Something for Wall Street to Be Sad About
This is the "return on equity" that investment banks are earning, one measure of profitability. It's of particular interest in the financial sphere because financial firms use so much leverage (i.e. debt) to finance their activity. A moderately profitable investment financed with a firm's own money (retained from previous profits, for example) is going to earn a modest return on equity. But if you manage to finance that exact same investment with only a tiny amount of your own money and a huge amount of debt, that can produce a very high return on equity. It's the search for a high return on equity (which creates large dividends, bonuses, and other fun stuff) that leads banks to take on lots of leverage. And it's the leverage that makes the financial system vulnerable to crisis.
The much-lower post-crisis return on equity tells us that even as bank profits have made a comeback, the pre-crisis leverage party hasn't. That's good news for the country but bad news for Wall Street. And it makes a lot more sense than being sad that not enough people will return your phone calls.
How Beyoncé Got Us to Pay for Music
Just as I was writing about how hard it is to get people to pay for music, what do I find myself doing but paying for Beyoncé's new album which dropped secretly with no publicity early this morning on iTunes.
Why does it work? A bunch of factors:
- Everyone already knows who Beyoncé is and there's a large audience for "the new Beyoncé album" that doesn't need details about its content.
- She's created artificial scarcity by distributing it exclusively through iTunes.
- The no-publicity thing serves as a great publicity stunt; everyone's talking about it on social media.
- Surprise is a great way of getting people out of their stingy mindset. I like Beyoncé, but she's not my very favorite artist. There's probably something else I could have done with the $15 I dropped on this. But because the availability of the album was a surprise it became an impulse purchase.
Long story short—good for her. It's important to keep innovating in business models. But this almost certainly isn't generalizable. To make it work, you have to be such a big star already that "grow your audience by distributing as widely as possible" isn't an important consideration. A handful of artists can take this approach. But for everyone else, in order to ever become a big star you need to first adopt a growth-first distribution strategy.
And of course the surprise album is a genius idea, but the genius of it is precisely that this isn't the way it's done. If everyone dropped unannounced albums at midnight with no publicity, it'd be boring.
Why It's Hard to Charge for Music
Water is incredibly useful. None of us would last more than a day or two without it. By contrast, most of us get along just fine with no diamonds. So water is, in an important sense, much more valuable than diamonds. And yet diamonds are much more expensive than water, since there's a scarcity of diamonds (thanks in no small part to some nefarious cartel activities) whereas water is fairly abundant. Such is the logic of capitalism, for better or for worse.
And that's the problem with any analysis of revenue options for the music industry that's based on getting people to subjectively value music:
Pandora, the only publicly traded streaming company, delivers about 1.5 billion hours of music each month to more than 70 million users, but only about three million of them pay. The rest listen free but must endure advertising. Even though it has a market value of $5 billion, Pandora has yet to turn an annual profit.
“There is this irrational resistance for people to actually plunk down their credit card for streaming services,” said Ted Cohen, a digital music consultant with the firm TAG Strategic. “We’re 13 years into the Napster phenomenon of ‘music is free,’ and it’s hard to get people back into the idea that music is at least worth the value of a cup of Starbucks coffee a week.”
The problem here is one of supply and demand. It's not that people won't pay for Pandora because they don't see any value in Pandora's service. It's that Pandora's paid service has to compete with Pandora's ad-supported service. Pandora could solve that problem by eliminating its ad-supported service, but it's pretty clear that there's a robust market for an ad-supported music-streaming service so then Pandora would need to compete with a new player. Personally, I really do enjoy an ad-free music streaming experience so I have a paid Rdio subscription which works on my computer, on my mobile phone, and on my home Sonos setup.
So good for me. But if I was a teenager with no money or ran into financial difficulty as an adult and needed to cut back, this would be an easy call to chop. Not because music isn't valuable but because the margin of convenience offered by a paid service versus a free one just isn't that big.
Stop Freaking Out About Phone Calls on Planes Stop Freaking Out About Phone Calls on Planes Stop Freaking Out About Phone Calls on Planes
The FCC is reconsidering the ban on cellphone use on airplanes, which was immediately met with action by the Department of Transportation to potentially re-ban them on consumer protection grounds.
Before the DOT acts, I think a deep breath is in order. The following things are currently legal in the United States of America:
- Talking on your cellphone in the movie theater
- Carrying on a loud conversation with the person next to you on a plane
- Showing up at a fine dining restaurant with shorts, flip-flops, and no shirt
- Yelling "Hey, man, f*** you!" at your bartender
It would be very annoying if these things happened frequently. And yet even in the absence of government regulation, they generally don't happen. Precisely because they are annoying, there are norms against doing these things. But more to the point, the state is not the sole purveyor of behavioral rules. You'll get kicked out of the movie theater if you talk on your phone. Airlines don't ban conversations with fellow passengers, but if you carry on at unreasonable volume you'll be shushed by your seatmates and eventually by the flight attendants. Life goes on.
We are strong enough to survive this freedom. Either people will use their cellphones sparingly and in a considerate manner, or else airlines will move to ban their use as a matter of corporate policy. The DOT can focus on its real job.
The Dakotas Are Drilling Their Way to Prosperity
Here's a map of the change in median income by county. You'll see that it's down almost everywhere. But it's up in the oil boom country in the Dakotas.
A little natural-resource boom can do wonders for your economy, at least in the short term.
Jim Graham's Insane War on Pop-ups
Here in Washington, D.C., there are some blocks where most of the houses are not built up to the full height permitted by the zoning. Since people are moving into the city and demand for housing is increasing, sometimes the owner of a house like this will add an extra floor.
This is for some reason regarded as scandalous behavior, and it leads to all kinds of freaking out about so-called pop-ups. How, everyone wants to know, can these dastardly pop-ups be halted?! At the same time, everyone is very worried about the lack of affordable housing. Here Aaron Weiner lays out Ward 1 council member Jim Graham's multipronged battle strategy* to prevent the supply of urban housing from growing even a little no matter how much demand increases.
But don't worry—he's for affordable housing too!
* Correction, Dec. 12, 2013: An earlier version of this post said that Graham was my councilman; he used to be, but I now live in Ward 2, which is Jack Evans' district.
The Car Purchasing Morass
Reading my colleague Amanda Hess on Mary Barra and her problematic relationship to the "car guy" concept in the auto industry and also Businessweek's excellent story on Barra's career, I'm left not for the first time scratching my head over basic practices in the automobile industry.
I'm not a car guy and in fact have never owned a car. But I do have a driver's license and a parking space (thanks, mandatory parking minimums!) and maybe I'll own one some day. Let's say it's a couple of years from now, I've got a kid, and my wife and I decide we need to add a car to our arsenal. We navigate over to the General Motors website and look at its search tool and find:
We find ... a lot of car jargon. I feel like sensible consumer-facing brands do this the other way around. The Banana Republic men's website has a link labeled "sharp at work" that I think a man is supposed to click on in order to look sharp at work. You go to "dress shirts" to dress up and to "casual shirts" to dress down. This works because these are all words in the English language that people who aren't interested in fashion understand. Do I really want to spend almost $2,000 for a laptop? No, I don't, and since the laptop in question has "Pro" in its name I know that I—not being a pro—should be well-served by the cheaper one. Right?
So why doesn't GM tell me whether my hypothetical young urban family needs a hatchback/wagon or crossover? I don't know what the difference is.
Which is not to single them out for abuse. Toyota has invested in a very well-designed interactive car-matching tool that opens with this absurd and reductive question:
I dunno, some of each? Right? Like everyone else? And while GM insists on confusing me by asking which brand I want, Toyota errs in the other direction—no matter what you say, they won't try to sell you a Lexus. After all, I didn't navigate to www.Lexus.com so obviously I'm not in the market for Toyota's highest end cars. All in all, the marketing seems to assume that the target is big-time car enthusiast. Someone who's really interested in the internal brand separation strategies of major automakers and wants to master the different genres of automobile.
I'm open to the possibility that this is just a weird quirk of my Manhattan upbringing and normal people find car companies' self-presentation to be totally clear and logical. But I have a suspicion that car companies run by "car guys" may be a little bit excessively cocooned about how this looks to just regular people.
Is Taxing Airfare Regressive?
One question a number of people asked me yesterday about the idea of raising taxes (or "fees") on airplane tickets is whether this is a regressive tax increase or a progressive one.
There doesn't seem to be any clear data out there about the income profile of American air travelers. But I think common sense can tell us a few things here. One is that at the top end, it's pretty clearly going to be regressive. Which is to say a person in the 80th percentile of the income distribution almost certainly spends a larger share of her income on airplane tickets than does a person in the 99.9th percent. Among other things, really rich people don't fly commercial at all!
But conversely, unlike a general sales tax you'd think a tax on plane tickets would largely spare the poor as people who are really struggling economically almost by definition don't have the luxury of worrying a lot about vacation expenses.
The bigger issue is that the actual incidence of this tax hike is going to be hard to figure out. You have two pretty distinct markets for air travel, one consisting of leisure travel and the other of business travel. The business travel market is fairly inelastic. Business travelers will look for a good deal on a flight, but if there's a meeting in Chicago and all flights get more expensive because of some new tax, then they're just going to pay the tax. The leisure travel market, by contrast, is very price sensitive. People have an amount of money they can afford to spend on vacation and find a plan that fits the budget. There's a welfare loss if higher taxes make you switch plans to a different destination (someplace you can drive to, say), but the economic loss is going to fall on the airline, which lost a chance at the sale. Those losses will trickle down throughout the airline value chain which is why, for example, you see a major pilots union blasting the deal.
Don't Get Tricked Into Swimming in This Swiss Vault Full of Money
JamesEdition—the billionaires' version of eBay—is auctioning off a chance to connect with your inner Scrooge McDuck by lounging in a bank vault filled with currency. The vault in Basel, Switzerland, is filled with 8 million real Swiss coins, which works out to roughly $450,000.
Here are some intrepid vault laborers shoveling the money:
Gizmodo thrilled at the JamesEdition listing, saying it would "fulfill every person's childhood (and adult) dream of swimming in money." Sorry to be a killjoy, but as much fun as it sounds, attempting to swim in 15 tons of Swiss doubloons would be extremely painful at best, and potentially life-threatening at worst. (Now, using that money to fill a swimming pool with cornstarch or spaghetti would be a much more reasonable, enjoyable alternative).
We are only human beings, and unfortunately cartoon physics don't apply to us. The Billfold's Matt Powers has put McDuck's wealth at $210 billion—making the Disney 'toon $137 billion richer than Carlos Slim Helú. It's time to accept the fact that Scrooge McDuck will always have it better than we do.
Good News for People Who Want Doritos-Flavored Chicken Wings
PepsiCo, makers of not just Pepsi but also various delicious snack products, struck a deal today with Buffalo Wild Wings to become the chain's exclusive soft-drink provider.
“You’ve got to get in the door with great beverages,” said Kirk Tanner, president of PepsiCo’s food service business, which supplies restaurants and other institutions with the company’s products. “But what this partnership does is give Buffalo Wild Wings a full access pass to all that PepsiCo has to offer.”
Of course PepsiCo has a lot to offer besides beverages. Quaker Oats oatmeal, for example. But I doubt we'll see oatmeal revolutionizing the Buffalo Wild Wings menu. The game-changer is to follow Taco Bell's lead and incorporate delicious chips into the food. Doritos-flavored wings. Or something with Fritos. Fritos are great.