195 (14 January 2015)

Welcome to week 195!  The articles below caught my attention this week.  Please note that what are intended to be relatively objective “briefs” are preceded by dashes (——–), whereas additional material or relatively subjective comments are preceded by asterisks (********).  The links to articles preceded by [SR] require a subscription to be read in their entirety, although complete articles may frequently be found by a title search.

(17 November 2014): “How Michael Jackson Made $150 Million in 2014” (http://www.bloomberg.com/news/2014-11-17/how-michael-jackson-made-150-million-in-2014.html)

——–[This article appeared in the online version of The Washington Post on 9 January 2015, having previously appeared at the address above and in Bloomberg Pursuits magazine.]  “Elvis Presley boasts 12.4 million ‘likes’ on Facebook (FB) and 187,000 followers on Twitter (TWTR) and recently released a duet with Barbra Streisand.  Never mind that he died in 1977.  And that’s just the beginning for the King of Rock ‘n’ Roll and other long-dead celebrities. . . . Today, deceased icons from pop culture’s heyday are enjoying unprecedented success, out-earning even their former flesh-and-blood selves, says [Jamie] Salter, one of the new breed of brand managers using technology to wring big bucks from superstars otherwise resting in peace (or so we hope).”  Such icons benefit from having captivated fans before the Internet age.  “Even better, they aren’t able to create the sort of mischief that bedeviled their handlers back in the day, potentially damaging their brand in the bargain.”  In brief, “Their reputations are intact.”  According Nathanael Fast, a professor at the Marshall School of business at the University of Southern California, “The bizarre business works because the truly famous tend to remain famous, even in death.

********Salter got into the so-called “dead-legends business” when he spent $30 million to be “the majority of Marilyn Monroe’s estate.”  And what about Michael Jackson?  His estate has mad “$250 million be extending the singer’s contract with Sony Corp . . . , and more than $260 million from This Is It, a film cobbled together from footage of Jackson rehearsing for a series of concerts canceled in the wake of his death.”  You can learn more about Nathanael Fast at: http://www.marshall.usc.edu/faculty/directory/nathanaelfast.  All this brings to mind, once more, the issue of reputation management which is less prone to risk for the dead, for reasons indicated above and in the article.  Reputation management was discussed in TIF 191 in relation to the question, “How does a company regain its customers’ trust when something goes badly wrong?”  Still, historical work can dim the reputation of those who have passed, so there is less risk, not no risk.

(8 January 2015): “’Nut Rage’ Reignites Backlash Against South Korea’s Family-Run Conglomerates” [SR](http://www.wsj.com/articles/nut-rage-reignites-backlash-against-south-koreas-family-run-conglomerates-1420654954)

——–“An outburst by the daughter of the chairman over how to serve nuts aboard a place has triggered one of South Korea’s biggest backlashes against the family-run conglomerates that dominate the economy.  The drama began in early December when Cho Hyun-as—at the time executive vice president in charge of Korean Air’s in-flight service—flew into a rage at being served macadamia nuts in a bag rather than on a plate.”  Subsequently, Ms. Cho was “stripped of her titles” and is facing charges that could lead to 15 years in prison.  The incident has “rekindled anger at the sprawling chaebol that have for decades dominated the [South Korean] economy but are increasingly seen as stores of wealth for dynasties with a patchy regard for the law.”  What is known as the chaebol “originated after the Korean War of the 1950s, when South Korea’s government selected companies to take the lead in industries it thought could thrive internationally.  Those companies were guaranteed financing and protected from local competition to help them grow and drive the nation out of poverty.”  Although the South Korean economy experienced “years of double-digit economic growth” the public has become less supportive of it in recent years.  Due to international expansion by many chaebol, their role in domestic employment has diminished.  In 2013 “the 10 biggest conglomerates accounted for only 4% of employment in South Korea.”

********Very interesting how a seemingly small incident could become so big, so fast.  It seems to have tapped into strong cultural values—Ms. Cho’s father apologized for not raising her better—and general dissatisfaction with how the chaebol has evolved.  You can learn more about ‘chaebol’ at: http://en.wikipedia.org/wiki/Chaebol.

(8 January 2015): “Challenged by Upstarts, Lenders Try New Strategy: Cooperation” (http://dealbook.nytimes.com/2015/01/07/challenged-by-upstarts-lenders-try-new-strategy-cooperation/)

——–“Employees at MasterCard thought they saw a drop-off credit card volume last spring at one of their merchants, a legal services provider.  Checking further, they found they had a new competitor, Behalf, a start-up small-business lender backed by two venture capital firms that makes credit decisions in just a few seconds.  But rather than play defense, a reaction banks and credit card companies were likelier to have not that long ago, MasterCard engaged Behalf and worked with the start-up to help arrange for its customers to use MasterCard’s system to arrange for its customers to use MasterCard’s system to pay their vendors.  The MasterCard-Behalf alliance . . . is an example of how entrenched financial players facing challengers armed with new technology are increasingly seeking to work with them.

********The article addresses alternatives to common issues relating to incumbents, upstarts, and disruption in the context of financial services.  As the article suggests, incumbents have options when dealing with the disruption visited upon them by upstarts: (1) work with them, the approach of MasterCard in relation to Behalf; (2) try live with them, by changing product quality or related services, more the “play defense” mentioned above; (3) merge with them aka, buy them out, a frequently exercised option, especially with in Silicon Valley; or (4) drive them from the market, by economic, legal, or media-based means.  The discussion of MasterCard and Behalf called to mind the modern classic Co-Opetition (http://www.amazon.com/Co-Opetition-Adam-M-Brandenburger/dp/0385479506/).  The article uses the word frenemies to describe such relationships.  The head of digital partnerships for American Express, Leslie Berland, notes: “Many companies that we work with may pose challenges as well as opportunities.”

********After having read the article, I counted 8 uses of the word disrupt (or variants), 4 of incumbent, and 3 of upstart; entrant appeared twice.  I’m sure that Clayton Christensen would like to be collecting a royalty on each use of the word disruption, which he made popular in his 1997 book The Innovator’s Dilemma (http://www.amazon.com/Innovators-Dilemma-Revolutionary-Change-Business/dp/0062060244/).

(9 January 2015): “Professional Cuddlers Embrace More Clients” (http://www.wsj.com/articles/professional-cuddlers-embrace-more-clients-1420759074)

——–[This is the A-Hed, quirky, article.]  “The cuddle-for-hire business is taking off—even though the clothes stay on.  Thousands of customers across the country are booking appointments with professional cuddlers in at least 16 states. . . . Patrons who booked these services out of mere curiosity say they have become hooked on their therapeutic benefits.”  New online apps and meet-up services have contributed to the growth of the cuddling business.

********The article includes a four-minute video with Samantha Hess, the owner of Cuddle Up To Me in Portland, Oregon.  She is organizing the first Cuddle Con for Valentine’s Day.  You can learn more about the convention at: https://www.indiegogo.com/projects/cuddle-con-the-cuddling-convention.  Ms. Hess provides valuable perspective on her work.

(10 January 2015): “In Colorado, Legal Pot Fails to Meet Predictions of Supporters, Critics” [SR](http://www.wsj.com/articles/in-colorado-pot-legalization-fails-to-match-predictions-of-backers-critics-1420830972)

——–“Before Colorado became the first state to allow marijuana for recreational purposes, supporters boasted that legalization would generate a sizable tax windfall, while opponents warned it could have dramatic social consequences.  Just over a year into the state’s experiment . . . , neither prediction is proving entirely true.  Marijuana so far hasn’t been the boon or bane that many expected, offering potential lessons to other states considering legalization.”  Some 16,000 people are licensed to work in the state’s marijuana.  Although the workers have boosted Colorado’s economy somewhat, helping to lead to higher warehouse rentals in Denver, “Neighboring states . . . are complaining that Colorado is flooding their jurisdictions.”  For that reason, Nebraska and Oklahoma last month filed suit against the state in the U.S. Supreme Court last month.

********Washington also allows the sale of recreational marijuana and Alaska and Oregon approved such measures in the November; California is expected to vote on such a proposition in 2016.  In light of these developments, Colorado’s experience will be closely followed.  I thought the comment by Colorado state senator David Balmer, who previously opposed legalization, to be worthy of note: “Once I toured the dispensaries and the warehouses, and I saw the dramatic regulatory framework that has been set up, I wanted to help the [marijuana] business community succeed.”

(11 January 2015): “Garbage Incinerators Make Comeback, Kindling Both Garbage and Debate” (http://www.nytimes.com/2015/01/11/us/garbage-incinerators-make-comeback-kindling-both-garbage-and-debate.html)

——–“With landfills shunned, recycling programs stalled and the country’s record-setting trash output unyielding, new waste-to-energy plants are being eyed as a path to salvation.  Facilities similar to the $670 million incinerators [in West Palm Beach, Florida] . . . , common in Europe, are under consideration in Massachusetts, Nevada, Virginia, Wisconsin and elsewhere.”  Such reconsideration of incinerators has been aided by the EPA’s classification of such plants as “renewable energy—akin to solar and wind power.”  Such facilities are risky and a waste-to-energy plant in Baltimore’s Curtis Bay neighborhood has found favor with local authorities “because it is privately financed,” rather than municipally financed, thereby reducing concerns about insolvency faced by cities such as Detroit and others.  According to incinerator supporters, the need to burn trash shows up in the data: “Recycling rates have barely budged over the past decade” and “curbside recycling has more recently been deemed an expensive luxury by a number of municipalities.”  Nationally, recycling rates vary greatly: the recycling rate of Indianapolis is 10 percent, whereas Portland, Oregon recycles 60 percent of its garbage; San Francisco diverts 80 percent of its waste due to recycling and composting.  According to Thomas Kinnaman, an economist who studies solid waste and recycling, “Some parts of the country realized . . . [recycling] was costlier than they’d anticipated.”

********You can learn more about Thomas Kinnaman, including a list of publications, at: https://www.bucknell.edu/academics/majors-and-minors/economics/faculty-and-staff/thomas-kinnaman.html.  I wonder if the increase in the output of negative externalities, such as mercury and lead, were considered in the cost calculations of municipalities.

(12 January 2015): “Daily Report: Education Technology Attracts Silicon Valley’s Attention” (http://bits.blogs.nytimes.com/2015/01/12/daily-report-education-technology-attracts-silicon-valleys-attention/)

——–“The education technology business is chock-full of fledgling companies whose innovative ideas have not yet proved effective—or profitable.  But that is not slowing investors . . . Venture and equity financing for ed tech companies soared to nearly $1.87 billion last years, up 55 percent from the year before, according to a new report from CB Insights, a venture capital database.  The figures are the highest since CB Insights began covering the industry in 2009.”  Betsy Corcoran, the CEO of EdSurge, which provides industry news and research, “Education is one of the last industries to be touched by Internet technology, and we’re seeing a lot of catch-up going on. . . . We’re starting to see more classical investors . . . pay more attention to the [education] marketplace than before.”

********It strikes me that many people have “crossed the Rubicon,” having moved from “schools should be managed like a business” to “schools are businesses.”  Similarly, many have moved from “education can be examined as if it is an industry” to “education is an industry.”  There can be little doubt, however, that the technologically astute see the large local, state, and federal expenditures on education as golden opportunities.  I searched for aggregate expenditure data on education spending on these levels but found nothing that I was confident in relating.

********An example of a technology that seems to address a growing concern in higher education in relation to the so-called “completion agenda” is provided by “Cracking Down on Skipping Class” [SR](http://www.wsj.com/articles/cracking-down-on-skipping-class-1421196743).  If the article is to be believed, “Attendance is the best known predictor of college grades.”  As a result, in pursuit of higher retention rates, some colleges and universities are experimenting with software called “retention alert systems” to inform students and others of missed classes.  One app service, Class120, “alerts parents or another third party in real time if the student isn’t in class, based on location data the phone tracks.”  All that for $199 a year.  You can learn more about Class120 at: http://www1.class120.com/.

(13 January 2015): “As Oil Slips Below $50, Canada Digs In for Long Haul” (http://www.wsj.com/articles/as-oil-slips-below-50-canada-digs-in-for-long-haul-1421114641)

——–“In the escalating war of attrition among top oil-producing nations, Canada’s biggest oil-sands mines have a message for the market: Don’t look to us to cut production. . . . even as oil prices settled below $50 a barrel Monday . . . , those companies are unlikely to shut off the tap thanks to . . . huge upfront costs, combined with long-term break-even points and lengthy production lives.  Unlike shale oil, which requires constant drilling of new wells to maintain output levels, once an oil-sands site is developed it will produce tens or hundreds of thousands of barrels a day, steadily, for up to three decades.”  Canadian Natural Resources Ltd. (CNR) underscored “the resilience of oil-sands growth.”  Although the company will “trim investment on new projects and curtail its growth forecast . . . it still expects overall output to grow about 7% over 2014 levels, and it [has] vowed to keep spending on expanding output at its biggest oil-sands mine for the next two years.”  As CFO Corey Bieber of CNR noted, “A lot of the costs are fixed in nature.”  Thus, “Existing oil sands surface mines can make money at about $30 a barrel, and efficient underground oil sands wells . . . can stay in the black below $35 a barrel.”

********As the article notes, although the per barrel cost of oil-sands oil is above that of “many traditional oil wells” it is below that of many unconventional sources of crude, such as from the Bakken Shale formation of North Dakota.  Although oil from Bakken Shale tends to be “light” and that from the oil sands tends to be heavy, there is a demand for both.  All of the above clearly indicates that there will be continuing oil industry interest for the Keystone XL pipeline.

********Additional perspective is provided by “Back to the Future?  Oil Replays 1980s” [SR](http://www.wsj.com/articles/cracking-down-on-skipping-class-1421196743).  The article points out that “one enormous difference between today and 30 years ago” is “the speed of shale.  Before U.S. energy companies figured out how to pull oil from shale formations, petroleum projects often took years to execute. . . . and billions of dollars.  Today, the discovery and development of oil from shale rocks means that oil output is faster paced and . . . An expensive well costs [only] $10 million.”  Another point of note about shale oil wells is that “Each well roars into life and then drops off fast.”  All this makes me think of there is a clear analogy between so-called “base load” power in the energy sector, think of a nuclear power plant, that runs all of the time, and the so-called “peak load” power, natural gas power plants.  So it would seem that in the context of this article, oil-sands oil is a “base load” source of oil and shale oil a “peak load.”  Shale oil will tend to go in and out of the market depending upon market conditions, but the oil stands will tend to be in the market under most circumstances.

May you have a good week!

Bruce

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