Archiv der Kategorie: Economics

Economics, music industry

The strange story of Vivendi Universal

It’s been a while since I’ve looked at my last case in business school. But I am pretty sure, my successors today will certainly, sooner or later, be looking at a case study concerning the making and breaking of Vivendi Universal. There might even be two solutions to that case, one written back in autumn 1999, the other written in spring 2002. One praising the former CEO Jean-Marie Messier for his alleged vision of the converging digital world to come, the other one bashing him and the company he assembled before being sacked this summer as an obvious mistake. It might have been different back in the good old time, but in these days the half-life period of a given “right” business decision is probably measurable in fashion seasons.

The problem at hand is that there is no theory of the firm which could possibly make sense of what Messier did in the late 1990s. From a theoretical (economic) perspective, the conglomerate he created does not make a lot of sense – back then a lot of decisions seemed to be “driven by … naive heuristics …, or the pure seductive power of Hollywood.” (Bane, William P.; Bradley, Stephen P.; Collis, David J (1994): Winners And Losers: Industry structures in the converging world of telecommunications, computing and entertainment, good article, written back in 1997, when people still dared to admit they did not have a clue about the future…) In the end, there has been not even been a real transformation. So far even the media businesses remain largely distinct. What happened was that Messier used one company as a bank/collateral to buy others and then get rid of the original one. This process will be completed once Vivendi Universal will have divested its remaining energy and water supply assets. Jean-René Fourtou, Vivendi’s interim CEO made this strategy pretty clear at a press conference in Paris yesterday, confirming once more that “Vivendi Universal is basically an entertainment company”.

Thus, looking at the results of Messiers conquest, one can see the following three things:

  • The collateral – 41% of a profitable French utilities company, known as “Générale des Eaux” since 1853, now conducting business as Vivendi Environnement.
  • The bet – synergies, economies of scale and scope. The future value of a vertically integrated content production and distribution empire. But so far the empire is merely a bunch of still largely unrelated communications and media assets, most importantly the previously Seagram-owned Universal Entertainment group. As most acquisitions were made by share swaps, the real result of those transactions is that direct ownership of these assets has been transformed into indirect part-ownership of Vivendi Universal. The price paid for by Vivendi was, in the end, paid for hierarchical coordination of the day-to-day business conducted by the acquired companies. Eg, Vivendi board hierarchical conrol in combination with Bronfman family control of Vivendi’s board vs complete Bronfman family control in the case of Universal. But running the conglomerate proved to be a lot more difficult than anticipated. The problem in the current CEO’s own words is that ” Vivendi Universal [has] suffered a lack of management under Mr Messier and [is] ‘chronically over-diversified’.” (LINK).
  • The price paid – currently 19bn Euro debt, piled up during Messier’s conquest. It was probably necessary to oust him. Some people are good are good at conquests bad at consolidation. But that is what the new company needs most now.

    • No wonder, there is no economic explanation for this – apart from capital market imperfections. No one would have invested the amount of money Mr Messier could use to acquire the businesses he wanted in a new company. To acquire assets on the scale on which Mr Messier operated, he simply needed hierarchical control over a significant amount of financial resources. His conquest was a very expensive operation. But back in 1999/2000, a lot of overpriced companies bought other overpriced companies with their overpriced shares. No one back then thought of the possibility to wait and buy cheap after the burst. That’s the nature of a bubble. You somehow feel it’s there. But then, you would not bet on it if no one else does, would you?

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    intellectual property rights

    In a nutshell: The differences between property and intellectual property.

    From Brad DeLong’s Semi Daily Journal –

    David Weinberger said something very reasonable about intellectual property:

    All contending parties agree, I believe, that (1) the goal is to build a marketplace that encourages innovation and (2) that the way to do that is to let the market reward innovation. Unfortunately, to spread the value of innovation, two things have to happen that are contradictory from the market point of view: First, someone has to have a great idea for which she is rewarded. Second, you want that idea to spread and be built upon as rapidly as possible and requiring that the creator be rewarded slows down the spread. Much butting of heads ensues…

    To which David Winer replied as if Weinberger had said something really stupid:

    For crying out loud David, it’s super simple. If I build a house I can live in it as long as I want. If I want to rent out rooms I can do that too, as long as I want.

    The peculiar thing about this David Winer position–this “Mine! I thought of it! Mine! It’s my intellectual property forever! All Mine!” position–is that Winer could not hold it had he looked up and around at the intellectual property house he happens to live in. If he did so, he would notice that he has–without getting their permission or approval–used a huge amount of intellectual property thought up by other people, and has neither compensated them nor acquired from them a license to do so.

    To pick just one thing at random, there is the case of Ez-Eki-Baal and his cousin Ish-Baal, residents of Tyre in 1160 B.C. They first thought up the idea of using a stylized picture of an ox to represent the phoneme “A” (and the idea of using a bunch of other stylized pictures of other things to represent other phonemes). This invention of the “alpha-bet,” as I have been told it is called, is in the estimation of some a very important piece of intellectual property. Some commentators have even claimed that most of us use it during most of our waking hours.

    But have Ish-Baal, Ez-Eki-Baal, or their heirs received one red cent in the past century in return for other people’s appropriation and use of their intellectual property? No. Does David Winer have a valid license authorizing him to use the alphabet–to move into the intellectual property house built by Ish-Baal and Ez-Eki-Baal and trash the place? No. Has David Winer made any effort at all to identify and compensate those to whom–on his own theories about the moral obligations imposed on those who make use of intellectual property–he owes a fortune? No.

    So does he believe his own theories? It’s hard to know at what level he does. It’s genuinely hard to know what to do with people who argue that all the intellectual property they make is “Mine! All Mine! All Mine Forever!” and yet classify all the intellectual property they use as the common and free inheritance of all humanity. It’s a “heads I win, tails you lose” kind of argument…

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    intellectual property rights, media

    The Secret War. Today: Eldred vs. Ashcroft.

    FREE THE MOUSEWhen Paul Krugman stated in his NY Times op-ed column back in February that, in his opinion, in ten years people will regard the Enron induced confidence crisis in American capitalism as a much bigger problem than September 11, 2001 and the ensuing war on terror, the public outrage was immediate. I am not sure Krugman is right with his statement – we’ll have to wait for future generations of historians to rank the events – but he’s making an crucial point. Important things are going on in this world and most people, including those professionally involved with selling opinion, the media, somehow don’t get it.

    What I am referring to is the war about who is allowed to benefit from a copyright on Mickey Mouse for how long after its creation. In short, the war about intellectual property rights, the fundamental distributive conflict of the digital age. Another episode in this war is going to take place in the U.S. constitutional court. I am not going to outline the Eldred vs. Ashcroft lawsuit which will be decided soon. Click on the big “e” and find out for yourself. But mark my words: The decision will affect the future of public life in Western societies deeply and possibly lastingly.

    As I have argued before, current copyright holders are about to exploit the existing socially institutionalised notion of property rights in order to perpetuate legal institutions for a future in which they will likely be entirely inadequate. The problem with such institutionalised myths of rationality is that people take them for granted. And with a deeply engrained (important!) institution as property, most people will never ask any questions.

    Thus, I am grateful that the list of supporters of the plaintiffs in the lawsuit (those in favour of moderate copyright extensions) includes some sort of who-is-who of famous and inflential economists, quite a few of which have been awarded the Nobel Price in Economics: George A. Akerlof, Kenneth J. Arrow, Timothy F. Bresnahan, James M. Buchanan, Ronald H. Coase, Linda R. Cohen, Milton Friedman, Jerry R. Green, Robert W. Hahn, Thomas W. Hazlett, C. Scott Hemphill, Robert E. Litan, Roger G. Noll, Richard Schmalensee, Steven Shavell, Hal R. Varian, and Richard J. Zeckhauser. One of their lawyers is Harvard’s William Fisher whose thoughts on the challenges of digital reproduction and distribution for copyright law I have already recommended.

    Hopefully they will be able to have a calming influence on the panel of judges.

    Again: The copyright war is a secret war. But – in my opinion – will have more important consequences for our societies than the one currently fought on the screens. So check the lawsuit’s website and help out Mickey!

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    Economics, German Politics

    Do it the German way, if you have to. But do it.

    Gerhard SchröderThe Social Democrats (SPD) seem somewhat desperate these days. With the general elections looming in only 48 days and the SPD still trailing the Christian Democrats (CDU) by about five cruicial points, Chancellor Schroeder kicked off the ‘official’ SPD campaign in Hannover saying that his government would contine to conduct business, that is economic policy, “the German way” – as opposed to the American way of social security, of course.

    While campaigns are not usually a good opportunity for serious policy analysis, this statement is actually interesting, because it demonstrates to which extent this government is at loss about its economic policy. A few weeks ago, the chancellor tried to gain points among the reformist voters who helped him into office back in 1998 by proposing to pursue the implementation of the proposals of a working group (the “Hartz-commission”) under the direction of a member of the VW-board.

    These proposals include serious supply side changes to the incentive structure of the German labour market regulations. The deal he tried to cut was – back me again and I’ll be in a better position to keep the Unions in check than a conservative-liberal coalition so I could actually implement the plan.

    While this calculation may be right if – and it certainly looks as if – Schroeder himself is the only argument that could keep the SPD in office, many voters seem to have lost their faith in his ability to deliver. After all, they signed precisely that deal in 1998 and the only changes the SPD made to labour market regulation, even after the departure of my-heart-beats-on-the-left finance minister Oskar Lafontaine, made it even more rigid than before.

    So it seems the SPD campaigners now believe that they will have to rely more on the votes of the traditional social democratic core than they thought and thus start a campaign to defend “the German way” – the corporatist rhenish capitalism – of organising the economy. Not helpful, you might say and you could be right.

    But I still believe in Schroeders deal. Especially if the SPD has to cut a deal with the Liberals after the election instead of the Greens whose very knowledgeable spokesperson for budgetary and economic matters, Oswald Metzger, will not return to the Bundestag due to plainly stupid electoral regulations, once conceived to promote the role of women in the Green party.

    So I fear in a coalition with a technically neoliberal chancellor they might try to appeal to leftist tradiationalists and slow down necessary reforms. I would certainly miss Joschka Fischer and will dearly deplore the lack of social progressiveness in the FDP but as things stand today I figure a coalition of SPD and FDP will be the best deal this country can get.

    So if Schroeder has to praise “the German way” to be reelected, be it. In any case, I would advise you not to listen too closely to any politician over the next 48 days, it’s campaign time. If you’re campaigning yourself, you’re a journalist or you’re into advertising, you might have have fun.

    All others – try to spend the rest of the summer abroad.

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    compulsory reading, intellectual property rights, music industry

    The future of the music industry.

    Last week’s ousting of Bertelsmann’s CEO Thomas Middelhoff prompted a lot of newspapers to reconsider the challenges the internet poses for companies with a business model based on the exclusive licensing and diustribution of intellectual property rights. And so I, too, want to repeat my opinion in this matter.

    Granted, the fundamental dilemma posed by changed economics of reproduction and distribution has not yet been solved: How to make people pay for formerly excluable intellectual property rights if they can obtain them for free without restrictions on the Internet. But then, consider the financial and especially societal costs of digitally fingerprinting people’s hardrives and controlling their use of the net. Assuming technical feasibility, Orwell’s nightmare would have become reality. OK, differences in degrees are certainly possible. But the trade-off remains: Which price will information societies be willing to pay to reinstore excludability of information goods at least to a certain extent?

    One of the biggest problems in this extremely important debate has so far been flatly ignored. It is the social institutionalisation of the current notion of property. Based on this notion, it is relatively easy for the music industry to claim the moral high ground and persuade politicians to restrict the private flow of information. Coupled with the increased perceived need for security after 9/11 this is a powerful political position.

    But everyone trying to climb the moral high ground should stop for a moment and reconsider what’s actually going on there. To know the history of copyright laws since Gutenberg would be a good starting point. After familiarising themselves with this fascinating topic people would have to accept that the current industry and cash flow structures are a consequence of a specific technology and its economics. New technology means new economics and in turm, new industry structures.

    Right now, those who became powerful in a world of restricted bandwidth are trying to preserve that position and the related cash flows in a world with different economics. Assuming that the industry structure evolved to suit the economics of its business, it becomes self evident that this structure is not going to fit into the new environment.

    In this respect, I recommend the excellent analysis of Harvard’s William Fisher, Digital Music: Problems and Possibilities, as a starting point.

    The cultural landscape of the future will reflect the changes in economics. The days of financing the likes of Britney Spears through sales of records as well as the need to have music companies of a significant size to keep a risk-diversified portfolio of acts are likely to end as the last bandwidth restrictions fade. That does not mean there won’t be stars in the future, just that they won’t be able to make the amount of money through record sales they could before. But the same development opens a market to so many musicians who have not been able to live from making music before. I think that is a good thing.

    But, of course, you have to decide for yourself.

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