Profit from Modern Day Music

   Between 1999 and 2011, the record industry shrunk by 64%.  With the advent of digital music, musicians were forced to find other streams of revenue as opposed to relying on record sales and touring.  Several qualities of digital music forced this change; those being the companies hosting the music downloads taking a cut, consumers newfound ability to buy only a song from an album as opposed to the entire album, music streaming, and digital piracy.  Ironically, the underlying structure of these services, the Internet, both undermines and supports artists.  With the help of the Internet, artists are able to reach listeners all over the world.  Unfortunately, the Internet also enables all the factors listed above, to the detriment of the profits of the artists.  For instance, the average iTunes user averages .25 albums a year, which equates to nowhere near enough album sales to fund an industry.

   Musicians have combated the downfall of the record industry by increasing sales of merchandise, accepting movie and TV licensing, creating fashion lines and beauty products, using crowdfunding websites such as Kickstarter, and finally, selling premium content. Items such as clothing are often sold at live concerts, so musicians that do not have the fan base to tour or play in concert are left without this option of revenue.  Rolling Stone estimates that bands such as One Direction net up to $225,000 per every show in merchandise sales.  Musicians, provided they have a hit song, are entitled to licensing fees when that song is played in a movie or television show.  Green Day licensed their song “99 Revolutions” for the movie “The Campaign” and made hundreds of thousands of dollars as a result.  One copyright licensing agent commented, “There was once a time where it was completely uncool for a band to allow their music to go on a TV commercial.  Now if you get your song on a TV commercial it’s high five, it’s great, everybody’s happy for you.”  Artists have also taken to using their fame to promote select beauty products.  One example is Justin Bieber, whose perfume “Someday” netted a three million dollar profit upon the summer of its release.  Obviously, this stream of revenue requires sufficient fame, and is therefore not an option for every musician.  That being said, musicians who are not yet famous enough to rely on these streams of revenue have taken to using crowdfunding websites such as Kickstarter in order to fund their projects.  Rolling Stone estimates that artists average around $200,000 in crowdfunding profits, which is a substantial dent in any expenses associated with creating music.

   It seems that the primary way musicians will profit in the digital age is by releasing exclusive content with their albums.  One Nielsen study found that a fifth of listeners would be willing to pay for exclusive content if given the opportunity, and that in-between 560 million and 2.6 billion dollars in revenue is possible if artists begin to increase the amount of exclusive content they release.  One such artist that uses this strategy is Nipsey Hussle, a rapper from Los Angeles.  He has released two studio albums, and each time has released his album for free but also offered a small number of copies of the album with exclusive content.  This strategy has proved profitable, as Nipsey made $60,000 the week his second studio album debuted from sales of exclusive material.  While music is far from unprofitable, it is obvious that musicians can no longer rely solely on record sales as a source of revenue.

Sources:

http://www.rollingstone.com/music/lists/9-ways-musicians-actually-make-money-today-20120828/youtube-19691231

http://www.abc.net.au/triplej/programs/hack/making-money-as-a-muso/6980832

https://bandzoogle.com/blog/18-ways-musicians-can-make-money

https://www.careersinmusic.com/how-to-make-money-when-music-is-free/

Natl Beer Day

Political Calculations has a history of beer container patents, replete with drawings from the patents. They also append long list of links to previous posts. All that I’ve read are “serious”, I’ll let you judge whether that results in deadpan humor, or comes out flat.

Disruptive Deflationary Technology

Disruptive technological innovations lead to out-sized financial returns, resulting in lower prices and higher quality products for consumers.  According to Professor Christensen from the Harvard Business School, “An innovation that is disruptive allows a whole new population of consumers access to a product or service that was historically only accessible to consumers with a lot of money or a lot of skill”.  While most new firms that enter the market have no chance in unseating incumbents because the performance gap is too wide, a few startups are able to capture new customers by offering a similar product at a lower price, thus gaining the market segment that could not previously afford to buy the product at what was offered by incumbents.  The market becomes expanded by having a new, lower price point entrant, and as the entrant gains more business, the quality of its product also increases.  As such new firms that launch disruptive technologies are able to rise to dominance in the industry.  What is interesting is that these technological innovations have a deflationary force on the economy: a sustained decrease in aggregate price level.

The smartphone for example, is essentially the combination of a mobile phone, a MP3 player, and internet connection at home, but is cheaper than buying all three of the functionalities separately.  Likewise, successful IT startups like Craigslist, Amazon, Google, and Skype have all disrupted and deflated parts of the economy by offering cheaper prices.  Craigslist took an industry where incumbents had charged users high fees and made such a service virtually free.  By providing free and cheap listings, Craigslist was able to build a critical mass of users, and today, remains as the most popular place for viewership and advertisements for free and “classified” types of posts. Likewise, Amazon was first able to increase its market size by undercutting the competition on price.  The online retailer capitalized on its cost advantage of not being subject to the limitations of physical retailers and physical floor space, and ruthlessly priced close to cost to increase sales volume. The Jeff Bezo aphorism soon became “Your margin is my opportunity”, so much so that Amazon now takes massive shipping losses (this reached an all-time high of nearly $7.2 billion in 2016).  But to Amazon this is a trade-off, as its strategy is focused on long-term growth and innovation rather than short term profitability.  Technology as a deflationary force is also evident in the energy industry. Horizontal fracking discovered by U.S. oil producers led to an increase in supply, a rise in competition, and a massive initial drop in crude oil prices (although as mentioned in a previous article, the price of oil is rebounding).

Of course this is not the case for all advances in technology.  As seen in many luxury automobile firms, premium prices are charged to capture early adopters through price discrimination and to continue to fund the firm’s investments in research and development.  But by and large, the effect that technological innovations have had on the economy is deflationary.   This also has implications on the predominating traditional thought that deflation is destructive.  Many economists and central banks including the U.S. Federal Reserve maintain that moderate levels of inflation are needed to drive consumption, push production, and fuel economic growth.  Keynes argued that some inflation was needed to prevent the Paradox of Thrift, where increase in individual savings lead to decrease in aggregate demand and thus a decrease in gross output.

However, in theory, the deflation driven by technology appears to be “benign”, as unlike “malign” deflation where prices fall due to deficient demand (as seen in countries like Spain and France in which reduced consumption, reduced output, and falling wages reinforce each other in a cycle of negative economic growth and high debts), technology deflation is caused by increased output and excess supply resulting from innovations that increase efficiency and reduce cost of goods.  This is illustrated in the figure below: AS shifts to the right, leading to a lower equilibrium point with lower price and greater gross output.

However, some experts do not feel that technology driven deflation is “benign”.  O’Connor argues that long term trends in the U.S. point to slower rates of credit growth and spending growth exacerbated by technology acting as a major source of deflation.  This can be seen in the U.S.’s interest rates, which have been declining for nearly four decades.  

Indeed, the sharing economy and the unprecedented transparency of information provided by the internet has only intensified competition among firms and continues to put downward pressure on price.  I wonder what the implications of this will be on the U.S. economy, and by extension the global economy at large.

Sources:
https://bothsidesofthetable.com/understanding-how-the-innovator-s-dilemma-affects-you-75563219a58d
http://www.businessinsider.com/technological-deflation-could-be-the-answer-to-economy-2015-12
http://blogs.ft.com/andrew-mcafee/2015/04/30/technology-deflation-and-secular-stagnation/
http://www.geekwire.com/2015/deflationary-technology-disruption-impact-money/
https://seekingalpha.com/article/3961697-deflation-new-normal
http://www.businessinsider.com/spotify-problem-for-economists-2016-9?utm_content=buffer4ff6f&utm_medium=social&utm_source=facebook.com&utm_campaign=buffer&r=UK&IR=T
https://marketmonetarist.files.wordpress.com/2013/04/as-ad-as-shift-rightwards.png

Net Neutrality and Internet TV Services

President Trump has talked about rolling back Obama-era net neutrality rules since the campaign. This would be an enormous victory for Internet service providers, many of which are also cable companies.

The purpose of net neutrality regulations was to keep the Internet open. What this means is that, under no net neutrality, cable companies are free to slow down service to whatever they want. Suppose you have Time Warner Cable. If you are like me, you realize that the service is terrible and probably overpriced. As a rational consumer, you would like to purchase a Netflix or Hulu account. Time Warner can now slow down your streaming service in order to keep you from using it.

This would be a huge victory for an industry that hasn’t had a lot to cheer for recently. As consumers are continuing to forego their cable packages in favor of more affordable options, cable companies have been clamoring for ways to retain more users. This would certainly help that cause.

Verizon has been one of the companies that have felt the sting of “cord-cutters.” To help make up for this, the company has been securing streaming rights with several television networks in order to pitch a nationwide launch of a live TV Internet service. Unlike regular cable packages that often have potentially hundreds of channels that users don’t want, the Internet service would be far more flexible in terms of being able to pick what you get.

This would be a potential game changer in the industry, especially if net neutrality rules are rolled back. Since Verizon already has a large consumer base using their home Internet service, this is an opportunity for the firm to capitalize. Besides the fact that Verizon’s service will have live TV, as opposed to just movies and television shows, they will now have the ability to slow down future competitors such as Netflix.

It will be interesting to see how live TV internet services play out in the future, regardless of what happens with net neutrality laws. Even to someone like me who has always valued the ability to watch live TV, as cable packages get more expensive and the service almost seems to get worse, switching to services like Netflix, Hulu, or Amazon are beginning to seem like “no-brainers.”

 

Sources:

https://www.bloomberg.com/news/articles/2017-03-30/verizon-said-to-be-planning-online-tv-package-for-summer-launch

https://www.wsj.com/articles/cmo-today-verizon-readying-new-tv-streaming-service-1490961171

https://www.wsj.com/articles/net-neutrality-rules-could-be-eased-under-donald-trump-some-say-1478728957

https://www.nytimes.com/2017/03/30/technology/net-neutrality.html

https://www.washingtonpost.com/news/the-switch/wp/2017/03/31/verizon-is-reportedly-planning-a-new-streaming-tv-service/?utm_term=.b040a0d13418

Renewable Power: Does Success Kill the Industry?

An article on the 25th February in the Economist described how the increasingly greater supply of renewable power is causing issues for electricity companies. Due to the issue of climate change, developed governments are forcing renewable energy on existing electricity systems that have no need for new capacity. Coupled with a currently declining demand for electricity, and this extra supply has pushed down the price of electricity. For instance in Europe, wholesale electricity prices have “slumped from around €80 a megawatt-hour in 2008 to €30-50 nowadays.” This led to $120bn of assets being written off by various utility companies within the EU, such as E.ON.

It’s not just the extra supply that is causing issues. The energy industry is structured around marginal costs, with the market historically meeting demand by purchasing electricity from the cheapest supplier and working its way up the suppliers until demand is met. These are the costs incurred in a fossil-fuel dominated scenario. However, as renewable energy sources have no need to purchase fuel, they have very low marginal costs. This allows the renewable companies to push the more expensive suppliers of electricity out of the market, which brings about the lower wholesale prices. The problem for the industry here is the intermittent quality of renewable sources. Because there are times of the day where wind or solar availability will be low, the grid can’t rely on purely renewable energy to supply all the electricity to meet demand. A graph of this effect is shown below. Because of the unreliability of renewables, fossil-fuel generated power is still required to fill in the gaps. But with the lower energy prices, it’s hard for fuel companies to stay in business as their lower revenues makes it harder to attract investment. If they get pushed out the market, they will subsequently not be available to fill in the energy gaps when needed. 

An indicator of how an abundance of renewable energy supply can cause lower prices can be shown by comparing prices in Norway and the U.S. Norway generates 98% of its electricity from renewable sources, the U.S. was at around 13% in 2015. The cost of electricity in Norway is 28 øre per kWh, which is 3.26 cents. In contrast, the average U.S. cost is 12 cents per kWh. It’s a rough example, but the four times cheaper prices in Norway can certainly be explained in some part by their reliance on renewables.

Looking to the future, there’s talk of a third industrial revolution wherein there will be a decline in vertical power structures in favor of a “horizontal, distributed model” due to the expected lower marginal costs of the future. Instead of making their revenue through pure sales, cheap energy will force energy companies to “make their money through partnerships with their customers and clients to manage those distributed networks.” If energy companies can successfully accomplish this, then hopefully the successful integration of renewable energy won’t end up killing the industry.

Sources:

http://www.economist.com/node/21717365

Are Zero Marginal Costs Transforming the Energy Industry?

http://www.npr.org/sections/money/2011/10/27/141766341/the-price-of-electricity-in-your-state

https://www.ssb.no/en/energi-og-industri/statistikker/elkraftpris/kvartal/2016-05-31

https://www.regjeringen.no/en/topics/energy/renewable-energy/renewable-energy-production-in-norway/id2343462/

https://www.eia.gov/energyexplained/index.cfm?page=electricity_in_the_united_states#tab2

US Oil Rebounds, Slated for Job Growth

The now $55-a-barrel oil prices have been keeping steel pipes in excess demand domestically. Dropping oil prices in the last couple of years have given oilfield-equipment companies a significant surge in sales towards onshore drilling, so much so that these domestic sales have surpassed sales abroad. These firms are having difficulty meeting this demand, struggling to hire employees to haul the gear, even at a minimum $80,000 a year salary. As oil prices have rebounded following the large drop early last year, more wells have been tapped and the industry is growing.

Another result of this recent surge is a much higher expenditure on US and Canadian drilling, which is expected to climb three to four times more than the worldwide average this year. The latest rig technology and extraction methods will but pressure on wages as well, causing oil companies to shift their hiring strategies in order to fulfill the workforce demand. Rehires have become particularly important. For example, TMK Ispco, a gear supplying giant set payroll records last year by improving employee benefits and wages.

Despite the impressive industry rebound in the US, oil and pipe supply companies are not comfortable yet. Labor cuts are still outpacing new hires for most large oil companies and regions, while welling activity continues to grow. Firms are adjusting their target oil prices in accordance with these labor pressures, lowering the safe threshold oil price. Should oil prices reach comparable peak levels we’ve seen in the past, there could be extreme effects to further workforce cuts.

Overall, the news is positive across the US. Crude oil pricing has reached a stable level, driving more activity up and down the supply chain. Although increased competition has put strains on larger companies’ capacities, profits should begin to flow as supply grows. New contracts up the value chain will spur activity for all oil-related industries in the US, and recent budget proposals will act to support US firms in a rebounding crude oil environment.

Sources:

https://www.bloomberg.com/graphics/2017-oil-rigs/

http://calgaryherald.com/business/energy/as-u-s-shale-oil-drilling-rebounds-80-thousand-jobs-find-few-takers

http://business.financialpost.com/news/energy/another-8700-oil-jobs-are-at-risk-if-prices-drop-below-us50-according-to-new-study

Make Flying Great Again

The Trump administration’s recent implementation of a policy banning large electronic devices, including laptops and tablets, in passengers’ carry-ons on flights departing from the Middle East, has airline companies scrambling.  The mainstream providers, including Emirates, Turkish Airways, Etihad, and Qatar, are now on the defensive, as they try to not lose their market share of long-haul flights to the United States.  More localized airlines, such as Air India, are greedily eyeing others’ shares, as they can provide flights to American that connect in China or Japan.  The Middle-Eastern airlines’ fears are not without evidence, as Turkish Airlines’ stock fell about 7% when the electronics ban was announced in the United States.

As such, many of the airlines have started marketing campaigns, attempting to reassure customers that they do not really need personal computers or Kindles to have an enjoyable in-flight experience. The quality of the advertisements vary demonstrably; one of the better, more notable examples is Etihad Airway’s commercial entitled “Make Flying Great Again.”  This commercial puts the perpetrator of the new American policy, President Donald Trump, in its sights, while also highlighting the multitude of benefits that comes with flying with their airline, such as in-flight wi-fi for cellphones, reclining seats, and premium meals.

Other airlines take a, perhaps, more traditional route by using famous actors and actresses in their commercials, in order to entice more customers.  In a brief, eighteen-second advertisement posted on Twitter, Emirates uses Jennifer Aniston to highlight the seat-back entertainment on their flights.  However, Emirates’ piece incited a good amount of backlash; an employee from the International Middle East Center tweeted, “@emirates journalists aren’t looking to be entertained on long flights.  Laptops are necessary to meeting a deadline.”

The United States has its reasons for banning large electronic devices on carry-ons from the Middle East; whether these reasons are morally just or not is a different story.  Intelligence agencies have recently thwarted several bomb threats, and they are in fear of a particular bomb-maker, Ibrahim al-Asiri, whom they say is incredibly cunning in his designs. Regardless, it is a difficult situation for many airlines, and all of the Middle-Eastern airlines are attempting to spice up their image, in order to not lose any market share or profits.  However, there is some hope on the horizon.  Even if the United States does not repeal this ban, airlines can start providing their customers with loaner laptops. Qatar Airways has already begun this service for its business-class passengers, and it is easy to assume that many more airlines will follow in its footsteps.  While this program is not ideal, it will lessen the already uncomfortable experience for travelers.

Sources:

http://www.economist.com/blogs/gulliver/2017/03/sugarcoating-tablet-restrictions

http://www.economist.com/blogs/gulliver/2017/03/another-arab-ban-1

http://investor.turkishairlines.com/en/stock/stock-information

http://www.businessinsider.com/qatar-airways-to-offer-laptop-loans-on-us-flights-2017-3?utm_content=buffer6cef4&utm_medium=social&utm_source=facebook.com&utm_campaign=buffer-bi

http://www.bananaburp.com/advertising/emirates-a380-features-jennifer-aniston-in-its-new-ad-campaign

Business Models in “Craft” Brewing: Brewpubs vs. Microbreweries

As defined by the Brewers Association, a craft brewer cannot produce more than 6 million barrels of beer per year and no more than 25% of the company can be controlled by a non-craft brewer in the alcoholic beverage industry.  The market share for craft beer doubled in size between 2011 and 2015, with rising disposable incomes largely explaining this rise in demand.  Within craft brewing several models exist.  In particular, this blogpost will examine the business models of brewpubs and microbreweries.

The Brewers Association points to microbrews and brewpubs as the main drivers behind craft brewing growth in 2016.  Microbreweries sell more than three-quarters of their beer off-site and produce less than 15,000 barrels of beer per year.  They sell beer to the public through a wholesaler who distributes the beer to retailers who sell the beer to a consumer.  They also can act as a wholesaler selling directly to a retailer, in addition to selling directly to consumers through on-site taprooms and carry-out sales. A brewpub operates as a restaurant that makes its own beer, while selling more than 25% of its beer on site.  When the law permits it, brewpubs will engage in selling beer offsite, like a microbrew.  Still, a brewpub sells less beer off-site than microbreweries.  In fact, when a brewpub sells more than 75% of its beer off-site, it can become reclassified as a microbrewer, following the American Brewers Association’s guidelines.

While both forms have experienced growth in recent years, the microbrew is outpacing brewpubs.  Now why is this happening?  To begin, the emergence of taprooms due to new laws and provisions allowing on or bordering site sales by small brewers allows a consumer to buy directly from production breweries.  Taprooms focus on selling beer, whereas the brewpub attempts to sell both good beer and food.  The taproom manages to avoid this money losing operation, reaping the cost of beer sales, while also pleasing customers by allowing food trucks on-site.

Craft beer have come to represent a large share of the total breweries in the U.S.  Of 5,005 total breweries, approximately 99% are small and independent craft brewers, according the Brewers Association.  The craft brewing industry thus provides a wide variety of beers, in addition to benefiting the public as a whole as it continues to grow.  As two vital components facilitating craft brewing success, microbrews and brewpubs are important business models to pay attention to.  In the eyes of the customer, the beer may not look different, yet craft brewery owners face the decision of which model to pursue: a brewpub or a microbrew.  This decision ultimately plays a major role in the distribution and sale of beer.  Regardless, both brewpubs and microbrews remain able to return high margins on the sale of beer by selling directly to customers.  As more states allow small brewers to operate such taprooms, microbreweries should continue to flourish in the U.S.

Sources:

A new model to become master brewer and key investor in your own beer

Breaking Down the Craft Beer Growth Numbers

Brew Pub v. Taproom: Which Business Model is Right for You?

Craft Beer Industry Market Segments

United States Disposable Personal Income

What qualifies as craft beer?

2016 Craft Beer Year in Review from the Brewing Association

 

Diamonds as durable goods; are they forever?

First, a quick overview of the diamond market.  Diamonds are a multi billion dollar business (Diamond Jewelry business valued at $74.2 Billion).  Diamonds are durable goods, meaning they last for several time periods.  Operating under a value chain framework (company value adding through multiple mediums), the diamond business is segmented into Miners and Producers, Cutters and polishers, Jewelry Manufacturers, and retailers.  About 133 million carats of rough diamonds are produced each year, and in fact four control about 65 percent of the market (De Beers controls about 35% of the market).  Diamond Giant De Beers in a 2004 interview with Fox Business warned that diamond prices could rise in the coming years as the gemstones become rarer.  No matter how big the mine is, one still has to move rocks to get a very small number of diamonds.

But, are diamonds really that rare?  Companies such as De Beers face criticism for the belief that large scale mining projects across the world invest billions of dollars every year to produce and control the supply chain, and in the end knowing the demand for diamonds will not be reduced by the end consumer.  Their is criticism that De Beers has created a monopoly trading industry, where the supply is controlled.  Coase’s conjecture states that “a durable goods monopoly that sells its product has less market power… when compared to a monopoly that rents the durable good”.  The paradox is, when selling a durable good, more market power leads to less market power.  Basically, the theory that there is no difference in outcome between renting and selling if consumers are convinced that the monopoly will continue with its pricing policy in the future does not hold based on De Beer’s current market moves.  The company is now trying to solve the problem of consumer expectations.  For a durable goods monopoly; you are trying to rent instead of sell, convince consumers that future production will be limited, produce less durable goods as a monopoly, and get a reputation for never lowering prices  De Beers cartel relies on controlling quantity to artificially increase price as part of their anticompetitive tactics.  If prices fall, De Beers reduces supply.  If new suppliers emerge, De Beers will flood market and sell below market prices.  Essentially, these tactics have allowed De Beers to have arguably the largest and longest lasting monopoly of all time.  Yet, their realization of current consumer trends and furthering incentives to lower prices has forced them to shift their focus to marketing and brand name.  It be kind of disheartening to spend thousands of dollars on a ‘rare” diamond jewelry and then realizing that the price is artificially controlled.

Sources Consulted

https://are.berkeley.edu/~sberto/DeBeers2008.pdf

http://www.wakingtimes.com/2016/02/13/when-ignorance-isnt-bliss-the-truth-about-the-diamond-industry/

http://www.cnbc.com/2016/06/16/blame-millennials-diamond-jewelry-business-in-a-rough-spot.html