What Psychic Friends Failed to Foresee
It's been a busy few weeks
in the history of American kitsch. First Planet Hollywood announced it was
hemorrhaging money, then Jean-Claude Van Damme got cold-cocked in a strip
joint, and now the Psychic Friends Network is no more. Its parent company,
Inphomation Communications Inc., has filed for bankruptcy, claiming that it has
$26 million in liabilities and $1.2 million in assets. What's next? A
revelation that Walt Disney really isn't preserved cryogenically?
The big
loser in the demise of Psychic Friends is, of course, chanteuse Dionne Warwick,
who's been the key spokeswoman for the network for almost five years now. You
might have thought that Warwick would have seen this coming two decades ago,
when, on the advice of a psychic, she added an "e" to her last name and watched
her singing career go into the tank. But, like so many others, Warwick's faith
in the business of getting poor and desolate people to shell out enormous
amounts of money they really shouldn't be spending for worthless advice
remained unshaken.
The economics of the psychic phone business are, in fact,
about as straightforward as that. At $3.99 a minute, the goal is to get people
to stay on the line for as long as possible--though not so long that they run
up massive bills they will deny having amassed--and to keep them coming back.
As a result, especially in the last few years, the psychic business has tried
to focus on establishing continuing relationships between individual psychics
and their customers. ("I don't want just any psychic! I want to speak to
Clarissa!") The implicit therapeutic element to consulting a psychic has thus
been made more explicit. After all, a good analyst costs ... well, there may
not be such a thing as a good analyst, but you get the point.
Still, while the psychic
business model is uncomplicated, its very simplicity poses a very real problem
to the dominant players in the field, since it means that the barriers to entry
are remarkably low. (The really big winners in the phone-psychic--as in the
phone-sex--business are actually the phone companies, since they take a chunk
of every call and provide only the line.) Since most psychics work out of their
homes, you don't even need that archetypal room with a bunch of telephones in
it. All you need is a few ads in the back of a magazine, maybe a commercial on
that cable channel that tells you what's going to be on other channels in the
next hour and a half, plus a gimmick, and you're in. In part, of course, that's
why building customer loyalty to particular psychics is so crucial. But it's
also why constantly differentiating yourself from the competition is essential.
The threat of commoditization, in other words, is omnipresent. (For more on the
commoditization scramble, click here.) And here
the Psychic Friends Network really fell down on the job.
"They just
didn't change the product enough," says journalist Stephen Glass, who recently
detailed his personal adventures as a telephone psychic (for the Psychic
Believers Network) in an article in Harper's . "If you look at other
networks, they do ads focusing on the lottery, on romance, on work. They just
keep re-packaging and re-spinning the product. But Psychic Friends was stuck
with these infomercials which just pushed psychics generally."
Failing to target its pitches--neglecting to
emphasize that psychics can help you win, or at least tell you you're going to
win large sums of money or find that woman of your dreams--was certainly
Psychic Friends' first big mistake. A probably more telling error was getting
locked into the infomercial model of advertising. While its competitors looked
to the 60-second or two-minute ad to push the product, Psychic Friends remained
enamored of the 30-minute pitch, with Dionne smiling her toothy smile and
everything looking vaguely like it was still 1979. (Do you really think it's a
coincidence that both Gary Coleman of Diff'rent Strokes and Ted Lange of
The Love Boat --he was Isaac the bartender--were Psychic Friends
salesmen?)
The
decision to stick with the infomercial model was certainly understandable.
After all, the company is called Inphomation, and its main business was the
production and distribution of infomercials. And the Psychic Friends
infomercials had been among the most popular in history. Between 1993 and 1994,
they aired more than 12,000 times, and at one point Inphomation was shelling
out half a million dollars a week to buy air time on cable stations. It was
money well spent: At its peak, Psychic Friends was bringing in as much as $125
million a year, most of it through infomercials.
Psychic Friends was not alone. The infomercial boom of the
late 1980s and early 1990s was a logical response to the deregulation of cable
television in 1984--which means that, like so much else, we can blame Psychic
Friends on Ronald Reagan. As the number of cable channels exploded, so too did
the demand for programming. Infomercials were an ideal cash cow for the cable
networks, since they actually got paid to air them.
But cable has changed in
recent years, as relatively more substantive programming alternatives have
emerged (the Classic Sports Network or the Cooking Channel may not be high art,
but they are better than another Ab Roller ad), and as the infomercial market
became saturated. Those Psychic Friends programs had probably reached a point
of diminishing returns, but Inphomation was stuck in an old mindset--a classic
case of a company not realizing that what had made it successful would not keep
it successful in the future. GE's Jack Welch is fond of saying that the key to
success is changing before you have to. Inphomation couldn't change even after
it had to. And the fact that this utter failure of foresight happened to the
Psychic Friends Network takes us, needless to say, somewhere beyond irony.
I don't
want to belabor that point (though it is fun, as all the "They should have seen
it coming" headlines on stories about Inphomation's bankruptcy suggest). Still,
it's worth recognizing that Psychic Friends was an enterprise created as a
response to people's uncertainty about the world (it's probably no accident
that it cropped up around the time of the Gulf War). And yet it ended up
foundering as a result of the inherent uncertainty of the free-market system.
Still a larger question remains: Why don't companies ever quit while they're
ahead?
Imagine if Michael Lasky, the former racing
handicapper who ran Inphomation into the ground, had seen two years ago that
margins were going to decline, that in the absence of any professional
requirements more and more psychics would be entering the market, that the time
for infomercials had passed, and that the Psychic Friends brand name had hit
its peak. And imagine if, at that point, he had liquidated the company and
instead deployed his capital elsewhere (by buying stock in AOL or something).
Today, the memory of Psychic Friends would live on in all our minds as a great
and kooky American success story; we wouldn't have hundreds of psychics worried
about their futures; and Lasky would still be ridiculously wealthy.
In the end, it may be that
most companies have naturally short life spans and recognizing that life span
and getting out before it's over is a rare but crucial talent (one Lasky
clearly didn't have). We've been conditioned, by a century of Fortune 500
companies, to see the large, decades-old corporation as the model for all
business. But much of the time, striving for longevity means ending up in
bankruptcy. Psychic Friends, like Michael Jordan, could have gone out at the
top of its game. Some crystal ball.
