Teri Bernstein, MBA, CPA has been teaching full time in the Business Department of Santa Monica College since 1985. Prior to that, she worked in Internal Audit and Special Financial Projects for the 1984 Los Angeles Olympics, CBS, Inc., and Coopers & Lybrand. She attended the University of Michigan and Wayne State University.
Many folks are not yet sold on the idea of Virtual Reality (VR) games and experiences, but that has not stopped many developers from bringing products to market. Sony Interative Entertainment introduced their Playstation VR expecting to have 1,000,000 units sold within 6 months. But the reality has been that only 4 months later, 915,000 units have been sold.
Product scarcities exist in many stores. “You literally have people lining up outside stores when they know stock is being replenished,” said Andrew House, Sony Interactive Entertainment global chief executive. He was describing the situation outside stores in Japan. One reason for this is that sales projections were too low, and production was cut back from what could have been its capacity.
Product development for virtual reality games is very expensive and risky. Mark Zuckerberg predicted that Facebook would have to invest over $3 billion over a decade in order to reach millions of users that might represent the VR market. Since VR products are expensive, the number of potential buyers is not as large as the video game console market.
Sources: "Popularity of Sony's PlayStation VR Surprises Even the Company," by Nick Wingfield, New York Times, February 26, 2017.
The 2017 Oscar telecast had a twist ending. The wrong Best Picture was announced. Apparently, the wrong envelope was given to Warren Beatty and Faye Dunaway--it contained the winner of Best Actress, which read, "Emma Stone, La La Land." When Warren Beatty opened the envelope, he hesitated, apparently confused, and then looked at the audience and Faye Dunaway. Dunaway, saying to Beatty, "You're impossible. God," took the envelope from him, glanced at it and said, "'La La Land'."
Oops. The mistake was awkwardly corrected, and the award went to the real winner, Moonlight.
On Twitter and in living rooms across the world, people were asking some version of "What happened?". As it turns out, the accounting firm PricewaterhouseCoopers, which has tallied the Oscar votes for 83 years, always creates two envelopes for each category. Someone along the line had made an error in distributing the envelopes correctly. And no one had caught the mistake.
Clearly, there was a breakdown in internal controls and supervisory checks and balances. It makes one wonder what other mistakes this Big Four accounting firm has made with its other clients.
Source: "PricewaterhouseCoopers issues statement after mistake robs 'Moonlight' of its moment," by Libby Hill, Los Angeles Times, February 27, 2017.
image from Amazon
Amazon is continuing to expand the number of "fulfillment centers" in the United States. These are strategically located giant warehouses, from which they can ship goods efficiently. As of January 2017, there are 214 centers in the U.S. The expansion of operations may not increase the number of blue-collar inventory picking and shipping jobs, however. The fulfillment centers are increasingly being "staffed" by robots.
Premium delivery--branded as Amazon Prime--is actually marketed as a product (with a revenue stream of its own in the form of an annual fee). This logistics priority may turn out to be one of the most insightful products developed and supported for Amazon's long-term business prospects.
Source: "Amazon's logistics footprint in the U.S. is only getting bigger," by Jeff Dunn Business Insider, January 23, 2017.
image from NPR intern page
Today's post is a public service announcement to those who are still college students, or to anyone who graduated AFTER May 22, 2016. National Public Radio's Planet Money is looking for an intern. It is a PAID 40 hour per week position in New York, NY.
As a long-time listener to NPR and Planet Money, as part of full disclosure I will say that this media outlet's goal is objectivity, but the critical thinking behind the stories is comprehensive and leans to the left of the political spectrum. If you are still interested, you can apply at NPR Jobs. The deadline to apply is Sunday, March 5, 2017.
NPR is partially funded by the Corporation for Public Broadcasting, which in turn is funded by federal, state and local governments. Who knows? If government underwriting of the arts, as anticipated, is totally defunded, this may be the LAST time such an internship can be offered.
Source: "Come Intern at Planet Money," NPR Planet Money, February 14, 2017.
image from theCHIVE
The competitive video gaming industry--also called "eSports"--in China grew 52% from 2015 to 2016, according to research firm IDC. It is poised to grow even more, since Chinese corporate giants such as Tencent Holding Ltd. and Alibaba Group Holding Ltd. are becoming involved.
eSports world-wide business revenues totaled $463 million in 2016 (a 43% increase over 2015). The U.S. eSports industry generated $175 billion in revenue in 2016 (from Fortune magazine). The sources of revenue included "online advertising, sponsorships, media rights, merchandise, tickets, and additional publisher investment," but did not include money from betting or fantasy eSports. (Newzoo, via the Fortune article). Top gaming competitors can make over $300,000 per year. The top games for professional player revenue are Dota 2 and League of Legends.
I found out about the size of this business while watching an episode of CBS network television: "Bull: Episode 13: The Fall". Of course, I did not trust the statistics quoted there without additional research.
Source: "Competitive Video-Gaming Gets Attention of Major Entertainment Companies," by Teng Jing Xuan, Shi Rui, Liu Xiaojing, and Huang Rong, Caixin, Business and Tech (English), February 10, 2017.
image from Project Bliss
There may be a cultural stereotype of an extroverted, Type A, boss being the most successful, but recent research by Adam Grant of the University of Pennsylvania Wharton School of Busines, shows that the stereotype does not hold true. What he found when studying a pizza store chain, is that it is the personality relationship between the manager and the employees is what can make a difference. The OPPOSITE type of boss did the best at managing employee groups:
Grant felt that the extroverts all wanted their own ideas to be up-front-and-center and the conflict hurt productivity. An introvert boss could manage the extrovert salespeople because he or she did not get in their way.
Check out the attributes of extroverts and the attributes of introverts to get a better understanding of these relationships.
Source: "Why It Might Be a Good Thing If Your Boss is an Introvert," by David Brancaccio, Marketplace, American Public Media, February 22, 2017.
image from the linked article: digital sketch by Point Blank Evumbi
Comic books in the in U.S.A. are a big business, with over $1.03 billion in annual sales. But comic books in Africa are often self-published in batches of 500, which may only sell for $2 apiece. Nevertheless, the art is top-notch and the characters and stories cover a wide and original range:
One writer-artist/entrepreneur has brainstormed an alternative to trying to convince African publishers to print and distribute comic books: Emmanuel Nyakwada (also known as "Point Blank Evumbi"). To buyers in the Nairobi area, orders can be placed through a Facebook page, and he arranges delivery of a hard-copy edition.
Another entrepreneur, Wesley Kirinya, founded Leti Arts, which delivers creative works by mobile phone. One of their products, a combination superhero game and comic called "Africa's Legends," has sold more than 100,000 copies. That represents significant progress for this fledgling African industry.
Source: "In Africa, locally produced comic books are starting to catch on," by Greg Presto, Marketplace: American Public Media, February 20, 2017.
Alas--I have been once again bamboozled by a online headline, bidding me to click through to another site...that ended up delivering something less than what seemed to be promised. I'd hoped to find a list of currently-in-the-theatres or soon-to-be-released films with business themes. But the Forbes article was actually a list of movies to watch on New Year's Eve.
Nevertheless, the list contains some classic movies and timeless lessons about business:
I was surprised that The Big Short did not make the list.
Source: "10 Best Wall Street Movies to Ring In 2017," by Zach Friedman, Forbes Magazine, December 27, 2016.
from CNBC via YouTube
The UAW (United Auto Workers' union) is organizing in the factory in which the Tesla 3 is being built. This car is intended for mass production and market penetration and is intended to be a mid-priced electric vehicle. (By comparison, the Tesla S ranges from $74,500 to $109,500--out of the range of most car owners.) Will the 6,200 workers opt for unionization?
Elon Musk, the CEO of Tesla, reacted with angry tweets when Jose Moran, a factory worker in favor of the union, posted an article on Medium that was supportive of Tesla overall, but critical of factory working conditions. The article mentioned that complaints involving mandatory overtime, bad ergonomics, lack of promotional opportunities, and various safety issues had been ignored. Musk's responses on Gizmodo:
“[Moran] was paid by the UAW to join Tesla and agitate for a union."
“He doesn’t really work for us, he works for the UAW."
“Tesla is the last car company left in California, because costs are so high.”
"[Moran’s piece is] morally outrageous.”
The article posits that Tesla must use all of its resources toward reaching its goals with the Tesla 3...and that unionization would be an unneeded distraction.
Source: "Elon Musk has a lot riding on Tesla's Model 3 — what will a unionization effort in California mean?," by Russ Mitchell, Los Angeles Times, February 15, 2017.
One profit-driven reason that Obamacare works is that everyone must be insured. This means that insurance companies can collect premiums from demographic groups that might otherwise not buy insurance because they assume that they are going to stay healthy. This group may include under-employed young adults who have no chronic health issues and do not participate in extreme sports.
The "carrot" for buying insurance is that one will get coverage. The "stick", or enforcement provision, is that insurers report who is insured and for how many months to the IRS each year. This is done on form 1095-B. Under Obamacare, if one is not insured for the whole year, a fine is imposed. And the longer one goes without insurance, the higher the fine.
HOWEVER: According to Dan Gorenstein (Marketplace Health Care analyst), this is what has recently happened:
"When Donald Trump took office, he signed an executive order immediately and sent a message to the administration saying he wanted to 'minimize the economic burden on people.' The IRS has apparently interpreted that in a particular way. What the IRS had been planning to do this year is that they were going to reject these returns if people say, 'Hey, I've got insurance.' Now the IRS is rolling back off of that. That's seen as potentially a way to weaken the individual mandate that requires everybody to have insurance."
What will be the consequences to the health care insurance market? Analysts' initial reaction is that it will undermine the program.
Source: "IRS rule change could weaken Obamacare mandate," by Kai Ryssdal, Marketplace, American Public Media, February 15, 2017.
image from truthfeed
Linda McMahon, the former CEO of World Wrestling Entertainment, is the new head of the Small Business Administration (SBA). Her confirmation was 81-19: Democrats as well as Republicans see her as a viable member of the administration. Her early adult life and her personal experience with small business growth may well be indicative of her abilities to fill this position.
Also good news for the SBA: there seems to be support from the administration for small businesses--especially for women entrepreneurs. One example of support that resonates with small business owners is the campaign promise that regulations will be reduced ("for every new regulation, two regulations shall be removed"). The appointment of Linda McMahon stands out among the other appointees to the new Presidential team as an individual who is uniquely qualified to head up the SBA and to manage its loan portfolio effectively.
Source: "What Lies Ahead For the Small Business Administration?" by Adam Allington, Marketplace: American Public Media, February 14, 2017.
image from news.bitcoin.com
Charlie Shrem was a Bitcoin entrepreneur and millionaire before he went to prison at age 22. While there, he learned that objects (for example, cans of mackerel) were used as a means of currency exchange among inmates, since money was forbidden. But the mackerel cans were like cash, and couldn't be protected at all times. This got Shrem thinking. He developed a way of tracking the exchange of cans on paper, keeping track of their value. Individual inmates kept track of their own transactions, which may have been problematic, since all of the inmates were convicted criminals and perhaps prone to cheating. Shrem worked out a "distributed ledger" system for sharing the information so that the data was fact-checked.
Shrem also saw that the mackerel-can currency was analagous to blockchain, the information technology that makes Bitcoin possible. So he developed a distributed ledger system for investment bankers (or, as he jokes: "unconvicted criminals"), to track and verify Bitcoin transactions. After his release from prison in 2016, he created a new company, Intellisys Capital:
"Shrem serves as chief technology officer, alongside co-founder and CEO Jason Granger. The startup's fund, Mainstreet Investment LP, will offer cryptocurrency tokens issued on the ethereum blockchain representing shares in a portfolio of companies involved in manufacturing, real estate and sanitary waste. Owners of the tokens will own a piece of the companies in the portfolio. The fund will be 30% owned by token holders, with the remaining 70% owned by Intellisys Capital. Mainstreet acquisitions will be directed by Shrem and Granger, with dividends paid to investors over the ethereum blockchain, and invested in blockchain technology companies. Intellisys is headquartered on the Cayman Islands." [Wikipedia; footnotes 25,26,27]
Let's hope Charlie Shrem stays out of trouble this time.
Source: "Episode 753: Blockchain Gang," by Keith Romer and Robert Smith, NPR Planet Money, February 10, 2017.
photo credit: Florian Plaucheur/AFP/Getty Images
In the image above, a worker at a Shell plant in Port Harcourt, Rivers State, Nigeria, is taking a picture of the Afam VI power plant. Both Royal Dutch Shell and Eni S.p.A. (an Italian oil company) have been accused of bribing Nigerian officials in order to get access to Nigerian oil fields. Italian prosecutors have obtained leaked documents and emails from 2011 that establish grounds for pursuing a criminal complaint.
The oil companies do not deny that they paid out $1.1 billion. But they are claiming that they paid the money to the government (for permits or fees), rather than as bribes to individuals.
Source: "Italian prosecutors seek criminal case in oil giants' deal in Nigeria," by Scott Tong, Marketplace, American Public Media, February 9, 2017.
A few college and NBA players have added to the "product line"of basketball skills by using the underhanded free throw. As you can see from the video, it is not an elegant form. But what it lacks in form, it makes up for in substance: Canyon Berry of the University of Florida has an 89.2% success rate on free throws using this technique. The average success rate in the NBA is 75% and the average for college basketball is 69%.
Free throw success means more points in the same time frame--and points are the primary measure of "profits" in basketball. The underhanded free throw is a way of increasing profits. So why doesn't everyone use it?
Maybe it is because, even though the TEAMS (corporations) may benefit from this product, the individual players also have an interest in establishing and promoting their personal brand. Image is a significant factor in endorsement contracts. An underhanded free throw (see the video above) might not be an image-enhancer. It might communicate a marketing message that fails to resonate with consumers. Maybe that is why everyone is not doing it.
As a side note: I have an idea for a fitness fad that has the same kind of dorky-looking quality that an underhanded free throw has: skipping. It is a great cardio exercise, it is easier on the knees than running, it burns calories, it uses "core" muscles as well as leg muscles, and it enhances balance. It has the added advantage of needing no equipment. Plus, I think it also improves one's mood. Do you think it might catch on?
Source: "Like Father, Like Son, Like Granny?: A Case for Underhanded Free Throws," by Tim Casey, New York Times, February 8, 2017.
image from Linked In
Learning the vocabulary of business--particularly terms that are used in newspaper articles and business magazines--is an important part of a businessperson's education. Liberal arts majors are tuned in to know various terms so that they can be considered "well-read" or "college-educated." Simple--or oversimplified--financial rules are part of the cultural literacy of business.
The "Rule of 72" is one such concept. It is a predictor of how long it takes to double your money. It relies on "compound interest"--which means that interest earned over a certain period is added to the base and the interest rate that is being used in the calculation is applied to the original investment amount PLUS any accumulated interest. For example, if $10,000 is invested for one year at 10%, then $1000 would be earned in the first year, and at the end of the year the balance would be $11,000. For the second year, then, the interest would be calculated as $11,000 x 10% or $1100. Each year the amount of interest increases and the balance compounds. From the linked article:
"The rule states that the interest rate multiplied by the time period required to double an amount of money is approximately equal to 72."
So, if the interest rate is 3%, we can re-arrange the equation as 72 divided by 3 = 24 years. So in the chart above, after 24 years, the investor of $10,000 would have $20,000. And in another 24 years, at 48 years, the investor would have $40,000. If you look at the other columns in the chart, you can see that the same amount invested at a higher interest rate produces considerably more money over that period of time.
Source: "How To Use the Rule of 72," via Wikihow.
Ben Sklar photo: Marhaf Homsi, left, and his wife, Nawal Wardeh
When trendy Brooklynites want authentic, unadulterated, "artisan" baklava, they go to Syrian Sweet Refuge online, or visit one of the farmer's markets where Marhaf Homsi and Nawal Wardeh sell their goods. Homsi and Wardeh started the business because the baklava they found in New York was either sickeningly sweet, or cheapened with other ingredients mixed into the nut layers.
Two of their sons, however, are still in Syria. Although one has received preliminary permission to immigrate to the U.S. as a refugee, everything is in doubt since the executive order banning Syrian refugees. While they are waiting, however, they continue baking and hope to expand their operation.
Source: "Two Bakers Thrive in Brooklyn, Far from Syria's Turmoil," by Tejal Rao, New York Times, February 7, 2017.
image by Andy Teebay: English installation by Dong Energy of Denmark
Even though solar energy gets a lot of press, over four times as much wind energy is produced in the United States. Wind is everywhere--and only limited areas have a significant amount of unobstructed sunlight daily. It is not surprising, then, that product development in wind energy has produced new and creative options.
Also because land is scarce in Denmark as well as other places, engineers developed wind-harnessing equipment that could be installed in the sea. The first project in Denmark succeeded, so other projects are in process. Pictured above is an installation off the coast of Liverpool, England. Some of its features include:
The success of these projects and the potential profits that may be derived from them has caught the interest of investors such as Goldman Sachs, Bank of America's Merrill Lynch Global, and the head of the Lego, the Danish toy company. The Liverpool project is being built by Dong Energy, but several multi-national corporations are also getting involved in other installations, including Siemens, Mitsubishi Heavy Industries, General Electric, and several Chinese companies.
Making renewal power and making money seem like an unbeatable combination. And there is plenty of water area in the world's oceans and seas.
Source: "Offshore Wind Moves Into Energy's Mainstream," by Stanley Reed, New York Times, February 7, 2017.
The structure of corporation income tax in the U.S. may soon undergo a major, major change. Trump proposes to decrease corporate taxes from 35% to 20%. In order to make up the difference, a Border Adjustment Tax is being proposed. Professor Alan Auerbach of the University of California, Berkeley, has been proposing this type of tax for over 15 years.
Currently, corporations are taxed based on where--technically--the profit is being booked for accounting purposes. Whether an item is sold in the U.S. or a foreign country, if it is "warehoused" in Ireland before shipment, then it is taxed in Ireland. Border taxes simplify and clarify things by taxing goods on where they are sold to. So, there would be NO TAXES on items shipped from the U.S. to another country on a sale. This would create a major incentive to business to increase exports, and would be a major benefit to companies who are already in the exporting business. But if something were imported from, for example, Apple in Ireland and sold to a U.S. buyer, Apple would be taxed on the price it sold for in the U.S.
How might this affect consumers? Since a lot of consumer goods are being imported, then the added taxes would be passed on to the consumer. This would create higher prices--the definition of inflation. Higher prices theoretically would lead to lower demand. Understandably, big importers (Best Buy, Walmart, Target) are lobbying against this tax.
However, the effects of the currency exchange rate theoretically will mitigate the higher pricing. Higher prices will make imports decrease relative to exports. This will have the effect of the value of U.S. Dollar rising relative to the currency of other countries. So an American dollar will buy more. This will make imports cheaper again. So--again theoretically--the tax would eventually have no effect on the markets or consumers.
Economists are debating the effects of this--and, most importantly--how long it will take to return to its current state.
Also under debate is how a Border Adjustment Tax will effect our relationships with other countries. If the tax is not rolled out with diplomacy, and if it is not well understood, there may be some backlash.
We will see how this will play out.
Source: "Episode 751: The Thing About that Border Tax," by Robert Smith and Jacob Goldstein, NPR Planet Money, February 1, 2017.
Snap, the parent company of what has been known as Snapchat, started out selling a social networking app that made sent pictures that disappear. Initially, their main product seemed to be an app that could send pictures that would then disappear, preventing problematic photos from being dispersed to a broader audience. The company is branching out into printed matter and branded content.
Snap filed papers for an IPO, in order to raise money by selling stock to the public. What is interesting about the financial statements required as part of the filing, is that they show a dramatic increase in revenues--but also a larger net loss. Nevertheless, the IPO will make billionaires out of the initial investors.
Many start-up companies run a net loss as they build their businesses. Nevertheless, if you take the data in the "single step" income statement presented in the article linked below, and you change it into a "multi-step" income statement, a surprising piece of information is revealed. "Revenues" minus "Cost of Revenues" equals "Gross Profit" (not shown in a single step income statement). And the Gross Profit for Snap is negative in both years presented.
This is comparable to a retail business buying T-shirts for $10 each, and selling them for $8 each, creating a negative gross profit. Since other operating expenses, including salaries, have to be subtracted from that, there is no way that a profit can be made if Gross Profit is negative.
I do not know what the "cost of revenues" for Snapchat includes, but it it is apparent from the two years presented that that cost of revenues compared to the total revenues is not directly proportional. The ratio improved dramatically from 2015 to 2016. This may mean that, as revenues increase, cost of revenues will not rise proportionally, and Gross Profit may be positive in future years.
Source: "What Snap's IPO Filing Reveals About the Company," edited by Andrew Ross Sorkin, New York Times DealBook, February 2, 2017.
In a 2015 Supreme Court decision written by Antonin Scalia, the Environmental Protection Agency (EPA) lost. The EPA had wanted to implement a rule that would have limited the mercury emissions from power plants in Michigan. The Clean Air Act, however, requires that "appropriate and necessary" regulations be issued. Scalia and the majority of the Court interpreted this to mean that "No regulation is 'appropriate' if it does significantly more harm than good." The "harm" to which Scalia was referring was cost. "the EPA could not ignore the costs of its actions when deciding whether or how stringently to regulate."
The Secure Fence Act of 2006 limits Homeland Security's border actions with the same language that appears in the Clean Air Act. It "authorizes the secretary of homeland security only to take action to secure the border that are 'necessary and appropriate'." If the legal principle were applied to the wall-building project, then the cost-benefit principle would also have to be applied.
Businesses that exist to maximize profits are well-acquainted the the cost-benefit principle. Corporations often resist regulations on the grounds that the costs of implementing them outweigh the benefits. We will see if this principle is applied to the costs that American taxpayers will have to assume.
Source: "How Antonin Scalia's Ghost Could Block Trump's Wall," by DANIEL HEMEL, JONATHAN MASUR and ERIC POSNER, New York Times, January 25, 2017.