Internet killed the Movie-Star

The 21st century will be characterised by the continued fragmentation of traditional media, as outlets for information and entertainment rapidly expand and decentralise the current TV hegemony. As these distribution channels grow and people become more comfortable with their use, the media often neglects a source of much of our entertainment, the film industry.

The decline of movie-appeal is only part of a much larger problem for the structurally declining industry. Consolidation to combat the excess capacity and reduce succession risk has already began in both the production and licensing film segments, with Walt Disney purchasing Marvel Entertainment (~US$4b), and the imminent sale of Metro-Goldwyn-Mayer Inc (MGM)for an expected ~US$1.5b.
Matthew Garrahan from The Times reported an interesting argument to light this week following Carl Icahn’s offer to increase his holding in Lions Gate to 30%, seeking to derail the management’s pursuit of the MGM film library, stating:

“I believe Library values are declining… Lions Gate already has a major investment in a library – its own”

This argument can be seen to present some truth, considering MGM was purchased by a Sony consortium for US$5b in 2005, as well as the lack of creditor belief in CEO Stephen Cooper’s continuing the business, being rejected by the creditors that now control the defunct business, instead pursuing a quick fire sale to recoup their investment.

Can it be true that these libraries of famous movies, which include the James Bond franchise, are declining in value? These massive archives of intellectual property that will continue to be viewed by audiences for generations? In this question opens up the plethora of thematic issues now driving the decline of the industry.

The growth of alternative entertainment, catering to a largely diverse and expanding population, have allowed former niche players to export their entertainment around the world at little cost. The most lucrative market is now Bollywood, where ticket sale numbers have dwarfed Hollywood receipts from as early as 2002, but now with rapidly expanding disposable incomes and population of India, the Bollywood industry is quickly catching up to Hollywood in film revenues.

Furthermore, the internet now exposes audiences to a variety of interests with a couple of clicks. Where as 15 years ago, Western audiences would have known little of the Manga revolution, these Japanese comics and cartoons now enjoy a rapidly expanding share of Western markets.

This increasing accessibility and ubiquity of the internet has likewise accelerated the decline of DVDs, as consumers can now download, whether legally or illegally, their entertainment. Likewise, with the expansion of Web 2.0, where users can actively participate and supply content, has enormously broadened the spectrum of entertainment offerings to users.

Finally, the recent credit crunch hasn’t don’t any favours for the industry, considering that ~90% of all films produced actually lose money, funding the production and distribution is highly risky, with financiers still licking their wounds from the 2008-2009 period. The economics of the industry rely on the ~10% of films that make stellar returns to keep the industry as a whole viable. Similarly, where problems occur in monetizing television, radio and newspaper news- these are all constant flows of operations, not the two year investment and one big splash we receive from the movies.

Although most of the media’s attention focuses on the decline of television and newspaper, the film industry is a quiet casualty. With convergence growing exponentially, it wont be surprising when soon there is no distinction between several mediums– a box in front of the couch that provides internet, television, blogs, shopping – the possibilities are limitless. Although we may hear about Rupert Murdoch and his struggle to monetize readership of online news, spare a thought for the movie-makers as they struggle to keep an audience.

Survival of the Fittest

Following Anton Valukus’ 2,200 page report on the demise of Lehman Brothers, the media has continued to dismiss the reputation of investment banks as nothing more than used-car sales men.

The now infamous ‘Repo 105’ transactions are now symbolic of the classed thievery that characterised investment banks preceding the global meltdown. But contrary to popular opinion, these opaque transactions and accounting methods were perfectly legal, being just another innovative adaption in order to promote a species continued success in the environment. As Charles Darwin wrote in 1859 in The Origin of Species, the process of natural selection is needed in order for continued evolution and growth of ecosystems.

Unfortunately for Lehman, which followed the fate of Bear Stearns in succumbing to the sub-prime meltdown, the adaption used was not enough to save it from being consumed by its environment. The bank collapsed in late 2008 with over US$613 billion in bank debt, and like the process outlined by Darwin, the characteristics of this bank were destroyed in natural selection.

Now in 2010, the investment banking world that remains is constituted of the surviving individuals that possessed some competitive advantage that ensured their survival, being able to transcend the meltdown and pass on its favourable characteristics.

Henry Sender for The Financial Times recently published an article outlining the use of Repo 105s, and how the now surviving banks were able to pre-assess Lehman’s position and reduce their exposure. It is said that Merrill Lynch, which continues to live under the shelter of Bank of America, warned regulators that Lehman was incorrectly calculating its liquidity position in 2008, with little action being taken by the so called Federal Regulating Agencies.

Likewise, it has recently come to public light that the monolithic HSBC was undertaking Project Milan, a codenamed project with the intention of disentangling itself from Lehman Brothers by avoiding margin and brokerage positions with the aggressive bank, as it too, saw the instability in the corporation’s structure.

This intellectual foresight has allowed these two banks, and many others, to survive the crisis, with now greater experience and understanding of the financial-dos and financial-don’ts of capital markets.

The world exists with a framework and rules for corporations to operate in, but without pushing the boundaries of financial innovation, and in-part breaking the rules, world markets would be a sluggish and un-innovative place. Although painful in the short-term, it is these continued adaptions to environments and pushing of the boundaries, whether successful or not, that stimulate growth and development.

What a boring world it would be without rule-breaking and controversy?

Long Live Credit Default swaps and Excessive Executive Remuneration

As George Papandreou this week called for the ban of naked Credit Default swaps, financially literate people will be rightly shaking their heads. Similar to the ignorant rhetoric that captured headlines a few months ago regarding executive remuneration – the current arguments re-iterate the fact that politicians have no place in financial markets.

Recently as the Greek sovereign debt crisis continues to unravel, numerous groups have pleaded for regulatory bodies to restrict or outright ban naked Credit Default Swaps. It has been argued by the Greek Prime Minister, that the use of these financial instruments have amplified the volatility currently characterising debt markets:

“We should not allow speculators to play around with the stability of the Eurozone”
(Sourced – H. Pulizzi from The Times, 11th March 2010)

To the non-financially educated, the three functional purposes for the existence of derivatives are:

1. Hedging is used to reduce or neutralise the exposure to the underlying asset or another risk.
2. Arbitraging discrepancies in pricing between markets or assets, thus keeping prices efficient.
3. Speculating on positions or views on the future of an instrument or market.

The United States' Affordable Housing Institute provides the defination of a CDS below.

(Sourced from AHI, Google images)

None of the above is more so important than speculating - naked positions – in adding liquidity to the market, being the foundation on which any effective financial market is built on. Investing in itself is a form of speculating, and without investment, capital markets would cease to function.

The involvement of speculators in any financial market significantly increases the financial depth and breadth for both buyers and sellers, allowing participants who need to hedge an exposure (hedgers) with significant more of a market to sell or buy to – therefore inducing further competition – and allowing these participants to attract better pricing. They are also paramount in the role of capital allocation, providing it for growth and withdrawing it from non-profitable avenues. As stated by Paul Murply from The Times: -“Speculators do God’s work”.

Contrary to the belief of the Greek Prime Minister, and numerous political groups, the CDS market, which constitutes only 2% of the outstanding Greek debt, does not have the power to push counties towards default. They are merely a tool for market participants to hedge or speculate. The Bond holders that invested ~€5 billion in the recent debt raising by the Greek Government, are far more educated the debt investing than to be concerned by the CDS market.

The fundamental issue is that ostracising the CDS market is a notion by political groups purely to impress or rally public support from the public. As Paul Murphy from the Financial Times outlined on the 14th of March, employees of the Greek government currently facing austerity measures, rightly would direct anger at any scapegoat seen to be associated with the pain.

The use of financial-buzz-words to stir-public anger and avert political scrutiny is no new concept, only weeks ago we observed the peak of the ignorance of political and media groups seeking to curb executive remuneration. These companies exist with the funding or their shareholders, not of the general public. If an individual believes that the executive remuneration in a company is excessive, he can simply cease to be a shareholder in that company. Albeit institutions that have received taxpayer funds to continue operations, should be governed by its shareholders – i.e. the taxpayer.

A derivative’s value, by definition, is an instrument whose value is based on another source. The CDS market is not the source of the problem facing the Greek economy. Greece is the source, struggling with serious concerns over its viability to refinance and tame the soaring budget deficit.

Politicians should focus on the source of problems, rather than seeking to divert the non-financially educated public’s scrutiny to financial derivatives.

Red Knights lead the charge to reclaim United

The key marketing ploy being used by the Red-Knight’s to rally support for an acquisition of the Manchester United Football club is a word splashed across newspaper headlines almost everyday in post-global financial crisis society. It is a word now used to evoke fear and disgust among non-financial savvy readers.



As the stigma of the financial crisis continues in developed governments and economies, debt is now a symbol of greed, recklessness and pain, fundamentally seen as the epitome of ‘those fat-cats that got us into this mess’. This continued miss-use and war-mongering of the word by economists and journalists has ingrained an unjustified fear.

Debt is structurally ingrained into our financial systems in the credit creation process, our consumers through credit cards and mortgages, and our businesses through providing greater equity returns from investment. Although its misuse in the American housing market triggered a credit crunch in 2007-2008, when used prudently debt supports economic growth and increases the standard of leaving of society.

The negative emotions now bound to the word have been used to rally support against the Glazer Family, owners of the 132 year-old Manchester Football club. The rebellion against the foreign American tyrants is being lead by the four Red Knights, playing on the nobility and courage of British Heritage. These individuals include Jim O’Neil, Keith Harris, Seymour Peirce and Paul Marshall – who themselves are members of the wealthy aristocracy, being prominent members in hedge funds and investment banks, but unlike the Glazers, they have been avid Manchester fans since childhood.

The Glazers purchased the company in 2005 through a £790 million leveraged-buy-out, a transaction structure that is ignorantly used to characterise the excessive greed of corporate America. An LBO is a acquisition structure where the assets of the acquired company are used as the collateral for acquiring the company with a significant portion of debt. The debt-servicing cost for Manchester United in the past five years is estimated to total ~£260 million. The corporation currently has £515m in debt, with a further £202 being held by The Glazers through their investment in the Club.

The Guardian’s coverage of the story on the 4th of March played perfectly on its largely working-class audience fears, portraying a fairytale in which fans rescue their team for the Glazers. The article quickly outlined that although the Glazers have publicly stated the Club is not for sale, the debt-heavy Americans would make a huge profit from a ~£1.4 billion sale (profit being another buzzword to stem dislike for the current owners).

It is in this capacity that the Red Knights seek to rally membership and fan support, to be seen as the crusading Knights to rescue Manchester United from its current debt binging tyrants. They have publicly scrutinised the club’s current financial structure, stating that money should be spent on investing in players, not in servicing debt.

The Financial Times coverage of the story, A contested goal on the 6th of March quoted “Debt has acted like a Leech on the Club. Sucking money out to feed The Glazers and their bankers”.

Animosity to the Glazers from the fans is nothing new to the club, with fans often wearing the clubs ancient green and gold to the club’s games, rather than the contemporary royal red. The largest Manchester Club on Facebook, with now just under 400,000 members, carries the symbol:


Support has been likewise seen in the official supporters trust of the club, The Manchester United Supporters Trust, has seen membership numbers rapidly double to over 100,000 since speculation of the bid surfaced last week. These trusts seek to influence the destiny of their clubs through democratic supporter ownership, ideally what the Red Knights seek to exploit, with the possibility of supporters potential funding up to 25% of the bid.

This idea of the noble Knights slaying the debt-beast is a fairytale most of the world would like to believe, and it has successfully drummed-up support to see ownership of the club return to ‘the fans’. However, corporate motivations have far more weight than social responsibility, and it is in the writers view that it wont be long before fans realise that the debt-beast may just be giving a collar, and in the interest of the equity providers, will continue to be part of the Club’s financial structure.