Author Archives: Nathaniel Beck

Revised Post 4: Up In Smoke: The U.K.’s Recent Branding Legislation

Thesis:  The U.K.’s recent ban on cigarette pack branding is ineffective in deterring sales and a restriction on competition through the robbery of free-speech.

In recent years, the world has seen an increase in health awareness.  New technology and research has allowed people to be more knowledgeable of the detrimental effects of activities such as smoking.  Accompanying this knowledge is an increased effort by health agencies all over the world to deter people from smoking cigarettes.  On Wednesday, the U.K. parliament banned branding on cigarette packs with a majority vote of 367-113.  Currently, cigarette packs are only required to have a small warning on them.  The new law will erase the logos and colors of tobacco companies and replace them with graphic images of the effects of smoking. However, the U.K. parliament fails to realize that similar efforts have been ineffective in other countries and even viewed as a violation of tobacco companies’ rights under the First Amendment.

In 2012 Australia was the first country to pass legislation in favor of plain packaging.  Since the passing, there have been a myriad of lawsuits in domestic courts regarding the restrictions on branding.  An article in Washington post illustrates the displeasure of the tobacco companies:

The companies have mustered an array of arguments in response: that the restrictions violate free speech, “expropriate” the value of carefully created trademarks, go against international free-trade obligations and won’t achieve the intended regulatory aim.

The article also gives insight into the source of the companies’ displeasure by saying:

“Much of this industry is about image. It is not about tobacco,” said Robert Stumberg, a Georgetown University law professor who has followed tobacco litigation and regulation around the world. For tobacco companies, Australia’s rules and similar proposals “get to the heart of their ability to market their products.”

This “[in]ability to market their products” is the exact reason that similar legislation failed to pass in 2013 in the United States.  A U.S. court of Appeals decided that the proposed legislation by the FDA was a violation of free-speech rights under the First Amendment.  The U.K. ignored this related case and decided to pass legislation of their own regardless.  So, has legislation proven to accomplish its goal?

According to this article:

The proposal for plain packs in the UK was intended to reduce the amount of children and teenagers that would ordinarily be drawn to smoking because of branded packaging which can make a cigarette packet seem more attractive.

Australia did not meet this goal.  Cigarette sales actually went up 0.3 percent after a year and loose tobacco sales went up 3.4 percent. Hence, it would appear that plain packaging legislation is ineffective.  It fails in reducing sales and restricts competition between tobacco companies.  The U.K. would be better off coming to a compromise with the companies and allowing them half the package for branding and half for warnings.  If that is ineffective in reducing sales, the parliament always has the option of heightening the tax.

Why Proxy Access Is a Good Thing

Thesis: By forfeiting some governance to the shareholders, companies adopting proxy access will help not only themselves but also prospective investors.

The new year has brought in a new wave of large companies in favor of proxy access by investors.    This issue of proxy access found its origin three years ago when the SEC attempted to mandate a requirement for proxy access but was denied in federal court.  Since this case, shareholders have been forced to fight for proxy access on a company to company basis and their cause is finally gaining momentum.  Proxy access allows shareholders with a minimum, company-determined stake in the company to nominate directors to the corporate board.  This push towards a more democratic system will ultimately benefit both shareholders and the companies themselves.

This idea of proxy access has become more accepted as more and more companies agree to the idea.  An article detailing General Electric’s adoption of proxy access gives some numbers to show the increasing acceptance of this policy:

The 17 such measures that reached a vote during annual meetings last year were approved by an average of 33.9% of shares cast, according to ISS.

By contrast, the 13 proxy-access proposals voted on during 2013 garnered an average of 32.5% support—with three getting majority endorsement, ISS added. Shareholders have submitted 93 such resolutions for 2015 annual meetings.

To summarize, in just three short years, the number of proxy access resolutions being voted on has increased from 13 to 93.  Some other companies that have adopted this new policy include Citigroup, Prudential Financial,  and Boston Properties Inc.

The first article hyper linked in this post best summarizes the overarching effects of such a policy when it states:

The shift could give pension funds, unions and other investors greater influence over the strategic and financial choices of U.S. companies by enabling individual or groups of shareholders to install their own directors.

I believe this new system is in the best interest of shareholders and companies alike.  Companies with proxy access will become more appealing to investors for they will feel a greater sense of ownership and control over the stock they own.  From the company’s standpoint, they stand to receive greater investment because investors are more likely to invest in a company in which they can have direct representation.  If a stock turns in a direction in which an investor is unhappy, that investor can create active change by nominating a director.

The numbers speak for themselves.  According to the article, Avrohom J. Kess, a consultant for companies considering proxy access, has predicted that 70 companies will have hopped on board by year’s end.  This new system reflects the current democracy we are governed by.  The ability to choose a director gives an investor more confidence in his decision to buy stock and will ultimately lead to increased investment in companies that adopt this proxy access.

A Random Walk Down Wall Street

Burton Malkiel, in his book A Random Walk Down Wall Street, entertainingly constructs the fundamental premise behind the stock market and then proceeds to tear apart the popular approaches to investing in it.  A must read for any beginning investor, A Random Walk Down Wall Street equips its reader with the basic knowledge to begin investing but also warns of the extreme unpredictability lying within.  Malkiel acknowledges that while it is possible to grow your money in the stock market, get-rich-quick schemes are an exception and not the norm.  A tortoise and hair theory of slow and steady wins the race is the best bet in earning significant growth in the long way.

Malkiel starts by describing the two main theories for investing: the firm-foundation theory and the castle-in-the-air theory.  The first theory says that stocks should accurately represent the value of the product for which they represent.  Investors with this ideology will buy a stock if they feel it is undervalued and sell a stock whose price they feel is overvalued.  On the other hand, an investor following the castle-in-the-air theory would buy a stock according to a crowd mentality.  These investors view stocks receiving a lot of attention as a sign of growth and try to invest early.  Malkiel deconstructs these theories with examples of the South Sea Bubble and the tulip craze.  Both instances represent a commodity becoming extremely overvalued through speculation of the crowds and then eventually bleeding out in huge losses.

Malkiel then goes on to both explain and criticize two methods for evaluating stocks: fundamental analysis and technical analysis.  Technical analysis looks for patterns in stock charts to determine future prices while fundamental analysis studies financial statements and similar documents to determine future prices.  Malkiel points out that profits have been made using these methods but they are more of a tool to help brokers sell stocks by giving some support for their decisions.

Malkiel effectively convinces his readers that investing is a risky game.  He always encourages having a very broad perspective.  With this broad perspective comes Malkiels admission that index funds tend to beat inflation.  By investing in a broad array of value stocks, an individual investor has the greatest chances of beating inflation in the long run.  Micromanaged funds pay commission fees more frequently which eats into profits.  Malkiel engages his readers with witty sarcasm poised in a manner that both informs of but disproves many of the existing theories behind investing in the stock market.

Up In Smoke: The U.K.’s recent branding legislation

Thesis:  The U.K.’s recent ban on cigarette pack branding is ineffective in deterring sales and a restriction on competition through the robbery of free-speech.

In recent years, the world has seen an increase in health awareness.  New technology and research has allowed people to be more knowledgeable of the detrimental effects of activities such as smoking.  Accompanying this knowledge is an increased effort by health agencies all over the world to deter people from smoking cigarettes.  On Wednesday, the U.K. parliament banned branding on cigarette packs with a majority vote of 367-113.  Currently, cigarette packs are only required to have a small warning on them.  The new law will erase the logos and colors of tobacco companies and replace them with graphic images of the effects of smoking. However, the U.K. parliament fails to realize that similar efforts have been ineffective in other countries and even viewed as a violation of tobacco companies’ rights under the First Amendment.

In 2012 Australia was the first country to pass legislation in favor of plain packaging.  Since the passing, there have been a myriad of lawsuits in domestic courts regarding the restrictions on branding.  An article in Washington post illustrates the displeasure of the tobacco companies:

The companies have mustered an array of arguments in response: that the restrictions violate free speech, “expropriate” the value of carefully created trademarks, go against international free-trade obligations and won’t achieve the intended regulatory aim.

The article also gives insight into the source of the companies’ displeasure by saying:

“Much of this industry is about image. It is not about tobacco,” said Robert Stumberg, a Georgetown University law professor who has followed tobacco litigation and regulation around the world. For tobacco companies, Australia’s rules and similar proposals “get to the heart of their ability to market their products.”

This “[in]ability to market their products” is the exact reason that similar legislation failed to pass in 2013 in the United States.  A U.S. court of Appeals decided that the proposed legislation by the FDA was a violation of free-speech rights under the First Amendment.  The U.K. ignored this related case and decided to pass legislation of their own regardless.  So, has legislation proven to accomplish its goal?

According to this article:

The proposal for plain packs in the UK was intended to reduce the amount of children and teenagers that would ordinarily be drawn to smoking because of branded packaging, which can make a cigarette packet seem more attractive.

Australia did not meet this goal.  Cigarette sales actually went up 0.3 percent after a year and loose tobacco sales went up 3.4 percent. Hence, it would appear that plain packaging legislation is ineffective.  It fails in reducing sales and restricts competition between tobacco companies.  The U.K. would be better off coming to a compromise with the companies and allowing them half the package for branding and half for warnings.  If that is ineffective in reducing sales, the parliament always has the option of heightening the tax.

Revised Post 3: The Economic Impact of Tiger Woods

Thesis: Tiger Woods, as a single athlete among many golfers, has the ability to dictate the economy of golf with his performance.

Tiger Woods: not only one of the most polarizing figures in our generation of sports, but also arguably one of its greatest singular market movers.  Everyone remembers the Tiger Woods of the late 1990’s to late 2000’s.  It was this Tiger that revolutionized the game of golf, sparking a monumental interest in the sport, and generating never before seen income for the PGA and golf retailers in general.  Then, the scandal happened.  This new Tiger, lacking the mental fortitude for which he was once revered, began a cold streak in both his career and the golf economy as a whole.

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The numbers speak for themselves.  When Tiger came onto the scene in 1997 and won his first of four Masters, he left the course with a measly $486,000.  In 2001, after winning his second Masters, he left with a staggering $1,008,000.  These figures represent a 107.4% increase over the course of 4 years (1997-2001).  To put this increase into in perspective, the first place winnings increased only 58.8% in the 4 years leading up to Tiger’s first Masters (1993-1997).  Now, in the years following the revelation of Woods’ infidelity (2009-present), the first place purse has increased a mere 20%.

 

Tiger’s rise and fall and thus the rise and fall of the golf economy, has had a huge impact on golf retailers.  I will use Dick’s Sporting Goods as my example.  According to a MarketWatch article, the golf industry was still booming just two years before Tiger’s downfall, as evidenced by Dick’s acquisition of Golf Galaxy in 2007.  Dick’s then went on to expand the acquired golf retailer from 65 to 79 stores.  The athletic retail giant then went on to hire and place a PGA professional in the golf section of all its stores.  Everything was looking up until Dick’s Sporting Goods announced a year ago that they were cutting 400 jobs in their golf department.  According to the article in MarketWatch, as of February last year there were only 593 golf professionals employed by Dick’s.  Essentially, Dick’s cut their golf employment by more than half, a very notable downsize.

 

The faltering year-to-year increases in tournament winnings and the recent job cuts by Dick’s cannot be left to coincidence.  I think these events can be directly tied to Tiger’s waning performance as of late.  Without a golf mogul like the Tiger Woods from the 90’s, interest in golf has faltered and so have its industries.  Woods is just one example of the correlation between great athletic prowess and economic influence.

Is Complete Connectivity a Good Thing?

Thesis: Improved connectivity will improve efficiency but have negative effects on cyber security and human capital.

For the past few decades, technology has been evolving at an ever increasing rate.  With the birth of “smart” items, our phones can be synced with televisions, speakers, computers, thermostats, lights and a growing number of other things.  All this connectivity has many benefits for users: improved efficiency, greater access to information, accelerated communication, ease of transactions, and the list goes on.  In the midst of all these obvious benefits, are there any other costs that mobile companies don’t openly reveal to us?

An article on Bloomberg talks all about the emergence of a 5G network.  This network, projected to be available no sooner than 2020, would have speed capabilities 100 times faster than the current 4G network.  These freakish speeds will allow for instant access to anything digital and allow for even very large files to be downloaded instantly. In comparison to 3G, 4G was only twice as fast as 3G.  This just goes to show the increasing rate at which technology is developing.  The article says:

Phone companies also anticipate much higher volumes as mobile access to the Internet surges. Allan Kock, head of radio networks for Swedish carrier TeliaSonera AB, expects as much as 1,000 times more traffic on networks by 2025.

All of this traffic will certainly require massive amounts of power.  5G developers do recognize this issue, however.  According the article, these developers hope to create a 5G network that requires a 90% lower cost for energy than the existing 4G network.  This 90% reduction will still not be enough to sustain such a massive flow of information.  With the continued addition of new, wireless devices, energy costs for consumers will rise and also have negative effects on the environment.

Even more issues arise for another reason.  This same Bloomberg article says: “By the time 5G is deployed there will be 50 billion devices linked to the Web, according to Cisco Systems Inc. That’s seven for every person.”  These figures are frightening to me for two reasons: the effect on human capital and the increased need for cyber security.  Worldwide spending for information security reached 71.1 billion in 2014 according to an article in eweek. This number seems minuscule in comparison to the 1.7 trillion dollars set to be spent by the major phone companies on upgrading their networks to 4G.  A decade from now, when information regarding everything we do will be available through wireless connections, I think that serious capital will be required to ensure security.  I also think that technological innovation should aim to direct improvements at garnering a greater return from human capital instead of creating endless distractions and depleting a worker’s worth.  Improved connectivity will surely improve efficiency but care must be taken to reduce negative externalities.

Revised Post 2: Rising Student Debt: A Dampener on the Sales Labor Market

Thesis:  Rising student debt is having a detrimental effect on the supply of sales positions, and employers must change their recruiting approaches to counteract this deficit.

In a Wall Street Journal article by Lauren Weber, our attention is drawn to companies and their desperation for more young employees to have an interest in technical sales positions.  She stresses the importance of these positions through her example of Paycor Inc.  She writes:

Paycor Inc., which sells cloud-based software for human-resources and payroll management, said it would have forecast $2 million more in 2015 revenue if it had hit its 2014 hiring goals for new sales reps in 2014.

Weber goes on to give a few hypotheses for this deficit in supply.  She states:

The youngest generation of workers, having lived through the financial crisis and recession, is more risk-averse, say sales executives, adding that young prospects are reluctant to enter a hard-charging work environment where success often boils down to a number.

Weber also mentions the existing stereotype that “sales isn’t really a career” and that either anyone can be a salesman or that you’re born to be one.  Given these arguments, I believe that Weber fails to mention what could be the leading deterrent to emerging sales positions: student debt.

According to an article by Phil Izzo, student debt from loans has more than doubled in the last 20 years, even when adjusted for inflation.  The average 2014 Bachelor’s degree recipient graduated with a debt totaling $33,000.  In my opinion, this figure has had an even greater effect on graduates than the recession when it comes to their identification as risk-averse.  Graduates risk aversion has even grown to the point where 12 states have 50% of their 25 year old college graduates still living at home.  This article, authored by Neil Shah, states that every $10,000 increase in student debt accounts for 2.9% more 25 year old graduates living with their parents.  I would argue that a similar correlation would hold between student debt and the tendency for graduates to stray away from sales positions.  Sales positions are usually performance based, in contrast with other career paths that have salaried wages.  When a student graduates with large amounts of debt, their willingness to take a risk and accept a sales offer goes down.

I feel that in order for employers to combat this growing grudge against sales positions, they must change the way in which they sell the positions (kind of ironic eh?).  Weber mentions that technical companies often market their sales positions by highlighting the “competitive environment.”  A risk averse graduate will not find much safety in that statement.  To stoke demand, I believe that employers should draw more attention to the freedom for creativity and the team environment that often accompanies a sales position.

 

Revised Post 1: Cable Television: Adapt or Die

The past few years have seen a shift in the market for cable television.  People have been increasingly drawn to services such as HBO GO, Netflix, and other pay-per-view platforms that allow for binge watching.  Accompanying this increasing demand for premium cable and all sorts of pay-per-view type platforms is the loss of viewership for standard cable companies.  In this new era for media intake, cable providers must adapt in order to survive.

In a Wall Street Journal article, George Stahl and Keach Hagey collaborate to detail the effects of this shift on Time Warner Inc.  The article states:

On a call with analysts, Time Warner Chief Executive Jeff Bewkes acknowledged declines in the number of subscribers at the Turner networks, the company’s main driver of operating profit, and weakness in the cable advertising market.

Bewkes draws attention to the advertising dilemma.  Cable providers need advertisements to drive revenues but it’s these same advertisements that are driving viewers away towards premium services.  This acts as a sort of negative feedback loop for cable revenues.  Despite this, Turner networks which includes stations such as TNT, TBS, and CNN, has actually recorded quarterly profits.  This is a result of Time Warner’s slight adaptations.  Time Warner credits their gains in overall revenue to their addition of premium content coupled with subscription fees, but attributes their losses in advertising revenue to a decline in viewership.

Other companies are also adapting to this shift in the market.  Another Wall Street Journal article, authored by Miriam Gottfried, details the recent deal made between Starz and Lions Gate Entertainment:

On Wednesday, Lions Gate Entertainment announced a deal with Liberty Media Chairman John Malone that would give it 14.5% of the voting power in premium cable network Starz , which Mr. Malone controls. In exchange, Mr. Malone gets a 3.43% stake in Lions Gate and a seat on its board.

In my opinion, this is a profitable move by both parties.  Starz has been struggling lately due to lackluster content compared to the content of its main premium cable rivals, HBO and Showtime.  Lions Gate Entertainment, which has historically produced quality content, recognizes that Starz is a weak player in an expanding market.  With this new content provided by Lions Gate Entertainment, Starz has the opportunity to turn its performance around, benefiting both Starz and Lions Gate Entertainment.

In the years to come it will be interesting to see how media providers react to these shifts in demand.  Will cable become obsolete?  Will new technology create a shift back in cable’s favor? Ultimately, cable providers need to look for new ways to generate profits from advertisements if they hope to compete with premium providers and other pay-per-view services.

Economies Get High On Legalization

To jump on the marijuana legalization train.. or not to jump on?  With the recreational legalization of marijuana over the past year in states such as Colorado and Washington, this dilemma looms over the thoughts of many Americans.  Some people, including Michael Bloomberg, former mayor of New York City, choose to throw general logic to the wayside, ignore the statistics, and criticize this recent legislation.  According to this Wall Street Journal article:

Bloomberg said at a meeting at the Aspen Institute on Friday that marijuana is hurting the developing minds of children…

…He says using marijuana could reduce the IQ of students and he said it’s different than using alcohol.

Now, these statements do hold some weight, if you choose to ignore the blatant fact that people still do things when they’re illegal (!!!), and the other fact that children smoking marijuana is still illegal under the new legislation.  When looked at from a moral perspective, his criticism might have some legitimacy.  It is reasonable to deduce that the legalization of marijuana may lessen the notion of severity in a sub-21 year old’s mind, hence making that person more likely to indulge in such a act.  However, this logic has not held true.

Source: Youth Risk Behavior Survey

According to an article in Forbes, marijuana consumption in Colorado by people under the age of 21 has actually fallen (see chart above).  Since 2011, the number of high school kids that have tried marijuana has fallen 1 percent and the number that currently smoke (in the month of the study) has fallen 2 percent.  While these changes may not seem statistically significant, the argument that legalization increases consumption can certainly not be made.  In fact, the legislation itself aims to incite the exact opposite response.  In an article from December 2014, it is stated:

As of October, Colorado brought in more than $40 million in marijuana taxes. The bulk of this revenue will go towards youth prevention efforts focused on marijuana and overall mental health.

Now, lets rewind to the way things were before the legalization of recreational marijuana.  In an absence of a retail market, the task of distribution fell on cartels and violent gangs; not always immediately, but through the grapevine.  The product was consumed by consumers, profits were allocated to criminals, and state economies in no way benefited.  Contrast this with the present and you’ll find a Colorado that is raking in huge amounts of marijuana tax dollars and even being dubbed the fastest growing economy by Business Insider.

The decision for legalization in additional states will ultimately fall in the hands of voters.  To these voters I ask: Would you rather have your money going to unsanctioned criminals who promote consumption to all ages or would you rather have it fueling your state’s economy and aiding the fight against underage consumption? The answer is clear, and in the upcoming years more and more states will jump on the legalization train.

Cable Television: Adapt or Die

The past few years have seen a shift in the market for cable television.  People have been increasingly drawn to services such as HBO GO, Netflix, and other similar pay-per-view platforms that allow for binge watching.  Accompanying this increasing demand for premium cable and all sorts of pay-per-view type platforms is the loss of viewership for standard cable companies.  In this new era for media intake, cable providers must adapt in order to survive.

In a Wall Street Journal article, George Stahl and Keach Hagey collaborate to detail the effects of this shift on Time Warner Inc.  The article states:

On a call with analysts, Time Warner Chief Executive Jeff Bewkes acknowledged declines in the number of subscribers at the Turner networks, the company’s main driver of operating profit, and weakness in the cable advertising market.

Bewkes draws attention to the advertising dilemma.  Cable providers need advertisements to drive revenues but it’s these advertisements that are driving viewers away towards premium services.  This acts as a sort of negative feedback loop for cable revenues.  However, Turner networks includes stations such as TNT, TBS, and CNN which, according to the article, have actually recorded quarterly increases in revenue.  This is a result of Time Warner’s slight adaptations.  Time Warner cites gains in overall revenue due to their addition of premium content coupled with subscription fees while advertising revenue has actually declined due to losses in viewership.

Other companies are also adapting to this shift in the market.  Another Wall Street Journal article, authored by Miriam Gottfried, details the recent deal made between Starz and Lions Gate Entertainment:

On Wednesday, Lions Gate Entertainment announced a deal with Liberty Media Chairman John Malone that would give it 14.5% of the voting power in premium cable network Starz , which Mr. Malone controls. In exchange, Mr. Malone gets a 3.43% stake in Lions Gate and a seat on its board.

In my opinion, this is a profitable move by both parties.  Starz has been struggling lately due to lackluster content when compared to its main premium cable rivals, HBO and Showtime.  Lions Gate Entertainment, which has historically produced quality content, recognizes that Starz is a weak player in an expanding market.  With this new content provided by Lions Gate Entertainment, Starz has the opportunity to turn its performance around, benefiting both Starz and Lions Gate Entertainment.

In the years to come it will be interesting to see how media providers react to these shifts in demand.  Will cable become obsolete?  Will new technology create a shift back in cable’s favor? Ultimately, cable providers need to look for new ways to generate profits from advertisements if they hope to compete with premium providers and other pay-per-view services.