Metrics, Fees and Regulations

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
Read More.
a | A


The basic way a media company works is, you make stuff, and you show it to people, and they like to look at it, and then you go to other companies and say "hey look how many people are looking at our stuff, would you like to put an advertisement for your stuff next to our stuff?" And they say yes, and pay you. And you develop metrics -- measuring how many people look at your stuff, and for how long, and how rich they are and how likely they are to buy products -- to convince the advertisers to pay you more. This is to some extent a matter of scientific measurement, but it is mostly a matter of persuasion: Your job is to craft a story about how, sure, not that many people are looking at your stuff, but they are all hip young influencers with disposable income, so the the advertisers should pay a lot to reach them. The art is not in measuring the raw numbers; it's in explaining the value hidden in those numbers.

The way a social media company works is exactly the same: You show people stuff, they look at it, and companies pay you to show their ads to those people. Or that's how it works in theory, and at Facebook. But earlier-stage social media companies add a slight twist to this process, which is that they often don't sell that many ads. Yet. There, instead of developing metrics to convince advertisers to give you money, you develop metrics to convince investors to give you money. The art here is much the same as it is in regular media businesses: Your job is not just to measure the raw number of people looking at your stuff, but to craft a story about how desirable those people are to advertisers, because of their youth or wealth or cultural cachet or obsession with your stuff or whatever.

This is very straightforward corporate finance. Eventually -- after you go public and are more established -- you will turn your attention to larding your stuff up with lots of ads. When you do that, all your metrics -- how many people look at your stuff, how attractive they are to advertisers, how committed they are to your stuff -- will translate into money. (Not in a direct mechanical way, but they will underpin the story that you tell to advertisers, who will give you money.) The better and more persuasive the metrics are, the more money the advertisers will give you (in the future). The more money the advertisers will give you (in the future), the higher the present value of those discounted cash flows is now, for investors modeling how much your company is worth.

Still it feels a little like an arbitrage, or a sleight of hand. If your users are so valuable, why not just make money from them? The story you are telling investors is in effect "here is a story we will tell advertisers, but not yet." The fact that you are telling it to investors implies that it is more convincing to investors than it is to advertisers

Anyway here is my Bloomberg Gadfly colleague Shira Ovide on Snap Inc.'s planned initial public offering, and the usage and engagement metrics that it is presenting to bankers, which "can also do double duty as corporate diversionary magic -- look at this shiny object over here! -- to flood investors with handpicked metrics that paint the company in the best light and distract them from its monthly user count." But why would investors care about monthly user count? Investors should care about money. Monthly users, and any other engagement metrics -- "what percentage of users take photos using the app’s camera, as well as how many of those images use geofilters," that sort of thing -- are second-order signposts on the road to money. The road to money is long, and Snapchat is just starting out. Ovide:

Revenue growth should be a breeze because Snapchat is just starting to dial up its advertising sales. The company now makes roughly $1 in ad sales for each user, according to a Gadfly calculation based on eMarketer revenue estimates and Bloomberg Intelligence user figures. Facebook and Twitter are at $16 and $8, respectively.

In a sense, Snap's IPO, in which it will go out and tell investors about how valuable it is that people are using its geofilters or whatever, is good practice for when it decides to actually make money, which it will do by going out and telling advertisers about how valuable it is that people are using its geofilters or whatever. But in another sense it feels weird -- not in comparison to other social-media or internet companies, maybe, but still weird -- to start with the investors.


You can sort of divide the financial services industry's activities into two categories, (1) doing stuff and (2) selling it to you, and the cost of doing stuff keeps going down. If you want to buy an exchange-traded fund these days, the fund's investment decisions are probably automated and your trades are probably done by computer. There is just not a lot of high-touch high-value work that goes into turning your money into an efficient diversified investment in the stock market.

On the other hand, if you buy that ETF from a Morgan Stanley financial adviser, there is a lot of expensive work that goes into getting your money out of your wallet. Like, that adviser probably has an office. It has chairs. He remembers your kids' names. He takes the time to chat with you about your financial goals. He requires far more care and feeding than the list of stocks that is making the actual investment decisions for your ETF.

Here is a story about how Morgan Stanley "has told some fund issuers to pay a fee or risk having future offerings blocked from its sales network," which "reflects an effort on Wall Street to bolster brokerage revenue as investors flee expensive actively managed funds for cheaper passive products like index funds." (Morgan Stanley "said the cost covered a range of services including access to the firm’s financial advisers, branch management and home office personnel.") Obviously if you are an ETF provider, distribution fees make you sad. If you are an ETF investor with a Morgan Stanley adviser, they might also make you sad. You just want the best products; why should Morgan Stanley refuse to give you those products just because their providers refuse to pay its fees?

But the uncomfortable reality is that a lot of the costs of financial services are the costs of pitching them to you, and someone has to pay those costs. (It's you.) This is not particularly crazy or anything; when you buy milk, you are probably at some level aware that part of the price goes to pay for cartons and supermarket displays and cashiers and so forth. The financial services business always has a way of making it look a little tawdry, sure, but one can sympathize. If you are buying your ETFs in a low-touch, low-cost, high-technology way -- online! robo-advisers! -- then, sure, you should expect the costs of distribution to be low. But if you are going to an expensive human financial adviser for hand-holding and childrens'-names-remembering, and then just buying low-cost ETFs from him, you should not be surprised if he wants to make a little money.

A theory of regulation.

I am working on a tentative theory of regulation. It goes like this:

  1. There are two kinds of regulations: custom regulations and bulk regulations.
  2. A custom regulation is designed to accomplish a particular goal. You want people to do something, so you write a rule mandating that they do it and punishing them if they don't. For instance, if you want U.S. companies to keep jobs in the U.S., you might write a rule to mandate that, and to "impose a 'very major' border tax on companies that move jobs outside the U.S." That is an example of a custom regulation, and it is good because it keeps jobs in the U.S.
  3. Bulk regulations are the kind that you buy by the yard, ones that you measure by quantity rather than purpose. They don't have a purpose, really; they are just generic "red tape." These are the regulations that presidents frequently announce they will cut in half, or freeze with an executive order. They're the regulations that come not from a reasoned desire to achieve a particular goal, but from a pure impulse to regulate. Bulk regulations are bad because they prevent businesses from doing business-y things without accomplishing anything good. 
  4. All regulations are custom regulations.
  5. All discussion of "regulation" is about bulk regulations, which do not exist.

Anyway yesterday President Donald Trump met with business leaders and promised to "cut regulations" -- read: bulk regulations -- "by 75 percent." (If you want to "do something monstrous and special," he told them, "you're going to have your approvals really fast.") He does not seem to have gotten into specifics on which regulations he would cut, which fits neatly with my theory. On the other hand, he did promise to impose new regulations requiring companies to keep their operations in the U.S. ("When you have a company here, you have a plant here"), and increasing their taxes if they don't. Companies will also face new restrictions in trying to export goods, as Trump is planning to abandon various trade agreements. Those are of course important and burdensome new regulations, but they are custom regulations, and so they are not covered by Trump's promise to cut bulk regulations by 75 percent. It all makes perfect sense, but you have to have a theory. 

In perhaps related news, Trump announced a hiring freeze for federal workers while he is in the middle of hiring thousands of people to staff his administration. That sounds weird, until you realize that Trump is freezing bulk hiring while continuing custom hiring.

Should mutual funds be illegal?

The more stocks a fund owns, the less attention they pay, and the more mischief managers can get up to, says science:

Chicago Booth’s Elisabeth Kempf, along with Bocconi University’s Alberto Manconi and Tilburg University’s Oliver G. Spalt, examines the economic impact of an environment in which shareholders are unable to actively monitor all the companies they invest in. Consistent with the standard principal-agent framework from economic theory, in which agents (managers) act on behalf of principals (shareholders), the researchers find that when shareholders are ”distracted,” executives have greater leeway to maximize private gains, to the detriment of shareholder value.

“We exploit unique features of US institutional holdings data to show that managers respond to temporarily looser monitoring, induced by investors with limited attention focusing their attention elsewhere, by engaging in investments that maximize private benefits at the expense of shareholders,” write Kempf, Manconi, and Spalt.

Elsewhere, here is "Mutual Funds As Venture Capitalists? Evidence from Unicorns," by Yao Zeng, Sergey Chernenko and Josh Lerner:

Our main findings regarding corporate governance provisions suggest that mutual funds are less involved than VCs and provide less governance in general. At the same time, they are likely to provide more indirect incentives to entrepreneurs in some specific dimensions through contractual provisions that are consistent with mutual funds’ unique financing sources. Specifically, we find that mutual-fund-participating investment rounds are associated with both fewer cash flow rights and fewer control/voting rights across many dimensions. For instance, mutual funds are more likely to use straight convertible preferred stock, which is associated with weaker indirect incentive provisions than participating preferred stock that is popular among VCs. Mutual funds are significantly less represented on the board of directors; they are thus less likely to directly monitor the portfolio unicorns through board intervention or voting on important corporate actions. These results suggest that mutual funds are not likely to provide governance service similar to VCs. At the same time, we find that mutual-fund-participating investment rounds are associated with significantly more redemption rights: that is, the convertible preferred stocks that mutual funds hold are more likely to be redeemable. Such results are robust across all of our different specifications. Mutual-fund-participating rounds are also associated with fewer pay-to-play penalties, which means they are less likely to be locked into refinancing unicorn investments when the underlying portfolio companies do not perform well.

This is consistent with my view that private markets are the new public markets. The traditional divide was that venture capitalists invest in private markets, where there is no liquidity, and make up for their lack of liquidity with lots of monitoring and control rights; mutual funds invest in public markets, where there is liquidity, and so demand much less in the way of monitoring and control. Now mutual funds invest in private markets, but only in the private markets that look the most like public markets -- "Mutual funds appear to be more interested than VCs in investing in late rounds and hot sectors" -- and they demand relatively more liquidity and less control than venture capitalists do.

Some more Trumpism.

This Jessica Pressler story about Donald Trump's Wall Street backers is just as delightful as you'd expect it to be, which is to say very delightful but with an undertone of terrifying. A lot of the focus is on Anthony Scaramucci, the fund-of-funds marketer who has now become a Trump public-relations person. When Pressler last wrote about Scaramucci, he was a key proponent of Secret Trump Theory, the idea that Trump is far more thoughtful and pragmatic than his words, actions and history would suggest. He still is -- he was advocating it at Davos last week -- but his advocacy now seems darker and more cynical. ("I’ll do whatever the hell you guys want," he told Mike Pence.) James Grant, kindly, calls it "a classic contrarian bet":

To be a big-deal person at a major Wall Street firm and publicly align oneself with a candidate who calls for the building of walls and the rounding up of immigrants, a notorious womanizer who slut-shames beauty-pageant contestants and once joked about dating his own daughter, would take what the genteel Grant called “a certain kind of moral courage.”

Elsewhere, here is Andrew Ross Sorkin on Trump's activist-investor method of dealing with companies as president. And Trump continues to lie about winning the popular vote.

People are worried about unicorns.

Often this section is about how people are worried that valuations of private tech companies are too high, but I feel like these days there are bigger worries in the Enchanted Forest of the Unicorns? One key worry among the unicorn elite appears to be the end of the world, which will apparently be especially hard on the nearsighted:

Yishan Wong, an early Facebook employee, was the C.E.O. of Reddit from 2012 to 2014. He, too, had eye surgery for survival purposes, eliminating his dependence, as he put it, “on a nonsustainable external aid for perfect vision.” In an e-mail, Wong told me, “Most people just assume improbable events don’t happen, but technical people tend to view risk very mathematically.” He continued, “The tech preppers do not necessarily think a collapse is likely. They consider it a remote event, but one with a very severe downside, so, given how much money they have, spending a fraction of their net worth to hedge against this . . . is a logical thing to do.”

I love that sort of fake appeal to math, like Wong has calculated the exact probability of a social and economic collapse, and the expected loss conditional on that collapse, and decided that it justified getting laser eye surgery. You wouldn't understand unless you've taken classes in differential equations and operating-system design. Anyway there are some objectors to the tech prepperism:

Max Levchin, a founder of PayPal and of Affirm, a lending startup, told me, “It’s one of the few things about Silicon Valley that I actively dislike—the sense that we are superior giants who move the needle and, even if it’s our own failure, must be spared.”

To Levchin, prepping for survival is a moral miscalculation; he prefers to “shut down party conversations” on the topic. “I typically ask people, ‘So you’re worried about the pitchforks. How much money have you donated to your local homeless shelter?’”

Speaking of which! Here is a story about how a lot of Uber drivers sleep in their cars:

Howard has been parking and sleeping at the 7-Eleven four to five nights a week since March 2015, when he began leasing a car from Uber and needed to work more hours to make his minimum payments. Now that it’s gotten cold, he wakes up every three hours to turn on the heater. He’s rarely alone. Most nights, two to three other ride-hailing drivers sleep in cars parked next to his. It’s safe, he said, and the employees let the drivers use the restroom.

Also there are apparently children in the Enchanted Forest.

Things happen.

Supreme Court Rules Brexit Trigger Needs Parliamentary Vote. Aetna’s $37 Billion Humana Takeover Blocked by Judge. Banks Stand to Lose Fees if Aetna-Humana Deal Collapses. "The hedge fund industry ended 2016 with $3.02 trillion in global assets under management, surpassing the $3 trillion mark for the first time as performance gains offset net withdrawals." After Bond Chief’s Exit, Millennium’s Englander Left Alone Again. Yahoo Sees Verizon Deal Taking Longer Than Expected. Fed Debate Over $4.5 Trillion Balance Sheet Looms in 2017. Money-Fund Overhaul Gives Federal Home Loan Banks New Prominence. Retirement Giant TIAA Rebrands Asset Management as It Seeks New Investors. A profile of John and Laura Arnold. Market structure rules and footnotes. The statute of limitations and disgorgement. At Wells Fargo, Bank Branches Were Tipped Off to Inspections. French Prosecutors Looking at 22 Targets in Panama Leaks Probe. Former MSD Capital Analyst Arrested After Skipping Trial. When Does Corporate Criminal Liability for Insider Trading Make Sense? "The Trump administration trusts neither its own appointees nor its own supporters, and is creating a situation where that lack of trust is reciprocal." The best job is data scientist. There'll be a Playboy Club in midtown Manhattan. Montréal Bitcoin ATM Stolen in Late-Night Robbery. Famed snake trackers from India latest weapon in Florida war on pythons. Tram thief. Horse diapers

If you'd like to get Money Stuff in handy e-mail form, right in your inbox, please subscribe at this link. Thanks! 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at

To contact the editor responsible for this story:
James Greiff at