Markets & Finance
Monday, November 24, 2008
I have no problem with government bailouts of troubled financial institutions, but could someone at least pay attention to proofreading the statements announcing them?
We will continue to use all of our resources to preserve the strength of our banking institutions, and promote the process of repair and recovery and to manage risks.
With some solvent copy editing, of course, that would read:
We will continue to use all of our resources to preserve the strength of our banking institutions, to promote the process of repair and recovery and to manage risks.
Just because the rules governing the financial markets are being rewritten on the fly doesn't mean the rules governing proper English should be, too. Seriously, guys. Grammar matters.
Friday, October 10, 2008
Quote of the Day
"It's impossible to predict the bottom, and technical analysis is meaningless as panic and fear overwhelm the markets."
-- Jang Huh, managing director at Prudential Asset Management in Seoul, on the Asian stock market dive.
Monday, September 29, 2008
The Case for Strategic Patience
AFOE's Edward Hugh offers a solid analysis of the current financial turmoil roiling Russian markets, that among other things debunks the idea that the invasion of Georgia was an essential cause -- as opposed to a catalyzing event -- of the capital flight in the invasion's aftermath. In other words, absent other fundamental weaknesses and contributing factors, there's no way of knowing whether globalized markets would have "punished" Russia's muscle-flexing in the Caucasus.
While most of the loud arguments about the Russian invasion have framed it in terms of NATO enlargement and some sort of moral obligation to defend Georgia's young democracy, the fact is that Russia's message was more directly addressed to the Central Asian energy sources that are shaping up to be tomorrow's geopolitical brass ring. Judging by the immediate fallout, that message has gotten through. Azerbaijan, a key stop on Dick Cheney's post-invasion tour, just decided to reduce oil shipments to the EU in order to increase Russian and Iranian deliveries. The move had been a temporary reaction to the threat the Russia-Georgia conflict posed to the trans-Georgian pipeline, but has now been continued indefinitely to "spread risk." (For more on just what those risks are, see this ISN piece.)
Azerbaijan's predicament highlights the difficult balance the Central Asian energy producers need to strike between a desire to lean towards the West on the one hand, and the reality that the West's tough talk and plans for future military integration did nothing to deter Russia from showing who has the military upper hand in the region now. That leaves the West with a tough choice of its own: push forward with the integration of Georgia, Ukraine and the Central Asian countries into the U.S.-NATO military sphere of influence (with or without membership for the former two), which means confronting Russia head-on at a time when Russia enjoys the tactical upper hand; or else develop a concerted energy security policy -- whether NATO or EU -- which means finding solutions that aren't necessarily easy to come by, and for which the proposed ones (ie. Nabucco) are unraveling.
On the other hand, as Hugh's analysis above makes clear, the other fundamental weaknesses and contributing factors to Russia's economic turmoil -- as well as the difficulty Russia's military sector will have meeting the demands of its ramped up military procurement schedule -- are significant enough to seriously weaken Russia's longterm strategic position. Russia needs Western capital to upgrade its dilapidated energy infrastructure if it hopes to meet its energy contracts into the next decade. That's one of the reasons it's been so aggressive in trying to corner the market on the 'Stans.
It's also why an expert cited in the Reuters article on the difficulties facing an EU energy security policy made it clear that the EU's dependency on Russian supplies is no greater than Russian dependency on EU demand. A conflict with Russia might ultimately be unavoidable. But there's every reason to believe that Russia's need to responsibly integrate the global order will become clearer to the leadership in Moscow with time, meaning our hand will only get stronger, and Russia's steadier.
Cross-posted to World Politics Review.
Friday, September 26, 2008
It's an extraordinary and disturbing spectacle that's going on now, with this White House unable to convince even and especially its own party to rescue what they argue is essentially the country's financial liquidity. All these years of gratuitous demagoguery, ideological rigidity, ultra-partisanship, secrecy, cronyism, lying, attacks on dissent and the media and immigrants and calling concerns about torture and domestic spying treasonous, it all just comes down to total bankruptcy and weakness and pleas to any and all in the end to please help. Extend them the reasonableness, the decency, the good will that in the almost fascistic overreach of their high power days they never considered extending, they sneered at. They presided over the destruction of so much they touched, sometimes on a cataclysmic scale; and now they are weak and have made this country weaker and more vulnerable before its adversaries to a degree unimaginable a decade ago. Such deeply, deeply irresponsible men.
Wednesday, September 24, 2008
Is America too big to fail?
Monday, March 31, 2008
The Wealth Subsidy
With capital gains taxes at a 70-year low, making effective tax rates on wealth lower than that on labor, maybe a little Reagonomics wouldn't be such a bad thing after all:
Reaganís 1981 tax cuts tilted toward the wealthy and made him a supply-side icon. But Reagan could also be fair, and fairness would permeate his last fiscal legacy. In the landmark Tax Reform Act of 1986, nearly three years in the drafting, Reagan again cut marginal rates on earned income but raised taxes sharply on investors.
The reform ended preferential tax treatment of capital gains. The tax rate on long-term gains leapt to 28 percent, nearly double the current levy.†
John McCain is quick to assume Reagan's mantle, but doesn't want to touch this one with a ten-foot pole. Making the issue one Barack Obama could win for the Gipper.
Sunday, March 2, 2008
Sweet Home Alabama
A quick word on the EADS tanker contract that's getting so much blog attention. (Kevin here, Art here, Danger Room here and here.) Some mention was made of EADS' promise to build the aircraft in Alabama as a way to placate Congress. It's important, though, to point out that as early as last December, EADS was floating suggestions of outsourcing operations to Alabama as a way of counteracting the
collapse of the dollar to third-world currency status correction in the dollar's exchange value. So while the move might make for some good Stateside p.r., it makes for some even better bottom line.
There are still some potential rough patches for the deal, though. To begin with, EADS, while publicly traded, counts among its major shareholders both the French and Spanish states, as well as a Russian state-controlled bank. The resulting public-private hybrid could trip the kind of ad hoc (read: politically motivated) American national security sensors that killed the Dubai ports contracts in 2006.
But perhaps just as dangerous will be how outsourcing EADS operations to America will play in Europe, where both France and Germany have often displayed protectionist impulses to what's considered an industrial feather in Europe's cap. It's hard to stick up for a national industry when the soundtrack for its payroll is more Lynyrd Skynyrd than Marseillaise.
Cross-posted to World Politics Review.
Friday, January 25, 2008
Reverse Peter Principle
There are two really spectacular aspects of the Jerome Kerviel story, the French rogue trader responsible for $7 billion in losses at Societe General. The first leaped out at me from the very first accounts, namely that although his trades were being described as fraud, it was hard to see where his angle was. Now the WaPo confirms that he was basically balancing the books by recording fake trades to offset real ones, but he wasn't cashing out his positions.
Which leads to the second spectacular aspect. Were it not for the global sell-off that hit the markets Monday, his positions were potentially winning ones. Not only that, some analysts are speculating that the global panic was in part caused or at least contributed to by Societe General's secret liquidation of his unauthorized investments. Which leads me to wonder why SG would cash out winning positions just because they were unauthorized, especially on such a massive scale? Surely there was a more measured way to deal with the problem.
As for Kerviel's angle, it's possible that he was playing long, intending to cash out gradually over time. But it almost seems from the coverage that he was trying to prove something (ie. that despite not coming from the best schools and upper crust society, he "belonged"), more than profit from his trades. Unfortunately for Kerviel, though, by the logic of these things (ie. the relevant legal statutes) he's most likely going down.
But every time I read about a criminal mastermind or hacker savant, it occurs to me that outlaws suffer from a reverse Peter Principle. Regardless of his authorization, Kerviel's trading record apparently looked pretty good up until Sunday night. And I'm not sure how many traders were looking too hot as of Monday evening. So it could be that, judging his record from a legal "absolute value" perspective, he deserves a promotion. At the very least, his ability to devise methods to avoid security detection seems like it could prove pretty valuable to Societe General in the future. Instead he'll be doing time, while some other trader rises to the level of his own incompetence.
Tuesday, January 15, 2008
The Sub In Subprime
A few days ago Josh Marshall wondered whether he should be unnerved about the fact that foreign governments (read: sovereign investment funds) were snatching up large equity positions in cash-strapped American financial services companies. I think it's more unnerving when the foreign governments decide that it's just not worth the risk anymore:
China's government has apparently squashed a multibillion-dollar investment in Citigroup Inc. by state-owned China Development Bank. The move suggests there is discord in Beijing over how best to deploy China's money pile. A few previous China investments like these have fared poorly so far financially.
These guys have got a pretty big incentive to keep the dollar from bottoming out. The question is whether there's anything they can do about it.
Saturday, January 12, 2008
Good Times, Bad Times
I almost wrote about this last night, but it's obvious that the economy is beginning to take a more prominent role in the national zeitgeist. In the context of the presidential campaign, it's interesting for two reasons. First, the lengthened format of the primary campaign runs the risk of emphasizing positions at the outset that have less impact when it comes time to cast ballots. In January 2006, when everyone was announcing their candidacies, the war in Iraq was clearly the main issue on people's minds. With the recent decrease in violence, that's likely to give way to growing anxiety over the economy.
Second, and at the risk of stating the obvious, this can only benefit Hillary Clinton's candidacy. To begin with, of the three candidates, she's the one with the most vulnerable position among Democratic voters adamantly opposed to the war. But more than that, whether it's warranted or not, economic prosperity is a fundamental component of the Clinton brand identity. This is one issue where people would find a repeat of the 90's not at all unwelcome.
Wednesday, January 9, 2008
Matthew Yglesias makes the point that housing foreclosures haven't really hit Iowa or New Hampshire, keeping this huge issue out of the campaign for the time being. Based on a Joint Center for Political and Economic Studies brief I flagged last month, I'd wager that has something to do with the fact that subprime mortgages, both by targeted marketing and self-selection, disproportionately effected blacks and minorities, and Iowa and NH are both lily-white. Yglesias is correct in noting that we're likely to hear the candidates weigh in on this given the impact the housing slump has had on California, Nevada and Florida.
Wednesday, January 2, 2008
When The Well Runs Dry
If you've been feeling the credit crunch from the subprime crisis, you might take consolation in knowing that you're in good company. According to the BBC, Blackstone and GE lost out on a deal to purchase US mortgage provider PHH because the banks that had previously agreed to finance the deal backed out. If this doesn't qualify as the anecdotal image that captures the whole subprime debacle, I don't know what does.
Tuesday, January 1, 2008
Subprime, Peking Edition?
I don't know enough about the subject to offer any analysis, but this seems noteworthy:
Central Huijin Investment Co. (Huijin), an investment arm of the Chinese government, signed a contract with the China Development Bank (CDB) onday to inject 20 billion U.S. dollars into the state-owned policy bank.
The investment, ratified by the State Council, would sharply raise the CDB's capital adequacy and improve its risk-prevention capability, said a press release by the People's Bank of China, the nation's central bank.
Add this to the Fed and ECB's credit injections, the Chinese forex equity injections into Blackstone and Morgan Stanley, and the Singapore forex equity injection into Merrill Lynch, and that makes roughly $80 billion in cash that the world's central banks have pumped into the global credit market in the past weeks to months. Not all of that can be to cover housing foreclosures in backwater American real estate markets.
Sunday, December 30, 2007
Regular reader and frequent commenter Gerald Scorse has a guest post on tax policy over at Voices of Reason that's worth a read. While I agree with his overall argument -- that longterm capital gains should be taxed at a higher rate than income from work -- I have to take issue with this claim, which I've seen elsewhere as well:
Billions of shares change hands daily on the major exchanges. On any given day, only a minute fraction of those shares grows anything. Days can pass without a bona fide investment; the sounds you hear are aftermarket noise and the closing bell.
In short, "investors" do not grow jobs (except in the financial sector). The seed money that nourishes start-ups and expansions comes from a tiny subset of real investors; the rest of us merely place our bets at the tables down on Wall Street.†
While it's true that only IPO's actually generate revenue for a company issuing stock, the market capitalization resulting from rising stock prices can create a more favorable credit environment for a company to invest in expanding its business. So aftermarket investors do contribute, albeit indirectly, to economic expansion.
Wednesday, December 19, 2007
It looks like the Fed and European central banks aren't the only ones concerned (read: panicking) about the credit crunch resulting from the subprime crisis. The China Investment Corp, the state-run investment company capitalized by China's massive foreign exchange reserves, has just agreed to buy $5 billion worth of Morgan Stanley equity. The equity units will pay 9% interest before being converted to account for roughly 10% of the investment banker's common stock.
While the CIC justified the move, which follows a $3 billion investment in the Blackstone Group earlier this year, by arguing that the American financial sector is undervalued right now, it's hard not to interpret this as a private sector credit infusion reflecting China's concern for its massive dollar reserves. Again, people who get overly worried about China's sway over the dollar should remember that now that China's holding about 750 billion of them, the dollar's got some sway over China,too.
Thursday, December 6, 2007
According to this brief titled "African Americans and Homeownership: The Subprime Lending Experience,1995 to 2007" from the Joint Center for Political and Economic Studies, even after controlling for comparable risk factors as well as borrower and lender characteristics, blacks and other ethnic minorities were wildly overrepresented in the subprime market for home purchase, home improvement and home refinance loans. There was also a direct correlation between states with a high proportion of subprime loans and states with a high proportion of black residents. Ditto for predatory loans and ZIP codes with predominantly minority populations.
Oddly enough, blacks in predominantly wealthy neighborhoods were three times as likely to take out subprime refinance loans as people in wealthy neighborhoods overall. Compare that to blacks in predominantly poor neighborhoods, who were only one and a half times as likely to take out subprime loans as people in predominantly poor neighborhoods overall. Leaving the brief's authors to wonder whether the expectation of racist lending practices doesn't lead qualified black borrowers to forego the more above board financing options and head directly to the predatory lenders that are happy to see them walk through the door.
Wednesday, December 5, 2007
Easy As MP One, Two, Three
Another French internet service provider, Alice, has come out with a free music download formula. For the price of the basic service package, new subscribers will have unlimited access to EMI's catalogue, for their computer and up to three mp3 players. The one wrinkle is that the files come embedded with Microsoft's DRM system, so they're not compatible with either iTunes or iPod. A spokesman for the company added that come 2008, for an extra 10 Euros, subscribers will have access to Sony, Warner and Universal. The offer comes in response to Neuf's recent formula of different levels of access to Universal's catalogue. That deal, which guaranteed Universal exclusivity for six months, will soon open up to other labels.
I'm a bit out of the loop with what's going on in the States, so I don't know if this kind of deal is already standard fare for American ISP's. What's becoming increasingly clear is that the entire landscape of music delivery is changing so rapidly that the early adapter companies will in some ways suffer from their innovative ways, on both ends. Those paying licensing fees to bundle music in their products or services can get locked in to limiting deals. And the majors have to be careful about not giving away the farm to any single licenser. If everyone can download free with an internet account, they have no incentive to pay slightly extra for an mp3 player that comes with pre-licensed catalogue downloads.
The music industry has been suffering (from self-inflicted wounds, in my opinion) for so long that they're in a rush to recoup some cash. But if it doesn't think through how this is all going to play out in the next five years, it will end up with end consumers saturated with offers, and little demand.
Tuesday, December 4, 2007
Third World Currency
It looks like the Bush administration's policy of a "strong" dollar has finally begun to pay off. After losing 25% of its value against the Euro in two years, the dollar now buys barely more than 50 euro-cents. The damage to Euro-zone exporters is obvious. But in a move that exemplifies the gravity of the situation, EADS chairman Louis Gallois today declared that its Airbus subsidiary will soon be forced to outsource its production to the dollar-zone:
"Unfortunately, I believe we must not use the conditional anymore. We must not say 'We ought to', we must say 'We will have to', because we no longer have the choice... The only way to prepare the company for a dollar that no one controls anymore is unfortunately to set ourselves up in the dollar zone," he added, judging that "the industrial substance is in the process of leaving" Europe... (Translated from the French.)
Had someone suggested two years ago that the Chinese, OPEC, the ECB and all of the other enormous market-making capital funds would simply sit by and watch the dollar lose 25% of its value, I'm not sure anyone would have believed it. Now there doesn't seem to be a whole lot anyone can do about it. Over the cliff we go...
Update: According to Der Spiegel, Airbus is exploring the possibility of an assembly plant in Mobile, Alabama, and VW is looking to establish a North American factory also.
Also, in response to a Comment thread, I should also make my broader point more explicit. Namely, that the dollar devaluation has been part of an economic "assault" on the Euro-zone and China. So far it's managed to boost American exports, and might end up resuscitating America's industrial productive base through "insourcing" from the Euro-zone, even if it hasn't gotten China to unpeg its currency. But it's hard, if not impossible, to imagine that the US can somehow maintain its global influence while at the same time becoming a Third World economic zone to a "rich" EU and a cash-bloated China.
Where it also gets sketchy is when it combines with underlying fundamentals to make investors reluctant to subsidize the American lifestyle. Already Asian central banks are increasingly moving towards Euro-zone debt, and should the dollar continue to slide, that will only become more pronounced. Since America is now primarily a non-productive debtor nation, this will have very painful consequences.
Tuesday, November 27, 2007
How Low Can You Go?
Two articles in the French press give you an idea of just how weak the dollar really is right now. According to Le Monde, in the twelve months between August 2006 and July 2007, Southeast Asian and Japanese investors -- including central banks -- bought 32 billion Euros worth of French government bonds, compared to only 14 billion Euros they invested in American government debt. The article quotes an official from the Chinese central bank reaffirming that the dollar is and will remain their principle reserve currency. A demonstration of faith that didn't prevent China from reducing its position in American debt since March.
Meanwhile, to add insult to injury, Marianne reports that with the dollar now at only 66% of the Euro, outsourcing telecommutable jobs to the United States has become an attractive option for French CEO's. Not, of course, as attractive as outsourcing them to Russia, India or Brazil. But, hey, it's a start.
Sunday, November 25, 2007
Last March, a news item about "bandwidth hogs" having their internet service cut off got me speculating about what internet usage would like once user demand outstrips available bandwidth. If a report just released by Nemertes Research is any indication, the answer is rolling brown-outs in about 3-5 years, unless ISP's invest $40-55 billion in infrastructure buildouts. That's 60-70% more than current outlay projections.
As I said then, on a lifestyle level we'll certainly look back on the days when we fired off a viral video to a friend just for laughs the way a man dying of thirst in the desert thinks back to his last water balloon fight. On a more serious note, net neutrality and the politics of bandwidth access will take on added significance, magnifying the importance of the outcome of today's policy battles.
On an even broader societal level, internet usage isn't the only activity we'll look back on with a sense of innocent wonder at the luxury we took so much for granted. Yesterday an acquaintance who works as a hedgefund analyst told me about a conference she'd attended recently. The featured speaker, Mikhael Gorbachev, spoke very matter-of-factly about oil at $300 per barrel in the near- to mid-term future. The potential impact on car and air travel is obvious; my acquaintance predicted a time not far off where only the global management elites (CEO's and heads of state) will enjoy the privilege of air travel. Globalization will increasingly refer exclusively to an exchange of capital and commodities, with little of the personal and virtual mobility we currently associate with it surviving.
I keep thinking that the sub-prime crisis is the defining metaphor for our historical moment: a last-gasp, credit-based mirage to fuel the tail end of a speculative bubble. So much of our current way of life is financed by virtual credit instruments whose solidity is based exclusively on the strength of our resolve to ignore their lack of foundation. Like Wily Coyote running past the cliff's edge, everything functions so long as no one looks down. The problem, of course, in reality as in the cartoons, arises when Roadrunner inevitably ambles over and nonchalantly chirps, "Mee-meep."
Thursday, November 15, 2007
Cash And Carry
Something that rarely gets mentioned in the discussion of the dollar's decline (or oil and gold's climb, or the rise and fall of the sub-prime market) is the extent to which globalization, by freeing the flow of capital, has created a situation where there's an enormous reservoir of cash looking for profit. And since shortterm profit goals surpass longterm growth projections, there's an enormous incentive for speculative bubbles. That's not to say there aren't underlying fundamental causes behind the shifts. But the proliferation of market-moving capital funds with very little restraints on their cash flows plays a role as well.
Friday, November 2, 2007
Music As Amenity
Ann Althouse calls the Ritz-Carlton's complimentary iPod with 1,000 classic and contemporary music selections a "strange hotel amenity", and wonders:
Who doesn't have their own iPod? Who wants 1,000 songs loaded by the hotel? Maybe if you lost your iPod...
She's right and wrong. It's actually just a clumsy prototype of how recording companies will squeeze some revenue out of their catalogues in the age of free recorded music for the end consumer. Eventually the "one size fits all" complimentary iPod will become a progressive menu. For an imperceptible fee hidden in the basic cost of the room, you'll get the iPod (or equivalent database) loaded with a generic music library. For an extra fee, kind of like the charge for using room service or the wet bar, you'll get a library selected by cutting edge artists and a&r insiders who can no longer find work in the downsized industry. And for a little bit more, you'll get every song ever recorded since Edison.
The hotels (and airlines, car manufacturers, etc.) will pay global licensing fees. The record companies will divide them among artists based on how often the files have been accessed. And the end user will pay nothing. Or at least, that's what it will feel like, because the cost will be included in the price of the service.
Eventually, the same system will be expanded to include heavily branded consumer products (like sneakers, and certain clothing lines), whose price will also include access to corresponding mp3 libraries. The major challenge facing the industry is that in its rush to solve the revenue question, it doesn't create licensing agreements that undercut one another. If you've already got a universal song library included (for a fee) in your mp3 player, you're not going to be interested in paying extra for one in a hotel room. It will probably be trial and error -- like the Ritz-Carlton's complimentary iPod -- for a while. But the industry will ultimately find a standard it's comfortable with.
Oh, and for what it's worth, I don't own an iPod, and couldn't for the life of me imagine being aurally isolated from what's going on around me.
Sunday, October 14, 2007
It's become increasingly clear ever since iTunes cornered the market for paid digital music files that, while the arrangement has been a goldmine for Apple, it's done little to change the declining fortunes of the recording industry. There are a few reasons for this, not least of which is the revenue split negotiated by Steve Jobs ("indecent" according to one record company executive). But the fundamental explanation is structural. The iTunes model is simply a digital age version of the traditional method of selling recorded music, where digital files replace mechanical copies. The problem, of course, is that the competition faced by the recording industry isn't more efficient distribution of music, it's free distribution of music.
Which is why the deals they'll be seeking with music distributors will increasingly give the appearance of offering free music by rolling the licensing cost into a service or product. In the case of this arrangement concocted by Universal Music head Doug Morris, access to three major label catalogs representing 75% of the American recorded music market would be included in the price of an mp3 player. In the case of French internet service provider Neuf Telecom, Universal's catalog was bundled into the monthly subscription fee. Airplane entertainment libraries and luxury car mp3 players offer similar opportunities to hide licensing costs in the purchase price, and others will be developed.
So as you read about the advent of free recorded music, keep in mind that you're still paying for what you listen to. You're just not being shown the price tag.
Update: Of course, just after I posted this, I ran across a WaPo article discussing whether and how much an artist is "selling out" if they license their music for commercials. This is a 1990's approach that will soon be obsolete. I wouldn't be surprised if in the not too near future, at least a certain amount of licensing rights will be retained by the record company in the standard recording contract. In other words, the record company itself will have product endorsement deals, and by agreeing to that first contract, newly signed artists will be licensing their music to the label's brand roster. Of course, once an artist becomes successful, they can always re-negotiate. But for the length of that first contract, selling will mean selling out.
Friday, October 12, 2007
You're Either With Us Or Against Us
It always pays to be skeptical of accusations made by someone trying to avoid the inside of a jail cell. But according to redacted court documents just unsealed from former Qwest CEO Joe Nacchio's insider trading trial, the NSA pulled the plug on a $100 million deal for Qwest to build them a "private" fibre optics network in retaliation for the company's refusal to go along with what is clearly a reference to the NSA telecom surveillance program:
Nacchio planned to demonstrate at trial that he had a meeting on Feb. 27, 2001, at NSA headquarters at Fort Meade, Md., to discuss a $100 million project. According to the documents, another topic also was discussed at that meeting, one with which Nacchio refused to comply.
The topic itself is redacted each time it appears in the hundreds of pages of documents, but there is mention of Nacchio believing the request was both inappropriate and illegal, and repeatedly refusing to go along with it.
The NSA contract was awarded in July 2001 to companies other than Qwest.
Nacchio was prevented by the first trial judge from presenting the evidence due to its classified nature. He's currently free pending appeal.
Friday, October 12, 2007
Bait & Switch
That Radiohead record that was going to revolutionize the music industry by allowing fans to download it for whatever they felt like paying? I don't think so. Looks like round one in the Battle Over the Future of Recorded Music goes to Madonna®.
Friday, October 12, 2007
A quick footnote to yesterday's post about Live Nation, the company buying the rights to Madonna®:
Although it is the largest concert promotion company in the world, it lost $161 million in 2005 and 2006, and barely managed to make $10 million profit from $1 billion revenues in the most recent quarter of this year.
Meanwhile, according to leaks about the deal, Madonna's cut of the concert tour take will be 90% of the gross. Frankly, I don't see where the upside is coming from for the folks distributing the music, whether it's record companies or concert promoters. Teenage boys will form rock 'n roll bands for as long as there are groupies crowding the stage (and the dressing room after the show). The $64,000 question is, who's going to record their music?
Update: To answer my own question, they'll record it themselves using the ridiculously inexpensive home recording technology now available. And they'll distribute it themselves using file sharing over the internet. And then when they've gotten enough exposure and buzz (precisely measured by clicks and downloads), they'll sign a deal with a tour promoter, who will expand their distribution capacity. In fact, it looks to me like there's some room there for a savvy online middleman to connect the talent to the re-invented "distribution" outlet. A cross between an online record company and an agent.
Thursday, October 11, 2007
Is It Live Or Is It Memorex?
It's increasingly looking like the future of recorded music is as a marketing tool for selling concert tickets and developing brand identities. The deal reportedly in the works between Madonna and Live Nation is just another step in that direction:
The story was first reported on the Wall Street Journal's Web site, which said Madonna would receive a mix of cash and stock in exchange for allowing Live Nation to distribute three studio albums, promote concert tours, sell merchandise and license her name...
The paper, quoting people briefed on the Live Nation deal, said the package includes a general advance of $17.5 million and advance payments for three albums of $50 to $60 million. (Album advances are generally recouped from sales income.
Live Nation also is expected to pay $50 million in cash and stock for the right to promote Madonna's concert tours.
To give you an idea of how lucrative the concert circuit is, in 2005 the industry totalled $3.1 billion in revenue, and that's not counting the ways in which technology will allow promoters to develop new revenue streams from live performances. Madonna's last three world tours grossed $400 million combined. Add to that merchandising, image endorsements and music licensing (which I'm surprised isn't part of the deal), and you've got a pretty lucrative market, even if the actual sales of mechanical copies will continue to decline.
It's ironic that at the dawn of the recording era, musicians felt threatened by technological advances that allowed mechanical copies to achieve better sound quality. Rightly so, since at the time, any activity that depended on music -- dance classes, theatre performances, nightclubs and private parties -- required live musicians, hence guaranteeing their livelihood. They became enthusiastic only after it became clear that recorded music sales could not only provide a revenue stream (although never a very reliable one due to shady industry practices), it could also serve to spread an artist's reputation. In the intervening years, recording became both an art and an industry in and of itself, distinct if not separate from the artistry of performance.
It would seem as though the industry has come full circle. Recorded music will once again serve primarily to publicize an artist's work, with live performance (complimented by licensing revenue from advertising) providing the livelihood. For artists with an already established stature, it won't really change much other than their accounting methods. What remains to be seen is how it will impact the way in which new artists are discovered and popularized.
Saturday, October 6, 2007
You've probably heard about the weak dollar. But have you ever tried giving one away?
(Via The Big Picture.)
Saturday, October 6, 2007
Call it one of the unexpected consequences of blogging, but in writing down one's spontaneous thoughts on a wide variety of subjects, one is inevitably confronted from time to time with one's minor inconsistencies that might otherwise have gone unnoticed. (In case it's not immediately obvious, 'one' in this case refers to me.)
How else to explain that a day after recording for posterity the fact that I'm a penny-pinching cheapskate when it comes to buying recorded music, I splurged and dropped five euros for the CD of the gypsy guitarist I mentioned in the same post. It only occurred to me once I'd gotten back home to check out the playlist, at which point I discovered that there were only five songs. Meaning I'd paid a whopping one euro per song, far more than the ten cents I try to stick to.
To make matters worse, the CD was on the whole not only bad, but very bad in a way that is usually only achieved by people who have no business with an instrument in their hands. And this guy is, as I noted, one of the most emotive guitar players I've ever heard. Unfortunately, instead of the gypsy/flamenco ballads he plays in the Metro, four of the five songs on the CD are cheesy Spanish-influenced numbers accompanied by a Casio orchestra. There is one solo guitar track which is good, but hardly reflects the power of his playing.
There's a category of band that can blow the roof off of every place they play but can never quite capture their sound or energy in the studio. Urban Blight, a NYC band from when I was growing up, was one. Soul Asylum, one of the Minneapolis post-punk pioneer outfits, was another. I'm going to file this guy in the same category. I'll keep tossing some change in his jar when I pass by. But I'll be a harder sell for the next CD.
Friday, October 5, 2007
Paying The Fiddler
I was just reflecting the other day in the Metro how my rule of thumb when buying music is to never pay more than 10¢ per song, which generally limits me to those four CD, hundred song compilations that you find in the supermarket here for about 10 euros. Usually it's a generic, The 100 Greatest Salsa Hits-type number (although as I recall, David Bowie's greatest hits came in under-budget as well), and truth be told, I've never really been disappointed. There's almost always a solid amount of familiar classics, with a bunch of b-side surprises to keep things interesting.
And yet, despite this red line when it comes to price per song of recorded music, I'm perfectly willing to toss a Euro or two into the basket of a subway musician for the pleasure of listening to about 40 seconds worth of live music. (Especially this gypsy guitarist who I pass nearly every day here, whose playing is among the most soulfully emotive I've ever heard.)
Be all that as it may, I'd certainly never pay $9,250 per song, as Jammie Thomas was just ordered to do by a federal jury for engaging in illegal file-sharing. That amounts to $220,000 in total, all in order to set an example of what can happen if you try to dance without paying the fiddler. Thomas, who according to her lawyer lives paycheck to paycheck, faces the possibility of seeing her meager earnings garnished by the recording industry for the rest of her life.
This, of course, is akin to getting sentenced to life in prison for stealing a horse in 1912 (ie. the dawn of the automotive era). Because long before Thomas is through paying, the idea of actually buying recorded music will be obsolete.
Thursday, September 20, 2007
House Of Cards
Barry Ritholtz over at The Big Picture provides the key to understanding the real danger of the subprime meltdown:
Alan Greenspan's 1% rates created what looked like a huge Housing boom. But what it really created was a credit boom, which then in turn led to a derivative boom and ultimately structured finance boom.
Thus, the so-called sub-prime crisis was merely the match that ignited a much wider breakdown.
What's also important to keep in mind is that everyone now getting burned by the flames of these high-risk loans was busy cashing in on them while the run lasted. That includes individual buyers (the ones who managed to convert unstable credit positions into solid leverage, anyway), as well as the institutional investors who underwrote the high-risk debt. Kind of like the junk-bond schemes of the 1980's.
As usual in a pyramid scheme, the last folks in are the ones left holding the bag. I'm just wondering if anyone's going to play the Michael Milken role and do some white collar time on this one. Of course, it would be difficult to really pin the blame, given that the entire operation was Federally subsidized.
Tuesday, August 21, 2007
Tin Pan Alley
For those of you interested in the rapid evolution of recorded music sales, there's some news out of France that will probably be a harbinger of things to come worldwide. Neuf Telecom, a telephone/internet service provider, has just inked a deal with Universal Music that will essentially include music downloads in the price of internet access.
The deal is based on a multi-layered access model. For twice the price of an ordinary internet account (30 Euros vs. 15 Euros), the user can download an unlimited amount of any single category of Universal's music catalogue (ie. Pop, Rock, Disco/Funk, etc). For another 5 Euros more per month, they get unlimited access to the entire Universal catalogue.
The mp3 files are inscribed with a Digital Rights Management license that needs to be renewed each month. So they're only readable for as long as you keep your Neuf subscription active.
While it's an interesting proposed solution to the problem of how to make money selling recorded music, there are already a number of problems I can identify right off the bat. The mp3 files come in Windows format, making the deal useless for iPod users. Then there's the question of accessing music catalogues besides Universal's. Obviously, no one's going to duplicate internet subscriptions just to download music. Finally, there's the problem of how to make this kind of deal compatible with some of the licensing deals already struck between the music companies and sites like iTunes.
But I'm not sure any of those are anything more than temporary roadblocks. After all, there was a time when Mac and PC word processing files were incompatible. Even the access being limited to a single company's catalogue can easily be turned into a way to "brand" the ISP.
So this seems like a pretty clever approach. It'll be interesting to see how soon before any American ISP's follow suit.
Thursday, July 26, 2007
Easy As One-Two-Three
You can agree with it or not, but frankly, I'm not sure you can say that Bush ended up with nothing from the US-India civilian nuclear deal. With France inking deals to build reactors right and left, with the Russians already taking care of our good friends in Tehran, and with nuclear power effectively frozen stateside, the India deal gives Bush a bone to throw to the domestic nuclear power industry.
Tuesday, July 24, 2007
Stephon Marbury deserves some credit for his Starbury line of sneakers, which delivers a contemporary sneaker (meaning one that you'd never catch me wearing in a million years but that the kids seem to like) for an affordable $14.95.
There's just one problem. Unless I'm badly mistaken, no matter how good the kicks look, if their principal selling point is how cheap they are, they will ultimately become known as the "poor kid's kicks". As in:
Kid #1: "Oh, dip. You seen Billy's new Starburyz? Them shitz is fly. I guess his daddy still ain't got no job."
Kidz #2, 3, 4 & 5: "Oh, snap. That shitz cold!"
On the other hand, pricing them at $135 in the store, but offering them for $15 through various outreach programs like the PAL, Boys Club and Big Brothers/Big Sisters would have achieved the same goal of getting fashionable sneakers into the hands of needy kids, without the stigmatizing jokes. Another method would be to offer one pair for $135, and a virtually indistinguishable pair for $15.
Still, much as I've never liked the on-court Marbury, the off-court version gets props.
Monday, July 23, 2007
Robbing Peter To Pay Paul
What happens when Sarkozy the Hardliner faces off against Sarkozy the Protectionist? The answer might go a long way towards revealing just how reliable an ally to America's neocon agenda Sarkozy's France will prove to be.
In this corner, Sarkozy the Hardliner, who via the Foreign Ministry announced that France supports tough new UN sanctions against Iran. In this corner, TotalFinaElf, France's quasi-national oil company that just announced it intends to increase its investment in Iran's energy sector.
Granted, Sarkozy doesn't actually control Total. As this brief corporate history points out, the French government divested 4% of its holdings in 1996, leaving it with only a 1% share in the company. But as recently as 1992, it held a 32% interest, and Total qualifies as one of the crown jewels of French industry.
So will Sarkozy have something to say about Total's courtship of Iran's oil mullahs? Stay tuned...
Monday, July 16, 2007
I mentioned yesterday that I spent a good part of this past weekend discussing the current state of the music and recording industry with a friend who's been responsible for signing and producing many of the last decade's most prominent French recording artists. When talking about the changes taking place, he referred to Prince as someone who "got it" very early on.
While many people had written him off because his album sales had suffered badly over the past decade, my friend explained that in fact Prince was busy figuring out exactly how to adapt to the new ways music would be diffused and consumed. As an example, he mentioned that in advance of a two-month stint of London performances, Prince would be including free copies of his new CD, Planet Earth, in the British tabloid, The Mail On Sunday. Here's how Prince responded to the outcry from music retailers:
"It's direct marketing and I don't have to be in the speculation business of the record industry which is going through a lot of tumultuous times right now," he said when asked why he was giving his music away.
A spokesman for the singer told The Mail on Sunday: "Prince's only aim is to get music direct to those who want to hear it."
That's only half true, though. Yes, actual mechanical copies of recorded music will soon serve only as promotional devices. But the publicity they generate will be used to generate income through publishing rights and licensing fees. Companies willing to pay to use a song to create a brand or product identity will eventually subsidize the bulk of the cost of recording and diffusing recorded music.
In other words, selling out will simply become selling. And we will pay for recorded music through the products it inspires us to buy.
Thursday, June 28, 2007
Following the spate of stories this month about Tony Blair shutting down an investigation into BAE's greasing Prince Bandar's palm to the tune of $2 billion, the Justice Department has opened an investigation of its own. Ostensibly, they'll be trying to determine whether the funds that BAE pumped into a Stateside Saudi governmental account were for Bandar's personal use or for his official functions, as he claims.
But the real question is, Why all the attention now? A friend of mine here, a Dutch ex-pat who worked on the original Yamamah contract in the 1980's auditing the construction component, told me that the kickbacks in general, and for Prince Bandar in particular, were common knowledge from the very beginning, to the point of being a running joke in the accounting department. It's also not the first time that investigations into the project were opened and closed. So, again, why an investigation into a business deal between two close allies, and why now?
Friday, April 6, 2007
Iran Attack: Pump & Dump?
That's the first thing that crossed my mind when I saw the headline to this RIA Novosti article: "No U.S. attack on Iran, oil price hits $70 in expectation". RIA Novosti, you might recall, was very active in pushing the April 6 attack rumor, with a steady stream of leaks from unnamed Russian military intelligence sources. Talk about moving the market.
Monday, March 12, 2007
Lil Jon Has Not Left The Building
I'm not sure if there's anything new here. A rapper enjoys some success, and quickly branches out into endorsements and product placement to maximize "auxiliary income". The massive deflation of what qualifies as famous, coupled with the expansion of blanket marketing in general, makes for ubiquitous semi-celebrities hawking everything from perfume to video games to ring tones (a $5 billion market).
Still, it seems like a leap to claim, as does Lil Jon the King of Crunk (wtf?), that, "Once you get popular, you have a brand... You have to market that brand." Not that there wouldn't be something ironic about contemporary rap artists actually becoming brands, given how much the music's early iconography owed to brand consciousness. I'm just not so sure how much that's actually happening.
Certainly in rap as in basketball, the balance of power has shifted between the star and the product manufacturer. Whereas before Adidas or Nike or Converse had a lineup of NBA stars who got a shoe designed and named after them, now certain players or rappers have a lineup of products that represent different facets of their salable image.
But the difference between a brand and a fad, or even a brand and a businessman, is kind of like the famous Potter Stewart definition of pornography: I know it when I see it. Shaq is a brand. 'Melo? Please. Sean Coombs? Arguable, but I'll give it to you. Jay-Z? Sorry.
But it still begs the question, What's new here? Long before there was MTV Cribs, people were lining up to tour Graceland. Twenty years after his death, Elvis the King of Rock 'n Roll is still a brand. Lil Jon the King of Crunk? Nah, I don't think so.
Monday, March 12, 2007
Bush's False Market Rally
Here's an interesting point from a comment thread on Barry Ritholz's business and market blog, The Big Picture. The post in question shows a graph of the Dow Jones Industrial Average divided by the price of gold. While the two track pretty closely for more than a decade, they diverge sharply beginning in 2003, when the ratio begins to fall dramatically and steadily (ie. a unit of DJIA buys less and less gold). Barry wondered whether anyone had a reasonable explanation for the divergence, and one commenter proposed the following:
It means that the value of the Dow has gone up when priced in dollars, but down when priced in gold. It's a currency question, implying that the market rally is just US dollar inflation. What the divergence is saying is that the price of gold is going up and the price of dollars is going down. We get lazy and forget that whenever you look at a "regular" chart of the Dow, it compares two variables: Dow and U.S. dollars.
Chart the Dow in dollars and we have a multi-year rally.
Chart the Dow in euros and we're pretty much flat.
Chart the Dow in gold and we've been falling for a while now.
The chart implies then that the US stock market rally is an illusion, we just *think* the markets are going up, but really it's just the currency going down.
I'm not enough of a financial wiz to offer any analysis, but it struck me as something to consider.†
Sunday, March 11, 2007
Could You Take Cheney With You?
Call it a marketing-driven strategy to realign their corporate structure with their brand identity. Or call it a logistics-driven admission that even in this age of rapid communication, nothing makes up for geographical proximity to their board of directors. Or else call it a case of truth at long last revealed. Call it what you will, but Halliburton just announced that they'll be moving their corporate headquarters to Dubai in the United Arab Emirates.
Sunday, March 4, 2007
Another Success For Market Deregulation
It's become something of a common wisdom that the housing market is being threatened with collapse by the proliferation of subprime mortgages. What's less commonly understood is how these mortgages have come to make up 20-25% of all mortgages currently approved. Here's the key graf from a Christian Science Monitor piece on the problem:
Deregulation has allowed the mortgage industry to create products like the no-down-payment mortgage and the even riskier "no documentation" loan where all borrowers have to do is state their income without providing proof of their ability to repay the loan. (Emphasis added.)
In the face of rising foreclosures and stormclouds on the horizon, Congress is already vetting proposals for more active regulation, and Fannie Mae is busy putting together "rescue" products to help bail strapped homeowners out before they default.
Trouble is, the Federal Trade Commission was aware of abuses in the subprime lending market as far back as 1998, as this report appropriately titled "Home Equity Lending Abuses in the Subprime Mortgage Industry" shows. The only difference being that back then, the major abuses were targeted towards minorities and the elderly, whereas now they're generalized.
Funny how conservatives are so keen to regulate who gets married, but couldn't care less about who gets screwed.
Saturday, March 3, 2007
Radioactive Supply & Demand
One of the consequences of skyrocketing gas & oil prices, political and geological uncertainties surrounding existing supplies, and growing concerns about greenhouse gas-producing emissions has been a dramatic increase in the number of uranium-powered nuclear reactors either under construction or already brought online in the past decade. Reactors that were fed by existing stockpiles of uranium leftover from nuclear power's 1970's glory days. But now that those supplies have dwindled, there's been a global run on uranium. So much so that the price has jumped from roughly $10/pound ten years ago to $85/pound today. And with yearly demand far outpacing production, the pressure on price doesn't look like it will let up anytime soon.
Uranium. It's the new oil.
Monday, February 19, 2007
When Bigger Is Not Better
If you want a metaphor for the challenges facing further European political integration, look no further than the Airbus A380. Airbus is the pan-European manufacturing arm of EADS (the European Aeronautic Defense and Space company), with facilities in France, Germany, Spain and England. It's the object of no small amount of European pride, and its rivalry with Boeing is something of a spectator sport over here.
Billed as the largest passenger airplane ever built, the A380 was destined to be the feather in Airbus' increasingly decorated cap. Its initial test-flights in late 2005 and 2006 impressed, and orders streamed in, eventually totalling 166 airplanes (pretty healthy sales for a $300 million bird). Major buyers include Emirates Airlines (43), Lufthansa (15), Qantas (20), and even UPS, which contracted to buy 10 units of the freight model.
In the meantime, in June 2005, before the plane was even test-flown, Airbus announced a six-month production delay. This was followed by another six-month delay announced in June 2006, followed by another delay accompanied by a delivery shedule re-structuring announced in October 2006.
The cause of the problem was ostensibly the cabin wiring, but insiders blamed a power struggle between German and French management factions resulting in poor communication throughout the company.
Now, with production delays of two years, orders in limbo, $6.6 billion in lost projected revenue, and stock value having taken a hit, EADS was supposed to announce a re-structuring plan to cut 10,000 jobs (20% of their workforce) tomorrow. An announcement which was postponed because none of the four countries involved can agree on where to make the cuts.
Which is why if you're waiting to see what an integrated EU foreign policy would look like, or a non-NATO European military force, I've got one piece of advice for you: Don't hold your breath.
Thursday, February 15, 2007
Winning Friends & Influencing People
Ever wonder what China's doing with its $1 trillion-plus foreign exchange reserves? Well, they're using part of the loot, as this article explains, to buy influence with resource-rich countries through generous foreign aid packages. Aid packages that undercut World Bank and other development organizations by offering more money, with less oversight, to countries where public funds have a tendency to end up in Swiss bank accounts. These are the kinds of deals that, if Tony Soprano were arranging them, would be called graft. And as with all graft schemes, the folks who suffer the most are the ones who might otherwise have ended up with a functioning railroad system, or an environmentally-friendly power grid, but instead wind up with nothing at all, if not worse. Oh, and for what it's worth, our trade deficit with China for 2006 was a little over $232 billion. How do you say, "Don't spend it all in one place," in Chinese?
Tuesday, February 13, 2007
Pop... Pop, pop... Pop... (From the LA Times):
For Hennigan, the search for a deal restarts every 10 days, when he gets a packet from United Title Co.
Drawn from public data, it has the names, addresses and loan information for people in Riverside County who are in default, which usually means about three months behind. They generally have another three months before the bank seizes the house.
"They get sold these houses on the idea that they can handle the mortgage, and then they can't," Hennigan said in his cubicle early one afternoon. He glanced at the sheets and reeled off some of the amounts due: $13,708 … $5,209 … $12,776 … $15,149.
When he combs through the listings, Hennigan ignores anyone who owes more on a home than it is worth. These folks are in too much trouble to be saved. What he's looking for are owners who, after closing costs and a 6% agent's commission (half to Hennigan, half to the buyer's agent), will walk away with their credit rating intact and some cash to start anew. This will give them an incentive to deal.
He likes to pay his unannounced visits late in the afternoon, betting that the wife will be home and the husband not. "I can't remember the last time a man said, 'Let's sit down and talk,' " Hennigan said.
Coming along on this afternoon's prospecting trip is Jerald Becerra, a former body-shop estimator for insurance companies who became a full-time agent in August. "I'll stay in the car, keep the engine running," he says. "Just in case someone comes out with a shotgun."