Devangshu Datta: Holding a mirror to the media

VIEWPOINT

The stock market generates noise and media monetises it. Several high-TRP channels exist because of the market; viewership consists of people seeking price-sensitive information. Pink papers derive circulation from the market exposure of their target audience. Many websites disseminate market information.

The relationship is usually symbiotic and beneficial for both the media and business. It is quite legitimate for a media organisation to recommend stocks provided this is done with disclaimers and disclosures that reveal any conflicts of interest that may affect judgement.

Such disclosures, however, never go far enough. They focus almost exclusively on issues of share-holdings. Another conflict is inherent in the standard media revenue model "" the media accepts ads even as it comments on the financial health of advertisers.

That relationship can obviously colour information dissemination. Good media organisations try to see that it doesn't. But nobody considers it appropriate to disclose: "We accept advertising from XYZ, whose stock we may recommend." Nobody confesses: "We don't say nasty things about our advertisers." Since ads are in the public domain, by definition relationships are known. Maybe there's no need to cross the Ts.

It is exceedingly rare to come across a media business that refuses advertising and generates revenues exclusively through trading the companies it covers! An American website www.sharesleuth.com has created waves in the past 14 months by implementing this approach to monetising noise.

Sharesleuth is a text-heavy, two-tone site run by one person, Chris Carey. Carey is a business journalist who "looks for companies built for fraud, for executives enriching themselves at shareholder expense, and for businesses whose behaviour runs counter to their stated objectives or to the public interest." He finds his stories by resolving inconsistencies hidden in public information, statutory filings, etc.

The site debuted in August 2006 with a 6,000-word investigative report indicting Xethanol, a company that claimed to have developed the technology to generate ethanol from organic garbage, such as grass mown off suburban lawns. That triggered a 60 per cent drop in Xethanol's stock price and eight federal class-action suits against Xethanol by investors and creditors.

Carey has done just three big exposes in the past 14 months. His meticulous methods of information-gathering and the high quality of analysis appear to be in the best traditions of investigative journalism.

The revenue model is simple. Trader Mark Cuban bankrolls Carey and Sharesleuth. Cuban makes his money short-selling the companies Carey nails. He may do so before the exposes are up on the Net. This is ok since Carey deals in public information and Cuban is trading Carey's insights, not insider information.

Sharesleuth is the media channel through which Carey's insights are disseminated once Cuban has set up his trades. Since Carey's exposes are exceedingly well-documented, Sharesleuth triggers panic selling. That enlarges Cuban's profits.

Sharesleuth is, therefore, a "Diss and Dump" revenue model as opposed to the much more common and much more dishonest "Pump and Dump" model. Pump and dump involves hyping up stock prices through feel-good rumours that are usually false.

"Diss and Dump" unlocks value in short positions by releasing negative information. Cuban contends there is no problem so long as that negative information is sourced from public domains and it can be independently verified as correct.

The website is meticulous in its disclosures. Cuban is forthright to the point of bluntness about how he makes his money. He claims that he is more honest than the standard media organisation because he eschews advertising (and subscription) revenue. He makes enough to offer Carey the time and resources to thoroughly investigate leads.

To the best of my knowledge, the "Diss and Dump" model is unique. It is difficult to scale up because it requires investigative skills that are not easily available. Short-selling successfully is also much more difficult than going long.

But by its very existence, Sharesleuth raises uncomfortable questions. It holds up a mirror to the mainstream media revenue model. How many media organisations can look into that mirror and face themselves fair and square?