Spring 2012 Money, Markets and Media

In November 2011, American Airlines filled Chapter 11 bankruptcy protection and said that it was determined to emerge from bankruptcy as a stand-alone company. Some of the driving forces that have led to bankruptcy were the increase in fuel prices and the decrease in profitability since 2007. In scope of Chapter 11 protection, the company intends to reorganize its business affairs so that it can pay its creditors who are mostly the airline’s employees.

For American Airlines to gain back its competitiveness, it has to increase its revenue by $3 billion annually. Reducing labor by 13,000 people (represents 16.6 percent of the total work force), cutting labor costs by $2 billion, adding flights to five major airports and partnering with European and Japanese airlines were the four things Thomas Horton, the CEO of American Airlines, had originally planned. However, many analysts immediately questioned the ‘$1 billion extra revenue ever year’ envision Horton outlined in his reorganization plan.

Horton insistently mentioned that he prefers to remain an independent company rather than merging with another airline. “For years I’ve said that I think consolidation has been — can be healthy and constructive for the U.S. airline industry. But right now we are in the midst of a very complex restructuring and so our focus is singularly on returning the company to profitability and growth. The idea of doing the two together strikes me as a bridge too far” said Horton in an interview with Alaska Journal of Commerce. Staying as a stand-alone company would mean additional job losses, compensation reductions and other expense cuts for 10, 000 nonunion workers.

According to Zephry, a research database, AMR is valued at an estimated
$120,011,275 based on the 335,227,024 shares outstanding and the closing share price of $0.358 on 11/01/12, the last day of trading. The timeline following the announcement of bankruptcy reveals some interesting facts about the domestic airline industry in United States. First of all, on January 25th, U.S. Airways Group Inc. claimed an interest in a possible merger with AMR Corporation and has hired Millstein & Company, Barclays PLC and Latham & Watkins LLP to evaluate the acquisition.

Two days later, Delta Air Lines Inc. reported to have the same interest. Furthermore, on April 25th, International Airlines Group, parent of British Airways and Iberia, stated that they have hired an analyst to look into the possible transaction as well. American Airline’s top competitors are considering buying the bankrupt company in order to increase their market share.

Right now, 41 percent of the market share in the U.S. domestic airline industry is owned by three companies (Delta Air Lines: 15.2%, United Continental Holding Inc:14.8% and Southwest Airlines Co.:10.8%). This is due to an increasing number of mergers. In 2009 Delta Airlines acquired Northwest Airlines and in 2010 United Airlines acquired Continental. Furthermore, Southwest Airlines will complete acquiring AirTran Airways before 2014.

“Consolidation, in our review, represents a later stage for a mature industry that is seeking ways to address its financial volatility… Our view is that consolidation is part of a longer-term process that should ultimately allow the global airline industry to efficiently allocate capital and assets such that a positive return on invested capital can be achieved…On the surface, airlines pursue mergers as a means to improve profitability…and their competitive positioning via an expanded network. Longer-term, consolidation should improve industry viability while mitigating industry volatility and consequently lower its cost of capital,” said John P. Heimlich, V.P. and Chief Economist at the Air Transport Association of America.

Among all others, U.S. Airways was the first company to take action towards an acquisition. On April 20th, U.S. Airways announced that three major labor unions of AMR Corporation have agreed to support the possible merger in order to have a collective bargaining power. The three unions, Allied Pilots Association, the Association of Professional Flight Attendants and Transport Workers Union represent nearly 55,000 American Airlines employees (10,000 pilots, 17,000 flight attendants and 26,000 mechanics and ground workers).

Dough Parker, Chief Executive at U.S. Airways, highlighted that union agreements do not mean that both airlines have agreed to merge in any case. “It only means we have reach agreements with these three unions on what their collective bargaining agreements would look like after a merger and that they would like to work with us to make a merger a reality. To get the actual merger, many more things must happen including gaining the support of AMR’s creditors, its management” he said to his employees.

However, do American Airlines and U.S. Airways have a choice? Can both companies be profitable considering the recent changes in the industry? Rick Seaney, CEO of FareCompare, fears that airlines are becoming ‘too big to fail’ such as the auto industry and banks. The domestic airline industry in the United States is becoming an oligopoly.

Oligopoly is one of the many models that explains the demand of a firm. In an oligopoly, there are few firms producing the majority of products. These firms are producing similar or slightly differentiated goods. The demand the firms face is downward sloping because consumers choose between three or four major companies. In the domestic airlines industry, these three companies are Delta, United and Southwest. In an oligopoly, competition is relatively low and the market power is relatively high compared to those companies that are in perfectly competitive markets.

In a perfect competition, firms are price takers- meaning that demand and supply of the market determines the price and the price determines the rate of production. The competition brings back the price to marginal cost and there are no economic profits in the long run.

However in an oligopoly, firms have power on prices to some degree. In addition, barriers to entry, such as economies of scale and cost advantage production techniques make it harder for new firms to enter the market. For example, a new firm who wants to enter the airline industry would not benefit from economies of scale. Economies of scale is the decrease in average total cost for every unit produced due to teamwork, specialization and spread of fixed costs. For example, Delta faces economies of scale by having large number of routes. The company is able to buy its cabin food at a much lower cost than that of competitors because it buys in bulk.

Not only that but also due to increased number of routes, top companies attract larger customers. Customers are loyal to a specific airline as they get benefits from frequent flier programs. Because they can use their advantage miles with variety of routes, they prefer major airlines rather than airlines with low market share. Benefits from additional routes is one of the main reasons why American Airlines and U.S. Airways should merge. In order to understand the factors leading to merger, we need to look more into the business lines of both companies.

U.S. Airways Group Inc (LLC) and AMR Corp (AAMRQ) both compete in two industries: air transportation and air passenger transportation. LLC has four product/service groups and AAMRQ has three product/service groups. A combined entity would have 75% product/service overlap. At first, this number might seem significant. However, one should always compare it to other scenarios. For instance,
Delta Airlines (DAL) and AAMRQ would also have 75% product/service overlap in a merger. As a matter of fact, analyzing lines of business and products gives a biased estimation. SWOT analysis, along with business lines, should be considered.

In SWOT analysis, one thing that stands out is the fact that U.S. Airway’s weakness is American Airline’s strength. U.S. Airways is greatly impacted by the U.S. economy because its business concentration is solely in U.S. 76.9% of revenue depends on one particular region. However, American Airlines has diversified business operations. As a matter of fact, its business does not rely one particular economy.

A merger would combine airlines’ route networks and would make their ranking number one among U.S. domestic carriers in terms of seat-miles-flown. Secondly, a merger would reduce the costs occurred at facilities at both airlines as they would have to decide on a single central hub. The companies would also benefit savings from reduced aircraft leases and reduced redundant management.

Analysts estimate the merger to bring $1 billion in additional revenue and $500 million savings in non-labor costs. Merger will also save 6,200 of the 13,000 jobs that will be lost. Most importantly, the merger will give them the power to be able to compete with other industry leaders.

What would a merger mean- increase in ticket fares? Absolutely. An increase in ticket fares would be due to two factors: lack of competition and increase in fuel expenses. If a merger happens, there will be only four major companies in the airline industry. The decrease in supply will increase prices as companies will have greater power. Secondly, the ticket prices will go up because of increasing fuel prices.

On March 8th, U.S. Energy Information Administration forecasted the average jet fuel price to be $3.00 per gallon. There was a significant increase of $0.36 from the previous forecast. $3.00 per gallon jet fuel is estimated to increase U.S. airlines’ fuel expenses by $15 billion. Companies have no choice but to increase prices in order to cope with the expenses. If the two companies decide not to merge, they will lose further profits due to increasing fuel prices.

A merger would also mean changes in market share. It is clear that with a merger only four airlines will have the majority of power. However, some industry analysts have doubts that this means oligopoly. In an interview with Bloomberg, Will Randow claimed the airline industry is not becoming an oligopoly because low cost airlines such as Southwest are able to compete with other major airlines. However, this does not change the factors that lead the American Airline and U.S. Airways merger.

A merger seems feasible for both companies to enjoy higher profits associated with larger market share. The increase in routes and cost saving reductions will be additional benefits other than the market share. However, the merger is likely to happen when American Airlines gets out of bankruptcy. This is primarily due to the fact for the company to remain its brand reputation. Secondly, the remaining steps required in the acquisition process will take a good amount of time.

The idea of playing video games for most people used imply anti-social teenagers locked in their rooms shooting vast hordes of zombies for hours.  Now, the gaming world includes eighty-year-old grandmothers playing Wii tennis and thirty-year-old business executives playing Angry Birds during their morning subway commutes.

The average gamer nowadays is 37 years old, says the Entertainment Software Association (ESA), with 72% of households in the United States playing games on either consoles or computers.  Consumers spent over $25 billion on hardware and games in 2010.

With the growing prevalence of smartphones and tablets, the industry is seeing a gradual shift away from traditional console games towards games that can be played via social media or on mobile devices.  In their most recently quarterly report, Electronic Arts (EA) states that their business for digital games has grown by 30% over the last three years, while console games have declined by 7%.  Accordingly, they have undertaken an aggressive recruitment program to bring in talent with social media expertise that can help the company design products compatible with Facebook and Google.  In a partnership with Insomniac Games, an independent game developer, EA has just released a new game designed to be played completely on Facebook called Outernauts.

This trend is confirmed by the ESA which claims 24% of game sales involved the purchase of digital content (a total of $5.9 billion in revenue), and that 55% of gamers play games on phones or mobile devices.  Linking games with Facebook and smartphones has transformed what used to be a solitary endeavor into a social one.  Friends can play Scrabble-like games across different states and new games like the Outernauts allow complex multi-player cooperative efforts via social media.

While epic role playing games like World of Warcraft or Mass Effect can easily be played for hours at a time by hardcore gamers, social media games IGN’s Justin Davis comments that “Outernauts isn’t a title gamers will sit and play for hours at a time, but will instead spend months with it, in 15-minute chunks.”  Facebook gamers can play on a tag-team basis, with one player completing the first part of a challenge during his morning commute, a second teammate finishing the level during her lunch break.

The pricing schemes of social media games vary wildly.  For console games, the disk has an upfront price (~$60 for a new game), but avid fans can purchase downloadable content to add hours of gameplay or new items.  In the case of Facebook games, it is free to play; however, once the gamer is addicted, there are a plethora of ways to spend small amounts of money to make the gameplay smoother or more entertaining.  In some cases, real money buys virtual money in the game or items/weapons that can’t be obtained otherwise.  And of course there are a million and one ways to message a player’s Facebook friends in an attempt to lure them to join in as well.

After half an hour of futile staring, Scott was through the virtual waiting room. The promised land was finally within reach.

For thirty minutes, Scott had sweated silently in front of his computer screen – hoping, praying, begging that he would be able to buy a ticket for Weekend 1 of the Coachella Valley Music and Arts Festival 2012. He’d been looking forward to this for months, and now the prospect of Coachella was finally turning from dream into reality.

Scott looked at the drop-down menu and selected one general admission ticket, which, after taxes and fees, would cost him about $330. He also added a car camping pass, which cost an additional $80.

He reached for his credit card, and slowly typed its numbers on his keyboard. The on-screen timer indicated he had five minutes left to complete his purchase. He double-checked, then triple-checked that he had typed correctly. Then, just before he clicked that all-powerful “purchase” button, he checked in with his four roommates.

They were still in the online lobby, with no end in sight. There was no indication that they’d ever be able to buy tickets. So Scott did what any good roommate would do and bought them tickets, too. They promised to pay him back as soon as they could stop by the ATM.

Scott completed the purchase, watched as the online receipt made its way into his email inbox, and then sat comfortably back into his desk chair. By default, Mozilla Firefox logged back into the ticket waiting room. But just as he was about to close his browser, something curious happened.

Somehow, Scott was now logged back in to the ticket purchasing area. With his and his roommates’ tickets secured, Scott now had the opportunity to reserve tickets for his other friends. So he called up those who he thought were deserving of these precious Coachella tickets (and who would pay him back promptly) and bought five more tickets for Weekend 1. His credit card had taken a beating, but he’d been a good friend. With a reassuring ping, his email client informed him that the receipt for the second round of purchases had arrived.

Out of curiosity, Scott left Mozilla Firefox open for a second time.

In a stroke of good fortune (or perhaps fate, if you’d like to view it that way), Scott had been logged back into the ticket purchasing area for a third time. His credit card had been maxed out, and there was no way he could afford to purchase any more tickets. So he maxed out his first roommate’s credit card, buying eight more tickets.

Once again, he left Mozilla Firefox open.

Once again, he managed to log back in.

“I bought a total of 40 tickets,” said Scott. “20 I promised to friends and other USC students. The rest I planned to sell on Craigslist at $500 each. My goal was to use the extra tickets to pay for me and my roommates’ tickets as well as food, gas, and supplies. We wanted a free Coachella.”

“The five of us spent $13,500. We expected to make a profit of $170 each on the 20 extra tickets we bought for a total profit of $3,400 – which would have more than paid for our Coachella weekend.”

Three hours after Scott first logged on to his computer, all the tickets for Coachella – 150,000 in all – had been sold. This was the first year that the festival had been held over two weekends (with identical lineups), and the decision to expand the event was only made in response to overwhelming demand in 2011, when 75,000 tickets sold out in six days.

So how, in three hours, did 150,000 tickets get sold?

The answer, it appears, is people like Scott. People who speculated that the price of Coachella ticket, as it historically done, will always go up. Ticket scalpers.

PR representatives from Coachella and its promoter, Goldenvoice, declined to be interviewed for the purposes of this article, as did staff members working in Coachella’s ticketing division.

A member of the Coachella talent buying division, which books artists to perform at the festival, only had this to say, via Facebook message: “We obviously do care about scalpers and want to stop them – hence the RDIF chips in the wristbands, all the encouragement to register them, and the linking between the camping passes and wristbands, etc.”

Scott’s asking price — $500 for each ticket he posted on Craiglist – was not exorbitant in the curious world of Coachella. Last year, average ticket prices spiked at $943 in the week following the festival selling out, then fluctuated before settling on $548 the week before the festival took place (still more than $200 above face value).

Coachella, just like oil futures or housing prices, is a market ripe for speculation. Buy tickets at the right time, sell them at the right time, make a killing.

But, as Scott would soon find out, Coachella tickets are no different to American homes or oil. Price is governed by the laws of supply and demand. Always.

In 2008, the American financial industry leveraged itself to the hilt on the presumption that home prices would always rise – that supply could never outstrip demand. Scott, when he bought those 40 Coachella tickets, was operating on that same presumption.

But, as the American financial sector would discover, supply and demand always determine price. And Scott was about to find out that Coachella tickets were not the fail-safe investment he had presumed them to be.

In the three hours that it took for Coachella tickets to sell out, speculators like Scott had inflated demand wildly, pushing up the price. Listings on Craiglist in January pockets asked for between $800 and $900 for a ticket and the peace of mind that the buyer would be attending the festival

Scott’s $500 per ticket listing went over well Craigslist. By March, when his Coachella tickets arrived in the mail, Scott had had committed to selling 15 of the 20 extra tickets. He happily drove all over Los Angeles, exchanging the exquisitely packaged Coachella boxes for wads of cash.

But as April dawned, Scott couldn’t get rid of the five extra tickets, which had cost him nearly $1800. Ticket prices were collapsing, and the festival was looming. On Monday, April 16, Coachella Weekend 1 tickets would be worthless. Scott was beginning to panic, and in the week before Weekend 1 he became desperate. On the Wednesday before Coachella Weekend 1, Scott sold his remaining five tickets for $370 each for a profit of $40 per ticket.

“In the end I guess I overestimated how badly people wanted these tickets,” he said. “They sold out so quickly that I assumed people would always pay any price for one, and maybe I got a little greedy.”

In the end, the presence of Scott and speculators like him had no effect on Goldenvoice’s bottom line. They sold their tickets and did their jobs. But for fans looking to pay face value for their tickets, like Luke Beshar, the entire ordeal was unnecessary.

Beshar, who paid $500 for a ticket (not sold by Scott) on Craigslist in March, said he “resented the fact that I had to pay extra money to someone who didn’t deserve that extra 100 bucks, didn’t produce the festival, didn’t perform, basically just wanted to make quick buck off someone else.”

When USC sophomore Sally Clary buys her textbooks for class, she doesn’t go to the USC Bookstore. In fact, she doesn’t even have to get out of bed. Clary, a communications major, simply opens her computer and places an order with an online book retailer.

Online book purchasing and rentals are a growing trend at USC and many college campuses across the country. Rather than make the trip to the university bookstore to try and navigate the confusing aisles crowded with piles of books, students can go online and have their books sent right to them.

There are many online book retailers. There are some of the more traditional sites, such as Amazon and Barnes and Noble. These online stores sell textbooks from their warehouses; Amazon Marketplace also offers books from various sellers.

Other online book retailers, such as Chegg and PennText, offer an alternative to purchasing your schoolbooks.

Chegg was established in 2007 in Silicon Valley as one of the first textbook rental companies in the country. They provide students the opportunity to rent expensive textbooks for a very low price, then return them at the end of the semester.

This has become more and more common among students as textbook prices continue to rise. According to a study conducted by the U.S. Government Accountability Office, college textbook prices have increased at twice the rate of inflation over the past two decades. The price of a textbook is now approximately 200% greater than it was in 1986.

So, say you need the 9^th Edition of Campbell Biology, a textbook commonly required for beginner-level college biology classes. The list price for this book is $202. At the USC Bookstore, it is bound to a Student Textbook Guide, bumping the price up to nearly $250.

On Chegg.com, the book is available to rent for approximately three months for just $45.99.

Clary rented textbooks for her classes through Chegg and said she plans on doing it again next semester.

“I wound up spending so much less money by just renting my books online instead of buying them at our (USC) bookstore. I’ll probably never buy textbooks from the bookstore again.”

Chegg also has a few other money-saving ways of getting books. Students can now purchase and receive access to eTextbooks. These virtual textbooks can be accessed from any device that connects to the internet, including computers, smart phones, and tablets.

The eTextbooks are also a bargain. For the Campbell Biology textbook, digital users only have to pay $76. As more students come to school armed with e-readers, eTextbooks are becoming a growing trend.

Randy Stuckless, an engineering student, began reading textbooks off of his iPad at the beginning of the school year.

“I didn’t think I’d like it at first. Usually I like having an actual book in front of me. But the e-books were so easy to buy and much cheaper than the actual textbook, I’ll probably keep buying them.”

Physical textbooks can also be purchased for a discounted price, both new and used. Campbell Biology is just over $107 for a used copy or $125 for a new copy.

According to the National Association of College Stores, an organization that tracks the higher education retail market, over the past year students spent an average of $655 on required course materials. These materials include textbooks, course readers, and lab manuals. This number includes both new and used books.

Cheaper books are a huge relief for college students who already spend so much on tuition, room and board, and other supplies. This feeling is reflected in a decrease in textbook purchases at university bookstores.

Raymond McDermott, the Senior Manager of the USC Bookstore’s book division, said he has noticed a change in textbook sales over the past few semesters.

USC Pertusati University Bookstore

“There has definitely been a slight decrease in textbook sales here lately,” McDermott said. “However, renting is at an all-time high.”

The USC Bookstore has a textbook renting system, similar to those of Chegg and other online rental companies. Once the order is placed through the USC book rental website, third-party suppliers send the books directly to the student. After the rental period expires, the student returns the books to the USC bookstore.

McDermott says the rental system has been so successful, they’re looking to update it for the Fall 2012 term.

“We probably had about 1200 students renting books from us this past semester,” he said. “We’re looking at upgrading the system so students can do rentals in store.”

The increase in bookstore textbook pricing has also led to the development of a used book market on campus. Students have begun to buy and sell used books between each other, eliminating the middleman.

The "Free and For Sale" Group on Facebook

A USC student group on Facebook has become home base for the sale of used textbooks. The group is titled “Free and For Sale” and is only open to USC students. Through this group, students negotiate prices with each other rather than try to sell their used books back to the bookstore.

Morgan Becker, a USC student, says trying to sell your books back is not worth the hassle.

“We pay so much for these books from the bookstore to begin with, then when we go to sell them back we get basically nothing back,” she said. “I gave up doing that. I’d rather sell my book to a fellow student who needs it for a reasonable price and buy my books that way too.”

The USC Bookstore has a very strict sellback price policy on its books. If the book is being used for a class the following semester, the Bookstore will buy it back from the student for half-price. If the book is not being used on USC’s campus, the return is very small.

McDermott explained that this is due to processing the used books and shipping them to other university campuses. The USC Bookstore would lose too much money if it had to pay students a large amount for the returned book and also ship that book somewhere else.

The movement toward e-books continues to grow. According to the Student Monitor, a private market research company, approximately 5% of all textbooks purchased in the fall of 2011 were electronic. They estimate that by 2013, electronic textbooks will make up 11% of all textbook revenue.

The evolution in purchasing methods is rapidly changing the textbook industry. The textbook industry is a $4.5 billion market in the United States. To maintain its portion of the market share, each book retailer will have to adapt to the changes. Like the USC Bookstore, starting a local book rental program is a way to keep student customers from spending their money elsewhere.

On Feb 19^th, 2012, DreamWorks Animation unveiled that the company has struck a $330 million deal to establish a studio in Shanghai as a joint venture with Shanghai Media and China Media Capital, two Chinese government-back media companies.

This is just the prelude of a range of potential collaboration between US and China during Chinese Vice President Xi’s US tour.  China and the United States issued the joint statement regarding lifting the restriction set on US-made films, including: exempting 14 “premium format films”, such as IMAX or 3D, from the original quota of 20, and raising revenue sharing remitted to foreign producers from 13-17 percent of box office to 25 percent.

The office of the United States Trade Representative valued the agreement as an achievement “resolving the WTO film-related issues”, which has been disputed between the two countries for more than five years.

However, Sino-US film disputes are far from being settled. Last week SEC, which barely aimed the fire at Hollywood, dropped a bomb which made waves on both sides of Pacific. Some major U.S. studios, including Walt Disney, 20th Century Fox and DreamWorks Animation, were requested for information about their business activities in China, which possibly violated the Foreign Corrupt Practices Act and were widely presumed as bribery to Chinese officials.

While the detail are not disclosed by SEC so far, Robert Cain, an producer and film industry consultant who is familiar with both US and China markets, speculated in his blog, that if any dirty dealings take place, it “likely involved bribes in exchange for film import quota slots” which is tightly limited by Chinese government and each of them may represents a over $50 million worth business.

The controversy has re-cast light on the challenge for Hollywood companies doing business in China, which is the largest potential market for US film studios. Will the new agreement endow Hollywood companies, like DWA, with more bargaining power and make them more comfortable to do business in China after the long WTO appealing for control discrimination? Also, SEC’s investigation is prompting the concern of how committed China is to open its market?

The answer would be negative.

Different with welcome applause in Hollywood, Beijing scanted about the new agreement in February. “In a day full of meetings on Saturday with film distributors, producers, and even the powerful head of China Film Group’s production division, not one person I spoke with was even aware of the news,” Cain wrote in his blog.

The silence in Beijing has led some to speculate that China was reluctant to lift the restriction. The compromise is more like a conciliatory move rather than openness.

In fact, the joint agreement on film issue just came the same week when government agency issued a new set of regulation in Beijing about banning all import comedies, dramas and movies during prime time and limiting program from abroad to less than 25% of channel’s offering each day.

For a very long time, the attitude for foreign film has been rather complex and awkward for Chinese government. On the one hand, the experience and technology of Hollywood is what top film leaders of China badly need. The decision made by China Central Committee, the country’s top leadership, last October to boost the country’s culture power, demonstrated that it has been a national strategy for China to translate the economic and geopolitical development on a cultural level.

The huge investment on film, animation and theme parks in China, mirror the central government’s consideration on domestic consumerism—China is following the pattern of all countries where people spend proportionally more on services that enhance their utility and satisfaction as people’s income rises.

On the other hand, China views the establishment of a strong national culture power as an issue of national defense to counteract the government’s negative image. “We must clearly see that international hostile forces are intensifying the strategic plot of Westernizing and dividing China, and ideological and cultural fields are the focal areas of their long-term infiltration,” according to Chinese President Hu Jin-Tao’s article, published in this January, about the West’s potentially pernicious effect.

Thus, it is not the Chinese film industry but Chinese government who wants to limit foreign films. The barriers for foreign films, such as import quota, have more to do with government’s motivation to protect the ideology than to preserve the local film industry.

However, witnessing that Avatar and Transformers 3 became the king of the box office, even though Chinese government warns of culture infiltration constantly, they also wish to learn of Hollywood’s magic code to lure consumer.

“Fourteen ‘enhanced’ films is interesting as it allows the Chinese government a bit of face-saving,” said Mr. Cain, “the loosening of the quota might appear as capitulation by Beijing to US pressure, but the ‘enhanced’ film requirement allows the Chinese to characterize the agreement as a ‘technological advance’.”

Even though the import slot has been increased to 34, promoting US-made films to China is less lucrative than elsewhere since government restricts foreign film companies to cooperate with designated distributors, China Film Group and Huaxia Film Distribution Co. Ltd, who remit US side no more than 17.5% of the box office, far less than what those studios can get from other markets.

“For example, a ticket of Harry Potter 7 costs a Chinese audience 100 RMB. 5% will go to National Film Special Fund, 3.3% business tax, 48% belongs to cinema and 52% will be shared between the U.S. film studio and CFG, or Huaxia,” said Guozi Li, a special film contributor of ftchinese.com, “for films that gross over 250 million RMB, like HP7, foreign producers can get the highest 17.5%, which is 16.04 RMB out of 100. By the way, foreign producers need to take the cost of promotion and copy which should belong to distributor.”

Now, with the new agreement that enhances the revenue share code from 17.5% to 25%, foreign producers might receive more than before. However, it is just a theory.

Most of the time, US producers cannot get that much as exhibitors will skim box office revenue and report a shrink data to distributors and producers. It can be hardly found that 100 RMB paid by audience for film ticket will become 70 RMB reported box office receipts and 30 RMB popcorn combo in exhibitor’s computer system. In some tier two or tier three city where the computer system is not being adopted, box office report is harder to track. The skimming approach varies from sophisticated “back-door” software installed in cinema’s reporting system to primitive artificial adjustment.

Even though the skimming process is literally treated as a severe crime since it causes some punishable consequence such as tax evasion, it is still a regulatory “grey area”.

“Insufficient attention to the issue of garnering a share of the box office” is concluded as one of the main challenges that foreign producers face in China, by Mathew Alderson, a Beijing-based Australian attorney whose expertise is Intellectual Protection and film law.

Increasingly, Hollywood companies are seeking the alternative way to get around the distribution limit and enlarge the revenue share. Another way to access China’s market is to produce a movie that qualifies as an official co-production that is free of import quota that applies to purely US-made films and that returns to US studios a relatively “fair” share-up to 40%-of the box office receipts.

Unfortunately, making money from co-production is also not an easy job.

The first concern is China’s abysmal record in defending intellectual property rights. US producers assume that they can rely on a strong Chinese partner that represents not only sufficient capital but also the background and connection that mitigate the risk of the investment, such as piracy. However, they soon find that China’s domestic film industry suffers from piracy as much as Hollywood does.

“We usually won’t take the Mainland market as our first market to release a new film, since as soon as it is released there the rest of the world can immediately see it through the internet,” said Dr. Jeanie Han, Senior Vice President at Paramount Pictures, at a MBA seminar held by USC Marshall School.

With political mission to promote China oversea, a qualified US-China co-production is required to include at least one Chinese actor/actress, some scene filmed in China and Chinese storytelling, and, of course, to accept the censorship of China Film Co-Production Corporation, a subsidiary of China Film Group, the largest state-run film enterprise in China.

These regulations make the challenge more complicated for co-production, which seeks to appeal audiences inside and outside China. China allusion and element often fails to please Western audiences and some Chinese story scripts processed by western writers are unacceptable by the Chinese audience.

“Some of them (co-production) have done well but most of them not,” said Stanley Rosen, an expert on Chinese films and a professor of political science at USC, “(One) Karate Kid made 68% of box office for the whole Chinese co-production marketing abroad in 2010, but most of them have not been successful.

“It’s very difficult to please both sides.”

For all of these reasons, DreamWorks’s new joint venture indicates that Hollywood is still exploring the way for US film companies to make further inroad into Chinese culture industry, while they are waiting for China to play by the rules.

Understanding that some inherent problems in China will still exist for a very long time, Hollywood is still eager to take advantage of China’s $2 million worth market with double-digit growth amid sluggish demand for film in the U.S.

“It’s still a risk calculation. Given resources that China invests in this venture, US companies may as well be a part of it rather than being outside of the tank,” said Professor Rose, “But it’s still early in the game. We’ll see how it will play out.”

The foreclosure mess continues to wreak havoc on the housing market.  When the real estate bubble burst, it caused a catastrophic devaluation of property and unleashed a financial crisis that affected banks and Wall Street.  That, in turn, resulted in further unethical behavior from financial institutions trying to get out of the mess by illegally ousting people who defaulted on their mortgage payments.

Even a Department of Justice $25 million settlement with several banks won’t do much to help the victims of wrongful foreclosures or help homeowners underwater with principal loan reductions.

According to the Brookings Institution, only 5% of underwater borrowers will be eligible to get a $20,000 principal loan reduction.  That’s not much if you consider that many homes in California are $100,000 to $200,000 underwater.

A CoreLogic report estimates more than 11 million residential properties in the U.S. with a mortgage were “in negative equity” at the end 2011.

National foreclosure map produced by the Center for Responsible Lending shows California leads in the number of foreclosures in the country.

And now, after mortgage lenders settled with the DOJ, analysts are predicting another wave of foreclosures in 2012, as banks move forward with pending cases.  “Shadow inventory,” which was on hold while improper handling of foreclosures were investigated, will be flushed into the market.

But it’s not as if foreclosures slowed down that much – at least not in California.  The Center for Responsible lending reports that more than 500 California families lost their homes every day since the end of 2007, with more than 30,000 foreclosures completed each quarter.

Recent numbers show California has been the most devastated nationwide, with more than 1.5 million homes lost since 2009, ahead of Florida, that saw slightly more than 1.4 million foreclosures.

But losing their homes isn’t the only problem people are facing when they get foreclosed… it’s where they go next and how much it’s going to cost them.

The ouster of millions of people from their homes by foreclosures has now also affected the rental market.  With more people looking to rent and a limited supply, prices for rental units have started to soar.  And for those who now have tarnished credit records because of foreclosures in their history, the picture is even bleaker.

USC’s Lusk Center for Real Estate forecasts that in the next two years, rents will rise almost 10%. It seems like for the millions of people who’ve lost their homes, their situation isn’t going to get any better in the near future.

At an public forum held in the afternoon at the University of Southern California’s recently constructed Ronald Tutor Campus Center regarding the shooting of two international students in April, one Chinese student got up and told university officials that expensive housing prices made it so international students like her had no other places to live but places beyond the patrol-and-response radius of campus police. She asked the panel what the university was doing to provide safe, affordable housing options for international students on-campus.

Vice President of Student Affairs Michael L. Jackson took the opportunity to remind the forum of the University’s recent construction of the air-conditioned, suite-styled Parkside student housing at the southern tip of campus — before he was cut off.

“I don’t want to interrupt you,” she said, “but make it affordable.”

Her words struck a nerve. The forum erupted in applause, leaving Jackson and the panel momentarily speechless.

“There’s also…” Jackson began, before pausing. “I guess this isn’t necessarily affordable, but there’s also the Gateway complex on Figueroa…”

While many students struggle to find affordable housing options, expensive housing options like Gateway Apartments, Tuscany Apartments, West 27th Place, and the soon-to-be-finished Icon Plaza have sprouted up around campus over the recent years with breathtaking speed. Such privately-owned complexes tower over the Figueroa corridor after the university neglected for years to provide sufficient university-owned housing options for an increasing student body, creating a large demand for off-campus housing. USC students might be hard-pressed nowadays to find cheap housing, yet luxury options are right around the corner — given you reserve your spot at the right time.

“We finished construction in July 2011,” said Tabitha Stephens, property manager of West 27th Place. “We were already filled up by the end of May or June 2011.”

The latest in a string of luxury housing projects, West 27th Place is a brand new seven-story building that sold-out every one of its 161 units for the 2011-2012 school year to 500 lucky students for serious cash.

Rooms sold fast “because we were brand new,” said Stephens, “and people want new.”
Costs run high: depending on room type, residents can expect to pay thousands per month on rent alone; pets trigger a $795 pet deposit along with a $50 monthly fee for every pet brought along the college adventure; electricity and parking add more to an already hefty bill.

“Our pricing is definitely one of the highest, at least until the new Icon Plaza comes around,” said Stephens.

The upside? Residents get a taste of the good life, complete with perks unmatched by even the most luxurious university-run dormitories on campus. The $55 million complex equips each room with ice-makers and a flat screen high definition television set. Recreation spaces come with a big screen television and a pool table. Warm, brightly colored walls catch the eye, as opposed to the dull pale of university-run dormitories.
Stephens said the high prices were “mainly because we offer so much. We offer a beautiful building and an impressive amenity package.”

“We also have a saltwater pool and spa,” Stephens added. She noted that the pool was certified LEED (Leaders in Environmental and Energy Design) platinum – the highest demarcation of eco-friendliness and “green” quality from the LEED scale.

“Everything from the saltwater pool, to our 24-hour gym, to our tanning beds and granite tiles,” chimed assistant property manager Alex Gutierrez, sitting to Stephens’ right, when asked what makes West 27th Place luxury housing.

Yet West 27th is by no means unique in its fast-paced selling of high priced condos. Luxury housing competitors like Gateway and Tuscany “fill up rather quickly,” according to Stephens. She added that Gateway stood at 98 percent capacity for its 1,600 beds.

At the heart of the development and the breakneck speed for luxury housing units has been the university’s failure to provide sufficient on-campus housing facilities for its growing student population. USC’s population has grown tremendously over the last decade; this growth has coincided with a shift in campus culture, from students commuting to school to kids opting to live on-or-near the university. At the same time, the university has put off the construction of more housing facilities to match such increases. The university’s neglect to build new housing along with its desire to be recognized as a bigger institution has led to skewered numbers: USC has 37,000 students, but only provides 7,000 beds overall (a large portion of which are for freshman only), leaving 30,000 undergraduate and graduate students on the search for non-USC affiliated housing.

Such numbers have left off-campus housing in high demand. A 2007 Enterprise study commissioned by the university concluded that while USC was doing a better job with housing compared to other private universities, “…with the current housing stock that the University owns, the supply cannot meet the demand coming from students.”

Enterprise recommended that the university provide 7000 additional beds in order to match rising demand, to offset high rent prices and to reverse the process of gentrification spurred by the university’s growth.

Yet for reasons unknown, USC chose to keep the study’s findings away from the public. SAJE (Strategic Actions for a Just Economy), a community group focused on improving conditions for families in South Central, managed to obtain a copy of the survey only after filing a public records request with the city.

Now in the public’s eye, the study shows that in the late 2000s the university had a severe shortage of university-owned student housing — a shortage which private contractors capitalized on by constructing monumental complexes adjacent to campus for prospective students to live in. Luxury housing units began to prop up after the university had reoriented itself as a residential campus and had seen a growth in its student body.

The university’s expanded safety measures north of campus have also contributed to the development of the luxury housing market, particularly units further away from campus. When asked whether West 27th Place could have been a reality 20 years ago, she said “that there were enough security measures in place at the time for housing to be this far off campus.”

“USC’s reach is definitely going further,” Gutierrez added. “I’m sure that by next year they’ll have a grasp on the other side of the 110 freeway.”

Like many universities, USC welcomed luxury housing with open arms. The university applauded the construction of giant off-campus complexes like Tuscany and Gateway; in particular, they cited such projects as the ideal solution to resolving the 7,000 bed shortfall.

A 2008 article published in Los Angeles Downtown News suggests that the development of Gateway gave the university another reason to further postpone addressing the housing shortage. In the article, university representatives like Jackson said that their goal of adding more beds would simply remain a “goal,” not a realistic commitment by the university to build more housing. Such statements quelled concerns from developers that that the university’s plans would reel a sizable chunk of students out of the housing market, and suggested that USC would instead offer to let private companies take a lion’s share of the market themselves. From the piece:

Currently, USC guarantees housing to freshmen and sophomores, but the institution has also set a goal in its campus master plan to guarantee four years of student housing for undergraduates and one year for graduate students by 2011.

Some market watchers say the plan, if fulfilled, would flood the USC area with units, harming apartment building owners near the campus that have long relied on USC student tenants.

But Jackson said the school’s housing plan is only a goal, and likely a lofty one at that.

“Certainly I think it’s a stretch to get 7,000 beds by 2011, but by setting that goal, it keeps us focused and lets others know, Urban Partners or whoever, ‘Hey, USC is interested in doing things so some people come to us with ideas,’” Jackson said.

Four years later, talk of developing on-campus, university-owned housing still remains talk.

“There is no specific date [for construction], but hopefully within 12 months,” wrote Director of Housing Keenen Cheung in an e-mail.

Cheung denied that accessible, affordable housing was a hard find around USC.
“We believe that all of our housing is affordable,” he wrote. Nevertheless, he refused to elucidate on the average cost for USC housing, writing: “we do not track average prices.”

At West 27th Place, management rejected the idea that an increase in on-campus housing would force them to lower their prices. They insisted that they were in the business of providing luxury housing to those looking for such elements, and not addressing USC’s housing’s shortage.

“They’re both different markets,” said Gutierrez.

“I think if students want luxury and if they can pay for it, they will go for it,” Stephens added. “That said, we need housing. It’s [an increase in university-owned housing] not going to be a threat to the luxury communities.”

Yet not everyone agrees that luxury housing prices won’t be affected if the university finally decides to build such housing units. When asked whether an expansion of on-campus housing would affect off-campus prices, Cheung replied: “I’m sure it will.”

Back at the campus center, Chinese graduate students Jack Jiang and Sophia Dong decide to walk out of the forum. Waiting for an elevator, the couple said they weren’t pleased with many of the answers campus police and university officials gave in regards to crime in the area.

“Crime may have decreased by 100 cases,” said Jiang, “but if murder still happens…there point is that they are telling us that they put a lot of effort. But we cannot say that it is a safe neighborhood.”

“It’s safe for me,” said Dong, “but I don’t think it’s safe for all of us.”

Jiang and Dong said they live on Portland Street, away from campus where housing is relatively cheaper.

“For people who still live like us, I think the university should do more.”

For frugal grocery shoppers, there is no such thing as forgive and forget.

“When they stopped the old double coupon program… when was that – four years ago?” said Vera Gonzales, as she walked out of a Ralphs on Adams Boulevard in South Los Angeles, her arms laden with bags. “I was so mad. I swore I’d stop going.”

Ralphs had once given shoppers $2 off for every $1 coupon. But in 2008, they capped the total discount amount to $1, angering loyal coupon-clippers across Southern California. For the next four years, Gonzales stayed true to her word and stayed out of the store.

That is, until last month. Parent company Kroger eliminated the Ralphs double coupon program entirely, but also slashed prices on 13,000 items, including staples like produce, eggs, medication and toiletries. The store today is a jumble of yellow and red discount signs, with the slightly frenzied air of a constant sale.

“So OK, I went back on my word,” Gonzales said, laughing, as she put her bags in the car. “But it was such a good deal.”

Gonzales is the customer Ralphs hopes to attract, analysts say. The addition of EDLP comes at a volatile time for grocery stores in Southern California, where food prices tend to be high and the demographics of customers vary drastically by geographic area. Food inflation continues to increase, but consumer confidence is dropping.

Kroger, Co. (KR) stock prices over the last year. Prices have stayed relatively stable, from $21.74 in September to a high of $25.76 in July.

In late September, stock prices fell slightly for all four major grocers in Southern California. And recently, Fresh & Easy closed nearly a dozen stores, seven in California.

By acquiring and expanding, Kroger has been able to raise its market share in the past two years, to 18.9 percent of the national market share. Last month, the company reported a 15 percent increase in quarterly profit.

The company’s earnings have picked up steadily since 2006, in part due to stronger sales at stores that have been open for several years. Sales are on the rise, but each shopping trip now produces less revenue, a recent report from IBISWorld analysts said.

Market share for the major grocers. (via IBISWorld April 2012 industry report)

Peer group analysis of Kroger's competition, in terms of net income, for the last available fiscal year. Kroger's net income is 4.5 percent of the industry total. (via MintGlobal analysis)

Nationally, chains are struggling, halting expansion plans and closing stores. Big box stores like Target and Walmart continue to expand their grocery options and their market share, using economies of scale to offer prices lower than even national grocery chains can afford. Fresh and organic stores like Trader Joe’s and Whole Foods continue to gobble customers from the higher end of the price range.

So what’s a grocery store chain to do?

Economists see two schools of thought: beat the big box stores at their own game, or be different.

“It’s the old, ‘If you can’t beat ‘em, join ‘em’ strategy,” Richard Volpe, an economist with the United States Department of Agriculture. “’Look at me!’ the store is saying. ‘You don’t need a club card to get low prices.’ And people love it.”

People who don’t worry about price tend to shop organic— a niche that grew last year at seven times rate of the grocery industry, according to a recent Standard & Poor’s analysis. Those who do worry about money, and care that the average shopping basket cost 6.4 percent more in 2011 than 2010, are prime targets for the fight between grocers and super-centers.

That’s where the new EDLP program at Ralphs comes in. “Everyday Low Prices” is a grocery store pricing strategy that’s been around for about 20 years, but has become more popular in the last decade as discount retailers — which S&P calls “a growing threat” — continue to gain ground in the grocery industry, Volpe said. Lower prices at neighborhood stores will entice shoppers to stay, rather than do one-stop shopping at discount stores like Target, Costco and Walmart.

“Retailers are always reluctant to raise prices, because then consumers start going elsewhere: Save-A-Lots, grocery outlet stores, even online,” self-titled supermarket guru Phil Lembert said. “Stores will do anything else to save money without the price tag going up.”

One way to do that is by eliminating double coupons. Typically, the manufacturer reimburses stores for coupon discounts. But some retailers double the discount and cover the second half themselves. With standard coupons, which Ralphs enacted April 1, Kroger will save up to a dollar on every couponed item sold. That’s more than enough to make up for the 13,000 prices slashed last month.

The elimination of the Ralphs double-coupon program could be a precursor to a nationwide shift away from the program at Kroger’s other branches, including Food4Less and Dillons, Lembert said.

Ralphs company spokeswoman Kendra Doyel did not respond to multiple requests for comment.

The other option facing traditional grocery stores — like Fresh & Easy, Vons and Albertsons — is innovation. The best way to separate themselves from gourmet markets and supercenters is by offering something no one else has.

“Stores should look carefully, neighborhood by neighborhood, to see what that area is looking for,” Lempert said. “Especially in Southern California, you have to understand your consumer from an ethnic standpoint, income standpoint and an age standpoint.”

That includes a heavy focus on so-called “category management” technology that tells retailers the shopping habits and preferences of its clientele, Lempert said, from where products are placed on shelves to what type of soda local teenagers prefer. That’s more difficult for supercenters, which deal with thousands of square feet of produce and non-gorcery products.

Differentiating could also mean investing in the store — making lighting brighter and floors cleaner, adding in special or bakery counters, hiring more customer service representatives or buying more local produce.

Some supermarkets have tried “flash sales,” a drastic several-hours markdown on a handful of items. Hi-Vee in Kansas tried the technique earlier last year in hopes of boosting sales; instead, they ended up with disgruntled comments on the store’s Facebook page because discounts weren’t deep enough.

“There’s no question that any of those options is a huge gamble,” Volpe said. “And an even bigger one in this environment where we have higher food prices. Increasingly, paying for service and how clean the floor is is something consumers don’t care about. They want to save.”

One cautionary tale comes from Fresh & Easy Neighborhood Market, owned by UK retail giant Tesco. The small-format stores with self-check and energy efficient lighting have had a rocky history in the United States since opening in 2007, many in lower-income areas of Los Angeles. Fresh & Easy recently closed a dozen stores, seven in California.

“The closing of the stores is not necessarily an indication of struggling,” Lempert said. “Tesco is not a stupid company at all. They may have made some real estate mistakes, but they invested in the right things: easy operation, low labor costs, quality food.”

Fresh & Easy’s operating loss widened from $91 million in 2008 to $208 million in 2011. The company did not respond to requests for comment.

The British retailer is most likely regrouping and rethinking its strategy for Southern California, Lempert said, and testing ideas in other cities. In Phoenix, they’re trying in-store bakeries that provide fresh breads to shoppers and local businesses.

Moving forward from 2012, as food prices continue to inflate and consumer spending shifts from restaurants to grocers, the battle between supercenters and grocery stores will continue to heat up, the USDA and S&P have said. The question will become whether supercenters, particularly Walmart, will be able to sustian the rapid growth they’ve achieved in less-populated areas of the country.

“It’s our consensus that the low-hanging fruit has been picked,” Volpe said. “Walmart thrives in places where the income is less than the national average, where it’s more rural in general. They have trouble breaking into major cities.”

That includes Los Angeles, where Walmart has stores but few grocery supercenters. That’s due in part to tumultuous relationships between Walmart and labor unions, which are highly active in Southern California.

But Walmart seems to be gearing up to continue the battle: the chain recently announced they too are lowering grocery prices by $1 billion. That’s less than 1 percent of the company’s grocery sales, but executives hope the lower sticker price will draw more customers in and entice them to spend money in other areas of the store.

“I can tell you that all of these major chains are devising strategies to make inroads into these areas,” Volpe said. “The future of the industry depends on how successful they are.”

If you take a look around your home, chances are good that you have a product made by Procter & Gamble Company.

The household product giant manufactures brands such as Tide laundry detergent, Charmin toilet paper, and Febreeze air fresheners. These are just three of the 50 “leadership brands” P&G has in its portfolio. These brands account for 90% of P&G’s sales and over 90% of its profits.

Some of P&G's Leadership Brands Source: P&G

Managing all of these brands is no small feat, even for the multibillion dollar corporation. In an attempt to improve the success of some of its brands, P&G has been selling off the licensing to hundreds of patents and trademarks of new products which they have developed.

The P&G product development sector is literally creating too many products for the company to successfully balance. In an effort to give fair attention to all of its operations, P&G is selling the rights to many of its products to smaller manufacturers.

Nehemiah Manufacturing Co. in Cincinnati, Ohio, has been manufacturing Pampers Kandoo line since September of 2009. Kandoo is a line of diapers, soaps, and other bathroom-related products created for young children.

P&G, who manufactures Pampers products, decided to focus its efforts on expanding the Pampers brand outside of the U.S. rather than develop the Kandoo brand.

Nehemiah Manufacturing president Richard Palmer is a former executive of P&G. He said in an interview with the Wall Street Journal that the Kandoo business would be “lost in the largest portfolio of Pampers.”

Nehemiah has cut Kandoo marketing costs by nearly 15%, saving nearly $1 million and doubling the profit of the brand and its products.

Nehemiah's Kandoo Soap Source: WSJ

Similar situations have occurred with other licensed brands. Other companies who license with P&G include Akebia Therapeutics Inc., Kaz USA Inc., and OraLabs Inc.

Buyers pay an initial licensing fee to P&G, then agree in advance to make additional payments. Most agreements typically last three to five years. Renewal options are available for companies who reach certain sales goals.

Until three years ago, P&G did not even bother measuring how much money its external partners had been making on P&G’s licensed products. They assumed the number was too insignificant to bother calculating.

When P&G finally decided to check this out, the result came as a shock. The smaller manufacturing companies made $3 billion on P&G patented products.

P&G pulled in net sales of $82.6 billion in 2011. When you put the $3 billion in perspective with this number, it might not seem like much. But for the financial advisors who thought it wasn’t worth anything, a portion of $3 billion is a pretty nice add-on to P&G’s profit margins.

Mainly, this trend benefits the smaller manufacturing companies. With P&G products to create, these companies can hire workers and benefit their local communities.

Nehemiah Manufacturing, for example, has already had a great impact on the Cincinnati area. Founder and CEO Dan Meyer built the manufacturing company in an effort to give back to the community.

Nehemiah Manufacturing's CEO Dan Meyer and President Richard Palmer Source: Entrepreneur.com

According to their website, they are a “purpose driven company focused on building brands, creating jobs, and changing lives in the inner-city of Cincinnati, Ohio.” They offer employment to people who may otherwise have problems finding jobs, such as individuals with criminal records or gaps in employment.

This is also a positive for consumers. Smaller companies can dedicate more time to creating high-quality products. It may only be a matter of time before other large companies follow P&G in the licensing business.