Monthly Archives: July 2008

The $20 billion dollar game

While the labor situation in Hollywood has focused everyone’s attention on the future new media environment, when it comes to cold hard cash, packaged media still rules the roost.
Here is a summary of some recent numbers:

“U.S. [c]onsumer spending on DVDs and Blu-ray in the first six months of the year for purchases and rentals was up 1.6 per cent from spending in the first half of 2007, according to Home Media Magazine’s market research department. The first half of 2008 tally: $10.77 billion U.S., compared with $10.6 billion U.S. a year ago.

“Spending on disc purchases rose 1.1 per cent, to $6.87 billion U.S. from $6.8 billion U.S.. Rental spending rose 2.6 per cent to $3.9 billion U.S. from $3.8 billion U.S., according to the trade publication.”
While it has become customary to assume that digital downloading will easily replace packaged media many analysts point out that most consumers have more time than technological savvy and so continue to choose packaged media, especially as the experience becomes stronger with Blu-Ray and HD.
Here is how one analyst put it:
“Most [Wall Street] analysts are techno-geeks with plenty of money and not much time, while most Americans are not technically savvy, and they have plenty of time but not much money,” said Adams, president of Adams Media Research.
“The fact is, despite what many on Wall Street seem to think, there is very little digital downloading going on. We’re talking about $118 million (U.S.) in 2007 spending, and about $254 million (U.S.) this year – so against a $24 billion (U.S.) packaged media market it’s really not making much of a dent at this point.”
So packaged media continues to outpace digital downloading by a factor of 100!
Concern about unionizing the new media environment is certainly understandable but the decision of the Guilds to drop the demand for a restructuring of DVD revenue sharing meant that the lion’s share of the digital world was off the table in this year’s bargaining.

Man Bites Dog: UAW Finances GM Rescue Package

Last fall when the Big Three auto companies were in the middle of tough contract negotiations I published several research notes on the joint GM/UAW proposed solution to their health care problems.

The proposal agreed to led to a new off balance sheet vehicle controlled by the UAW itself to pay future retiree benefits.  GM agreed to transfer billions in assets to the new Voluntary Employee Beneficiary Association, or VEBA, and the UAW would appoint a board of trustees to manage the entity.
At the time I flagged two related concerns:
1) the UAW’s contract ratification process failed to inform union members of the risks associated with the new entity, thus potentially violating both federal labor law and securities law; and
2) the shaky financial structure that GM put in place to fund the VEBA was, I argued, a house of cards.
This week those cards began to tumble.
The UAW leadership sold the new collective bargaining agreement with GM, over fierce rank and file opposition, on the basis of an assertion that the VEBA would secure health care for retirees for 80 years.  
And now, only a few months later, it appears GM is not even good for its promised initial cash transfers to the VEBA!
Yesterday, GM announced a massive multi-billion dollar cost cutting restructuring effort that includes a commitment by the UAW to allow GM to delay a $1.7 billion cash payment GM now owes the VEBA. That is a loan to GM and, assuming GM has the money, it carries a 9% interest rate.
In essence, that means the UAW is now helping to finance deeply troubled GM.  There has been no explanation how the decision was made since it is not even clear that an independent board of trustees to run the VEBA has yet been appointed.
Legally the VEBA owes its beneficiaries a fiduciary duty to defend their long term interests. That means that any decision about how to invest fund assets should be made at arms length. 
Hence, the operative question is: if the VEBA wants to invest in the debt of another entity to the tune of $1.7 billion they must consider all the possible alternatives. 
It is not clear to me that it makes sense at all for the VEBA to be lending anyone $1.7 billion, much less General Motors.

GM/UAW VEBA: A House of Cards

The illusion of "constructive engagement"

As I found out while participating in a recent panel on labor rights in China, there are many seemingly well-intentioned liberals out there who still think that China will progress smoothly towards a democratic future. Thus, they argue for example, that it is time for American unions to “engage” with what they argue are also unions in China but what are, in fact, arms of the Chinese state.

Most such liberals are not Chinese.  
This new book by former Washington Post China correspondent Philip Pan argues, as I have, that a new form of “authoritarian capitalism” is taking hold there and that absent tremendous pressure from the general population it will not change.  
Today’s review in the New York Times noted:
By embracing market economics while preserving the party’s monopoly on power and restricting political freedom, Mr. Pan writes, China’s Communist leaders have concocted an “authoritarian capitalism” that “could be as exploitative as anything Marx — or Mao — ever envisioned.” Free markets and private enterprise, he says, “generated wealth and prosperity, but unrestrained by democratic institutions, they also produced grim work conditions”: without trade unions, a free press, independent courts or elections, workers have little leverage with their employers and no way to remove corrupt officials, who often collude with business interests.

Dispatches From Capitalist China in ‘Out of Mao’s Shadow’ by Philip P. Pan –

Socialization of Risk – US steps in to help Fannie and Freddie

Thirty years of neo-liberal attack on the statist reforms of the New Deal took a serious detour today as the Federal government stepped in to bolster the troubled government sponsored enterprises, Fannie Mae and Freddie Mac.  
These giant financial institutions had always benefitted in the financial markets from an implicit government guarantee that they were “too big to fail.”  While efforts to cut the umbilical cord between them and the U.S. government had been attempted today the pendulum swung firmly in the opposite direction (yes, a mixed metaphor).  
The Federal Reserve opened up its doors to allow the two institutions to borrow from it and the U.S. Treasury said it reserved the option to invest cash for an equity stake.
Some republican and conservative defenders of the neo-liberal counter revolution may try to excuse the behavior as analogous to the police powers that the government must exercise in cases of genuine public danger.  But that case may be hard to sustain depending on how deeply involved the government now becomes.
The problem is that the massive multi-trillion dollar explosion in finance capital over the last several decades depends fundamentally on the returns generated in a now global and rapidly changing economy. No one can safely predict if or when any money invested by the government will be returned. In the meantime, in essence, the American taxpayer is being asked to go ever deeper into debt to rescue an anarchic global capitalist system. Of course, as someone who is trying to sell a house, maybe this is the bottom!

Treasury Takes Steps to Bolster Fannie Mae, Freddie Mac –

Buying a house on fire…..

This interview of Jamie Dimon, head of JPMorganChase, on tonight’s Charlie Rose Show is well worth listening to. It took place last week at the Aspen Institute’s Ideas Festival. I always like listening in on these events as I spent almost every summer in Aspen growing up including a stint at the Institute as a teenaged participant in a seminar there led by Bill and Judith Moyers.
Dimon comes across as straightforward and honest and, of course, hard nosed about the rumored short pressure on Bear Stearns on Wall Street. He describes the massive effort it took to get the takeover of the flailing Bear in some detail. As he said, buying a house and buying a house on fire are two very different exercises.
He does struggle with the question of regulation.  Clearly there is something very wrong at the heart of the global financial system. Dimon seems to argue that it is just another downturn that is typical in the volatile system of finance capital.  
If true, then a light touch would be called for.  But arguably there is something deeper at work – a disconnect between the pace of globalization and technological change, on the one hand, and the managerial control of those processes by the institutions of finance capital.  
If I am right, and Dimon is wrong, then the house is still on fire.

A conversation with Jamie Dimon – Charlie Rose

Quote of the Day: True Believers

British journalist Malcolm Muggeridge was correspondent for the Manchester Guardian in Stalin’s Russia in the 1930s. He was amazed by the travels there of British pilgrims interested in seeing first hand the “great socialist experiment.”  

Of them he wrote:

Their delight in all they saw and were told, and the expression they gave to that delight, constitute unquestionably one of the wonders of our age. There were earnest advocates of the humane killing of cattle who looked up at the massive headquarters of the OGPU [later the KGB] with tears of gratitude in their eyes, earnest advocates of proportional representation who eagerly assented when the necessity for a Dictatorship of the Proletariat was explained to them, earnest clergymen who reverently turned the pages of atheistic literature, earnest pacifists who watched delightedly tanks rattle across Red Square and bombing planes darken the sky, earnest town-planning specialists who stood outside overcrowded ramshackle tenements and muttered: “If only we had something like this in England!” The almost unbelievable credulity of these mostly university educated tourists astounded even Soviet officials used to handling foreign visitors…

Today, of course, the pilgrims travel to Havana, Caracas and Beijing, but the effect is the same.

News Corp Consolidates All Fox Interactive Employees Into New Facility

Any doubts about how the congloms think about the future of new media?
Fox Interactive (of the Murdoch Fox empire) just took a 12 year lease on a new 300,000 square foot (“wowza”) facility in Playa Vista, as reported here by Tech Crunch.  They will leave behind their current Beverly Hills location for the new mega-complex which puts them closer to the 405 and the airport.
FIM joins gamer Electronic Arts (now EA) which is a mile away and others in the new media area, recreating the “all politics is local” view of the high tech world here in Silicon Valley where 3D chip design companies cluster in Fremont while social networking companies like Facebook hang together (or separately, in the inevitable shake out to come) in downtown Palo Alto.

News Corp Consolidates All Fox Interactive Employees Into New Facility