The Freeware Hall Of Fame
Presents:

United States Myths - and their realities


By Rey Barry

"Americans have free television and radio"

Come sit by my feet and hear some truths that the advertising industry, the trade groups, the advertisers, and the media go to some lengths to keep from being in public debate.

And they are successful at keeping us uninformed. As Arbitron recently boasted, "The vast majority of Americans (82%) agree with the statement 'Listening to commercials is a fair price to pay for free programming on the radio.'"

It's a lie. No media carrying advertising is free. We pay a massive bill for that advertising. It's the most expensive thing in your budget and mine, as you're about to see.

The cost of advertising is priced in our goods. New goods obviously, but also used goods. It even governs the drug industry where inflating drug costs to pay for marketing affects life and death.

Ever do any channel hopping and see the same car advertised on a dozen stations at the same time?

Buy a new car and you subsidize ABC/CBS/NBC/FOX and four dozen cable channels, and Self and Mademoiselle and Teen and 5000 other mags, and radio stations you never hear, and co-op ads in local newspapers all over the country you never see.

The cost of all those ads comes out of our pocket with every vehicle bought, every bite of food purchased, and every utility bill paid.

Passing the total cost to the buyer including advertising and marketing has been normal for years. It was first documented with automobiles in 1958 in John Keats's The Insolent Chariots and has been quietly reported a thousand times since.

But in the last two decades the amount involved has surged to extravagant levels. Thousands of advertiser-supported media only exist because advertisers can pass the cost to buyers.

Magazines are started today not because there is a reader market. Readers are ferociously over-saturated with magazines. They are started because a publisher sees advertising budgets he can tap so he adds another magazine to his line.

A glance at the magazine racks tells the story. Even a chain like Barnes & Noble with high yardage devoted to magazines can't stock 1% of the titles. More than 99% of magazines take our advertising dollars to their unseen grave.

This explosion of buying worthless pages in unseen mags is coupled with an insanity in top end advertising expenditures. Everyone is aware of the multi-million cost for a 30-second Super Bowl spot. These ads aren't buying sales; they're buying status at the Advertising Club.

We have billions of dollars going into ads in TV, radio, and mags of little value to viewer or reader, and less to the advertiser, only because they have our money to do it.

Ambition and ego, not value, create this abundance of expensive ads. They exist to generate commissions, or to try for a half percentage point gain in market share, or to advance cronyism, or for the prestige the industry bestows on trophy extravagance.

There's a bogus adage in the ad biz to justify spending: "95% of advertising dollars are wasted but it's impossible to identify the 5% that works." (Like hell.) Today that means buy ads willy-nilly and charge the end user.

Passing advertising costs to the end user means the big players needn't care what's productive and what's waste. When Nike can retail a pair of sneakers for $140 that costs $5.50 to produce, there's profit galore for mass marketing and local co-op advertising.

The money is there to spend because the end user's bill is hiked to cover everything the company pays, including, for example, $50 million paid to the Int'l Olympic Committee to be its endorsed hot dog, the only hot dog allowed to be sold at Olympic events. (Others dogs are sold just outside the gate.)

Even vegetarians pay for that. Advertising is spread across the product line. The conglomerate owning that hot dog added higher cost to its other lines to raise the $50 mil. For example if it was Ball Park franks owned by Sara Lee, the $50 mil was paid for with boosts in the prices of franks, pound cakes, cheesecakes, pies, muffins, L'Eggs, Hanes, Playtex, and Wonderbra, among other Sara Lee products.

Millions to pay for Internet web page ads are included in the cost of new cars despite zero evidence they ever influenced a buying decision. Everyone has adopted the Coca-Cola strategy. You know what that is without knowing you know: stick your brand name everywhere anyone might look.

When it was a nickel a bottle Coke used their own money to do that. Today it's close to $1 a bottle because Coke is using our money.

Historically there was the economy of scale argument to justify advertising. Born in mass production, the phrase reflected the price break points reached as production increased. Mass production means lower unit cost. Everyone understood that.

As every chief financial officer now understands because he sees the figures, above a certain level it breaks down. The law of diminishing returns forces it to work in reverse.

For example, the most popular weekly picture magazine in the country, Life Magazine, was folded by TIME-Life in 1972 when its paid circulation was 6 million. The law of diminishing returns made the profit too small to justify the investment in a quality magazine.

Life eventually returned, at least the name did, as supermarket checkout impulse junk.

In advertising, the law of diminishing returns means that after sufficient saturation, each further dollar spent is less effective than the last. Automakers exempt themselves from the penalty of the law by adding enough profit in every new car to cover every last advertiser. No matter how small the return, they get the benefit. The car buyer pays the bill. Since the last price break was waaaay back down the line, there are no manufacturing economies of scale at this level so the buyer only loses.

Precise figures are proprietary to the auto manufacturers and not released, but informed estimates are that 1/2 the sticker cost of new cars is the budget for merchandising and advertising. One-half. And there's no escape. Soaring new car prices inflate the used car market whose prices move in step with new.

Auto merchandising sends a massive inflationary ripple through the economy because cars and trucks are universal. Not only must we buy them, every single business must buy them at those bloated prices and pass the cost to us.

Vehicles are only one of the industries up to its neck in this, though perhaps the most inflationary. Thanks to adding every imaginable cost to the sticker price, GM, Ford, and Chrysler are respectively number 3, 4, and 5 in total revenues on Fortune's current list of the world's 500 wealthiest corporations.

Automakers know a thing or two about making money, as anyone who has even bought a replacement part knows. Andy Rooney pointed out on 60 Minutes that if you totally wreck a $20,000 car and want to rebuild it, the parts bill alone will be $125,000.

Also up to its neck in bloating the economy are beer, soft drinks, beer, cosmetics, beer, processed food, and beer, plus others with trophy ad budgets.

The Advertising Council's claim "America has free TV and radio" is less a myth than a lie, and no one knows it better than they do. We are burdened with the most expensive broadcast media in the world even if we never watch, never listen.

How expensive? Take the total billion$ spent on US TV & radio advertising in a year, divide by the 127 million US households, and that's the direct annual household cost for our "free" broadcasting. The figure is mind-boggling. Then add the even larger inflationary ripple.

Figures show 30 to 40 percent of the average US household budget pays for marketing and advertising, and the percentage is rising.

Some of it is glaringly obvious. The enduringly popular Time-Life set of 10 CDs of 1970s hit music is $120 when purchased from the TV infomercial but only $79 when bought from a Time Life agent on eBay, and the shipping is cheaper. The cost of TV advertising bumps the sales price 50%. But few are so obvious.

Just one example cited by Advertising Age in 2001: 30% of the current retail Cheerios price is marketing, nearly all to try to grab a point of market share. Nearly 1/3 of the Cheerios price is due to a breakfast food market share war of zero benefit to buyers.

AA says the 30% doesn't include the cost of packaging or packaging research, another marketing expense. Now you know why a box of processed grain is $4.40 instead of 40 cents.

Ever seen cents-off coupons? Of course. Everyone has. Again using figures from Advertising Age, what was your share of the cost last year to produce and circulate 248 billion coupons of which 1.7% were redeemed?

What was the ripple effect of the shelf price increase those coupons required to sustain the profit margin and cover the cost of redemptions? And we paid for the anticipated cost of redemption, not the actual cost, 2% and not 1.7%.

And add the ripple effect of price increases by competitors. Their prices go up as well, reflecting the rule of retail which is to attain the highest competitive price in your target market.

The last thing they want is a price war or a competitor thinking of it.

It's the end user who pays everyone's bill for everything, increased at each step by the cost of personnel and automation to keep track of billing him.

That includes taxes ever since the auto industry taught others that estimated taxes on expected profits can be added to the retail price so long as your competitors also do it.

And that's crucial.

"So long as your competitors do it" is fundamental to undermining textbook free enterprise. It's so much more profitable to go along. Pontificate about competition all you like, but follow the leader and do what he does. And take it to the bank, like he does.

Do customers ever squawk? They have. It may bring a brief downturn in sales which results in a ramp-up in marketing. The company counters with more advertising or more product placements for the brand, more magazine or in-store cash register coupons.

Do consumer groups matter? Don't they follow what's going on and tell us? Sure, and the media undercuts their press release by "balancing it" with denials from the industry. But don't look for editors to undercut an industry press release with balance from consumer groups. "Media fairness" doesn't work that way. What's fair has nothing to do with this.

It's who matters to the media bottom line and who doesn't. It's king dollar who rises like a mackerel in the moonlight to shine and stink.

Even reputable newspapers like the NYTimes go out of their way to unbalance the coverage when advertising is examined.

That July 11, 2001, article in The Times all but dismissed the consumer group and fell over backwards printing drug company denials. The Times responded to a serious indictment of the drug industry - not with an investigation - but by running shallow Associated Press copy.

All AP stories today are shallow - or worse - when a national advertiser is involved. It's a wire service requirement because newspapers don't want to offend advertisers. In order to produce that unbalanced story, look what the AP had to ignore in the press release that created the news.

The AP, and therefore the Times, edited out this key line: "In 2000, the pharmaceutical industry was, once again, the most profitable U.S. industry, and profit margins in the industry were nearly four times the average of Fortune 500 companies."

We aren't supposed to learn that outside of the newspaper financial section. Drug companies want investors aware of that, not you.

The US news media have no quarrel with that. Do you?

Since 1997 when the FDA opened the door to prescription drug advertising to consumers, prescription drugs went up in price 200% to 1000% to pay for it. Non-prescription drugs went up with them. They get away with it because industry public relations claims, and we accept, that giant profits are needed to "develop new drugs." They dun that in on TV news.

But in the Wall Street Journal we read: "The success of the company's drugs has enabled it to support a $3.2 billion R&D program (equal to 14% of sales in 2003), which Merck hopes will lead to an ongoing stream of blockbuster drugs in coming years."

Nearly $23 billion income at four times the profit margin of the average Fortune 500 company results in just 14% spent for new drug development at Merck.

Seldom reported fact but it did happen: on the eve of Congress enacting the Medicare drug discount card, the drug industry raised its prices by the amount the drug buyer was supposed to save using a card. This immensely costly program will save senior citizens nothing compared with pre-card prices. The drug companies raised prices to collect all the money Congress intended to help seniors.

Learning actual (rather than claimed) drug prices from the companies is never easy. They don't want us to know they charge more in one place than another, more here than overseas. However, there is a source of data on average wholesale drug cost for specific drugs, the Medical Economics Data Red Book. An in-depth Comparison of 2004 and 2006 costs could be revealing.

I checked one drug. Pfizer's popular lung inhaler Spiriva cost on average $117 a month before Congress acted and appears to have jumped to around $160 right after.

Congress reacted by funding a study on how to enhance dental and vision coverage in the posh medical plan covering ... members of Congress.

Few know that the entertainment figures who go on Good Morning America and the like and emote over diseases they or their "loved ones" have are paid to do that. This isn't Bob Dole standing up for Viagra. Viewers know Bob is being paid to do a commercial. This other thing is made to resemble truth and sincerity. You aren't told on Good Morning America that these people are being paid by a drug company to push their drug.

Since 1997 we've seen gymnast Bart Connor, Olympic figure skater Dorothy Hamill, jockey Julie Krone, former NFL coach Bill Parcells, San Francisco 49er legend Joe Montana, actors Rita Moreno, Bob Uecker, Rob Lowe, Debbie Reynolds, Olympia Dukakis and so many more participating as paid parrots for drug companies.

How much does this add to the cost of drugs? Rob Lowe went on a drug-company sponsored awareness campaign for a cancer-related illness called febrile neutropenia that reportedly netted him personally $1 million. Add the cost of agents, lawyers, and support staff, and Lowe's star trek will cost the drug company at least $1.5 million to be recouped in drug price hikes. And Lowe is but one spokesman among scores of spokespersons.

People are dying over this, people who can't afford life sustaining drugs since the massive price increases. For them, greed is not good. For them, greed is death.

Ok, so there is no economy of scale to be had here. But surely there are cost savings being made. Are any being passed along to customers? You decide.

Did you see savings:

  1. when manufacturing moved offshore to lower labor costs, throwing people here out of work. One conglomerate, General Electric, the world's 8th largest corporation, went so far as to require even its sub-contractors to out-source off-shore or risk losing GE's business. Former CEO Jack Welch boasted of that at stockholder meetings and on CNBC;

  2. Did you see savings when new technology like the internet, cellular telephones, and industrial robotics increased productivity and decreased labor costs;

  3. Did you see savings when virtually all companies replaced salaried staff with automated telephones keeping us on hold. This saved on their labor and shifted unproductive waiting time from them to us. Scum companies dun us with ads while we wait, hoping we'll go away, and submerge live response inside a telephone maze. Savings? We actually lose billions to this every 24 hours;

  4. Did you see savings when out-sourcing to zero overhead contract workers replaced costly in-house departments;

  5. Did you see savings when full-time jobs with benefits gave way to part-time jobs without them;

  6. Did you see savings when artificial yearly obsolescence came to washing machines, kitchen stoves, bicycles, and similar durable goods, forcing retail inventory turnover;

  7. Did you see savings when automated computerized inventory and ordering via satellite revolutionized retailing. You did if you shopped at Wal-Mart, Sam's Club, and Costco which is why so many do. Did anyone else pass on the savings?

  8. Did you see savings when manufacturers began to over-charge for refills and high replacement cost for weakest link components. For example, Gillette's goldmine selling razor blades, and GE's often astounding cost for the minor appliance parts likely to break first. And by sheer luck manufacturers always know what part this is.

Despite all those cost cuttings and profit enhancements, prices did not decrease. They went UP. All the profits got absorbed, to be spent on acquisitions to buy competitors, or to morph into a conglomerate, or just accrue. "So long as your competitors do it" you can too.

These companies own professional sports teams which compete; their NASCAR teams compete; their marketing competes; only price and quality don't compete.

Advertising and marketing are a bottomless pit. Even companies not involved in heavy marketing must be prepared to defend themselves if a competitor starts a war for market share. And learning from the cold war, companies put excess profits in a massive retaliation war chest whose existence keeps others in line.

It's a growth area, and in 2004 it resumed after the lag when the Internet bubble burst. It's not far off when more than 50% of retail prices go to marketing and advertising. Even more as hugely populated 3rd world markets open.

Here's some growth to look for. The Federal Communications Commission mandated that Real Soon Now TV broadcasters must use digital TV. This will (it already has) greatly increase the number of TV channels, especially free channels via roof antenna. Because of our bloated merchandising paradyme, every channel no matter how marginal is required advertising to auto makers, brewers, and others who easily pass the cost to the consumer.

And that's just this country. Most of these companies are global and advertise or someday will in every country in the world. The income from wealthy nations pays marketing bills elsewhere.

Truly a bottomless pit.

And of course there's that other cost, the cost to society and to civilization itself when we are awash in vulgar, coarse, crude, and tasteless media rot. Intelligent, educated people don't respond to ads. Advertisers must have a low level target to get results and you don't attract a low level audience with high level fare.

It's ironic that as modern warfare eliminated the need for cannon fodder and breeders, we elevated that population to prominence because we could manipulate its spending habits. In a mere half-century, merchandising and advertising replaced our nation's traditional values with junk values.

And it's tragic that we exported this vapid commercialization. We trashed our culture, and trashed the culture of our trading partners. Now through globalization we are trying to trash every other culture on earth.

That's not being well-received by Islamists, the second largest religion behind Christianity. They appear to be attempting to protect their culture by attacking the supply side of US commercialism. It remains to be seen if they attack only the supply side. Innocent American who are themselves targets of commercialization may yet become the targets of terrorism as well.

Some followers of Allah do not like where some followers of Jesus and Moses are leading the world. They have set themselves a collision course.

Choose another myth?

Introduction - How these myths began
"The US separates church and state"
"Justice will triumph"
"We have self-government"
"You cannot be forced to incriminate yourself"
"Americans have free speech"
"No Man is Above the Law"
"Corporate political contributions aren't bribery"
"The best is yet to come"
"Abner Doubleday originated baseball"

The name Freeware Hall of Fame is Service Marked by Rey Barry
(rey at cstone.net)
All rights reserved
RBA Logo