[Final]Can Natural Disaster Ever be Good to Economy?

Hurricanes, earthquakes, and wildfires … America and the world have been entangled by natural disasters recently. The natural disasters never could be considered as a positive force because of the destruction and death the bring. However, disasters also tend to make reconstruction the primary task for the government, making it easier for public money to flow into hard-hit regions. Economically, in what case would natural disasters be a boost to the regional economics? It depends the previous economic status of the affected region and the immediate assistance efficiency from the government.

In Sichuan, China, where a magnitude 8 earthquake took place in 2008, is an example how the local economy can recover and even expand during the post-disaster reconstruction. Poor infrastructure exacerbated the damage, leading to an official death toll of 87,150 and 4.8 million people homeless, according to the BBC News. The economic loss was estimated at $191 billion, the second highest in absolute number in history, according to 2013 CATDAT Damaging Earthquake Database. The noteworthy part was that the central counties in 2008 Sichuan earthquake, WenChuan and Ya’an, were neither a raw material production base nor manufacturing zone. Actually, these counties were poor. Thus, the earthquake did not hurt the Chinese exports or GDP to any great degree.

The rebuilding efforts cost the Chinese government almost $150 billion, equivalent to a fifth of its entire tax revenues for a single year, according to the state media of China in 2008. Quickly after the earthquake happened, the National Development and Reform Commission of China announced a reconstruction plan that “envisages buildings 169 hospitals and 4,432 primary and middle schools to replace collapsed structures. Another 2,600 schools that remained standing will be strengthened. More than 3 million homeless rural families will get new houses and 860,000 apartments in the city will be built.”

Relying on such tremendous capital investment, the regional economy of Sichuan was able to recover in an amazing speed. Here is the chart associated with the Gross Regional Product(GRP) of Sichuan from 1998 to 2010.The blue, yellow, and green line respectively indicate the GRP of Sichuan, of the hardest hit region of Sichuan in 2008 earthquake, of else of Sichuan, in the form of percent of Chinese GDP. The pinkish line represents the GRP per capital as ratio to Chinese GDP.

The graph tells that before the earthquake happened, the hardest hit region in Sichuan earthquake, which is composed of the ten serious-damaged counties, generated about 0.25% of Chinese GDP. Meanwhile, the Sichuan generated about 4.1% of Chinese total GDP.

By 2010, 2 years after the earthquake, the GRP of Sichuan and the GRP of non-central damage area of Sichuan both not only recovered but even had growth.

“The GRP level of the worst-hit area of Sichuan decreased by 35.4% in 2008 compared to the 2007 level. After three years of reconstruction, the region had still not returned to its pre-earthquake GRP level, but the GRP level of the rest of Sichuan experienced a boom in those three years because of the reconstruction demand stimulus,” according to a studies conducted by MOE Key Laboratory of Environmental Change and Natural Disaster of the Beijing Normal University.

The GRP per capital in Sichuan had a huge growth; however, it is meaningless considering the tragic death tolls.

In a article published by China Daily , by 2012 when reconstruction basically completed, the Deputy-Governor of Sichuan Gan Lin said, Sichuan was the fastest growing of the major economic provinces in China. China Daily asserts “the quake zone has seen unprecedented changes.” Governor Gan said, during the past four years, Sichuan’s GDP doubled more than 2 trillion yuan ($317 billion), enabling its per capita GDP to surpass $4,000.

*A noteworthy point for the above statement is the “go west” strategy to increase inland development formulated by the State Council in 2000 also plays an significant factor to Sichuan’s growth.

“When something is destroyed you don’t necessarily rebuild the same thing that you had,” said Mark Skidmore, an economics professor at Michigan State University. “You might use updated technology, you might do things more efficiently.” With massive amount of national resources, “the disasters allow new and more efficient infrastructure to be built, forcing the transition to a sleeker, more productive economy in the long term, a New York Times article commented on the Sichuan Earthquake in July, 2008.

More practical and explicit reflection of the benefits from 2008 earthquake to Sichuan region comes from the 7.0 magnitude Sichuan earthquake in Ya’an. According to the BBC report, “none of the buildings built since the Sichuan earthquakes collapsed.” The quality of housing for sure has improved.

However, the previous economic condition of the hardest hit region in Sichuan earthquake facilitated the recovery session. A New York Times article wrote about one month after the earthquake, “only 1 percent of China’s population lives in the hardest hit quake-affected area, in northern Sichuan Province. Those residents account for an even smaller share of China’s economic output, because many of them are impoverished farmers.” In other words, these areas might not receive this much of national investment or resources within short period of time.

The economic affects brought by Northridge earthquake in 1994 was a different story. That 6.7 magnitude quake struck an area of 2,192 square miles in the San Fernando Valley, causing 57 people killed and 11,800 injuries. It is still ranked by CNN Money as the most expensive earthquake in American history, costing $44 billion.

In the research “The Northridge Earthquake, USA and its Economic and Social Impacts” conducted by Professor William J Petak from University of Southern California and Research Fellow Shirin Elahi from University of Surrey explains the difficulty of reconstruction for Northridge area, “Northridge earthquake was a direct hit on an urban area and the scale of losses caused by the earthquake far exceeded expectations.”

Unlike regions in Sichuan, US has a large concentration of localised industries, such as the entertainment and aerospace industries in southern California, which was severely undermined by the earthquake, the research argues. Moreover, unlike most people lived in Sichuan’s affected regions were rural farmers, San Fernando Valley supports half of the city of Los Angeles’ population. “Approximately 48% of the population were homeowners – middle class and therefore not obviously insecure- yet many proved to be vulnerable to the hazard,” the Northridge Earthquake research claims.

Another important factor that determines the success of reconstruction after catastrophe is how effective and efficient the state or the federal government respond to the recovery assistance. The highly-centralized government system allowed the Chinese government to respond Sichuan Earthquake immediately, ordering national assistance and resources investment. Kevin L. Kliesen, Economist from Federal Reserve Bank of St. Louis wrote in his article “The Economics of Natural Disaster,” explains the difference in American government, “although emergency funds for food and shelter are usually disbursed immediately by Presidential directive, monies for longer-term rebuilding efforts are often appropriated by Congress with a substantial lag.” The research “The Northridge Earthquake, USA and its Economic and Social Impacts” criticizes the reaction from the government during the Northridge Earthquake. The research attacks the lack of “a desire for a recovery to reproduce a return to normalcy, and achieve the status quo of the socio-economic and built environment prior to the earthquake.” Many federal, state and local officials were not willing to sacrifice their own political, economic, social or environmental agenda to cooperate to help the affected regions, the research asserts. They were at best willing to make adjustment.

An extreme case is the Haiti’s response to earthquake. The Bernard L. Schwartz Chair in Economic Policy Development Martin Neil Baily wrote in an article for Brookings that Haiti, which is too poor to manage the immediate recover after hurricane, has to wait international aid to get basic rebuilding, leaving alone economic growth. It is so difficult for Haiti to recover.

The study of economy in disasters is not new. In 1969, Douglas Dacy and Howard Kunreuther, two young analysts at the Institute for Defense Analyses, published a book called “The Economics of Natural Disasters.”  It was probably one of the first attempts to measure the economic influence of catastrophe. The book argues that the dreadful Alaska earthquake of 1964 helped the Alaska economy by garnering government loans and grants for rebuilding.

“We got a lot of hate mail for that finding,” said Kunreuther, now a professor of business and public policy at the Wharton School of the University of Pennsylvania.

The theory of economic boom from disasters also received criticism.“Over any reasonably relevant period of time, society is not made wealthier by destroying resources,” Donald Boudreaux, an economics professor at George Mason University, said. If it were, “Beirut should be one of the wealthiest places in the world.” Economist Frédéric Bastiat labeled the disastrous economy theory as “the broken window fallacy” in his article “What is Seen and What is not Seen.” Bastiat compares the disaster reconstruction to fix a broken window. It costs $100 dollar to fix a window. The repairman and window shops got money because the window owner pays it. In the reconstruction case, the money comes from tax payers or just money printers. The natural disaster could be an economic boost to a region, but it always is an economic downturn for the whole nation.

In conclusion, the theory model of disastrous benefits for economy should be viewed as that the areas that would not receive national resources or investment during the normal time becomes privileged after suffering catastrophe. It also gives these areas more opportunity and capital to develop during the reconstruction period. The previous economic condition of the affected region and the efficiency of government assistance determine the success of the recovery. Despite to the regional growth, we should never be positive toward disasters because it never generates economy but merely redirects capital and resources to recover a definite loss of wealth.

Disney: The Monopoly of All Monopolies

In July of 1955, the magic of Disneyland began with the first theme park opening in Anaheim, California. Sixty-one years later, Disney parks and resorts dominate the tourism industry inside and out of America. Every movie and TV show is the perfect opportunity to bring children’s favorite characters to life right in the park. Disney theme parks would not be nearly as lucrative without cashing out on gift shop souvenirs, as screaming children beg their parents to buy them a plush, pet-sized Olaf. The opening of Disneyworld in Orlando, Florida and its booming success has lead to Disney theme parks crossing borders to Paris, Tokyo, Hong Kong, and Shanghai (and that isn’t even including all the resorts.)

Not only does Disney dominate in tourism (Disney runs the world,) their presence in all things entertainment such as media and cable networking is undeniable.  However, with the subscription and viewing issues at ESPN, the historically stable company is facing unforeseen challenges.

It is no secret that America’s patience with cable is slowly dwindling, but no one knows this better than ESPN. Nielsen Cable confirmed the alarming loss of subscribers for November 2016 was 621,000, and a drop in revenue of over $52 million. Don’t try to do the math for 2016 as a whole. Long story short, its pretty painful.

The question is will ESPN put Disney at long-term risk? Although shareholders aren’t exactly fleeing anytime soon, we have to consider how the future of cable will affect the company as a whole. Disney may be too big to fail in many people’s eyes, as the popularity of Disney’s parks, resorts, and studio entertainment will not wane anytime soon. Despite this, looking at the impact Disney parks and resorts have on the economy is important to understand how much could be lost if Disney earnings continue to slow down (the thrilling exploration of quarterly earning reports will take place to further understand this.)

Disney’s effect on the urban economy in Anaheim and Orlando

The Disneyland Resort in Anaheim has undoubtedly changed the economy of the surrounding city (Disneyland Resort includes Disneyland and Disney California Adventure, Downtown Disney, and three hotels.) In fact, Disneyland is one of the reasons for Southern California’s economic success. An economic impact study was conducted by Arduin, Laffer & Moore Econometrics (ALME) which revealed that $5.7 billion is generated annually for Southern California’s economy. Additionally, the Disneyland Resort contributes $370 million in state and local taxes. The employment statistics are equally impressive The study was based on fiscal 2013 data, so these numbers may be higher today. Employment is also positively impacted with 28,000 employed and 25,000 jobs created indirectly due to the company. Disneyland Resort’s employment rate has grown at 34% which is faster than California’s 6.7% rate (from 2009-2013.) As you can see, Disneyland dominates Anaheim, one-third of Orange County’s tourism profits being linked to them.

The opening of Disney World Resorts shaped the future of Central Florida. Before Disney, the area was far from a popular destination. As of 2015, there are an estimated 67.8 million visitors to all theme parks combined (which includes Magic Kingdom, EPCOT, Hollywood Studios, Animal Kingdom, Typhoon Lagoon, and Blizzard Beach.) Compared to Disneyland and California Adventures combined 27.7 million visitors, that is a huge difference. It shouldn’t be too surprising then that Disney dominates this urban economy as well. According to a study conducted by Fishkind and Associates, Disney World is responsible for generating an estimated $18.2 billion annually and 1 in 50 jobs in the state are linked to the company. The 161,000 jobs linked to Disney World along with $900 million spent paying Florida vendors is equally noteworthy if not more. This study was based on fiscal 2009 data, so its impact since then has surely increased.

If it is not already apparent, Disney has a huge impact on local economies.  Disney pumps money into these areas by attracting so many visitors who end up spending money outside of the parks themselves. Job growth and tax revenue are equally as important if not more to keep the system growing. This economic growth positively impacts the U.S. and makes us more appealing to international travelers. In fact, the multitude of park and resort locations have not dissuaded international Disney fanatics from coming to the states, as it gives the incentive for true fans to accept the challenge of visiting all parks and resorts. According to a fellow anonymous Trojan who works as a performer at Disneyland Anaheim, “true Disney fans will stop at nothing to come to the parks. Some annual pass holders come every day! And a lot of the time I get to meet so many international kids it’s crazy.”

The fact is cities like Anaheim and Orlando were created by Disney, for Disney. If Disney begins to falter then so do these cities as they are all almost too reliant on each other at this point in time. To show this, it is now time to play the numbers game.

Disney as a whole

As Disney expands, it is unrealistic to expect every quarter to be a slam dunk. Additionally, increase or decrease in attendance, revenue, and profit has a lot to do with the season in tourism. Disney’s best profit time of the year is during the most wonderful time of the year: Christmas. Other factors come into play such as unforeseen events. For example, the Charlie Hebdo attacks in 2014 along with the terrorist attacks in 2015 during Bastille Day and in November decreased attendance at Disneyland Paris. No one wants to put their entire family at risk after a tragic event like that. Therefore, there was a 10% drop in guests and 7% drop in revenue this past year.

The fourth quarter for Disney as a whole was a shock compared to past years, and even compared to the third quarter. The third quarter generally had a trend of increased revenue and income, with a 6% increase in revenue for parks and resorts and 8% increase in profit. On the other hand, the fourth quarter resulted in a decrease across the board.

Fourth Quarter and Full Year Earnings for Fiscal Year 2016 https://ditm-twdc-us.storage.googleapis.com/q4-fy16-earnings.pdf

As shown above, revenues were down 3% from $13.5 million to $13.1 million, and operating income was down 10%, from $3.5 million to $3.1 million.

Looking at revenues for parks and resorts, there was only a 1% increase from $4,361 billion to $4,386 billion. Operating income was down 5% from $738 million to $699 million. The report attributes lower operating income to lower turnout at Disneyland Paris and Hong Kong, but this is offset by the opening of Shanghai. Long story short, Disney always has an answer for concerning numbers.

The true reason for decreased revenue and income is largely connected with cable networks. Media networks revenue was down by 3% from $5,826 billion to $5,658 billion, and operating income down by 8% from $1,819 billion to $1,672 billion. Revenue for Cable Networks decreased by 7%, and operating income at Cable Networks decreased by $207 million to $1.4 billion (from $1.6 billion.) This is linked to both ESPN and Disney Channels.

ESPN is bleeding money

Decreased revenue is primarily due to ESPN, as the loss of subscribers in November alone was 621,000. According to Market Realist and Nielsen Cable projections, from 2013 to 2015, 7 million subscribers have been lost. 

The issue is the expense of ESPN. At roughly $7 a month, you end up paying around $80 a year. However, owning as many sports rights as ESPN has is truly that expensive. But customers don’t really care about that they just want their sports!According to Disney, this quarter resulted in lower income from ESPN specifically due to “lower advertising and affiliate revenue and higher programming and production costs” Ironically, during their third quarter press conference, it was the complete opposite wording with

According to Disney, this quarter resulted in lower income from ESPN specifically due to “lower advertising and affiliate revenue and higher programming and production costs” Ironically, during their third quarter press conference, it was the complete opposite wording with “higher advertising and affiliate revenue” to explain the “nice operating income growth” of 1%. I see what you did there Disney, but no one is fooled (but seriously what is that plug-in statement code for/what does it really mean?)

During their press conference back in August, Disney said they are optimistic that subscriptions would slowly trickle back in. To combat loss of subscribers, they are pairing up with BAMTech to allow future streaming. The licensing rights of BAMTech include MLB and NHL which will bring more viewers. Bob Iger claims the goal is to provide a complimentary service to what ESPN already has, by creating streaming access for the sports that are not currently on the channels. This includes college sports, basketball, tennis and so on. Although no cable subscription is necessary to watch this new ESPN streaming service, the catch is the channels already available on ESPN will not be viewable through this service.

To me, this idea may work for in the short term to bring people in, but it will further frustrate customers and be counterproductive to not be able to fully stream all ESPN channels. However, Iger also feels that more subscribers can be brought in through Direct TV’s Sling TV, which is only $20 a month and includes all the ESPN channels a sports fan needs. Perhaps this will work, but this would require more incentives to join Direct TV and every region in America has a different cable monopoly (for example Comcast is your only viable option in Marin County in Northern Calfornia.)

How ESPN aka the former cash cow of Disney may affect theme parks

You may be wondering how all of this connects. Logically, every component of business matters but how much impact could the decline of ESPN have on theme parks and resorts? Before streaming programs changed the game, ESPN was the be all and end all of Disney profits. The money has been pouring in ever since being acquired through ABC back in 1995. According to the annual report of 2014, ESPN brought in $6.8 billion in operating profit or 46% of the company’s total. Cable networks overall contributed to 34% of Disney’s revenue. Wells Fargo Securities analyst Marci Ryvicker estimated back in November 2015 that $700 million in fee revenue and $200 million in earnings would be lost due to the loss of subscribers (3 million at the time.)

All of this is problematic because if there are less corporate funds, then there are fewer funds to open new attractions within existing theme parks, along with taking the possibility away of expanding further (but does anyone really need another Disney theme park, I think not.)

Additionally, if the stock price begins to drop significantly, investors pulling out is never a pretty sight. You can even say ESPN is potentially holding back Disney’s stock price from growing as the headlines of “millions of subscribers lost” doesn’t help anyone.

Overall, what we’ve learned here (and probably already knew) is everything within Disney is deeply intertwined. The theme parks and resorts simply cannot succeed without the funds to maintain upkeep and periodically upgrade them. I believe that the current business model for ESPN will not be successful or beneficial past 2020. Streaming is taking over as it is, and although families will continue to buy cable packages for a long time, nothing is permanent in this technological world. It may be time for Disney to sell ESPN to Comcast or AT&T and let someone else face the backlash. In fact, if subscribers do increase as Iger predicts, it would not be a hard sell to another cable company to take on the project. Since Disney theme parks and resorts are such an important part of the domestic economy (if I had discussed the world market as well this would be overwhelming) sacrificing the most traditional and magical component of Disney is not worth it. Disney’s history all ties back into the mini economies of Anaheim and Orlando (and the rest of Florida) and therefore prolonging their well-being is not negotiable.

Disney Parks and Resorts Research

https://smartasset.com/credit-cards/the-economics-of-disney-world

https://ditm-twdc-us.storage.googleapis.com/q3_fy16_earnings_transcript.pdf

http://www.usatoday.com/story/money/2016/08/09/disneys-q3-income-up-5-theme-parks-film-studio-gains/88483996/

https://blog.shermanstravel.com/2014/8-major-differences-between-walt-disney-world-and-disneyland/

http://www.ocregister.com/articles/study-665882-resort-disneyland.html

https://publicaffairs.disneyland.com/disneyland-resort-generates-5-7-billion-for-southern-california-economy-2/

http://www.broadcastingcable.com/news/currency/disney-ceo-bullish-espns-future/161076

http://www.broadcastingcable.com/news/currency/disney-earnings-suffer-espn-declines/161072

https://finance.yahoo.com/quote/dis?ltr=1

http://marketrealist.com/2016/03/disney-believes-espn-will-start-gaining-subscribers/

http://www.heritage.org/research/reports/2011/07/what-is-poverty

https://en.wikipedia.org/wiki/List_of_assets_owned_by_Disney#Walt_Disney_Parks_and_Resorts

https://www.bloomberg.com/news/articles/2015-11-27/espn-viewer-losses-add-to-angst-for-disney-s-big-profit-engine

Disney Quarterly Reports

https://thewaltdisneycompany.com/disneys-q3-fy16-earnings-results-webcast/

https://ditm-twdc-us.storage.googleapis.com/q1-fy16-earnings.pdf

https://ditm-twdc-us.storage.googleapis.com/q2_fy16_earnings.pdf

https://ditm-twdc-us.storage.googleapis.com/q3-fy16-earnings.pdf

https://ditm-twdc-us.storage.googleapis.com/q4-fy16-earnings.pdf

League of Geeky Athletes: E-Sports and League of Legends

“He’s gonna find Santorim right before the dragon. Looks like he’s gonna try to get over the wall. Not gonna work though. Oh chilling spikes and now Santorim is in a lot of trouble.. he’s lost and WOOOOOOOOOO DENIED! HEAD BUTTING AND BACK, OUT OF THE LANTERN!” Believe or not, this quote is from a sports caster. What kind of sports commentary involves a dragon and chilling spikes? You guessed it, the E-Sports. Back in Fall of 2013, there was an unusual event held in Galen Center and Staples Center. The League of Legends World Championship semi-finals and finals were held in those arenas. Those events attracted about 23,000 fans to spectate the video game matches in both event halls.  In case of the finals held in Staples Center, the tickets were sold out in an hour. Even for a professional basketball event held in Staples Center, it is very extraordinary. On top of the arena attendance, the final matches in Staples Center attracted about 32 million viewers worldwide according to Riot Games. In the end, South Korean team SK Telecom T1 won the prize of 1 million dollars. 

It may seem totally outrageous by traditional sports fans because these so-called “Professional Gamers” (or Pro-gamers) are earning millions of dollars by simply playing a video game in front of people. Yet, pro-gaming is more than that. Donghun Lee, scholar at Ball State University, wrote a journal article about how the E-Sports players need to train rigorously just as traditional athletes do. According to Lee, the Pro-gamers need to train their eyes to follow fast movements of pixeled characters and objects on the computer screen, train their hands to react faster for mouse clicking and keyboard button pressing, and train their hearing for reacting to gaming effect sounds. Some pro-gamers like SangHyuck “Faker” Lee plays practice games for over 12 hours a day to master his finesse in League of Legends.

League of Legends is vital to E-Sports because it showcased how serious the professional gaming can be through the outstanding number of viewers over the world. League of Legends is a free-to-play online competitive multiplayer game developed by Riot Games in 2009. Two teams of five players are required to play the game and one match lasts about 35-45 minuets. Since its release, League of Legends has been gathering monthly active users in a very fast pace. The monthly active users have increased from 15 million in 2009 to 100 million in 2016.

As mentioned earlier for the League of Legends Season 3 World Championship, the final matches attracted 23,000 physical fans and 32 million fans streaming online. Chad Millman, the editor in chief of ESPN.com and ESPN magazine, praised how E-Sports market is attractive on Fortune Magazine interview: “We saw how responsive the fan base was, how tremendous the storytelling opportunities were and, for those of us not already immersed in the industry, how similar it was from a competitive standpoint to what we already cover [. . .] It didn’t seem like that much of a stretch then to get aggressive about creating a digital destination.”It is very apparent that the E-Sports industry is growing. In the same article, Fortune states how the revenue from the E-Sports industry will grow from $278 million revenue in 2015 to $765 million revenue in 2018.

Essentially, League of Legends has made E-Sports big enough to attract investors to bring a significant change; once a niche industry is now becoming a profitable mainstream industry. As shown on the info-graph on the left, 2016 League of Legends World Championship had accumulative prize of 6.7 million U.S. dollars to distribute to the competing teams. Besides the prize money, the player salaries are pretty crazy as well. For example, aforementioned star gamer Faker earns $2.5 million per year from his contract with SK Telecom. While being this successful, the model of E-Sport industry actually comes from overseas despite the origin place of League of Legend being in the United States.

South Korea has had the strongest market environment for E-Sports since late 1990’s. According to New York Times Article, the Asian Financial Crisis triggered South Korea to have the best environment for E-Sports because the government allocated its funds in telecommunication and Internet infrastructure. By 2000s, the PC Bangs (PC방, it is directly translated as Personal Computer Rooms) were formed and the wide community of gamers was created. PC Bangs are the Internet cafes on steroids that provide the fastest Internet speed, computers with great CPUs, and superior graphic cards for  very cheap price like a dollar for an hour. With the introduction of StarCraft, a game released by Blizzard Entertainment in 1998, the PC Bangs became the proving ground for early gamers and multiple tournaments were held in different PC Bangs. In my personal experience, PC Bangs are like the neighborhood basketball courts. If someone in my class was good at either StarCraft or WarCraftIII, he would have the same popularity as a varsity football quarterback would have in the U.S. PC Bangs has made an E-Sports culture in South Korea and the market was meant to do well because of the infrastructures.

As the competitive gaming became popular, the South Korean government created the Korean E-Sports Association to manage E-Sports. As a result, a TV station dedicated for broadcasting E-Sports and big companies such as Samsung, CJ, and SK started to organize, manage, and finance their own E-Sports teams. Those companies still act as major sponsors in South Korea. For League of Legends, those sponsoring companies put their players in a training houses so they can practice as a team at least 8 hours a day. This model of hardcore training has influenced other League of Legends teams in the world. According to New York Times, “the country’s success at League of Legends has led several Western teams [. . .] many foreign teams have also tried to emulate the group living and training approach used in South Korea.”

League of Legend’s popularity in global E-Sports market triggered the United States to take actions. The U.S. teams such as Team Solomid, and Cloud 9 are sponsored by HTC. Cer Wang, the chairman of HTC said in 2015, said that “E-Sports has seen significant growth in the past few years and we see synergy between people who are passionate about this sport and our own customer base. It was an easy decision for us to sponsor these talented teams and individuals.” Apart from HTC, many different companies like Red Bull or GEICO sponsor League of Legend Teams because they see the profitability. According to SuperData report, “Brands have taken notice of E-Sports’ popularity and many have become sponsors quicker than projected [. . .] By year’s end, sponsorship of tournaments, players, and esports-related sites will exceed $578 million, just 28 percent less than this year’s NBA sponsorship total.”

Just as Fantasy Sports exists for traditional sports fans in the U.S., the hype of E-Sports seem to extend its reach to the betting game as well. According to the Internet magazine Travelers Today, a casino in Las Vegas started to allow people to bet on the League of Legends. The magazine also mentions that XLIVE, an entertainment organization event, will have a betting panel for League of Legends this month in Las Vegas. Waco Hoover, founder of XLIVE says that “E-Sports  is a burgeoning industry that’s poised for significant growth in the coming years. Some estimates put the global sports betting industry over $1 trillion and with the growing popularity of E-Sports the industry is looking to capitalize on gambling. Unheard of in traditional sports – crowd sourced prize pools in excess of $20 million demonstrate the extraordinary fan bases that exist with E-Sports and their leagues.”

Moreover, there has been a deal going on between Major League Baseball Advanced Media and Riot Games recently. According to Los Angeles Times, Riot Games is finalizing a deal to sell streaming rights for League of Legend matches to MLB’s tech unit for $200 million over two years. This is quite significant because most of the E-Sports matches are broadcast on Twitch or YouTube. What this deal means is that the streaming of League of Legends can be done in MLB app. The LA Times suggests that there could be a synergy for MLB to purchase League of Legends streaming rights because Riot Games has proven the wide audience its game can reach. Both Riot Games and MLB could gain massive profit with advertisers. Yet, there are still concerns regarding E-Sports broadcasting because the profit generation in E-Sports broadcasting is still in early stages. Whereas South Korea has its own TV station dedicated for video games that the station can profit from advertisers, the American E-Sports are broadcast mostly online. In this regard, moving into a premium app may pose a danger to the League of Legends fan community because the matches may lose its audience and perhaps become unpopular.

Though the MLB deal is still not announced to be closed, the concern LA Times brought up is very significant. League of Legends is not the only E-Sports game. Until recently, the League of Legends has been the most popular online multiplayer video game for MOBA (multiplayer online battle arena) genre. According to data on Statista, League of Legends hold 66.3% of the market share based on PC and console revenues in 2016. For the MOBA genre, League of Legends may still be secure in E-Sports arena; however, new competitive game was introduced in this year’s Summer to perhaps bring down League of Legends from its E-Sports throne. Overwatch, a competitive online first person shooter game developed by Blizzard Entertainment, recently gathered over 15 million users according to Forbes. Bringing the E-Sports to South Korea, the PC Bangs are now populated with more Overwatch players than League of Legends. Even though League of Legends matches are still broadcast on Korean TV station, Overwatch matches have been raising a great number of fans.

Does the emergence of Overwatch mean the downfall of League of Legends? According to major video game news outlet Polygon, the first Overwatch World Cup at Blizzcon 2016 had more than 100,000 viewers. According to Polygon, Overwatch definitely has a potential to be big in E-Sports scene. While League of Legends has been focusing on team construction in the beginning of each round, Overwatch provides more fluidity in game. This means that once players select their champion characters in the beginning of the game, the players are locked with the champions they selected; in other words, the strategy is already locked with the character choices in the beginning of the game. Meanwhile, players can switch their choice of characters at any time of the gameplay. Providing more fluidity in strategy, many hardcore gamers find Overwatch to be a great game in competitive setting. Yet, Polygon points out the flaw of Overwatch that may hinder it from entering the E-Sports market. Overwatch is not the best game for the spectators because it is a first person shooter and it confuses spectators on which characters are on the same team. For a fast pace gun-serking game such as Overwatch, it becomes very difficult for the spectators to see what is going on. For League of Legends, each teams’ health bars are color coded so it is intuitively easy to figure out what is happening in the battle field. In case of Overwatch, not so much.

Does an introduction of new exciting competitive game threaten League of Legends? Not so much. It is just like traditional sports. Basketball getting more popular than baseball does not mean that baseball is not relevant at all. Just like how League of Legends have been treated as sport, it will not have the same decline. Older games can still be relevant and profitable in E-Sports. For example, StarCraft I is still relevant in South Korea even though the competitive market started since 1990s. There are still StarCraft I matches in South Korea and they are broadcast, although StarCraft II came out and the tournament of its own has been getting popular. For this regard, I think the emergence of new games is not a threat to the E-Sports community or League of Legends. It just means that more sport genres are added and the fans will have more options to watch the pro-gamers competing with their passion. As E-Sports get popular just like League of Legends, maybe people will see E-Sports being part of Olympics.

Nordstrom and its Path into the Future

Consume. America is a consumer society. We like to eat, drink, and shop. And as the holidays roll around we are constantly bombarded with advertisements and marketing campaigns reminding us that it is time to buy- buy gifts for our family, jewelry for our wives, toys for our kids, and even treat ourselves. However, over the past decade the annual pilgrimage to the shopping mall has experienced a shift. With the still growing trend of e-commerce, more people are looking online to make their holiday purchases. This comes as no surprise to Nordstrom who has been adjusting their company strategy to maintain a competitive edge as the landscape of retail changes.

Over the past 100 years Nordstrom has built itself into a trusted and recognizable retailer throughout the United States. They are known for their impeccable customer service and good selection of products. However for a high-end retailer it is not easy to stay afloat in the current retail scene. In order to run a physical store, a lot of costs are involved. The retailer has to pay rent to a landlord, pay utilities, keep an inventory, hire employees, account for theft, and much more. These costs have always been a factor in opening a store however the ever-growing bigger threat to traditional stores is e-commerce. Our society has progressively become more connected to technology and this has influenced our shopping habits. As a result the traditional store set up faces real obstacles moving forward.

These purchasing habits can be seen in Nordstrom’s division of sales. In 2014, Nordstrom’s web sales increased by 26%, accounting for $2.5 billion in revenue. For the first six months of 2016, Nordstrom reported net sales of $6.782 billion with $1.178 from Nordstrom.com, up 6.6% from the previous year. This number has only continued to increase. E-commerce has become such a burgeoning item that during the second quarter of 2016, Michael Koppel, Nordstrom’s CFO announced, “We recognize that the shift towards e-commerce is having an impact to our financial model. As we accelerate investments to support changes in customer expectations, our expenses, particularly in technology, supply chain and marketing, grew faster than sales”. This means that for Nordstrom to stay competitive in today’s market they need to pivot the way they make their products available to consumers. They have invested heavily in growing their e-commerce platform and on engaging their customers on their mobile devices. In the past couple of years Nordstrom has really begun to reap the rewards with 21% of its revenues coming from digital sales.

 

If you open Nordstrom.com you will be exposed to a carefully planned marketing set up. Their opening page constantly changes showcasing the most popular products and trending brands.

Their website is also extremely customer friendly and easy to navigate with tabs dedicated to holiday shopping. Carefully curated links can be found with Gifts for Her, Gifts under $100, and Luxury Gifts, making the shopping experience a hopefully easier one. They also make sure to be at the forefront of online promotions. Leading up to Black Friday they sent out email blasts reminding their customers of the promotions they were offering. Beyond that they regularly send out emails giving product suggestions and to inform their customers about new arrivals.

One of Nordstrom’s possibly most competitive strategies is their price matching promise. They have a competitor price matching policy that states, “We are committed to offering you the best possible prices. If you find an item that we offer, in the same color and size, in stock at a national retailer, we’ll be glad to meet a competitor’s price”. By offering this they are promising their customer that at no other location will they be able to find a better price, and in the event that they do, Nordstrom will match it. This makes it easy for shoppers to shop on their platform with confidence that they are getting the best prices. While perusing Nordstrom.com it is quite common to come across the red “We’re Price Matching” banner. In many occasions the customer does not need to shop around and compare prices because if Nordstrom sees a competitor selling a product at a lower price, they automatically match it so the customer does not need to ask for a price adjustment. This also makes the store immune to shoppers who come in to look at the physical product just to make the purchase online for the cheapest price. This policy is more valuable than meets the eye because according to Entrepreneur’s article, millennials are price sensitive and are using their mobile devices in store and online to compare prices. With a website that works symbiotically with its online stores, Nordstrom effectively cuts out its competition for millennials who would otherwise be searching for cheaper prices.

Some might question what the comparative advantage Nordstrom has over other retailers offering similar prices, but Nordstrom offers quite a few very enticing incentives. They offer free shipping on all orders without a minimum purchase requirement making their website a go to source when shopping for virtually anything that can be purchased online. The customer can also have peace of mind that the product that arrives on their doorstep is authentic and accounted for because Nordstrom has an established reputation. Making a purchase with them also means knowing you will receive impeccable customer service including an extremely lenient return policy. They handle their returns on a case-by-case basis with the goal of keeping their customers happy, relying on the idea that if they treat their customers fairly, their customers will also treat them fairly.

They also have a price adjustment policy that ensures customers that the price they pay is not going to fluctuate and in the event that the product goes on sale for a lower price within two weeks they will be able to be reimbursed for the difference.

It’s stores work symbolically with their online website. Customers who might not be fully accustomed to shopping online can satisfy their need for instant gratification because they can place their orders online with the comfort of knowing that they can bring their items in to the store to exchange for a different size or color or get a refund. This saves them the hassle of having to ship their packages back and wait to receive their money. Customers also have the option of buying online and picking up their purchases in store. This gives them the convenience of shopping online without the downsides of having to wait for shipping. This also saves them from the potential of going to a store just to find out its run out of stock of the item they are looking for. This is a win-win situation because when a customer picks up their items in store, Nordstrom saves on shipping costs. And whether a customer is coming in for an exchange or a pick up, the company has won half the battle once a customer has stepped into the store. Whether the shopper is looking to make a return or pick up their items, they are likely to browse as they walk through the store. So in all actuality by creating a business model where both a physical store and an online store serve important needs but have enough of a point of difference where they are both valuable makes for a sustainable business in today’s world of instant gratification and convenience.

Nordstrom’s stores pose a benefit beyond it’s physical sales as well. They are an essential part of Nordstrom’s brandy equity. Their brick and mortar stores occupy space in some of America’s most prestigious malls. Their well-groomed stores alone are a marketing tool. People walking by cannot help but notice the health and wealth of their storefronts. Businesses trying to sell their products take notice too. They have access to exclusive brands and therefore carry what is coveted, trendy and popular. In the past they have struck deals with the likes of Baublebar and Shoes of Prey both of which are brands that are exclusively online. The reason they may be willing to work with Nordstrom is because they become associated with Nordstrom’s name and thereby reputation. Furthermore their inventory is up to date. So if Rebecca Minkoff launches a new line in her stores, you can be sure that Nordstrom will have them available as well. According to Forbes’, millennials are brand loyal so once they trust a company and are accustomed to them, they are likely to continue to be patrons into adulthood. This shows the importance of capturing the millennial generation retailers have as these relationships are formed and often continue to just build on itself.

Nordstrom is also the parent company of other business such as Nordstrom Rack and hautelook.com, both of which have proven to be successful. Nordstrom Rack offers branded clothes, shoes, and accessories at a discount. Nordstrom Rack continues to expand with 113 stores and an e-commerce site that launched in February 2014. It makes up about one fifth of Nordstrom’s overall sales at $2.5 billion since 2013. Similarly, HauteLook is a shopping website and mobile app that has flash sales and limited-time sales events with branded apparel and items such as makeup, jewelry and home decor. HauteLook encourages their browsers to make purchases because of the way their website is set up. Their product offerings change daily and the time restrictions set on them create a sense of urgency. HauteLook was launched in 2007 and was purchased by Nordstrom in March 2011 for $180 million in stock. This is significant because it showed Nordstrom’s commitment to branching out into e-commerce. Furthermore it was one of the first times a traditional retailer acquired an online retail company. Since its acquisition, it has been racking in sales. Nordstromrack.com and Hautelook brought in $323 million in sales in the first six months of 2016, a 38% increase from the $234 million the year before.

While all these projections and figures sound extremely promising. Nordstrom’s ecommerce success also comes at a cost. Interestingly enough it might be taking away from some of its in store purchases which are actually more profitable for the company. Online purchases are generating a lot of sales but not always at the best margins. Online super star, Amazon, has been infamous for their extremely low profit margins but Nordstrom does not necessarily have the same business goals as Amazon. Moving forward, Nordstrom has some tough decisions to make. The efforts and investments they have focused on the past few years may need yet another adjustment to stay on top of the game. The costs involved in creating a successful e-commerce platform on a large scale are not small. They opened their second e-commerce fulfillment center last summer to expedite their shipping process and accommodate the volume of sales. This year the company played around with the idea of opening a third fulfillment center estimated to cost about $170. This may be a smart move because of the slowly online growth they have been experiencing, but it may also be a risk worth taking as Nordstrom’s upfront investments in growing their online business have paid off in the past. Nordstrom has since held off as the future of their online sales is still uncertain. These decisions are pertinent in Nordstrom’s future, as they will have repercussions whichever way they decide.

Macy’s business challenges and what they can do overcome them

Macy’s has been facing a major downfall and its stock price has been tanking for a while now. This problem has been persisting for several reasons, and departmental stores in general have been facing problems making profits. Macy’s stock price fell by 15% in May after its 2016 Q1 financial results were released. Even more recently, in August, Macys announced that it is planning on closing about 100 of their stores. The company executives mentioned that these stores would be performing their final sales in the next year. They have also already had a few recent store closures.

 

There are several reasons that have been costing Macy’s major decline in sales and market share. It’s stock price and overall financial valuation has also been plummeting due to this.

 

Firstly, fast fashion upstarts and established fast fashion companies like Zara, H&M and Forever 21 are rapidly eating away market share because they are able to bring in new styles and designs within short intervals, which is attributable their low costs of production. Also, off price retailers like TJ Maxx and Nordstrom Rack have been providing high quality merchandise at lower prices, which have been attracting a lot of departmental store retailers.

 

However the real game changer in the fashion retail industry has been e-commerce. E-commerce has made a strong dominant presence in the retail world. This is more than evident as Amazon is about to have the label of the largest seller of clothing in the US. Not just Macy’s but multiple traditional retail companies have been struggling to keep up with the e-commerce industry performing at its ultimate peak. Though the profound growth of the online shopping realm is not a firsthand phenomenon, it is now establishing complete control over the apparel retail industry. Macy’s CEO Terry Lundgren is extremely concerned and recently made a statement that “Macy’s has been seeing continued weakness in consumer spending levels for apparel and related categories”. On the other hand, Amazon’s stock has been flying. According to research done by a recognized financial services firm, the Cowen group, its primary growth has been driven by its apparel and accessories businesses, which makes it a key competitor to Macy’s. This is not only apparent from numbers from financial statements and financial valuation represented in stock market prices, but also from increase in the number of shoppers of the companies over time. Cowen and Company, an investment-banking firm performed a detailed survey of 2,500 shoppers in the United States on a monthly basis for the past three years, and their results, which are reflected in the following graph, show that Amazon’s shoppers are continually increasing on an average where as Macy’s number of shoppers has remained the same.

 

Also, there is a current trend of millennial consumers being more willing to spend on services and experiences rather than on material or tangible products. Millennials are defined as Americans who are in the age group of 18-34. They form the U.S.’s largest generation by population and account for about $1.3 trillion of the country’s total annual consumer spending. According to research done by The Boston Consulting Group, the generation values personal experiences much more as opposed to material possessions, weather it is clothes and bags or cars and homes. This generation differs from previous generations in that happiness is a result of sharing personal experiences like a music festival or a vacation rather than of owning a car and a home. This trend has also been slightly contributory to decline in sales of high-end clothing brands, which sell in departmental stores like Macy’s and Nordstrom. The preference shift trend has also obliged many other clothing retail brands to try and adapt and provide experiences along with their products.

 

The stock price of Macy’s for the past year, which is summarized in the subsequent graph, has been quite volatile.

 

 

The key issues that are worrying and need to be carefully addressed by Macy’s can be gathered from data from the company’s recent financial statements. On May 11 2016, Macy’s stock price fell by 15% to $31.38, which was both a highlight of its stock price history and also an alarming wake up call for Macy’s. Macy’s released its first quarter financial results a few weeks before this and they showed that its sales fell from more than 7% from more than a year ago and its performance didn’t meet forecasts. Also, same store sales which indicate the change in sales generated from the existing stores of a retailer, are an important performance metric for retailers, have also been significantly declining for Macy’s.

 

The combination of fierce competition from e-commerce, off price retailers and stores that cater to fast fashion, along with shifts in consumer preferences that are moving away from traditional clothing retail stores have caused problems for not just Macy’s, but even its major competitors that have similar business models, like JC Penney’s, Sears, and Nordstrom.

 

It is crucial for Macy’s to craft an optimal strategy that has features that can address each of the causes for its decline in sales. Addressing each cause of the big problem specifically helps create a detailed approach. Capitalizing on the company’s existing strengths and opportunity is an integral part of implementing any plan to solve business problems. Consequently, Macy’s has announced that they have been taking some initiatives to combat their problems. They have been receiving constructive feedback and response towards these initiatives.

 

Firstly, the company has tried to achieve off price retailing, which is being adapted by many retail departmental stores. Off price retailers sell high quality products for much cheaper prices. The catch is that products are usually second hand goods, last season items, cancelled orders or goods returned by other retailers. They usually have an inconsistent mix of brands. An important characteristic that attracts consumers to departmental stores even today is sales and discounts. Even though departmental stores attempt to restrict discounts, it’s difficult them to do so while retaining their loyal customers. This is because some economically prudent customers get too used to this pricing and it is difficult to get them to pay full price. This is exactly where off price retailing comes into the picture. It caters to these customers by providing a discounted products option all year around. For example Nordstrom, one of Macy’s biggest competitors has introduced Nordstrom Rack, which has a strong presence in the off price retailing industry. Macy’s is also planning to start its own off-price retail store, Macy’s backstage, and aims at opening 15 stores by the end of 2016.

 

While the addition of this segment will definitely give Macy’s a stronger foundation to combat its competitors, off price retailing comes with its own set of troubles. It is important to look from a consumer’s perspective when trying to increase same store sales. Off price retail stores sometimes have defective products, because they are usually returned or rejected products bought out from other retailers. The décor of the store is not at all attractive and welcoming; the manner in which clothes are displayed in these stores are very unorganized and inconvenient for customers as they are all a mix of different kinds of clothes from different brands. Off price retailers project a different aura and feel altogether, and though Macy’s can start an off price retailing division, it would still need to focus on enhancing its primary departmental stores that define its brand image.

 

Another step that Macy’s has made towards progressing is focusing on developing and revamping their cosmetics and accessories department. While the retail industry as a whole has been struggling to perform in the United states, cosmetics and accessories sales have been soaring, and this has proven to be very beneficial to departmental stores. Not just Macy’s revenue mix, every general department store’s sources of revenue has a good proportion of income from the accessories and shoes departments. The revenue of Macy’s specifically is 38% accounted for by this department, which is the largest portion of all the categories.

 

Amidst of the struggle to perform, increase same store sales and expand customer base, Macys made an acquisition of Bluemerucry, which is a luxury cosmetics and spa with 100 stores all over the country. After acquisition, Macy’s is planning on opening 24 Bluemercury stores within the biggest Macy;s stores by the end of next year.

 

Macy’s is indeed making a clever attempt to reinforce their cosmetics department.

 

Sales of cosmetic products have been progressing remarkably and departmental retail stores like Macy’s should intend to take full advantage of this. Sales have been rising due to a combination of several factors. Firstly cosmetics cater to the contemporary trend of willingness to spend money on experiences. Buying make up is an experience, because most cosmetics stores like Blumercury provide in store make up salons and spas, which have in store makeovers. This is essentially the experiential service that Bluemercury stores could add to Macy’s. Exploiting the cosmetics department by selling experiences can play a substantial role in helping achieve higher sales for the company as millennials become more and more inclined towards such services. Another aspect about the cosmetics industry that makes its products so attractive is that it provides luxury at a much a smaller price and level. For example products from luxury cosmetics brands like LeMar, Clinique and Chanel provide millennials with the contentment of owning a luxury product, though it is at a much smaller level.

 

A noteworthy innovation that Macy’s is set to bring to its departmental stores is a virtual store assistant that guides you through the entire collection in the store. Macy’s initiated a partnership with IBM to create an app called Macy’s on call that is driven by artificial intelligence and provides customer with efficient in-store help.

 

A common apprehension that customers have towards large departmental stores is that that they do not get as much help and consideration from store associates as they would get in a smaller standalone store of any brand. Though a lot of times store assistants are helpful to customers, many customers, especially millennials would rather get this help from a smartphone in their hand rather than have to look for a store assistant and have them answer their questions. This app not only caters to such consumer preferences, but would also enhance the efficiency of the shopping process for customers. Such an app would be apt for shoppers with time constraints. Such customers know exactly what they want to buy, and in which size; they would take a few seconds to locate their items on the app and then checkout and get going. However, technology does come with its disadvantages. The risk of issues like network errors, app breakdowns and other technical glitches will subsist. Also, there is still an older group of shoppers who would prefer talking to a human store associate, not only because it might be harder for them to use the app but also because they actually like having the human touch in their shopping experience. Overall, however a user-friendly app like this one would be a considerable addition to improve the shoppers’ use experience and would also help attract more customers to drive sales revenues.

 

Ultimately, Macy’s will need to constantly keep innovating to add creative and unique components to their business to recover from its sales problems. It is not that blunders have been made by the company that have led them into difficulties, it is just that consumer preferences and trends have been rapidly changing, and intense competition from e-commerce and fast fashion retailers has been grasping customers and market share from departmental store retailers. Nordstrom, which is one of Macy’s major competitor, has also been facing a similar crisis, due to almost identical reasons. Departmental retail stores will therefore need to continually add new elements to their businesses, or remodel existing features to accommodate new trends and revolutionize the value of departmental store shopping.

 

 

 

 

 

Tracking Benjamin: U.S. dollars around the globe and why cash is here to stay

Text version below.

 

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I could go a whole week without touching a piece of physical currency once. Apple Pay at Starbucks, credit card at the bookstore, debit card at their favorite food truck, Venmo to split restaurants checks with friends, cash a check on an app, you name it and it can be done from a smartphone.

In today’s digital age, it’s easy to envision a day when grubby green dollars are a relic of a bygone era, like typewriters or pagers, but the evidence points in another direction.

There are two main reasons why the United States will keep printing the Benjamins for many years to come. The first is that most Americans still use cash as a secure way to complete transactions, especially for small payments. Secondly, many developing nations prefer to use American currency instead of their local currency.

In a 2015 study by the Federal Reserve Bank of San Francisco, credit card, debit card, and electronic payment methods were used in 58 percent of transactions. Credit cards accounted for 21 percent, debit cards for 27 percent and electronic for 11 percent of the year’s ways to pay among American consumers. In spite of widespread use of more modern payment methods, cash has maintained its status as the most used payment instrument at 32 percent of all transactions.

American transactions by payment type in 2012 and 2015. Over three years, cash use declined but remains the most used payment method.

While cash remains king for now, it’s popularity declined in the United States from 2012 to 2015 accompanied by in increase in the use of cards and electronic payments. Credit cards, in particular, increased use by 4 percentage points over the three-year period.

Despite declines in cash usage among Americans since 2012, the total Currency in Circulation Value has been rising every year since it was recorded and published by the U.S. Department of Printing and Engraving in 1995. Since then, the value of currency in circulation has increased over 300 percent to $1.38 trillion.

The total value of currency in circulation has grown significantly since 2008.

The U.S. Department of the Treasury decides how much physical currency should be in circulation each year by considering how much currency was destroyed in the past year and the projected demand for currency, in its various denominations, for the upcoming year.

It’s not just a response to inflation that is driving up the amount of dollars in existence. The rate of growth of currency in circulation far exceeded the rate of inflation between 1995 and 2015, as determined by the Consumer Price Index. Adjusted for inflation, the $148 billion in circulated cash in 1995 would be equivalent to $230.17 billion in 2015 dollars, just 16 percent of the actual value in 2015.

Although since 1916 inflation rates have been somewhat erratic, since 1995 inflation has remained relatively steady.

If the supply of cash is ever-increasing at a rate much higher than that of inflation, demand must also be increasing, otherwise inflation would rise because too many dollars would begin to chase too few goods. Between low inflation rates, since 1995 inflation has averaged around 2 percent each year, and a decrease in demand for cash among Americans moving toward credit and debit cards, there must be a missing piece.

To find the missing piece to the puzzle, travel to Cambodia where locals shuffle crisp one dollar bills from hand to hand at a bustling floating market, Zimbabwe where farmers collect U.S. dollars from customers at the market, or Argentina where middle class citizens buy cars with American cash.

This is called dollarization. It describes the use of a foreign currency in a nation either formally, to replace its national currency, or informally, where individuals use a foreign currency alongside their official national one.

Dollarization in countries like Cambodia, Zimbabwe, and Argentina has led to increased demand on an international scale for American currency. For Cambodians, Zimbabweans and Argentinians alike, the dollar was and remains a safe currency that is stable unlike their native monetary system which has struggled and or continues to struggle with hyperinflation and political instability.

Research conducted by the Federal Reserve has consistently shown that overseas demand for American currency has been strong and will continue grow in the coming years. While there is not way to know exactly how much currency is abroad, estimates in 2011 suggested that about 50 percent of all currency in circulation was held outside of the United States, about $500 billion.

Nations that adopt the dollar as their currency formally, and to a lesser degree those that use the dollar informally, also face some disadvantages in exchange for stability, favorable interest rates, and increased trade opportunities. One of the major drawbacks of formal dollarization is the complete lack of control over monetary policy. Dollarized nations with stagnating or shrinking economies are unable to lower interest rates which would encourage consumer spending, investment and create growth.

All of this begs the question: where exactly does the Treasury belong in foreign nations’ economies?

The Treasury Act of 1789, created by the First Federal Congress, established the U.S. Department of the Treasury to manage government revenue collected mainly through taxes. Since its inception, the role and scope of the U.S. Department of the Treasury has expanded and shifted significantly. A part of government that once served almost exclusively as the American public wealth manager now also has major roles in foreign economic policy and even an office specializing in terrorism and finance intelligence.

The United States Department of the Treasury Building in Washington D.C.

Today, it is part of the Treasury’s stated mission to promote “the conditions that enable economic growth and stability at home and abroad” giving a reason for the Department’s support of international economies. Furthermore, providing unstable nations with a stable currency comes at a relatively low cost for the United States while creating some degree of political and economic leverage over the dollarized nation.

In 2015, the cost of printing the year’s currency was $578 million, 0.0001 percent of the year’s federal budget. In exchange for providing dollars, the United States has the ability to strengthen its influence over the nation in question. Additionally, use of the U.S. Dollar abroad facilitates trade by avoiding exchange rates and risks associated with dealing in unstable currencies.

A potential downside to allowing American currency to be used overseas is risking deflation as international demand increases without increases in supply. Luckily for the Treasury, it has the power to print essentially unlimited quantities of dollars in order to maintain the stability of the currency.

There is also no beneficial alternative. If the Treasury only prints what is needed for domestic use, international demand will remain constant with an even smaller supply of currency resulting in an increase in the value of the currency itself. This appreciation might also affect the overall value of the dollar but to a much smaller degree.

Today, the vast majority of money exists virtually in a computer network. The CIA World Factbook estimates that there at $11.78 trillion in virtual and physical U.S. dollars worldwide. This means that physical currency is only 9 percent of all American money in existance. As such, fluctuations in the value of this small portion can only affect the overall value of the dollar by so much.

So, providing currency to the world comes at relatively low cost to the United States and provides some political benefits but dollarization doesn’t entirely explain the increased production of $100 bills.

Currency production by the United States Department of Printing and Engraving separated by denomination. Production has increased overall, however, larger denominations have grown at a higher rate.

Hundred dollar bills in particular have become a larger proportion of the Treasury’s annual currency order. From 2010 to 2015, the amount of $100 bills ordered by the Treasury increased 34 percent from 7 billion to 10.8 billion notes. In the five previous years, from 2005 to 2010, $100 bill orders increased by only 18 percent.

Yes, some people have converted their life savings into dollars and are hiding them in their mattresses as a safeguard against the instability of their own currencies. However, logically, most people who are doing this are in developing nations and won’t have vast amounts of savings to convert into dollars and stash away.

A study conducted by Peter Sands, a Professor at Harvard, suggests that a significant amount of American currency, particularly $100 bills, is preferred by and thus facilitating international crime. The study estimates that global crime finance amounts to over $2 trillion U.S. Dollars per year. Sands argues that most of the illegal transactions that combine to make this astronomical figure use cash due to its anonymity, lack of record, and ease of transportation. Given the large sums of money exchanging hands, large denominations of stable currencies issued in mass quantities are the preferred form of payment.

From this point of view, the Treasury can be seen as an organization that is unintentionally aiding international criminals. Upon further scrutiny, however, the Department can’t really be held accountable for how people use its bills. The Treasury would face opposition to decreasing the discretion and portability of cash because those same characteristics make it attractive for law-abiding citizens.

Perhaps the best it can do is limit the supply of large denominations as proposed by both Sands and former Secretary of the Treasury Lawrence H. Summers in order to limit its facilitation of crime.

The Big Three’s Foray into Tiered Wages

Troubled Waters

It’s 2007 and The Big Three automakers, Chrysler, General Motors and Ford, all found themselves in big trouble. They were on the verge of collapse, with wage bills spiraling out of control and foreign competition continuing to undercut their former domestic supremacy. GM’s profits were down 90% in the first quarter compared to the previous year, and the automakers looked for any means by which they could save themselves amidst the falling debris of debt, rising gas prices and cars no one wanted to buy anymore.

Most economists argue that globalization is a net positive for economic growth, benefits consumers in a number of ways and should be encouraged. It creates a more competitive environment that in theory increases not only the quality of products available to the average consumer while also decreasing their cost. The American auto market shows us a very clear example of how it works.  The Japanese and Korean automakers entered the US market and essentially took the Detroit giants out at their knees. Companies like Honda and Toyota created cheaper, more efficient and longer lasting cars than their competition and won larges swathes of the market.

In response, American automakers cut costs fast and furiously. For example, in the mid-2000’s Ford downsized significant parts of the company by closing plants in order to reduce excess production and they liquidated thousands of salaried positions. According to it’s 2005 earnings statement, Ford planned to close 14 manufacturing plants by 2012, leaving some 25,000 to 30,000 workers jobless. They did this because they did not have a demand for the vehicles at level needed to operate the facilities at full capacity. In fact, they operated at a mere 75% of capacity as of that earnings release. These initiatives were a direct result of automotive sector of the company losing almost $3.895 billion in 2005.  Eventually, Ford cut over 40,000 jobs between 2005 and 2008.

Ford’s 2005 earnings report shows trend of shrinking market share

This poses a major drawback, for some, of globalization and how it effects workers; it depresses wages. This happens because workers are now faced with a market place flooded with cheaper competition. Logically, that should for the wages for American auto workers to decrease in order to compete with the foreign workers. But in this instance, the wages of the American auto worker have not shrunk to match the other entrants in the field. Author Edward McClelland points out in a Washington Post column that, “because it provides pensions and benefits that GM’s labor costs average $58 an hour, compared with $48 for Toyota and $38 for Volkswagen.” So the Big Three cut jobs, shut down factories and continued to move production into cheaper wage countries like Mexico. These moves cut union membership from 1.5 million in 1979 to 400,000 members as of 2015.

 

 

 

 

 

 

 

 

 

The Big Three and the weakened unions had to confront the wage issue in order to find a workable path moving forward. Faced with the loss of jobs due to reductions and outsourcing, the unions agreed to system in which hourly employees hired before 2007 would have the designation of tier one or “Traditional” employees and their wages would remain frozen, but not cut. Whereas, all new hires from 2007 onward would be deemed tier two employees, and their pay would be capped permanently, with no hope of ever matching the rates of tier-one employees. Basically, they imposed a wage ceiling of $19 an hour on newer hires, no matter how long they worked there, while the longer tenured employees could make up to $28 an hour. The move was justified as a means to save thousands of factory jobs in the U.S. A move that has been since in other companies such as Kroger’s supermarket chain and United Parcel Service. Many point to Ronald Reagan’s use of tiered wages against government employees at USPS in 1984, as the first instance of its use in the US. Now the automakers were betting on its efficacy as well.

 

The Bailout

Initially, the plan did not make a major impact. We know an enormous number of factors played into the demise of the Big Three. After all, if you look at the Ford’s stock over the past 15 years, we see a massive downward trend from 2000, far before the financial collapse, until it scraped the bottom of the barrel in 2008. Foreign competition battered the Big Three, and drastically reduced not only their market share. For a number of years, the Americans could still bank on consistent sales volume to maintain, but after the recession demand dried up producing the crippling blow. Now higher labor costs became an even more significant point of contention in explaining why they couldn’t keep up. Soon Chrysler and GM teetered on insolvency. Ford hung in, but could’ve easily tumbled as well.

Ford Stock Price 2000-2010 Source: Google Finance

In late 2009, both Chrysler and GM filed for chapter 363 bankruptcy. In response, despite some calls to allow the companies to fail, the Obama administration intervened to prevent an, “Industrial Lehman Brothers Effect.” By utilizing TARP, the Troubled Asset Relief Program instituted under President Bush in 2008, the government dispersed $49.5 billion to GM, $17.17 billion to Ally Financial, the former financial arm of General Motors, and $11.96 billion to Chrysler in various loans, bankruptcy payments and share purchases. As a result of this agreement, Chrysler went under the dominion of Fiat, and the two companies merged to become Fiat Chrysler Automobiles US.

Ford, after initially taking part in conversations about a bailout, decided to walk away from the negotiations. It drew on lines of credit that they established in 2006 by mortgaging assets ad setting up long-term borrowing plans for the credit crisis in 2008. This allowed the company to infuse itself with life preserving liquidity to weather the storm of contraction in 2009 and 2010 which included; shrinking sales numbers and, consequently, shrinking production output.

These actions undoubtedly saved a number of jobs, and allowed the American auto industry to continue to exist as we know it. The Center for Automotive Research released a report on the topic in 2013, “Our results show the U.S. government saved or avoided the loss of $105.3 billion in transfer payments and the loss of personal and social insurance tax collections—or 768 percent of the net investment.” The report continues, “Additionally, 2.6 million jobs were saved in the U.S. economy in 2009 alone and $284.4 billion in personal income saved over 2009-2010.” But what did a lot of these “saved” jobs pay? A fair number of them didn’t pay what they used to, and that was the intention. But the results are difficult to argue against. Ford added more than 17,000 hourly jobs in the last five years through in-sourcing, and brought back production of certain pickup truck models from Mexico. Meanwhile FCA brought in around 15,000 new workers since their bankruptcy 2009.

 

Removing the Limiter

The US government attached a number of stringent restructuring requirements to the bailouts of Chrysler and GM. Initially, the tiered wage plan, as agreed to in the labor negotiations of 2007, prevented the Big Three from having any more than 20% of their work-force constituted by tier-two employees. After GM and FCA filed for chapter 363 bankruptcy in 2009, Obama lifted that restriction. The cap was supposed to be reinstituted during labor negotiations in 2011, when the companies became profitable again, but that did not happen and the tiered wage agreement continued. According to the New Labor Forum, FCA’s workforce consisted of up to 45% tier-two employees before the most recent collective bargaining sessions in 2015, while Ford’s number sat at 29% and GM at 20%. As a consequence of having the most tier two workers, FCA saw the greatest benefits to this plan. It saw wages drop to an average of $48 dollars an hour, according to the Center for Automotive Research, as compared to Ford whose costs rested at $57 an hour.

But Ford still pointed to the new agreement as a key factor in their regaining international competitiveness. From its 2011 earnings report, “In 2011 we signed a four-year agreement with the United Auto Workers that will help us improve our global competitiveness. As a result, we will be investing $16 billion in the U.S. and adding new jobs at our U.S. manufacturing facilities.” They also reported an increase of pre-tax operating profit for their North American operations to $6.2 billion. A massive change from the losses they faced back in 2005. Obviously, many factors play into that resurgence, but wage cost reductions were a major talking point for all of American auto makers.

Source: Ford’s 2011 end of year earnings report

 

The Downside of Tiered Wages

While the new wage structures helped retain many jobs, and played a role in the revitalization of auto industry in the US, sometimes things resonate on a deeper level than just spreadsheets. The wage gaps between employees, with no possibility of ever closing, caused a lot of discontent amongst the workforce. A fact acknowledged on both sides of the negotiations. Imagine getting a job and working alongside people doing the same job, and yet you will never receive the same pay. Many of these workers had close relationships with one another as well, which only made the disparity more difficult to bear for some.

In an excellent article for The Nation about the growing trend of tiered wages in the US, Louis Uchitelle talks about a father and son, Gary and Karl Hoeltge, who both work on a GM assembly line in St. Louis. Karl feels disillusioned with the work and has his sights set elsewhere, in part because, “I’ll never catch up to my father’s pay—not if the union allows the present setup to continue.” Uchitelle describes how father and son must refrain from discussing the issue at the dinner table so they don’t upset the rest of the family. The divisiveness of wage tiers seeping into home life is important to note, because one can imagine how those same feelings must render themselves in the workplace.

The Hoeltge’s paint just one example of the discontent that many autoworkers felt in regards to the tiered wage system. Trey Durant, a 20-year factory employee for Chrysler, has strong feelings on the issue, “Working in the same facility, side by side with someone who has a different wage than you was a bad idea, even though I know why they had to do it when times were tough,” He says. “I want my brothers and sisters to be at full wage also.” And even FCA CEO Sergio Marchionne, whose company benefited the most from this arrangement, called the system unsustainable and pushed for it to end.

The UAW worried that the increasing number of tier two employees at the factories would more firmly entrench the system. Whether they worried about younger workers making ends meet as Trey Durant says or worried about being forced out for cheaper labor themselves is anyone’s guess. What we do know is that the unions made ending the two tier system a key point in labor negotiations with the Big Three in 2015. Ultimately, they reached an agreement that instituted a new eight-year track for new hires to eventually reach the same wage rate as tier one employees. So the controversial wage tiers are no more.

 

Conclusion

Ford utilized the advantages of tiered wages when in-sourcing jobs back from Mexican plants, but now they have to rethink their strategies.  “The business case for in-sourcing is more challenged with today’s agreement versus the prior agreement,” said Joe Hinrichs, Ford’s President of the Americas to Automotive news. “…there will be business choices over time that will have to be looked at, given the new cost structure that we have.” These wage structures made it economically beneficial for the big Three to keep jobs in the US, and now that they’re gone it will be interesting to see what actions they take next to try and keep earnings high. The bail-out and tiered wages certainly helped punch up the economic recovery, but how will these companies choose to compete with foreign competition going forward?

For the worker, the ever evolving market place, in the end, is the primary difficulty they have to face. Tiered wages may have cause unrest amongst the employees, but ultimately they allowed many people to attain jobs they otherwise would not have. Faced with the looming threats of increased automation and further outsourcing to Mexico it appears many of these workers have picked a losing fight.

China’s National Love For Live-streaming

“Please don’t send gifts to me anymore! Why not buy some snacks if you have extra money?” said Fu Yuanhui, a Chinese Olympic swimmer, after seeing the barrage of virtual gifts such as yachts and sports cars being sent to her via cyber space. Fu, who became famous for her lovely facial expressions and the buzz she generated from her “mysterious power” during the Rio Olympic Games, was live-streaming herself interacting with her fans on a platform called Sina Weibo, the Chinese version of Twitter. More than 10 million people watched this live show and many of them contributed in filling up Fu’s mobile phone screen with virtual gifts.

Though seemingly useless, virtual gifts have more value than is initially apparent. The virtual yachts, sports cars and diamonds are not real ones, but they are paid for with real money by fans, which the live-streamer is then able to cash out proportionally. The prices of gifts range from several cents to thousands of dollars on Inke, a one-year-old live-streaming mobile app that has occupied the No. 1 spot on China’s app store multiple times in the past few months.

Believe it or not, at any given hour, millions of Chinese are live-streaming on their smartphones. Not only celebrities, but netizens from all walks of life are joining the army of live-streamers to showcase themselves performing all kinds of activities. “You can live-stream whatever you want,” said Ge Wang, a student live-streamer studying Communication Management at the University of Southern California. Her graduation capstone project is about how to be an Internet celebrity. Before she started live-streaming this summer, she had already several short videos online. “My friends told me that if I want to get famous, live-streaming would be a good way,” Ge explained.

Welcome to China’s new national reality show industry! Live-streaming is gaining huge popularity among youngsters who are willing to show their personal lives online for fun or fame. Accordingly, the past year witnessed hundreds of new live-streaming social accounts, especially on apps such as Inke and Huajiao, spring up in the country as millions of young internet users became engaged in this activity. No wonder 2016 has been called the national live-streaming year of China.

While China did not invent live video-streaming, it has taken these reality shows to a completely new level. “Dozens of Chinese live-streaming apps almost copy exactly the same format as Twitter’s Periscope and Younow,” Ge explained. Live-streaming is a growing mobile-video market that is hungry for content reflecting young people’s tastes and lifestyles.

 

Platforms, Live-streamers and Content

Live-streaming has been around in the U.S. for years on social media platforms such as Facebook Live, Flipagram, Instagram Stories, Snapchat, Twitch, Periscope and YouNow, but it is not a mainstream activity in the States. However, China is turning it to a national fever.

Video game live-streaming is the most common type of content initially, which is the same case for both China and America. Live-streamed video-gaming targets hard-core gamers and the shows are usually hosted by professionals. For example, Douyu, a competitive live-streaming platform, which is operated by Wuhan Douyu Internet Technology with investments by Tencent Holdings and Sequoia Capital China, debuted as a live video website for gamers in 2014, but then moved to lifestyle live-streaming last year. It is now claiming 600,000 users who have streamed at least once and 120 million active monthly users.

Lifestyle live-streaming then prospered. A lifestyle live-streaming bellwether is Inke mentioned above, which says over 50 million users have downloaded its app since its establishment. Moreover, China’s biggest social media platform Sina Weibo launched its live-streaming platform in May. Since then, Weibo celebrities and influencers have brought a number of live-streaming shows for fans, for fun and even for charity. Video streaming site iQIYI also launched its live-streaming app Qixiu in the following July.

“Everyone can be a live-streamer,” said Ge, “no matter if you are a celebrity, an entrepreneur or ordinary person.” That’s the truth. Approximately 46 percent of China’s internet population used a live-streaming app in June 2016, according to Hua Chuang Securities.

With popularity largely driven by celebrities and key opinion leaders, live-streaming can be especially useful when famous brand ambassadors serve as hosts to the online events. Alibaba’s Tmall seizes this business opportunity as usual. A total of 49 percent of beauty brands have live streamed on Tmall between April and October 2016, The e-commerce giant, Taobao, follows with 35 percent of beauty brands having live-streamed on the site, according to Jing Daily. This September, prominent make-up brand Guerlain partnered with Yangyang, a Chinese celebrity via Tmall Live. The live-streaming show garnered 2.43 million views, 4.55 million likes and most importantly, more than 10,000 of lipsticks sales.

(Guerlain’s partnership with Yangyang)

Papi Jiang, a Chinese cyber celebrity, drew 20 million viewers for her first live-streaming show in July 2016. During her 90-minute unscripted live-streaming show, which was available on eight leading live-streaming platforms in China, including Youku, Meipai and Douyu, Papi Jiang told jokes and shared with her fans details of her daily life and romances. According to the New York Times, there were more than 74 million views in one day, which exceeded what Taylor Swift’s latest music video, “New Romantics,” received on YouTube in four months.

(Papi Jiang’s first live-streaming show)

Renowned entrepreneurs also seek to take advantage of the platforms to boost their brands among young consumers. Wang Jianlin, the chairman of Dalian Wanda Group and China’s richest man, once live broadcasted himself visiting a company theme park and playing cards on his private jet.

(Wang Jianlin’s first live-streaming show)

“I don’t think Chinese live-streaming has good content,” Ge complained. Ge indicated that current live streaming fever is lacking qualified production. A lot of people are live-streaming their lives all day from squeezing in the metro to eating a bowl of ramen. Moreover, Chinese live streaming apps breed soft porn in a society where such content is tightly controlled. Understandably, Americans don’t need Periscope to watch pretty young women, but Chinese need live streaming platforms to help satisfy their sexual cravings.

(A pretty young woman live streams herself.)

Where is the money going?

It is not uncommon to read such an eye-catching title as “China’s Internet ‘Stream Queens’ Are Being Showered With Cash” if you search for live-streaming related content via Google. Is live-streaming that profitable?

“I made 20 yuan ($3) to 30 yuan ($6) every live-streaming show that lasted for an hour,” said Ge. Ge admitted that she was new to live streaming but professional live streamers are able to earn as much as one million yuan ($0.2 million) in a month. Someone even quits his or her full-time job to pursue a live-streaming career because it pays so much more.

How does live-streaming monetize? Through the collaboration of the app, the live streamer and the viewer.

Admittedly, live-streaming is well known for its interaction. However, many Chinese live-streaming apps have integrated an original tipping feature that motivates people to stream more and generate profit for the apps. Other than leaving comments, viewers can also interact with the hosts by buying them virtual gifts, such as flowers, toys and cars through the streaming platforms. Not only the apps are making a profit, the streamers can also trade the token value of the presents for cash.

For example, one yuan (20 cents) on Inke can buy 10 tokens, which users can in turn use to purchase virtual presents, such as a bunch of cherry flowers (one token), a hug (five tokens), a fleet of virtual Ferraris (3,000 tokens each) or a yacht (13,140 tokens). In other words, if you want to tip your favorable host with a yacht, you have to spend 1314 yuan ($190) for Inke’s tokens. Moreover, Live streamers and Inke split the income from token sales. Different companies set different rules for splitting the income. Inke gets 70 percent of the revenue while Douyu says it splits token income with streamers halfway.

Through digital tipping, live-streamers are incented to live stream more frequently. “If you want to build your loyal fans group, you have to post regularly say every Monday evening at 8 pm,” Ge stressed.

Besides live-streamers and live-streaming apps, adding to the monetization of streams are also e-commerce and games sales. E-commerce platforms such as Alibaba also share a huge slice of the profit in this market as viewers might be tempted to buy the same clothes their hosts wear and gamers are more likely to play the games that the host recommends during live-streaming.

Live-streaming directly gives rise to new forms of advertising for different brands. Brands start to advertise on the apps and users pay to watch their favorite personal reality shows.

Investors are thinking highly of this flourishing live-streaming market as it is generating a huge amount of capital. Investment funds and tech giants, including Baidu, Alibaba and Tencent, have invested heavily in the fast-growing industry. According to Hua Chuang Securities, the live-streaming market reached 12 billion yuan ($1.8 billion) last year. It is estimated to grow to 106 billion yuan ($16 billion) by 2020. Credit Suisse stated in its September research report that it believes the Chinese personal live streaming market will be $5 billion next year — already just $2 billion less than China’s movie box office total ($7 billion) and half the size of its mobile gaming market. In addition, 108 out of 116 live-streaming apps have successfully secured financing.

Furthermore, investors are swooping in. Inke, which now has more than 2 million users, raised 68 million yuan ($10.3 million) in January from Beijing-based web game developer Kunlun Tech. In March 2016, Douyu raised $100 million in a round led by Chinese web giant Tencent Holdings. Enlight Media, a Shenzhen-listed entertainment company chaired by billionaire Wang Changtian, invested 131 million yuan ($20 million) for a controlling stake in live-streaming platform Guagua this May.

 

Where is the future? Tighter government supervision and better content

Earlier this year, some of the most viral content on these live streaming apps reflected pornography such as topless women in front of the camera and suggested erotic behavior. Those streams were deleted quickly. However, the Ministry of Culture, the national anti-pornography office and other regulators have investigated 19 live-streaming platforms for potentially criminal, pornographic or violent content, according to state media reports. Almost all bigger Chinese streaming apps were named or fined, including Inke and Douyu.

In front of the grey areas that exist on the streaming apps, government is trying to tighten its supervision and the sites are also trying to rein in what users post. Nonetheless, pornographic content is more lucrative as users are more willing to pay the live streamers.

Another future challenge is a tension between the quantity of the production and the quality of the production. Although the streaming industry provides a steady supply of content, the market has a low entry barrier. During the interview with Ge, she mentioned that live-streaming is a good way to pass time as a lot of people can live-stream for a whole day. “Maybe it’s ridiculous but I think people are live-streaming because they get bored,” Ge answered with laughter. One of the most astounding statistics of the live-streaming trend in China is that the most active hours are between 10pm and 4am, with peak usage at midnight. Live-streaming may be an answer to loneliness. Moreover, to drive more short-term profit, live-streaming apps are likely to hire beautiful female hosts to attract users and drive sales of virtual gifts.

China’s web has become increasingly mobile-driven, with more than 92 percent of the country’s 710 million internet users now accessing the web via their mobile phones, according to a report published this month by the official China Internet Network Information Center. Undoubtedly, live streaming dramatically changes and broadens people’s social life as everyone is under the spotlight. Everyone can watch each other.

When asked about her future plans to build her brand, Ge said she gave up starting with live-streaming to get fame. She plans to continue and prioritize making funny short videos regularly to increase her viewership and build her loyal fans group, just like how Papi Jiang accumulated her fans before. She highlighted that only short-form videos are considered good content now. Ge has already gained more than 30,000 views for one of her short videos uploaded to YouTube. “If you want to build your brand, live-streaming might not be a good way as no one will pay attention to you until you become someone,” said Ge.

###

Sources:

http://www.wsj.com/articles/live-streaming-apps-flourish-in-china-1462995001

http://www.forbes.com/sites/ywang/2016/06/02/in-china-millions-are-broadcasting-their-personal-lives-online-including-the-countrys-richest-man/#63a0a0e57cb4

http://www.cnn.com/videos/world/2016/08/15/china-live-streaming-matt-rivers-pkg.cnn

16 Observations on Livestreaming in China

http://www.economist.com/news/china/21707070-authorities-wish-they-wouldnt-chinas-netizens-love-sharing-live-video-themselves

http://www.voanews.com/a/china-live-streaming-apps-surging-in-popularity/3356667.html

https://www.techinasia.com/weibo-live-streaming-china

https://www.bloomberg.com/news/articles/2016-11-01/chinese-live-streaming-apps-employing-censorship-against-rivals

Live-streaming in China

http://www.bbc.com/news/world-asia-china-37127904

https://www.bloomberg.com/news/articles/2016-07-04/millions-of-chinese-stream-reality-shows-starring-themselves

Airbnb: the future and challenge of experience sharing

Airbnb and its hosts are broadening their business. During the company’s annual conference in November, Airbnb’s CEO Brian Chesky announced “experience” and “places” will be the two new features joining “homes” on its app. Besides booking a spare room rental, travelers can now use Airbnb to reserve tours and activities.

These two new features are design to help travelers to make more in-depth planning and to have a fuller travel experience. The launch marks Airbnb’s start of transitioning from a home rental site to an integrated travel-planning platform.

“Places” are the travel guides curated by local hosts or experienced traveller. They are essentially lists of places to go. Hidden artistic corners, must-try restaurants, unlikely music venues, etc. Travelers do not have to pay to read these recommendations. This feature has potential to help Airbnb attract more travelers to view its content. Most travelers like to look for places to go before they take off. Some ask on Facebook, some turn to TripAdvisor. But this new “places” feature offers organized personal recommendations that people can eyebrow base on their own preference.

Some curators may recommend places or activities that they have special access to, and that leads into the “experience” feature. “Experience” allow travelers to purchase travel packages on Airbnb. Currently, about 500 activities are available on Airbnb’s app. They are generally more personal and sometimes more creative than the tours from travel agency. For example, travelers can connect to a film producer who can put up a set for them to try out acting. Or they might stay with ranch owner for a few days to ride horses and harvest fruit. Most of these experience packages have activities on multiple days, cost anywhere from $200 to $1000 and provide amenities such as food, drink and tickets. Like home rental, the experience service providers are also individual hosts; Airbnb remains a platform for people to share and meet.

The expansion didn’t come from sudden. Airbnb has been planning and testing on this launching since a while ago. A “journey” feature was tested in the bay area last year, which encourages hosts to plan a whole trip for travelers. In August this year, an app called Airbnb Trip was available briefly on Google Play Store. Similar to “experience”, Airbnb Trip allowed users to reserve activities in their destination, such as booking a restaurant or connecting with a tour guide. In September, Airbnb acquired a travel site called Trip4Real, which also emphasize on unique local experience. The fact that Airbnb raised $850 million in capital this August at its $30 billion valuation also signals a big move.

It is quite an ambitious transition for a company that has only be in the competitive market for a few years. But Airbnb isn’t afraid of trying, because it has the strongest supporters. The annual conference held three days in Los Angeles’s Orpheum Theatre. Although the admission was between $275 and $345 — and Airbnb does not pay for that fee, over 7000 excited hosts from all over the world still rushed to L.A. Many applied to be hosts of “experience”, but the company decided it was going to be more selective at the beginning. Depending on the market needs, there should be more “experience” hosts joining the party.

Hosts are supportive of Airbnb’s new attempt because they are benefited by Airbnb’s operation. Chinese e-commerce giant Alibaba created Taobao and became the most popular online trading site; one of its keys to success is that it provided individuals the opportunity to become business owner. Similarly, Airbnb offers a chance for individual homeowner to become a host. As of July 2016, listings on Airbnb has exceeded 2.3 million. Some people even make enough that they decide to run b&b full time. Gabrielle Catania for example, owns a house in Oregon that has four guest rooms. Her place is always reserved as she keeps getting fantastic complement on the breakfast she made. Gabrielle spends at least an hour preparing breakfast for her guests. Apple rose is her favorite desert to serve. She enjoys being an Airbnb host, because it gives her a chance to meet guests from different background while making enough money.

 

Airbnb’s influence over the hospitality industry has been rising drastically since 2013. According to Forbes, Airbnb over 100 million travelers have used Airbnb’s home rental service. The average number of nightly stays is about 500,000. And the valuation of the company has exceeded hotel giant Hilton; about five times of Hyatt.

   

It succeeded for a reason; Airbnb came in at a perfect timing with extensive understanding of the market and consumers. There are always people with extra space in their homes; many even have extra houses. While renting in long term can be troublesome, many welcoming homeowners are willing to rent short term to travelers. There is supply, and there is demand. Internet has encouraged a culture of sharing. Travelers nowadays are often not satisfied with traditional hotel experience. They want a sense of excitement and belonging for their journey. More importantly, they are usually on different budgets. This is when Airbnb kicks in. It partners with homeowners to offers unique accommodations that feel like home at various prices. Travelers can choose to pay $40 a day to live in a tiny tidy single room in Monterey Park, or they can reserve a beautifully designed luxury villa in Malibu that costs $1500 a night. The prices are very flexible, because the market demand is generally high, and it isn’t too difficult to enter the competition and become a host. So even on a relatively low budget, travelers can still compare and choose from different home styles. They like to be able to choose, so they keep coming back.

The home rental is already making great success. But Airbnb still decides to expand its business, because finding a place to “live” is just the start of a great journey. They are aware of this long before they launch these new features. For a long time, Airbnb has been using slogan “Live there, even if it’s just for a night,” to encourage travelers to value their “living experience.”

But there might be other reasons why Airbnb is expanding to promote travel experience. As a platform, sometimes it is hard for Airbnb to background check every host. Many authorities are worried about some of the listings fall foul of laws, so they try to make policy to implement stricter regulations. The state of New York passed law in October to curtail Airbnb and other short term rentals. To ease the worry, Airbnb has been “compromising” by being transparent to the public and releasing users data. Although the enforcement has been postponed, the future of short term home rental in New York cannot be guaranteed. Airbnb needs an alternative, a new area of business to support its operation if any unpredictable happens.

While Airbnb is making a reasonable business expansion, there might be other problems to consider. Airbnb’s selling point is that its activities are provided by local experts, but many local travel agencies have already been in the business for a long time and know the area very well. Although localization is always on the top of Airbnb’s mind, it cannot guarantee its experience packages to be better than what travel agencies offer. Some hotels may find it hard  to keep up with Airbnb because they have established environment, but travel agencies can easily adjust their travel plans and make them more exciting to compete with Airbnb and its proud hosts. At the same time, these local agencies have better relationship and understanding to the government.

Airbnb also needs to be smart on communicating with its hosts if it wants to remain outstanding in the competitive local market. Afterall, Airbnb relies on the hosts to provide great experiences to the customers. It does not interact with the travelers directly. So how can I insure the uniqueness and quality of the service? In a long term, that can be a challenge.

 

 

Reference:

https://www.theguardian.com/travel/2014/jul/08/airbnb-legal-troubles-what-are-the-issues

http://www.wsj.com/articles/the-enforcement-of-airbnb-law-postponed-again-1478305423

Airbnb releases first transparency report on government requests for user data

http://www.forbes.com/sites/briansolomon/2016/07/13/airbnb-confronts-racism-as-it-hits-100-million-guest-arrivals/#4fab57e41c3c

Airbnb Now Has 100 Million Users and More Grown-Up Problems

Using the Past to Pave the Future – The Toy Industry

These days, it seems that everyone from factory workers to United States president-elect Donald Trump cannot help but reminisce about the ever-vague “good old days.” Many say these were simpler, more predictable times, and it was easy to repeatedly use the same strategy to find success. This is no longer the case, and people and industries as a whole have had to shift their mindsets and continuously innovate in order to stay afloat. This is perhaps most evident in the toy industry and Toys “R” Us specifically as both have been through a roller coaster of progress throughout the last few decades as technology has gotten better and toy preferences have changed.

The modern toy industry was born at the end of World War II. The Great Depression and the World Wars did not leave people with much spending money, but the return of prosperity and the introduction of television and plastic propelled modern American consumption. This was perfect timing for Toys R Us founder Charles Lazarus, who believed that “toys are a great kind of thing to sell, because they don’t last that long.” Lazarus’ strategy was to offer name-brand merchandise at less than list price, and toy manufacturers were willing to compromise because Toys R Us was one of the only retailers that offered year-round sales. Traditionally, toy stores did 70% of its sales during the 6 weeks leading up to Christmas. This meant that the carefully selected stocks of toys were cut dramatically from January to August, which made the toy year short and unsustainable. Toys R Us was unique in that its stocks were maintained throughout the year with toys from manufacturers’ entire catalogues.

Toys R Us stores revolutionized the toy industry. Whereas toy stores used to be small with much of their merchandise stashed in the back room, Toys R Us introduced the warehouse shopping experience. Toy packaging design was now centered on how it would look on the shelf, and from 1975 to 1985, annual revenues at Toys R Us grew from just over $200 million to over $2 billion. The emphasis on the shopping experience worked, and it brought in great success for that time.

Ironically, the toy’s short lifecycle that attracted Lazarus in the first place needed to be adjusted in order for the industry to have consistent sales. Toys that only get played with once or twice is a waste of money in the parents’ eyes, so for a line to stay popular over time, children must want to continue playing with it. The emphasis on sustainable toy lines also keeps prices down by allowing manufacturers more time to get their return on investment while keeping quality up. Children only return to a toy if it has a deeper meaning than just being a plastic object. This could be in the form of a story that is supplemented by a television short or a movie. In the 1980s, the Cabbage Patch dolls and the Transformers took exactly this route, which allowed children to better relate to their toys. Unfortunately, the 90s brought the Internet and technology that offered instant gratification, and static toys no longer held the same appeal.

Instead of producing a toy and creating a story to go with it, toymakers began seeing the benefit of making the two a more streamlined experience through videogames or interactive toys. Videogames tell the story over time, and children can play by themselves in a way that keeps them engaged. In the early 90s, toy spending peaked for four-year-olds, but by the end of the decade, the peak for spending was for three-year-olds. Children were simply outgrowing their toys earlier and finding more interest in electronic games at a younger age.

This shift forced Toys R Us to revamp their stores, and in 1998, it greatly expanded its electronic section. While this was new for Toys R Us, its competition already offered that and more. Wal-Mart, Target, and other discount stores put pressure on Toys R Us as they captured more and more of the toy business. In the mid-90s, Toys R Us held 20% of the market, and Wal-Mart and Target were insignificant. By 2004, Wal-Mart had 20% of the market, Target had 18%, and Toys R Us was down to 17%.

In the 90s, many moms including Kathy Klatman used to regularly shop at Toys R Us, buying dolls and play sets from the toy giant. By the mid-2000s, all of the toys she bought fell into two categories: the more expensive toys, such as American Girl Dolls, were bought through catalog, and the cheap toys, like Matchbox cars, were purchased during her weekly shopping trips to Target. Unfortunately, this did not leave much space for Toys R Us. Klatman says that her kids “already have so many things to play with that [she has] a tendency to look for quality and whether they will play with it for a long time.” When the kids need to be pacified with a simple toy, she can easily pick them up at Target cheaper than she could at Toys R Us.

This was a troubled time for Toys R Us; however, the retailer came up with a plan to stay competitive. In 2000, Amazon and Toys R Us signed a ten-year agreement in which Amazon would devote part of its website to products chosen specifically by Toys R Us. This allowed Toys R Us to select the most popular products and get them to customers more easily. This alliance was widely applauded as a seamless connection between traditional brick-and-mortar stores and new-age Internet companies, but it eventually became entangled in allegations that both sides were not doing as they promised. Toys R Us accused Amazon of allowing other companies to sell toys through their website, and Amazon claimed that Toys R Us was not maintaining a high quality selection of toys. The biggest problem was that online toy sales just were not at the level that both parties anticipated, so they were not making the profits they hoped. By 2004, lawsuits from both sides effectively ended their contract, and Toys R Us was left on its own again.

Toys R Us was at a crossroads. It seemed on the verge of collapse as its market share decreased and the falling out with Amazon worsened. Toys R Us had actually given up rights to its own website in its partnership, so there was not much hope for a quick rebound in online sales. However, Toys R Us was more motivated than ever to take back their place at the top of the toy industry, and they did so by acquiring three pertinent brands: FAO Schwartz, eToys.com, and KB Toys. As much as Toys R Us suffered during this period, its smaller rivals were on the verge of bankruptcy, which meant that Toys R Us could acquire them at a relatively low cost. The acquisitions allowed Toys R Us access to the companies’ established websites, trademarks, and some of their stores. All three of these companies already had well-known brand names, which gave Toys R Us the opportunity to sell a wider variety of products.

To give a greater push during the holidays, Toys R Us began opening temporary pop-up stores that were smaller but require less staff and stock. They were located in malls and shopping centers that could not hold the traditionally massive warehouses of Toys R Us. The widespread and obvious presence of the retailer garnered high sales and happy customers. This was so successful that the company ended up keeping a third of its locations after the holidays in 2010.

Toys R Us also benefitted as the industry as a whole made its comeback. From 2014 to 2015, annual toy sales rose over 6% to $19.9 billion, which was the largest increase in ten years. Popular Hollywood films fueled the popularity of collectibles, which boosted sales like it had in the 80s and 90s. This not only appealed to children, but it also helped toy manufacturers capture the preteen and adult crowds with paraphernalia from movies like Star Wars. Even Frozen, a movie targeted for children, was able to become a top toy brand with $531 million in sales in 2014.

There were also huge developments in technology, which gave toys the ability to interact with children in a more animated and stimulating way. Toys are able to interpret speech and react in the appropriate way using chip technology, which has become cheaper and more powerful. Dolls can have conversations with users and toy cars can be controlled by smartphones. The new Barbie Dreamhouse by Mattel is voice activated, and the music, appliances, and even the elevator can be controlled by simple commands. In this modern era of touch screens and applications, toy manufacturers have to put in extra effort to make sure that physical toys can compete with the seemingly limitless iPads and smartphones.

As for its competition, Toys R Us can be proud to report strong sales, especially during the holiday season. Sales went up 3.7% in the holiday season of 2015 compared to that of 2014 for stores open at least a year. The demand was high for toys, learning products, and seasonal goods, and low for electronics, video game consoles, and videogames. The advantage that Toys R Us has over Wal-Mart and Amazon is that Toys R Us is in the toy business for the entire year, whereas its competition only pushes toy sales during the end of the year. Vendors know this, and they can give Toys R Us more favorable margins.

Toys R Us also has had great success internationally, especially in Canada and Japan. Sales went up 13% in Canada in 2015, and Toys R Us became the largest retailer of children’s products in Japan. The retailer used partnerships to cater to the Japanese market specifically, and there was a strong cultural fit. Japanese families often allow children to choose their own gifts, so the store layout and experience was well-matched with their culture.

Looking to the future, Toys R Us CEO Dave Brandon wants to revamp its stores by turning them into an experiential destination. By creating an interactive space, he hopes that children will begin dragging their parents down to the stores to play at Toys R Us on weekends. Children already love the store, and by giving it this new dimension, they will want to continue going back. The company is now testing sound effects and colorful lights, and they are unboxing more toys in play areas. They are also hosting events including card trading and birthday parties.

Toys R Us is already moving towards their goals, and by mid-2017, the company projects 14% inventory growth. This will make their inventories at the highest amount in almost a decade, and it is proof that they are serious about putting money back into operations. Toys R Us seems to be moving in the right direction, and now it is a waiting game whether the company will go for an initial public offering. The retailer needs to have a successful 2016 holiday period in order to lay the groundwork for a potential second run at an IPO. Toys R Us was a public company until 2005, when it was taken private by investors for $6.6 billion. With strong sales and measureable improvements, 2017 may be the right time for private equity backers to strike. The toy industry will continue to be volatile as technology changes and competition gets tighter; however, Toys R Us has been in the game for quite a while now, and it has gained knowledge and experienced that will help it navigate the whirlwind of its market. Toymakers have every reason to root for Toys R Us, and hopefully, the children of today and the future will make Toys R Us great again.