Disney’s Growing Character Arsenal, Amazon’s Publishing Troubles, Machiavelli in Citibank

Disney buys Star Wars studio for $4B: As the cognoscenti now know, Disney swooped up Lucasfilm, of Star Wars fame, for $4B (half cash, half disney stock). George Lucas, Lucasfilm’s visionary and legendary sole owner became richer and now owns about 40m shares of The Walt Disney Company. 

Why did Disney do it? Disney has been building up a war chest of comic book, fictional and mythological characters (its purchase of Marvel a couple of years ago, for example gave it 5000 such characters including Spider Man and many other lesser known ones), with the intent to further monetize them via sequels, prequels, amusement park rides (anyone want to guess how popular and money generating Star Wars themed Disney Park rides will be?). So expect Disney to really milk this one in a way that is tasty for fans and shareholders. Lucasfilm’s video game unit, LucasArts may (not sure or clear at this time) boost Disney’s own highly anemic performance in the ever expanding and growing video game market. 

A huge part of the acquisition is the merchandizing. In fact, in terms of cash flow, the Disney will realize the cost of the acquisition in about 5 years (though becoming NPV-positive may take more time, based on costs):

Lucasfilm’s consumer-products revenue this year will be comparable to the $215 million Marvel generated in 2009, when Disney acquired it…suggesting 2012 sales of about $860 million for all of Lucasfilm. Disney seeks to expand “Star Wars” merchandise beyond toys and sees international markets, now 40 percent of consumer-product revenue, as a growth opportunity, he said.

And why did George Lucas do it? He was getting old and at 68, wanted to pass the baton on to someone who would keep the flames burning. Nice way to do it, if you ask me. 

Amazon – becoming a book publisher is hard: Amazon, as we know, started with books. And while it tries to sell everything to every customer out there, it hasn’t stood still in the book industry either, where it has tried to integrate forward and backward in the book industry. In terms of backward integration (replacing or supplanting the big publishing houses it bought the books from, for sale on its website), it has been trying very hard to become a publishing house. 

The economics are simple. A $10 book might give the author $2 in royalties or so, but generate $3 for the publishing house and $5 for the retailer. So Amazon wanted to see if it could eliminate the $3 that the publishing houses (Penguin, Random House et al, from my post yesterday) captured, capture some more of that value itself and cut customer prices some more. 

So why the trouble in paradise? Two things. One, many of the big publishers out there still supply most of the physical books and the eBooks that Amazon sells. And they haven’t been too happy in the past, which means that the number of books they make available to Amazon goes down. Two, and more importantly, authors are getting cold feet – especially the famous ones (whom the publishing houses made famous in the first place) so they are not signing up with Amazon to publish their books. And they are getting cold feet because of what is happening to authors that make Amazon their publishing house:

…But a likely factor in the book’s poor sales is its severely limited availability. It wasn’t stocked in the 689 stores of Barnes & Noble Inc., Wal-Mart Stores, or Target. Some independent booksellers don’t stock the title either. Nor is the digital book for sale in e-book stores operated by Sony Corp.,  Apple Inc. or Google Inc.

The boycott of Amazon Publishing is deliberate on the part of these book sellers. Like the WSJ article quoted above says, why would a Barnes and Noble store promote a book published by Amazon?

Still, as always, never discount Amazon. It will be interesting to see how it solves this problem.

More rules = corruption: While I find corruption morally repugnant, the sadder thing about corruption is that instead of a million people becoming more prosperous, only a 100 become millionaires because businesses don’t get started, competition doesn’t thrive, jobs are not enabled and prosperity cannot take root.

An interesting article in The Economist argues that as opposed to the lack of no rules like in Somalia which is not exactly known for its thriving multinational corporations, few simple clear (enforced I would imagine) rules go a very long way in promoting businesses – and by implication, the virtuous cycle of value creation and capture (this blog’s raison d’être, as I never tire of reminding my readers).

(Above: The chart lifted from The Economist’s article)

The short piece is worth a read.

Citi’s CEO ouster was a result of its chairman’s Machiavellian moves: A fascinating piece in the New York times details how Citi’s CEO (until a few days ago), Vikram Pandit, was ousted because of its Chairman’s well orchestrated and executed campaign over a number of months that culminated in

…Mr. Pandit, the chief executive of Citigroup, was told (by the Chairman, in a face to face meeting) three news releases were ready. One stated that Mr. Pandit had resigned, effective immediately. Another that he would resign, effective at the end of the year. The third release stated Mr. Pandit had been fired without cause.

The choice was his.

A longish but fascinating piece.

Sandy, Price Gouging and Lifetime Customer Value

Shops in tourist spots are notorious for charging insane prices for both ordinary essentials (like clean bottled water) and useless junk. Small vendors in such spots are even worse.

They do it because demand is high and tourists’ options are generally limited. [Also there is some inherent collusion going on between them…if all of them sell at exorbitant prices, where will the tourists go?]

But yet, at other times of sky-high demand, namely hurricanes, snow storms, etc., it turns out that stores, in most cases, do not engage in price gouging. Why?

The answer lies in what I would call “Lifetime Customer Value”, per an interesting post on NPR. 

The post argue that in times of crises, customers may end up paying for something that is temporarily twice or thrice the original cost should a store choose to take advantage of the situation. But, when normality returns, the article asserts that customers remember and take their business elsewhere. 

But that story will be the exception. Even in states without price gouging laws, most stores won’t raise prices for generators or bottled water or canned food. Which raises a question: Why? Why doesn’t price go up when demand increases? Why don’t we see more price gouging?The people (Nobel laureate Daniel) Kahneman surveyed said they would punish businesses that raised prices in ways that seemed unfair. While I would have paid twice the normal price for my groceries yesterday, I would have felt like I was getting ripped off. After the storm passed, I might have started getting my groceries somewhere else.

The corollary to that is that stores and vendors, especially those that are fixed to the ground, have more to gain in terms of revenues over the long run than by temporarily jacking up prices over the short-term. 

And those tourist sharks? What is your lifetime value to someone like that?

 

 

Apple’s Shakeup, Random Penguin House, Google’s S-M-L Devices and Comcast and Lobbying

Yes…yet another format change – but hopefully the last for a while. Going forward, I will have daily roundups such as this one, once-a-week long-form articles (or maybe twice, time permitting).

As always, please let me know what you think. You can also vote with your wallet by interacting with the ads on this site.

Apple’s Management Shake-up: Two of Apple’s top execs are being let go in what is being called a rare top-management move. The best reasoning I could find is from a Gartner analyst:

“I’d call this a big shakeup,” said Gartner Research analyst Ken Dulaney. “And at least with Forstall, it looks like it has to do with problems with usability, which is the iPhone’s trademark. And if Apple feels they’re not at the top of their game, they’ll do what they have to do to get back on top.”

No one is talking about the iPad Mini move though. One could argue that it was a defensive move, which is very unlike Apple. So for some time they did lose some potential sales to 7 inch tablet makers. Then again, one could argue that Apple doesn’t always have to create a category. Entering a pre-existing category and executing flawlessly also works extremely well.

Google’s S, M and L devices: Google announced a 10 inch Nexus tablet. So now it has a S, M and L Nexus – phone, mini Tablet and Tablet. As far as sticking to the Nexus brand and doing classic brand extensions, nice move. I use both Apple and Android devices and can see why each one appeals to different types of users.

So the question is – in a year or two, will customers “self select” themselves as Apple customers (that just want things to work) vs Android/Google/Nexus customers that like to tweak and tinker and change things? Amazon of course can’t be discounted, though at some point, if the Kindle starts eating into Nexus sales I wonder if Google will change the terms of its licensing for Amazon.

The holiday season will be interesting to see how the relative sales of each ecosystem stack up.

The power of lobbying in the U.S.: I remember from a case in an economics class at Kellogg that talked about how $1 spent on lobbying by the Cotton Farmers (huge, corporate ones) resulted in about $7000 of benefits. Think about that, for ROI. I thought of that when reading about an interesting article in The Washington Post that talks about the power of lobbying, in the context of Comcast and how this has enabled Comcast to retain its sometimes-buyer, sometimes-supplier, sometimes-competitor power so well and grow and thrive. The article goes on to assert that this increasing and growing power is stifling the growth of competition and innovation:

In Cohen’s decade at the firm, Comcast…with $58 billion in annual revenue…(has become) the nation’s biggest provider of broadband Internet and cable television and the owner of network television programs, a movie studio and broadcast stations across the country. 

A consequence of all that power is a stubbornly strong cable television model that keeps many households paying upward of $100 a month for their service bundles, critics of the company say. Even as Verizon,Apple, Netflix and YouTube have tried to capture the living room, Comcast still dominates.

Random Penguin House: A big piece of news in the book industry is that venerable Penguin and Random house are merging next year and will control 25% of the world’s English language book sales. The reasons are a combination of (a) the parent companies wanting to focus on other things and (b) more importantly, synergies: cost savings, as well as increased buyer power (in a sense, they buy authors with lucrative contracts) – which become very important given the rise of the eBook and associated margins and (c) supplier power – in the sense that they supply books to book stores around the world.

The Economist says this has some agents and writers worried:

Some agents and writers worry that any combination of the two publishers may pressure the advances that writers are paid; it will almost certainly reduce the number of titles published under lucrative contracts, though self-publishing may be boosted. Whether there is a happy ending to this story may depend on whether you are an agent, writer or Penguin Random House.

But it had to happen, especially with Amazon now trying to become a publishing house too (more on that soon).

Until tomorrow.

Sandy, Insurance Companies and Catastrophe Models

Perfect storms like Sandy cause immense harm to people’s lives and property.

Across the Eastern U.S. today, anyone that has the luxury of not being on the road or outside are staying put at home with generators, food and batteries, or have sought refuge at various shelters, and are waiting for the storm to pass.

Ever wonder what Insurance companies do at times like this?

They get ready too (AllState already sent me a couple of get-ready and here’s-what-to-do-for-claims emails) with claims processors on the ground and keep a close eye, a very close one, on data from the likes of Eqecat.

And in turn, what does Eqecat offer?

Catastrophe risk modeling provides essential data for global and regional insurers, reinsurers, brokers, financial markets and corporations to evaluate potential and the probability of risk and financial loss from natural hazards. 

EQECAT’s catastrophe risk models incorporate the latest scientific research, deep engineering knowledge, vast amounts of claims and exposure data, combined with advanced mathematics and statistics to produce a unique view of catastrophe risk. 

For insurance companies, this data is hugely important and can make or break them when catastrophes strike. That’s because home insurance, as we all know, exists to cover once or twice in a lifetime events. So the occasional flooding or mold or a lightning strike is easy to handle, but when millions or even tens of millions of homeowners suffer a devastating loss, insurance companies run the risk of a devastating loss as well:

After a 17-year lull in major landfalling hurricanes in Florida, Hurricane Andrew roared ashore in South Florida near Homestead on August 24, 1992. With insurance claims reaching almost $16-billion, several of the state’s insurance companies went bankrupt while many more lost large percentages of their equity.

This is bad for consumers (home owners) too because not only will existing policy owners not be made whole on their losses when their insurance companies go bankrupt, but in the future, they will not have anyone to buy insurance from.

As a result, the Federal Government or State Governments end up stepping into the vacuum and create “insurers of last resort”  or cooperative insurance agencies, as in the case of various East Coast states.

Still, because of various at-times-controversial moves like raising premiums steeply or not offering insurance in certain areas, an article in the WSJ (free just for today) thinks that the impact of Sandy on insurance companies is not going to be too high:

No matter the cost to the insurance industry, its impact is certain to be less than it would have been a few years ago. Insurers have been raising home-insurance rates and tightening underwriting standards in recent years as claims costs from severe weather have risen.

Those changes come on top of steps insurers have taken since the 1990s to scale back selectively sales of policies in hurricane-prone areas and require consumers to pay steeper deductibles in some instances.

The Importance of Storytelling in Business

If strategizing, thinking and analysis are one part of being successful in business and one’s career, then an equally important but oft overlooked aspect of business is the importance of influencing and persuading others in working towards a goal or milestone. 

A book and an article about that book on FastCompany talk about how humans respond better (read: get influenced or persuaded) to a cogent story than just datasets, charts and graphs. 

Some interesting insights buried in a particularly poetic passage in the article:

First, storytelling is a uniquely powerful form of persuasive jujitsu. Second, in a world full of black belt storytellers, we had all better start training our defenses. Master storytellers want us drunk on emotion so we will lose track of rational considerations, relax our skepticism, and yield to their agenda. Yes, we need to tell to win, but it’s just as important to learn to see the tell coming–and to steel ourselves against it.

The full article is worth a read.

PS: Yes, the irony of talking about the importance of storytelling on The Story of Business’ blog has been noted.