In the aftermath of California’s most deadly wildfire season, in which 88 people were killed and over 18,000 structures destroyed, tens of thousands of displaced residents looking to return and rebuild are faced with yet another costly obstacle: a severe construction labor shortage.

In Butte County, where the deadly Camp Fire had decimated nearly 14,000 homes (around 18% of total homes built on an average year in California), the shortage could exacerbate the already tight housing market.

“Nobody’s gone into construction as a career for twenty to thirty years,” said Kate Leyden, executive director of the Chico Builders Association. “So we had a problem to begin with. We didn’t have workers and we had a very tight housing market even in Butte County.”

Leyden said that the labor shortage is pervasive all through Northern California and that builders often have to bring in workers from other counties to come in to work. But this then leaves a shortage of workers in the county of origin.

“Even if they come from Sacramento, that hurts Sacramento. In our area, we have these circles of fires—Santa Rosa, then Redding, and now Paradise—with each one of them, like with Santa Rosa, we see our trades go to Santa Rosa,” said Leyden. “To the north of us—Redding lost a thousand homes in July— we were concerned that we’d lose our trades to Redding, but they’re still cleaning up lots.”

In addition, around 1500 of the construction workforce in Butte County lost their homes, over a third of the 4500 workers the county had to begin with, according to Leyden.

Scott Littlehale, a senior research-analyst for the Northern California Carpenters Regional Council, said that much of the labor shortages are occurring in the residential construction labor pool, as opposed to the non-residential pool.

According to Littlehale, for decades residential developers have been relying on cheaper, more “unskilled” labor, as opposed to the more unionized laborer force in non-residential construction.

“The residential construction labor market was heavily influenced by immigration. It became a critical element. And immigration flows are way down.” Littlehale said.

“I think what the fires do is reveal that the residential industry has come to a dead end with a kind of ad-hoc, low road workforce strategy of relying on the cheapest labor that builders can find.”

He also cites the uneven keel of power between laborers and developers as another major factor, which have been driving down wages.

“It used to be that housing builders negotiated over terms and conditions with the unions. That has for the most part not been the case for decades because they left the collective bargaining table,” said Littlehale.

Low wages combined with the high injury rate in construction, he said, are the reason why many of the local young are discouraged about entering into the trade. You either take less pay and risk falling through a hole or roof or go into less stressful work.

According to Peter Phillips, a labor economist from the University of Utah, in more rural regions like Butte County, even raising wages won’t always guarantee a burgeoning construction labor force.

“Even if contractors do raise wages, that doesn’t necessarily bring new workers into the labor market if the labor market is isolated, such as rural labor markets around Northern California like Chico and Paradise,” said Phillips. “All construction is local. In places like Chico and Paradise, the construction industry has evolved to fit the size of that community. So there’s a hand-in-glove element where the construction industry comes to fit the size of the local community.”

For those on limited incomes, the costs to rebuild will be close to impossible to afford, especially for the uninsured and underinsured.

“We’ve been in Samona County after the North Bay fires in October in 2017 and when we surveyed the people we worked with six months after the fire, 66 percent of them were underinsured by some amount,” said Sandra Watts, project coordinator for United Policy Holders, a non-profit insurance consumer advocacy group. “Because of the location of Paradise, we anticipate it’s going to be quite a bit worse because there’s already fewer resources up there,” she said.

“We have something like 300 houses on the market for sale (before the fires). Now there are 61. Thirty of them were over a million dollars,” said Leyden. “So the people who could buy houses fast, bought houses right away. Then, the apartments got snapped up.”

With FEMA coming into Butte County to bring temporary trailer homes for displaced families, the first major step will be in the lengthy cleanup process that is to come.

“There’s never been anything like this. We’re sort of making it up as we go along,” said Leyden. “When this fire broke out, Chico Builders Associaton called an emergency meeting on how we can keep our construction labor force. The last thing we want is to lose what little workers we have.”

 

The grip that McDonald’s has on the fast food industry is currently being challenged—not by a competitor, but instead by a labor crunch. The company is adding new technology in its restaurants to adapt, and as long as these renovations are successful, competitors will likely follow suit.

In recent years, McDonald’s has been unable to meet consumer demands, in large part because of the current labor landscape. First, there’s the rise of the gig economy, where workers can spend the day putting together someone else’s IKEA furniture through TaskRabbit instead of working a cash register. Second, minimum wage is increasing across the country, which means it’s harder for companies to afford enough employees to make their businesses run.

Plus, due to low unemployment, the labor market has changed dramatically. While a high employment rate is typically considered positive since it increases our country’s capacity to produce, it also means that businesses looking for workers will have a harder time finding them. This trend hurts fast food companies in particular, since jobs in the industry are often seen as less desirable compared to other options that offer higher pay and better benefits. The current economy favors workers, who can pick and choose where to work—and fast food restaurants often aren’t their first choice.

Source: The Wall Street Journal

In addition, less teenagers are working, which hurts the fast food industry in particular. In 2000, 45 percent of young adults aged 16 to 19 had jobs, whereas today, only around 30 percent do because more students are focused on their education. Teenagers historically provided cheap labor that fast food relied on, but now that source of labor has decreased drastically.

Source: The New York Times | Bureau of Labor Statistics

There were 898,000 open jobs in the accommodation and food services industry in August 2018, which was 20 percent higher than August 2017, according to the Bureau of Labor Statistics. If unemployment says low, we can expect the number of vacant positions in fast food to continue growing.

This market also means it’s harder for fast food chains to retain workers. Workers are quitting at the highest rate in over a dozen years, and the turnover rate in the restaurant industry at large was 133 percent last year, according to TDn2k, a restaurant research firm.

To address the changing labor landscape, some companies have raised their wages. In 2014, fast food wages began to increase and have risen at a higher pace than overall wages in the U.S. ever since. In May 2018, the owner of one Chick-fil-A store made headlines when he decided to increase pay of his workers from $12-$13 to $17-$18.

Instead of increasing wages—which McDonald’s promised to do in 2015 at company-operated stores but has failed to deliver on—the fast food giant has found other ways to entice employees. In October, the company announced an innovative career advising program. According to Stephanie Chan, who oversees the company’s Brand Reputation in California, Arizona, and Nevada, McDonald’s has also grown its career services department so that assistance “isn’t just being offered to employees themselves—it’s open to their immediate family as well.” Earlier this year, the company also announced that it was allocating $150 million to its education program and lowering the eligibility requirements, allowing an additional 400,000 employees to be eligible for tuition assistance and high school diploma programs.

Archways to Opportunity, the company’s education opportunities program, provides a variety of benefits to McDonald’s employees. Source: Archways to Opportunity.

In the long run, the trouble that companies are having hiring and retaining workers hurts customers, since new workers or fewer employees means that the quality of service worsens. According to the American Consumer Satisfaction Index’s national measure of consumer happiness, on a sale of 1 to 100, consumer moods have slid from 77 in the first quarter of 2017 to 76.7, where it has sat for all of 2018. The Index reports that this is “the longest period of stagnation since 1993.”

As a result of growing dissatisfaction, American fast food restaurants have less foot traffic and have become less profitable. In September 2018, there were 2.6 percent less people visiting fast food stores than a year ago, which means fewer opportunities to sell food. At McDonald’s, revenue was 7.32 percent less in 2017 than in 2016, which followed a 3.11 percent decrease from 2015.

This decline in customer satisfaction is partially an outcome of higher expectations. Recent growth in the restaurant industry means customers have more choices when deciding where to eat, which has led to fierce competition. In a recent survey, 26 percent of U.S. consumers said that because they have so many dining options, they have higher expectations than they did two years ago.

Customers also have higher expectations in terms of the food production process. As a result of demands for better ingredient quality and less animal cruelty, companies have already been forced to adapt. After Panera Bread and Chipotle Mexican Grill led the way, chains like Chick-fil-A, Burger King, Taco Bell, McDonald’s, and KFC instituted policies that would limit antibiotic use in poultry. Plus, McDonald’s announced a few years ago that it would use 100 percent cage-free eggs in the U.S. and Canada by 2025.

Source: The Center for Food Integrity

The company also announced earlier this year that it would start making fresh beef quarter-pounders rather than relying on frozen meat. Evette Gonzales, a McDonald’s store manager in Los Angeles, said that her location in Century City is “selling more quarter-pound beef since we changed over.” In fact, sales at her location are up 5 percent this year, which she largely credits to the introduction of fresh patties.

Consumers are also requesting lower prices, causing many stores to offer discounts and deals. At McDonald’s, this has taken shape in the revamped Dollar Menu, which launched in early 2018 and features $1, $2, and $3 options. Plus, back in 2015, McDonald’s started offering breakfast all day after years of pressure from customers.

All of these tactics to meet consumer needs seem to be paying off. In the company’s most recent earnings report, which came out at the end of September, same-sales stores growth went up in the U.S. and internationally, although the 2.4 percent increase in same-store sales in the U.S. was actually fueled by higher prices, driven by increased commodity costs. Additionally, the earnings report shows a 7 percent decrease in revenue and a 13 percent decrease in net income compared to a year ago. Despite these seemingly-negative figures, the company largely beat expectations from analysts, who assumed that the company’s earnings per share would be at $1.99 but instead came in at $2.10, and that revenue would be around $5.32 billion instead of $5.37 billion. Therefore, while McDonald’s is still not performing as well as it has in the past, the fact that the company outperformed some projections shows that their tactics may be working.

Quarter 3 expectations and results from 2017 and 2018 for revenue and earnings per share. Source: Terifs

This largely positive quarter stands in strong contrast with how McDonald’s was viewed by investors earlier this year. In June, the company was on its way to becoming the worst performing in the DOW in 2018, in large part because shares dropped dramatically in March after the Dollar Menu brought in uninspired results. Since then, the company has rebounded.

Stock price of McDonald’s Corporation over the course of 2018. The company took a hit after lackluster sales from its Dollar Menu, but has managed to recover ahead of 2019. Source: Google Finance

Despite these tactics to appease customers, and the steps taken to attract and retain employees, larger trends have weighed heavily on McDonald’s. As a result, the company has separated itself from competitors by taking more drastic action.

It’s called “The Experience of the Future,” a remodeling plan that was supposed to be completed by 2020, but was just pushed back to 2022 because franchises believed the previous timetable was unrealistic. The remodels will include self-order kiosks, new systems for delivering orders, and extra drive-thru lanes. Additionally, over 12,000 stores will have digital menu boards, more parking spots for pick-up, and expanded counters and display cases. Beyond this initiative, McDonald’s has already invested in its mobile ordering and payment system, which is currently operating in 20,000 stores, and introduced delivery through a partnership with UberEats.

A customer using a self-order kiosk at McDonald’s. Source: Bloomberg

The price tag for the project is big —in August, the company announced that in addition to what it had already set aside, another $6 billion would be put toward the modernization process. While the technological advancements are certainly costly, McDonald’s sees them as an investment that will pay off. Although few stores have received their makeovers, given how much McDonald’s is devoting to renovations, investors are bullish about the stock heading into 2019.

However, opinions diverge on exactly what is the driving force behind the massive renovation project.

According to Shon Hiatt, a Professor of Business Administration at the University of Southern California and expert in the world of fast food, investmenting in technology “is a fantastic way to address the labor cost issue—they don’t need nearly as many people.” With greater technology integrated throughout the restaurants, Hiatt predicts that McDonald’s will reduce the number of employees. This makes sense given the current labor market—right now, it’s hard to find workers, plus thanks to the rise of minimum wage, companies are devoting more and more money to afford their staff. Through technology, McDonald’s can put that revenue to use elsewhere.

However, this change will likely have dramatic implications in the long-run. If companies cut employees as the move toward automation, Hiatt cautions that will increasingly “displace those who are the least qualified in terms of having a job,” taking away their minimum-wage position and throwing them into the job market with the subpar skills one learns flipping burgers. At the same time, Hiatt notes that a low-paying job like one at McDonald’s at least provides an opportunity to learn transferable skills like customer service and sales. Without that possibility, many individuals will have even less of a chance to dig themselves out of systemic poverty.

Those inside McDonald’s tell a different tale. Chan said the move toward innovation is focused on “meeting customers where they are at” and listening to their preferences, not a labor crunch. She said that the focus of the innovations is on “putting more choice in the hands of guests—evolving what they order, how they order, how they’re paying, and how they’re served.” While many believe that self-serve kiosks will take away jobs, Chan says the opposite is true—stores will have to “increase jobs because with the introduction of the kiosk, it introduces several new positions into the restaurants” including a team member to show customers how to work the technology. In Century City, Gonzales agrees that “the technology actually calls for more employees, because customers are afraid of how to use the screens.”

Despite these arguments, employing technology instead of people seems to be the way the industry is moving, given comments made last year by Yum brands CEO Greg Reed. Even if the argument made by Chan is true now, one is still left to wonder whether the positions created by the technology will last. Once customers learn how to use the ordering devices—which most people know how to do already—that job could easily vanish, along with others that are no longer necessary in the redesigned stores.

Whether the main driver behind the investments is rising labor costs—which, given the evidence, seems likely—or changing consumer demands, or some combination of both, McDonald’s is forging ahead with technology in hand to do what it has deemed necessary to save its business.

This McDonald’s in Sydney, Australia is an example of what renovated stores may look like across the U.S. Source: Fast Company 

While it’s unclear how customers will respond to the renovations and if McDonald’s will turn higher profits as a result of them, one thing is for sure: if any fast food company is suited to address the challenges headed their way, it’s McDonald’s.

Although competitors are starting to invest in automation, and have begun offering greater employee benefits and discounts for consumers, no other company is investing as heavily in its future as McDonald’s is right now. In her past year working for McDonald’s, Chan has seen that “there’s innovation happening constantly throughout the company—whether that’s with technology, the food, what we are doing with our people. There’s a constant forward movement.” As a result, she believes that whatever comes next, the company is well-suited to face it head on.

Sheila Li is a graduate student at the University of Southern California. After a year of job-hunting, she received an offer for a full-time job as a software engineer in Austin, Texas. The email came in at 1 p.m., but Li waited five hours– until the sun rose in Beijing– before she called her parents to announce the news. She knew they would be disappointed.

“My parents do not want me to work in the United Sates,” Li said, explaining that her parents hoped she would move to her hometown, Hangzhou, a rising tech hub that incubated both the multi-national e-commerce conglomerate Alibaba and the internet tech company NetEase.

It doesn’t help that Li, 21, like many of her generation, is an only child. Being a woman makes things even harder. “Parents never want girls to go far away,” she said, “but working as a coder in China is exhausting. Plus, I get higher salaries here.”

More than 350,000 Chinese students are currently enrolled at U.S. colleges and universities. A third of them are here to become engineers. A Chinese research firm reported this year that engineering grads received the highest-paying jobs in China, but many aspiring Chinese engineers who are studying abroad are nonetheless determined not to go back home.

Dr. Danny Friedmann is a law professor at Peking University. He explained that there is a gap between the economic growth and a dearth in skilled coders, thus Chinese tech workers receive lower payment than those in the U.S.

“The higher salaries and better working conditions for coders, the higher costs for the companies, which makes them less competitive in the short term,” he said.

A Choice of Lifestyle

Apart from the payment, the reasons may be linked to a relentless work culture. Chinese tech companies have reportedly been pushing their employees to work overtime, encouraging employees to compete to work the longest hours. The companies accommodate this approach with o do this, they offer late meals, night shuttles, and even bunk beds in the office.

Fuzhi Wang is a hardware engineer at Huawei, a Chinese telecommunication equipment company based in Shenzhen. He said that he and most of his colleagues work “9-9-6” — from 9 a.m. to 9 p.m., six days a week. “The company does not mandate long working hours,” he said. “But people simply won’t leave the office at 5 o’clock.”

In August, Huawei passed Apple to become the world’s second-largest maker of smartphones, Bloomberg reported. In 2017, the company invested approximately $13 million, which accounts for about 15 percent of its revenue, in research and product development. Forty-five percent of its workforce are involved in R&D.

This means Huawei’s demand for tech workers is enormous. “Huawei is catching up with the U.S companies, said Yiwei Song, who worked as recruiting coordinator for Huawei in 2017. “It prefers to recruit students that have studied abroad and expects them to bring back fresh ideas.” Students with overseas educations tend to benefit from high salaries and greater opportunities for advancement than those who graduated from domestic universities, she added.

Despite the preferential treatment they receive back home, new grads from China tend to choose Silicon Valley over Shenzhen.

Sheila Li believes there is a bigger backstory — China lacks proper intellectual property protection for tech companies.

“Once company A creates something, company B would steal the idea, which pushes company A to accelerate the process of innovation,” she said. “There are distorted competitions in the market. As a result, engineers have to work day and night to catch up with that speed.”

Dr. Friedmann said China does have a proper intellectual property law system in place in the books, but on the ground, this is not always manifested, for example, because of local protectionism.

“Intellectual property in general is sometimes ill-equipped to protect these fastly developing innovations,” he said, “and in the case of software the copyright protection, it seems too long as well.”

After receiving his master’s degree from the New York University, Zhi Cao went back to Wuhan, the capital city of his home province, to work for a tech start-up.

“I am considering applying for another master’s program in the U.S.,” he said. “Life here (in China) is too intense and I don’t think I could adapt to it.”

Cao had been in the U.S. for six years before he went back to China, since he went to undergrad in New York as well. “I really regret that I didn’t stay in the States,” he said.

Yi Leng just received his master’s degree in engineering from the United States and landed a job at Amazon. “Here everything is based solely on merits,” he said, adding that interpersonal relationships between colleagues were “simpler” in the U.S, while the “guanxi” culture in China, where everything is based on networking, added complexity to the working environment.

Leng has a green card, but he is not obsessed with the idea of living in the U.S. “If I get to play my role and contribute to my own country with what I’ve learned here, I will go back,” he said.

The Challenges to Stay

Unlike Leng, most of international students who intend to work in the U.S. here need an H1B visa. It is a type of non-immigrant visa for international students to work in the United States.

According to MyVisaJob, Facebook, LinkedIn, Amazon, Apple and Google filed 13,875 Labor Condition Applications (LCA) for H1B Visa in fiscal year 2017. A year before that, the number was 11,047.  The trend resulted from STEM-favored policies under the Obama administration as well as rapid expansions of tech giants in the United States. For years, Silicon Valley has been demanding skilled foreign workers, especially in the tech niche.

“I can imagine the day when a large portion of tech workers will be coming from Ohio and Michigan,” said Professor Dowell Myers, Director of the Population Dynamics Research Group at the University of Southern California. “I can imagine that day, but it’s impossible.”

Myers said the United States has a shortage of workers, shortage of all levels — blue collar, white collar and scientists’ levels. As a result, Chinese and Indian engineers become “important shares of the technology workers”, he said, and added that they can be influenced by the recent immigration policy.

President Trump’s Buy American and Hire American Executive order gives creates more barriers for H1B petitions to be approved. This disincentivizes companies to sponsor new grads. The number of petitions the immigration department received in 2018 has drastically decreased from 236,000 in 2016 to 190,098, according to its website. That means employers have shrunk their quotas for international employees.

Notably, Amazon this year earlier began a round of corporate layoffs. Back in 2016, the company sent out a huge amount of job offers. At that time, applicants were only required to complete two online assessments before they got recruited. Now, it takes multiple rounds of interviews for an applicant to proceed into the final phase of recruiting.

Amazon is also locating its second headquarters in East Coast. Myers suggested such locations, as opposed to the West Coast, is centered in an area with a higher percentage of this was to give more jobs to native-born Americans than immigrants in the job pool.

Despite the shift in political climate, the number of Chinese students coming to the United States for higher education is increasing. Engineering remains the most popular major for them. The field of math & computer science witnessed a drastic increase of 18 percent in its student population of all origins from 2016 to 2017, according to the Institute of International Education.

“Even if tech companies do not reduce the number of positions for foreigners,” Li said, “more and more international students are flowing into this industry with a hope to secure a job here, the competition of job-hunting in the States would only be fiercer year after year.”

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

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

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

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

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

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

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

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

Solution 4:  Lofty Federal Goals

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Graph: Data Science Central

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

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

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

Graph: Michael Dempsey, Compound VC

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

Graph: CB Insights, November 16, 2017

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

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

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

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

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

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

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

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

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

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

References

• http://www.pewresearch.org/fact-tank/2016/04/25/millennials-overtake-baby-boomers/

• http://fortune.com/2015/05/27/7-facts-every-business-should-know-about-millennials/

• https://studentloanhero.com/student-loan-debt-statistics/

• http://www.goldmansachs.com/our-thinking/pages/millennials/

• https://www.theatlantic.com/business/archive/2017/04/retail-meltdown-of-2017/522384/

• https://www.forbes.com/sites/jimmyrohampton/2017/05/03/does-social-media-influence-millennials-shopping-decisions/#6ee3be874cf3

• https://www.forbes.com/sites/greatspeculations/2017/04/19/how-estee-lauder-is-looking-to-attract-millennials-to-brick-and-mortar-stores/#41f572017cd2

• https://www.ft.com/content/e98d3ada-9acd-11e6-8f9b-70e3cabccfae

• https://www.elcompanies.com/news-and-media/newsroom/press-releases/2017/08-18-2017-114420311

• https://www.entrepreneur.com/article/253582#

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

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

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

The Great Content Desire

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

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

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

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

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

Vertical Merger

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

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

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

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

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

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

Effects of the Merger

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

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

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

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

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

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

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

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

Possible Solutions

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

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

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

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

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

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

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

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

The Political Question

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

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

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

What’s Next

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

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

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

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

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

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

 

Sources 

https://www.bloomberg.com/news/articles/2017-11-20/at-t-is-said-to-face-u-s-antitrust-lawsuit-over-time-warner

https://www.cnbc.com/2017/11/21/dojs-lawsuit-to-sink-att-time-warner-deal-is-short-sighted.html

https://www.politico.com/agenda/story/2016/10/att-time-warner-merger-paper-000224

https://www.wired.com/2016/11/the-att-time-warner-merger-must-be-stopped/

https://www.npr.org/sections/alltechconsidered/2016/10/25/499185907/the-at-t-time-warner-merger-what-are-the-pros-and-cons-for-consumers

https://nypost.com/2017/11/30/why-consumers-should-fear-the-att-time-warner-merger/