at this time.

Forrester’s George Colony just blogged a piece of advice for CEOs of media companies and it didn’t seem to me that he had a clear sense of how media companies should be monetizing going forward either. Transparency is here to stay and it benefits those who can put out information and opinions without running them up a flagpole or worrying about client reactions. Having said that, I do think any bloggers who also want to secure end client business need to be aware that rigorous reporting and balanced commentary is crucial to turning influence into purchasing decisions. Flying off the handle or publishing rumors is fun for readers and may even expand influence but it doesn’t encourage buying decisions in my opinion. In that case, it depends on the business model of the independent analyst and whether they care about that type of client business.

Flattering, but I think it’s a bit of a stretch.

http://dealarchitect.typepad.com/deal_architect/2007/11/the-delusion-of.html