Delusions of Grandeur: The Repercussions of Fyre Festival

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By Bonnie Wong

Two years ago New Jersey-born, start up entrepreneur and college dropout Billy McFarland created the most “ill-planned music event that never was.” But to label it as just that is an understatement. The music festival, which was scheduled to take place over two weeks in late April 2017 on a private Bahamian island called the Great Exuma, turned into a nightmare for over 8,000 people who had paid anywhere between $1,000 to $100,000 to attend only for it to fall grossly short of expectations.

Fyre Festival was advertised as an ultra-luxurious music festival getaway for the elite

In October 2018, McFarland pleaded guilty to fraud and was sentenced to six years in prison and ordered to forfeit $26 million, pleading guilty to wire-fraud charges. Fyre Festival co-founder and rapper Ja Rule was dismissed last month from the $100 million class action lawsuit, according to an article by the New York Times. 

But the real question is how did Fyre Festival, like other promises made by grifters, continue to operate even when others both the inside and outside suspected they were destined to fail? Furthermore, what are the implications of large-scale fraud on the overall economy?

Instead of the private, custom Boeing 737 flight, luxurious accommodations and promised VIP experience, Fyre Festival guests were left waiting in the airport, given bread and cheese in Styrofoam containers to eat and left to sleep in makeshift tents scattered around the island with no cellular service or plumbing. Major A-list artists who were scheduled to perform dropped out in the weeks prior to the music festival (there turned out to be no musical acts), businesses who were contracted to provide their services for the event were never paid and guests live-tweeted their nightmare experience for the rest of the world to see.

In reality, attendees stayed in makeshift tents with no electricity or running water

The 2019 Hulu documentary titled “Fyre Fraud” produced by Jenner Furst and Julia Willoughby Nason opens with a quote by Calvin Wells, venture capitalist who originally exposed the Fyre Festival scam on Twitter. 

“You see these wonderful, beautiful people in places that you’re not, doing things you can’t afford to do, it really didn’t matter that these guys may be waifs, trustafarians, and this guy hosting this party was an obvious fraud, because many of these influencers are people you follow, that you aspire to be and also this rapper, his music you listen to,” Wells said in the documentary. “So when an opportunity presents itself to get out of your parents’ basement and go be part of something that’s culturally relevant, you’re going to absolutely jump at that.”

In America alone, the music festival industry has become a lucrative market. Nielsen Music estimates about 23 percent of the U.S. population has attended a live music festival in 2018. The majority of attendees are millennials, 57 percent of which now say they prioritize traveling and seeing the world over ever owning a home, according to a study by Deloitte.

Music festivals are attractive for artists and attendees alike. The business model is more profitable than ever before. Instead of conducting large scale production tours that take days and require setting up and tearing down at each location, artists simply get paid to fly to the venue, perform and then fly back home all while earning a considerable amount for their performance. Since 1999, 50 percent of U.S. recorded music sales have dropped, according to Vox. To make up for the loss in revenue, live concerts, shows and merchandise compensated for 40 percent of the loss between 1999 and 2009, originally grossing $1.5 billion and then peaking at $4.6 billion. In recent years, streaming services have deflated album sales further, Vox states.

On the consumer end, attendees can enjoy day or weekend-long events with their favorite artists in one place and have something to post on Instagram from the ordeal. For attendees, it’s all about the experience a music festival can provide, fueled by aggressive social media marketing that helps the consumer envision what their life could look like and playing into overall fears of FOMO—fear of missing out. 

Jerry Media, who was charged with promoting the festival spoke of their original strategy of marketing Fyre in the Hulu documentary.
“My whole idea was like stop the internet and so to do that you kind of have to figure out a way, in this time of advertising, to stop somebody’s who’s scrolling at speeds that are less than, like, a second,” Oren Aks, ex-Jerry Media employee said.

Their social media strategy did stop consumers in their tracks. Through their heavy promotion, Fyre Festival easily became a shareable experience through both online and word-of-mouth advertising.

And it’s not just major cities such as Los Angeles and New York that host music festivals anymore. Smaller towns, looking to benefit from the influx of travelers attempt to contract with the hottest artists who hold the promise of bringing in economic revenue. In 2012, the Firefly Music festival hosted in Dover, Delaware saw approximately 30,000 attendees daily and made upwards of $9 million in ticket sales and contributed over $12 million overall into the city’s local economy, in a report by LA Weekly. 

“We’re living in an era in which you can convince millions of people to do anything just on marketing alone,” Wells said.

But to host a music festival, especially one of that scale, takes a lot of planning and effort, two things McFarland did not forsee. According to an article by Vox, instead of planning out the insurance, predicting weather forecasts or even creating a budget sheet, McFarland focused on advertising his idea through paying celebrities like Kylie Jenner and Bella Hadid and then shooting a promotional video centered around his life (and then refusing to pay the company he hired). 

“McFarland induced investors to entrust him with tens of millions of dollars by fraudulently inflating key operational, financial metrics and successes of his companies, as well as his own personal success – including by giving investors a doctored brokerage account statement purporting to show personal stock holdings of over $2.5 million when, in reality, the account held shares worth under $1,500,” read a press release by the U.S. Securities and Exchange Commission.

Using his companies Fyre Media, Inc., Fyre Festival LLC and Magnises, Inc., McFarland conned over 100 investors into lending him $27.4 million, according to the press release. The now defunct Fyre Media and its partner companies have little information on their financial reports other that what was reported by the news outlets in their investigations. 

In a leaked Fyre Festival investor pitch deck, slides show the festival being promoted as one that would “ignite energy and power” among its attendees and even had a five year plan to host its future festivals on different islands McFarland planned to purchase. While the pitch claimed to Fyre Media owned $8.4 million worth of land and had partnerships with companies such as Snapchat, in reality none of their claims were true. Perhaps most telling, their slide titled “Financials” simply read “Please see appendix.” 

Music festivals, in all their glory and splendor, have also had a notorious history for being grand failures. Woodstock, TomorrowWorld, Governors Ball, Karoondinha Festival and Panorama Festival all faced similar endings with false promises that couldn’t deliver due to poor planning. 

Even more telling, beyond the attendees who were conned into giving up big bucks, those who were contracted to do business with Fyre ended up scorched as well. Local islanders who built infrastructure for the festival were not paid for their time and labor. In particular, one business owner MaryAnn Rolles spoke out in the Netflix documentary that was made about the fraudulent festival saying that she spent $50,000 of her own savings and was owed $134,000 by festival organizers for her restaurant catering services. Many other locals have not been paid for their services either and are unsure if and when they will receive compensation.

“The owners/operators/agents of this festival represented they would perform a service that would require the services of local persona and businesses. As with any economic opportunity, locals … simply expected to be paid based on the representations made,” Pedro Rolle, Exuma Chamber of Commerce president, said in an interview with Thrillist. 

Traditionally, music festivals have the ability to create temporary jobs for the host communities. The 2012 Coachella and Stagecoach music festivals generated over 3,000 temporary jobs alone in Indio, California. The original Fyre Festival promotional video to investors even outlined “the creation of hundreds of jobs for Bahamians” (perhaps they left out the payment part). In the Netflix documentary “Fyre: The Greatest Party That Never Was” cites that about a quarter of a million dollars are still owed to laborers. 

When dreams are built on empty promises, money stolen from investors and hopeful kids, and jobs created by plans that never actually succeed, the results can be extremely detrimental. Currently while serving his 6 year sentence, McFarland apparently has plans of publishing a memoir titled “Promythus: The God of Fyre,” handwriting it on over 800 pieces of paper and mailing it to his girlfriend to type up, according to New York magazine. He says he plans to use the profits from his book to pay off the $26 million in restitution. It is also reported that he and Ja Rule plan to have another Fyre Festival in the future. For con artists alike with immense egos, the legacy these grifters leave is also a key component in their minds. It doesn’t matter who they hurt in the process, in their minds they can do no wrong. McFarland has likened his novel to that of Jordan Belfort’s, who was sentenced to jail for manipulation of stocks and wrote a memoir that became the movie “The Wolf of Wall Street.” 

As if he doesn’t believe enough damage has been done already, the gifted grifter has made it clear he’ll be back and better than ever. 

Sources:

The New York Times: In Wreckage of the Fyre Festival, Fury, Lawsuits and an Inquiry
Nielsen 2018 U.S. Music 360 Report
Deloitte 2019 Global Millennial Survey
Vox: “Why are so many music festivals total disasters?”
LA Weekly: The economics of music festivals: who’s getting rich, who’s going broke?
U.S. Securities and Exchange Commission: SEC Charges Failed Fyre Festival Founder and Others With $27.4 Million Offering Fraud
Business Insider: This leaked Fyre Festival pitch deck shows how Billy McFarland was able to secure millions for the most overhyped festival in history
Thrillist: How Great Exuma’s Locals Are Managing After Fyre Fest, ‘The Greatest Party That Never Happened’
New York Magazine: This Is Billy McFarland’s Fyre Festival Comeback Plan

Retail Apocalypse or Retail Evolution?: How Changing Property Zoning Can Give Brick-and-Mortars a Second Chance

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Headlines in the past two years have highlighted a growing concern for the economic hardship caused by the “retail apocalypse”. The term itself covers the story of thousands of big box retail stores shuttering its brick-and-mortar doors to downsize or filing for bankruptcy and liquidating its assets as a mark of extreme losses and business failure.  

According to research firm CoStar, 10,600 retail outlets have closed in 2019 whereas 3,017 opened.  In 2018, 5,400 stores closed and 3,200 opened. Among those closing shop included Charlotte Ruse, Payless Shoes, Forever 21, Sears, Toys R Us, and JC Penny—all which were previously known as common marketplace staples for most shopping centers in the U.S..  

Many blame this phenomenon on the rise of e-commerce driving customers away from physical retail. As physical retailers suffer losses, they are forced to either pivot or close shop. While it is common for the retail market to swing its volatile head in either changing consumer habits or demands, the accelerated rate of change caused by the incumbent online shopping marketplace has left a graveyard of businesses in its wake. 

To gauge a better understanding of ‘what went wrong’ in its failings and to look at ‘what has gone right’ for the surviving businesses, it is best to begin with a stakeholder dependent on the brick-and-mortars themselves: commercial real estate owners and investors. 

Because commercial real estate is tasked with managing the environment and land use of all retail properties, owners and investor’s sole responsibility is to identify and adapt to changes in the market to maximize foot traffic in order to charge the highest rent. Because of this, their troubles actually began a decade ago, when the financial crisis hit its peak and consumer spending was at an all-time low. 

The Great Recession was the first wave to shake retailers as they saw the average storefront struggle while discount big box stores like Walmart and the Dollar General Store grew.  Malls were hit the hardest as foot traffic began to dwindle, affecting all stores within its multiplex walls.  

As the economy began to recover in the following years, online shopping simultaneously became more efficient and widely adopted by the general public. This change in the market’s habits contributed to the continued losses of these established brick-and-mortars, particularly in apparel and general goods. In an era where 70 percent of shopping centers comprised of apparel retailers, traditional malls and plazas were to face serious losses if they did not act promptly. Many were already feeling the effects of this disruption.

 On average, shopping mall property values declined 13 percent, according to Green Street Advisors, a California-based research firm, and is the only sector in the real estate industry to have lost value over the past twelve months.

For long-time owners, such as the private equity firm Walton Street Capital, such a high devaluation leads to large losses. The firm purchased its Poplar-Prairie Stone Crossing shopping center in 2014 for $46.6 million and has recently sold the same property for $32.3 million this year—a 31 percent devaluation.

Part of this diminishing value lies in the fact that the primary foot traffic for these malls have always relied on anchor stores: big box retailers with a high known demand in the market. Many of these anchor stores were some of the staple brands mentioned before: Sears, JC Penny, and Forever 21, to name a few. 

As these stores shutter and the overall number of opportune customers reduce, the remaining tenants in a shopping complex either suffer to the point of leaving themselves or negotiate for lower rental rates, depressing the profitability of the mall and driving down its valuation in the process. 

Losses of big box retailers also mean an absence of otherwise highly profitable lots festering in the dark as other retailers of the same size appear to be in similar troubled waters and therefore pose the same risk of failure. 

In the American Dream Mall in New Jersey, Lord and Taylor was slated to open as a major retailer for the complex. Due to poor finances, the company pulled out from their lease. The replacement for the chain, Barney’s New York, ultimately filed for bankruptcy several months after and had to abandon the same lease as well. With this pattern, vacancy rates remain high and compound over time.

This increasing risk both affects the value of the properties as well as presents an increasing risk for investors, which has led many to hold out on commercial real estate investment in recent years, even for shopping centers that are relatively full.  Due to lack of access to capital coupled with diminished returns, retail delinquency rates are up 6 percent in the past four years, which is twice the average for all other forms of real estate.  

Rate of delinquency on loans for commercial real-estate properties in 2015-2019

Property owners are pushing to get connected to investors as a means of recovery. Many are looking to mortgage-backed securities, called CMBSs. These securities spread the risk for lending to commercial properties, though many investors are not even willing to approach that much. Consequently, only “trophy malls,” high-end shopping centers with strong financials to ensure trust, are able to gain access to investment capital. Those comprising of the middle- or low-tier shopping districts are thus left to fester or are abandoned. 

Those who are able to collect a sizable investment allocate their funds in a variety of ways, each with its degree of success dependent on its location and demographics. The general consensus, however, has been to replace those who are competing with online retail with unique or specialized tenants. 

1. MORE EXPERIENTIAL BUSINESSES 

A majority of shopping malls across the U.S. have approached this first by increasing the ratio of restaurants and entertainment on their property. According to Harvey Ahitow, general manager of the North Riverside Park Mall in Chicago, the current average proportion of apparel stores to the entertainment-restaurant mix in shopping malls is about fifty-fifty, in comparison to the seventy-thirty of a few years prior. 

This emphasis on entertainment and restaurants is part of a growing focus on experiential shopping over shopping for general goods. If the shopping experience can provide an aspect that is unable to be generated through online simulation or information, then it is more viable in this new post-retail-apocalypse context. 

Some of these businesses even outfit the place of anchor stores, including kid’s recreation facilities, gyms, and even grocery stores. Niche interests are also encouraged over general goods as well, including specialty stationary stores or other novelty stores that will bring in customer base on their own.

Inside the American Dream Mall, NJ: Nickelodeon-themed rollercoasters and attractions take up the bulk of the entertainment options in the mall itself.

Some shopping centers are looking to expand the entertainment value of their mall to the extent of an amusement park to attract both locals and tourists to their property. The newly-opened American Dream Mallis the second-largest in the U.S., located in New Jersey. On top of containing an array of staple brands, the mall also boasts a bunny field, an aviary, a doggy day care, and a luxury lounge. The development also included the construction of several hotels beside the mall to add convenience for visitors and tourists. 

Triple Five, the company behind the largest malls in North America, including the American Dream Mall, is looking to establish American Dream as a “community hub”, modeled heavily off of its two other malls, the West Edmonton Mall in Alberta, Canada and the Mall of America in Bloomington, Minnesota.  

2. SMALLER STOREFRONTS

Shopping centers are also looking to diversify their portfolio by quantity. Since previously-established anchor stores no longer carry the same weight in terms of bringing in foot traffic, multiple smaller retailers ultimately can bring in the same amount of their own customer bases. At the same time, more retailers spreads the risk of loss if one fails. Smaller tenants are also easier to replace.

3. MIXED USE DEVELOPMENT

Some shopping centers decide to abandon the mall format altogether and adopt a form of mixed-use development. The architecture of this format includes commercial real estate on the ground floor and residential real estate on the upper floors. This mix is conducive to urban settings and is a prime way to diversify the property’s portfolio in a manner that isn’t reliant solely on the whims of the retail market

At the same time, the convenient accessibility of both components to the property also give each an added value proposition. Apartment complexes can be charged higher rent due to convenient access to shops, which often includes access to a grocery store in the complex. Retailers also are given easy access to a customer base and therefore can be charged higher rent because of the increasing exposure to and producing revenue from that customer base. 

These development projects adapt malls and plazas into strip commercial districts, which have been more capable of recovering from both the recession and the retail apocalypse. According to Costar, strip retail center values are growing 2 percent in the 2018-2019 year, which is a stark contrast to the 13 percent decrease in mall property values. 

4. EDUCATION APPROPRIATION 

Shopping centers themselves are buildings with size specifications that can fit the needs of many different services outside of business operation as well. For Austin Community College, the Highland Mall was a perfect venue for a state-of the art lab space.  The Hickory Hollow Mall received a similar treatment when Nashville State Community College decided to renovate its space into a professional hockey rink and a school-sponsored ethnic market filled with immigrant businesses. 

5. ENVIRONMENTAL RECLAMATION

Development of commercial spaces did not go without its environmental costs either. As suffering low-end malls see their end-of-life, government initiatives buy up land of parking lots and structures to repurpose into recreational parks or nature conservation regions, such as the Northgate Mall salmon stream in Meridien, Connecticut. 

This decision could imply an admittance of failure in the commercial structure itself. This does not mean that the value derived from a park is no less than the value of a commercial property. 

THE OUTCOME

With these pivots in mind, it is more difficult to see the retail market failures as an “apocalypse” intent on destroying our physical retail economy, but rather a change in the guard of the major players in the industry based on which companies were able to adapt to the shift in customer wants and utilize new technologies to compete with new value propositions created by the emergence of the online shopping space. 

What exemplifies this distinction is in the fact that many of the online entrants in the retail space are beginning to open their own brick-and-mortars themselves. Native internet companies such as Warby Parker, Glossier, and even Amazon itself have set up storefronts nationwide.

It should also be noted that new anchor stores have emerged from the rubble of the fallen. High-end apparel such as Nordstrom and Lululemon as well as specialty goods such as Apple and Peloton have since replaced major general goods retailers and drive in a majority foot traffic to shopping districts. 

What distinguishes these new major players from companSears is therefore not in the replacement of physical stores with online shopping and direct-to-consumer shipping, but rather the adoption of technologies that enhance value proposition of basic goods or distribute increasingly valuable specialty goods. Those who are able to survive in the landscape are those who stand out either in price or in specialty.

However, some of these value propositions come at a cost. Amazon, the dominant hand in the e-commerce space, has a prolifically deplorable record for workplace abuses and underpaying its warehouse personnel, which have contributed to its cheap and highly efficient shipping systems. It also has a history of extorting its vendors.  Since these value propositions come at an unfair cost, the possibility for other businesses to challenge the behemoth ultimately diminish into a fraction of the typical market environment exhibited just a decade prior. It is through this that we may see more graveyards appear as retailers existing in the same space of general goods, apparel, or even furniture struggle as underdogs. In this new landscape, it is either “be better” or “fail with the rest” with no room for averages or just getting by.   

The Economic Incentive for Studios to Promote Movies for the Oscars and The Cutthroat Battle of Obtaining Distribution Rights!

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The battle to obtain distribution rights is the most competitive it has ever been with the introduction of streaming services. It will only continue to get bigger.

A picture of the Oscar logo at the 2019 award show

Introduction

Since the establishment of the renowned “Best Picture” Oscar award in 1929, film studios have campaigned for their movie to compete for the award by spending millions of dollars each year to promote its candidacy. An Oscar nomination or win does not always correlate with further box office success, but studios continue to promote their films even with the risk involved. An Oscar “bump” has been known as the winner or nominee within the “Best Picture” category gaining more viewership through box office success following the Oscars award show. There hasn’t been more than a $7 million “bump” at the box office since the silent film “The Artist” won the award in 2012. Recent articles have stated that the economy and film industry are changing due to streaming service giants obtaining rights to critically acclaimed films. Now, the Oscar “bump” has to include viewing on streaming services to go along with box office success. So why do studios continue to spend millions if the Oscar “bump” does not directly relate to box office success? Because now these critically acclaimed films are being viewed on streaming services rather than in the theatre. Studios such as Netflix, Amazon, A24, Fox, Columbia Pictures(owned by Sony) know that to get the most viewers possible(and more importantly the most prestige and money), they have to continue to obtain rights to critically acclaimed films. Most recently, Netflix saw an increase in media attention due to having rights to four out of the five films nominated in the “Best Picture Drama” category for the Golden Globe awards. Netflix is now considered a quality film distribution company, and the Golden Globe nominations will surely get Netflix more critically acclaimed films and exclusive partnership deals. Netflix has already signed a contract with director Martin Scorsese to have his work distributed exclusively on the platform. In a crowded streaming service platform race, Netflix is hoping to prevail through not only owning the most content, but more importantly the most quality content. Gaining access to high quality films for a streaming giant could help them prevail in the streaming service war. Netflix’s recent awards season success has put even more pressure on other studios in the competition, especially independent film studios. Since Netflix is trying to create a monopoly to limit other studios(and other streaming services) from gaining rights and praise for critically acclaimed films. Even A24, a popular studio giant, is partnering with Netflix to share rights to critically acclaimed film,“Uncut Gems”. Netflix is credited as the international distributor, and A24 is credited as the United States distributor. Sharing rights to critically acclaimed films may also be a trend we continue to see as having any distribution will boost revenue and prestige. The economic incentive is simple: The more nominations and awards won by a studio, the more critically acclaimed movies the studio will obtain which inevitably makes them more money. The hard part is actually implementing a strategy to make that happen with longevity. The crowded streaming service war will turn into the streaming services battling for critically acclaimed films, which inevitably will lend them partnerships and more exclusive content. It will also push big studios like Columbia Pictures(Sony) and Fox(Disney) to be limited in gaining rights, or have produce their own content and/or partner with other studios to get a share of the profit and prestige.

Independent Studios have been pushed out and even household names are losing rights to streaming giants such as Netflix and Amazon.

Netflix’s logo
A24’s logo

Streaming giants Netflix and Amazon have tried to make the jump in attaining high quality films to compete with big theatrical-partnered film studios. Netflix took a big loss at the awards last year, when they spent $15 million promoting “Roma”, but the film got upset by “Greenbook” in the “Best Picture” category.  This season, Netflix stocked up by obtaining and heavily promoting four Oscar candidate worthy films and they all seem to be getting tons of praise. Netfllix and Amazon are still competing against Columbia, Fox, and A24, unless they have a partnership with those studios to distribute the picture. I mentioned before that the competition is so cutthroat and competitive that A24 had to partner with Netflix to gain rights to Oscar contender “Uncut Gems”. Obviously, studios would want to promote and distribute a critically acclaimed film alone, but if only twenty films in a given year (usually) have a chance at an Oscar nomination, then it is inevitable that studios will partner with each other (including streaming services) to gain credibility if that film is in fact nominated. Together, these studios can spend an absurd amount of money promoting “Uncut Gems”. Columbia, Warner Bros, and Fox Searchlight are household names in the industry with a track record of multiple net picture wins each, so they have enormous amounts of money to spend each year on attaining rights and promoting critically acclaimed films. With the competition heating up between Warner Bros, A24, Columbia, Fox, and Netflix and Amazon, there is little room for independent studios to make a name and join this list in the competition. Especially with Netflix having four of five “Best Picture Drama” nods at the Golden Globes, and probably three to four of the seven to ten Oscar nominations for “Best Picture” when they are revealed, it is leaving little room for even the big studios like Fox, Columbia, Paramount…etc. However, it is not impossible for an independent studio to enter the competition as A24, a once small, independent company, now film studio giant, hit the lottery after their film Moonlight won “Best Picture” in 2017. Moonlight catapulted A24 into a powerful distribution studio and since 2017, not only has A24 received the rights to huge box office successes such as “Hereditary” and “The Lighthouse”, but also critically acclaimed films that are supposed to be up for multiple Oscar nominations such as “Waves”, “Uncut Gems”, and”The Farewell. Moonlight did not have a huge “Oscar Bump” with box office success or streaming services until late 2018 when it appeared on Netflix. Although Moonlight did not garner an extreme amount of box office success or streaming service recognition immediately after its “Best Picture” win, it catapulted the smaller/independent studio in A24 to a household name that will continue to gain rights to critically acclaimed films in the competitive field for years to come. However, in 2017, Netflix had 0 nominations for the Oscars and Columbia, Fox Searchlight, and Universal Pictures combined for 0 nominations. Paramount Pictures and Lionsgate were the only two big studios that got Oscar nominations for the “Best Picture” category. The rest of the films were distributed by independent film companies. Even Amazon got its first “Best Picture” nod in “Manchester by the Sea” that year, but more importantly, independent studios had more of a chance in 2017. At the 2019 Oscars, only one independent studio got a best picture nomination as Fox, Universal, Netflix, Columbia, and the other big studios received the other “Best Picture” nominations. Since Netflix is expected to receive 35 percent of “Best Picture” nominations for the upcoming 2020 Oscars, and they have already purchased big name films to distribute for next year, many people are worried that the streaming giant could be creating a monopoly. Gaining more and more critically acclaimed films would boost Netflix’s stock, viewers, revenue and help them with their enormous amount of debt. The better argument now is that big studios have a monopoly in the industry and independent studios’ Oscar nominations are down each year. It will be interesting to see in the coming years if this gaining rights to critically acclaimed Oscar films continues to be dominated by Netflix and other big names as a monopoly, or if more independent companies make a surge and make it more competitive. If Netflix is spending $10’s of millions per year to promote each of their movies, the bigger question is how an independent studio who has nowhere near the money or prestige to buy rights or promote the film, is going to compete with them. 

Marriage Story, one of four Netflix films expected to receive an Oscar nomination for Best Picture
The Irishman, another one of the critically acclaimed films from Netflix that is expected to get an Oscar nomination for “Best Picture”


The competition is heating up!

   Since independent studios have odds against them with bigger studios continuing to expand and take advantage of the competition, the competition right now is streaming services (Netflix, Amazon) vs. household studio names (Fox, Paramount). This year, according to GoldDerby.com(the most valued prediction website for award and talent shows), household studios Universal, Paramount, and Columbia are predicted to receive zero Oscar nominations for the “Best Picture” category, while Netflix is expected to receive four. Amazon bought a numerous amount of critically acclaimed material, hopeful to make a splash in this years nominations, since they haven’t had a Best Picture nominee since 2016. Unfortunately for Amazon, the two films they promoted the most from their batch of critically acclaimed material in 2019: “Honey Boy” and “The Report”, have been ruled out of Oscar territory according to many experts including GoldDerby.com. Even though Netflix is in tons of debt, it’s promotions of critically acclaimed films for this upcoming Oscar season has payed them dividends as they will have the most Oscar nominations of any other studio. Hulu did not even try to compete in this years award season because they are owned by Disney, which is working on multiple original films(to go along with the box office giant Marvel films) to put on Hulu and Disney Plus in the next couple of years to compete in the already stacked field. It also helps that Disney owns Fox, and of Colombia, Fox, Paramount, and Universal, Fox is the only one expected to receive an Oscar nomination this year in the “Best Picture” category.  Furthermore, Amazon being shut out and Hulu and Disney Plus waiting on their original films, Netflix(even with their debt) has won the streaming service race for this year. However, all of the streaming services know that a strategy to win the streaming service war in the long run is to monopolize quality content to the best of their ability or just buy everything(like Disney is trying to do). Disney has bought Fox and Marvel Fox Searchlight promoting high quality films and Marvel promoting box office successes), CBS owns Paramount Pictures and is going to introduce a new streaming service soon, and Sony owns Columbia Pictures and is trying to buy A24(which is still independently owned and private). Even though Netflix has won this award season so far, other streaming services(Disney Plus and Amazon) will continue to partner with other companies and studios(or again in Disney’s case just buy them) to gain as much quality content as possible in the near future. It does not help Netflix that they do not have a parent company supporting them, considering Fox Searchlight, Hulu, Columbia, Warner Bros, and Paramount, all have parent companies supporting them. Amazon is so rich off of their e-commerce and shipping business that they can support their own streaming service and do not need a parent company to continue to spend money on obtaining and promoting films. Even though Netflix won not only the streaming service battle, but the studio distribution battle as well this year, it remains to be seen if they can keep it up, considering more streaming services and studios have partnerships and are buying more exclusive content to compete. 

The Columbia Pictures logo, which is owned by Sony
Fox Searchlight Pictures Logo, owned by Disney

Paramount Pictures, owned by ViacomCBS

Disney Plus logo

Conclusion!

In conclusion, the economic incentive for studios to promote critically acclaimed films is to obtain rights to even more critically acclaimed films that will continue to make them money. Whether they distribute the films themselves(Columbia and Fox), or share the films(A24 with Netflix), getting as much high quality content as possible within a year is always the goal for studios. Considering only roughly twenty films have a shot at receiving a “Best Picture” nomination, studios scramble throughout the year to get distribution rights to those films. With the economy and film industry shifting to streaming services, competitors such as Netflix and Amazon have entered the already loaded race. Netflix has gained so much Oscar praise and nominations in so little time that other studios are fearing they will have trouble competing with Netflix. Independent studios have virtually no leverage anymore in obtaining critically acclaimed films since they do not have the money that Netflix has to by and promote high quality material. As Disney Plus, HBO Max(owned by Warnermedia), and possibly even Apple Plus enter the race to obtain critically acclaimed films, the pie will only get smaller. Obtaining distribution rights to critically acclaimed films may be the way to win the streaming service war. Even though Netflix has made a comeback (after spending $10 million promoting “Roma” for it not to win) with highly praised Oscar material this year, the competition will only get harder for them with Disney owning Fox and Disney Plus, which will spend enormous amounts of money in the next couple of years to obtain rights to critically acclaimed films. Not to mention that Sony, Universal, and Warner Bros will continue to partner with different streaming services and companies to gain critically acclaimed material in the years to come as well. Since the economy and film industry will continue to adapt to the streaming services and content war, it will be interesting to see if independent films can get back into the competition(A24). It will also be interesting to see if big studios can make a push to obtain rights to critically acclaimed films over the new competitor streaming services, or if the streaming services will take over completely and create a monopolizing business. Netflix has won the streaming service and content war in the short term(2019/early 2020), but it remains to be seen who will win in the long term and the effects it may have on the film industry and the economy. 

The Two Popes, another Netflix film expected to be nominated for “Best Picture” at the Oscars.

Sources:

  1. GoldDerby.com 
  2. CNBC.com – https://www.cnbc.com/2019/12/09/netflix-dominates-golden-globes-nominations-with-17-nods.html
  3. Indiewire- https://www.indiewire.com/2019/06/movie-exhibition-distribution-future-1202152832/
  4. The Verge- https://www.theverge.com/streaming-wars
  5. CNBC.com – https://www.cnbc.com/2019/11/16/disney-plus-streaming-wars-just-warming-up.html
  6. Time- https://time.com/5736490/streaming-wars-disney-plus-apple-tv/
  7. New York Times – https://www.nytimes.com/2019/01/17/business/media/paramount-pictures.html
  8. The Atlantic- https://www.theatlantic.com/entertainment/archive/2019/03/disney-fox-merger-and-future-hollywood/585481/
  9. The Observer- https://observer.com/2019/11/disney-fox-apple-netflix-media-merger-acquisition-predictions/

The Consequences of Overturning the Paramount Consent Decrees

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By Casey Fraser

In November, the Department of Justice announced their intent to end or significantly alter the Paramount consent decrees, which stemmed from the pivotal U.S. v. Paramount Pictures case in 1948. The Department of Justice’s decision to pursue the removal of this statute has the potential to eliminate smaller theater chains. In an industry where competition is increasingly daunting, the reversal of the U.S. v. Paramount Pictures case does not serve those who require it the most. Rather than supporting independent distributors and exhibitors, the overturning of the Paramount consent decrees will further consolidate the entertainment industry and have a ripple effect on the industry’s economic landscape.

Photo Courtesy of Time Out

The Paramount consent decrees drastically changed the manner in which the entertainment industry functions. In the 1930s and 1940s, major film studios maintained a near-monopoly on the United States entertainment industry, according to A&E Television Networks History website. Film studios owned most theaters and were able to control their distribution and exhibition with minimal outside influence. The theaters that studios didn’t own were often subjected to “block booking,” a process in which studios require independent theater owners to show films as a unit, rather than booking individual films. For example, if Metro-Goldwyn-Mayer wanted to show their low-budget film at a theater in the 1930s, they could sell it as a package with the 1939 blockbuster Gone With the Wind. This flawed system allowed major studios to coordinate with one another and squash innovation in the industry.

The 1948 case was preceded by a lawsuit in 1928 filed by the Federal Trade Commission against ten major film studios for similar antitrust violations. The court ruled that the ten studios were guilty of antitrust violations in 1930 according to the Hollywood Renegades Archive. Despite this ruling, the studios were allowed to resume normal business operations due to extenuating circumstances that stemmed from the Great Depression and subsequent National Industry Recovery Act according to A&E Television Networks History website.    

Eight years later, the issue of studio monopolies became a topic of discussion once again. In 1938, the government filed an antitrust lawsuit against Paramount Pictures, Inc., Universal Corporation, Loew’s Incorporated (later renamed Metro-Goldwyn-Mayer), Twentieth Century-Fox Corporation, Warner Brothers Pictures, Columbia Pictures Corporation, United Artists, and Radio-Keith-Orpheum Pictures (which was dissolved in 1959), according to the United States Department of Justice website. The government accused the plaintiffs of controlling all movie distribution and exhibition, a direct violation of the Sherman Antitrust Act. In their initial filing, the government called for studios to sell their direct distribution channels (mainly theaters) and stop block booking all together.

The case was quickly dismissed in favor of an out-of-courtroom settlement. Frustrated with the results of the settlement (which allowed studios to maintain their theater ownership and better regulate block booking), the newly formed Society of Independent Motion Picture Producers lobbied for further restrictions on the studio system according to A&E Television Networks History website. Their efforts pushed the matter back into court and this time, the studios were not so lucky. The New York District Court ruled against the studios in 1946. Both sides were unhappy with the ruling and appealed. The U.S. Supreme Court issued a decision in 1948, once again ruling against the studios according to the National Constitution Center.


Photo Courtesy of Unsplash

As a result of the U.S. v. Paramount Pictures case, the plaintiffs agreed to a settlement termed the Paramount consent decrees. Studios were required to sell their theaters, separating film distribution and film exhibition. The studios were also prohibited from block bidding and other monopolistic practices such as circuit dealing, resale price maintenance, and granting overboard clearances, according to the United States Department of Justice website. Lastly, studios were banned from owning theaters without first receiving court approval.

The implementation of the Paramount consent decrees split up the major studios and reshaped the way that entertainment businesses operate. Studios took a “theater-by theater, picture-by-picture” mindset according to Deadline. No longer able to use their blockbuster films to leverage the sale of their smaller productions, studios began to rely on more nuanced marketing and sales techniques. This policy is still used today by major studios. The dissolvement of vertical integration in entertainment also allowed newer studios such as Disney to succeed in the marketplace.

Last month, Assistant Attorney General Makan Delrahim addressed the Department of Justice’s decision to pursue eliminating the Paramount consent decrees during his address at the American Bar Association’s Antitrust Fall Forum. In his speech, Delrahim pronounced the decrees outdated and overly restrictive. “We [the Department of Justice] have determined that the decrees, as they are, no longer serve the public interest, because the horizontal conspiracy – the original violation animating the decrees – has been stopped,” said Delrahim. “Changes over the course of more than half a century also have made it unlikely that the remaining defendants can reinstate their cartel.”

The Department of Justice is correct to assume that sections of the Paramount consent decrees are dated. In contemporary times, the entertainment industry looks vastly different than when the decrees were first decided upon. In the 1930s and 1940s, urban areas traditionally had one movie theater with “one screen that showed a single movie at a time,” according to Delrahim. Today, theaters are more numerous with more screens in each establishment. This allows theaters to play multiple movies from different distributors at the same time. In the city of Los Angeles, there are currently 62 open movie theaters according to Cinema Treasures. The largest of these theaters, Cinemark 18 and XD Los Angeles, has a total of 18 screens.

Photo Courtesy of Cinema Treasures

The idea of studios controlling the marketplace through theater ownership is also a concern of the past. The streaming industry has revolutionized film distribution and exhibition. Rather than watching movies in theaters, consumers have a multitude of options for in-home entertainment. Netflix, Hulu, Amazon Prime, and Apple TV+ are amongst the well-known brands that offer subscription video on demand services. Unlike the major studios, these streaming companies are not bound by stringent distribution and exhibition regulations. Eliminating the Paramount consent decrees could help studios remain competitive with streaming companies by removing regulations that limit a studio’s scope.

The unintended consequence of the Department of Justice’s announcement is the potential impact on smaller, independent theater chains. Without the Paramount consent decrees, small theater chains will likely have to compete with studio-owned theaters. The department’s decision also reopens the door to block booking practices. Theoretically, if a company like Disney wanted to attach a niche Fox Searchlight film to their upcoming live-action remake of The Little Mermaid, they be able to do so with no negative consequences. Larger multiplexes and theater chains such as AMC, Regal, and Cinemark have the scale to withstand this change but independent theater chains will suffer the financial consequences.

For theaters that can only house two to six movies at a time, the return of block booking poses a serious dilemma. Independent theaters are already struggling to keep up with increasing demand for a luxury theatrical experience. If small theaters are required to house a slate of studio films in order to obtain in-demand blockbuster movies, they will no longer be able to curate their programming to maximize profits. Adding undue stress to an already frail ecosystem could have potentially disastrous consequences. Amongst other small theater chains, Box Tie Cinemas voiced their distress regarding the impending changes. During the sixty-day public comment period about the decrees, a representative from the theater chain spoke out in opposition to the proposed change. “Chains of Bow Tie’s size (and smaller) would be disproportionately affected by the removal of block booking prohibitions, as we do not have as many screens to potentially spread out the major studio films we would be required to book in order to have access to the films our customers desire,” the representative said, according to Indie Wire. “The prohibition on block booking is necessary…to prevent theater chains such as Bow Tie from becoming de facto exclusive exhibitors of a particular studio’s content.” The National Association of Theatre Owners echoed these concerns to the Department of Justice. “If distributors are permitted to block book, they could demand exhibitors book an entire slate on multiple screens, leaving little room for the independent and smaller distributors to finance and distribute films that consumers demand,” the association commented according to Deadline.

The National Association of Theatre Owners also expressed concern that removing the Paramount consent decrees will halt conversations about modernization in the theater industry according to Deadline. One innovation currently being discussed in the industry is dynamic pricing, a model that prices films based on their desirability rather than setting a standard price for all movies. AMC has recently been experimenting with this model and plans to roll it out in four major cities. The purpose of dynamic pricing is to revitalize the theatrical experience and draw more audiences to theaters. Advancements such as this could be discontinued if studios take control of exhibition channels such as theaters.

Photo Courtesy of Celebrity Access

Overturning the U.S. v. Paramount Pictures case has the capacity to cause a ripple effect throughout the entertainment industry. If studios control theatrical releases, there is limited room for independent movies to succeed. As the barrier to entry increases for filmmakers and financiers, the number of jobs in film will decrease. In this environment of limited competition, it is the consumer who pays the ultimate price. Ironically, stifling innovation is exactly what the Department of Justice aims to avoid by overturning the Paramount consent decrees.

Some entertainment experts believe that eliminating the Paramount consent decrees will not significantly alter the industry. Established entertainment companies are stretched thin due to recent acquisitions and expansions. For example, Disney acquired Twenty-First Century Fox in March and launched their new streaming service Disney+ in November. If torn between investing their remaining capital in theater acquisitions or streaming content, it is practical to assume that companies will choose the latter. This hypothesis may hold true in the short-term but as time passes, studios will likely take advantage of the decrees reversal. Entertainment companies are always looking for ways to expand their businesses and please investors. Owning theaters gives the studios an opportunity to further promote their content and control pricing, in addition to providing an additional revenue stream. Even with the Paramount consent decrees in place, several studios skirted the rules and branched into owning theaters. For example, Disney currently owns the El Capitan theater in Los Angeles. The larger issue stems from the potential for block bidding, which costs studios no additional capital and could cause significant damage to the revenue of smaller theaters.

In anticipation of the challenges associated with repealing the Paramount consent decrees, Delrahim noted the Department of Justice intends to implement a two-year “sunset period” to give studios and theaters time to adjust to the removal of the consent decrees. During this time period, the entertainment business will be able to examine “any licensing proposals that seek to change the theater-by-theater and film-by-film licensing structure currently mandated by the decrees,” according to Delrahim’s speech. Delrahim also noted that the elimination of the Paramount consent decrees does not mean that studios are exempt from government regulation. “Terminating the Paramount decrees does not mean that the practices addressed in them are now considered per se lawful under the antitrust laws,” Delrahim said. “Consistent with modern antitrust law…if credible evidence shows a practice harms consumer welfare, antitrust enforcers remain ready to act.”

By eliminating the Paramount consent decrees, the Department of Justice aspires to “clear the way for consumer-friendly innovation,” according to Delrahim’s speech. Unfortunately, creating a landscape conducive to innovation is not as simple as repealing old legislation. The Department of Justice’s comments show that they do not fully understand the entertainment landscape and the potential consequences of repealing the Paramount consent decrees. By disregarding the findings of the U.S. v. Paramount Pictures case, the Department of Justice is further encouraging a monopolistic economy. Instead of studios being the sole contributor to this noncompetitive environment, both streaming services and studios are at fault. The potential overturning of the Paramount consent decrees illustrates a wide-reaching conundrum currently facing the entertainment industry. As established entertainment companies continue to merge, expand, and acquire, there is limited room for smaller companies in the marketplace. In this era of fast-paced consolidation, the industry must figure out how to regulate itself and avoid the type of problems that sparked the Paramount consent decrees over 70 years ago.

Sources:

Forbes

Deadline

Deadline (2)

History.com

Cobbles.com

Cobbles.com (2)

Constitution Center

Justice Department

Justice Department (2)

Cinema Treasures

Wall Street Journal

Indie Wire

Variety

The Hollywood Reporter

Duke Law School

The Future of the Electric Vehicle Market: Challenges and Solutions

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Tesla Cybertruck (photo from www.tesla.com)

Last week the world saw yet another one of Tesla’s creations, the Cybertruck. This electric pickup truck that looks like a prop from a futuristic science-fiction film can accelerate from 0 to 60 mph in 2.9 seconds and boasts a driving range of up to 500 miles. The Cybertruck can easily rival a conventional internal combustion engine (ICE) automobile in performance, however, with a price tag of $69,900 for such performance, it is far from being affordable to most people. Although the industry is putting out cheaper models every year, generally electric vehicles cost more than gasoline-powered cars. The long-standing issue of a limited driving range poses a significant barrier for potential consumers. Additionally, the current infrastructure is insufficient to provide for comfortable use of electric vehicles and to dispel consumer doubts. On the supply side of the market, manufacturers often face production issues when demand suddenly spikes and there is a shortage of materials. Given that the electric car manufacturers operate on thin profit margins these challenges, or rather the ability of the industry to overcome them, will shape the market over the next two decades. 

What is going on in the market today?

The electric vehicle industry is growing at an unprecedented rate. Last year, global EV sales were over 2 million units, a 63% jump from 2017. Out of 2 million units sold worldwide, China accounted for a lion’s share of sales. In the United States alone, the number of electric cars on roads has grown from barely a dozen thousand in 2011 to over 1.1 million cars in 2019 (reference figure 1 below). No doubt, electric cars are gaining increased popularity among drivers. Tesla Model 3 best showcases this trend as it became the best-selling electric car in the world in 2018 with 138,000 units sold, outselling its Chinese rivals BYD and BAIC as well as Nissan Leaf.

Figure 1

Tesla is still in the lead in terms of sales even surpassing the sales of luxury gasoline-powered car brands such as BMW in the United States. However, since Tesla unveiled its first electric car in 2008, other players have joined the race for EV dominance. Well-established automakers such as Volkswagen, BMW, GM, and Toyota are investing heavily in transitioning to electric vehicle production. Volkswagen is spending billions of dollars to reshape its factories for electric car production. The company has already revealed its first electric car model, ID. 3 1ST, which will start deliveries in 2020. It will offer free battery charging for a year and the vehicle will cost less than $45,000. Additionally, according to CNN Business, Volkswagen Group, which owns luxury car brands such as Porsche and Lamborghini, will spend $34 billion over the next half-decade to develop an electric or hybrid model of every car currently in production. Toyota claims 50% of its automobile sales will be electric in 2025 and plans to electrify all models by the same year. This year, BYD, a Chinese EV car brand that is barely mentioned in the west, began sales of its cheapest model, e1, starting at $8,950. Although the driving range is significantly lower than that of Tesla, the price provides an exceptional opportunity for the company to capture a sizable market share in China. According to Bloomberg, BYD Co. is now the largest producer of plug-in electric vehicles with monthly sales of 30,000 units in China. Favorable market conditions in China prompted the entry of startups as well. Premium EV startup, NIO, went public in the U.S. in 2018 and is already ramping up its production and deliveries in China. Multiple reports including Bloomberg predict Chinese EV makers will account for at least a third of the world’s production in a decade. 

The main driver of growth: incentives

Aware of the current state of climate issues, governments worldwide are implementing strict CO2 emission policies and subsidizing buyers to expedite the transition from ICE cars to electric. Multiple countries have announced various bans on new gasoline vehicles. Norway, for example, stated there will be no sales of gasoline cars by 2025. The Netherlands said all vehicles will be emission-free by 2030 while the United States plans to reduce car emissions to zero by 2050. In order to achieve these ambitious goals countries are heavily subsidizing consumers. The Chinese government has been especially active in encouraging development in the market, hence the visible progress. It has implemented license-plate restriction on gasoline cars in Beijing and, until recently, China incentivized consumers to purchase electric cars by providing credits of up to $7,400. This year China raised its 2025 sales target for EVs from 20% to 25% to spur progress. England is pushing regulation to discourage fossil-fuel car use as well. According to a McKinsey report, local authorities in London are placing $16 daily fees on overly polluting vehicles in “ultra-low-emission zones”. In the U.S., buyers of electric vehicles can get a tax credit from $2,500 to $7,500 when purchasing a new electric car. Buyers in California are eligible for even higher tax credits. Some cities such as San Jose provide extra purchasing subsidies of $2,500 in addition to IRS incentives. Even Ukraine, Europe’s poorest country, offers subsidies by waiving a 20% VAT on all imported electric cars. 

Current challenges: cost, range, infrastructure

As impressive as the progress looks, the global EV market is facing numerous challenges that currently limit the growth of the industry as a whole. The most noticeable issue is the high price of electric vehicles. This year, the average price of an electric car in the U.S. was $55,600, while the average price for a full-size gasoline car in 2018 was $34,925. Hybrid cars were even cheaper with the price hovering around $27,600. There are several reasons why EVs cost more than conventional vehicles. EV producers focus on building luxury models thus driving up the average price. BMW’s cheapest EV model starts at $44,500 while Audi’s SUV starting price is $74,800. In terms of economics, a major price driver is a high vehicle production cost. The battery pack is one of the main contributors to an overall high price. Batteries are expensive to make and the process behind manufacturing cells is incredibly complex. Today, manufacturers use lithium ion batteries in production. According to an Accenture report on the industry, because lithium is a rare metal sensitive to shortages and price shocks it creates certain risks and can cause production issues or delays. Ultimately, the main factor contributing to the high costs of producing batteries and assembling cars is the scale of production. Currently, the industry does not have the demand nor the funds to scale its production. Therefore, consumers assume the burden of cost. In addition to high upfront costs, two other major public concerns slowing down the growth of the industry are the range and availability of infrastructure. The first concern is tied directly into battery production. However, a Deloitte report analyzing the EV industry states that as next-generation electric vehicles are introduced, and the battery technology improves, the “range anxiety” will become obsolete (refer to figure 2 below). According to the U.S. Department of Energy, the median drive range has already increased from 73 miles in 2011 to 125 miles last year.

Figure 2 (graph retrieved from Deloitte)

A far more pressing issue is the charging infrastructure. As of 2019, there were only around 10,000 public charging stations in the United States. Center for American Progress, a public policy research organization dealing with economic and social issues, stated that in order to support an increasing number of EVs in the U.S. the country must dramatically improve its charging infrastructure. It cannot accommodate the increasing demand for electric cars. It is estimated that the U.S. will need to invest around $4.7 billion by 2025 to install 330,000 public charging stations throughout the country. 

How to address the concerns and challenges?

These challenges create substantial barriers for growth, however, there are several developments in the industry that will likely resolve issues with production, infrastructure, and consumer demand. Ultimately, it comes down to reducing costs for manufacturers without sacrificing the quality of production. The key factors are scale, location, and strategic partnerships. EV companies are already scaling up production. For example, Tesla’s Gigafactory is an expansive facility that produces batteries, car components, and solar panels and will eventually begin assembling cars. Furthermore, the company wants the factory to operate entirely on solar energy by installing solar panels on the factory’s roof. Since Tesla started building its first Gigafactory in Nevada, it has already built a second factory in the U.S. and a third in China. Moreover, recent plans were announced to build a Gigafactory in Germany. This will allow the company to minimize car manufacturing and shipping costs while expanding production on three continents. 

Partnering with other EV manufacturers and placing key production in advantageous locations will allow EV companies to reduce risks of battery shortage and decrease cost. NIO outsources its manufacturing and, according to The Verge, was able to start production quicker while its Californian competitors, Faraday Future and Lucid Motors, struggled to build their own factories. General Motors and LG are investing $2.3 billion into a battery plant in Ohio to jointly make batteries for electric cars. Toyota is investing $2 billion in Indonesia to manufacture electric cars. This strategy will place Toyota EV production in a country that is rich in key resources that make up batteries. Since other companies are investing in Indonesia as well, according to Businessinsider, establishing production in Indonesia will allow Toyota to work close to other EV manufacturers and: “lead to supply chain and infrastructure efficiencies that can drive down costs for components, such as batteries.” 

Government incentives will play a big role in helping the EV industry to grow. According to McKinsey, government subsidies and regulations decrease the gap between high costs and consumers’ ability to pay and directly stimulate investments in EV technology. Since 2016 the U.S. Congress has allocated roughly $8.9 billion to EV technologies R&D that includes battery and vehicle tech as well as sustainable transportation development. The funds that the U.S. Department of Energy (DOE) has been receiving from Congress has aided the development of EV technology. By 2014, DOE has helped cut battery costs by 50% which ultimately cut costs for manufacturers. In California, EV companies get a special incentive. The California Air Resources Board (CARB) enforces a cap-and-trade program to lower emissions in the state. Part of this program requires the automakers in the state to make a certain number of zero-emission vehicles a year. When companies produce more than required, they receive “allowances” which they can sell to automakers that did not meet the requirement. Such a program does two things: it encourages automakers to produce more EVs and generously rewards the EV manufacturers. By 2018, Tesla has sold $1.2 billion worth of “allowances”. Furthermore, the U.S. government aims to subsidize the costs of installing charging infrastructure. According to the Center for American Progress, 17 states have already implemented incentives to develop the infrastructure. These include tax exemptions and direct investments. The industry will, no doubt, require more robust investments and incentives on behalf of governments to develop the infrastructure to an appropriate level. To keep the industry growing it is vital for the world’s governments to directly subsidize costs for both the consumers and companies.

The future is near

Just like many other exciting developments in the modern world, the electric vehicle industry is widely discussed, especially given the climate circumstances all over the world. However, it is important to keep in mind that gasoline cars are still far more prevalent. It is estimated that non-electric passenger vehicles sales in 2018 exceeded 85 million units worldwide while electric vehicles only accounted for 2 million units. This will change, however, within two decades. The sales of EVs are expected to surpass ICEs in 2038. Already ICE auto sales are contracting in China while EV sales are growing and account for half of worldwide sales. China will, in fact, remain the largest market for the EV industry, although its market share will start declining in about 5 years (see figure 3 below). 

Figure 3

Every year the costs are subsiding, the range is increasing, the infrastructure is getting more widespread, therefore drivers are more willing to purchase an electric vehicle. An Accenture global study done in 12 countries involving thousands of people showed that 60% of those who wanted to purchase a car within 10 years will probably consider an electric vehicle. This indicates a shifting mentality among the population and will drive the demand for the EVs. Cost won’t be a major issue within a couple of years. Deloitte estimates that the costs of owning EVs will reach an equilibrium point with the costs of owning ICE cars as early as 2022. McKinsey stated that as battery efficiency and economies of scale improve, we can expect a cost reduction of at least $5,100 per vehicle. As these trends emerge, the EV brands will evolve and compete for supremacy; their ability to overcome previously mentioned challenges by taking advantage of location, partnerships, and scale will determine their fate in the market. The future is not as far as it seems but is much further than we would like it to be. 

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Pumpjacks hammer in a changing world: A petro-village becomes a medical hub

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The MALP Moinesti Clinic is the only private clinic in the entire municipality and surrounding villages. (Photo: Courtesy of Dr. Mihaela Cotirlet)

Pumpjacks hammer for petroleum in Moinesti. They hammer and hammer and hammer like it’s still the 1970s, when the government-run petroleum industry kept the small municipality economically afloat. Then, Communist dictator Nicolae Ceausescu was overthrown in 1989 with a bloody revolution that ended with him and his wife getting executed on national television, on Christmas Day. 

As Romania shifted from communism to capitalism in the 90s, the petroleum industry was privatized, and life in Moinesti changed as petroleum jobs fled the community. At its worst, the municipality’s unemployment rate was more than 20%. In 1993, Romania’s unemployment rate was 8.40%.

Romania’s unemployment rate, 1991 – 2019 (Photo: Courtesy of Macrotrends.net)

At first glance, Moinesti looks unremarkable. Almost 200 miles away from Bucharest, Romania’s capital, Moinesti is surrounded by farmland and clusters of small villages. With a population of roughly 20,000, it is not uncommon to see horse-driven carts on the street. It is also located in Moldova, Romania’s poorest province and the fifth poorest region in the European Union.

Still economically recovering from the loss of petroleum industry, Moinesti is known for four things: 1) Being a “global village” destination for Habitat for Humanity, 2) having a Jewish cemetery, 3) the fact that a giant DADA mural marks the entrance to town, and 4) having surprisingly good health care.

There are two major medical facilities in Moinesti: a private clinic and a public hospital. The private clinic, MALP Moinesti, is run by Dr. Mihaela Cotirlet and provides various types of care, including family medicine, infectious diseases, rheumatology, nephrology and clinical psychology. 

The lobby of Dr. Cotirlet’s private clinic. (Photo: Courtesy of Dr. Mihaela Cotirlet)

Her husband, Adrian, runs the public Moinesti Municipal Emergency Hospital; he was voted the best healthcare and pharmacy manager in 2019 by Capital, a business and economics magazine. His hospital is working on new infrastructure projects to improve the hospital’s accessibility to neighboring counties and extend hospital spaces, bringing some jobs to Moinesti.

Good healthcare is something of an oxymoron for Romanians due to the system’s infamous corruption. After the fall of the dictatorship in 1989, the healthcare industry, much like the petroleum industry, switched from government-owned to privately owned. 

“We found ourselves in a system in which the disrespect placed its influence on the young doctors, a system that had not developed any strategy for the doctors who wanted more than the state of employment,” Cotirlet said. 

According to a study by Mihaela Cristina Dragoi, a professor at the Bucharest Academy of Economic Study, the political changes in 1989 created a partial replica of the totalitarian regime’s sanitary system: the Semashko system. Borrowed from the Soviet Union, the Semashko system’s goal was to provide free, universal healthcare through a multi-tiered system of differentiated networks of service providers.

Romanian physicians lobbied for reform, to change from the Soviet Semashko model to the German Bismark model, which provides free, universal healthcare through an insurance system jointly financed by employers and employees. According to Dragoi, reform was stunted because of Romania’s political instability. 

“Frequent changes of government and ministers, the lack of clear strategy and defined objectives to be pursued rigorously and independently of political changes slowed down the health reform process after 1990,” she wrote. 

Bribery is common in the sector, and since 2007, the EU has invested over €12 million to fight against corruption in Romania. Even though Romania provides universal healthcare, the system does not provide equal coverage; rural areas are frequently left behind.

In short, a combination of Soviet bureaucracy and crony capitalism has led to Romania’s health care sector turning a transaction of care into an economic exchange. 

Perhaps no event in recent Romanian history encapsulates the crony capitalism that has infiltrated the system as much as the 2015 Colectiv nightclub fire, which claimed the lives of 64 people. While 27 of those people died on the scene, the other 33 passed away in the hospital, some from preventable bacterial infections. Gazeta Sporturilor (“The Sports Gazette”), a daily Romanian sports newspaper, investigated, and found that government health authorities never inspected the disinfectant used by hospital staff. 

A map tracing the movement of Condrea’s disinfectant scam entitled “The ‘Disinfectant’ Business.” Pret means price and Cipru means Cyprus. (Photo: Courtesy of the RISE Project)

The quality control came from Hexi Pharma, a pharmaceutical company who distributed antiseptics to 350 out of 367 public hospitals in Romania. Further investigation revealed that Hexi Pharma diluted the disinfectants to increase profits. In addition, hospital directors allegedly took a 30% cut on Hexi Pharma contract. According to the RISE Project, a non-profit journalism organization based in Romania, Aurelian Condrea, the owner of Hexi Pharma, would buy a liter of disinfectant from Germany for about €7.9 euros, sent to offshore mediary Condrea owned in Cyprus, and then finally sold in Romania for €75 – €100. 

Public outrage over the Hexi Pharma scandal and Colectiv nightclub fire deaths led to the resignations of multiple cabinet members, including Prime Minister Victor Ponta and Patriciu Achimas-Cadariu, the Minister of Health. Achimas-Cadariu’s replacement was Vlad Voiculescu, an economist  with no prior political experience, known for creating the Cytostatic Network, a group of volunteers who bring cancer drugs free of charge to Romania from other countries.

This is the kind of system Dr. Mihaela Cotirlet is operating in. “For some, [a doctor] is just a person. For others, it’s a white coat,” she said. “And for the system, it’s an investment.” 

Although Romania’s healthcare system struggles with corruption and inefficiencies, Cotirlet tries to operate her practice with a simple maxim: Be the change you wish to see in the world. 

One thing she is trying to change is the level of access to healthcare in rural areas, a historic problem in Romania’s universal healthcare system. Her clinic is the only clinic in the Moinesti municipality; without it, villagers from neighboring communes like Poduri and Solont would need to drive approximately 30 miles to Bacau, the county’s capital, in order to receive care. 

Although her practice is well-established, renowned in Romania and financially stable, the Moinesti native said she remembers her experience with medical school in Ceausescu’s Romania vividly. “You deliver babies, clean them in pots, and as transportation, you have to use a carriage pulled by horses,” she said. 

Romania’s healthcare system is still underfunded today. In fact, Romania spends the least of its GDP on healthcare out of all EU countries. In 2016, that meant that only 5% of the total GDP went to the public health system. According to Cotirlet, it’s this sort of environment that has made Romanian doctors tough.

2016 European Union healthcare expenditures (Photo: Courtesy of Eurostat)

“They [Romanian doctors] are used to hardship, with hospitals with no medical equipment,” she said. “For that reason, they are very good clinicians. Management counts: even with less money, people can achieve progress.”

However, until 2018, many Romanian medical practitioners weren’t paid as though they were valuable members of society. In 2015, a first-year resident physician in Romania made €260 (~$288.30) a month. Meanwhile, in the United States, the 2015 Residents Salary & Debt Report found that the average yearly salary for a first-year resident was $52,000, or roughly $4,333.33 a month. That is around 15 times more than what a first-year Romanian resident would make. 

The economics of this made living self-sufficiently as a doctor difficult, if not impossible, leading to a brain drain. From 2009 to 2015, half of Romania’s doctors left the country, leaving almost one-third of hospital positions vacant. Despite Romania being a leading EU state in medical school graduates, the Ministry of Health estimates that one in four Romanians have insufficient access to essential healthcare, which makes practices like Dr. Mihaela Cotirlet’s all the more necessary.

Sometimes, it can feel like there is no incentive for people to stay. That goes beyond just doctors. According to the Carnegie Council for Ethics in International Affairs, conservative estimates put one in five working-age Romanians living abroad. Romania has the second-fastest growing diaspora, only after Syria. 

But Dr. Alexandra Scovronschi, also a Moinesti native, decided to move back home after completing dentistry school not only to start a family with her husband, a surgeon at a public hospital, but to start her own private dental practice. 

According to residents of Moinesti, Scovronschi’s dental practice is one of the first in Moinesti that has been accessible to locals. Because Moinesti was a small town where Scovronschi grew up, some parts of starting a business were simpler because she knew the people and the people knew her. It made it easier for her to build a client base. 

An aerial view of apartment blocks in Moinesti, Romania. (Photo: Courtesy of Daniel Anturaju via Flickr)

Scovronschi remembers the pumpjacks digging for petroleum as that segment in Moinesti’s economy began faltering. It was the same year she had a health scare and underwent surgery at the public hospital in Moinesti, which has received national prestige for its hygienic conditions.

Scovronschi said she knew she wanted to be a doctor since she was a little girl, but didn’t realize how badly she wanted it until she decided to go to college for economics instead of pursuing medicine. 

Unlike in many other Western countries, a career in medicine did not equate to wealth. During her summer holidays from business school, Scovronschi said she worked at a small tile business in Southern California where she made around $1,600 a month – more than five times what she would have made as a first-year medical school resident. 

In 2018, the government raised the base gross salaries for public health employees by more than double in order to stem the hemorrhage of medical professionals. First-year residents will now earn €715 ($792.85) a month. Whether this succeeds in stopping the brain drain is yet to be seen. This move is also intended to help stop the common practice of bribing medical professionals for better care. 

“Receiving flowers, boxes of chocolate, and coffee is not bribing. It’s a form of showing respect and appreciation after the work with the patient,” Cotirlet said. “This is rooted in customs, but what is condemnable are the ones who ‘ask something’ because now the salaries are sufficient.”

Many of the municipality’s Gen Z population decided to pursue medicine in college. Raluca is a Moinesti native who is on her first of six years of medical school at the Iuliu Hatieganu University of Medicine and Pharmacy Cluj-Napoca, generally abbreviated as UMF Cluj. She has requested that her surname be withheld. 

According to Raluca, out of the 30 students she graduated high school with, 15 wanted to go to medical school. Eight got into a medical college in Romania, four reapplied and got in the following year, and five decide to change their path. 

Cluj, the fourth most populous city in Romania, can sometimes feel like a whole world away from Moinesti. “In Moinesti, it’s impossible to go outside and not bump into someone you know. In Cluj, you can walk for three hours and not find someone you know,” she said. “I don’t plan on going back to Moinesti.”

Although she was born around the time the petrol industry left Romania, she said she remembers the pumpjacks hammering for oil even though all the jobs left the community, sending them into a downhill economic spiral. “Bad men got rich backs on the backs of the people,” she said. 

Petroleum pumpjacks in Romania. (Photo: Courtesy of Desteptarea)

Growing up in a Romania defined by corruption and scandal can make it hard to not become at least a little cynical, especially for an aspiring doctor. 

“At a certain moment, you need to have hope. And then you meet people who have no hope for the future, and that affects you,” she said. Becoming a doctor is a life-long ambition, and she said that she can’t picture herself being happy doing anything else, but to find happiness in her career, she might have to leave her country. 

“It’s easier to leave than to stay and fight. So many people want to leave. So many people in my year want to leave,” she said. 

According to her, this leaves Romania’s medical system in a tenuous state – without capital and with young people leaving, there are few people bringing in new ideas. “At the same time, there is nothing to offer them,” she said. “Either way, the school makes money.” 

This system made her want to leave Romania for a long time. “Now, I don’t. The salaries are rising. And I still have five years to decide.” 

Raluca said that although the system creates good doctors, it’s deeply flawed. For her, two of the largest problems are the underfunding and bribery. Growing up, she said there was pressure to bring mita, or bribes. “It’s ugly. I hope my generation stops accepting money,” she said. What makes mita particularly heinous to her now is that with the salary increases, it is unnecessary. 

“I just want to live in a state where there is no political turmoil,” she said. 

As a new generation is left to find hope and battling a fight or flight instinct, the pumpjacks of Moinesti still hammer.

SOURCES

The Coffee Cup Crisis: Starbucks Needs a Greener Solution

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People get used to grabbing a cup of Starbucks coffee before starting their day. But, would you mind spending more on your single-use coffee cup? Apparently, no one would do that. While since 2020, customers will be charged an extra 25 cents if you drink in a disposable cup at any shop in Berkeley, California. It sounds like a great way to cut down on disposable coffee cups, but for chains like Starbucks, which goes through about 6 billion cups a year, this represents no less than an existential dilemma, and Starbucks needs a greener solution to handle its cup problem.

Litter Reduction Ordinance, the policy passed by Berkeley’s City Council in January 2019, is designed to reduce single-use food ware from entering the landfills and 25 cents paper cup fee is part of it. By far, it is the first and the hardest line drawn to-date against single-use cup waste by any U.S. municipality. Although it is not the first worldwide policy to combat the use of disposable coffee cups, its emergence marks that the nation started to say ‘no’ to those environmentally-friendly single-use paper cups.

“Most people don’t know this, but Starbucks paper cups are not recyclable in most cities across the U.S. because the cups are lined with plastic. In today’s world, a paper cup is no longer just a paper cup. It’s plastic pollution,” said Ross Hammond, the former U.S. Campaigns Director for Stand.earth.

As Hammond said, the majority of customers reasonably think that Starbucks single-use paper cups are environmentally friendly and can be completely recycled. Starbucks, the most successful worldwide coffee chain, operates over 28,000 stores across the globe. People assume these cups with the green mermaid logo will get recycled and turned into new products after throwing them in the recycle bin. However, Starbucks disposable cups cannot actually be 100 percent recycled.

Why single-use cups are hard to recycle

While drinking a Grande size cup of Americano in the morning, look out for the statement at the bottom that reads “This cup is made with 10 percent post-customer recycled fiber. Do not microwave.” The main reason why Starbucks does not recommend the cups be put in the microwave is because each one is lined with a thin layer of 100 percent oil-based polyethylene plastic, a waterproof material to hold liquids safely.

According to research from Creative Mechanisms, a Pennsylvania-based engineering company that specializes in plastics, polyethylene is an incredibly useful commodity plastic. Because of the diversity of polyethylene variants, it is incorporated into a wide range of applications. It is always being used to make containers, plastic bags and wraps.

Although the polyethylene could be recycled the same way as paper, the current technology is not widespread across the country. This is what makes the polyethylene such a large pollution problem. According to the data from Stand.earth, a non-profit environmental organization also located in Seattle along with Starbucks, is one of the organizations and activists that is pushing Starbucks to pay more attention to environmental issues, only 18 of the largest 100 U.S. cities provide residential pick-up of paper cups for recycling. Most recycled paper mills are not able to separate the polyethylene from the paper cups due to the lack of the recycling capacity of polyethylene.

Credit to Jiajun Chen

Other research from the Carton Council shows that only three paper recycling mills in the U.S. can process plastic-coated paper. These mills make up less than 1percent of the over 450 pulp and paper mills in the U.S.

In the end, most cups end up in a landfill.

In addition to the landfill, those paper cups and other kinds of trash such as paper box, are wrapped and exported to China. Jim Ace, the senior campaigner for Stand.earth, explained that compared with landfills, China could process much of the waste and turned it into new products, and the price of shipping commodities to China is very cheap. China was the biggest garbage-importing country across the world, disposing of over half the world’s garbage in the past two decades. However, this changed after the Chinese government announced a ban on imported trash at the end of 2017.

Ace also pointed out that, as the fastest-growing market for Starbucks, China doesn’t want to receive more trash from North America. He says this is because China already has to dispose of large amounts of garbage from their local market. China’s restrictions on the import of waste will indirectly lead Starbucks and other companies to increase trash in landfills across the U.S.

‘To be charged rather than get discounts’

Besides the policy introduced by Berkeley, the current incentive plan in the U.S. launched by Starbucks allows customers to receive 10 cent discounts if they enjoy Starbucks drinks using their mugs or cups, but only 1.4 percent of Starbucks’ beverages were sold in reusable cups as of spring 2017. However, Todd Paglia, the executive director of Stand.earth, thinks that this is not enough of a discount to encourage customers to bring their own cups when they normally pay $4 or $5 to purchase a cup of coffee. He also suggested the discount should be increased at least 50 cents or even $1 per cup.

Ace held similar perspectives to Paglia’s. He thinks changing the current incentive plan from a positive to a negative thing would have more of an impact on customers’ behavior. “If people want to use single-use paper cups, they have to be charged rather than get discounts when they bring their own cups,” Ace said.

The government plays a crucial role in reducing the use of disposable coffee cups. As an iconic brand, Starbucks does not want to revise their current market plan due to the fierce market competition and customer loyalty. However, Ace says that the government can push companies to change through establishing policies or drafting documents.

“They’re smart. They know that. If they don’t take action, it actually is worse for them,” Ace said. “I understand why they do it, but I think the example of the UK shows us that, as soon as either a city or a state government starts to take action on it, the private sector gets very active, very quickly. It’s an interesting dynamic.”

In July 2018, all Starbucks stores in the U.K. were required to add 5 pence, about 25 cents, to each single-use cup due to the introduction of ‘Latte Levy’ by the U.K. Parliament. This was to encourage people to reduce using disposable cups and cut down the enormous quantity of paper cups that could not be entirely recycled in the U.K. According to a report from the U.K. Parliament, more than 2.5 billion disposable coffee cups are used in the U.K. each year, but only less than 1 in 400 cups (0.25%) is properly recycled. Thanks to the rapid growth of coffee shops in the U.K. over the past 20 years, disposable coffee cups consumption will approximately reach 3.75 billion per year by 2025 without any regulation.

The trial worked. Six weeks after the ‘Latte Levy’ was introduced, the use of reusable cups in 35 selected Starbucks shops across parts of central and west London increased by about 150 percent, according to a preliminary assessment by Starbucks. Although the proportion of customers bringing in their own mugs was still modest – only 5.9 percent compared to 2.2 percent, the ‘Latte Levy’ was still seen as a long-term and effective way to control the use of disposable coffee cups in the U.K, according to a report by Independent.

“We are encouraged by the initial results of our trial that show that by charging 5p and increasing communication on this issue, we can help to reduce paper cup use,” said Jason Dunlop, the chief operating officer of Starbucks in the U.K.

In response to growing environmental problems, other European countries followed Britain’s lead in reducing the use of disposable coffee cups. Up to 200 million disposable coffee cups are thrown away every year in Ireland, according to MyWaste, an Irish government-funded organization. In November 2019, Ireland imposed ‘Latte Levy’ to cut down on single-use coffee cups. Customers would pay an additional 10 pence to the price of a takeaway coffee cup.

Besides, Germany introduced the ‘FreiburgCup’ scheme in 2016. The project aims to encourage people to use recycled cups in coffee shops. It is very simple for customers to participate. Customers only need to pay a deposit of one euro when ordering coffee to use the reusable coffee cups. After drinking the coffee, they can return the cups to any coffee stores and get the deposit back. For the convenience of the customers, around 60-70% of local coffee shops participated in the project in Germany.

South Korea, another leading country in coffee consumption, announced a campaign to curb the use of single-use at coffee shops in August 2018. Shop owners could be fined up to 2 million won ($1,780) if they are found to offer disposable cups to consumers frequently. In order to promote the implementation of the campaign, the government also provided financial support for recycling firms by 1.7 billion won ($1.5 million).

The cup of the future

Caption: Starbucks is experimenting with coffee cups in an attempt to reduce slowly decomposing waste. (Credit to Daniel Acker of Bloomberg)

Starbucks is taking action in the face of growing policy opposition.

In March 2018, Starbucks announced its new environmental plan regarding disposable paper cups. To create an innovative sustainable cup in the future, Starbucks and McDonalds pledged a fund of $10 million for the Closed Loop Partners, an investment platform that funds sustainable consumer goods, recycling and the development of the circular economy. As an essential part of investments, the NextGen Cup Challenge, an innovation challenge to redesign the fiber to-go cup, was created by the Closed Loop Partners.

The NextGen Cup Challenge attracted 480 entries, ranging from amateurs to industrial design firms. All 12 of the winning entries at the first stage came up with greener alternatives to the plastic lining, such as water-based coatings. Up to six of 12 winners will enter a business accelerator, where their innovations could be tested whether they can scale or not.

Caption: winning works of NextGen Cup Challenge. (Credit to NextGen)

“The level of interest we saw in the Challenge demonstrates a real appetite for long-lasting, sustainable packaging solutions,” said Kate Daly, Executive Director of the Center for the Circular Economy at Closed Loop Partners. “This level of industry collaboration in support of the NextGen Cup Challenge is really exciting, and we look forward to building on this momentum to encourage more innovative solutions. Fully recoverable fiber to-go cups are just the beginning.”

However, Starbucks was forced to make a promise to the public to quell the anger of people in 2008 that their paper cups would be 100 percent recyclable by 2015. Starbucks also promised that they would establish an incentive plan, which would encourage approximately one-quarter of their customers to bring their own coffee cups to the store. To achieve this goal for the environment, Starbucks also had a partnership with the Massachusetts Institute of Technology, aimed to develop new disposable paper cups.

But Starbucks failed to fulfill their commitments, saying that they were unable to find an available plan to execute after attempting for two years. Therefore, the company adjusted its promise for the number of customers they hoped would bring their own cups to the store from 25 percent to 5 percent.

Although Starbucks had failed to follow its commitments before, Paglia maintained a relatively optimistic attitude to this new environmental plan in response to the public pressure.

“There are more and more big Industry players working together to solve this problem, so I think that looks pretty promising,” Paglia said. “I would say that none of this would be happening if the public and if Stand.earth didn’t pressure Starbucks to live up to its original promise. I think that they are now going to do that.”

LABron

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Los Angeles is many things, but in recent years, one thing it is not is the hub for NBA teams to prosper. People love the Hollywood glamour that is associated with LA, making it a must-see tourist location. For a long time, one thing it lacked was proof to a claim as a basketball city. The Lakers haven’t won a championship in the past decade while the Clippers have never even won a league or conference title. The rivalry between the two teams was just not exciting enough to coin Los Angeles a basketball city. This was true until July 2018, when LeBron James officially signed a 4-year $154 million deal to become a Los Angeles Laker. This contract is much more than a shift in NBA power rankings. LeBron’s decision transformed the perception of Los Angeles all while redefining the image of the modern superstar.

LeBron James is not just a basketball player. He is not just a four-time NBA MVP, three-time NBA finals MVP, fourteen-time NBA All-Star, and two-time Olympic gold medalist. LeBron is an icon in industries that far transcend the talents required to qualify as one of the best basketball players of all time. He is more than an athlete. Today, it is almost foolish to think of LeBron as an athlete and not as a businessman. His athletic capabilities are just a lever to propel his many other ventures.

At the start of his career, it was not unreasonable to view LeBron as just a great athlete, but the moment he signed his first contract with Nike, the sense people gained of his true brand and character shifted. LeBron was drafted first overall in the 2003 NBA Draft straight from high school. Shoe companies were vying for his loyalty and he strategically signed with Nike, giving up the extra $28 million Reebok offered. This monetary sacrifice early on in his career proved his loyalty to brands he believed in. The dream of wearing the iconic swoosh overpowered the monetary gain of signing with Reebok. 2003 LeBron could not have even predicted the eventual outcome of this decision. In December 2015, LeBron signed a lifetime contract worth over $1 billion with Nike. This deal is the largest single athlete guarantee in the sports apparel company’s history. Young LeBron’s sweet and naïve faith in Nike showed his true character and proved to have a huge payoff in the end. Now, there is no end to the team of LeBron and Nike. LeBron’s athleticism led him to peak success in the apparel and shoe industry. He dominates this market that falls in the realm of basketball as Nike sells the shoes he wears on the court, but apparel and shoes are not the expertise LeBron trained for throughout his life. LeBron expands his market by expanding his fan base. Although his fans fall all over the nation, coming to Los Angeles strengthens and grows a huge market of potential Nike customers. Why wouldn’t he go to a city with a population of over 4 million? That’s a lot of potential new customers. The Lakers offered him the opportunity to be in one of the largest markets by population in the United States.

In 2012, this businessman again deliberately leveraged his talent in basketball to branch out of the NBA. Fast food brands have traditionally endorsed athletes for decades but LeBron discovered he’s better off owning a chain instead of just taking on endorsements. He rejected a $15 million commitment to McDonald’s to invest in the pizza start-up Blaze Pizza. He bought into the company at a highly discounted rate in exchange for his influence. The initial investment amount is unknown, but per contract, he received two franchise locations. He now owns 21 Blaze Pizza franchise locations. Just like his faith in Nike, this early investment in the chain pays off huge for LeBron financially. Blaze Pizza is the fastest-growing restaurant chain of all time. As of 2017, James’ investment in Blaze Pizza was reportedly worth at least $40 million. As LeBron simply puts it, “Who doesn’t like pizza?” The tactical decision to branch out of the norm, in this case extending far past just signing an endorsement deal, proves LeBron is not the traditional athlete. Although these decisions are backed by a team of strategists, LeBron is the ultimate decision-maker and therefore the one to claim the credit. This start-up, based in Southern California, utilizes his fame and influence to develop campaigns around LeBron’s friendly and personable character. His presence in Los Angeles allows the company to utilize his persona more strategically because he is now regularly present in the company’s city of operations. When needed for a commercial shoot, it is now likelier LeBron will already be in Los Angeles. A new challenge Blaze Pizza faces in LeBron’s schedule is that because he is now in the central city of entertainment, it is inevitable his superstar image branches from just NBA All-Star and strategic businessman to Hollywood actor.

LeBron’s move to Los Angeles changes the trajectory of his career in the spotlight. Even though he may one day out-age professional basketball, he will never be too old to act. We will see LeBron James on our TV screens far beyond his NBA career. On July 16, 2021, we’ll see LeBron James and the Looney Tunes defeating a team of Monstars on the big screen. LeBron is set to play the starring role in the upcoming live action/animation movie “Space Jam 2.” The film is shooting in Los Angeles soon. What a convenient coincidence for LeBron. The talks of this movie began in 2015, so it is safe to assume LeBron knew moving to Los Angeles would make a lead role in a movie a more doable task if he was already playing in the city the movie is shot in. LeBron’s talent in basketball allowed him to trust that he would receive an offer from the Lakers to pursue a career path very different but in tandem to his current one. Now familiar with his smart and risk-taking business decisions, it seems reasonable that he would choose to leave his hometown team for the potential of Hollywood stardom. “Space Jam 2” will not be the first time we see LeBron’s untrained acting skills. He played himself in the movie “Trainwreck,” starring Bill Hader and Amy Schumer. This movie was released in 2015 before he decided to join the Lakers. Maybe it was a test run for LeBron. Maybe he was gauging whether Hollywood is a reasonable pursuit for his skills. If that’s the case, he clearly saw the potential benefits. LeBron can now indisputably claim he is an actor, but he has entered the entertainment industry in more ways than just one.

“I am more than an athlete” is a phrase he and Maverick Carter, LeBron’s longtime friend and business partner, coined and have implemented into a content-led athlete empowerment brand and media group called Uninterrupted. The group produces documentaries, podcasts and a multitude of short series to expose the real lives of athletes. An iconic moment that Uninterrupted documented was Mayor Gavin Newsom, the California mayor, signed a first-in-the-nation bill that allows college athletes to sign endorsement deals. This finally allows college athletes to see a monetary return for their talents. Uninterrupted has taken over a previously non-infiltrated industry. A media group that exclusively works to show the truest identity of athletes we know and love succeeds because LeBron and Mav Carter’s reputation encourages the development of historic moments on their platform. It is transforming the world of sports by working with athletes to tell unique stories, ultimately humanizing people we perceive as heroes. Uninterrupted is a name many young LeBron fans are familiar with because it has strategically garnered huge success via social media. Uninterrupted offices, as well as production, are conveniently located in Los Angeles, allowing LeBron to be more present in the content-led platform. He is no longer just the hidden figure behind it, but now an active member in the content. LeBron’s name attached to the brand is enough to produce success, but his regular appearances will just allow it to dominate even more in the very niche portion of the entertainment industry Uninterrupted has entered.

This is just the start of LeBron’s long-lasting presence and career. It is impossible to determine where these ambitious ventures will take him one day. All that is a guarantee is that no one will forget his name anytime soon. It is seemingly a consensus that if LeBron wants to surpass Michael Jordan as the greatest player of all time, James needs to win more rings. His judgment in choosing an NBA team based on business or personal motives, and not championship capabilities, proves he prioritizes the development of his career outside of the NBA and not the title of the greatest player of all time. We must redefine the word player to encompass LeBron’s plays in industries outside of basketball. Even without the additional championship rings, LeBron is undeniably one of the greatest athletes of all time because he is a dominant player in every industry he has entered. Even though the decision to move to LA was made for his selfish desire to succeed in a variety of industries, LeBron fans all over the country reap the benefits. LeBron is continuing to prove he is a superstar and of course, sees huge monetary benefits. He persistently builds his hero persona. He not only defines what a great basketball player looks like but also establishes the variety of talents that determine the image of a name not worth forgetting. LeBron prevails in all industries he penetrates and has given LA a valid claim to a title as a basketball city. Los Angeles is LeBron James’ city, and I just feel lucky enough to be living in it.

Sources:

https://www.nbcsports.com/washington/wizards/lebron-james-signs-4-year-deal-los-angeles-lakers

https://www.marketwatch.com/story/when-lebron-james-chose-nike-in-2003-he-gave-up-28-million-it-could-end-up-making-him-1-billion-2019-08-29

https://www.si.com/nba/2016/05/17/lebron-james-nike-deal-contract-one-billion

https://variety.com/2019/film/news/space-jam-2-release-date-1203145700/

The Economics of Hype

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Walking around Los Angeles, it is not uncommon to find Millennials sporting Supreme hoodies, Antisocial Social Club hats, and Air Jordan sneakers. Upscale streetwear brands are highly popular amongst athletes, celebrities, and “hypebeasts”—people that collect clothing, shoes, and accessories for the sole purpose of impressing others—all over town. Streetwear brands generally cater to skateboarding, hip hop, and youth cultures, which all have a strong presence in the L.A. area. 

Being a hypebeast is much more than purchasing a hoodie or a nice pair of shoes from Champs at the local mall. Behind the individuals wearing expensive streetwear items is an entire culture of hype across the internet, entrepreneurship, and product resale, all fueled by one common factor: the business of scarcity. 

Streetwear brands upended the traditional supply and demand model to become the success that they are. These companies ensure that there is not enough supply to meet demand, making their products exclusive, more desirable, and therefore, more expensive. 

But it goes a step further. After the release of a “hype” product, one may find it marked up 1000% or more on a resale website. And people actually buy the product for an insane price because of its exclusivity.

The brand that reigns supreme in the business of scarcity has to be, well, Supreme. 

Supreme, a streetwear brand founded in 1994 by James Jebbia, has exploited scarcity to the fullest extent. Every Thursday morning, the company “drops” a limited number of exclusive products on its website. Just about 30 seconds after the drop, online buyers have cleared the inventory. Products usually include shoes, clothing, and accessories and may be created in collaboration with another brand such as North Face, Nike, BAPE, and Off-White.

The hype around drops is generated over the internet before it happens; Supreme makes announcements about product launches via social media, and the message is shared and supercharged by celebrities, hypebeasts, and influencers alike.

Flagship stores in Los Angeles, New York City, London, Tokyo, and Osaka also release the products every Thursday, drawing hundreds of customers to line up outside of its doors.

Product purchasers can keep and wear their items, but more often than not, they take them to the resale market. Using online platforms like eBay, StockX, GOAT, and Stadium Goods, buyers have the potential to resell their merchandise for over ten times its original price, depending on the scarcity and original price of the product. 

For example: a Supreme brick (yes, an actual clay brick) is listed on Stadium Goods today for $220. An item that originally cost around 40 cents now costs hundreds of dollars because the Supreme brand was stamped on it.

Many have questioned the sustainability of Supreme’s business model. The company sells its products for much more than their intrinsic values because they are in demand, but consumers may not always hold an obsession for Supreme’s products. Streetwear brands must remain on the cutting edge of fashion and culture with the economics of hype in mind.  

SOURCES:

https://abcnews.go.com/Business/inside-supreme-economy-streetwear-phones-bots-side-hustles/story?id=59316142

https://www.bbc.com/worklife/article/20180205-the-hype-machine-streetwear-and-the-business-of-scarcity

https://www.uea.ac.uk/documents/953219/29343977/Motala%2C+Taahir+2019.pdf/96431214-038c-9191-eaa6-fdc456719e7b

https://medium.com/@adelaideeconomicsclub/hypebeast-economics-4e9d583c7ea5

https://hypebeast.com/2017/6/supreme-resell-economics-million-dollars