A blog about business and economics.

May 15 2015 11:51 AM

Facebook Is Raising Wages for Contractors to $15 an Hour

Facebook is taking up the fight for $15, if not formally then through a wage increase it announced this week. The company has begun paying its U.S. contract workers—which include cafeteria staff and janitors—a minimum of $15 per hour. Contractors are also getting improved benefits: at least 15 days of paid time off, and a $4,000 new-child benefit for workers who don’t get parental leave. “Taking these steps is the right thing to do for our business and our community,” Sheryl Sandberg, Facebook’s chief operating officer, wrote in a memo. “Providing adequate benefits contributes to a happier and ultimately more productive workforce.”

With its decision, Facebook is getting ahead of the increasingly visible class tensions in Silicon Valley. Earlier this year, a study from Joint Venture Silicon Valley described how uneven economic growth in the valley has been. While Silicon Valley’s overall job growth was 4.1 percent in 2014, the best rate since 2000, middle-wage jobs actually declined slightly. And that year, the median gap between low-wage and high-wage jobs was $91,804 in Silicon Valley compared with $69,992 elsewhere in the Bay Area. “Though we’re proliferating high-wage and low-wage jobs, we’re steadily losing share in the middle,” Russell Hancock, president and CEO of Joint Venture Silicon Valley, wrote. “It’s as if the economy has lost its spine.”

If these disparities are particularly acute in Silicon Valley, they’re also apparent across the country. Last summer, the Russell Sage Foundation delivered the shocking news that the median household was officially poorer than it had been in 1984.* Meanwhile, a report this week from the AFL-CIO found that the CEOs of America’s biggest public companies now earn 373 times more than the average worker. Microsoft’s Satya Nadella was the third-highest paid CEO on that list, with $84.3 million in compensation in 2014. Oracle’s Larry Ellison was right behind in fourth place with $67.2 million in compensation while Yahoo’s Marissa Mayer ranked 13th, with $42.1 million.

The timing of Facebook’s announcement probably isn't accidental. Since the start of 2015, several other majors companies—including Target, Walmart, and McDonald’s—have announced increases to their minimum wage. Their decisions have come alongside repeated, prominent labor rallying efforts from groups like Fight for $15, as well as a new Democratic push to raise the federal minimum wage to $12 an hour by 2020. Facebook said in its memo that the change is already in place at its Menlo Park headquarters and will reach more workers within the year. The company declined to tell Reuters how many contract workers it employs or who its vendors are, so it’s a bit hard to estimate what this increase will cost. But with a market cap of $226 billion at last count, chances are Facebook can afford it.

*Correction, May 15, 2015: This post originally misspelled the name of the Russell Sage Foundation.

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May 14 2015 1:45 PM

Walmart’s Answer to Amazon Prime Is Here. And It’s Way Cheaper.

A decade after Amazon launched Prime, its signature membership and free shipping program, Walmart has a rebuttal ready: unlimited shipping for half the price.

Walmart said Wednesday that it will begin limited tests of a subscription shipping program for online shoppers. Those who sign up for the $50 annual service will get unlimited free three-day shipping on more than 1 million of Walmart’s top-selling items, with no minimum purchase required.

Walmart says it will start testing the service on an invite-only basis in a limited number of markets later this summer. Ravi Jariwala, a company spokesman, declined to provide details on which markets in particular, or exactly how many. Walmart is also not sharing details on how it plans to fill the online orders or who will deliver them, but Jariwala added that Walmart works with “a number of different carriers.”

When it comes to all things digital, Walmart knows it needs to do better to keep up with the likes of Amazon, and last fall it announced plans to accelerate investments in e-commerce. The company said it would spend between $1.2 billion and $1.5 billion on those online efforts this year—a big increase from last year’s $1 billion. In a sign of how the retail market is swinging, Walmart added that it would continue building new fulfillment centers to speed up delivery for online orders, but offset increased e-commerce costs by adding fewer square feet to its physical stores.

Walmart currently offers a grocery delivery service in five markets, including Phoenix and Huntsville, Alabama. The company also has a “site to store” program that lets customers place orders online and then pick them up for free at a local store. Walmart says that a third of its online orders “somehow touch the store,” meaning the merchandise is either picked up directly at a store, or shipped to customers from a store rather than one of the company’s fulfillment centers.

While Walmart’s new delivery service will be available for half the price of Amazon Prime, which costs $99 a year, that alone seems unlikely to convince Prime patrons to switch allegiances. For starters, three-day shipping is slower than the standard two-day delivery—and, in select markets and items, two-hour delivery—that Prime provides. Walmart’s 1 million eligible items also likely won’t compete with the estimated 20 million things available on Prime. Then there’s the fact that Amazon Prime now offers many more perks than just delivery—streaming music, streaming movies, and access to the Kindle library, to name a few.

But it’s also possible that Walmart’s shipping service isn’t really trying to go head to head with Amazon’s. At $50, it’s substantially cheaper, so it makes sense that it would offer much less that Prime. At the same time, Jariwala says the eligible items will include most basic consumables (things like toilet paper and soap and paper towels). If you assume, as Amazon has seemed to, that many people sign up for delivery services largely to keep those everyday necessities in stock, then Walmart’s $50 shipping subscription starts to look pretty good. You might not be able to get a horse-head mask delivered in two days, but if your main focus is replenishing essentials, why not try the cheaper service instead?

May 12 2015 6:39 PM

Stephen Schwarzman Needs His Name on Yale Much, Much More Than Yale Needs the Schwarzman Center

Stephen Schwarzman, Yale graduate, billionaire co-founder of the Blackstone Group, and thrower of birthday parties, has donated $150 million to his alma mater for the creation of a student center. Should this sound like an absurd amount of money to give to the second-richest university in the world, you simply aren’t thinking big enough. The Schwarzman Center, per a Yale press release, will be “world-class” and “state-of-the-art.” It will transform Commons, Yale’s grand dining hall, into a tremendous complex for eating, mingling, performing, and pontificating. “My hope is that the Schwarzman Center will serve as the crossroads for the campus, but also place Yale at the crossroads of the world,” Schwarzman says.

Presumably this gift is quite important to the powers that be at Yale. Planning for the Schwarzman Center, which is set to open in 2020, will begin almost immediately. Peter Salovey, Yale’s president, said in a campuswide email that the gift will be “transformational” in creating “for the first time, a center dedicated to cultural programming and student life at the center of the university.” As a relatively recent, not yet entirely out-of-touch Yale graduate, I’ll note that this is something of a stretch. Yale boasts many elite arts and performance centers (for starters, see: the Yale Repertory Theatre, the Yale School of Drama, the Off Broadway Theater, Woolsey Hall, Sprague Hall, the Center for British Art, and the University Art Gallery). In terms of student life, Yale’s entire housing system, which assigns incoming students to specific “residential colleges,” was designed to eliminate the need for a single campus student center. To paraphrase a 2013 op-ed in the student paper, the greatest obstacle to a student center was never lack of space or funding; it was lack of need.

But let’s forget Yale students and what they may or may not need. This gift really isn’t about students—it’s about Schwarzman. Despite the fortune and success he has wrung from life, or perhaps because of it, Schwarzman’s appetite for prestige and affirmation can still seem insatiable. For an extensive 2008 profile in the New Yorker, Schwarzman bragged that every fundraiser he had chaired or been honored at had set a new record. He has held positions on countless boards. He delights in putting his name on iconic buildings. As a high school student he applied, unsuccessfully, to Harvard, although Schwarzman says he later received a call from the former admissions dean, who admitted Harvard's mistake in rejecting him.

All of this might help explain why Schwarzman has been on a decadeslong quest to inscribe his name upon the walls of Yale. In the late 1990s, Schwarzman made a similar proposal to the university—naming the Commons dining hall in his honor—in exchange for a $17 million gift. But when it came out that Schwarzman was proposing not a straightforward donation but a contribution to a Blackstone investment partner on Yale’s behalf—which meant that the investment, when liquidated, could be worth far more or far less than $17 million—the deal fell through. As the New Yorker put it, “Yale balked at trading a significant naming opportunity for what it considered a speculative commitment.”

Fast-forward to 2015, though, and Schwarzman is back. The size of his promise has increased nearly tenfold, and the raw figure is second only to a $250 million gift from billionaire financier Charles Johnson in September 2013. Assuming all goes smoothly, Schwarzman within five years will have his name forever enshrined in Yale’s halls, and Yale will get a new student center that it doesn’t need. Certainly, there are much better uses for $150 million—at Yale or, preferably, just about anywhere else. But those uses would not suit Stephen Schwarzman, an ultra-rich man, a man once spurned by Harvard, a man on a lifelong quest to achieve immortality through money. Of course he hopes the Schwarzman Center will place Yale “at the crossroads of the world.” Because then, maybe, finally, Stephen Schwarzman will be at those global crossroads as well.

May 12 2015 1:24 PM

Olive Garden Will Serve Subs on Its Addictively Good Breadsticks Starting This Summer

Olive Garden has plenty of detractors, but few would criticize its breadsticks. They’re soft and warm, perfectly salted, slightly garlicky, doughy without being gooey. They’re also unlimited, and addictively good. My younger brother, as younger brothers are wont to do, used to routinely scarf down 10 at a time. Wait too long for your main course at Olive Garden, and breadsticks risk becoming your entire meal. And come this summer, that’ll be exactly the idea.

Olive Garden will serve chicken parm and meatball parm sandwiches on its famous breadsticks starting in June. The parm-ready breadsticks will be slightly shorter than those distributed as appetizers, but also wider, to accommodate the sandwich filling. They’ll only be available at lunch (replacing the current sandwiches on the lunch menu) and will start at $6.99 for meatball parm and $7.99 for chicken. Jessica Dinon, a spokeswoman for Olive Garden, said customers shouldn’t expect any differences in the sandwich breadsticks. “We’re not changing anything—the buns taste like breadsticks and it’s the same recipe, butter and garlic salt, that we already use.”

Darden, the parent company of Olive Garden, has been pushing through a rough stretch. Last summer, the company spun off Red Lobster, a longtime property, and announced that its chief executive of nearly 10 years, Clarence Otis, would step down from his post. Then in the fall, Olive Garden was publicly ridiculed in a report and presentation from Starboard Value, which, among other things, characterized the restaurant’s breadsticks as “just one example of food waste.”

Yet even Jeffrey Smith, the activist investor and Starboard CEO who led the campaign against Olive Garden, recently admitted that he enjoys the breadsticks. “We’ll have chicken parm on them,” Smith said in an interview this weekend. Yes, yes we will.

May 12 2015 9:42 AM

Verizon Is Buying AOL for $4.4 Billion

Verizon Communications said Tuesday that it plans to purchase AOL for $50 a share, or about $4.4 billion. The deal is expected to help Verizon build out its mobile-video offerings by giving it access to AOL’s digital content and advertising technologies, along with its many media properties: The Huffington Post, TechCrunch, and Engadget are all owned by AOL.

“At Verizon, we've been strategically investing in emerging technology ... that taps into the market shift to digital content and advertising,” Lowell McAdam, Verizon’s chairman and CEO, said in a statement. “AOL’s advertising model aligns with this approach, and the advertising platform provides a key tool for us to develop future revenue streams.”

Verizon’s stock edged down 1 percent in early morning trading. Shares of AOL jumped 17 percent.

Rumors of a Verizon-AOL deal were reported back in January by Bloomberg, which noted that Verizon could use AOL’s ad technology to create a “future online-video product.” At the time, AOL dismissed the reports as untrue. With the now-announced deal, Verizon will also gain AOL’s roughly 2.1 million paying subscribers, which last quarter brought in $182.6 million in revenue. And yes, those are the people who still use dial-up to connect to the Internet.

In an internal company memo sent Tuesday morning, AOL chief executive Tim Armstrong said being acquired by Verizon will allow AOL to “fully open up the mobile frontier.” Verizon, the largest wireless provider in the U.S., at last count said it had about 108.6 million wireless users. “Mobile will represent 80 percent of consumers’ media consumption in the coming years and if we are going to lead, we need to lead in mobile,” said Armstrong, who will stay on as AOL’s CEO. “The deal will game-change the size and scale of AOL’s opportunity.”

What does that proverbial game-change mean for AOL’s media properties? Re/code is reporting that Verizon could potentially spin out HuffPo and the like to a third partner. That possibility would also square with Bloomberg’s initial report, which said it was “unclear” whether Verizon was actually interested in AOL’s media properties. When Armstrong first took over at AOL in early 2009, the company was still operating under Time Warner, which it had acquired in 2000.* Later that year, the disastrous merger finally unwound, with AOL separating into its own publicly traded company. Will history repeat itself with Verizon’s bid? Let’s ask Shingy.

*Correction, May 13, 2015: This post originally misstated that Time Warner acquired AOL in 2000. AOL acquired Time Warner.

May 11 2015 5:20 PM

Shell Gets Conditional Approval to Start Drilling in the Arctic This Summer

Shell Gulf of Mexico is one step closer to being able to drill for oil and gas in the Arctic Ocean this summer after the Obama administration conditionally approved its plan on Monday. That’s a big win for Shell, which has spent years campaigning for permission to drill in the Chukchi Sea, a part of the Arctic thought to have plentiful oil and gas reserves. Environmental groups, on the other hand, are much less pleased. From the New York Times:

The Interior Department decision is a devastating blow to environmentalists, who have pressed the Obama administration to reject proposals for offshore Arctic drilling. Environmentalists say that a drilling accident in the icy and treacherous Arctic waters could have far more devastating consequences than the deadly Gulf of Mexico oil spill of 2010, when an oil rig explosion killed 11 men and sent millions of barrels of oil spewing into the water.

Before Shell actually starts any drilling, it needs to get federal and state permits. Abigail Ross Hopper, director of the Department of the Interior's Bureau of Ocean Energy Management, told the Times in a statement that the department took a “thoughtful approach to carefully considering potential exploration in the Chukchi Sea,” and that moving forward, “any offshore exploratory activities will continue to be subject to rigorous safety standards.”

Shell, for its part, said it will ensure contractors are well-prepared to drill in the region. That did little to reassure environmentalists, who maintain that Shell hasn’t proven it can operate safely in the Arctic. Because if there’s one thing that industry and environmental groups agree on, it’s that drilling in the Chukchi Sea—where the closest Coast Guard station equipped to respond to a spill is more than 1,000 miles away—is extremely dangerous.

May 11 2015 2:29 PM

Uber-Rich Uber Might Be Getting Even Richer

It seems weird to suggest that a startup could ever tire of raising money, but in Silicon Valley the richest entrepreneurs seem to be getting a little blasé about their millions and billions. Perhaps the most frank about this is Stewart Butterfield, co-founder and chief executive of corporate messaging app Slack, who in April explained Slack’s latest $160 million raise like this:

I’ve been in this industry for 20 years. This is the best time to raise money ever. It might be the best time for any kind of business in any industry to raise money for all of history, like since the time of the ancient Egyptians. It’s certainly the best time for late-stage start-ups to raise money from venture capitalists since this dynamic has been around.
And as a board member and a C.E.O., I have a responsibility to our employees, to our customers. And as a fiduciary, I think it would be almost imprudent for me not to accept $160 million bucks for 5-ish percent of the company when it’s offered on favorable terms.

Combine that with the rise of the Valley’s billion-dollar “unicorn” club and you have a tech scene soaked in—and nearly jaded by—cash. At last count, private companies with billion-dollar valuations numbered 90 strong, with nine boasting valuations in the 11 digits. To count off some of the most prominent: Uber ($40-plus billion), Snapchat ($15 billion), Pinterest ($11 billion), and Airbnb ($10 billion going on $20 billion). These billion-dollar ventures are now so common that “unicorn” seems a misnomer. (Bloomberg View’s Matt Levine said it best this morning: “Now they’re everywhere, and there’s been some weird etymological transference where now ‘uni’ means ‘one’ and ‘corn’ means ‘billion dollar valuation,’ which is why people talk about ‘decacorns,’ just a hideous coinage really, what would you want with a ten-horned horse?”)

So it probably shouldn’t be surprising that Uber, already the second-richest venture-backed private company out there, is reportedly looking to raise more money. Because, well, if the time has come for another pyramid, why not build it? Should investors once more leap to fund Uber, the ride-hailing service’s valuation could reach $50 billion. That would make Uber the most valuable private company in the world, not to mention pushing it past major publicly traded companies like FedEx (current market cap: $49.1 billion).

What will Uber do with all that money? What is Uber already doing with all its money? The new funding would be “strategic, with an eye on partnerships,” the New York Times reports, citing an anonymous person “familiar with the discussions.” As for the second question, Uber continues to expand aggressively in the U.S. and around the globe. It is lobbying for Uber-friendly “ridesharing” legislation, competing with local taxi-hailing apps, pursuing new delivery services, fending off lawsuits, and building out its mapping and self-driving car technology. Certainly, that’s bound to be expensive. Like Slack’s Butterfield might put it, if investors are in the mood to throw money at you, why not catch it?

May 8 2015 4:48 PM

Zappos Stopped Managing Its Employees. They Don’t Seem Too Happy About It.

Zappos, the online clothing retailer and Amazon subsidiary, has spent the past year and a half conducting a peculiar experiment. It’s called holacracy, and it’s the somewhat radical notion that the employees of some companies—like Zappos—would function better without managers in the mix. At Zappos, the project began in late 2013, when chief executive Tony Hsieh announced that the company would eliminate all titles and managers and transition to a holacratic structure.

In theory, holacracy has a certain appeal. Who hasn’t, at some point, wished for a world without bosses, or that a manager would just disappear for a while? At Zappos, though, it seems like the ideal of self-governance has stumbled in practice. In late March, Hsieh said in a companywide memo that Zappos would accelerate its transition to holacracy with a “rip the bandaid” approach. “As previously stated, self-management and self-organization is not for everyone, and not everyone will necessarily want to move forward in the direction of the Best Customers Strategy and the strategy statements that were recently rolled out,” Hsieh wrote.

He offered dissatisfied employees at least three months severance if they quit; 210 of them—or roughly 14 percent of the company’s workforce—took it.

There’s nothing especially odd about the severance deal itself. Zappos has long offered employees money to leave if they don’t feel the job is a good fit. New hires who feel out of place in the company’s offbeat culture are promised one month’s pay should they choose to move on. Amazon’s Jeff Bezos has adopted this management strategy at his company’s warehouses. Amazon’s “Pay to Quit” program offers workers a chance to quit once a year, with the bid starting at $2,000 and increasing by $1,000 a year until it reaches $5,000. “In the long run, an employee staying somewhere they don’t want to be isn’t healthy for the employee or the company,” Bezos wrote in last year’s letter to shareholders.

What’s troubling is that 14 percent of all employees accepted. Historically, just 1 to 3 percent of new hires have taken Zappos’ severance deal. Amazon said last year that only “a small percentage” of its employees end up doing the same. The Zappos exodus suggests that employees aren’t buying into holacracy, the language of which wavers between manifesto-esque and outright cultish. (See again Hsieh’s March memo: “The people management aspects of the manager role are valuable in what the book refers to as Orange and Green organizations, but do not make sense in a self-organized and self-managing Teal organization.” And: “The right question is not: how can everyone have equal power? It is rather: how can everyone be powerful?”)

Back when Zappos first announced its holacracy initiative, I spoke with Jan Klein, a lecturer at the MIT Sloan School of Management and expert on self-management. Klein was skeptical that Zappos would be able to pull off the shift. Holacratic systems have a history of failing for one reason or another, and are notoriously difficult to scale. There’s also plenty of reason to question Hsieh’s pseudo-utopian approach to management and business. The Downtown Project, Hsieh’s multimillion dollar attempt to revitalize Las Vegas with startups and a happiness manifesto, has faced unsettling accusations: nepotistic hiring, juvenile management, and three suicides that were largely kept quiet. Last September, as many of these reports were coming out, Hsieh abruptly stepped down as the project’s leader.

John Bunch, the Zappos employee heading up the move to holacracy, told the Wall Street Journal that he’s not concerned by the 210 departures. “Whatever the number of people who took the offer was the right number as they made the decision that was right for them and right for Zappos,” he said. Presumably Bunch has to say that. But no matter how you spin it, 210 people is a lot of employees to lose at once, and an even more formidable number to consider replacing.

May 8 2015 10:00 AM

The April Jobs Report Is Boring, but That’s Just What We Needed

March was terrible; April was better. Employers added 223,000 jobs to their payrolls, pushing the unemployment rate down to 5.4 percent, its lowest level since May 2008. That's a reassuring payrolls figure to see after the jobs number plummeted last month—the initial report was 126,000—and was revised down further on Friday to 85,000. You can see the ugly blip that March’s figure left in this chart below:



Meanwhile, over the past quarter, we’ve now added an average of 191,000 jobs per month.



In short, today brings us a pretty boring jobs report, but after some bad numbers in March and other spotty indicators, boring was what we needed. The labor force participation rate was basically unchanged, at 62.8 percent. So was the number of people working part time for economic reasons. Wages also stagnated, with average hourly earnings edging up just 0.1 percent from the previous month (2.2 percent annually), missing expectations for 0.2 percent growth (2.3 percent annually).

The wage piece in particular is interesting, because it suggests that unemployment still has further to fall. Economists eye wage growth as an indicator of “tightness” in the labor market. (Basically, whether workers are in short enough supply that they can start bargaining with companies for higher pay.) Wage growth is a tricky issue because while higher pay sounds good to most of us (more money!), it can also potentially lead to inflation, at which point the Federal Reserve might step in to cool things down. But so far, that hasn’t happened. And Friday’s data would suggest a rate hike isn’t imminent. With stocks up in morning trading, the market seems to agree.

May 7 2015 4:16 PM

FDA Says Blue Bell Knew About Listeria Problems As Early As 2013

Blue Bell Creameries, the ice cream and frozen desserts maker that’s been tainted by a listeria crisis, had “strong evidence” that the bacteria was in its Oklahoma plant as of early 2013, the Houston Chronicle is reporting. According to reports the Chronicle obtained from the U.S. Food and Drug Administration, Blue Bell’s tests had turned up a “presumptive positive” for listeria on the floors, storage pallets, and other nonfood surfaces of its Oklahoma plant. In 2014, Blue Bell tests also found that the level of coliform bacteria in products exceeded the maximum allowed by the state of Oklahoma. On top of all that, the FDA said water condensation in the plant had been trickling into the company’s frozen sherbet containers and possibly its ice cream during production. So yeah. Gross.

What really looks bad is that Blue Bell was apparently aware of all this, yet took little or no action to clean up the mess. And in light of the latest FDA reports, Blue Bell’s steps to respond to positive listeria tests this year seem plodding. Blue Bell issued its first-ever product recall in 108 years of business in March, after the deaths of three Kansas hospital patients were linked to its ice cream products. But even as it did that and halted operations at the Oklahoma facility, the company maintained that none of the listeria links had been confirmed. Then in late April, Blue Bell announced it was recalling all its products over listeria concerns. The Centers for Disease Control and Prevention upped its number of Blue Bell listeria cases to 10 and recommended that consumers “do not eat any Blue Bell brand products, and that institutions and retailers do not serve or sell them.” Blue Bell’s CEO Paul Kruse issued a public apology.

Well, now it looks like Blue Bell will need to do a lot more than saying sorry to restore its reputation. The FDA said Blue Bell’s Oklahoma plant had tested positive for listeria on equipment and in products 16 different times between March 2013 and January 2015. Sixteen! Bill Marler, a lawyer and food safety expert, told the Chronicle that Blue Bell’s apparent violations were “as bad as it gets.” (Sixteen!) One hundred and eight years is a long time to build consumer trust. Failing to act on a clear and well-documented consumer health risk is a surefire way to erase it.