Operation Fashion Police Hopes Cash Businesses Go Out of Style

New financial reporting laws in LA’s Fashion District could dramatically change the way retailers conduct their business. 

Los Angeles—The Fashion District is an anomaly in today’s modern retail marketplace. This is not because men standing on wooden boxes use megaphones to announce deals like, “Ten dollars, ten dollars, everything ten dollars…” to the tune of Mexican banda music blaring from an old boom box as shoppers struggle to make their way through Santee Alley’s dense crowds without stepping on merchandise splayed on the street. Rather what’s most surprising is that in today’s money culture of credit cards, mobile payments, online banking and Bitcoin, Fashion District retailers and shoppers alike prefer to conduct their business in cash.

Many young Americans perceive the “cash only” culture as a throwback to a bygone era. Paying with cash makes it more difficult to track personal spending—who likes keeping receipts?—and provides none of the cash-back or rewards benefits that many credit card companies offer. However, from an owner’s perspective, cash payments afford businesses more flexibility in making everyday decisions. Companies can opt not to report revenue from cash transactions, effectively lowering their tax bill. They also avoid paying credit card interchange fees, which average about 2.5% but can be as high as 4% per transaction for some cards. “A $100 cash sale is $100 in my pocket,” says Neda Amanat, a manager at System: Women’s Clothing in the Fashion District.

Dealing in cash also gives retailers greater elasticity in pricing goods. Merchants in the Fashion District regularly negotiate on prices for customers purchasing wholesale or bulk orders. They are often inclined to knock off the 10% sales tax for any customer paying in cash, regardless of quantity. Ultimately this will allow them to move more merchandise. In essence, using cash helps small businesses skirt some financial reporting rules.

The decision to use cash may also have cultural ties. The Fashion District houses a large Hispanic community whose cultural markers are abundant; signs are in Spanish, street vendors sell Mexican candies, and stores promote deals for Quinceañera dresses. Considering Mexico’s sales tax rate is 16% and its financial system is perhaps less trustworthy than America’s, it’s no surprise that the Fashion District’s immigrant population prefers cash. In contrast, a 2013MasterCard survey found that the US is at the “tipping point” of becoming a cashless economy.

The problem with a cash-based economy is that criminal organizations also rely on this model to hide the proceeds from their nefarious activities. Last month more than 1,000 law enforcement officers raided dozens businesses in the Fashion District suspected of helping Mexican drug cartels exchange dollars for pesos through a trade-based money-laundering scheme. Officers arrested nine people and confiscated $90 million, the largest ever cash seizure by US law enforcement in a single day.

TBMLDrug cartels must constantly innovate ways to launder their illicit profits as law enforcement officials become savvier and nations enact increasingly cooperative financial regulations and reporting policies. During the September raid, deemed Operation Fashion Police, officials identified a complicated trade-based money-laundering (TBML) scheme the cartels employed to transfer drug profits back to Mexico. The Financial Action Task Force defines TBML as, “the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins.”

The key point is transporting value, which can include commodities in addition to currency. Drug cartels exhausted their options for directly moving cash. Depositing funds in an American or Mexican bank would raise suspicions, as would exchanging millions of dollars for pesos. Shipping or driving the cash home is incredibly risky. Instead the cartel will “deposit” relatively small increments of cash ($10,000-$150,000) with Company A, a complicit business in the Fashion District. Company A will do business with Company M, a Mexican company that is also a part of the drug cartel’s money-laundering network. Company M might order shirts worth the amount of money the cartel “deposited” with Company A, which then ships the shirts to Mexico. Company M sells the shirts in Mexico for pesos and incrementally deposits the proceeds in a bank account predetermined by the cartel. By converting their money into value, as shirts, the cartel can exchange dollars for pesos and transfer money from the US to Mexico without directly alerting banking officials. The process is not perfectly efficient at transferring money, but it is more effective than having the cash stuck in the US.

To prevent TBML, the Financial Crimes Enforcement Network (FinCEN) will require businesses in the Fashion District to report any cash transactions involving more than $3,000, as opposed to the $10,000 national reporting threshold. The Treasury Department issued this geographic targeting order (GTO) for six months, with the potential to renew it. This GTO is unprecedented in the scope and number of businesses affected.

“A geographic targeting order is a very blunt instrument,” Kent Smith, executive director of the Fashion District’s business improvement district, told the Wall Street Journal. “…It basically sends a message that every business in the area is involved in money laundering, and that is far from the case.” Law enforcement officials raided a few dozen businesses of the nearly 2,000 that the GTO encompasses. Retailers in the Fashion District worry that this increased regulatory scrutiny does not bode well for businesses.

GTO area

This is the area the GTO encompasses.

Hector Vilchez helps run his family’s business Kukuly’s, most notable for its unique, hand-made jewelry. Kukuly’s also sells hand-made leather purses and belts for a fraction of the price shoppers would pay elsewhere. A braided brown leather belt with turquoise accents costs $40.00 at Kukuly’s, while the same item retails for $80 to $100, plus tax, at a similarly sized boutique on Melrose. Their $60-$80 leather purses would sell for upwards of $200 in Abbot Kinney. Vilchez says his customers prefer to pay in cash, and thinks the reduced reporting threshold will force his family to change certain aspects of their business to avoid the extra paperwork. Most of their customers spend well under the $3,000 threshold, but occasionally they fill large orders for purses or belts. They sell small clutches shaped like bows that are especially popular in large quantities, Vilchez says. “I don’t know if I’m going to sleep as well at night, you know,” he laughs, “because we run a good business, a clean business, but I don’t know maybe I will make a mistake.”

His fears are justified considering the amount of information and paperwork his business is now obligated to provide for transactions involving more than $3,000. To legally accept this much cash, Vilchez must see a valid government ID, record phone numbers, addresses, and names for everyone associated with the transaction, and obtain a written certification from a customer purchasing goods for someone else explaining the situation. This will require considerably more effort than accepting cash.

Joy Xie of Krustallos, her family’s jewelry and accessory store, shares similar concerns. Xie says her family will change many aspects of the business to comply with the new reporting restrictions. Krustallos sells the bulk of its merchandise to wholesale buyers. A prospective client will consider various items for about an hour, slect a few pieces and negotiate with Xie over quantity and price. After consulting her calculator Xie will offer a slight discount for a larger purchase, say 10 rings for $90 instead of 7 rings for $68, and suggest complementary items, like a matching necklace or a coordinating purse hook. The process continues until the customer pulls out a wad of bills, thumbs a few loose, and hands Xie the cash. She estimates her average customer spends $700-$1,000, but said it’s not uncommon for someone to spend $2,000 or $3,000 a few times a month. Those transactions, which previously were no different from every other, will now require Krustallos to collect that extra information from buyers. She worries customers will decide to spend less money if they have to spend more time filling out paperwork. Failing to properly document the transaction could subject Xie to up to $10,000 in fines, and that’s the minimum penalty. If the government finds a business willingly ignored the law the fines can double and individuals may also face prison sentences.

It’s too soon to say what effect the GTO will have on businesses like Kukuly’s and Krustallos, but a few ideas remain true today. Businesses in the Fashion District prefer to use cash, and so do their customers. It remains one of the few places in LA where shoppers can barter with retailers over prices, enjoy the “hunt” for a certain accessory or the perfect prom dress, and feel accomplished after acquiring every item on their lists for a fraction of the cost they might pay elsewhere. Shirae Christie lives in Costa Mesa and visits the Fashion District several times each year with her mom and her aunt. “I tell Shirae to carry exactly as much cash as she want to spend when [we] come [here], because if you bring more, you spend more,” says Christie’s mother. Regarding a potential shift of businesses from cash to credit cards Christie says, “I guess it would kind of take the fun out of the experience for me. Then [the Fashion District] would be like a dirtier version of Forever 21.”

Cash is the blood that courses through the veins of this wonderfully bizarre shopping locale in Downtown LA. The government-issued GTO will serve as a warning to cartels, but will not directly interfere with TBML or Mexican drug sales in the US. Perhaps a well tailored, government solution to such a serious issue was too much to ever hope for. For the next six months, with any luck no longer, retailers must try to remain hopeful that the GTO will not seriously constrict their cash flow and suffocate their businesses.

Adidas is down for the count

 

Adidas is headed in the wrong direction

Adidas is headed in the wrong direction

In a small, rain-soaked town in northern Bavaria, a German company is trying to design athletic apparel and footwear that will appeal to the masses in America. And they’re failing miserably.

Adidas, the world’s second largest sportswear company in the world, has a problem: the American consumer doesn’t think they’re “cool.”

“At the moment, Nike is cool, very cool,” said Tammy Smulders, head of marketing consultancy at SCB Partners, to Reuters. “If you ask a 20-year-old, they are not going to pick Adidas right now.”

Part of this is due to the disconnect between their headquarters in Herzogenaurach, Germany, and the US market. Analysts and even the company itself have acknowledged the difficulty in recruiting top design and marketing talent to live in a German farm town with a population of less than 25,000 people.

 

Being based in Bavaria has left Adidas out of the loop with US consumers

Being based in Bavaria has left Adidas out of the loop with US consumers

Their products, while functionally sound, have recently lacked the style and marketing necessary to permeate the American market.

Nike, on the other hand, has been more willing to push the envelope. A recent illustration is their introduction of neon-yellow shoes for their athletes at the 2012 London games, a bright color scheme that has become a staple over the past two years.

The Swoosh has also introduced several well-received footwear innovations in recent years. Flywire, Hyperfuse, and Flyknit technologies, for example, have been hits with the US consumer because they are both stylish and practical.

“[Nike] understands the US consumer. Adidas does not,” said Matt Powell, head of Forbes’ Sneakernomics blog.

But Powell doesn’t believe the disparity between the companies is due to technological innovations, but rather their ability to market them.

“Adidas has a very credible technology in Boost [a new shock absorbing system],” said Powell. “They just have not exploited it here.”

 

Footwear expert Matt Powell believes Adidas has the tech to compete -- they're just not promoting it right

Footwear expert Matt Powell believes Adidas has the tech to compete — they’re just not promoting it right

It certainly hasn’t helped that the North American faces of Adidas have been trending downward.

After signing a 13-year, $185 million extension with Adidas in 2012, Chicago Bulls guard Derrick Rose has dealt with a myriad of leg injuries that have kept him off the court for nearly two full seasons. While his $40 million in signature sales ranks fourth overall among athlete-endorsed basketball sneakers, it’s difficult to make a shoe look good when the lead endorser is wearing a suit on the bench.

Adidas’ other top endorser in North America, Rockets center Dwight Howard, has faired even worse. His line only moved a paltry $5 million in product. Big men generally don’t sell shoes as well as guards to begin with, and Howard’s Q Score, which measures “the familiarity and appeal of celebrities,” has fallen to 13. The average is 16.

Between the location of the company, its inability to market fashionable products, and its pitchmen failing to resonate, it becomes clear why Adidas has lost ground in the States.

Conversely, The fact Nike’s lead endorser, LeBron James, rarely wore his signature shoe and still generated huge returns speaks to the company’s Teflon status. As long as the shoe design appeals to the consumer, they’re willing to look the other way. This speaks to the underlying divide between the companies – that consumers feel Nike inherently makes a better and more desirable product.

The numbers back this up. Combined, Nike and its largest subsidiary, Jordan Brand, account for 60 percent of all US footwear sales, ten times the market share of Adidas. The gap is also substantial in their apparel sales, with the Swoosh enjoying a 30 percent cushion.

Nike is crushing Adidas in US

Nike is crushing Adidas in US

And with Nike making inroads in Adidas’ home turf of Western Europe, the increasing divide between the world’s two biggest athletic companies has only become more glaring.

Nike’s nearly $28 billion in total sales for 2014 dwarfed their German rival’s most recent sales figures. In 2013, Adidas’ total sales were €14.49, equal to a little more than $18 billion. It represented a 2 percent drop from the year prior.

Adidas is headed in the wrong direction, and they’re looking for answers.

Where does Adidas go from here?

The Trefoil realizes it has to make its brand sexy again, both in America and internationally.

Adidas fears its headquarters in sleepy Bavaria has lead to being out-of-touch with the US market. To assuage this, they poached three of Nike’s top designers last month and pegged them to open a new design studio in Brooklyn this winter.

They’re also looking beyond athletes to help make an impact on the American market. Collaborations with hip-hop artists such as Big Sean, ASAP Rocky, and Snoop Dogg have been geared towards drawing the younger demographic back into the fold.

Adidas has also partnered with fashion designers Jeremy Scott and Raf Simmons in an effort to target the high-end casual shoe market, where products can run for several hundred dollars.

These moves point to a concerted effort from Adidas to reposition itself as a company that not only see itself as a sportswear brand, but a lifestyle brand.

Still, Adidas has a ways to go before catching Nike on this front, where the Swoosh has benefited from having artists turn up online wearing their performance and casual wear. In essence, celebrity is just as important as athlete product endorsement.

“[hip-hop artist] Wale wearing a pair of Durant’s is just as important as [Durant] wearing a pair Durant’s,” said Ian Stonebrook, writer for NiceKicks.com. His weekly “Celebrity Sneaker Stalker” column routinely ranks as the most-viewed page on their website.

Signing Kanye West to a design deal may be the biggest indicator Adidas has caught on to this phenomenon. West had previously designed two popular shoes for Nike – the Air Yeezy – but was upset over his compensation.

Adidas hopes the coup will cut into Nike’s stranglehold on cool.

“[Kanye’s] influence on the market is unmatched…he’s ahead of LeBron” said Stonebrook. “This could be the biggest move since Jordan.”

Adidas is banking on Kanye West bringing some cache back

Adidas is banking on Kanye West bringing some cache back

And if it isn’t, and their marketing continues to be second-rate, Adidas could see a change in leadership. With shares of ADDYY down more than 30 percent on the year, investors have started to grumble about the performance of CEO Herbert Hainer.

Powell believes this is a necessary move for Adidas to truly become a competitor again in North America. “The US must become design and product center for the brand,” said Powell. “Current management does not see that.”

It’s become apparent the latest maneuvers from Adidas will bring change in one form or another – either in market share or in the boardroom.

China Becomes a Better Place for the Medical Device Industry

Jiahong Tan, a 50-year-old engineer in the medical device industry, when leaving China twelve years ago to pursue his career in America, never thought that he would come back to China someday. However, he is back, quitting his principal engineer position in Johnson & Johnson America and working for a much smaller domestic medical device company, “Shanghai MicroPort Medical Device Co, Ltd.”

The fact is, more and more people in the medical device industry like Tan, who strived for a better career overseas, now prefer to go back to China. In 2013, the size of the medical device market in China has reached over $35 billion, and is expected to grow continuously in the next following years. The emerging of Chinese medical device industry not only creates a multitude of of job opportunities for talent, but also indicates the change of landscape of the Chinese economy.

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In the early 1990s, when China was still facing poverty and backwardness, state-owned enterprises (SOEs) just started to transform into private-owned companies. There was hardly any money that can be invested on the development of medical devices, nor was the medical technology advanced enough to support researchers. In fact, almost all the medical devices in use were imported from Western countries. The only kind of medical device China was able to produce on its own were scalpels. As a result, most scholars and researchers in the medical field chose to leave China and work overseas.

Tan was also one of them. He achieved his graduate degree in biomedical engineering and worked as a researcher on heart disease at Chinese Academy of Medical Sciences. In 1996, Tan was given a chance to study as a visiting scholar at Case Western Reserve University in Cleveland. “Working in America where medical technology is highly developed was the best career path I could choose.” So he emigrated to America after finishing his study in 2003 and found a job as a medical device engineer at St Jude Medical, Los Angeles.

In 2001, China joined World Trade Organization (WTO), which brought tons of cash into the Chinese economy. The government now had extra money to develop the high-tech industry, among which the medical device industry is the most fast growing one. In addition, as SOEs grew bigger during the past few years, they were also able to invest on technology to generate more profits and to be competitive in the market. By the end of 2012, China has already grown to be the world’s fourth largest medical device market, which is over ten times that of the year 2001.

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Some people, seeing the large potential in Chinese medical device market, went back to China. So did one of Tan’s previous colleges, Li Wang. She was so surprised at the platform China created for medical device engineers that she immediately introduced Tan to her company. Tan, who was already a primary engineer at Johnson & Johnson America, chose to go back to China after careful consideration. Now, Tan stayed apart from his family and spent most of his time in Shanghai.

When asked why he was willing to leave America, Tan smiled, “I found the job boring, and there was not much work for me to do.” In fact, in a giant company like Johnson & Johnson, the complicated internal structure makes it hard for engineers to develop a new project and to take full control over it.

However, the situation in China is different. Because the medical device industry in China is still in its early stages, companies encourage skilled engineers to develop innovative projects. In fact, as soon as Tan moved back to Shanghai, he was given the position of the Vice President of Technology. “I am now in charge of an important project with a crew of 70 people, including engineers, product managers, technicians and workers, which is much bigger than the one I have in America.”

Moreover, Chinese companies are also willing to pay higher salaries to attract talent, especially people like Tan who has previous working experience in the world’s leading market for medical devices. In fact, Chinese medical device industry is at least five or ten years behind that of the America. As a result, overseas talent can help China catch up with America as soon as possible.

So why does medical industry suddenly become so important to the Chinese economy? There are two different aspects for us to understand the question.

First, it is because of the demand for cheaper medical devices in China. In fact, with the increasing number of aged people and the amount of money accumulated, people in China are willing to spend more on medical care. However, although the demand for better medical services is increasing, there is still a shortage in the supply of medical devices in China. As Tan said, China now relies mostly on imports, especially in the high-end medical device market. For example, in the area of heart disease, China produces about 70% to 80% of the stents domestically. While for the other complicated devices like pacemakers, almost 85% of them are imported from America, of which the cost even overweighs that of the military industry.screen-shot-2011-07-05-at-1-13-37-am

As a result, in order to cut medical costs and reduce burden on patients, China finds it essential to develop domestic medical device market. In this August, China’s National Health and Planning Commission (NHPC) announced that Chinese government would pursue policies explicitly designed to favor domestic manufacturers over foreign manufacturers. This accelerates the current trend of foreign multinational medical device manufacturers acquiring or joint-venturing with Chinese medical-device companies. An example for this is Medtronic, the world’s fourth largest medical device manufacturer, which recently acquired a local company in Hangzhou, aiming to expand its market share in China.

Secondly, the medical device industry is actually leading the transformation of economic structure in China. For the past few decades, China was known as the world’s factory where manufacturing industry led the economic growth. However, as the manufacturing industry has a really thin profit margin, and companies are also moving their factories to Southeast Asia for cheaper labor force, China realizes the sense of urgency to transfer its economic structure from manufacturing to innovation. During recent years, China has invested huge amount of money on high-tech industry, which encourages people to develop their own intellectual property rights instead of following the others.

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However, as good things and bad things always stay together, China is also facing great challenges in the process of economic transformation. The development of high-tech industry is extremely expansive and time-consuming. For example, Tan’s project on heart rhythm management is estimated to cost about $2 million and takes at least four years to achieve the primary goal. Moreover, medical devices also require numerous tests before they can be put into use. Hence, whether companies could ensure consistent investments on long-term projects is the key to the success, and also the key to the future of the medical device industry in China.

At the end of the interview, Tan told me that he is pretty satisfied with the current working condition in China. “What’s your plan after graduation?” He then asked me. When I said that I would like to stay in America for several years and then go back to China, he nodded his head: “That’s right. You can’t go back without any working experience. But the final destination is always China.”

 

Student Debt for the Aging Population – an Issue to Last a Lifetime

Rosemary Anderson owes the federal government $152,000 due to accumulated student debt. Hundreds of thousands of students find themselves in similar straits. However, it is her age, 57, that leads to an alarmed reaction.

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Rosemary Anderson

When the Great Recession plagued the nation in 2008, unemployment spread quickly throughout the middle-age workforce. In 2010, approximately 3.9 million individuals aged 35 and older were pursuing a degree, a 20% increase from 2006. Pursuing a college degree as an older adult became more common as the few jobs available were increasingly competitive to acquire. The payoff for going back to school was not clear for everyone in this cohort, and the repercussions of this have spilled into saving for retirement.

Social Security, a government entitlement program, would typically serve as the safety net for a person with diminished financial resources in later years. One of the purposes of Social Security is to assist older Americans with the transition from a working salary to retirement. Approximately 45% of people 48 to 64 will not have enough money saved to cover basic needs once in retirement. This translates into a disproportionate part of the population depending on Social Security as their major money lifeline.

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Unfortunately, this option is starting to fade for people like Rosemary. She went back to school for her bachelor’s degree at the age of 37, and a master’s degree at the age of 44. Rosemary has been able to put off loan payments because of claiming unemployment and sorting through a divorce, but this period is soon to end. Beginning April of 2015, she is mandated to pay $699 a month for the next 24 years (until she is 81) – or else she will default on her loans. With a $3,400 monthly income and a $2,200 mortgage payment, if she were to pay her student loans, this would leave her with $500 a month to live on. With car payments, utilities, and other bills still to pay, the security of old age is quickly slipping away from Rosemary’s grasp.

In 1995, the Higher Education Technical Amendments Act was approved to remove any time limits the federal government had to collect money from student loan borrowers. A year later the Debt Collection Improvement Act passed, allowing the federal government to garnish Social Security checks in order to collect this debt. Once a monthly Social Security check drops to the value of $750, the government cannot collect more money until the subsequent month. The Supreme Court upheld these provisions in 2005. This monthly value is below the poverty line, likely due to the fact that it has not been adjusted for inflation since 1998.

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Rosemary could start receiving Social Security payments in as little as four years, but because of the debt that hangs over her, relying on these checks is unrealistic. If she were to retire, her reduced monthly Social Security check would only cover about a third of her mortgage payment. With health implications already a concern, the amount of time she has left to remain employable is questionable. With no source of income to look upon in later years, her future options appear to be bleak.

According to Rosemary, “I incurred this debt to improve my life, but the debt has become my undoing.”

Although statistics show that a college degree leads to an overall higher salary than those with only a high school diploma, it is important to consider how many viable working years are left to pay off school loans. Adult students are also less likely to receive private scholarships that help alleviate the burden of student loans. The aid most available to the older students consists of Perkins Loans and Stafford Loans – both administered through the federal government.

According to a report from the Government Accountability Office, the aggregate federal student loan debt in 2005 was approximately $400 billion. By 2013, this number more than doubled as it reached $1 trillion dollars. The current population aged 65 and older account for $18.2 billion of the total student debt (compared to $2.8 billion in 2005).

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The amount of student debt is projected to grow, even with the recovery gaining traction. A visible growth in employment during the recovery has been in the low-paying job sector. Since the height of the recession, many high and middle-wage occupations have been replaced with positions available in lower-wage industries. This shift in job openings did not create a favorable environment for the middle-aged population with new degrees. The consequence of this has become a battle with unpaid student loans and a low salary, ultimately leaving these individuals in a crippled financial state.

With the economy still in a delicate state, the growing amount of people who are caught in this financial predicament are negatively impacting the future growth of the recovery. Because of unpaid student loans, from January to August of this year alone, 115,00 Social Security checks were garnished from the federal government.

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Senator Elizabeth Warren introduced a bill early in 2014 to allow individuals in this predicament to refinance their loans, consequently alleviating some of the financial distress; however, the bill was blocked in June.

As Rosemary sees it, “If I had taken out a loan with a loan shark, I would have been better off.”

On September 10, 2014, Rosemary shared her personal story at the United States Senate Special Committee on Aging in hopes of reaching out to lawmakers to take action upon this occurrence.

In an interview with columnist Rodney Brooks, Senator Bill Nelson, chairman of the U.S. Senate Special Committee on Aging, emphasized the importance of Rosemary Anderson’s situation that has become all too familiar nowadays.

When questioned about the magnitude of this issue, Nelson said, “Some may think of student loan debt as just a young person’s problem. But increasingly that’s not the case. Right now, student loan debt among seniors is fairly small, but it’s growing quickly and much faster than other age groups.” As for the reason the aging population is facing large amounts of debt, the Senator indicated, “Many of these folks are going back to school later in life, but are then unable to find jobs that will allow them to pay off their debt before they hit their retirement years.”

Senator

Senator Bill Nelson at the US Senate Committee on Aging (photo: Lauren Victoria Burke, AP)

Because of the Senate Committee meeting, the Senator wants to push forward new legislation to protect Social Security checks. He intends to index the $750 reduced check payment for inflation to prevent the aging population dependent on Social Security checks from poverty.

Aaron Hagedorn, clinical assistant professor at the USC Leonard Davis School of Gerontology, explained the repercussions of an absent savings to depend upon in later years.

Aaron first highlighted the idea that the population is severely unaware of how much money an individual would need to save for a comfortable retirement.

Aaron Hagedorn and Gerald C. Davison

Aaron Hagedorn, pictured on the left, with the USC Davis Dean, Gerald Davidson on right.

“If you make about $100,000 per year and your mortgage and other various payments are dependent upon this fixed income, then for a 20 year retirement (assuming a person will be alive for 20 more years), you would need to have at least $2 million saved.” Aaron laughed after this statement, bringing to light that the nature of planning ahead of this magnitude is not common, and simply not realistic nowadays with the amount of debt the population incurs. Aaron exclaimed, “For most of the population, planning for retirement is not possible. Even if an older person stashes away a bit of money hoping it is enough to cover them in old age, with increasing interest rates, the value of their already small savings decreases as time continues.”

Aaron emphasized the importance of Social Security in retirement, and how necessary this money is to keep up with not only the increasing health issues that transpire in old age, but also to simply keep food on the table.

“Getting another loan on top of already built up student loans is not an option for these people, and this is truly an issue that needs to be addressed, but unfortunately, the future does not look certain for them,” Aaron lamented.

An attorney at the National Consumer Law Center, Deanne Loonin, proposed to forgive debt for seniors such as Rosemary Anderson who cannot sustain a minimal standard of living, as they are the most vulnerable debt-holders of the population. Because there is no limit for the government to collect student debt, Deanne summarized the situation in terms that reflects the realistic nature of the issue:

“In human terms, that means, literally, that it follows them to their graves.”

The Miracle

On Valentine’s Day, groups of Chinese young people waited for a Chinese movie, “Beijing Love Story,” at the Monterey Park AMC Theater. The movie was released day-and-date with China. The film made a strong opening weekend in North America, earning $128,000 from a limited release in nine screens over its first three days in the market following a Valentine’s Day premiere. Moreover, the film set a single-day record for a 2D film in China, with16.1 million Yuan.

“It’s a golden age of the China film market now. It is experiencing a prosperous development…China’s local movies beat Hollywood movies and now have begun to lead the market in the past few years…I remembered that 60% revenues are from our local movies, which could not be imagined in the past,” said Long Wan, founder of Fire Rock Global Media. Wan is doing pre-production as the supervisor producer for a US-China co-production film, which is going to be filmed in Las Vegas this summer.

“Beijing Love Story” is only one of the “miracles” made in February, the Chinese New Year month. Another blockbuster, “The Monkey King,” has earned 1.02 billion Yuan since it was released, making it the third movie of One Billion Club in Mainland China. According to box-office records from Huxiu technology blog, China’s February box-office revenues hit 2.96 billion Yuan (about 50 million US dollars). Experts predicted that the number would probably hit 30 billion Yuan at the end of 2014. It is a dramatic change, comparing to 2007, that the market earned about three billion for the annual box-office revenue.

The second largest film market

According to a report from the Motion Picture Association of America in March, China overtook Japan to become the second-largest film market after the United States, with box-office receipts of around 17 billion Yuan (about 2.8 billion dollars) compared to 2.4 billion in Japan.

More than 5,000 new cinema screens were added last year, and a massive 903 new complexes were opened. The State General Administration of Press, Publication, Radio, Film and Television (a national media censorship bureau) reported that China now has 4,582 cinema complexes and 18,195 screens, an increase of 25 percent and 39 percent respectively from 10 year ago, according to Variety.

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In the past five years, more Chinese audience chose to spend time with friends and families in cinemas. Below the chart shows that 48.9 percent of audience who buy film tickets watched two to four films in 2009, but in 2012, the number of films has been diversity showing that 15.6 percent of audience watched more than 20 movies yearly.

The high price of movie tickets hasn’t dampened the public’s enthusiasm for cinema. In Shanghai, an ordinary movie ticket costs 100 Yuan (around 15 dollars) and a 3D movie ticket costs 150 Yuan (around 25 dollars), according to Want China Time. China’s movie ticket prices are reportedly the most expensive in the world. However, the high price helped emerge a lot of ticket groupon websites that were very popular with Chinese young generations.

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The development of film marketing strategy companies also contributed to the prosperous market. “Do you know the average age of our audience is 22….do you understand those young people born in 90s?” Wei Liang said to the Chinese director veterans in an interview. Liang’s film marketing company, Magilm Pictures, is one of the pioneers marketing companies in China. “When I opened the company in 2009, there were only one or two big-budget productions seeking for professional marketing proposals….now tens of movies every year,” As the chart shows that 37.3 percent of audiences are 20-29 years old, according to Entgroup.

中国影院观众年龄分布

 

China’s cultural market & Propaganda

China has a long history of propaganda in both news media and cultural market. In 1942, Chairman Mao Zedong gave a speech in a cultural panel meeting in Yan’an, which emphasized that literature and art should serve workers, peasants, soldiers and proletariat. And movies are the tools of propaganda for educating people about the “right things,” and also have to express the right political views. At that time, the Chinese film market experienced a downturn.

During the Cultural Revolution, the film industry was severely restricted. Most of older films were banned, only a few new ones were produced. The most notable ballet version of the revolutionary opera was “The Red Detachment of Women” (1971). Film production revived after 1972 under the strict jurisdiction of the Gang of Four until 1976, when they were overthrown. The few films that were produced during this period, such as 1975′s “Breaking with Old Ideas,” were highly regulated in terms of plot and characterization, according to “Uncovering Chinese films”, a book talking about films during China’s Cultural Revolution.

China’s economic reform and opening in 1979 gave a new life to the whole country as well as its movie market. The government film distribution reform project, which was released the same year, said that film distribution companies could keep 80 percent for developing new projects and pay 20 percent of film revenues to central government. The film industry flourished for a short time as a medium of popular entertainment after the reform project. Around 29 billion people went into cinema in 1979, according to historical record.

In 1993, Chinese government released a new reform report to open doors for private film companies to produce movies. The newly formed SARFT, State’s Administration Radio, Film and Television strengthened supervision over production at the same time. DMG Entertainment, a Chinese-based private film production and distribution company was opened in 1993, which produced “The Founding of a Republic” produced, a new style of mainstream Chinese films in 2009.

Foreign films restrictions & Co-production

Since 1994, China set up an import quota system and started to import ten Hollywood movies every year. “China places a strong emphasis on censorship not only to ensure compliance with the political aims, but also because the country lacks a rating system. The SARFT censorship board regulates the content of movies to make them suitable for the entire national audience,” according to a research paper from Duke University. The board consists of 40 members, including government officials, filmmakers, academics, and representatives from interest groups. The Hollywood films, which apply for a quota slot, must submit either a script or a finished film to the board.

Each Hollywood studio expects to get four to six studio films each per year into China through the revenue-sharing quota system that expanded from 20 per year in 2011 to 34 in early 2012. The expanded total includes an additional 14 Imax and special category movies, according to Variety. Because of strict policies of the quota system, a lot of Hollywood moviemakers figured out another way to enter China film market. One of them is co-production.

“Every week, there is at least one Hollywood producer asks me if there is any good co-production projects in China…They are eager to producing co-production films with China,” said Wan.

“It’s actually really hard to tell one movie produced by one specific country…there are co-productions all over the world,” said Bo Guan, international selection committee member of FIRST International Film Festival.

The main point of co-production films is that they have the same right to share revenues with cinemas as local movies, around 43 percent of revenues, but imported quota films only share 25 percent.

“They want Chinese culture to spread around the world so that they are known and have influence. So we look at the problem from the macro level to figure out what we need to do so that all our partners—U.S. and Chinese—feel like their needs are being met,” Dan Mintz said to The Hollywood Reporter, CEO of DMG Entertainment Company.

“The Growing Pains”

Expansion was the key word of China’s economic development in the past years as well as film market. “Hot money”, which represents excessive money from different fields flowing into film industry, played roles in movie production industry. Lots of non-professional enterprises such as coal companies, which hold “hot money”, entered into film market accelerating the high-speed development. Moreover, genre films that became popular in the market, like fast-food movies, fan movies and young idol movies, which lack deep cultural elements attract most young audiences. At the same time, more Chinese audiences are used to watching films in cinemas recent years, which became another advantage for China film market. However, it’s still not a real mature “battlefield” for moviemakers who really appreciate the art of film. The blockbuster “The Man from Macau” earned not only more than 500 millions box-office revenues but also a bunch of bad reviews.

Where is the future?

Economic austerity is the policy that China released for the new planning years in 2013. People might save their money in banks rather than paying for high-price movie tickets. And also there might be fewer businessmen investing in films, which are more risky than other industries. It is hard to predict if there is any influence on Chinese film market in the future.

More Chinese students are choosing study film production or film related majors in US and they might be the main power of China’s new generation filmmakers. According to UCLA School of Theater, Film and Television, there are 65 Asian American students, which comprised of 13% of the TFT population.

“As I know, USC has more than 20 Chinese student in film school…UCLA and AFI both have less than 10,” said Ivy Yang, a recent graduate from film school in Los Angeles.

Yang is pursuing communication management master degree in USC now. She appreciates the mature atmosphere of film production in Hollywood but she also wants to seek more opportunities in China even though normative rules of a mature film industry haven’t been set up yet there.

“ No rule is the best rule. It’s easier for young filmmakers to get chances…I just want to have a try,” said Yang.

Screen shot 2014-03-25 at 5.25.14 PMGraduated from USC film school in 2013, Alan Wang has spent almost one year in Beijing as a music video director. His plan is to become a famous MV director in China and then seek opportunities for long feature films.

“ I enjoy working here in Beijing except the air… it’s not about “rule” issue, I think every new graduate will face the same problem. We had lots of freedom for creating and shooting whatever we like, but here you have boss and clients…most of time you only can contribute 70 percent of your own ideas…I will stay here for longer time and see,” said Wang.

 

 

 

 

Over the Top: the Emergence of Arctic Ocean Trade

The north polar view of the world is not a common perspective, most of us may know it from the white on blue flag of the United Nations. However this view of the world may become increasingly common as the effects of climate change on the Arctic Ocean have opened new opportunities for Arctic trade routes. The opening of these trade routes is of particular interest to certain actors and nations and has the potential to change the face of global trade.

The Polar Paths for Shipping (The Globe and Mail)

A dream of the seventeenth century explorer Henry Hudson, the fabled Northwest Passage over Canada was first navigated in 1906 by the Norwegian Roald Engelbregt Gravning Amundsen, who was also the first explorer to reach the South Pole. The other Arctic Sea route is the Northeast Passage over Russia’s northern coast, more commonly called the Northern Sea Route (NSR), it is a Russian-legislated shipping lane

Scientists predict ice-free summers by the end of the decade and navigable winters by the mid 21st century. Regardless of how one may feel about environmental politics, the question of the polar caps melting is not one of “if” but “when.”

Commercial traffic over the Arctic would most affect the Suez route. Suddenly ports along the Suez route would see much less traffic from China destined to Europe. Singapore, a commercial hub and one of the busiest ports along the route signaled its awareness of this threat by applying for permanent observer status in the Arctic Council, a regional governance institution. Singapore isn’t the only observer nation that seems out of place in Arctic Council. China, France, Germany, India, South Korea, Italy, Japan, Netherlands, Poland, and the United Kingdom are also permanent observers. Either as observers or members, nine out of the ten largest economies are in the Arctic Council.

As the Arctic’s pristine environment becomes accessible, commercial shipping is not the only encroaching human activity. Reduced sea ice is making accessible an estimated 30% of the world’s natural gas and 15% of the world’s oil. The combined potentials of Arctic shipping and resource extraction may tilt the scale in favor of developing arctic capabilities and infrastructure over environmental preservation. Professor Lassi Heininen, an expert in Arctic Issues at the University of Lapland, describes this problem as a paradox by which less sea ice means better access, which leads to more human activities which leads to less ice. The loss of sea ice is just one part of the environmental catastrophe unfolding in the Arctic and after speaking with Lassi the question he left for consideration is: “Are we willing to lose the Arctic’s beauty, or do we try to keep it for our grandchildren?”

"Are we willing to lose this?"

“Are we willing to lose the Arctic’s beauty, or do we try to keep it for our grandchildren?”  A baby Polar Bear at Ranua wildlife park in Finland, June 2012 (Photo by the author).

The Russian Federation has already started developing infrastructure to service the Northern Sea Route. Between 2009-2013 maritime traffic has improved from a handful of vessels to several hundred. While most are research vessels several trade voyages have been made. So far Norway and Russia have been the primary navigators, but in the past few years Chinese shipping giant COSCO has turned its eyes northward. This past fall COSCO’s Yong Sheng became the first container-transporting vessel to make a journey from Dailan to Rotterdam via the NSR. Huigen Yang, Director General of the Polar Research Institute of China, announced in 2013 that as much as fifteen percent of China’s maritime trade may travel the route by 2020.

A visual comparison of the Northern Sea Route (Blue) to the Suez Route (Red). The Northern Sea Route is 40%, or 12-15 days shorter than the traditional Suez route. (via wikimedia)

The Arctic region is governed by a combination of international agreements such as the UN Convention on the Law of the Seas (UNCLOS) and multilateral governance institution such as the International Maritime Organization (IMO, a UN Agency) and The Arctic Council (AC). The Arctic Council is made up of the eight nations that intersect the Arctic Circle: The United States, Canada, Russia, Norway, Finland, Iceland, Sweden, and Denmark by virtue of Greenland. In the past few years the AC has passed agreements on search and rescue and the IMO is finalizing a shipping ‘polar code‘ that is expected to be in place by 2016.

Most data estimates suggest that roughly 90% of mercantile trade is shipped. For China, the potential of arctic routes could represent savings of hundreds of billions of dollars. “Once the new passage is opened, it will change the market pattern of the global shipping industry because it will shorten the maritime distance significantly among the Chinese, European and North American markets,” said Qi Shaobin, a professor at Dalian Maritime University according to China Daily. Not to mention China’s traditional route to European ports passes through pirate infested waters that the Arctic Route would avoid.

Infrastructure is still the key obstacle to the expansion of trans-Arctic trade. There are very few ports in the Arctic and they are fairly underdeveloped. Missing also are extensive maritime charts as well as search and rescue capabilities. While the Arctic Council passed a search and rescue agreement for cooperation between Arctic States, investment in capabilities is still low. Icebreakers are expensive and the largest fleets number in the tens. Additionally maritime laws and insurance standards in the draft of the IMO’s Polar Code need to be adhered to and implemented before any substantial shipping would occur.

So far Russia has been the only player to make significant commitments to development by reopening research stations and arctic ports. Canada has done little aside from accepting a legal framework on paper. Notwithstanding, there has been an increase in maritime activity through Canada’s Arctic waters:

Northwest Passage Transits 1903-2013 (Globe and Mail)

At a meeting in Stockholm with USC students in the summer of 2012, Gustaf Lind, the Swedish ambassador to the Arctic Council, accepted the possibility of Arctic Ocean Trade, but noted, “I don’t think we will see much shipping for quite some time.” Mike Keenan, an economist at the Port of Los Angeles, explains “You need long stretches that are regularly free of sea-ice and right now you don’t have that.”

There is an undeniable economic advantage to Arctic Trade Routes to connect not just China to Europe but China to the East Coast of the United States. Currently the typical shipping time from Shanghai to Rotterdam is twenty-five days, from Shanghai to Los Angeles is thirteen days and then seven days by rail to reach New York. Rotterdam to New York is another nine day sail. However a Northern Sea Route to Rotterdam from Shanghai would shorten the journey to ten days, making a sail from Shanghai to New York via Rotterdam last nineteen days. This number could be even shorter without a stopover but it already is faster than the current path from Shanghai to New York taking rail from Los Angeles. This means that without any time lost with stopovers and putting cargo on rails, the current route to New York from Shanghai is twenty days, an Arctic route would be nineteen days at most.

The Port of Los Angeles and the Port of Long Beach are, respectively, the top two busiest ports in North America. As entry points they are currently the fastest way for goods from China to reach consumers in most of the United States. It represents a huge economic asset that handles $260 billion of trade throughout the US. According to Keenan, “3.6 million jobs throughout the U.S. are related to the port’s activities.”

Whether Arctic Sea Routes posed a challenge to the port’s position seems an unlikely prospect for the port to consider in the near future. In addition to the infrastructure problem Keenan noted that “there’s simply too many variables to make any predictions for the port.” In terms of adapting to a changing trade environment “there’s a limit to what [the port] can do if you have a serious time advantage.” Keenan further noted that “the priority should be to focus on climate change and sea level rise” and pointed to the Port’s respectable environmental record and investment in clean technology.

Perhaps it is too early to quantify the effect of Arctic Sea Routes on global shipping but even if there is a long term threat to the Port of Los Angeles the sheer volume of trade between Asia and Los Angeles accounts for over ninety percent of the port’s volume. Mike Keenan asserted “cargo will always come here.”

Community Colleges: Benefit or Burden?

Sarkis Ekmekian is a junior at USC majoring in communication. He’s taking four classes, is the show-runner for Speakers’
Committee, public relations chair at Trojan Pride, and is a campus centre consultant at the Ronald Tutor Campus Centre.

He also is a transfer student.

Ekmekian, one of 1,430 transfer students who enrolled in USC in fall 2013, transferred from Santa Monica College, a top feeder school for USC and the University of California. Community college transfer students have a strong presence at USC: 58% of the fall 2013 transfer class were community college students (up from 50% from fall 2012).

The California Community College system is the largest system of not only community colleges but higher education in the nation, with more than 2.1 million students and 112 campuses. According to the California Community Colleges Chancellor’s Office, “70% of state nurses and 80% of firefighters, law enforcement personnel, and emergency medical technicians” are educated at California community colleges.” Furthermore, most California community colleges have agreements with the UC and CSU system in regards to transfer students: 29% of UC and 51% of CSU graduates started at a California community college.

However over the last few years, California Community Colleges, along with the UC and CSU system, have suffered through severe funding cuts due to the Great Recession. Funding for California Community Colleges was “cut $1.5 billion – about 12% of its funding – between the 2007-08 and 2011-12 academic years,” resulting in about 25% of college courses to be cut.

As a result, there has been a significant decline in both the number of transfer applicants to four-year colleges and enrolment at community colleges in California. UCs received 1,653 fewer transfer applications from community colleges in the fall 2013 year, compared with fall 2011. California Community Colleges Chancellor’s Office also reported that “enrolment [in California community colleges] decreased by more than 585,000 students to 2.3 million in four academic years (from 2008-09 to 2012-13) due to severe budget cuts.”

Now that the economy has slowly begun to recover, the California government has been looking to put more money back in state-funded institutions. But do community colleges offer a significant enough economic benefit to the economy to warrant reinvestment from the government?

The state certainly believes that community colleges provide significant economic benefit to the economy. Recently, Gov. Jerry Brown proposed a budget which would increase funding to community colleges by $1 billion. The funding would freeze tuition rates at the current rate of $46 per unit and “allow colleges to increase enrollment by 3 percent. Enrollment [of new students] has been cut by up to 15 percent since 2010.” According to Brown, the additional funding would allow students to transfer faster by increasing the amount of classes, counsellors and academic resources available to students.

According to a report conducted by the American Association of Community Colleges, “in 2012 alone, the net total impact of community colleges on the U.S. economy was $809 billion in added income, equal to 5.4 percent of GDP.” Furthermore, “community-college graduates receive nearly $5 in a return on investment (ROI) for every dollar they spend on their education.” The report also found that associate degree completers earn an average of $10,700 more than someone with a high-school diploma at the midpoint of their career. Furthermore, according to the Pew Research Center, the unemployment rate of those aged 25 to 35 drops from an average of 12.2% for high-school graduates to 8.1% to those with a two-year college degree. The report also found that on average, two-year college graduates will earn on average of $2,000 more than high-school graduates per year.

From an economic point of view, it is evident that it is the state’s best interest to encourage more efficient transferring and graduation rates. According to the American Association of Community Colleges, “U.S. taxpayers paid $44.9 billion to support the operations of America’s community colleges in 2012.” In return society will receive “$1.2 trillion in benefits, the sum of the added income and social savings that the 2012 student population will generate in the U.S. economy.” Furthermore, when students earn more because of their higher education, they also pay more in taxes: “federal, state, and local governments will collect a present value of $285.7 billion in the form of higher tax receipts over the students’ working lives [due to community colleges].”

The proposal for additional funding has been met with approval from community colleges, professors and students who have long suffered from severe underfunding. “We have been underfunded for a really long time compared to K-12 and the UC system,” explained Mary Mazzocco, who is the journalism department chair and advisor for school newspaper “The Inquirer” at Diablo Valley College. “Given how many students we serve, given that we are the gateway for non-traditional college students, and given our role in helping retrain people who lose their jobs… I do feel like that they should at least give us the money to allow us to do the job that they have given us to do. And I feel like they haven’t done that in a really long time.”

Statistically, students who manage to transfer to four-year institutions are successful. According to the University of California’s Accountability Report, “transfer students entering UC since 2004 have a 50 to 53 percent two-year graduation rate and an 85 to 86 percent four-year graduation rate.” By comparison, freshmen from the same cohort who enter the UC system have a four-year graduation rate of 60% and a six-year graduation rate of 84%. According to the Pew Research Center, millennials with a bachelor’s degree or more earn on average $45500 – compared to the average income of $30000 for those with an associate degree.

Rachel Ann Reyes is a student at Diablo Valley College majoring in communication. She has been accepted to UC Davis for fall 2014, and is awaiting responses from UC San Diego and UC Santa Barbara. When she transfers, she will be the first in her family to attend an American university. “I’ve personally really enjoyed being at a community college,” said Reyes. “I think that sometimes community colleges get a bad rep for being almost being a continuation of high school, but I think it’s a great opportunity for people who want to save money. If they are determined enough to go to community college to get their AA degree or transfer, I think it can be a really helpful tool at a great cost.”

However, there are also concerns about the efficiency of community colleges – particularly regarding the students who either take too long or don’t manage to graduate or transfer to a four-year college. In 2009, the average graduation rate from California community colleges was only 25.08%, while the transfer rate was an even lower 14.36%. An op-ed in the LA Times also criticized the inefficiency of community colleges and the burden that it places on the economy: “Community colleges are subsidized through direct state and local government appropriations and through student grant programs. Every student who drops out represents an investment loss by the taxpayers in that student’s uncompleted education.” Through further investigation, they found that “of the full-time, degree-seeking students who entered California community colleges in 2007, more than 35,000 had not earned their degrees three years later, and most of them were no longer enrolled in any postsecondary institution.”

The state has attempted to address the low transfer and graduation rates of community college by pushing “state law requiring guaranteed transfer pathways for graduates of the two-year institutions.” Furthermore, new bills would require the CSU system to accept a wider range of transfer degrees when possible, with the transfer pathways focused on “areas of emphasis rather than majors.”

While Mazzocco realizes the importance that community colleges play in transferring students and awarding qualifications, she also worries that the mission of community colleges has taken a turn for the worse – and that too much emphasis has been placed on just the economic benefits of an education. “Historically community colleges were not just for transfer students, but the state has adjusted our mission – we are now supposed to focus on certificates and transferring,” said Mazzocco.

The campus library at Diablo Valley College in Pleasant Hill is nearly empty at the end of the day as the community college has suffered from budget cuts, its student population down 700 from last fall. Photo: Brant Ward, The Chronicle

The campus library at Diablo Valley College in Pleasant Hill is nearly empty at the end of the day as the community college has suffered from budget cuts, its student population down 700 from last fall. Photo: Brant Ward, The SF Chronicle

“There’s a certain amount of worry that the states push for us to become more efficient and to cut classes that are not high demand, and to focus on certain classes that transfer or go towards a degree,” Mazzocco explained. “For example we’ve added another Mass Communication class because now it’s a part of two or three different majors that transfer. But now I probably have to take feature writing out of the curriculum… because it doesn’t fit into the transfer degree that was agreed upon on the state level… and that’s happening with a lot of classes that are good classes. There’s value to be had to be taking them and offering them, but they don’t fit the pattern that’s being established and are being squeezed out.”

However, there is still a value in attending community colleges that can’t be quantified for some students. “If I had gone to a UC or university straight out of high school, I wouldn’t know what to do,” admitted Reyes. “I think my three years at DVC (Diablo Valley College) have really helped me discover who I am. I got the opportunity to take different classes in different fields and figure out what I liked and didn’t like at an affordable cost. Through that experience I fell into journalism and communication and that is something I really enjoy – I would have never found that straight of high school. Because of community college I am more prepared, and more willing and motivated to succeed at a university because I know what I want and I can apply myself to that.”

 

 

The Pixelated Screen: The Sudden Move of Entertainment and the disappearance of Movie Rental Shops

Sam Nguyen wakes up everyday at around 8 AM to drive to work at his movie rental shop, “Video Town,” located in the city of Hawthorne. Throughout the rest of the day, he is met with a string of long-time customers that are either returning a movie or asking him for help on what the best new release is to rent.

“Is this movie good, Sam?” one 5-year-old boy asks, holding up a DVD.

“It’s horrible,” replies Sam, with a little laugh.

Sam has been fortunate enough to be able to keep his shop open for more than 15 years.

Sam, of course, is the exception.

With the sudden business transaction between Time Warner Cable and Comcast that was followed by Netflix paying Comcast for better streaming access, it is safe to assume that a majority of viewership is shifting towards the internet.

And although the majority of the attention is about the relationship between television shows and broadcasting channels, others are also discussing what this new found partnership means for the movie industry and what it has at stake from a financial standpoint.

The movie industry has not exactly been on smooth land. While almost all of the Motion Picture Association of America (MPAA)’s theatrical market annual reports show consistent progress, there are some cautious points to take into account.

Both the numbers at the box office as well as the ticket prices continue to have consistent progress, increasing at a good rate for more than a decade. But what is important to note here is the number of people that are actually taking the time to go to the movie theater.

There has been no consistent increase when it comes to audience. In fact, the graph above shows that the number of audience going to movie theatres appears to have reached a plateau with no signs of progress for the future.

There are a lot of signs that show lack of progress when it comes to the “physical audience” in a physical space.

Even when those movies have left the theaters and begin their way to the land of renting and purchasing movies from specific local businesses, not as many people are racing to get there at midnight.

What caused this very gradual shift?

Back in the mid 1980’s, US citizens would rush to stores in order to access their favorite movies without having to depend on television broadcast schedules telling them when they were going to watch it. In the 90’s, as Blockbuster rose up, making $785 million in profits on $2.4 billion in revenues: a profit margin of over 30 percent in 1995.   However, what is important about Blockbuster’s success was all the profit it made from overdue and late fees from customers who would forget to turn it their rentals as scheduled and the fact that people had no other method of viewing movies, aside from actually buying the movie.

But things have changed.

These “brick and mortar” shops are facing large competition from technological alternatives. Instead of going to a local rental store such as the once-upon-a-time giant Blockbuster, one can now quickly go to the grocery store and pay for their bread and then quickly rent out a movie from a Redbox machine all before leaving the store. It is important to note that a majority of Redbox success comes from the profits they make from late fees they acquire from their customers, allowing it to have a promising future.

redbox market share

Or if that is too much of a burden on people, the existence of Netflix and Amazon provide even more convenience by allowing consumers to access whichever movie they want from the comfort of their home. Netflix started their business model by showing commercials that focused on the fact that DVDs could be mailed to one’s house and one could mail it right back in the same envelope–and with no late fees.

Amazon also provides the same alternative to consumers, allowing them to both rent and buy movies from their website. Blockbuster attempted to compete with these emerging enterprises by creating its own website, but by 2007, it was tanking and going on the verge of bankruptcy (which it declared in 2010).

Even to those that are still seeking a physical space to purchase their product, the opposite is expected. Much like the way that Redbox is offered at grocery stores or outside convenience stores, the interior of the Redbox itself provides lots of options. One has the choice of DVDs, Blu-Ray discs and even video games when searching through the “Box”.

This abundance of product is why locations like Target or Best Buy seem to be struggling a bit when it comes to DVD and Blu-Ray sales. Joanna Cantu, manager at a Best Buy in Lawndale, CA, believes that Best Buy has been able to stay afloat for the moment because of the variety of products they sell when it comes to watching movies.

“Here, one can go into the DVD or Blu-Ray section and see something they like, want to buy it, and then decide they also need a laptop to watch it,” she said.

But the way that both DVD and Blu-ray sales are shifting towards that is hurting the Best Buy stores around the country. In a recent report by Zack.com, analysts reported that Best Buy’s ESP earnings had dropped for last year and were more than likely to drop for this year as well. Even their Zacks Industry Rating was 257 out of 265 (at the bottom 3% of all the companies that it ranks).

Best Buy might still get a majority of its profit from selling laptops, tablets and smart phones, but it is the movie purchases that are still going to stop it from surviving.

So what allows small exceptions like “Video Town” to survive when even big names like Best Buy are struggling?

For one, Nguyen receives a majority of his revenue from both customers wanting to rent the newest movie that is out but also those that wish to rent movies that are not available on Netflix or at their nearest Redbox. Amazon certainly gives Video Town a competitive run for its money but Sam Nguyen has always had a consistent price in his establishment.

Customers have a choice between renting one movie (regardless if it is a DVD, Blu-Ray or VHS) for $3 or purchasing three of them for $5. He rents out video games (he even has video games for Nintendo 64 available in his store) for $2 each and has a section for movie purchases for $5 each.

The other source of profit that Nguyen makes is from late fees. Video Town charges three dollars for every day that people do not return their rentals and the store owner notes that even though the town is relatively small, people will go days without returning their rentals.

“I always wait exactly one week before I have to call customers and remind them,” Nguyen said, “and you’d be surprised how many people I actually have to call.”

Still, there is no denying that movie rental shops are now talked about once in a blue moon. There are overwhelming different forms of getting a movie once it has stopped being shown in the movie theatres.

What is even more threatening is the emergence of taking out this fine line between movie theatres, movies at home, and access to the internet. Slowly, it is becoming all intertwined into one big thing.

Televisions are now being turned into Smart TVs, where you can access your cable channels and switch onto Netflix with the click of a button.

But if that is not enough for consumers, particularly to the younger demographic, Microsoft’s newly released Xbox One now has an update coming up later in March that will allow players to watch video, play games and chat with friends all on one screen. Video includes movies which players can purchase and save in their Xbox One hard drive to watch whenever they want.

There has not been any speculation about Comcast going into the video game console industry, but considering the way that this lure into the Internet spectrum is flowing, one can only assume that Comcast is patiently waiting for the appropriate opportunity to do this.

What is important to note is that both big and small stores, and even vending machines are relying on one thing: customers going to those place consume their products; products, which is important to note, that have to be made.

The music industry has been fortunate enough to see a rise in vinyl sales, but can the same be said for the movie industry?

What happens when DVDs and Blu-Rays are no longer being made?

There is already evidence of these products being hurt by those that simply pirate movies and shows from websites. An 11-employee Independent U.S. film distributor, Wolfe Video, an independent American film distributor had its profits halved due to piracy and costs to mitigate damages from piracy in 2013, according to The Wall Street Journal.

DVD sales have not been having the great track record these past couple of years and there were not many releases for Blu-Rays.

Even Netflix is showing a gradual shift away from their once marketing strategy of DVD shipments to the home.

It is all about accessibility and convenience when it comes to consuming movies or shows and having one product to do that. Everything is a bundle and DVD players or Blu Ray players being sold as sole products (not combined with anything) has not been consistent.

There is only a matter of time before the streaming becomes the only form of consumption and neither Best Buys or even exceptions like “Video Town” will be able to hold on.

The Changing Face of Brick & Mortar Retailers: The Rise and Fall of the Shopping Centre

Edited & Updated

Growing up surrounded by expats in a foreign environment, days at the mall were often a nostalgic subject among my American schoolmates. Indeed, the mall was something of a hallmark for American society to many of us non-Americans. Yet only a few years later, the sprawling shopping centres that were once the favoured activity of families and teens across America, have become relics of a bygone era. Mall mogul and C.E.O. of one of America’s largest privately held real estate companies, Rick Caruso, went so far as to call the traditional mall a “historical anachronism – a sixty-year aberration” that no longer meets the needs of retailers, communities, or the general public. Once known as the ‘temples of consumption,’ the American mall has become outdated and obsolete. Years of haemorrhaging to e-commerce sales has left its mark, driving under anchor retailers and leaving traditional malls increasingly empty. Up from 0.6% in 1999, e-commerce has grown ten times, with sales reaching 6.0% of total retail sales in Q4 2013, according to the U.S. Census Bureau. Meanwhile, total retail foot traffic for the key shopping period of November and December saw declines of 28.2% in 2011, 16.3% in 2012, and 14.6% in 2013. Over the same period, online sales increased at more than double the rate of its brick-and-mortar counterpart. As retailers physical sales as a percentage of the revenue stream drop and e-commerce’s market share burgeon at an expected compound annual growth rate of 13.6%, they are faced with a chilling prospect – adapt or perish.

growth_bigFor malls and brick-and-mortar retailers, the emphasis now lies on what Rick Caruso calls the need for “reinvention of the shopping experience.” Rather than be what was once, according to a 1971 news article, a “monument to big spending and the shopping spree,” the modern mall looks to capitalise on a growing demand for experiential shopping.

“The future of malls is about experience, creating a destination,” says Executive Vice President of Business Development for Mall of America, Maureen Bausch, in an article for Fortune. “It’s about giving the customer an experience they’ll leave their laptop for.” In response to the rising threat posed by e-commerce and declining foot-traffic, real-estate investors and retailers alike have grudgingly initiated plans for the costly redesign and rebuilding of malls across the country. The vision: expand the massive structures to become lifestyle hubs, complete with fitness centers, cinemas, farmer’s markets, massive and unconventional attractions like indoor ski slopes and aquariums.

Rick Caruso, CEO of Caruso Affiliated, speaks at the National Retailers Federation’s annual convention in New York.

Before launching into the spectacle and staggeringly high cost of this overhaul however, it is worth noting the hesitation caused by a culture of surefire investment in commercial property that has hindered, and in some cases, already doomed particular malls and retailers.

The Rise of the American Mall

Following their inception in the 1960s, the spread of malls to suburbia grew rapidly and confidently as downtown areas fell into decline. In a review of one of America’s first enclosed malls, Architectural Record called it  “more like downtown than downtown itself.” As these malls grew in popularity, so too did their bankrolling parents – the Real-Estate Investment Trusts (REITs). Created by Congress in the 1960s, REITs are companies that own and often operate income-producing real estate. These large-scale proprietors enable ‘average investors’ to purchase equity in commercial projects. REITs provide investors with a  pro-rata share of income while offering an easy gateway to the benefits of real estate ownership without the common obligations, risk, or expenses. REITs investors also enjoy special tax treatment – an REIT is exempt from paying federal income tax so long as it pays out 90% of its net income to common shareholders. Though REIT stock took a hit in 2008-9, with many forced to slash dividends to investors in order to free up cash flow caused by the recession’s contractions, most of these dividends rebounded in 2010-11 thanks to severely lowered interest rates. Because REITs borrow money short term to fund their purchase of long term investments, they benefit from the Federal Reserve’s ‘tapering’ or quantitative easing policy. By increasing the money supply, the Fed drives down interest rates to the benefit of REITs.

REIT stock has risen significantly, mirroring lowered interest rates.

This benefit has not, however, translated into economic recovery for most malls. Following the 2008 collapse, consumer and personal spending as well as retail sales sunk to record-lows. Bottoming out in 2009, personal spending was down -1.5% from a high of 0.6% while retail sales slumped to -3.0% over the same period. Yet across the board, these losses were expected to reverse along with rising economic activity. As Jeff Jordan points out in his 2012 blog post for Quartz, however, vacancy rates and rents have “shown virtually no improvement” despite economic revival. As REITs and retailers have reshuffled their finances to accommodate for this lag, the focus has shifted to luxury goods and overseas sales. The rising demand for value or luxury items has been well-documented, in the fashion industry, between supermarkets, and even with malls. This polarisation has resulted in a widening gap that leaves many middle-market brands (and their respective malls) in a literal no-man’s land. For example, mid-market retailers like J.C. Penney and Sears, concerned with market saturation and oversupply, have begun cutting back on stores, raising mall vacancy rates across the country. In contrast to the relative stability achieved between 2002 and 2008 vacancies at regional malls spiked to 9.4% in Q3 2011, according to a Reis Report. The mid-market, as a whole, is expected to decline by 1-2% per year through to 2017, according to a recent article in Forbes.

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Industry-giants like Simon Property Group have already adjusted for this market shift. The group recently isolated its ‘traditional’ properties saying that “it will spin off into a separate company its strip centers and smaller enclosed malls.” At the same time, REITs have capitalised on the rapid recovery of the nation’s affluent, seeing increased performance in Class A malls, which demand the highest rents. In comparison, Class B and C shopping centres that serve lower- to middle-income crowds remain in deep trouble. While vacancy rates for Class A malls have dropped back to and even below their pre-2008 levels, B and C malls are faring significantly worse with vacancies still 40% above pre-recession levels. The future of these malls, who occupy the mid-market position and are removed from the now-bustling and hip areas in-town, is bleak. Though some have been successfully converted into community centers, churches, and schools, their ultimate demise (and demolition) seems almost inevitable.

Middle-market stores like J.C. Penney have seen a crippling decline in foot traffic and sales-per-square foot.

Towards the Future

Despite this apparent impending doom, however, there is hope for the better-off malls and retailers to achieve success. Many malls have adjusted their offerings for the digital era, selling products less conducive to online sale, like jewellery and sporting apparel. At the same time, a more diverse selection of stores, particularly small brands, keeps things interesting.

“The industry was effectively finished, no one wanted to shop at a store anymore,” says Ton Van Dam, a Dutch businessman and shopping center tycoon. “But we have evolved, and now they come to try and compare different brands, to engage with the product.”

Ton Van Dam

A founding partner and former investor in Multi Corporation, a shopping centre developer responsible for more than 180 shopping centres across 12 European countries, Van Dam stresses the need for a complete shift in the way retailers operate.

“It is all about selling and sharing the experience” he goes on to explain. “The main focus now is experiential shopping, creating an in- and out-of-store experience and community that…motivates people to be part of it in person, to share it with their friends.”

The experiential focus Van Dam describes is already a fast-emerging trend among retailers. British fashion-house, Burberry, made waves as was one of the first to offer a digitally-integrated shopping experience. In its flagship store, full-length mirror screens in the fitting rooms correspond with radio chips in clothing to show the item being worn on the runway. Store associates recommend products based on data from iPads that log all the items a customer has previously purchased in store or online, allowing for a more personalised shopping experience.

“The aim of these efforts is to bring Burberry’s online brand environment, Burberry.com to life in a physical space for the first time” says Burberry Chief Creative Officer Christopher Bailey.

Burberry’s in-store experience merges the digital feats of its Burberry.com ecosystem with the personalisation and attention to detail in its stores.

In the US, Verizon Wireless debuted its first ‘Destination Store’ at the Mall of America. A dynamic space that allows customers to interact and engage with the products on offer, the store includes six ‘lifestyle zones,’ that give customers the opportunity to use the technology in scenarios relevant to them.

The Verizon Destination Store encourages customers to interact with products in scenarios relevant to them.

Malls have like the Mall of America have diversified their offerings by expanding into non-retail categories. The Minnesota-based mall is hoping to become more of a destination, planning to include an office tower and J.W. Marriott on site. The Dubai Mall, the world’s largest, plays host to 75 million people a year. It features a 10-million litre aquarium with over 400 sharks and rays, as well as a ski slope and an ice rink.

The Aquarium at the Dubai Mall, the world’s largest.

Harnessing the power of e-commerce as opposed to resisting it, these malls and retailers are working to transform the shopping experience. Digital and online sales offer a host of measurable metrics that allow companies to form a deeper understanding of their customer. Basic tactics include the personalisation of the shopping experience, dynamic pricing strategies, and easy-access to post-sales service.

“The digitalisation of our brand has been one of the biggest challenges faced by the company,” says John Clarke, Vice President of External Communication at the 140-year old HEINEKEN International. “But it has also given us fantastic ways through which to better understand our customer, their habits, their preferences. It has really altered the way we approach our communications.”

In addition, digital sales have greatly altered the supply chain. Customers now visit stores to compare products, only to buy them online later. Similarly, customers can request in-store pickup, allowing retailers to stock precise amounts of particular products and offer a more tailored product selection. Today, the shopping experience begins end long before customers cross the threshold of a physical store. More and more the brick and mortar environment feeds off of what is happening online, anticipating customer needs. In Apple’s retail stores, ever the shining beacons of forward-thinking retail, technology called iBeacon, which uses short-range technology to track how customers move around in-store, sends relevant promotions in the form of push-notifications.

The integration of digital into the actual product, too, has gained stead. Heineken created “the Sub,” a pressurised countertop  beer tap that chills a chosen ‘torp,’ a mini-keg of torpedo-like design in order to pour the perfect beer without even leaving the kitchen. HEINEKEN International offers several of its 250 different beer brands in torp-format. Merging physical and digital, the Sub measures which torps are consumed most frequently and makes recommendations via a smartphone app to order more torps of the same or similar brand when they run low.

The Heineken ‘Sub,’ allows beer enthusiasts to swap different beer brands in the form of ‘torps.’

The number of behemoth malls that dot the American and global landscape almost certainly prevent them from going extinct, however bad business may be. But for many of these malls, which occupy the traditional space, their success depends on the ability of management and brick and mortar retailers to enhance the mall experience.  The nation’s top malls leverage their sheer size to go beyond retail, moving instead to engage their customers with a relevant, changing tenant mix and exciting design, their success shows there is still viability in the mall model.

The Resurgence of Some and the Death of Many

The number of malls that dot the global retail landscape almost certainly prevent them from going extinct, however bad business may be. Success, though, hinges on the ability to adapt to the changing retail climate. For many of the malls in the traditional space, their age, location, and design mean it may well be too late. Built for a past retail heyday, the already uphill battle to transform retail combined with a massive oversupply of property, the fate of these malls is mostly decided.

For the nation’s top malls, though, the ability to leverage their sheer size to go beyond retail, moving instead to engage their customers with a relevant, changing tenant mix and exciting design, and achieve success shows there is still viability in the mall model. For now, the experiential shopper is entertained. But one must ultimately wonder, for how long?

The Cost of Hollywood: Runaway Production

Hollywood, California: long synonymous with film and television production; the Mecca of the entertainment industry. If you weren’t here, you weren’t anywhere. That said, movies and TV aren’t all about entertainment. To the hand that feeds them, they’re investments, and huge ones at that. Putting together a budget for the production of a film is a complex and intimidating process. That’s where state-based tax incentives come in, easing the financial burden and encouraging productions to stick around the area to generate future economic benefits. However, such incentives have spread to other states and countries, disrupting California’s film business at its core and bringing into question it’s worth.

Dubbed runaway production, it has waged a war of attrition on Hollywood production over the last decade, and if not for the government incentivized projects (represented by black on the graph below, provided by runaway production outreach program FilmWorksLA), 2010 would have been a record low year for Los Angeles productions.

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California’s legislation on film production credits was established as a defense system to incentivize production in-state. “The motion picture and television industry is responsible for 191, 146 direct jobs and $17.0 billion in wages” in California, according to the Film Commission of California. In an interview with the Los Angeles Daily News, Louis Friedman, producer of 2013’s Lone Survivor, believes production planning around tax credit is “’the single most important financial decision made” and it “affects both the creative look and financial bottom line from day one.’” This production season is bread and butter for the highly skilled – and highly populated – pool of artists, technicians, and other crew people in the state.

However, that legislation has served as a model for other states’ and regions’ incentive programs to surpass. In California, the program was “crafted with limits, from a $1 million minimum to $75 million maximum [in regards to overall budgets] on feature films, and further restrictions on drama series,” not to mention a lottery system that deals with the high demand. This leaves out a lot of areas of production, as major tentpole films’ budgets soar higher and higher and TV shows take bigger and bigger slices of the market. Sensing this sitting-duck situation, the film lobbies of other regions responded.

Canada was the first big player to encroach on Hollywood’s territory in any serious way, putting into law their first production tax incentive in 1997 (just one year after the “all-time high in 1996” of film productions in Los Angeles, noted by  FilmWorks). For awhile, Variety reports, “it was only lower-budget series for cable that set up shop outside of Southern California…usually in Canada…[b]ut now the network-studio congloms play a kind of incentive sweepstakes” and pit California cuts against out-of-state cuts. As Variety points out, “these days studio chiefs insist that filmmakers…take advantage of out-of-state incentives…[whose] savings are crucial in a franchise-obsessed era when big-budget movies commonly cost north of $200 million to produce.”

States like New York, North Carolina, Louisiana, Michigan, and many others got into the game. Kevin Klowden, director and managing economist at the Milken Institute’s California Center, estimated a total loss of “4500 production jobs…between 2005 and 2012,” compared with the “7900 production jobs the state should have gained during that period.” New York now has a $420 million annual cap on tax credits, compared to California’s $75 million cap, and has begun to offer additional incentives for productions that complete post-production work in New York as well. Stan Spry, founding partner of up-and-coming management and production company The Cartel, knows this reality very well: “Tax incentives and rebates have been a massive part of our financing plan. We’ve been able to finance up to 40% of production budgets due to incentives…why stay in LA when you can save almost half the money somewhere else?”

Another industry professional, Michael Karnow, creator of SyFy’s Alphas, mentions for that show “we shot in Toronto to save money,” but out-of-state locations “could end up being an asset. It can turn out to be very exciting to turn a problem into an opportunity, and not only let the benefits be financial, but creative.” He mentions Breaking Bad as such an example, one of the most groundbreaking shows of the last decade…almost completely shot in New Mexico, and tailored specifically to the state. It’s interesting to note the original pilot of Bad was written to take place in Southern California…until AMC heard those incentives calling.

This competition, though, now faces the same question that California does: what exactly are the economic benefits of these incentive programs? Other states and countries realized Hollywood was a state of mind, and put into action measures to replicate that mindset for cash-desperate filmmakers. At its peak around 2010-2011, 42 states were offering over $1.4 billion combined in tax credits to productions, hoping to reap economic gains. However, it helps to recall that California’s incentives were built to keep productions inside of its already-developed infrastructure, not to lure runaway production away from Michigan or New Mexico. Historically, California remained the center for production because it housed the developed pool of workers, artisans, and talent, aged like fine wine. Other states don’t have that history, and therefore may not have the job force or economy in place that would benefit from film and television productions.

Take Michigan: leading up to 2011, $57 million had been given out annually to productions each year, with high profile movies like Oz, The Ides of March, and Transformers 3 basing their filming in the state. The problem here became that the Michigan Film Office did not have to disclose the true costs/benefits of the program. Responding to fervent state government criticism, who believed the program wasn’t bringing the economic growth its proponents promised, the program was scaled back in 2011, capping total credits at $25 million and changing the classification of the credits from tax breaks to grants. Michigan legislature, led by Gov. Rick Snyder, now “obligates the [Michigan] Film Office to report back on the specific movie projects that it finances; and to openly declare the criteria it uses to award subsidies,” according to the Tax Foundation. Snyder argues this new criteria makes transparent expenditures that were once “hidden in the tax code.” The Tax Foundation analyzed Michigan and other states’ specific programs, and ruled the incentive programs “distort[ed] the allocation of resources, provide[d] only temporary jobs and benefit[ed] special interests at the expense of the taxpayer.” Other states have scaled back recently as well, with only 35 states offering incentive programs currently.

However, there’s still been a huge increase of programs spanning the globe, and California and its competitors face a race to the bottom. New Los Angeles Mayor-elect (and therefore Prime Minister of Hollywoodland) Eric Garcetti is well aware of this possibility. “’We lost feature films. That’s sad. They may come back to some degree, but probably by and large won’t.’” Instead of competing neck and neck for the most generous incentives, Garcetti wants California to stay ahead of the curve, focusing on creating an environment for a wider spectrum of media production. His plan is to remove the $75 million cap, and make incentives a more viable option for premium cable shows, commercials, visual effects, and even videogames. Garcetti admits he’s seen unfavorable studies, projecting the state seven cents on every incentive dollar spent, but believes there is an unseen multiplier in effect due to California’s historical place as the home of production, and that productions spur economic activity up to five times that incentive dollar’s worth.

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Garcetti has charmed his way into many meetings in Sacramento already, but he is facing strong opposing arguments from other neglected California groups. A coalition, made up of the MPAA, the Directors Guild, the Teamsters, and the IATSE artisan union, will work to “win over powerful [opposing groups]…such as the California Teachers Assn.” Groups like the teachers believe more Hollywood tax cuts are merely “giveaways to the glitterati,” similar to the arguments that shut down other states’ programs’ momentum. The Tax Foundation rebuffs Garcetti’s and groups like FilmWorks’ arguments about the film and TV’s  key place in states’ economies, believing state legislators should make sure they’re not just lining the pockets of “one particularly vocal and connected industry.” While it is certainly true that the Clooneys and the Spielbergs don’t need much pocket padding, California is a unique economic home of the production worker, and Garcetti wants to make sure it stays their home. An ally, assemblyman Mike Gatto, quoted in Variety, says, “’incentives offer a return on investment that has more to do with individuals’” than studios. “’This is about the regular, workaday people who make a living from production.’”

Despite questions of its long-term economic worth, California undoubtably has a large group of uniquely skilled workers that are facing the possibility of major disruption and possible migration. Garcetti’s planned innovations are important to the future of the state now that Hollywood has proved to not be as stationary as it once appeared.

 

Interviews with:

Stan Spry, Co-Founder and Head of Production, The Cartel Management & Production, West Hollywood, California

Michael Karnow, writer & creator of SyFy’s Alphas, Venice, California

Other sources:

MPAA, State-by-State Statistics  http://www.mpaa.org/policy/state-by-state

Tax Foundation, http://taxfoundation.org/blog/filmworks-blog-criticizes-tax-foundation-industrys-dependence-film-tax-credits