After Nokia, the Next Silicon Valley?

Nokia did not become the largest telephone manufacturer in the world by doing what it is doing now. As the company’s management sets it on a course of slow-motion self-destruction, some observers believe this could make Finland the next Silicon Valley.

The latest cost-cutting measures announced last week at Nokia involve closing a major factory in Romania and locations in two other countries, with only 300 job cuts in Finland. Yet there have already been major job cuts in Finland and more are seen as inevitable as the company commits its dwindling resources to the ultra-low-margin business of making Microsoft handsets.

Where will thousands of high-skill Nokia workers go after their Nokia jobs evaporate? It is fair to guess that most of them will remain in southern Finland and will try to keep working in electronic devices. Already former Nokia engineers have created some interesting start-up businesses, and this is a trend that could snowball if it is encouraged by a few early successes, successes that could easily come around the same time as the bulk of Nokia’s work force is sent packing.

Coming Unglued at Bank of America

Bank of America customers are more angry and afraid than I realized.

Yes, everyone knows that a significant fraction of Bank of America customers actively hate the bank. I say this as someone who became a Bank of America customer two times over after two of its many acquisitions of the past decade. (I must also disclose that I had previously done work for various predecessor organizations of Bank of America.) My relationship with the bank didn’t last long. One day, I found that the bank had stopped accepting online payments for my credit card account. The only explanation, when I called to ask what had happened, was, “I’m sorry, we simply don’t offer that service anymore.” I took the hint, wrote and mailed one last check, and went on my way. From what I’ve heard, things have not exactly gotten better at Bank of America. Its long-suffering customers have had to put up with far more than I was willing to. If they are angry, it is because they have been mistreated.

Still, the response to last week’s announcement of a $5-per-month activity fee for debit cards caught me off guard. Customers are angry and frightened and are taking action. Based on the magnitude of the blog reactions, the bank has already lost a quarter of a million customers, not that those accounts are already closed, but they will be within a few days, with more to follow. And this for a fee that doesn’t go into effect until December or January. That is one reason I was expecting a more muted reaction. Worse, one initial analysis suggests that the new fee could cost the bank one half of its customers in the coming months. A quick survey found that only one seventh of Bank of America customers who have debit cards expect to pay the new fee. Of those who object to the fee, the vast majority said they would be closing their accounts. From history, we know that more than half of banking customers who resolve to close an account actually do so, and the proportion may be higher in this case because of the sticker shock and hard deadline. These surveys tend to skew toward more active customers, but this only means that other customers will take longer to move, not that they won’t move in the end. Needless to say, such a large loss of customers would force the bank to close most of its branch network. Bank of America estimated it would lose $2 billion per year because of new restrictions on debit card fees, and that was its rationale for the new debit card activity fee. But as a result of that move, it is losing at least $1 billion in deposits this week alone, and that, for a bank, is a far more serious matter.

The headlines from Bank of America in the five days since the announcement hint at an organization that is coming unglued. The main focus has been on the bank’s web site, which was offline for much of the weekend and inaccessible again yesterday. The bank’s explanation to major news organizations was that it was throttling its web servers, reducing its web capacity in a cost-cutting move. That explanation is as astonishing as it is implausible. The money the bank saves by idling servers during parts of the day is measured in the hundreds of dollars. It is not anywhere near the kind of cost savings that is sufficient to justify the risk of frightening already worried customers who collectively are worth billions of dollars. These would not be the actions of a functional business organization.

But on the other hand, the public relations response to the outage was equally dysfunctional. When the public face of a business disappears, that is normally considered a big enough event to justify sending an executive to reassure the public. At the least, you would expect a senior public relations representative to be fully briefed before facing the media. But Bank of America’s response yesterday recalls the early days of Napster, when interns who had impressive-sounding titles but no real information were sent to ad lib statements to reporters. It begs the question of what is really going on at Bank of America. At the same time, it creates the impression that the bank’s thousands of vice presidents are all too busy with more serious crises, though it hard to imagine a more pressing business problem than a near-complete failure of a business’s public-facing transactional infrastructure.

But then again, maybe it is not so hard to imagine a more serious crisis at a bank. Obviously, executives were not prepared for the furious customer reaction to the debit card fee announcement, or they would not have made it public the day before the end of the quarter, allowing customer reactions to further weaken an already distressed quarter-ending balance sheet. Many bloggers seem to believe the bank’s web site problems must be a denial-of-service attack in retaliation for the new fees, but I can find no evidence or even hint of that. The denial-of-service attack sounds like a nice theory but it simply doesn’t exist. Others have suggested that it is the large number of customers going to the web site to cancel their accounts that has stressed the system, but that is not credible either. In terms of web transactions, a customer preparing to close an account creates no more of a server load than a customer paying a utility bill. One more cynical theory I have heard is that the bank has been intentionally throttling its servers to slow down the pace of account closings, so that the deposits do not walk out the door quite so quickly. But that is something that would help the bank only if it barely hanging on at the edge of liquidity. Possibly that is the case, but there is nothing else that indicates that Bank of America is that close to the edge.

Customers might well worry, though. If Bank of America’s web site is fully back today, there might well be a rush of customers thinking they need to move their money quickly in case the servers are down again tonight. The millions of customers who are leaving anyway because of the new service charges might feel a greater sense of urgency at the sight of a bank web site that seems to be coming apart. And other customers might worry that the rush of customers leaving the bank could be overwhelming the bank’s resources, such that their money too might be made more accessible by placing it somewhere else, at a bank whose web site was not similarly at risk. This unfortunate confluence of stresses could create something resembling a run on the bank, even if customers are worried more about access to their money than the bank’s actual solvency.

Looking farther down the road, Bank of America’s solvency is not something to take for granted. The bank’s stock fell more than 3 percent on Friday and a total of 44 percent in the third quarter. Then, it fell nearly 10 percent more yesterday, a day when the stock market in general was down only 3 percent. Bank stocks usually decline by 10 percent in one day only in the final year or so, when losses are piling up and there is no plausible hope of creating the profits that will turn the bank around. But stocks can also decline just because they are misunderstood. Based on yesterday’s closing stock price of Bank of America, which was less than one fourth of the company’s book value, Wall Street is betting against the bank’s survival.

With such a low stock price, Bank of America cannot possibly issue enough stock to get out of financial trouble. It needs to sell whatever assets it can just to buy time, and then, it has to find a way to make a profit from operations. Its profits in the last two years have apparently mostly come from the stock market, and that is working against it now.

One asset Bank of America had hoped to spin off or sell was its correspondent lending unit. An investment group was seriously thinking of buying it, but the business was losing too much money to be sold at any price, so last night, the bank announced that this business unit will be wound down in the next two months, and its 1,200 jobs eliminated. Bank of America was not always judicious in the purchases it made in its decade-long buying spree, and more than likely, other things it is hoping to sell will also turn out to be liabilities rather than assets. The bank will be able to sell some assets and buy some time, but that leaves it with a bigger and increasingly urgent question: how can it become profitable again?

In the meantime, about 100,000 Bank of America customers are checking the bank’s web site this morning, hoping they find it online this time. Because they’ve decided it’s time to take their money out.

Denmark’s Coconut Oil Tax Is Just a Tax

Over the weekend, Denmark became one of the few countries to specifically tax food. The new “coconut oil” tax is based on the saturated fat content of food. The government says the new tax may encourage citizens to eat more healthy food, but the tax falls most heavily on coconut oil, a very healthy food, and lard, a very unhealthy food, with no distinction between them.

And the fact is, saturated fat is an essential nutrient. It forms cell walls and other essential parts of the body and carries three of the best-known vitamins. Most people eat more saturated fat than they ideally should, but when scientists experiment with diets that attempt to eliminate saturated fat, the result is an increase in cardiovascular disease and other degenerative diseases as cell walls begin to break down. That is, a no-saturated fat diet (actually having 1 or 2 percent of food energy from saturated fat, because it isn’t possible to eliminate all saturated fat) is more harmful to health than a high-saturated fat diet. The latest scientific evidence suggests that saturated fat does little harm in itself, and that most of the problems associated with saturated fat come from the absence of fruits and vegetables, which generally have high nutritional value and exceptionally low levels of saturated fat.

The tax won’t particularly shape consumer behavior either. It may sound shocking that coconut oil will now cost $30 per kilogram, but a chef doesn’t really use coconut oil by the kilogram, and if you are determined to eat healthy, an extra $2 in the price of an ingredient is not likely to stop you. On the other side, the people who don’t really pay attention to what they eat probably also won’t notice that a donut now costs 25¢ more. So the new tax is really just a tax, a way to transfer money from citizens to the government by making them pay more for their food.

Food taxes are rare for a reason. Everyone needs about the same amount of food. Food taxes push poor people deeper into poverty while having minimal impact on rich people. This makes food taxes an unpopular and morally questionable revenue device. The “coconut oil” tax has other failings, including administrative difficulties and a suspicion that it falls more heavily on domestic producers than on importers. In Denmark, political observers are betting the new “coconut oil” tax will be repealed within a year. If the government cannot repeal the tax, it must at least revise it to make some kind of distinction between health food and junk food. A more sensible version of a food tax, for example, would simply tax all foods other than fruits and vegetables.

Broken-Up Arctic Ice

It really wasn’t a trend-setting year for Arctic sea ice extent. Yes, Arctic ice did set a new all-time low according to the most precise measure of ice extent, and it set record lows for calendar months along the way, but the new ice extent records were barely below previous marks from the last four years. What is really noteworthy about this summer’s Arctic sea ice is not the extent, but how broken up it was. Satellite photos from the densest areas of Arctic ice this summer showed virtually all of it broken into 1- and 2-kilometer pieces with gaps of hundreds of meters between. I didn’t see any areas where ice held together in solid blocks that extended for miles in all directions. The textbook picture of solid ice largely held true until this summer, but when it broke down, the breakup extended all the way to the North Pole.

Even as the gaps filled in with new ice fragments in September, the southern edges of the ice continued to retreat. As of today, open water stretches as far north as 83° north latitude, 800 kilometers from the North Pole. Svalbard, which by historical standards ought to be connected at its north and east coasts to a near-solid polar ice mass, still has 1,000 kilometers of open Arctic Ocean waters north of it. So even if the ice in 2011 didn’t convincingly break the 2007 extent minimum record, it gives every indication of being thinner and more fragile than we have ever seen.

As I have mentioned before, this was a spring and summer of unremarkable Arctic Ocean weather. Ice observers now believe calm conditions in March, cloud cover in July, and December and January snows protect the ice cover from melting. If we were to ever get a year with the opposite conditions in these three seasons, a series of new record lows would be virtually assured.

Hauling Away the Cigarette Machines

England is banning cigarette machines starting today. The vending machines, long since confined to pubs, were hauled away over the last couple of days, and pub owners made sure of that. Cigarette machines will be as scarce as vending machines dispensing firearms, narcotics, and other dangerous materials, because starting today, the criminal penalties are similar. The ban takes effect in the rest of the United Kingdom next year. Significantly, the ban doesn’t impose any new restrictions on places where people can sell cigarettes — it is only the machines that are affected.

Where I live, the cigarette machines started to disappear around 1975. What happened before than was shocking by today’s standards. I particularly remember the scene of 8- and 10-year old children with a handful of coins running to the vending machine in the laundromat to buy packs of cigarettes for their parents. That was illegal even then, of course, but no one had ever heard of the law being enforced. Even schools had cigarette machines at that time. The machines were kept out of the sight of students, but that didn’t mean that students weren’t the primary customers. But then, in a decade, the cigarette machines vanished from schools and hospitals, and then from the laundromat, and finally were confined to seedy bars. I can’t remember the last time I saw a cigarette machine myself.

The U.K. government cites the importance of limiting sales of cigarettes to children. The smoking habit generally forms in the early teen years. Most smokers started when they were 12, 13, or 14 years old. Those of us who make it to the age of 16 without smoking a pack of cigarettes are unlikely to experiment with cigarettes (or, for that matter, cocaine) as adults.

But under-age customers provide only about one eighth of cigarette machine revenue, and reducing the impulse purchases that cigarette machines encourage may be an equally important effect. It is unconscious behavior that feeds addictions, and purchases can be surprisingly unconscious when there is little chance of another person observing the purchase. The best evidence of unconscious, addictive purchases from cigarette machines are the people who walk to a machine, make a purchase, and return to where they were before, and a few minutes later, have no recollection of having done so. Pubs can continue to sell cigarettes from behind the counter, but have complained in advance about the lost revenue. Sales will slow. The presence of mind it takes to make an over-the-counter purchase, which might involve a conversation with a person and has a much higher chance of being observed by bystanders, will be enough to prompt most customers to have second thoughts.

The U.K. government has to take a strong stand against tobacco because the government pays for health care. In the 20th century, about half of all health care costs were tobacco-related, and that proportion is decreasing mainly because fewer people are smoking.

Despite the outcry about the various new restrictions on tobacco over the last 30 years before each goes into effect, there is strikingly little public regret afterward. This will be the case again with the cigarette machines. Only the addicts will miss them, and for a few, the change will be enough for them to break the cycle of addiction.