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Saturday, August 25, 2018

Startup PR 101: Planting Stories and Gaming Data

Given the name of this blog, it's hardly surprising that I spend time talking about how misleading PR from any company can be. Most of the time I don't blame marketing for pushing the best possible narrative they can get, if the product is pretty meaningless and it's really on the press, investors, and public to look at it with a skeptical eye - which sadly is a pretty rare event. Where it gets shady is when the marketing "white-washes" their desired story through a third party, often media looking for the next scoop, to be able to pretend it isn't them making these bold claims, but rather a neutral bystander. Where it gets illegal and immoral is when "facts" are simply fabricated and planted in the media, especially if it's during fundraising or for the purpose of manipulating company share price or valuation. Most of it is pretty blatant, and when you see it up close and personal, it's amazing how easily people fall for it, or even how company "fanboys" evangelize based on this and will not hear otherwise from "heretics". 

While there is a pretty high profile case of this out there right now, since so many column inches are already spent on it, I thought I'd highlight this technique using a recent tweet from VC Josh Wolfe of Lux Capital. For those of you who don't already, I'd recommend following him, he has a lot of very interesting posts and insights that are worth reading. Here's the start of it, the fully unrolled version is at the base of this post

The basic premise is this - the founder of Red Hat (now a ~$25 billion company) needed to gain credibility for his product, so he essentially gamed a 'study' of high Linux user growth, and got a small Linux journal to quote him. Then he managed to get BusinessWeek to quote the Linux journal, and suddenly this made-up statistic had all the authority of being stated in a prestigious national publication. He abused the lack of fact checking and diligence to plant an idea in the media as if it had substance, and used that to help promote his own company.

Is this OK? He didn't really lie, no-one asked him for corroborating evidence, so it mostly falls into the realm of "amusing anecdote".  As the author say "This kind of stuff happens ALL THE TIME" and it's pointless to try to stop it in most cases - press just need to be more careful and the public need to be more skeptical. When the stakes get higher such as with safety, or actual investment, then it's much harder to turn a blind eye to this - if investment was raised based heavily on this, and while specifically quoting that statistic, that is moving towards the illegal.

When it starts to matter is something of a grey area, but sometimes it's just pretty damn clear. Let's take WorldCom, a telecommunications and internet backbone company from the original dot-com era around 20 years ago. By the late 1990's they were claiming that internet usage was growing at 1000% per year, and this widely quoted (though rarely challenged) statistic drove (mal)investment in many other companies. A readable story on this can be found in an industry publication, but to quote from a 2003 Yale Journal on Regulation article:

WorldCom’s false Internet traffic reports and accounting fraud encouraged overinvestment in long-distance capacity and Internet backbone capacity. Because Internet traffic data are proprietary and WorldCom dominated Internet backbone services, and because WorldCom was subject to regulatory oversight, it was reasonable for rival carriers to believe WorldCom’s misrepresentation of Internet traffic growth. WorldCom’s accounting fraud may have destroyed billions of dollars of shareholder value in other telecommunications firms. 

How did this statistic get justified? From the industry publication, Light Reading:

Here's how it worked, according to the former WorldCom employee: WorldCom would hook up new customers with connections capable of handling, say, up to 1.5 Mbit/s of data, knowing that for most of the time the lines would only carry a fraction of this amount. WorldCom would then use the 1.5 Mbit/s figures, not the actual traffic figures, when citing Internet traffic growth statistics...

"The myth of Internet traffic doubling every 100 days seemed to be based on (i) the fact that such growth rates really did hold during the two-year period 1995-1996, and (ii) WorldCom making misleading claims in subsequent years,” 

So like the Red Hat founder, the numbers were essentially made up, and the laziness of readers and media taken advantage of. In this case, that the company was FCC regulated gave the misleading data a stamp of approval it otherwise would not have had - something that 20 years later other technology companies like Energous remember. Now some did call this out, for example here in this 1999 report from AT&T Labs:

"The growth rate of traffic on the public Internet, while lower than is often cited, is still about 100% per year... these claims can be correct only if something unusual is happening to the WorldCom network... Reports, which claim 1,000% growth rates for the Internet, appear to be inaccurate today..."

but no-one listened to the sensible data and fact driven analysis because it wasn't so exciting (I feel their pain). In the end the con at WorldCom, which extended into accounting and beyond just exaggerated PR, resulted in bankruptcy and eventual purchase at a fire-sale price by Verizon. The CEO, Bernie Ebbers, was found guilty of fraud and conspiracy and was sentenced to 25 years in jail (if you're wondering why a white collar crime got punished, see the "may have destroyed billions of dollars of shareholder value" quote above). I do wonder if the willingness of a company to be lax with the truth on smaller details like PR is a more public sign of a willingness to push the limits in accounting and other areas.

Why does this matter? In this case, WorldCom data pushed investment by the public in an area that ended up oversupplied, and when the crash came (it was a dot-com and telecommunications crash back in 2001, not just dot-com) it caused great pain for companies and employees that had to find new businesses and jobs - and to re-re-quote "may have destroyed billions of dollars of shareholder value". Companies in other areas that may have been more viable in the long term didn't get funded, and what they could have done either lost or delayed. Mal-investment has an invisible cost in what doesn't happen, and in the loss of trust in the system. In the end, the system (kinda) worked, but if this had been caught earlier then that pain for others could have been avoided.

What's even more hilarious is when you get two companies in the same industry trying to out-compete each other this way on stats, covering performance that neither can actually achieve. It's like setting two mirrors facing one another, it just reflects off each other into infinity, and ridiculousness. From another post on companies playing the media:

In the past, I've sat inside a company watching the CEO engage in a war of fantasy performance stats and delivery dates with a competing vaporware company, using the tech press to launch salvos of ever increasing capabilities. When the enemy returned fire with a further 'improved' product, there was panic at the top and demands made to engineering that our product get better or timelines be shortened - statements from those trying to be rational, such as "No. Their numbers are just as made up as ours.", garnered a mix of confused and annoyed looks.

Neither company has, to my knowledge, released a product since then and in part this is connected to these inflated performance promises. (And two years later, as of August 2018, still hasn't happened)

So when you read something in the media that seems to be too good to be true, remember that it might be that "truth isn't truth".


2 comments:

  1. Makes you realise how easy it is to abuse statistics and how often marketing teams probably do it.

    ReplyDelete
  2. The private sector is not the only place this is happening. Government is rife with this in the "innovation" and "smart city" space.

    ReplyDelete