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

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

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

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

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

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

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

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

A brief history

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

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

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

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

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

How aerospace companies respond

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

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

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

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

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

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

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

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

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

Going even smaller

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

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

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

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

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

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

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

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

Looking ahead

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

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

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

Games as a service has the industry in a predicament

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Kensgold receipts for purchases on items

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

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

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

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

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

SOURCES:

https://kotaku.com/ea-temporarily-removes-microtransactions-from-star-wars-1820528445

https://kotaku.com/battlefront-overwatchs-loot-boxes-under-investigation-1820486239

https://kotaku.com/hawaii-wants-to-fight-the-predatory-behavior-of-loot-1820664617

http://www.pcgamer.com/belgium-says-loot-boxes-are-gambling-wants-them-banned-in-europe/

https://www.rtbf.be/info/medias/detail_non-la-belgique-n-a-pas-qualifie-star-wars-battlefront-ii-de-jeu-de-hasard?id=9769751

https://ds1.static.rtbf.be/uploader/pdf/d/d/b/rtbfinfo_5c742f9b8996afe274e39ad9b4acb453.pdf

https://www.cnbc.com/2017/11/28/eas-day-of-reckoning-is-here-after-star-wars-game-uproar.html

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

http://www.gamesindustry.biz/articles/2016-03-02-eas-ultimate-team-earning-around-usd650-million-a-year

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

https://www.giantbomb.com/dlc-season-pass/3015-7186/

https://www.thedailybeast.com/an-obituary-for-the-online-pass-why-you-cant-charge-us-for-used-video-games

http://www.eurogamer.net/articles/2013-03-26-tomb-raider-has-sold-3-4-million-copies-failed-to-hit-expectations

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

https://kotaku.com/how-much-does-it-cost-to-make-a-big-video-game-1501413649

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

https://www.cinemablend.com/games/Capcom-Gets-Busted-Disc-DLC-Discovered-Street-Fighter-X-Tekken-40114.html

http://www.rollingstone.com/glixel/features/loot-boxes-never-ending-games-and-always-paying-players-w511655

Videogames Can’t Afford to Cost This Much

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

 

PAY ATTENTION! Disney’s On to Something

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Venmo: Helping or Hurting the Banking Industry?

By: Libby Hewitt

 

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

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

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

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

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

“What a horrendously useless app and payment service!”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SMART CONTENT MANAGEMENT

How content might redesign the media industry’s business model

 

Once upon a time, there were newspapers, radio, television, and movie theaters: well-defined platforms through which content was easily spread and consumed. Distribution and its related issues were not a concern. Then the Internet stepped into this tidy situation, followed by mobile devices, along with the creation of apps that also started working as new kind of platforms. From this point forward, all content, from TV shows to commercials, from music to news, began floating in the complexity of the intricate digital media landscape.

Companies have to deal with hundreds of different platforms, the dominant culture of contents consumed for free, users whose preferences change often, and, last but not least, the giants of Facebook and Google, through which pass all content produced on the web. The question is raised: how can media industries still monetize the content they produce?

With this question in mind, I met with Thomas Jorin, of the Strategy & Innovation department at Havas 18, a research hub of Havas, a French global communication group that provides strategies and solutions to connect companies with their customers. Havas works with large media and entertainment companies around the world such as Walt Disney and Universal Music, that explains why Thomas at Havas 18 is so much involved in studying the ongoing processes around how contents are produced, shared, consumed and monetized.

Working in his LA-based office, Thomas is in charge of conducting research in collaboration with the academic world —most often, the University of Southern California and the University of California, Los Angeles— in order to scout innovative business models that might be applied to Havas’ clients.

Thomas Jorin at Havas 18, Los Angeles

As soon as we started our conversation, he immediately highlighted the biggest issue that the media industry currently struggles with :“The challenging thing is to change your business model because of your content.” Instead, companies are still replicating the same business model for every type of content and platform they handle: for the majority of them, the only thing changing is the type of screen. Thomas stated that, for example, many advertising companies replicate the same type of ad used on TV even on totally new types of platform such as the influencers.

Yet content is not fixed into a single channel anymore. We have to start thinking of digital content as social content, he continued: “By definition, social content is drastically different from, for example, TV content; it has capillarity, it can move from platform to user, from one person to another; it’s shared by consumers, so the value of it is much more defined by the fact that you share the content.” This means an enormous shift in how content value is measured. In fact, the entire media industry is trapped in limbo while it struggles to redesign its business model.

For example, as Thomas said, Universal Music has to constantly deal with how it is paid by Spotify, Apple Music, Amazon, Pandora, and SoundCloud…and news media outlets are not excluded from this difficult scenario either. Indeed, they seem to be the ones suffering most because of the loss of their once-undisputed role of one-and-only content distributors.

Newsrooms have been trying to protect their content with the paywall business model or the subscription model. “I think this is a very old way to think about news, and more in general about content, because it means that content is designed just for one platform or one website and it can’t go out, it can’t be shared. It can’t be viewed differently, it can’t be consumed differently. If you think about today’s most successful media companies, they’re the ones that let their content go out.” Thomas pointed to the example of Tastemade, which produces food videos, that in his opinion is one of the best media companies because it is able to spread its content on every kind of platform, including TV, generating 2.5 million views a month. “If you think about newspapers, that’s exactly what they should do: try to be the best at what they do and let people have access to their content. But in order to do that, you have to be smart in how to monetize every platform.” And here comes the pain-point of the whole question.

“For example, Tatsemade’s CEO said that they generate everyday revenue in fifteen different ways.” Hence, in order to smartly monetize its own content, a company should be open to adopt a different type of business model every time it changes the context where it publishes content: “At some point, you’re gonna to be paid by platforms, at some points you’re gonna be paid by brands, at some points you’re gonna be paid by consumers because you can develop some premium offers… But you need to play with all of that at the same time and find a balance every month, every week, depending on how the market is doing and where it is going. And you can do that if your content is strong enough to attract interest.”

Therefore, the issue of how to smartly monetize each platform is also connected to the audience.

As Thomas stated, the media industry’s problem stems from continuing to use old criteria to look at people, as well as people’s information—that is, data. “As you look at the communication field, everybody has been focusing on male or female, how old you are, what your income is…that’s a very old school approach—especially right now, when you can customize your content for different users.” The old demographic segmentation placed people in a frame that can’t change over time. “A person is going to change every day. We all are different and even myself, I am different from Monday to Sunday, I am different when I am alone or with friends, I will be different in a year…You should not talk to me in the same way.”

For this reason, the audience was the main focus of one of the research projects conducted by Havas 18 in collaboration with the USC Annenberg Innovation Lab, where in 2014 Erin Reilly, Managing Director and Research Fellow, developed a new framework called Leveraging Engagement. Its main purpose was to reveal the right way to look at the audience in order to properly engage with it. The Leveraging Engagement framework was created to discover the types of motivation that, according to different contexts, trigger people’s interest and bring them to engage with a specific content.

Erin told me that for example Walt Disney is going to apply this framework to its show Andi Mak, in order to identify the underlying motivations that bring its fans to watch it. Once Disney has that information, it will be easier to understand how to improve engagement with its audience and how to better monetize the show and other similar content.

Since motivations are driven by situational triggers that reveal why people engage with specific content, the Leveraging Engagement framework  can be applied to many fields, including politics, art, sport, and music. Might it work for the news media as well? Reshaping how news media interact with their audience could help them to develop new ways to earn revenue from their content. As Erin stated, “In any type of media content you can identify the motivation: it’s just knowing the framework and knowing what triggers people’s motivation. If you do that, there are multiple ways to use it to change a company’s  business model.”

The recent news that even the biggest ad-supported news media outlets, such as Buzzfeed and Vice, have not reached the revenues that they estimated, has scared shaken the world of digital newsrooms. It has made clear that a new and solid business model is desperately needed. But the problem, as Erin pointed out, is more complex then we think: “I believe it is hard to shift your business model once you have a company. Newsrooms are established industries with certain business models that have been working forever, and so now we are in a cultural shift, which offers new business models, and yet the people in charge are often afraid of what these new business models could mean. I think they are trying to learn but it’s a big risk to be able to shift to something without having the proof to know that it has been validated and that revenues will come in.”

The crisis that the media industry is facing is leading to the redesign of old paradigms through which companies used to think and value content. Music, movies, articles, video, TV shows…are part of our culture and, in spite of the big changes going on, people will continue to consume them in the future, but media companies must figure out HOW people will do it.

As Erin stated, “It’s a bigger problem than just: let’s do a new business model. It has a lot of moving parts that you have to take into account. And it’s a moving target—it’s not that you can shut down the business and restart; it’s still going while you are trying to change.”

 

by Mara Pometti

No One Can Copy the Taste of Coca-Cola: Predicting Hollywood’s Influence on Chinese Cinema from the Case Study of French Cinema

No One Can Copy the Taste of Coca-Cola:

Predicting Hollywood’s Influence on Chinese Cinema from the Case Study of French Cinema

Yutai Han

JOUR469

12.6.2017

In this paper I ask the question: what was Hollywood’s influence on world cinema and on the domestic market, in particular, I look into the history of Hollywood’s impact on French cinema from the Nouvelle Vague to the recent years. Because of the richness of the history of French cinema and the success of cultural policies that counteracted Hollywood’s impact and maintained opportunities for local filmmakers, the case of the French cinema provides an ideal example to analyze the future of China’s domestic film industry. This question is inspired by my previous inquiry into the Chinese film market and China’s failed investments in Hollywood. In my last blog post and presentation, I claimed that it is possible that due to Beijing’s tightened control on investments leaving offshore, Hollywood is losing their bet on Chinese money saving the day, and that China will continually focus more on domestic film productions and will probably impose the same, if not less and harsher, limits and rules on the number of films that are allowed to be exhibited in mainland China each year, as a new negotiation is set to take place this year that will decide on the issue.

Zhang Yimou, a well-known Chinese film director, published a commentary titled “What Hollywood Looks Like From China” on The New York Times on Monday in which he asked what China’s film industry gain in return while Chinese audiences provide Hollywood with huge profits. He wrote, “…homegrown movies in China sometimes face steep challenges in the shadow of Hollywood blockbusters. We are right to be concerned about the succession and inheritance of China’s film traditions as well as the potential loss of our unique values and aesthetics.” To put this letter in more context, in 2017, according to official data from the Chinese “Ministry of Truth” (The State Administration of Press, Publication, Radio, Film and Television of the People’s Republic of China), the market is rosy. As of November 20th, 2017, the box office in China has exceeded 50 billion yuan ($7.54 billion), which is a 19 percent up from last year. Domestic films grossed 26.2 billion yuan (52.4%) in total while foreign imports grossed 23.8 billion yuan (47.6%). Among the top ten highest grossing films in China, five films are Hollywood productions. The biggest contribution to the domestic film market this year is Wolf Worrier 2, a nationalist propaganda film that grossed $862 million in the summer of “domestic film protection month”. From the research from my last presentation, I found data that shows only 7.7 percent of worldwide net revenue came from China. Although that’s not a large percentage, but Hollywood’s impact on Chinese audience’s viewing habit is still significant, as the top ten grossing list has shown. I shall discuss this more in the third part of my article.

1. Summary of Hollywood’s Influence on World Cinema

The artistic and economic impact of Hollywood’s blockbusters on the local film industry have been widely studied. Diana Crane, professor of Sociology at the University of Pennsylvania, wrote that “The quantitative analysis shows the domination of the US film industry in almost every region. American films and American co-productions dominate the lists of top 10 films in the global market and in national markets in spite of protectionist cultural policies and national subsidies in many countries.”  Moreover, Hollywood’s need for return on investment in blockbuster productions, the most prominent case being Marvel’s superhero franchise, has led to changes in content toward “deculturalized, transnational films, a trend that is also evident in other countries.” (Crane) In order to attract global audiences, Crane claims that “the content of Hollywood films has been transformed. The levels of violence, action, sex, and fantasy, all of which can be conveyed visually rather than through dialogue, have steadily increased in Hollywood films.”

Indeed, at least in my viewing experience of Hollywood productions that came out in recent years and those from the earlier period, there exists a noticeable change of narrative, form and content. De zoysa and Newman argue that “the mythical golden years of Hollywood spanning 1938–1960 (which) projected a uniform vision: faith in the democratic order, the classless society, heroic individualism and the golden opportunities offered by the capitalist work ethic and enterprise.” However, in recent years, and in particular this year, I noticed that film as an art form started to change fundamentally. No matter the genre and production budget, film-making is becoming more and more an industrialized factory of flat, boring, transnational works of literal depictions of events, and less and less a cultural artifact that may revoke emotional responses and inspire individual expression. Here, I quote Crane’s summary of the trend of“transnationality”, “Films in other countries and regions, such as China, East Asia, Scandinavia and other parts of Europe, are also becoming transnational. They are likely to be less rooted in their national cultures and more likely to incorporate perspectives from other countries in order to attract audiences in the global film market.” (Crane) One example that helps to make sense of the issue is a scene in Alfonso Cuarón’s post-apocalyptic film Children of Men, in which an art collector gathered famous art pieces in a monotoned, large room. Michelangelo’s David is seen as just a giant piece of sculpture, missing an ankle and bared out of its original meaning. This scene can be understood as a statement that corresponds to the issue facing the film industry. If art is taken away from its cultural background, then there is no art. Michelangelo’s sculptures cannot leave their chapels in Italy, just as Hollywood films will lose the glamour if they’re forced to adapt to a global context in order to appeal to foreign markets. Moreover, in film, the audience can discern the fake elements instantly, and avoid the film, which can result in an unsatisfying box office, such as The Great Wall (2016). Think in terms of Coca-cola and companies trying to copy its taste: we will know instantly, in the first sip, that the fake Coca-Cola is inferior to the taste of the real Coke that is manufactured and bottled in the United States. But everyone knows that the coke never “conquers the thirst”—it only leaves us wanting more.

2. History of French Cinema and French Cultural Policies

I have already established that film is a distinctive cultural artifact that has significant symbolic and artistic value. Now, let’s look at film from an economic perspective. Specifically, in France. What policies did France enact to lessen or counteract Hollywood’s impact on their domestic film industry? After the Second World War, France imposed quotas on the number of American films, and reserved screen times for domestic films. The youth who grew up during that time of France, watched a lot of these films and formed their perspective of how films should be made. The young Godard and Truffaut, who would later become master directors and would influence Hollywood directors and Asian directors like Tarantino (Pulp Fiction, Kill Bill), Alfonso Cuarón (Harry Potter and the Prisoners of Azkaban), and Wong Kar-wai (Chunking Express, In the Mood for Love), were so critical about the Hollywood productions and domestic films that they launched their own career as film review journalists. Their journalistic efforts and devotion to art contributed to the formation of the film movement known as The New Wave. “It was the sudden rush of creation in the late fifties that led France’s then-Minister of Culture, André Malraux, to introduce a series of measures intended to promote the production and distribution of French movies not just as commercial ventures but as works of art that would be fundamental to France’s cultural heritage. The New Wave directors themselves, at least in the early years, hardly benefited from this system, which, however, reinforced their critical legacy—that of the auteur, the individual creator, as the key element in movie production—as the image of the French cinema as marketed to the world.” (Brody, The New Yorker)

This idea of filmmaking, that serving cultural interests takes priority over economic gains, has been central to the French film industry and policy-making, and it is why French cinema didn’t decline as severely as it has in Italy, Germany and Britain. (Scott, 27) The cultural policies are “an intricate combination of financial subsidies, induced investments, television broadcasting quotas, managed labor markets and the many and varied services provided by the CNC [The National Center for Cinematography and Moving Image] to the film industry.”  (Id.)

     (Image: Allen J. Scott, Economy, Policy and Place in the Making of a Cultural-Products Industry)

These cultural policies led to an increase of the number of French films produced annually, from 89 in 1994 to 230 in 2009. (Crane) However, it has been reported that three-quarters of French films do not recover their costs. And as a result, some French filmmakers are going in the same direction as Hollywood, imitating the style (“transnational” films), the process of production, and hiring international casts and crew. These films have been “much more successful in attracting foreign audiences.” (Id.)

This is the underlying problem of the the film industry that every country must face. In Brody’s article, he says “creation can be managed but not popularity: the government may foster the production of films that are aimed at wide audiences but can’t make the audiences buy tickets.” Therefore, in terms of the economy of scale, because Hollywood has been the center of the film industry since the 1920s, it’s able to develop and maintain the order of things in a way that other nations are unable to compete with.

3. Discussion on the Future of Chinese Film Industry

Finally, we are back to the main concern of this article. From 1 and 2, I have laid out why Hollywood can have a significant advantage over local film productions. Local film markets, such as that of France, are unable to compete with the “build quality” (glamours of the stars, “transnational” narrative structure, visual effects) and the marketing ability (roughly a third of the budget goes to promotion) that Hollywood gained throughout the years. Furthermore, Hollywood is able to maintain its economy of scale in today’s global film industry, despite cultural policies taking place. In light of this over-arching tension, I begin my discussion of my prediction on China.

First, under normal circumstances that the quota don’t decrease, China will contribute more to the foreign box office of Hollywood productions. Figure 3.1-3.3 demonstrates that as a general trend, Hollywood derives more profit from the foreign box office than the domestic box office, and it will be the predominant factor for production in the future. It’s possible that domestic box office will continue to decrease, while the foreign box office will continue to grow. China is the major contributor for that growth (figure 3.4). 

(figure 3.1)

(figure 3.2; source: https://stephenfollows.com/important-international-box-office-hollywood/, same below)

(figure 3.3)

(figure 3.4)

Every school in China has English lessons, and the youth grew up watching Hollywood films and TV shows. The online forums for fans are robust, and they would wait for a new episode of an American TV show impatiently. This appetite doesn’t reflect on the box office records, but it’s safe to say that the youth are hooked to American entertainment. If a production is phenomenal in itself and received a positive review, such as Nolan’s Interstellar and Inception, or Pixar’s Coco, which scored a record box office in its first weekend opening in China, then the film will be successful in the Chinese market. Hollywood studios need not tailor their films for the Chinese audiences.

Second, since investments are down due to government regulations and conflicts of power, the investors will shift their direction to favor more domestic projects. This will result in a wave of young filmmakers trying to make a name out of themselves. Wang Jianlin, the CEO of Wanda, which owns Legendary Entertainment and AMC, said in a TV interview that he wants to “have an award show like the Oscars and the Golden Globes in China” and that “no one told me to show Chinese films in AMC (in the United States), but I did.” His son, a well-known social media personality, recently launched a multi-million yuan campaign aimed to find the best young directors and offer them filmmaking resources.

Third, internet studios, such as Alibaba’s Youku, Baidu’s iQiyi and Tencent Video, have announced ambitious plans to develop original series. Arguably, the success of original shows produced by Netflix and Amazon Studios is the inspiration for the Chinese counterparts. In fact, the biggest internet companies in China has followed its U.S. counterpart’s footsteps, and it’s no coincidence that the Chinese internet studios are investing in their original series. However, this wave of big capital flowing through the market may result in a negative way in terms of the production’s artistic value. In fact, there is evidence that Chinese production companies are flipping the market before the film is made. One report says that according to sources, insider trading and splitting shares are not unusual.

References:

Crane, Diana. “Cultural Globalization and the Dominance of the American Film Industry: Cultural Policies, National Film Industries, and Transnational Film.” International Journal of Cultural Policy 20.4 (2013): 365–382. Web.

De Zoysa, Richard, and Otto Newman. “Globalization, Soft Power and the Challenge of Hollywood.” Contemporary Politics 8.3 (2010): 185–202. Web.

Scott, Allen J. “French Cinema.” Theory, Culture & Society 17.1 (2016): 1–38. Web.

It’s a “We” World After All: Inside WeWork’s $20 Billion Valuation

In September 2017, WeWork became the sixth most valuable startup in the world. The co-working company takes on long-term leases for raw office space and builds out the interior into trendy, millennial friendly spaces that are then subleased to Fortune 500 companies and startups alike, one conference room or desk at a time.

 

To provide a sense of WeWork’s fast-spreading dominance, the startup has dazzled tech investors by portraying itself as a Silicon Valley-style company that serves as a “physical social network” for millennials. It has raised over $8 billion to date, accruing over $4.4 billion through the Japanese tech giant SoftBank’s Vision Fund in 2017 alone. Additionally, it was valued at $20 billion this year, which is the largest valuation in New York City and the third biggest startup valuation in the United States after Uber, Airbnb and SpaceX.

The impressive valuation of a startup – which coincidentally encourages the startup lifestyle – is worth more than Twitter ($12.96 billion), Box ($2.44 billion), and Blue Apron ($1.54 billion) combined, Business Insider reported. Yet, industry experts, professors, and the general public has been left scratching their heads whether the co-working giant can justify its grandiose appraisal. With a $20 billion valuation that is eight times that of a traditional leasing company with a similar business model warrants a major question: is WeWork overvalued?

 

First, let’s take a look at how WeWork came to be the highly talked about startup it is today.

 

CEO Adam Neumann was born in Isreal and moved to the United States in 2001 after serving as a naval officer in the Israeli military. “Before I started WeWork, I owned a baby clothing company based in Dumbo, Brooklyn,” he said in an interview with Business Insider. The company, called Krawlers, sold clothes fit with padded knees for crawling babies. “We were working in the same building as my co-founder Miguel McKelvey, a lead architect at a small firm. At the time, I was misguided and putting my energy into all the wrong places” he said.

McKelvey and Neumann noticed that the building they both worked in was partially vacant. With the combination of their individual architectural and entrepreneurial expertise, they came up with the idea to open a co-working space for other entrepreneurs. Although it took tremendous convincing of their landlord, McKelvey and Neumann opened the first floor of a co-working startup called Green Desk in 2008 – the early incarnation of the company that would contrive WeWork. The “green” in the name was inspired by the company’s focus on sustainable co-working spaces featuring recycled furniture and electricity that came from wind power.

 

Despite Green Desks near-instant success, Neumann and McKelvey eventually sold the business to their landlord, Joshua Guttman. The WeWork co-founders recognized the importance of being green, but felt the focus of their business should revolve around community. The two founders knew they were onto something and possessed a strong concept. After pocketing “a few million” from the Green Desk sale, the two men founded and launched WeWork.

 

WeWork, in its current iteration, opened its doors to New York City entrepreneurs in April 2011 and has since expanded to cities across the country and worldwide.

 

At WeWork offices, options include a single desk in an open floorplan, dedicated private offices with doors, and full floors for more established companies. Amazon.com Inc. and International Business Machines Corp. have both taken advantage of the entire-floor leasing option. Common spaces feature comfortable couches, fun and interactive amenities like foosball tables and beer kegs to encourage meetings and socializing, and various office events take place frequently.

 

Moving on, we must raise another question: what industry is WeWork in exactly?

 

Neumann has blatantly denounced defining WeWork as a real-estate company or tech company. The “We Generation,” as he calls it, strives to encourage sharing and collaboration rather than isolated office places. Neumann instructed the WeWork Public Relations representatives to push back against any characterization in the media of WeWork as a myopically defined real-estate company and instead encouraged the description of WeWork as a “lifestyle” or “community-focused” company.

 

In an interview with the Wall Street Journal, Artie Minson, WeWork’s president and chief financial officer said, “we frankly are our own category. We use real estate and services to empower our community.” Minson supported the company’s sky-high valuation, stating it made sense because investors are looking to WeWork’s plans for growth and confident in the acquisition of millions of members in the future.

 

The WeWork client is “coming to (the company) for energy, for culture” Neuman stated at an event this summer, aiming to breakaway from a pigeonholed industry classification. The Wall Street Journal reported that Neumann and other WeWork executives described the company “at various times… as a community company, a lifestyle company and a platform for entrepreneurs.”

 

Neumann went on to add, “we ourselves are still discovering what is the best type of company that we want to be. We’re taking the best practices out of the for-profit world and best practices out of the nonprofit world.”

 

Skeptics continue to question whether WeWork should receive the tech company treatment, especially in valuation, when real estate is so integral to its main product and subsidiaries. In addition to co-working space, WeWork dabbles in communal housing, early education, and, strangely, a wave pool business.

WeLive, WeWork’s attempt to infiltrate the residential real estate industry, features shared expansive kitchens, large laundry rooms with ping pong tables and other interactive amenities, and free WeWork cocktails on rooftop terraces and in mail-room themed bars. That’s right, what serves as the WeLive mailroom during the day is converted into a happening bar at night designed to bring the inhabitants together to socialize and expand their network.

Bloomberg Technology noted that “WeWork wants to parlay its success with co-working into a “we” lifestyle brand that incorporates not just work but living and wellness for community-minded people.

 

Similar to other tech-giant influencers like Facebook’s Mark Zuckerberg, the WeWork co-founders have taken a keen interest in early education. In Fall 2018, the company is set to open a private elementary school for “conscious entrepreneurship” inside an New York City WeWork space. The experimental school was tested via a pilot program of seven students, including one of the five children of WeWork Co-founder Adam and Rebekah Neumann.

 

The project is being spearheaded mostly by Rebekah Neumann, who attended the prestigious New York City prep school Horace Mann and received a bachelor’s degree in Buddhism and business from Cornell University. She told Bloomberg the school will “(rethink) the whole idea of what an education means” but is “non-compromising” on academic standards.

 

“In my book,” she stated, “there’s no reason why children in elementary schools can’t be launching their own businesses.” Can anyone say, “Baby Boss?”

 

The most peculiar industry expansion for WeWork, however, was the purchase of a “large stake” in Wavegarden, a wave-pool start up. It remains unclear how Wavegarden’s technology, which can produce up to eight-foot-high waves for surfing at various water facilities, fits with WeWork’s common-space persona. A company spokesperson told the Wall Stret Journal that WeWork has “made meaningful investments to significantly enhance (the company’s) product offering.”

 

Throughout the various expansions and acquisitions of the WeWork brand, one narrative has remained the same: “the “we” brand promotes a seamless integration of meaningful work and a purpose-driven existence.

 

The “We” model has proved popular. As of October this year, WeWork established itself in 172 locations in 18 countries, granting its 150,000 a variety of locations to work from. The workspace provider employs over 3,000 people. The startup is rounding out the year with an impressive purchase of the social network company Meetup which strives to connect individuals during their off-work hours based on common interests. WeWork hopes the acquisition will help establish a sense of community in its shared workspaces, Inc. reported. The most valuable component of the purchase, however, is Meetup’s 35 million user base.

Some Silicon Valley investors and others in the real-estate industry say the company’s well-crafted image belies the unremarkable nature of its business. For instance, let’s consider WeWork’s competitors. With an indeterminate identity, it is hard to say just who WeWork’s competitors are or if the company even has any contenders due to its multitude of market engagements. IWG PLC, an office-leasing company with a similar business model to WeWork, manages five times the square footage and has approximately one-eighth the market value. Boston Properties Inc., the United State’s largest publically traded office leaser, owns five times the square footage that WeWork leases and manages while boasting a market capitalization of $19 billion.

 

Barry Sternlicht, who runs Starwood Capital Group LLC with more than $50 billion of real-estate assets under management, said, “if you had positioned (WeWork) as a real-estate company, it wouldn’t be worth (its valuation).” Neumann “dressed it up and made it into a community, and that turned it into a tech play” he said.

One argument against WeWork surrounds it’s “expanding” clientele base. A large portion of WeWorks client base is comprised of startups. If there were to be a downturn in the market, it would become increasingly difficult for startups to raise funding. If startups don’t have the funding necessary to sustain themselves, WeWork might run into trouble staying profitable with a decrease in leasing demand as its clients wouldn’t be able to pay the rent for the office space.

 

WeWork was swift to negate any doomsday arguments, stating that only a small fraction of its client base are other tech startups. “Venture capital-backed companies only makeup mid-single digit of the total population of our WeWork member companies,” a spokesperson told Business Insider. “The membership is very diversified across multiple industries and our fastest growing segment is larger, more mature companies who have joined for the value proposition of more affordable space, community, networking, and flexibility – as well as services (healthcare, payment processing, etc.)”.

 

Despite the company’s efforts to assuage any skepticism, many academics and industry experts remain unsold. Consider the passionate words of Scott Galloway, a marketing professor at the NYU Stern School of Business and the founder of business intelligence firm L2, said in a Business Insider presentation, “WeWork is arguably the most overvalued company in the world. WeWork is now getting a valuation equivalent of $550,000 per customer… In some instances, WeWork – if you do the math – the floor that the WeWork (office) leases in a building is worth more than the building hosting the WeWork.”

 

Galloway went on to compare the co-working space to other tech companies like Snap, Inc. and Twitter, “Snap is incredibly overvalued, WeWork is incredibly overvalued, and a company that’s off (its market estimation) 70%, Twitter, is still massively overvalued. (Twitter) is a stock that will be trading for between five and ten bucks within six to 12 months. Two and a half years ago, when it was at 55 (dollars per share), I said it would be below ten, and I was wrong, it’ll be below five.

 

It is unclear whether WeWork will have a similar rocky post-valuation experience to Twitter and Snap, Inc. with so much tech industry confidence balancing out the vocal skepticism.

 

From WeWork’s commencing days, Neumann would preemptively boast about how he was building a $100 billion business to his friends. With a $20 billion valuation under WeWork’s belt, the co-founder’s brag might not be terribly outlandish after all. Does the company actually deserve its high appraisal? Will WeWork be a startup that simply dazzled the tech industry in its 15-seconds of fame? Only time will tell, but for now, WeWork is confidently looking towards the future and not letting criticism get in its way.

Uber’s Road to Profitability

About 10 years ago, it was obvious that one should never sit in a stranger’s car. In March 2009, Uber Technologies Inc. sought out to change that norm and disrupt the taxi industry. 8 years later, they have reached complete dominance over the industry through their transportation app, Uber. Founded by Travis Kalanick and Garret Camp, the app was originally an effort to create an affordable black car service, which soon transformed into a massive ridesharing platform. Today, they operate in over 80 countries and over 670 cities worldwide (Uber). However, they are still growing. They now offer a low-cost ride program, rides in black cars, food delivery service, and more. According to Kalanick, the Uber app has more than 40 million active riders worldwide (Vanity Fair). Yes, that is 40 million people actively using 1 platform.

Although those numbers do sound sexy, the company is actually not making any money. During their past four quarters of operations, Uber experienced losses exceeding $3.3 billion. With this outrageous number, Uber has become the most loss-making private company in tech history. Simultaneously, the company has also become the highest valued private technology company. According to Bloomberg, Uber is valued at $69 billion (Bloomberg).

At this point, you might be thinking, “How does a company that continues to make no profit get such a high valuation?” Before understanding how a company gets valued, it is important to grasp the intentions of an unprofitable company. It is comprehensible for a startup business to not make any money within their first year or two in business. However, Uber has been around for more than 7 years, has raised over $11 billion, and still is unprofitable (Crunchbase). It may sound counterintuitive to stay in business after making no profits for such a long period of time, right? In fact, companies can become very successful and attract many investors even without making profits for lengthy periods of time.

There are three core principles that companies follow in order to survive without any profits. The first method is to continuously reinvest in the company. According to Uber’s release to Bloomberg, the company’s net revenue was $6.5 billion, excluding revenues from China (Bloomberg). Therefore, earnings are significantly large, but Uber is choosing to reinvest that money back into their company. The purpose is to continue their growth and boost future revenues. This intentional reinvestment strategy has been proven to work with Amazon, which irregularly reported a profit throughout more than twenty years in business to focus on growth. Amazon obviously has the ability to allow profits, but argues that they must constantly reinvest into the company in order to compete in different fields.

Another way a business could continue to operate without any profits is the expectation of potential expansion. Twitter was a great example of this, as they acquired Vine, Periscope, and other platforms in an effort to expand its social media presence. However, they are dealing with significantly large expenses due to the compensation of stock options. Other companies that used this method include Yelp and Spotify. Although Yelp reached profitability in 2014 through expansion, Spotify is still in the process. Similar to Uber, Spotify has consistently experienced increasing revenues, but still has continuously shown upwards of a billion dollars in losses. Their strategy is to increase their number of users on their free service to potentially convert them into subscribers.

Lastly, an unprofitable company can remain in business because of its speedy growth in its early stages. Tech companies that can show a rapid increase in user growth will secure the backing of venture capitals. Through the investors’ perspectives, they see massive potential due to their user base and disregard the early revenue drought. Uber is definitely the leading tech company in this category. As mentioned earlier, Uber’s valuation is extremely high, surpassing many established car-rental companies and airline companies, and it is exactly because of this reason.

All three of these categories play a crucial role in generating a valuation of an unprofitable company. In the case of Uber, their valuation is driven by the tremendous confidence investors have in the company due to its user base. However, the large size of the backing will make it challenging for Uber to deliver long-term. It is very important for Uber to continue to convince investors that profits will begin to unfold. It is very easy for investors to lose confidence in the company’s abilities to generate future profits. So why do investors continue to invest in Uber? Obviously, they trust the company’s growth models that will keep their stock high. They also have faith in the company’s ability to reach their large goals.

Usually, when evaluating a firm, one would pay close attention to the price-to-earnings ratio. This ratio suggests how much an investor would have to put into the company in order to get $1 in return. However, this ratio is irrelevant for many tech companies, such as Uber, as they do not have any profits to show in its early stages. Also, tech companies do not have many assets other than the software, which is extremely hard to value as is, so the price-to-book ratio is also out of the equation. Instead, investors of Uber, and other unprofitable tech companies, would look at their price-to-sales ratio to determine the company’s valuation. This ratio compares the stock price of the company to its revenues. This is an indicator of the value placed on each dollar of a company’s sales or revenues. Uber’s valuation of $69 billion and its net revenue of $6.5 billion in 2016 gives the company a price-to-sales ratio of 10.6. This ratio is much higher than the S&P 500 Information Technology Index price-to-sales ratio, which is the highest compared to all other S&P 500 sectors.

The technology industry is known for its overgenerous valuations. Even based on the technology industry standards, Uber’s valuation is still very high. However, if Uber was treated as a transportation company instead, they would be nowhere near their current valuation. The price-to-sales ratio of the S&P 500 Transportation Index is 1.5. Therefore, Uber’s value would have to fall by 86% to associate with the average transportation company. However, it is obvious that Uber enjoys being in the technology category.

Regardless of the industry, a company’s valuation also reflects their business plan. For Uber, investors are paying very close attention to the company’s path to make money and if they seem attainable and realistic. Although it is not possible to accurately predict when and how the company will become profitable, Uber must be very convincing to deserve such a high valuation. They have somewhat modeled themselves after Amazon, which had successfully completed the process after years of net losses. According to Mike Walsh, and early Uber investor, “There are many companies, Amazon as an example, that invest heavily in the early years and hit profitability only after a company IPO.” (CNN). However, the most Amazon lost in 1 year was less than $2 billion, even at the peak of the dot-com boom.

Uber generates revenue primarily by charging clients for the rides, taking around 20% of the total fare. The company has reached such enormous growth because of how convenient and affordable it is for consumers. This resulted in Uber stealing market share from taxis and other traditional transportation methods. Even drivers began to switch, realizing that driving for Uber would allow them to make more money than driving a taxi. This is largely because of the fact that Uber allows drivers to better optimize their time and services. However, these drivers are responsible for the depreciation of their own cars, which is not factored into the ride.

The affordable prices for users and high incomes for drivers are all part of a long-term strategy. Uber is essentially subsidizing each trip. The plan is to dominate market share and drive taxis and other competing rideshare companies away. The prices are expected to increase as the initial process of acquiring customers begins to slow down. Currently, drivers for Uber are essentially donating the use of their own cars in exchange for the company’s growth. This does not get factored into Uber’s actual cost of operation.

Is Uber’s business model sustainable? Will they eventually become a profitable company? How long will that take? These are obviously very important questions to consider. Clearly, Uber is significantly unprofitable as of right now. However, you can make the argument that the company’s losses are diminishing over time. As seen through the chart, Uber has the ability and control to accelerate or slow their spending to become more or less profitable. This is important evidence to deliberate when making the case that in the long run, Uber does have potential to become profitable. Many optimists argue that the company is so large that people are just not used to the losses on such a large scale. Their revenues are also massive, and are quickly growing. However, they might be taking a longer time getting their global business under control, whereas a smaller business, such as Snapchat, would not take as long. This could be due to their attempt to break the norm, as well as the need for actual drivers and app awareness.

However, recent headlines have given Uber a tough time throughout their road to success. Earlier this year, Uber got caught up in allegations of prevalent sexual harassment throughout the workplace. Not to mention, the company even experienced a #deleteuber campaign throughout social media, and accusations of technology theft. As controversies added up, investors began to question Travis Kalanick, the current CEO and Co-Founder, and his ability to run the company. Kalanick had become a massive liability to the company due to his unclear business practices, poor management skills, and concerning lawsuits. Therefore, Kalanick resigned as CEO of the company back in June of this year.

After a couple months of searching for the perfect candidate, Dara Khosrowshahi was hired as the new CEO in August to get the company back up on its feet again. Khosrowshahi’s resume includes being the former CEO of Expedia, becoming one of the highest paid CEO’s in America, and being a board member of BET.com and the New York Times Company. He believes that although Uber is unprofitable as of right now, the “math is working” in certain countries, and that they are currently focused on subsidizing other investments. In an interview by Andre Ross Sorkin, a New York Times columnist and CNBC anchor, Khosrowshahi mentioned that Uber will not be profitable in the U.S. for the next six months, depending on the performance of their rival company, Lyft (CNBC). He has inherited a company that has been hit with a public scandal, the faction among its board members, an investigation into workplace harassment, and many other lawsuits. Therefore, he has not been given an easy task.

So, how do these public-relations woes impact the Uber’s road to profitability? Ultimately, they take away from the company’s primary focus – growth. Instead of concentrating on expansion, reinvestment, and strategies for profitability, they are forced to deal with fixing their public image.

However, it has been announced that Uber does have big plans for the future. They are currently in the middle of negotiations with SoftBank Group for a multi-billion-dollar investment deal. The Japanese-based company has global ties that could potentially help Uber in its constant international expansion. Also, Uber has recently agreed to a deal to purchase thousands of self-driving cars from Volvo. Last year, Uber and Volvo joined together to develop autonomous vehicles that will potentially become the future of Uber. Additionally, Uber’s project, Elevate, is set to bring “flying cars” into the market by as soon as 2020. They have partnered with NASA to sign a Space Act Agreement that will allow these low-flying, possibly self-flying, aircrafts to become a reality.

Uber has already begun taking steps to prepare for an IPO. Khosrowshahi announced in an interview that the company plans to go public in 2019. This will be a big day for investors, and a brand-new chapter for the company. Uber has the chance to live up to its extremely high valuation. It is clear that they have big plans for the future that can potentially allow the company to generate massive amounts of profits, but only time will tell.

 

https://uberestimator.com/cities

https://www.vanityfair.com/news/2016/10/travis-kalanick-uber-ipo

https://www.crunchbase.com/organization/uber

https://www.bloomberg.com/gadfly/articles/2017-03-16/uber-needs-to-get-real-about-that-69-billion-price-tag

https://www.bloomberg.com/news/articles/2017-04-14/embattled-uber-reports-strong-sales-growth-as-losses-continue

https://www.cnbc.com/2017/11/09/uber-ceo-dara-khosrowshahi-speaks-at-nytimes-dealbook-conference-2017.html

https://techcrunch.com/2017/11/09/uber-ceo-says-2019-is-the-target-for-ipo/

Can California handle recreational Cannabis?

Following a trend of progressive change throughout the country, California recently passed the legalization of recreational marijuana. Going into effect starting in 2018, any person over the age of 21 can legally buy marijuana. The $7 billion industry is expected to generate over $1 billion in state tax revenue.

However, per the federal government, marijuana remains a schedule 1 narcotic (the same level as heroin). Since the federal government is responsible for regulating banks and interstate commerce, there is a significant barrier to banking services for people in the cannabis industry. It is considered a crime to handle the financial proceeds from marijuana sales—banks can lose accreditation or even face money laundering charges.

There are obvious implications that stem from the lack of safe financial structures for the cannabis industry in states where the sale is legal. The irony of this industry is that it is essentially the only business that is begging to be regulated, as regulation will create safety for everyone involved in the transaction.

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

John Chiang & the Cannabis Banking Working Group

To brainstorm solutions to this problem, California State Treasurer John Chiang created a task force coalition, the Cannabis Banking Working Group (CBWG), with representatives from law enforcement, banks, regulators, and local governments. The goal is “to ensure a safe a smooth transition for the public, businesses and financial institutions” in the “unchartered waters” of legal recreational marijuana. The coalition has met several times in the past year and recently published a report on possible solutions to marijuana and banking in California.

Solution 1: State Courier Service

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

Solution 2: Adhere to lenient existing laws

 Support and expand the few small banks that followed strict compliance guidelines that allowed for business with the marijuana industry under Obama’s U.S. Deputy Attorney General.

Solution 3: Public Bank

The creation of a publicly owned bank or state-supported financial institution. Public banks are independent of the federal reserve, and are insured by the state. This idea, that has been gaining popularity since public dissatisfaction with Wall Street and big banks, may also reap other benefits. Such a bank could expand banking to underserved groups beyond the cannabis industry. However, the obstacles are formidable:

  • Difficulty of getting deposit insurance
  • Unknown start-up costs
  • Investment likely to measure in the billions of dollars
  • Probability of losses for several years or more that taxpayers would have to cover
  • In addition, a public cannabis institution might have trouble obtaining federal regulatory approval and access to Federal Reserve money transfer systems.

Solution 4:  Lofty Federal Goals

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

 

 

Behavioral Economics

Humans do not actually behave according to economists’ thought processes. Classic economics assume that humans are perfectly rational beings, who are all-informed and have infinite calculating abilities. In such a world, where people have concrete preferences and act in isolated events, advertising would not need to exist. This is because people would be certain in their preferences and unable to be swayed by ads.

In 2016, $190 billion was spent on advertising in the United States, so clearly, the real world has a need for advertising. That’s where behavioral economics come into play. Behavioral science–at the intersection of economics and psychology–assumes that people are not rational or capable of making decisions in their best interest (Freakonomics). In reality, most people make decisions using their emotions as the deciding factor either equally as much or more often than they use reason.

In this world of incomplete information, independent actors (people) must infer from others or situations with more complete information. Their safest bet is often to copy what the people around them are doing. The academic term for this is social norming, which in lay man’s terms means peer pressure.

A big reason for this herd mentality is something called loss aversion. Loss aversion is a concept explaining that people experience greater emotion (pain) with loss, than the emotion (pleasure) they experience with gains of proportional size. So in simplified terms, people hate giving stuff up, even if said stuff has little to no value to them. They want to mitigate their losses, and one way of doing this is by making decisions that other people have already made which weren’t catastrophically bad.

Behavioral economics takes into account these factors playing into decisions that real, irrational individuals make. It’s a study of the “codification of behavioral anomalies” which economists establish using empirical evidence (Forbes). Consumers frame their personal economic outcomes as gains and losses, which affects their economic decisions and choices. Behavioral economics examines this framing.

Advertising is an industry that has been using behavioral economics to its advantage long before the area of study was formally established. The industry manipulates the emotions of consumers in a way, changing their preferences, which contrary to standard economics beliefs, are not concrete. Like social norming, people pick well-known brands because they figure they’re less likely to be catastrophically bad than the alternative.

One tactic some advertisers use is the creation of scarcity. Limited edition, limited time only, etc., labeled products construct an artificial scarcity, driving humans to take action. They buy the product right then and there instead of waiting. Companies and advertisers exploit this scarcity bias in consumers as an effort to sell more products.

Advertisers and ad agencies rely on data to help manipulate their audiences. This collection of data calls for a new area of academia–this time in the field of ethics. Where is the line drawn? If voluntary data collection is okay, what about involuntary? How do these ethical issues converge with those of digital data collection as seen by Google, Facebook, etc?

http://adage.com/article/adagestat/advertising-dan-ariely-behavioral-economics-marketing/146001/

https://www.investopedia.com/terms/b/behavioraleconomics.asp?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186

https://www.spectator.co.uk/2017/08/how-sutherlands-law-of-bad-maths-could-solve-nightmare-train-commutes/