Cannabis, Cash, and California

In November 2016, following a trend of progressive change and cultural shift throughout the country, California passed the legalization of recreational marijuana for consumers over the age of twenty-one. Going into effect starting in 2018, any person over the age of 21 can legally buy marijuana. According to California State Treasurer John Chiang, the $7 billion industry is expected to generate over $1 billion in state tax revenue.

However, per the federal government, marijuana remains a schedule 1 narcotic, the same level of hazard and as heroin. The federal government is responsible for regulating banks and interstate commerce, which naturally yields problems for states with the legal sale and consumption of marijuana. Ergo, those who work within the new industry of recreational cannabis are completely blocked off from banking and financial services. Interstate banks fear harsh criminal repercussions from handling money from illicit activities—they can lose accreditation or even face money laundering charges. During the Obama Administration, Deputy Attorney General James Cole and the administration employed a lax stance on marijuana. Stopping marijuana sales in legal states was pushed to the back burner, and there were even some compliance guidelines that allowed for a small number of banks to work with some cannabis-related businesses. However, current Attorney General, Jeff Sessions has taken a vehement opposition to the sale and consumption of marijuana. At the beginning of his term, Sessions outlined a plan to employ more resources to curbing the federally illicit activity in the rogue legalized states. However, the agenda item has failed to actually commence, as a June 2017 deadline passed with no sited work in progress.

With a burgeoning $7 billion industry existing mostly in cash, there are dangerous and inefficient implications that stem from the neglect of banking services. The irony of the industry is that it is essentially the only business that is begging to be regulated, as regulation will create safety for everyone involved in the transaction. Less cash on hand means less potential for burglary and crime. Additionally, the switch to electronic payment systems would make wages and compensation more foolproof, as well as more efficient with sending tax revenue to the federal government (though the drug is recognized as a schedule I narcotic, the federal government still requires taxes on the sales of said illegal drug).

Hundreds of thousands of dollars in cash being mulled around in duffel bags and cars present a high risk for crime and theft. Armored vehicles and security guards are a necessity and a costly investment. The laborious counting of stacks of cash for paying taxes is slow and inefficient—it requires the tax collectors to use more time and people bring backpacks full of cash to bank and takes time Additionally, a cash-only system makes it difficult to pay employees and write checks.

In efforts to find an effective solution to the impending booming industry, California State Treasurer John Chiang commissioned a task force coalition, the Cannabis Banking Working Group (CBWG), to brainstorm solutions to this problem, comprised of representatives from law enforcement, banks, regulators, and local governments. The goal is “to ensure a safe a smooth transition for the public, businesses and financial institutions” in the “unchartered waters” of legal recreational marijuana. The coalition has met several times in 2017 and published a report in early November 2017 outlining possible solutions to marijuana and banking in California. Four proposed solutions were detailed in the report. Chiang and the CBWG certainly signal a strong volition that may over time lead to actual policy results.

Solution 1: State Courier Service: Under this plan, “the money would come to the state and the would be the party that would interact with the banks”. Armored vehicles would pick up cash from marijuana businesses and then transport those tax dollars to a secure counting facility. The cash would then be taken to either a federal reserve facility or a financial institution willing to “accept the cash as deposits to state accounts”.

Solution 2: Adhere to lenient existing laws: Support and expand the few small banks that continue to follow the strict compliance guidelines that allowed for business with the marijuana industry under former U.S. Deputy Attorney General James Cole.

Solution 3: Creation of a publicly owned bank or state-supported financial institution. Public banks are independent of the federal reserve and are insured by the state. This idea has been gaining popularity since public dissatisfaction with Wall Street and big banks, and may also reap other benefits. Such a bank could expand banking to underserved groups beyond the cannabis industry. However, the obstacles are formidable: it would be extremely difficult to obtain deposit insurance. Expensive start-up costs and investments would likely reach billions of dollars, and the likelihood of taxpayers paying for potential losses for several years is probable. In addition, a public cannabis institution might have trouble obtaining federal regulatory approval and access to Federal Reserve money transfer systems. So far there only exists one state-owned bank in the United States—The State Bank of North Dakota, which is insured by the state of North Dakota.

Solution 4:  Lofty Federal Goals

  1. Provide legal safe harbor to financial institutions, by prohibiting federal prosecutors or regulators from penalizing them for serving cannabis customers that comply with state law.
  2. Legalize cannabis by taking it off the list of Schedule I controlled substances.
  3. Prohibit federal officials from prosecuting cannabis consumers or businesses in states that have approved medical or adult recreational use.

Some dispensaries that have already secured tightly regulated financial bonds with credit unions are also finding innovation to take their business from cash to plastic, using the stringent guidelines still existing from the Obama years. CanPay, “the world’s first debit payment app for Cannabis retailers,” is available in a handful of states and offers app holders with an electronic form of payment with their dispensary. According to BDS Analytics, people buy more with debit cards than cash, as its easier for cashiers to up-sell customers at the register, as the buyer doesn’t come in with a hard cash limit.

There are existing small banks and credit unions that offer services to the cannabis industry. However, the Fourth Corner Credit Union has been in a battle with the denial of federal deposit insurance from the Federal Reserve Bank of Kansas City. The Union has taken the case to the 10th Circuit Court of Appeals. Recently, “the ruling leaves Fourth Corner free to pursue another master account and provides a legal fallback in case that bid were to be quashed”.

Though the tension between the legality of marijuana continues to brew, the legality will ultimately come from a major shift in sentiments, especially from conservative lawmakers. In September 2017, Senator Orinn Hatch (R-UT) introduced a bill into the Senate that would make it easier for researchers to conduct research on the medical benefits of marijuana. Hatch, who is by no means a supporter of the recreational use of marijuana, issued a witty prepared remark:

“It’s high time to address research into medical marijuana. Our country has experimented with a variety of state solutions without properly delving into the weeds on the effectiveness, safety, dosing, administration, and quality of medical marijuana. All the while, the federal government strains to enforce regulations that sometimes do more harm than good. To be blunt, we need to remove the administrative barriers preventing legitimate research into medical marijuana, which is why I’ve decided to roll out the MEDS Act”

While Senator Hatch’s remarks represent a potentially more open perspective on easing marijuana jurisdiction. On the other hand, however, cannabis and banking remain stagnated by members of Congress. In mid-November, a proposed amendment protecting Cannabis Banks was blocked by GOP members of the House. Also known as the “Safe Act of 2017”, the amendment would have allowed greater access for the cannabis industry into Federal Banking and for financial institutions to give services to cannabis-related businesses through safe harbor.


ofo: China’s Bike-Share Giant Faces Bumpy Roads Ahead

First came the taxi hailing and riding-sharing apps Didi and Uber, then there was the lodging app Airbnb. China has been fully embracing the concept of “sharing economy” in recent years, and the next big trend is here: dockless bike-share. Founded in 2014, ofo has now become the leading bike-share company in China and is valued at $2 billion. Today, ofo has 200 million users and is operating in more than 100 cities globally. While it seems like ofo fits every definition of a successful internet start-up, many people are questioning whether this rare unicorn is in fact a giant bubble waiting to burst.

It all started when 5 college students in the cycling club of Peking University, one of the most prestigious colleges in China, decided to create a student project together involving bikes. Dai Wei, the 24 year old CEO and co-founder of ofo first came up with the now household name because the letters are shaped like a bicycle. At the beginning stages, ofo was only operating on the campus of Peking University. Students who offer their own bikes for ofo’s bike-share program will gain access to use all the other ofo bikes around campus with a small charge, including the initial 200 bikes Dai bought. What is different about ofo is, these bikes do not need to be parked at specific bike stations. Users can look for bikes near them, and park the bikes at their convenience at the end of their trip. In September 2015, 1,000 more ofo bikes were brought to the Peking University campus. In a month, the amount of orders ofo received daily grew from less than 200 to over 4,000.

After its successful launch in Peking University, ofo quickly expanded to five more prestigious universities around Beijing. However, the team soon realized that they cannot rely on the students to share their own bikes to quickly grow their user base. Rather, the company learned that it needed to buy more bikes because easy access to the bikes is what attracts more people to use their app. From then, ofo has been through many rounds of venture funding, capturing more capital each round. Data from Crunchbase shows that ofo received 10 million RMB ($1.5 million) in series A funding in January 2016. In October, the start-up was able to raise $130 million in a series C round. In the latest D and E rounds, ofo raised $450 million and $700 million led by DST and Chinese tech giant Alibaba, respectively. With all this capital in hand, ofo has been doing one thing—expand. In 2016, ofo owned 85,000 bikes; this year, that number has gone up to 10 million.

Exactly what kind of business model attracted so much capital? Today ofo operates by charging users 0.5 to 1RMB ($0.07 to $0.15) an hour to use their bikes in China. Their pricing overseas is usually higher, at around $0.5 to $1 an hour. Users have to download an app on their smartphone, pay a 199RMB ($30) security deposit, and scan a QR code on the bike to unlock and use it. This is a big shift from when ofo operated solely on college campuses, which are better regulated environments with clear demand. Also, because ofo collected student owned bikes, the pricing was likely profitable. Today’s ofo effectively operates as a bike renting company, even though it is still being marketed as a “bike-share” company. Ofo is fundamentally different from ride-sharing apps like Uber or Didi because it does not provide a two-sided platform connecting riders and drivers. There is no network effect, namely, the value of ofo’s service does not increases with the number of users on the platform. Moreover, unlike Airbnb, there is no significant asset-sharing going on with ofo. It is not part of the sharing economy where companies connect users with assets owned by someone else that are underutilized. Airbnb does not own a singlepiece of property but uses other people’s “spare rooms”, whereas ofo directly owns all the bikes its users are paying to use. “What they’ve got is a very interesting technology, but a basic business model that makes no sense,” says Paul Gillis, an accounting professor at Peking University.

Is the new ofo model actually profitable? It seems like no one has a definitive answer to that question. Michelle Chen, COO of ofo claimed during an interview with Financial Times China that the company has gained profit in a few cities, but refuses to reveal any details about the profit margin or name the cities. In fact, many believe that the current business model of ofo may never profit. “Across the board, what we are seeing is non-economic behavior and a race for scale that is fueled by hype and enabled by easy access to money”, says Jeffrey Towson, a private-equity investor and a professor of investment at Peking University. Towson believes that the biggest issue with ofo is that its pricing is “almost certainly unprofitable”. Ofo bicycles are reported to cost 500 RMB ($75) to manufacture. According to the company’s official website, there are currently around 10 million bikes in use and 25 million rides registered per day. Assuming each rider spends 1 RMB on each trip, it would take about 200 days to recoup the production expense of a bike. Although this seems like a rather promising calculation, with high expense for maintenance, as well as theft and vandalism charges, the odds of breaking even drops immensely.

Ofo needs to hire numerous maintenance teams to move the illegally parked bikes, and to redistribute bikes in areas with high demand because there are many complaints of the bikes blocking the streets and pedestrian walkway. The maintenance teams are also responsible for tracking down bikes that are vandalized, stolen or reported broken and unusable. Videos of people throwing ofo bikes in to canals have gone viral on the internet, and there are also reports of the QR codes being intentionally defaced so that users are not able to scan and unlock the bike. Unlike Uber and Airbnb, where most of the tasks involved with purchasing and maintenance are outsourced to users (drivers, hosts and guests), ofo has to take these losses and put a lot of money and effort into the maintenance of bikes. Essentially, the very factors that make ofo’s bike-share services so convenient—low prices and ease-of-use, have resulted in razor-thin margins and widespread customer negligence, and are making it difficult for it to stay afloat.

A mechanic from Ofo stands amongst damaged bicycles needing repair in Beijing. Photograph: Kevin Frayer/Getty Images

Despite the still lingering questions about the ultimate profitability of ofo’s business model, the company continues to carpet bomb China with hundreds of thousands of bikes. The main reason why ofo is taking this strategy is that it is fighting for the market share. Even though ofo is the first dockless bike-share company, many copy cats soon entered the competition and are putting their own colorful bikes on the streets of China. In 2016, 30 different bike-share companies were operating around China, scrambling for investments and users. Mobike, ofo’s largest competitor backed by Tencent, was able to surpass ofo with a 69.5% share of active users of bike-share apps. With the support of more capital, ofo stroke back this year with more bikes and promotions to attract users and regained its lead in the market. However, it appears that this fight for market share between different bike-share companies will not end soon. Michell Chen, COO of ofo claimed that the company’s goal for next year is to continue its expansion by putting more of its bikes in more cities. Mobike and smaller competitors including Youon and Mingbike are also planning on further expansion. This creates continued competitive pressure on already likely razor-thin, if not negative, operating margins.

Under ofo’s current business model, revenue depends on getting rides, and getting rides depends on making sure bikes easily accessible wherever you are. One way to ensure that a potential rider always has a bike nearby is to put dozens of bikes on every street corner, but that has led to chaos and oversupply. In August, Shanghai’s municipal transportation bureau sent a notice to a number of bike-share companies demanding they refrain from adding more new bikes on the streets. The notice also asked these companies to relocate bikes parked and scattered carelessly across the city. According to Quartz, Ofo said it was addressing the problem in Shanghai in an interview with China’s Hubei Television in August.“This month Ofo has dispatched 80 extra carts [to relocate bikes], and we have a total of 2,500 operations staff working on cleanup and repairs,” said Hu Yun, chief of Ofo’s operations in Shanghai. “We are proactively cooperating with the government’s calls to clean up the city.” By the end of November, the city has already cleared out 500,000 excessive bikes (link in Chinese) put on the streets. The government also called for the comapnies to register the 1.7 million sharing bikes (link in Chinese) in the city. Similarily, authorities in Beijing, Shenzhen, Guangzhou, Wuhan, and many other cities also put the brake on adding more shared bikes to the streets. With five operators, including Ofo and Mobike, expanding rapidly since in the city at the end of last year, Wuhan’s urban districts now has 700,000 shared bikes (link in Chinese), far exceeding the city’s carrying capacity of 400,000. The government stepping in to prevent the companies from adding new bikes on the streets is no small hindrance for the industry’s core business model. Ofo now needs to spend even more resources on maintenance under the government’s tight scrutiny, and needs to figure out new ways to expand their business.

Thousands of share bikes laid to rest in the south-eastern Chinese city of Xiamen. Photograph: Chen Zixiang for the Guardian

In the past six months, six different bike-share companies has went belly up (link in Chinese), and over 1 billion RMB ($151 million) of users’ security deposit has been lost. In July, some users of Mingbike claimed that they were having problem getting their security deposit back, causing many users to request their money back from the company. Employees of the company claimed that they still owe 250,000 users a total of 50 million RMB ($7.55 million). In August, Dingding was branded an “abnormal enterprise” by the authorities due to illegal fundraising and cash flow problem, and was not able to return the security deposit to over 10,000 users. In September, when many users of Bluegogo bike found that their refund of security deposit was overdue, Chinese social media erupted in complaints about the company. With more than seven million bikes, Bluegogo was the third largest bike-share company in China and had expanded their business into Sydney and San Francisco. Nevertheless, the company failed last month in what analysts say is the sign the country’s bike-share bubble may be bursting, leaving thousands of users without their deposit back.

Over the past two years, China’s bike-share companies have grown in an astonishing speed and have taken over the streets with colorful bikes. However, it is clear that there has been far too many players backed by far too much venture funding chasing far too little profit in the sector. Moving forward, even well-managed and well-funded ventures like ofo will face an uphill climb. Many peole predict that ofo will eventually have to merge with its biggest competitor, Mobike, in order to stop burning money and focus on turning profit. Earlier this year, CEOs of both companies have made it clear that they would not consider a merger. However, since the landscape in China’s bike rental industry has been settled with ofo and Mobike accounting for 95% share of the market, the attitudes of investors behind these companies are growing more favorable towards a merger to end the costly competitive battle, according to Bloomberg. Will the two companies join forces to become a single leader in the industry? Will ofo be able to achieve its goal to turn a profit in 2018 under its current business model? How will ofo manage its many branches overseas and adhere to local policies? For now, the future of the company remains unclear.

Blue Apron’s Bust

To date, 18+ investors have put $199,400,000 into a company they believed would disrupt the world. In a pre-IPO regulatory filing, the company said it could be worth $3 billion, pricing shares at a range of $15-$17 and making it a unicorn. More recently, though, one of the co-founders stepped down as CEO, the company’s market value is $714.59 million, and as of December 5, 2017, at 6:26 pm EST, those highly-anticipated common shares are worth a measly $3.76.

Blue Apron was once a highly sought after and heavily funded food and beverage startup. Now, it’s the most recent company to go down in a string of failed initial public offerings. So, what happened?

In 2012, chef Matt Wadiak connected with Harvard MBA Matt Salzberg and engineer Ilia Papas, a duo looking to launch a food startup. In August of that same year, the three began hand-boxing ingredients, the first version of their product, in Wadiak’s New York City apartment. They shipped to their 20 closest friends and family members and found vast success.

The idea, and the company, took off. In February of 2013, Blue Apron received $3 million of funding in its Series A round. Series A follows seed capital, the initial funding round that raises cash for market research and business development. Blue Apron received $800,000 in its seed round from angel investors Traveon Rogers, Jason Finger, and James Moran. Angel investors “are affluent individuals who inject capital for startups in exchange for ownership equity or convertible debt” (convertible debt is a bond that the holder can either convert to shares in the company or cash out at the equivalent amount). These three investors–a football player and two entrepreneurs–saw something in Wadiak, Salzberg, and Papas. They invested in the founders themselves and an idea that could confront an industry ripe for disruption: food.

The hefty $3 million from Series A financed the optimization of Blue Apron’s product–meal-kit deliveries–and user base, growing the number of subscribers much higher than those first twenty friends and family members. This round saw action from Greycroft Ventures, Graph Ventures, First Round Capital, BoxGroup, and Bessemer Venture Partners, all of which are venture capital firms.

Venture capital has a relatively short history. In America, companies were originally funded heavily by debt. This began to shift in 1811, when New York established limited-liability laws, making it so that shareholders wouldn’t be held liable if companies went bankrupt. These new laws, in addition to the development of information systems that reliably report the status of a company to potential investors, are what allowed funding via equity to come to fruition. Railroad companies were some of the first companies to be funded by equity. Since their shares were tied to tangible assets–trains, train tracks, etc.–people were more keen to invest in them because they could always sell these assets as direct materials if the company itself went bankrupt (Salon).

Henry Goldman (yes, relation to Goldman Sachs) next introduced a way to underwrite securities for companies without tangible assets like railway cars, deriving market value from a company’s earning power. Goldman’s valuation process was used mainly for merchandise and retail companies. Tech companies couldn’t borrow from banks or raise capital because people didn’t know how to value them or if they were reliable companies. Thus, private equity was born. These tech companies were too high risk for the typical methods of funding, so they turned to private, wealthy individuals (Salon).

The invention and mainstream adoption of personal computers ignited an explosion of startup companies seeking venture capital to fund their early growth stages. Venture capital is special because it mainly funds new companies and ventures who are looking to raise early stage funding. This type of investing can be done by individuals (Angel investors), investment banks, or other firms, funds, or financial institutions. VC can yield extremely high returns, but is also very high risk.

The venture capital phenomenon gained even more traction with the invention of the internet, ultimately leading to the formation of a dot com bubble. Venture capitalists were investing millions of dollars in any company that ended in .com. These new internet companies, however, wouldn’t produce earnings or profits for several years, so their valuations were based purely on speculation.

Graph: Data Science Central

As seen in the graph, U.S. venture capital investments reached an insane high of over $106 billion in 2000. The following year, 2001, is when the dot com bubble burst. These highly speculated and overvalued internet companies could not meet the expectations of the VCs who owned equity in them, and eventually they tanked. Trillions of dollars of venture capital funding went under. The landscape since has recovered, yet in recent years has started to see an uptick.

In 2016, $69.1 billion of venture capital was invested across 7,751 companies (NVCA). Blue Apron actually skipped funding efforts that year, as it was anticipating going public. The company received their $3 million Series A funding (mentioned earlier) in early 2013, only to be met with another $5 million from Series B later that summer. The next year, 2014, brought $50 million in Series C, and the year after $135 million for Series D. At this point in time, October of 2016, Blue Apron was set to do more than $1 billion in annual revenue and was preparing to IPO. As reported in the unaudited income statement provided in Blue Apron’s 2017 Q2 Earnings Statement, Blue Apron did $482,900,000 in revenue in the six months ended June 30, 2017, which was up from 2016’s $374,022,000, but not close to being on track to make the projected $1 billion in a year. Once again the question arises, what happened?

Chris Dixon, of prominent VC firm Andreessen Horowitz, applies something called the Babe Ruth Effect to venture capital. Babe Ruth, an American baseball player, frequently struck out while at bat. However, when he did hit the ball, he broke several batting records. Typically used in gambling and statistical logic, the Babe Ruth Effect explains that in venture capital, a few big hits are what often “return the fund.” VC investors will bet frequently on new ventures, of which only a few, or one, will have success of any magnitude. In fact, 80% of returns come from only 20% of the deals (CB Insights). This follows a power law distribution. Most people expect companies and their returns to fall somewhat linear in rank v. return. In reality, the graph looks very different from this expectation. The highest ranked company typically performs exponentially better than the second highest, and so on and so forth.

Graph: Michael Dempsey, Compound VC

Power law distribution is prevalent in venture capital, as it is also seen across unicorn companies (startup companies valued at over $1 billion). When 100+ unicorn companies are ranked from highest to lowest valuation, a cluster of values dominates at one tail-end of the graph.

Graph: CB Insights, November 16, 2017

The top ten unicorns, including Uber, Snapchat, SpaceX, AirBnb, Pinterest, Dropbox, etc., represent $184 billion, almost half of the total valuation. Blue apron can as one of the following 70 unicorns. Its valuation falls between Trendy Group International and Proper Marketplace, all three of which are companies or relatively similar valuation size. Because the distribution follows power law, the first few unicorns have the highest valuation by exponential values, followed by the rest of the unicorns. The tail trails off with most companies at almost the same valuation.

Valuation and market capitalization are two different measures. Valuation is the estimation of a private company’s market value. It is what these unicorn statuses are based on. Companies like Uber, who are still private, have no measured market value, so they must go off of valuation. Dash Victor, former Square accounting manager, explains that a company’s valuation can be calculated by multiplying the price paid per share at the latest preferred stock round (for Blue Apron this is their Series D funding round) by the company’s fully diluted shares, which consists of outstanding preferred shares, options, and warrants, restricted shares, and potentially an option pool. Before going public, Blue Apron had a proposed valuation of just under $3 billion. Its current market capitalization, calculated by multiplying outstanding common shares by the current stock price, is only $710.79 million.

Differences in the way these two numbers are calculated can be attributed to some of Blue Apron’s woes. In market capitalization, only common shares (stock sold at IPO in addition to preferred shares converted to common shares at time of IPO) are used in calculating the total. Valuations, on the other hand, include outstanding options, warrants, and restricted shares. Additionally, a company’s valuation is based on preferred shares, which as titled, have preferred options over common shares, like in some cases guaranteed pricing upon exit. Victor explains that valuing a private company using this method is like “valuing a concert by taking the price of a front row seat and multiplying it by every seat in the house.” The premiums involved make it difficult to compare a company’s valuation to its market capitalization.

Valuation/market cap discrepancies were nowhere close to Blue Apron’s only problem. The year 2013 saw record highs for the volume of global VC investment, the majority of which was in companies in early and seed stage funding. Money was cheap, markets were overconfident, speculation was high, and this venture capital funding was easy to obtain. VC firms were investing in more and more companies, and according to the law of distribution, lots of these companies were bound to fail.

Graph: Global VC financing volume into technology companies by stage. (TechCrunch)

Blue Apron credits itself as an American ingredient-and-recipe meal kit service. When asked to define Blue Apron, a past subscriber coined it simply as a “food service.” Blue Apron is a subscription service that delivers semi-weekly, perfectly portioned ingredients and step-by-step recipes. Their vision claims a they’re on a quest to create better standards, regenerate land, eliminate the middle man, and reduce waste. The past user, Bella, said she and her father subscribed as an easy way to transition into being a single parent family. Her dad wanted to continue providing home cooked meals for her, but he didn’t have time to devote to grocery shopping, meal planning, and ingredient prepping. They subscribed for the convenience of the product, not the vision.

Another problem Blue Apron faced in going public was this current environment of hyper convenience. It seems as if every new product or service provides people with something to make their lives easier. This abundance of convenience is becoming oversaturated. The Los Angeles Times’ Tracey Lien writes that new ventures aimed at solving “seemingly trivial problems” have increasingly been popping up. This is due to powerhouse startups–Facebook, Google, Snapchat– already picking the “low-hanging fruit of the startup economy.” This is why the world had a $700 juicer and has a sock company that has received $110 million in funding. With lots of investment cash and copious amounts of wannabe founders, the startup economy has seen an increasing number of companies founded not to solve pressing world issues, but instead the trivial issues of the upperclass. This is what accounts for the hyper convenience in U.S. products and services. People no longer feel that delivery or subscription services are special. They’ve become desensitized to these luxuries, and no longer give them much value.

Another dilemma in the obsession with startups and their culture is the way in which they is communicated. For starters, the media defines almost every new venture, Blue Apron included, as a tech company. Blue Apron is a subscription service, but its products lie in the realm of the food and beverage industry. It can be classified as a delivery or ecommerce company, but to strictly define it as a technology company would be inappropriate. America is obsessed with technology, so consequently, startup coverage is heavily focused on tech companies. But with no real parameters for determining what it means to be “tech,” metrics and numbers can be misconstrued. A food and beverage company should not be expected to perform the same as an SaaS company. Similarly, an apparel startup should not be anticipated to live up to the performance metrics of a fintech company. Fortune’s David Meyer was wrong to compare 2017’s worst IPOs–Snap, Inc., Blue Apron, and Stitch Fix–all as technology companies.

Blue Apron’s meal kit delivery was a good idea. It probably could have done well in certain high income markets. However, it was overvalued, overfunded, and over speculated, leading to an unsatisfactory initial public offering. The state of American venture capital is at a tricky crossroads. Hundreds of trivial companies are being funded, leading to increasingly inflated valuations. Very few of them will IPO, but of those that do, they often face a rude awakening when their market capitalizations do not match their private valuations. The current obsession with tech, VC, and going public could potentially create drastic consequences for the American startup economy.



Advertising doldrums: News orgs revenues dwindle as Facebook booms

There was a clear method of monetization through advertising in the early days of journalism, back in the 1900’s when news outlets ruled mass communication and information. This notion is considerably less strong today with the inclusion of user-based social media and the competition its brings that directly affects advertising revenue.

In the 1900’s, print newspapers were great at making money because people were paying for content on the physical product, and advertisers were paying for the remaining space on the physical product (two strong streams of revenue).

Now, our world is full of sleek touch screens that serve as the hardware for all sorts of information. The product has changed. Humans don’t turn pages that much anymore when it comes to consuming news; instead, consumers hope the digital format acts fast with the pressing and clicking buttons. And reliance on print newspapers for other important reasons—to find a house to buy, for example—is not needed in the age of the internet when you have .com’s with simple-to-use categorization methods.

Newspaper advertising was at its peak in the 1990’s, via the graph below, bringing in $67 billion of revenue before digital advertising became legitimate after the ascension of the internet. Newspaper print advertising dropped to $16 billion in 2014, while the digital revenues of newspapers ($19.9 billion) total near the same amount. 

Like a print newspaper, computer and phone screens of the digital realm have space for advertising. So, it should come as no surprise that with less people paying for a physical product, news outlets have become more reliant on advertising revenue generated from the screens of phones and computers.

But people in general don’t get excited about digital advertising. Our quick-acting phones may be a factor in supplementing this obvious distaste for digital advertising, as numbers in 2016 show that over 80 million Americans were projected to use ad blockers that year, which cost digital media companies about $10 billion in revenue, according to EMarketer.

As difficult as it might be to utilize advertising revenue on a computer screen, it’s even more difficult to advertise on mobile phones because they’re smaller devices that make it easy for ads to take up the entire screen and seem pretty obnoxious.

Since news organizations’ advertising is driven by the amount of room available within the confines of a page, there is a limited ability to advertise, and advertising revenue can only generate so much monetary gain for news outlets.

After all, advertising is a business of ebbs and flows; if the economy is flourishing, revenues will most likely be higher. So when 2008-2009 hit, people thought that newspaper advertising revenues would see significant recovery when the economic downturn was over. That hasn’t happened, especially through digital means.

“While that digital ad pie is growing, the numbers show that news organizations are competing for an increasingly smaller share of those dollars,” wrote Kenneth Olmstead for the Pew Research Center.

A notable issue exists within the new digital framework we live in, contributing to news organizations’ “increasingly smaller share” of those digital advertising dollars. News outlets aren’t frequented to the same level as they once were, since more competition comes from blogs and social media, like Facebook and Twitter, which are driven by new media consumption habits.

Instantaneity and an abundance of content are indicative of what social media is, compared to traditional news media which usually needs some sort of verification from an editor that doesn’t make it instantaneous. And newspapers’ content is often professionally produced, so its output isn’t as plentiful as what’s generated from free-flowing social media.

The reality of this digital age can be summed up simply. As social tech giants continue to rise and have a wide base of consumers online, it’s clear the more engagement you have, the more potential exists for advertising.

“Ultimately advertising is about selling attention, and if most of that attention is focused on Google and Facebook, then naturally they can monetize it,” Balderton Capital venture partner Suranga Chandratillake told the FT.

According to The Guardian writer Roy Greenslade, Facebook’s net income increased 300% and its margins jumped from 26% to 37% in the first quarter of 2016.

“In effect, 90% of the increase in mobile revenue is going to Facebook and Google,” Greenslade wrote. “Combine this with agencies’ own income influencing advertising decisions, and the internet begins to resemble a monopoly based around algorithms rather than a supposedly neutral distribution platform.”

Facebook can move the right ads to the right audiences and better exhibits user engagement for ad agencies because the company holds about 98 data points per user. This function basically allows advertisers to target specific people with specific interests, leading to more effective ad placement. News organizations have failed to capitalize on social media’s new-age comprehension of behavioral economics.

The average media consumer’s focus shifting from news organizations to social media is also because destinations like Facebook feel so unique.

Social media is user-based, meaning anyone with access to the internet can build virtual communities and contribute to worldwide communication, and those who were once voiceless can have their perspective seen for its good and bad consequences. It’s an idea that feels like democracy, bringing power to the people in a sense, but also feels too open for slander at times. We can very simply broadcast ourselves to mass audiences, and the initial and constant gratification gained from this wide-spanning personal connection is present in millions of people.

Therefore, trying to compete with media companies that have such power over mass communication is, and will be, tough for news organizations. Facebook, for example, has media organizations working with them in such a way that Mark Zuckerberg’s company seems to be the one in control.

“When Facebook says it will prioritize video in News Feed, every publisher that can afford to do so builds a video team….Facebook is setting the rules, and news organizations are following,” WIRED staff writer Julia Greenburg wrote. “That’s concerning because the news industry is in a precarious way. Publishers have finite resources and limited time. Staff are overworked and underpaid.”

Online ads for news outlets have increasing revenue each year, so that’s not a problem. From 2009 to 2014, U.S. newspapers went from $2.74 billion in digital ad revenue to $3.5 billion, according to the graph below. A $1 billion increase in five years wouldn’t look bad if digital ads had been used by newspapers since the mid-1900’s. But that’s not the case, as the main source of advertising originated on the print newspaper, and in 2003, print ad revenue was $44.94 billion. In 2014, that number dwindled to $16.4 billion.

“Online advertising is looking more and more like a contest that publishers can’t win—not on a large scale, at least,” Slate’s Will Oremus wrote. “Advertising can help to cover some of their costs, but online ads alone won’t pay for big, serious, high-quality journalistic enterprises the way that print ads once did.”

In the early 2000’s, news organizations were optimistic by thinking that their revenue streams would work out. They weren’t able to forecast that fewer people direct their attention to digital ads, making them less reliable than print ads. By not having every news organization construct online paywalls 15 years ago, consumers now expect online news is there for reading, not ad viewing, while there are so many other entities on the fast-paced internet that can redirect one’s attention — a combination of realities that puts news sites in a conundrum.

Even though a lot of newspapers thought digital ad revenue was going to pay their bills so that they wouldn’t need an online paywall, there were some that went in a different direction, such as the Arkansas Democrat & Gazette. This paper allowed free access to the website, but only if the reader had subscribed to the newspaper.

“For the last 10 years we’ve remained steady in both daily and Sunday circulation, whereas other markets have seen 10-30 percent drops,” Conan Gallaty, director of the paper’s website, said.

The New York Times has adopted this method as well. But if many outlets were to do this, the value of print newspaper advertising could plummet because people are still going on their computer and viewing the news online, while the actual paper sits in front of their house collecting dust. The decline of print newspaper advertising would accelerate at an even faster rate, and many would argue there’s no point in trying to save it.

Another subscription-friendly site is the online publishing platform Medium, which thinks its future of revenue is rooted in subscriptions that are free of ads, costing around $5 a month and featuring exclusive content. Stratechery, run by one man, Ben Thompson, caters to lovers of tech and media and is $10 per month for a subscription. Similar to Medium, exclusive content exists by paying the monthly fee.

“Making advertising a secondary — though still vital — revenue source is the most important strategic goal for most news publishers,” Ken Doctor of Newsonomics said. “Reader revenue, if backed by sufficient high-quality content and good digital products, proves far more stable than advertising.”

The subscription fees might get people who don’t read a paper to still monetarily contribute for the news. After all, since the older demographic reads physical newspapers, there continues to be less and less print readers as they die off.

If subscription fees can’t get the job done for some of the medium-to-large media companies, then what’s the next step for their revenue? One method could be having a team of journalists do consulting and market analysis for clients that are willing to pay, considering the writing and analytical skills of experienced reporters covering certain beats are considered to be of high-quality.

New organizations could also step up their push for revenue by selling merchandise, striving for unique consumers goods like entertaining clothing. But there’s a strong belief that news organizations have to do a better job enticing people into their online community. Video is being used more often in producing news, but the interactions between the readers is still fairly basic with the use of a straightforward comments section. Building other initiatives into the experience of watching video and reading text may really help these news organizations.

There’s also a possibility that someone alters the composition and experience of the ads, and not the news content. It’s unknown how this would actually look, but attaching social meaning to the ads through reader voting and reactions could be along the right line of thinking.

Clearly, retaining reader engagement poses a challenge for news companies. And their current situation can only get worse — unless a group of forward thinkers hits the nail on the head with one or many solutions.

Millennials Are Shaking Up the Retail Industry

According to the U.S. Census Bureau, as of 2016, millennials overtook Baby Boomers to be the largest living generation group. Millennials, who are defined as ages 18 to 34, now number 75.4 million, surpassing 74.9 million Baby Boomers. With Baby Boomers, ages 51 to 69, reaching retirement age, millennials are now reaching their prime working and spending years. This means millennials will fundamentally change the landscape of the U.S. economy, and for the better. Over the next five-years, the purchasing power of millennials is projected to increase from 133 per cent from $600 billion to $1.4 trillion. With millennials being the largest and most diverse generation in U.S. history, their impact on the economy will be significant. In order to survive in a millennial-driven time, retailers will need to hit the refresh button not only to keep themselves alive, but the U.S. economy too.

To understand how millennials will affect the retail industry, it is important to understand the two factors that have shaped their spending habits. Firstly, is the 2008 recession, also known as The Great Recession. The first wave of millennials entered the workforce during the recession, and this meant one of two things: 1. They were unemployed for a considerable amount of time, or 2. They were employed, but were earning far less than what they should have been. Secondly, is student debt. While millennials are the most educated generation, what distinguishes millennials from other generations is the historic student debt they carry. As of September 2017, the total amount of student debt Americans owe is $1.45 trillion dollars. This, combined with coming of age during the 2008 recession, means millennials have had less access to full-time jobs and wealth than previous generations. Consequentially, this has severely limited the spending power of millennials and had a direct effect on their spending habits.

The spending traits of millennials will hurt U.S. retailers if companies do not take a look at their business models and re-strategize. This is because millennials are putting off major purchases, such as cars and houses. This is a result of being more conservative with their money and not being big risk takers or gamblers. Their inability to own means they opt to rent or lease. Most recently, they have embraced the sharing economy by highly utilizing services such as Uber, Lyft, AirBnb and Turo.

“Millennials are not confident consumers; they are afraid of recession and lack of employment,” Head of Loeb Associates Inc., Walter Loeb said. “They want to own less and lease more, even dresses and suits! Millennials respond to good service and do research on the internet before making a major purchase. They are real-time consumers, shopping for today’s needs and waiting until the last minute to shop for tomorrow’s events.”

Two-thirds of the gross domestic product (GDP) is consumption. This means the economy relies on people spending money. While it is estimated that by 2020, 30 per cent of all retail sales will be to millennials. Because millennials value objects and big-ticket items far less than previous generations, millennials have shifted their focus towards activities and experiences that make make memories. This value is forcing retailers to rethink how to attract millennial purchasers. With millennials’ love of technology and social media, retailers are only now beginning to implement changes to the way they offer their products and services. For example, millennials’ value for convenience and ease of transaction has seen many large supermarkets and retailers offer self-serve checkouts and electronic payment systems that don’t require you to take out your wallet, instead, just a swish of your phone.

While implementation of technology into the retail experience is useful in drawing in the millennial crowd, it is also one of the most dangerous millennial values that threatens brick-and-mortar retailers. A study conducted by BlackHawk Engagement Solutions, an international incentives and engagement company, showed that millennials are “plugged” into mobile and social shopping, which is completely disrupting historically traditional shopping patterns.

“Millennials are leading a change in purchase trends,” BlackHawk Engagement Solutions marketing president, Rodney Mason said. “It’s incredibly important for retailers and retailer marketers to understand how to appeal to this demographic. Millennials are savvy shoppers and many have come of age in a post-recession era. This group routinely comparison shops on mobile to get the best value and shopping experience. The market, however, has not yet capitalized on those habits.”

The retail industry has yet to catch up with the growing number of millennials entering their prime spending age. Retailers need to take into account that it is hard to convince millennials to make big purchases or purchases that aren’t considered a necessity with their limited spending ability. This lack of forward-thinking in the industry is evident in the number of reported store closings and bankruptcies. So far, in 2017, there have been nine retail bankruptcies and as many as all of 2016. Retailers such as J.C. Penney, Macy’s and Sears have each announced more than 100 store closures. However, these closures have occurred during GDP growth (eight straight years of growth), unemployment being under five per cent and steady wage growth. This further strengthens the notion that American storefronts are largely driven by millennial spending habits.

Due to millennials’ savvy shopping ways, e-commerce is eating away at traditional retail. Between 2010 and 2016, Amazon sales in North America quintupled from $16 billion to $80 billion. To put this into context, Sears’ revenue in 2016 were approximately $22 billion—Amazon grew by three Sears in six years. Mobile shopping is also seeing big increases thanks to apps and mobile wallets. Since 2010, mobile commerce has grown from two per cent of digital spending to 20 per cent.

As well as millennials’ love of technology is their equal love of social media, which is apparent in their retail spending traits. They’re on a mission for a bargain and one of the tools that helps them make an informed purchase is social media. Many use it as their primary source to find and hear about products, specials and shopping news. A report published by Deloitte found that 47 per cent of millennials say their decision purchase is influenced by social media. This figure is 19 per cent across all other age groups. Millennials are not listening or looking at a brand marketing messages on their social media accounts. Rather, they’re using social media as a way to review input and feedback about products and services. PricewaterhouseCoopers asked digital buyers about how they make purchase decision online. Nearly half reported that reviews, comments and feedback on social media impacted their shopping choices. With the ability to look for the cheapest price of a product at the drop of a hat, e-commerce is hurting retailers who generally offer their products at a higher price than their online competitors.

One company that is revitalizing itself to appeal to millennials is Estee Lauder. Estee Lauder recently announced a partnership between itself and YouCam Makeup to enhance the mobile phone browsing experience while still attracting customers to brick-and-mortar stores. App users can now apply makeup through uploading an image of themselves. This allows users to try on as many shades as they want before deciding to make a purchase in-store. To provide a unique experience for in-store customers, YouCam’s virtual in-store magic mirrors encourage customers to further engage with products, try on more options and take selfies.

About 70 per cent of Estee Lauder products sold today are new, have been updated or re-formulized in the wake of millennials entering their prime spending age. It’s most recent acquisitions include Too Faced, which began as a social media start-up and Becca Cosmetics, a makeup line that relies on social marketing and is designed to appeal to consumers of all ethnicities. Estee Lauder has relied heavily on acquisition to bring in millennial dollars. Their growth has been driven by the group’s “cooler” brands such as Jo Malone, Tom Ford, MAC, La Mer and Smashbox.

Not only is Estee Lauder making changes to cater for millennial customers, they are also catering for their millennial employees. The group’s attempts to tap young employees began a couple of years ago with retail immersion days, where Estee Lauder CEO Fabrizio Freda was shown how millennials “fall in love with brands”. Following that, the company created reverse-mentoring programs, where young employees were paired with senior Estee Lauder managers to teach them how to be tech-savvy shoppers by learning how to utilize social media during this process. Estee Lauder also created millennial advisory boards to offer advice to executive teams.

Based on Estee Lauder’s learning experience from millennials, the company launched a product line, The Estee Edit, targeted at millennial women. The line was promoted heavily on social media by reality television stars, such as Kendall Jenner. The makeup consisted of bright shades, all products were under $50 and were featured on numerous YouTube video tutorials—all that appeals to a millennial.

So far, the results look promising for Estee Lauder. During their Q4 quarterly earnings announcement, they reported strong financial results as well as for their fiscal year, which ended June 30, 2017. For the three months ended June 30, 2017, Estee Lauder reported net sales of $2.89 billion, a nine per cent increase compared with $2.65 million in the prior-year period. The recent acquisitions of Too Faced and Becca Cosmetics outperformed expectations, with incremental sales contributing to approximately 3.5 percentage points of the reported sales growth. The company posted sales growth in most brands across-the-board in all geographic regions (Asia/Pacific, Europe, the Middle East & Africa, and The Americas) and product categories, except hair care. For the year, Estee Lauder achieved net sales of $11.62 billion, a five per cent increase compared with $11.26 billion the previous year. Incremental sales from Too Faced and Becca Cosmetics contributed approximately two percentage points of the reported sales growth.

While it appears Estee Lauder’s efforts have achieved success thus far, other retailers will need to catch up in order to stay ahead of the millennial game or risk becoming, old, outdated and unappealing. For retailers to target and attract millennial shoppers successfully, there are a few important aspects to note: 1. Smartphones are a primary means to connect to the internet. Smartphones are the dominant method of connection to the internet for millennials, with 89 per cent of them the device to connect, versus 75 per cent who use laptops, 45 per cent tablets and 37 per cent desktop computers. Retailers will need to have a mobile-first strategy if they want to stay relevant with millennials. 2. Millennials love for social media means retailers should integrate digital media with their traditional advertising strategies. Brand engagement and peer discussions are the key making brands memorable. Retailers will need to encourage customers to leave feedback, or create a social media hashtag for millennials to use with their posts. 3. Google and Amazon are the go-to sites for price comparison. Almost 80 per cent of millennials are influenced by price and 72 per cent search for a coupon online before making a purchase. An average of three minutes is spent searching for coupons. To compete, retailers will need to offer competitive pricing, whether that be product discount, volume discount or distribution of coupons/promo codes.

While millennials are more conservative with their money compared to other generations, millennials are willing to part with their cash if retailers can impress them; their business must be earned. If retailers can tap into what millennials want, one thing is clear—that millennials’ love for technology, convenience and experiences will help grow the U.S. economy. These factors will drive competition within many sectors and industries, and if companies don’t keep up, they risk going out of business. This is the new reality for producers of goods and services.



AT&T vs. The Department of Justice

In October of 2016, telecommunications giant AT&T agreed to buy Time Warner for $85.4 billion. This merger would bring together a content distributor with a juggernaut of content production.

The deal was set to close by the end of 2017 until the Department of Justice stepped in. On November 20th, the Justice Department sued to block AT&T’s acquisition of Time Warner.

This case has the potential to be a landmark case and a sign of changing antitrust tides in the Justice Department. This result of this case could have implications beyond this one deal.

The Great Content Desire

AT&T is a multifaceted telecommunications company and Time Warner owns channels and produces originals TV shows and movies. Their businesses intersect but do not compete. AT&T wants to acquire Time Warner so it can pair its existing content distribution streams with Time Warner’s content production.

AT&T divides up its company into four operating segments:  business solutions, entertainment group, consumer mobility and international. Consumer mobility is the segment traditionally associated with AT&T and provides wireless service in the United States. The entertainment group, which includes recently acquired DirecTV, some content production, advertising and broadband internet, is at the heart of the conflict around the merger.

AT&T wants to acquire Time Warner so it can own its premium content produced by HBO and Warner Brothers and the content produced by the channels of Turner Broadcasting, which includes: CNN, TBS, TNT, TruTV, among others. The merger would also give AT&T the sport broadcasting licenses Turner Sports including the rights to NCAA march madness. It is this mass of content production that AT&T is craving.

Across the tech and telecommunications industries, there is a general hunger for content and content production, especially as there seems to be no slowing down of online streaming content. Everyone is trying to keep up with and compete with Netflix. For example, Apple recently invested $1 billion to produce original TV shows and movies. AT&T’s motivation behind the merger is its hunger for content.

Merging with Timer Warner would diversify AT&T’s entertainment portfolio and allow them to become a competitor of streaming giant Netflix. If the deal goes through AT&T would have a control over both premium content production and content distribution channels, like DirecTV and their wireless cell phone service.

Vertical Merger

There two main types of mergers: vertical and horizontal. Horizontal mergers, when direct competitors merge, raise more concerns of a reduction in competition. When two competitors merge they are directly reducing competition in a field.

The AT&T and Time Warner are not direct competitors; therefore, their merger is a vertical merger. In this vertical merger, it would be a unification of a distributor, content distribution platforms of AT&T, with a supplier of a product, the content produced by Time Warner. Technically, by merging there is not a removal of competition in the market. Before and after the merger there will be the same number of wireless service companies and TV cable and satellite companies.

While this merger is vertical, AT&T has also pursued horizontal mergers in the past. In 2011, they ended an effort to acquire T-Mobile. That merger would have directly decreased, already limited, competition in the wireless service market.

On a conference call with reporters in 2016, AT&T CEO Randall Stephenson reportedly said “This is not the T-Mobile deal; there is no competitor being removed from the marketplace…Time Warner is a supplier to AT&T. It’s a classic vertical merger.”

The goal of United States anti-trust law is to ensure competition and prevent the creation of monopolies. Since horizontal mergers directly reduce completion and could lead to monopolies the Justice Department and Federal Trade Commission (FTC) have historically been more vigilant in blocking and preventing horizontal mergers.

The government has only challenged 23 vertical mergers since 1979. Of those 23, three were abandoned by the companies and the other 20 were approved. The government has never won a vertical merger court case.

Effects of the Merger

AT&T’s argues that the goal of acquiring Time Warner is to “give customers unmatched choice, quality, value and experiences that will define the future of media and communications.” They say that the deal will lead to benefits for both investors and consumers.

Some of the possible consumer benefits that AT&T is promoting includes new video innovation and the potential alternative to cable. AT&T in a press release said that “the combined company will strive to become the first U.S. mobile provider to compete nationwide with cable companies… It will disrupt the traditional entertainment model and push the boundaries on mobile content availability for the benefit of customers.”

There is the rationale laid out by AT&T for why this deal should proceed, but there are also legal scholars who believe this deal should go through because if it is successfully blocked by the government there would further reaching consequences.

In the Harvard Business Review, Larry Downes argues that if this deal is challenged then “other pending or likely mergers,” like Disney and 21st Century Fox, “will be thrown into chaos—and the stock markets along with them.”

In addition to the possible positive effects of the merger that are possible negative consequences. Just because the merger technically would not directly reduce completion, it doesn’t mean there isn’t any risk of this merger resulting in anti-competitive practices.

Time Warner owns three of the top basic cable channels, the top cable news network, and the top premium cable channel. AT&T, thanks to its acquisition of DirecTV, is one of the largest distributors of those channels and their content. When AT&T owns both the distribution network and the content, they have the ability to withhold or increase the price of the content from Time Warner.

For example, they can raise the price of HBO and CNN. This could, in turn, drive customers away from other cable companies and to AT&T owned distribution networks or just lead to a customer having to pay more for AT&T owned content. They would be able to use the leverage of Time Warner’s “must have programming” to restrict competition and give their platforms an advantage. The acquisition of Time Warner would give AT&T the opportunity to stifle its competition through its ownership of highly desired content.

However, Harvard Law School Professor Susan Crawford points out in a Wired article that AT&T’s response to this claim would be that they have “every reason to ensure that Turner content is seen as many places as possible.” She also notes that this argument is flawed as “the revenue AT&T loses by effectively locking competing providers out of its must-have content will be more than made up for by those new subscriptions—available nationwide through DirecTV.”

Possible Solutions

The case most similar to the AT&T Time Warner deal is Comcast’s acquisition of NBC Universal, but the Comcast merger never went as far as with DOJ as the AT&T case has. The Justice Department did not sue Comcast to stop the merger. The DOJ allowed Comcast to buy NBC Universal as long as they agreed to over 150 conditions meant to prevent Comcast from favoring NBC content.

Behavioral conditions, like the ones in the Comcast case, have been a common way the government has dealt with vertical mergers. These measures are harder to ensure are followed and not a foolproof way of preventing anti-competitive practices.

The current head of the antitrust division at the department of justice, Makan Delrahim, has spoken about his dislike of the behavioral remedies in merger cases. In a recent speech, he said that “our goal in remedying unlawful transactions should be to let the competitive process play out. Unfortunately, behavioral remedies often fail to do that. Instead of protecting the competition that might be lost in an unlawful merger, a behavioral remedy supplants competition with regulation.”

Delrahim’s aversion to behavioral conditions hints to an avoidance of this as the solution to the AT&T case.

The alternative to behavioral conditions is structural remedies. These structural solutions, also known as divestitures, force a company to sell off a part of their business.  Maurice Sucke, a professor of antitrust at the University of Tennessee College of Law said that structural remedies “are much easier than behavioral remedies to craft and enforce.”

Prior to the department of justice suing AT&T over the merger, it was reported that A

T&T met with lawyers from the DOJ to discuss possible divestitures. It has been reported that AT&T was urged to sell off either Turner Broadcasting, which includes CNN, or DirecTV for the deal to go through. AT&T showed no interest in these divestments.  In a news conference after the DOJ decision to sue, AT&T, Stephenson said that his company was not willing to give up any assets to get the deal approved.

In Variety, Jan Dawson argues at AT&T needs all parts of Time Warner in order to justify the merger. Turner, which CNN is under, is the most financially profitable segment of the Time Warner business. It has contributed half of its operating income in most recent years. So while, Turner is not the premium content contributor, like HBO or Warner Brothers, that AT&T was originally seeking it does provide its income is important. Dawson’s analysis helps to explain the rationale behind AT&T’s lack of interest in selling off any part of its existing company or Time Warner.

The Political Question

This proposed selling off of CNN has raised some political questions due to the President’s feud with the news network. It is not known if the President had any influence over the DOJ’s decisions in this case.

However, if he did exert influence on the DOJ, “Mr. Trump will become the first president since Richard Nixon to use the levers of executive power to threaten the economic interests of a news organization whose coverage he does not like,” wrote Jim Rutenberg in the New York Times.

Even if there was no specific intervention by the President, Daniel Lyons, a visiting fellow at the American Enterprise Institute, said that AT&T counsel could argue that “these divestiture requirements are not motivated by the fact that the Justice Department thinks that divestiture is necessary to prevent consumer harm but instead that this is motivated by a more political purpose”

What’s Next

Following the lack of agreement over divestments, the DOJ proceeded to file a case against AT&T. Cecilia Kanf and Micahel J. de la Merced wrote in the New York Times that the DOJ suing AT&T is “setting up a showdown over the first blockbuster acquisition to be considered by the Trump administration and drawing limits on corporate power in the fast-evolving media landscape.

In a statement on the decision to sue, Delrahim said that “this merger would greatly harm American consume it would mean higher monthly television bills and fewer of the new, emerging innovative options that consumers are beginning to enjoy.”

Moving forward the DOJ has indicated they would still be willing to negotiate a settlement with AT&T, however, if they cannot reach an agreement the case will go to court. There is very little precedent for a vertical merger antitrust case going all the way to court.

The result of this case could also signal a change in antitrust regulation enforcement in the United States. It could affect the result of other pending or proposed mergers. For example, it could have implications for Disney’s exploration of acquiring 21st Century Fox.

It could even have ramifications on verticals mergers in entirely different sectors. CVS recently announced its acquisition of insurance company Aetna, a healthcare vertical merger. The result of the AT&T Time Warner case could set precedent for the DOJ or FTC’s actions regarding the CVS merger.

In the end, the lack of precedent in cases like this leaves a lot of uncertainty of what happens next. The justice department could continue to be lenient on vertical mergers or change course entirely and affect all vertical mergers to come.



Why the world’s biggest plane manufacturers are fighting over the future of air travel

An airBaltic Bombardier CS300 sits on the tarmac. (Image courtesy Bombardier)

Norwegian Air made headlines earlier this year when it advertised flights between the United States and Europe for as low as $65. It was unthinkable. No airline could possibly pull it off.

But Norwegian has created a new business model as a low-cost long-haul airline, riding on a wave of innovation from airplane manufacturers. Thanks to the fuel-efficient Boeing 787 Dreamliner and 737 MAX, it’s now possible for airlines to fly relatively small jet planes between far-off destinations and avoid the expense of flying large planes through large and costly airports.

This link between the airplane business and the airline business is strong and has been for decades. But it takes years for a concept for a new plane to become a flyable reality, so aerospace companies are always trying to predict the future: what will airlines and their customers want?

Bombardier is trying to do for domestic and regional flights what the 787 Dreamliner did for international travel. With its C Series, an entirely new 100- to 160-seat plane built with modern technology, the Canadian aerospace giant is betting that the future of air travel is direct flights between destinations on smaller planes rather than large flights through crowded hubs.

But the C Series program has been plagued by trouble, and other manufacturers are jumping at the chance to be first to the point-to-point air travel future. Boeing took action that led to hefty tariffs on Bombardier’s jets, and Airbus has since acquired a majority stake in the program.

As airlines phase out their large planes, what happens next will decide who dominates the airplane market for years to come.

A brief history

Prior to 1978, air travel in the United States was heavily regulated by the U.S. government. A federal agency dictated routes that airlines had to run, the fares they were allowed to charge for those routes, and how frequently they had to serve them. These mandates limited the ability of the industry to respond to changes in demand or fuel prices and the ability of individual airlines to innovate or compete with one another.

The deregulation of airlines in 1978 led to a period of rapid change in the industry, with most airlines coalescing by the end of the 1980s around what has become known as the hub-and-spoke model.

In a hub-and-spoke airline network, flights from “spoke” airports in smaller cities fly toward a larger “hub” airport, with the arrivals timed so that passengers can connect to other flights at the hub and fly to their destination. For example, a traveler leaving Oklahoma City headed for New York City could fly to Chicago first and connect there to a New York-bound flight. The system made up for uneven demand across cities by consolidating passengers headed for one destination onto one route.

The hub-and-spoke system enables airlines to provide more frequent service on larger aircraft at a lower per-passenger cost, creating an economic incentive for aerospace companies to design and produce larger planes. Its primary alternative, a point-to-point network, encourages the opposite: fast and frequent service on comparatively small — or “right-sized” — planes. This model was first popularized by Southwest Airlines, which has transformed the airline industry since its nationwide launch in the 1990s.

Avoiding a stop at a hub reduces costs by up to 30 percent, researchers at Embry-Riddle Aeronautical University found, and those savings can be passed on to the passenger. In a hub-and-spoke system, many flights arrive at a hub airport within a short time period and then depart together somewhat later. This increases congestion at the airport and means that planes and staff go unused between groupings of flights. Additionally, nonstop point-to-point service reduces the need for ticketing agents, gates, lounges, and baggage facilities by spreading demand throughout the day.

How aerospace companies respond

These different models of airline routing demand different kinds of planes, which has shaped the strategies of plane manufacturers over time. Research and development for a new model of airplane takes years, sometimes up to a decade from conception to delivery. This is a huge investment of resources for the manufacturers, so they try to anticipate trends years in advance.

But sometimes the big players don’t agree on where things are headed. Looking at the programs that duopolistic Airbus and Boeing pursued throughout the 2000s, we see diverging trends: Airbus believed that bigger planes would bring costs down through economies of scale, while Boeing thought efficiency would help midsize planes travel more cost-effectively over long distances.

The Airbus A380 program officially began in December 2000 with the goal of allowing high-capacity flights between hub airports at a low per-passenger cost — consistent with the hub-and-spoke model. Airbus has described this as a necessary response to growing demand for air travel, which it says will lead to overall air traffic doubling every 15 years. Years after its release, the A380 remains the world’s only double-decker plane, able to carry more than 600 passengers over distances of more than 15,000 km.

But it seems that Airbus made the wrong choice in pursuing size over economy. Very few cities have passenger counts that could reliably fill a 600-seat plane, and the four jet engines on the A380 mean that flying one that isn’t full becomes prohibitively expensive. Not a single airline in the United States has purchased an A380, and their attitude toward large planes is shown in their treatment of its closest equivalent, the iconic Boeing 747: all American airlines plan to retire their 747s by the end of this year.

“Every conceivably bad idea that anyone’s ever had about the aviation industry is embodied in [the A380],” aerospace analyst Richard Aboulafia told the New York Times.

Airbus initially predicted it would sell 1,200 of its superjumbos within two decades of launching, but the most recent data show that only 317 have been ordered.

Thousands of miles away in Washington state, Boeing was developing a different kind of airplane: one efficient enough to fly the longest routes in the world and small enough to avoid overcrowded hub airports.

With the 787 Dreamliner, Boeing used composite materials rather than metal to create a plane far lighter than its peers, saving up to 40,000 pounds. This, combined with more efficient engines and battery-based systems, made the plane 20 percent more fuel-efficient, bringing costs down to levels that made a 300-seat plane appealing to airlines flying international routes.

Despite launching commercial service four years after the A380 and being grounded worldwide for months due to early safety concerns, the 787 has sold three times as many planes as the Airbus superjumbo, with 1,283 orders as of Oct. 31.

Going even smaller

Bombardier, looking to the success of efficient planes and point-to-point networks, has tried to scale down the business model of Boeing’s 787. In 2008, it publicly announced the C Series, a line of small jets that could seat between 100 and 160 passengers. This placed it in the market between an increasingly popular line of regional jets from Brazilian firm Embraer and the ubiquitous Boeing 737 and Airbus A320 series mainline jets. Bombardier expected to sell more than 3,500 planes in this market within 20 years.

The C Series was designed to increase efficiency on domestic routes, and its smaller size is meant to make it feasible for shorter runways at smaller airports while still allowing more passengers than a regional jet. Bombardier says it will “let operators open more new routes and offer the frequency being demanded by passengers, without increasing costs.”

Bombardier and the governments of Canada, Quebec and the United Kingdom all invested heavily in the development of the C Series, totaling about $4.4 billion by early 2015 — or about two-thirds of Bombardier’s market value at the time.

“We all kind of loosely used [the term] ‘betting the company’” to describe the project, former Bombardier Commercial Aircraft president Gary Scott told the Wall Street Journal.

But the company has struggle to make that big investment worthwhile. New technology meant the C Series could be more efficient than other airplanes, but fuel prices began plummeting soon after the project was announced, and production delays eliminated the first mover advantage that Bombardier had over Boeing and Airbus. Both the big players quickly launched new versions of their 737 and A320 series with more efficient engines, something that Bombardier hadn’t anticipated.

Competing directly against Boeing and Airbus proved difficult for Bombardier, which in the past avoided such competition by focusing on smaller regional jets. After Delta Airlines placed an order for 75 C Series jets, Boeing began demanding the U.S. Department of Commerce place a tariff on those planes, which would be produced with what it called a Canadian government subsidy. The government agreed, levying a 300% tariff on the C Series.

To save the program from extinction, Bombardier gave half the C Series program to Airbus at not cost. Since Airbus has more resources, U.S.-based manufacturing plants, and worldwide service centers, it’ll be able to sidestep the tariff and make the C Series more appealing to airlines. Plus, Airbus gets to benefit from the revenue on a plane it paid nothing to develop.

This fierce and somewhat unprecedented battle over small jets signals a major shift in the industry and perhaps the end of the reign of hub-and-spoke networks. Airbus has said it expects to sell up to 6,000 C Series planes in the next 20 years, which make the new category nearly as widespread as its own A320 family, one of the world’s most common planes.

Looking ahead

As air travel demands increase and large airports become more crowded, planes like the C Series will allow airlines to more completely meet passenger demand, flying long and thin” routes between cities that are too far from each other for regional jets to travel but don’t have enough demand to profitably maintain service with something like a 737 or A320.

According to Embry-Riddle researchers, only about 5 percent of airport pairs in the U.S. could sustain nonstop point-to-point service on mainline jets. For an airline like Southwest that flies only Boeing 737s, it would be hard to break into markets with unsatisfied demand.

But a plane like the C Series could open new markets to air travel, and that’s why aerospace companies are vying for pieces of this new segment. At an airport with short runways like London City Airport, the C Series can go twice as far as any other aircraft and with 25 percent more passengers, Bombardier program head Rob Dewar told The Globe and Mail. For other airports like this around the world, a new generation of planes can create new routing possibilities, expanding the reach of point-to-point networks to places they couldn’t have gone before.

Games as a service has the industry in a predicament

Long gone are the days of penny arcade rooms and basic computer games. Multi-million dollar blockbusters have since taken hold and given way to a worldwide industry generating nearly $100 billion annually. Mobile games, retail games, free-to-play games, virtual reality, and esports are all segments of an industry that shows no signage of stopping.

When accounting for inflation, gaming has never been cheaper. A 2013 article by IGN details the high cost of gaming in the past compared to today. Cartridges for the Nintendo 64 that once cost $70 would require the equivalent of $100 at the time of writing in 2013. The Atari 2600 cost $199.99 in 1977 and with inflation that same console would cost $771.83.

Inflation aside, programs such as BestBuy’s “Gamers Club” which shaves 20% on new video games and the rise of second-hand stores such as GameStop have allowed gamers of all financial statures to participate.

As the decades have passed not only have games become theoretically cheaper, but their production values have increased as well. The 8-bit sprites of yesteryear have since moved on to high-resolution graphics that parallel real life. These graphics are often matched by movie-like stories and gameplay segments. But, as production values have increased exponentially so have the cost of creating video games.

For example: Star Wars: The Old Republic which released in 2011 had a development budget of nearly $200 million according to a story published by the Los Angeles Times. Grand Theft Auto V cost $265 million and the reboot of Tomb Raider carried a reported budget of $100 million.

How viable are such microtransactions? Very. This is why publishers ditched expansions in favor of them. In some cases publishers doubled down and now offer both.

The numbers above represent production costs and in some cases, do not reflect the amount needed to properly market the game, or the cost to keep the game alive post-launch. Many of these games carry multiplayer features which require continued maintenance and upkeep.

More so, the above games only represent a fraction of dozens of titles released annually. When looking at Game Informer’s 2017 release calendar, an average of 2-3 AAA quality videogames are released monthly. In peak months such as the summer, that number can quickly rise to over five.

With such a high cost of production and dozens of videogames on the market, video game publishers find themselves in need of generating revenue past the initial $59.99 entry point.  To generate more revenue to meet the rising costs of games, publishers have employed all sorts of tactics including, post-release content and pay-for cosmetic items, however, have since moved on to what is being deemed as predatory tactics in the form of loot boxes. These contents of these boxes are entirely random and can provide in-game boosts to lucky players. The battle between publishers, gamers, and now the governments of the world has the power to change the landscape of gaming forever.

Fifa 18 costs 59.99, but to truly be competitive, one must buy into the game. Coins and other items to get marquee players are sold at retailers and within the games themselves.

Originally video games were items that you bought once, however, publishers now see video games as a service. In the same vein that fans of Netflix original shows subscribe to the service above Hulu, avid fans will continue to pay into the game for added content. The shift in the landscape has tripled the value of the industry according to VG247.  At the same time this idea creates strife in that, if games are indeed a service, where fans buy into a game over time, then the game should not cost as much as it does upfront. It’s unreasonable to expect someone to purchase a game once and devote that same amount of money into it through microtransactions to remain competitive.

The idea of games as a service and loot boxes boiled over during the release of Star Wars Battlefront 2. The game aimed to improve on all the misgivings of its previous entry, but it was everything but that. Following the current trend, it carried loot boxes. The loot boxes would carry cards that help enhance a player’s ability. It was an entirely possible to play the game without ever buying them, but it was just as possible for people to get ahead quickly, creating an uneven playing ground. The game in short resembled mobile games and their pay-to-win aspects.

Much of the Playstation store for Madden is for coins to purchase card packs to boost in game play.

EA would remove the feature to purchase with real cash after gamers spoke out in droves, but those who had already acted in the lead up to the game were free to keep their earned items. It is still possible to purchase said boxes, only with in-game currency earned from playing.

As a result, it has been reported by CNBC that EA’s stock has been wiped of 3.1 billion. Still, even with such a high magnitude loss, the company is still up 39% year to date because Star Wars is only one of its many franchises and is not the only game to feature such transactions that boost revenue.

In the time since, many governments have been attempting to deal with how to tackle the issue. Loot boxes by nature tread the line of gambling. Much like a slot machine, a player pays for the box and through RNG, three or more items appear in the same vein that numbers would in casinos. And just like a casino, the odds of winning the big one, or in this case the best perks are never disclosed. More so, unlike casinos there is no oversight.

In China, the Commerce Government requires that the odds of loot boxes are disclosed to gamers. Where games such as StarCraft and League of Legends are most popular, players found that the odds of getting rare items were slim. In Dota 2, it was revealed that an epic skin, had a 2% chance of dropping. Unfortunately, publishers have found a loophole as only the Chinese version is required to do so and it is possible for such drop rates to be boosted.

Other governments have also hopped on board including Belgium where the Gaming Commission announced it has opened a case regarding the boxes and their gambling nature. Companies involved with gambling are required to have a license to operate. More so, minors and those suffering from addiction are forbidden to play or purchase

How did loot boxes come about? It wasn’t overnight. Honest post-release content became an unreliable source of income in the wake of multiple AAA titles being released monthly.


No ruling has been met, however, a transcription from Belgian news site RTBF and a concurrent report states that the country recognizes the difficulty in regulation utilizing current laws. It calls for “closer cooperation between governments, software developers, and rating agencies.” It also states that “with the right rules and consistent enforcement,” it should be possible to “protect players from the harmful effects of gambling without compromising,” the games.

In the United States, Representative Chris Lee (D) of Hawaii held a press conference days after the release of Battlefront 2. In it he denounced the predatory tactics utilized by EA and hoped to introduce legislation to combat of boxes found not only in Star Wars, but other games as well.

Lee, an avid gamer, said in an interview, “There’s a huge portion of the population outside what we might consider the die-hard gaming community.” Citing large discounts on video games during the holidays Lee continued, “…They’re looking for good deals on Christmas gifts not knowing what kind of mechanisms are built into games and ultimately systems their unaware of. It’s that large market space that continues to drive revenue.”

In a video published on YouTube, Lee outlined his proposed legislation, which includes prohibiting videogame sales containing “gambling mechanisms” to anyone under the age of 21. It would cover titles that carry a “percentage chance” of obtaining an item, rather than the item itself. He’s also seeking an “accountability piece” to ensure that drop rate changes do not occur, almost ensuring that such rates be revealed like in China.  Lee hopes that other states can join in to help drive change.

Grand Theft Auto’s “Shark Card” currency is utilized to buy new clothes for characters and vehicles. It has no impact on the game whatsoever, but is a cash cow. Now imagine if such cash did have an impact on play.

Currently, the Entertainment and Software Rating Board does not label games with such features as gambling. The ESRB which assigns ratings to games from E for Everyone to M for Mature with descriptors has categories for both Real and Simulated Gambling. The criteria for them to be utilized would necessitate that real cash be involved or that players can wager without real cash. Any game with either would receive an Adults Only rating which prohibits anyone under the age of 18 from purchasing. Just as major movie theatres shy away from showcasing NC-17 films, major retailers refuse to sell AO rated games.

While many are questioning the legitimacy of the ratings due to the nature of the boxes, a spokesperson said in a statement to Kotaku: “While there’s an element of chance in these mechanics, the player is always guaranteed to receive in-game content (even if the player unfortunately receives something they don’t want). We think of it as a similar principle to collectible card games.”

However, unlike collectible card games, the items received in such boxes do not have much, if any resale value. EA’s Ultimate Team mode allows the resale of lesser tier cards for values less than the initial purchase, while other games do not.

A few lucky players received cards that made the Boba Fett character nearly invincible. Other players who rolled loot boxes received emotes which do not boost the in-game abilities of players. RNG mechanics help determine the winners and losers.

What’s most concerning about videogame ratings is that the ESRB is an organization part of the larger Entertainment Software Agency. The ESA is a trade industry that carries members from the top publishers and developers in the world.

While the governments of the world work towards outlawing such predatory tactics, gamers across the globe currently find themselves stuck in the middle. While it would appear easy enough to not purchase a game like Star Wars Battlefront 2, it is difficult for avid fans to stay away.

Joseph Mellinger, a student at Penn State University and Star Wars fanatic has staved off buying the latest release in response to the loot box controversy. Still, he admits to having participated in the practice before, particularly in EA’s “Madden” series of titles. “That rush of possibly pulling something great grabbed me.”

That risk-reward nature is what grabs players and what governments are trying to combat. The hope of getting something good after receiving less than stellar items is what drives them to continue buying. It’s what drove players such as Reddit user, Kensgold to dump over $10,000 into microtransactions. Players like him are classified as ‘whales’ and according to Venture Beat make up less than 2 percent of gamers, but drive more than half the revenue through microtransaction purchases.

Kensgold posted an open letter on Reddit denouncing the loot boxes in Battlefront 2, citing his own experiences as cause for concern. In an interview he said, “At that point I had already set the precedent that dropping 100 bucks was not all that big a deal…I was in high school with almost no bills to speak of.”

Kensgold receipts for purchases on items

He hopes that publishers can take note of stories like his and help push the industry forward positively. “I would love to see publishers as a whole take a step back and look at what methods and strategies they are using to make money, how those strategies work, and what positive or negative effects they can have on their consumer base.”

The next few weeks and months of gaming will prove to be highly interesting. While EA has stated on record that they will bring back the microtransactions present in Star Wars Battlefront 2, it has yet to be seen when they will do so. It can be inferred that they are waiting for the theatrical release of the Last Jedi to boil over before doing so.

It will be equally as interesting to see what occurs in next year’s slate of titles. EA will once again be releasing its annual slate of sports titles, all of which will continue the trend. Likewise, games such as Call of Duty, which recently incorporated such boxes will also be released.

Finally, as we head to the future, should such practices be outlawed, it remains to be seen how games will be priced or developed to generate profit. It is entirely plausible that games become more expensive to make up for money lost. Likewise, it is equally as plausible that production values of games drop.

For an industry that shows no signs of stopping it has quite the dilemma on its hands.


The Video Game Loot Box Problem Goes Deeper Than Star Wars: Battlefront II

Battlefront II goofed, but gamers are still spending more on additional content

Worldwide game industry hits $91 billion in revenues in 2016, with mobile the clear leader

Star Wars: The Old Republic — the story behind a galactic gamble

Videogames Can’t Afford to Cost This Much

What it means to be a ‘whale’ — and why social gamers are just gamers


PAY ATTENTION! Disney’s On to Something

On November 6th, 2017, The Walt Disney Company’s potential acquisition with 21st Century Fox was first announced, and since then, has been the talk of all major media platforms. Although this sale has been thrown around, on and off, for the past month, CNBC reported on December 5th that Disney and Fox could be closing in on the $40 billion deal, as early as next week. But despite this acquisition not yet being official, it alone speaks volumes about our current state of the entertainment industry, and the rapid shifts taking place in the movie business today.

“What is striking about this deal is that, presuming it goes through, it is evidence that both Fox and Disney have fully internalized how the world has changed and are adapting accordingly,” said the stratechery. In other words, networks have two options: adapt or boot, even if it means teaming up with your competition.

It is no secret that the internet has changed our media landscape—especially the way in which we now consume most, if not all, of our video content via online and on-demand. This change has been brought on by giants like Netflix and its rapidly growing power. So similar to how broadcast television destroyed printed content, a comparable domination is happening between broadcast TV and internet entertainment, with the latter in first place.

Companies like Facebook and Netflix are “dominating the digital distribution of digital video content,” as stated by CNBC, and Disney must contemplate what’s at stake to remain on top. The mutual factor in possession of power is access to its customers at the lowest distribution cost—this distribution cost has become close to zero thanks to the digital age. And access to customers is a result of providing the best user experience possible, as Netflix does—and once you provide that, you have your users hooked—and more users mean, again, all the more power.

The stratechery explained it best that “[if] selling the rights to a television show to a broadcast network and an international channel and whoever else wants it is good, then selling streaming rights to Netflix is even better! After all, the content still costs the same amount to make, and now it is generating more revenue. This, of course, is exactly what content producers did.” Disney did have its content on Netflix for some time, which was great for added reach and exposure. But they don’t just want to do “better,” they want to be the best.

It is known by most in the industry that Netflix is currently the world’s leading internet entertainment service, with more than 109 million subscribers in over 190 countries. But on August 8th, 2017, Disney announced that it will pull its movies from Netflix and create its own direct-to-consumer streaming service in 2019. Netflix’s stock dropped over $10, from $181.33 to $169.14, just two days following the news, which shows the power that Disney holds. One reason for this was due to the shareholders’ fear that other networks could follow Disney’s lead and remove their content off of Netflix as well. This announcement acted as a precursor for the Fox acquisition (this acquisition being, a step closer towards Disney’s objective to make their streaming service one that tops Netflix).

So why is Disney even going through the trouble to launch their own service from the bottom-up? This is because, again, Disney is very much cognizant about the changing landscape of media. Entertainment gravitates towards streaming, and while broadcasted television still exists, it is unfortunately dying like the print industry now. Therefore, Disney can’t just continue to do what everyone else is doing by using a source like Netflix, HBO or Hulu to stream their content on. Because Disney is, and wants to continue to be known as the forerunner of the industry, they will not settle for what everyone else is doing.

But this isn’t just about Disney becoming the next Netflix. “From a marketplace standpoint, fundamentally what [the acquisition with 20th Century Fox] does is that it allows Disney to become a bigger player in the cable arena,” said president and co-executive director of national broadcast at Mindshare Jason Maltby—as well as become more accessible and attractive to advertisers. It could “promise one-stop shopping” to marketers and ad buyers, now that Disney has reorganized their ad sales for its entire portfolio, from ABC and the Disney Channel to Freeform and Radio Disney (qtd. in Business Insider)—and with this aquisition, they will only further consolidate their company with additional networks. Also to note, if Disney chooses to dive into the advertising market for their anticipated streaming service, they will have an immense amount of revenue from that alone that Netflix does not have, as a company who is an ad-free service.

And this acquisition 100% aligns with Disney’s trajectory to be the next Netflix. First of all, in terms of success, Disney ranked number one in profitability as one of the six largest studios, with 2016 profits of $2.5 billion. The company currently “owns Lucasfilm, Marvel Studios, and Pixar, [and] already makes almost $1 billion more than its next biggest rival,” Time Warner, profiting $1.7 billion in 2016 (qtd. in The Atlantic). It is also important to note that Disney has not only been around longer than its future competitors (Netflix, Hulu, HBO Go and Amazon Studios), but has had an international presence before them as well. Not to mention Disney provides timeless content that every generation can love.

What Disney is buying is key to understanding their strategy to ensure their streaming company will be a success. They aren’t interested in purchasing 21st Century Fox’s broadcasting network or Fox News—Disney is only interested in buying Fox’s entertainment assets with an enterprise value of over $60 billion. These assets include Fox movie and television studio, the FX cable network, National Geographic, Star, UK pay-television business Sky, and their share of Hulu. Disney already owns 30% of Hulu. If they acquire Fox’s share, Disney will end up having 60% shares of the network responsible for creating Handmaid’s Tale, which took home the most wins at the 2017 Emmy’s, including in the category, “Best Drama Series.” And on top of Disney becoming Hulu’s majority and potentially full owner, the company also holds 18% of the domestic box office while Fox has 12%, according to Forbes, meaning the House of Mouse could end up with 30% of that sector of entertainment as well.

“It’s all about owning content and pipelines. And if you don’t have both, you might go out of business,”said a marketing professor at the USC Marshall School of Business Gene Del Vecchio (qtd. in Los Angeles Times).

So what else is specifically included in Fox’s entertainment assets? Let’s remember that Disney already owns the Star Wars and Captain America franchises. To put that into numbers, Captain America: Civil War made $1.15 billion in the worldwide box office market, while Rogue One: A Star Wars Story made $1.05 billion in 2016 alone. As part of the deal, Disney would also own Fox’s X-Men, Fantastic Four, and Avatar franchises, giving them control of the entire superhero world (and being able to bring that world to 24 hour, personalized streaming).

“In particular, Fox’s strong television production business would help Disney shore up its own struggling ABC Studios, which recently lost its star producer, Shonda Rhimes, to Netflix,” added The New York Times.

Fox’s logic behind selling to Disney “stems from a growing belief among its senior management that scale in media is of immediate importance and there is not a path to gain that scale in entertainment through acquisition,” according to CNBC. Disney is a company that meets this “scale” that Fox desires, who makes enough money to compete with giants like Netflix and Amazon.

So what’s going to happen to 21st Century Fox?

Well, their focus will become Fox Sports and Fox News. “[Given] that both news and sports are heavily biased towards live viewing, they are also a good fit for advertising, which again, matches up with traditional TV distribution. What Fox would accomplish with this deal, then, is shedding a huge amount of that detritus,” as stated by stratechery. Basically, Fox is selling off their assets, as well as debt, to Disney, while honing in on what they do so well (news and sports), without having the pressure of competing in the streaming world.

There is concern, though, that this acquisition could be illegal, drawing attention of government regulators like the Federal Communications Commission and going against antitrust laws. Forbes defines the goal of an antitrust law, in terms of acquisitions, as a way to “prevent those that would limit the general public’s ability to make choices and receive products and services at a fair price.” An acquisition between Disney and Fox, two out of six of the biggest studios, would make the House of Mouse even more powerful than it already is. For example, their future impact on the content consumers will consume would be tremendous and potentially, unfair, depending on the company’s beliefs and biases integrated in their stories. Also, the antitrust laws brings up the notion that Disney most likely would have bought the entirety of Fox if it weren’t for legality issues, but one company cannot own two broadcast networks. Regardless, with the assets Disney strategically picked out from Fox, Disney’s already extraordinary portfolio will be bigger than ever.

Another concern is that “[if] a deal closes, marrying the two brands and two very different corporate cultures could take awhile. You have the family-friendly Disney, which doesn’t even do R-rated movies, and Fox, whose movie studio produces unapologetically hard R-rated,” as explained by Deadline. But instead of thinking of this as a challenge, it is again, broadening their portfolio to provide content that anyone and everyone can enjoy.

So if this acquisition does follow through, which seems highly likely as of now, it will be a game changer for the movie industry. First of all, the “Big 6,” six companies that own basically all media, becomes the “Big 5,” eliminating more competition. Basically, “[in] terms of sellers in the marketplace, agents, managers, producers, production companies – they have one less buyer,” said University of Southern California professor Jason Squire (qtd. in Boston Herald). Disney CEO Bob Iger will also likely “stay on past his 2019 retirement date if the entertainment company wins its bid to buy” from Fox, according to The Wall Street Journal. In fact, 21st Century Fox CEO Rupert Murdock has requested that Iger stay if the sale goes through.

Netflix CEO and Founder Reed Hastings has shared sentiments on why he isn’t concerned about how other streaming companies are doing, during a quarter one earnings call this year. He said, in particular about Amazon, that “they’re doing great programming, and they’ll continue to do that, but I’m not sure it will affect us very much. Because the market is just so vast.” Hastings is known to have a “there’s room for everybody” attitude.

It will be interesting to see if Hastings’ room for all attitude will change once Disney is officially in the playing field, or even better, beating them at their own game.

Venmo: Helping or Hurting the Banking Industry?

By: Libby Hewitt


As time has gone on, technological advancements have made certain industries obsolete. Many have argued that peer-to-peer payment systems like Venmo may be well on their way to doing this to the banking industry as a whole.

Venmo, a mobile payment service owned by PayPal, came to be in 2009 when two friends at the University of Pennsylvania brainstormed the idea of the app. The two men were in New York City for a weekend when one of them realized he had forgotten his wallet. When they were trying to figure out the logistics of paying one another back, the idea of Venmo was born. The original prototype sent money through a text messaging system, but it has evolved into the platform we know now, where transactions are all done through the Venmo app itself.

In 2016 alone, $147 billion was transferred using peer-to-peer payment systems, which was up from the $100 billion transferred in 2015. These numbers are forecasted to continue growing to as much as $316 billion by 2020, according to an analyst at Aite Group.

To break those numbers down even further, Venmo users alone transferred $17.6 billion of funds to one another through the app in 2016. This was a 135% increase from 2015. While this seems like a massive amount of money being exchanged, Venmo transactions only accounted for 17% of the total peer-to-peer transfers in 2016. In comparison, $28 billion was exchanged on QuickPay, which is JPMorgan Chase’s comparable peer-to-peer payment system. So, while millennials may think that Venmo is the only mobile payment system in existence, some of the big banks in the U.S. are actually still the biggest players in the game on these technologies.

In fact, nineteen of the country’s biggest banks have recently come together to launch Zelle, a new peer-to-peer payment service available through an app. Even though the app has large, recognizable banks backing it like Bank of America, Citigroup, JPMorgan Chase, Wells Fargo and more, Zelle’s Summer 2017 launch did not go as well as anticipated. The following are some of the reviews that can be found on iTunes’s App Store, where the app currently has a 2.6 star (out of 5) rating:

“What a horrendously useless app and payment service!”

“I wish I could give zero stars but it is not offered.”

“If you want your funds to disappear without a trace, count on Zelle.”

“The user experience doesn’t even compare to PayPal or Venmo. There are too many screens/legal hoops to jump through even trying to give someone money.”

Even though Zelle did not have the entrance into the marketplace that it probably hoped for, the app store rating has gone up almost a whole point in the past month. So, maybe the Zelle team is working out some kinks and will eventually have a more seamless user experience.

This lackluster launch of Zelle may say more about the intersection of banking and marketing than the platform itself, however. Senior Vice President of a community bank in Iowa (Clear Lake Bank & Trust), Matt Ritter, believes this is an ongoing issue within the banking industry in introducing new products.

“Banks and their traditional marketing efforts often fail at generating an interest in new technology that is less expensive to offer and transactions that are more efficient to process,” said Ritter.

Even with these challenges upfront compounded with the fact that some people think that Venmo and other payment systems like it may run physical banks off the market, there are some significant ways in which the existence of peer-to-peer payment systems are positive for traditional banks. For example, since Zelle was created by banks, many bankers are optimistic about its invention and actually hope to adopt the system themselves.

President and CEO of Clear Lake Bank & Trust, Mark Hewitt, thinks the innovation of peer-to-peer systems like Venmo are both helping and hurting the banking industry at the same time.

“The proliferation of Venmo has underscored the need to provide a peer-to-peer solution for community banks like ours.  While adding a product like this to our mix was relatively easy, successfully marketing it is much more difficult, especially to users already comfortable with Venmo,” said Hewitt.

As far as Zelle is concerned, he believes that the system is a good way for traditional banks to attempt to compete with these technologies like Venmo.

“Zelle is firmly on our radar, and is likely a product that we will utilize to replace our current peer-to-peer solution.  It’s the product of a mega bank consortium, but is also being made available to community banks via our core software providers,” said Hewitt.

Ritter agrees with Hewitt on this point, adding “Zelle is the banking industry’s best response to date to ensure it is not left out of the payments industry altogether. It will allow banks to compete with Fintech solutions like Venmo.”

Because Zelle is directly connected to users’ bank accounts and is run by the banks themselves, Zelle’s creators are hoping that users will feel more confident using it for larger transactions than they might using Venmo. There is even opportunity to move into more business-to-consumer payment options with Zelle, like insurance companies paying their client’s claims via the app.

Another way the entry of Venmo into the market has been a positive force for traditional banks is that it has motivated them to become competitive in this more technologically advanced space. Banks have been forced to adopt the rapid spread of technology and innovate alongside some of the biggest players in the game to best cater to their customers. The spread of Venmo has also spurred banks to take the peer-to-peer idea beyond just millennials. Of course, millennials are the biggest group currently using Venmo, but banks are hoping to take the momentum that Venmo has created and appeal more to a mainstream audience, directed beyond millennial use.

“We’re hoping that by eventually partnering with Zelle we will be able to target not just our young customer base, but also make it the norm for some of our older customers with smartphones to get on board with,” said Hewitt. “It just makes sense for us to market this easier transactional system to all customers since so many are already so comfortable with the peer-to-peer concept.”

One of the largest complaints from Venmo users that Zelle is hoping to solve is the couple days of delay it takes for money to actually get to users’ bank accounts after participating in a transaction on the app. Zelle allows for more instant transactions because the accounts are directly linked to each user’s bank account, rather than being the third-party platform in the exchange.

Banks are hoping to use this to their advantage and get the message across to users that Zelle may be the fastest option.

“It’s hard for us to break into this space since apps like Venmo have such a head start,” said Hewitt. “Many people don’t realize that many banks already are offering our own peer-to-peer products that have a faster settling rate than Venmo.”

Another thing Venmo is lacking that traditional banks are hoping to perfect is the trust issues that often come with having one’s bank account information on a third-party app. Banks can take that hesitation people have of sharing personal information and make them feel more comfortable doing it on an app that was created or is sponsored by their bank, with whom they have already developed a trusting relationship.

Even though peer-to-peer systems have given banks the push they may have needed to appeal more to today’s customers, there are still things that Venmo is providing that banks worry they won’t be able to keep up with.

The most obvious threat to the banking industry that Venmo presents is the loss of fees and revenue streams that come from regular bank transactions like deposits and transfers.

“Fintech companies engaged in the payments industry are largely unregulated and not required to abide by the same rules as banks, placing banks in a competitive disadvantage,” said Ritter. “Because regulations in the banking industry can often flow down to the consumer, the inconvenience this causes can push consumers into non-banking solutions, like Venmo.”

Because so many people use Venmo for the pure convenience of the transactions, banks are having a hard time reminding customers that they have similar systems already in place that may be even more legitimate when it comes to regulations.

Even so, Venmo was the first to make it possible for a person with a Bank of America account to easily make a transaction with a Chase bank customer. Before Venmo, payments of this type were not convenient or easy. Zelle is attempting to fill this gap for customers transferring between the large banks currently using the app, but for customers at a smaller community bank like Clear Lake Bank and Trust, for example, Zelle may still not be implemented for months or possibly years.

Additionally, bankers are worried about the potential growth of Venmo, as there have been talks of the platform developing its own credit card service. Speculators also think the payment platform may move into more traditional banking roles like giving loans and more. Of course, this has banks worried and wondering how they can compete with such a growing platform and user base.

Another feature Venmo has that a traditional banking experience does not provide is the social aspect. Venmo users are doing more than just transferring money to one another on the app. They are using it as a social site with the ability to like and comment on their friends’ transactions. By requiring a description of what the money transfer is concerning, users are able to have fun with it and connect with their friends, often using emojis as descriptions. In fact, pizza is the number one most used emoji in the description box, followed by the beer emoji. Additionally, users can connect their profile to their Facebook account, and are then able to see their Facebook friends’ payments to one another coming through, like a news feed. While there are various privacy settings that can be activated and the dollar amount of each transactions is kept private to those outside the transaction, the platform is still used socially and as a way to keep up with friends.

“It’s important to remember here that we, as banks, are more interested in the actual deposit, while Venmo is more interested in the customer’s information,” said Hewitt. “That’s where most of the discrepancies lie.”

While the main goal of Venmo may be different than the goal of traditional banks, there is no doubt that each party uses the other to its advantage in the end.

“It is interesting to note that most peer-to-peer solutions still rely on consumer bank accounts, debit cards and credit cards to fund purchases or accounts from which payments are made,” said Ritter. “So, without banks, there really would be no Venmo.”

So, is the existence of Venmo helping or hurting the banking industry, or are the two mutually reliant on one another? It is hard to tell now, but it is clear that peer-to-peer systems are sweeping the nation and are becoming the norm as a payment option. It will be interesting to see how much these systems have advanced in ten or twenty years. Who knows, maybe they will put an end to physical banking structures altogether, or maybe Zelle will catch on and overtake Venmo. We’ll have to stay tuned to find out.