No, Washington, D.C., Is Not the Most Expensive City in America
Yesterday, the Washington Post reported that, according to a recent government study, the D.C. region was "the most expensive place to live in the country, ahead of the pricey markets of New York and San Francisco." I hate to be the guy complaining that somebody said something wrong on the Internet, but the study stated no such thing.
The Post article is based on a report by the Bureau of Labor Statistics that looked at how much the average household spent on housing and related expenses in 19 U.S. metro areas—meaning cities and their surrounding suburbs. And indeed, Washington metro residents shelled out the most for their homes, their utilities, and things like furniture.
Here’s the problem. Looking at what the average household spends on housing doesn’t actually tell us whether a metro area is expensive. It just tells us what people spend, whether it’s because they can’t find more affordable options or because they’re well off and want to own an oversize home with a nice backyard. Washington, D.C., isn’t the cheapest city in which to rent an apartment. But the region has the highest median income among the top 25 largest metro areas. And if you’ve ever driven through its particularly affluent suburbs, you know they’re chock-full of McMansions that probably push up average spending on things like home furnishings and air conditioning bills. Washingtonians—and their suburban neighbors—spend a lot on housing in part because they can afford to.
There’s a slightly bigger point to make here. Even if Washington, D.C., did have the least affordable housing in the country, that wouldn’t necessarily make it the least affordable city. As I’ve written before, judging whether a city is relatively expensive means taking into consideration factors like transportation, since it’s much cheaper commuting every day on a bus or subway than it is to own a car. In cities with weak public schools, families have to worry about the cost of educating their children. Taxes change the equation, too. And so on. Any report that only looks at a few statistics about housing costs to declare which city is the least affordable would be misleading at best.
Man Wants $150,000 for Ebola.com, Compares Self to a Doctor
Because no calamity is complete without a little bit of small-time profiteering, the Washington Post reports that the owner of Ebola.com now wants $150,000 for the URL. Jon Schultz is a "merchant of disease domains," according to the Post, who also owns such properties as birdflu.com and H1N1.com. He bought Ebola.com in 2008 for $13,500, and now, with thousands of infections in Africa and the entire U.S. beside itself about a few cases in Dallas, he thinks it's time to cash out. “We’re getting inquiries every day about the sale of it," he told the Post. "I have a lot of experience in this sort of domain business, and my sense is that $150,000 is reasonable."
Is there anything inherently wrong with making a little money off a public health crisis in a way that probably won't cause any lasting harm? Investors make far more money betting on the misfortune of others all the time—think about the hedge funders who made bank shorting the housing market before its collapse. But Schultz isn't his own best advocate. When asked how he felt profiting off a disease that had already killed thousands, he offered up this dazzling analogy:
But you could say the same thing about doctors. ...They can become very well-off treating very sick patients. Besides we have sacrificed a couple of thousands in parking page income to put up links about Ebola on the site. And people can also donate to Doctors Without Borders at the site.
Yes, Mr. Schultz, you are just like a doctor.
The Nobel Economist Knew About “Too Big to Fail” 10 Years Before the Rest of Us
There’s something a bit ironic about the work of Jean Tirole, the French economist who won the Nobel Prize today for his influential research on how to regulate large and powerful corporations. Even in papers published decades ago, the subjects of his work feel ripped from today’s headlines—he was writing about the threat of too-big-to-fail banks and the hazards of bailouts all the way back in 1996. Want to talk about how to prevent another financial crisis, deal with Comcast, or think about the meaning of a monopoly in the era of free Internet services such as Google and Facebook? Triole’s your man, and has been for a long time. Yet he’s not a name you’re likely to see all the time in the New York Times or Wall Street Journal.
“Many of his papers show ‘it’s complicated,’ rather than presenting easily summarizable, intuitive solutions which make for good blog posts,” economist Tyler Cowen wrote in a summary of Tirole’s work. “That is one reason why his ideas do not show up so often in blogs and the popular press, but they nonetheless have been extremely influential in the economics profession.”
And “it’s complicated” is hardly a bad message for the Nobel Committee to be sending. “In the 1980s, before Tirole published his first work, research into regulation was relatively sparse, mostly dealing with how the government can intervene and control pricing in the two extremes of monopoly and perfect competition,” the committee wrote in its announcement. The problem is that perfect competition and total monopolies for the most part only live in econ textbooks. Instead, many markets are often dominated by a small group of very large companies—or oligopolies. To get the picture, think about today’s increasingly concentrated airline, music, or beer industries. Or the smartphone wars between Apple and Samsung. Or your local cable market, which probably has no more than two (deeply unsatisfactory) providers.
In the 1980s, Tirole and his late colleague, Jean-Jacques Laffont, started using game theory and other rigorous mathematical approaches to begin modeling these oligopolistic markets, and figuring out how regulators ought to deal with them to serve the consumer’s best interest. The answers tended to change according to the industry. This was a rebuff to the old idea that regulators should apply a few simple rules that applied broadly across the entire economy. Many of his ideas have been picked up by governments, but not all. As Joshua Gans wrote today at Digitopoly, “Want to know why there is so little competition in telecommunications and broadband service in the US? go open one of Tirole’s books; it is time you listened.”
As the Nobel Committee put it, “The best regulation or competition policy should therefore be carefully adapted to every industry’s specific conditions.” Another way to frame it: It’s not about light regulation, or heavy regulation, but smart regulation. Which is complicated.
Wayward Olive Garden Might Start Salting Its Pasta Water Again
About a month ago, it came out that Olive Garden had been committing a culinary crime against humanity: The Italian chain was not salting its pasta water.
The scandal was first revealed in a 294-page slide presentation compiled by Starboard Value, a hedge fund and activist investor that holds an 8.8 percent stake in Darden and had been engaged in a lengthy proxy fight for control of Darden's board. Whether the pasta water or something else was the final straw we may never know. But on Friday, Starboard emerged from the battle victorious, ousting the entire Darden board and electing all 12 of its nominated directors.
As Reuters notes, Starboard's win was an unusually large one for activist investors, who typically lock up no more than a few spots on a company's board. Starboard and another activist investor, the Barington Capital Group, had spent months lobbying for Darden to spin off Olive Garden, Red Lobster, and LongHorn Steakhouse from higher-growth chains in Darden's portfolio. Then in May, Darden abruptly decided to sell Red Lobster alone for $2.1 billion over strong shareholder objections. Tensions increased even further and pushed more investors to Starboard's side.
In a statement released Friday, Starboard CEO Jeffrey Smith said that "Darden has all the right ingredients to regain the strength and prominence it once enjoyed. We look forward to continuing our hard work from inside the boardroom and working with management on a shared goal of excellence for Darden."
We can only assume those "right ingredients" will include a restored dose of salt to the Olive Garden pasta water.
Family Dollar’s New Strategy: “Magical” Price Points and Lots of Alcohol
It's been a rough few months for Family Dollar. The discount retailer is currently trying to ward off a hostile takeover from Dollar General, while sealing a merger deal with another dollar store chain, Dollar Tree. The mess has hardly done wonders for its business. On Thursday, Family Dollar reported that its profit tumbled 66 percent in the fourth quarter and same-store sales edged up a mere 0.3 percent. During that period, it shuttered 375 underperforming stores and lost money to inventory markdowns, restructuring fees, and merger expenses.
Sales at Family Dollar are growing in one area: tobacco and refrigerated/frozen foods. But the company's management isn't exactly pleased about this. Because those items have low profit margins, the sudden spike in purchases of them by consumers has actually put more pressure on Family Dollar's own margins. "What we are really focused on is keeping those businesses going strong, but also growing some of these margin areas to offset some of the impact there," Family Dollar CEO Howard Levine said on the quarterly earnings call. That might help explain why Levine said Family Dollar will speed up its rollout of beer and wine—high-margin items—in the coming year. Alcoholic beverages are currently sold in about 500 Family Dollar stores, and supposed to hit 1,500 more over the next 12 months.
Before that rollout happens, a big test for Family Dollar—not to mention every other retailer—will be the coming holidays. The previous year, holiday sales largely disappointed, and Family Dollar was no exception. But Levine spent a good portion of the call reassuring investors that this time around, the company is positioned to have a "very competitive holiday season." He added that the store is more focused on "everyday values" and the "magical $1 price point." (Family Dollar is not a "true" dollar store, but rather sells its inventory at a range of relatively cheap prices.) "Things are on track," Levine said. "We feel very good about the flow of our goods and are well-positioned for the holiday season."
That's all well and good, but even that "magical" price point and upcoming sales of alcohol can't necessarily make up for the bigger economic challenges facing the company. Dollar stores in general have been hard hit in recent years as the recovery has inched along and drained low-income consumers of their spending money. When things don't look great for the main Family Dollar consumer, they don't look great for Family Dollar either. Levine acknowledged as much with what is now a familiar refrain of his: "Our core customer is still struggling."
Amazon Is Opening an Actual Store
File this one under #innovation. Online retailing giant Amazon is planning its first brick-and-mortar store, the Wall Street Journal reports, and it's going to be a big deal. According to the Journal, the real-life Everything Store at 7 West 34th St. in Manhattan will push the boundaries of commerce with revolutionary in-store services that include:
- Receiving same-day delivery items
- Facilitating product returns and exchanges
- Allowing customers to pick up online orders
- Highlighting Amazon inventory
The ambitious project is also risky. The Journal notes that operating a physical store could force Amazon to take on retailing costs it thus far "has largely avoided." These include leasing a space for the store and paying employees to work there. The added expenses could prove dangerous to the thin profit margins that Amazon's Jeff Bezos is famous for maintaining.
Amazon has toyed with the idea of a physical store before. Last November, the company opened pop-up shops in U.S. malls to sell its Kindle tablets and e-readers. As it turns out, physical stores for online retailers is something of a trend—some call it trading "clicks for bricks." In 2013, Etsy opened a pop-up store in New York City and eBay teamed up with Kate Spade to create temporary storefronts. Online eyeglasses seller Warby Parker has also experimented with physical locations.
Other online retailers have tried to strike a balance between the physical and digital worlds. Companies like Trunk Club and Stitch Fix, which regularly send their subscribers a sampler of items, are built around the notion of trying to bring an in-store shopping experience to your living room. Either way, nothing says disruption quite like turning our online experiences into IRL ones.
Why PayPal’s Split From eBay Threatens 70 Million Americans
PayPal’s coming split from eBay potentially threatens eBay, Apple Pay, and all the ungainly legacy tech companies whose investors are now pushing them to break into pieces. But there’s also a large group of people for whom the PayPal-eBay breakup is bad news: anyone who hates banks, particularly the low-to-moderate income people the industry calls “underbanked.”
That’s a lot of people. About 70 million Americans, or one in five U.S. households. They’re everyone from students and immigrants to entrepreneurs and business owners. They pay some $78 billion in fees every year to cash their paychecks, take out payday loans, or use debit cards. Some of these people hate banks on principal, or because of sneaky things like overdraft fees; some of them can’t qualify for bank accounts or traditional credit card loans; some of them need to send money to relatives in other countries or use other financial services that banks often don’t provide.
And these 70 million Americans just lost the attention of the executive who was making some of their nonbank financial services cheaper.
That would be Dan Schulman, the incoming chief executive of the independent PayPal. Until last week, he was a senior executive at American Express, where he was leading the credit card company’s strange but surprisingly effective campaign to develop better financial services for underbanked consumers.
Strange: American Express, the company that taught us to refer to credit cards like they’re high-end jewelry (“Platinum!” “Gold!” “Silver!”), has always been an unusual standard-bearer for economy-class financial services.
Surprisingly effective: Since Schulman arrived at Amex in 2010 to “create new fee-based revenue streams for the post-recession environment,” the company has helped drive down industry prices for things like “prepaid” cards, which are something between debit cards and bank-less checking accounts.
Those cards tend to be predatory and full of hidden fees for basic functions ($0.99 just to swipe the card? $1.25 to call a customer service representative? $3 for not using the card??) But those fees have gotten less egregious, and slightly cheaper, in the past couple of years, according to Pew Charitable Trusts—and it’s hard not to give American Express at least a little credit.
Schulman oversaw Amex’s unveiling of two prepaid cards, Bluebird and Serve, which even financial industry critics acknowledged were pretty good about reducing fees. In 2011, the New York Times’ Tara Siegel Bernard said Serve “appears to right many of the industry’s wrongs.” At Reuters, Felix Salmon called it “a huge improvement, from a consumer perspective, over any prepaid alternative,” and suggested that it might even have some advantages over checking accounts: “The Amex card is never going to surprise you with something nasty and unexpected in the way that checking accounts are prone to doing.”
That’s a lot of good press for a traditional financial services company that, after all, isn’t in the business of being altruistic. But now the man responsible for championing those cards at American Express—and by extension, bigger companies’ efforts to improve their financial products—has taken his cowboy boots and left the building.
The company says its efforts of the past four years can survive one executive’s departure. American Express is promoting Neal Sample, a former eBay executive whom Schulman hired in 2012, and spokeswoman Leah Gerstner told me that CEO Ken Chenault is still very committed to the “enterprise growth” unit: “There’s no change in mission. We’re still very focused on bringing products to market for those who are underserved.”
The problem is that Schulman was very much the face of that mission. It got him written up everywhere from the Harvard Business Review and Fast Company to the New York Times and American Banker. It sent him to South by Southwest this year, promoting American Express’ glossy Spent documentary about financial difficulties faced by the underbanked. It put Schulman front and center at a red-carpet June event for the film in New York, where he rubbed elbows with Spent narrator Tyler Perry.
People who have worked with the company told me this week that they’re not concerned about American Express immediately abandoning its products for lower-income people. But they are worried that without Schulman as a powerful champion, the marketing budget for those products may slowly slip away.
That might have happened anyway, since it was never clear how sustainable this business was for American Express. The company doesn’t break out numbers for its prepaid cards, which "suggests they don’t contribute meaningfully to the company’s bottom line," RBC Capital analyst Jason Arnold told Bloomberg.
But the marketing dollars were getting Amex something more ineffable, as they’re supposed to do: goodwill, and attention to the cause of "disruptive" financial services.
American Express is hardly alone in trying to disrupt financial services, of course. There are many bona fide startups, including IPO-planning Lending Club and OnDeck Capital, trying to figure out new (but not always cheaper) ways to lend to Americans. In the realm of big companies, Walmart has been as prominent as—though less lauded than—American Express; last week the retailer unveiled its version of a basic bank account for low-income people.
And yes, Schulman’s move is probably good for PayPal, one of the earliest and most successful financial disrupters. But that company’s interest has traditionally tended to be more in payments—including mobile wallets of the sort that Apple Pay is taking on—than in lower-priced financial products.
It’s possible that Schulman could change that, although he’ll obviously have other initial priorities when he starts his new job. PayPal isn’t making Schulman available for interviews, and a spokeswoman declined to comment.
But that brings us back to the problem with financial services disruption, especially in terms of making cheaper, better products for Americans who don’t have much money to begin with. Those people aren't hugely lucrative customers.
So most businesses would, understandably, rather focus on selling you a better smartphone wallet than on building a better bank account for people who might not be able to afford the iPhone 6. It's just unfortunate that one of the most prominent financial executives focused on the latter is becoming one more in the crowd of people devoted to the former.
AT&T Ordered to Repay Customers for $80 Million of Bogus Phone Charges
The Federal Trade Commission notched a win for consumers on Wednesday when it announced a $105 million "cramming" settlement with AT&T. The fine is notable for a few reasons: It's the biggest one the FTC has ever made with a major mobile carrier, and, more importantly, $80 million of it will go to refunding customers who were taken advantage of in the first place.
"Cramming" is what regulators use to describe the illegal practice of stuffing extraneous charges—typically from unauthorized third parties—into customers' bills. These charges are often buried deep in the bill or given vague, deceptive labels such as "service fee" or "other fees" so as not to arouse suspicion. Cramming predates smartphones, but those users are especially vulnerable to it since they tend to make more purchases that unauthorized line items can hide behind. The FTC demonstrates this with an infographic containing "excerpts from an actual AT&T bill."
Pretty much everyone agrees that cramming is a big problem. In a report released in July, the Senate Committee on Commerce, Science, and Transportation said cramming was a billion-dollar industry that costs consumers millions each year. At the same time, cramming bolsters revenue for AT&T, Sprint, T-Mobile, and Verizon, as carriers often retain 30 to 40 percent of third-party charges. Earlier that month, the FTC filed a formal complaint against T-Mobile that accused it of reaping hundreds of millions of dollars from phony charges buried in customers' cellphone bills. The FTC says it has pursued seven cases again mobile cramming since 2013.
The FTC is instructing consumers who believe they were charged unfairly by AT&T to submit a refund claim online. As part of its settlement, AT&T is also supposed to notify all current customers who were affected of the deal and the refund program. In other news, trivia text alerts just lost a lot of unwitting but well-paying customers.
Warren Buffett Is Putting His Money on Hillary
Warren Buffett deviated from business predictions at Fortune's Most Powerful Women Summit on Tuesday to make a political forecast: "Hillary is going to win."
The Oracle of Omaha is a known supporter of both Clinton and President Obama. He reportedly backed Clinton's 2008 campaign and has donated to and helped fundraise for Obama. Buffett also showed his support for Clinton in one of his five tweets since joining Twitter in May 2013:
Hello @Hillaryclinton! Happy to welcome one of my favorite women in the world to twitter. #45— Warren Buffett (@WarrenBuffett) June 10, 2013
How sure is the billionaire investor of his hunch? "I will bet money on it," Buffett said. "I don't do that easily."
Did Comcast Get a Man Fired From His Job for Complaining About Its Service?
Update, Oct. 8, 11 a.m.: Ars Technica confirmed the account described in this story over lunch last Friday with the man, Conal O'Rourke, in Northern California. O'Rourke was fired from his job at PriceWaterhouseCoopers (PWC) earlier this year after his extended dispute with Comcast. Ars Technica reports that he provided "an astonishing amount of documentation" and is threatening to sue Comcast if the company does not apologize, retract its comments to his employer, restore his job, and pay him $100,312.50 by Oct. 14.
Innovative might not be the first word that comes to mind in describing Comcast. But are we giving the company credit where credit is due? Let's face it, after that harrowing 18-minute customer service call went viral in July, it looked like Comcast had nothing more to strive for—it had reached peak horrible. Yet if reports this week are accurate, Comcast has continued to shine as an innovator in the competitive field of corporate terribleness: It got a customer's employer to fire him for complaining about shoddy customer service.
The full story in all its sadistic glory is at Consumerist, but here's the SparkNotes version. A customer named "Conal" started subscribing to Comcast service in early 2013. There were issues: erroneous charges, bills that never arrived, discounts that weren't applied. Conal considered canceling his service, but decided to stick with it after a Comcast rep promised that the issues would be resolved and threw in some free perks. As another friendly gesture, the company also allegedly sent and billed Conal for $1,820 of equipment he'd never ordered.
This is where it gets crazy. Conal, understandably frustrated, decided to bypass the customer service department and take his complaints straight to the Comcast controller. During the call, he claims, he suggested that a private-sector oversight group look into Comcast's billing and accounting issues. Shortly after that call, Comcast contacted Conal's employer—a large accounting firm that Consumerist reports happened to do business with Comcast. The rep claimed that Conal had name-dropped his employer as leverage during the call; according to the story, the firm opened an investigation against Conal and then fired him from his job.
It's hard to know who's telling the truth here. Conal tells Consumerist that he never mentioned his employer and that someone at Comcast must have looked him up to figure out where he worked. Comcast, for its part, has allegedly refused to release any tapes of the phone calls it made on the matter. That's a little strange: If Conal did invoke his company's name in a threatening way, Comcast could easily prove as much by excerpting the relevant portion of his call. So much for monitoring "for quality assurance purposes." If you want it done right, record the call yourself.