Saturday, 28 March 2009

EVERYONE'S NOT ATWITTER

Journalists and technology writers are enamored with communications technology and tend to portray successful technologies as representing large scale trends. We are regularly presented with news stories and promotional materials about the rise of new technologies and about how their uses create social trend that are significantly altering society.

The release of the new iPhone was recently featured on network evening news, Blackberry has been heavily discussed because its use by Pres. Obama, and Twitter has been featured in numerous television and newspaper stories. The impression given by coverage is that anyone who doesn’t have an iPhone or Blackberry and anyone who doesn’t Twitter is out of touch with the mainstream and being left out of modern society.

These new means of communications offer interesting possibilities, but their consumption needs to be seen realistically. Blackberry, for example, has 14 million subscribers-- about 5 percent of all mobile phone users in the US. iPhones represents about 1 percent of mobile phone users. The number of Twitter users is currently around 1 million, representing only about 3 tenths of 1 percent of the US population.

Certainly those kinds of numbers can create businesses successes for their firms, but we have to be realistic in interpreting their overall impact on technology markets, social interaction, and diffusion of technologies. Not everyone wants to or will be equally wired, communicating, or sharing mundane details of their lives with their friends and the world. Some persons will find communications enabling technologies more rewarding in business and personal terms than other persons.

It is easy to forget the size of market when discussing the impact of diffusion of technologies. Without doing so, however, one gets a warped sense of their role in contemporary life.

Wednesday, 25 March 2009

ANALYSIS OF THE NEWSPAPER REVITALIZATION ACT

The Newspaper Revitalization Act introduced by Sen. Benjamin Cardin, D-Md., would permit newspapers to operate as not-for-profit entities under the tax code and is being heralded by some observers as a means of saving newspapers, much as was the Newspaper Preservation Act of 1970. Good purposes aside, it is useful to study the act to determine whether it will actually accomplish the goals that are stated as its rationale.

The bill is a small bill, about 435 words, that would amend the IRS Code of 1986 to permit newspapers to be given 501(c)(3) status, thus obtaining tax exempt status and the ability to accept charitable contributions. Currently tax laws do not permit newspapers to be operated tax exempt, but they do have mechanisms that permit foundations to own them or support them financially.

Paragraph (b)(1) of the bill would allow general circulation newspapers “publishing on a regular basis” to establish themselves as tax exempt organizations. The language does not limit periodicity so daily, bi-weekly, weekly, monthly, and other combinations would be possible. It would thus permit a range of neighborhood and community non-dailies, as well as dailies to use the mechanism.

Paragraph (b)(2) stipulates that the newspaper contain “local, national, and international news stories.” This section is somewhat problematic because non-dailies, particularly neighborhood and community papers, do not typically carry national and international news and nationally oriented dailies do not typically carry local news. The bill contains no provisions that require local creation of content, thus allowing publishers to fill a paper only with syndicated material or other content produced elsewhere.

Paragraph (c) permits advertising, but limits it “to the extent that the space allotted to all such advertisements….does not exceed the space allotted to fulfilling the educational purpose of such qualified newspaper corporation.” This provision is apparently intended to ensure advertising does not dominate the content and effectively limits advertising to 50 percent of the content. This provision, however, is problematic because daily newspapers and most non-dailies currently contain two-thirds to three-quarters advertising. Indeed the regulations governing Post Office (USPS) distribution limit advertising to 75 percent.

The bill does not require that newspapers have paid subscriptions or even requests to receive the paper, as do USPS regulations, so it would apply free circulation papers.

By giving not-for-profit status to newspapers, the bill would also make the paper eligible for USPS not-for-profit rates, which would permit lower postal delivery rates for such papers than those afforded for-profit papers. This might raise issues regarding the fairness of competition if commercial publishers exist in the market

It should also be noted that the bill makes no provision to limit payments to publishers and editors. This creates the potential for some abuse. A small commercial publisher could use the mechanism to become “non profit” to avoid company taxes by not taking compensation from profits but taking a higher salary instead—effectively letting tax payers subsidize his/her income.

One drawback of using 501(c)(3) status is that entities are not permitted to engage in direct political activities, such as endorsing candidates for local, state, or national office or possibly even taking positions on governmental proposals. This would somewhat limit the scope of content and could lead to IRS investigations if complaints were made to the IRS that a paper was taking sides, was too conservative or liberal, or evidenced some other kind of agenda that was deemed political activity.

It appears that the overall effect of the bill would be limited. It will be appealing to very few dailies and most neighborhood and community papers will have difficulties complying with its content and advertising requirements. Even with tax exempt status, the costs of creation, publishing, distribution of a newspaper probably can not be covered by many publishers with a 50 percent ad limit, unless they are especially effective at raising charitable contributions over time.

The bill appears to be well intentioned, however, it can not solve the problem it purports to address in its current form and creates potential for some abuse.

Wednesday, 18 March 2009

Magna Finally Faces Up to the Market

Probably figuring that its latest SEC filing would be thoroughly ignored amid all the focus on its bankruptcy, Magna Entertainment (MEC) filed a Form 8-K yesterday with the Securities and Exchange Commission in which it finally admitted that some of its race tracks and land holdings aren't worth anything like what Frank Stronach paid for them not all that long ago.

The 8-K, which is required whenever there is an event that materially affects a company's business, reports that on Monday MEC's audit committee approved a $136 million write-down in the value of the company's assets. In particular, the write-downs included the value of racing licenses for Lone Star Park in Texas, Golden Gate Fields in California, and the Maryland Jockey Club's tracks, Laurel and Pimlico. Other reductions in value were allocated to The Meadows harness track, to the now-shuttered operations at Portland Meadows and at Stronach's Austrian Racino, and to the value of land that MEC owns in Dixon, California, once the intended site of a thoroughbred track.

No mention in the SEC filing of the value of Santa Anita, Gulfstream or other Magna properties.  But the unforgiving nature of bankruptcy proceedings may sooner rather than later show exactly how much of the value of MEC's assets as carried on its balance sheet has any relation to the real world.

THE OVERBLOWN JOURNALIST EMPLOYMENT CRISIS

Journalists keep raising the crescendo of the chorus that journalists are losing their jobs and journalism is suffering. They point to the fact that about 10 percent of journalists have disappeared from newspapers since the millennium when U.S. newsroom employment reached a peak of 56,373.

It is true that cutbacks are pandemic these days, and that these employment reductions hit close to home for journalists, but some context is usually useful when considering the numbers and their impact. Let’s take a look at the U.S. numbers.

The American Society of Newspaper Editors has conducted a newsroom employment census for 3 decades and it presents a telling story. According to the latest ASNE newsroom employment figures, there are 22 percent more journalists in newspapers than there were in 1977 (43,000 in 1977; 52,600 in 2007). Even granting employment losses of 2,000-4,000 since the last census, employment is still about 18 to 20 percent higher than it was in the 1970s. That doesn't seem like an industry employment CRISIS, except for those who unfortunately lost their jobs.

If mere numbers of journalists are considered an indicator of quality, the growth of journalist employment from 1970s to 2000 should have made journalism extraordinary in the 1980s and 1990s. No one should have been surprised by the savings and loan debacle, the Soviet Bloc collapsing, the international debt crisis in developing nations , U.S. aid to governments in central America and the Iran-contra affair, child labor in the developing world, the explosive growth of Chinese economy, or rising domestic and international terrorism. But we were surprised and journalists didn't forewarn us. Obviously, the attention of the rising number of journalists was turned elsewhere.

If you look at newsrooms you can see the problem. Most journalists in newspapers do everything BUT covering significant news. They spend their time doing celebrity, food, automobile, and entertainment stories. Look around any newsroom, or just the lists of assignments or beats, and you soon come to realize that 20 percent or fewer of the journalists in newsrooms actually produce the kind of news that most people are concerned about losing.

It is not the mere number of journalists that matters; it’s the choices that editors and publishers make about how to use the journalists available to them. Journalists are a crucial resource and how they are utilized has a significant influence on quality. Few newspapers have cut sections or types of coverage, choosing instead to cut throughout the newsroom and not to reassign journalists to the kinds of journalism that matters most to society.

It should also be noted that decisions where to cut employment in newsrooms have not been equally spread among employment categories either. According to ASNE statistics the number of newsroom supervisors has declined only seven tenths of one percent since 2000; copy editors 1 percent, photographers and artists 10 percent, and reporters 11 percent. There may be reasonable rationales for that, but the numbers seem unusually lopsided to me. If there are fewer reporters and photographers to be supervised and edited, one would expect that fewer editors and supervisors would be required and warranted.

Maybe it’s about time that journalists stop whining about their troubles and initiate some internal discussions about how their own newsrooms are structured and operated.

Wednesday, 11 March 2009

Carolina Fuego Wins At Aqueduct

Most of what I write here focusses on the big picture in racing -- how Magna, Churchill or NYRA are doing, what's happening at the sales, what the economics of various niches in the racing industry are like.  But every once in a while it's fun to just celebrate being part of this great game.  Today was definitely one of those days.

My partnership operation, Castle Village Farm, had been pretty quiet over the winter. We'd retired a couple of horses, sent our better runners off for winter vacations, and had a couple of babies getting ready for their debuts.  And the there was Carolina Fuego.  We'd claimed her as a three-year-old back in June of 2007, and in 17 sytarts before today, she'd been in the money eight times, including a good second in the 2007 Delaware Certified Distaff Stakes. But she hadn't won for us, and the partners were, understandably, getting restless. In fact, back last summer, when her performance tailed off, we'd decided she needed a rest after two straight years at the race track, and gave her a couple of months of R&R at an equestrian facility on Long Island, just for a change of pace.

We brought her back to the races last month, and, despite being left flat-footed at the start, she made a nice run through the stretch to get third.  Today, we entered her back in a claimer for horses that hadn't won in six months -- in most cases, they hadn't won in a lot longer than that -- and she came through for us.

Sent off by the public at Aqueduct at an overlaid 11-1, Carolina bided her time toward the back of the eight-horse field, moved up into the turn, and pushed through to the lead in the stretch.  She then held off a late challenge and prevailed by almost a length.

Lots of high-fives in the box area, where a dozen of us were watching. Lots of smiles in the winners circle, and lots of win photos for the two dozen other partners who couldn't find a good enough excuse to get out of work and come to the track today.  And lots of appreciation for Leah Gyarmati's training and Sheldon Russell's very smart ride.

Sure, the first at Aqueduct on a winter Wednesday isn't the Kentucky Derby, or even the Empire Classic.  But, if you're in this game, there's nothing better than a win.

Tuesday, 10 March 2009

THE DEAD AND THE DYING

Judging from the continuing panicked commentary by big media journalists and commentators, newspapers are dead and dying. They are comatose, the family is gathering at the bedside, and quiet discussions are taking place about whether to disconnect them from life support.

Walter Isaacson writing in Time Magazine last week told us that “the crisis in journalism has reached meltdown proportions” and that we can save newspapers by starting to make micropayments for articles we read online.
http://www.time.com/time/business/article/0,8599,1877191-4,00.html

David Carr, writing in New York Times, this week tells us that a “digitally enabled free fall in ads and audience now has burly guys circling major daily newspapers with plywood and nail guns.” We need to start charging for news, forcing aggregators to pay, turn away from ad support, and start thinking about new ways of collaboration even if they require a new antitrust exemption.
http://www.nytimes.com/2009/03/09/business/media/09carr.html?emc=eta1

Jonathan Zimmermann writing in Christian Science Monitors tells us “The American newspaper is dead.” And that we can save its functions by having professors write for the public.
(http://news.yahoo.com/s/csm/20090309/cm_csm/yzimmerman)

Nickle and dime-ing readers like the airlines? Special treatment from the government? Relying on professors to tell us what's going on? Have journalists gone mad?

It some ways they have. They are panicking at problems in big city media and ignoring the fact that most newspapers are relatively stable and reasonably healthy. The only newspapers experiencing serious competitive difficulties are those in the top 25 markets (about 1 percent of the total) and these are joined in suffering by corporate newspaper companies whose executives have made serious managerial mistakes.

Journalists are sometimes their own worst enemies, and this is one such time. Through overly pessimistic outlooks and sweeping generalization, they may be hastening the obituaries of some weak papers by making readers and advertisers think their serve no purpose today.

Discussion of the newspaper industry’s situation is confused because many observers do not separate its short-term problems with the economy from the challenges of long-term trends. Then they compound that problem by using papers as examples of industry developments that are unrepresentative because of their market situations and managerial errors.

Most newspapers continued making profits up to the current financial crisis and many papers whose parents went into bankruptcy were doing likewise. They will make profits again when the recession ends as they have done in the past.

The Rocky Mountain News did not die because the newspaper industry is in trouble, but because it was the secondary paper in the market and the joint operating agreement was not enough to save it. Several other JOA papers are on their way to oblivion for the same reasons. The Journal Register Co. and Tribune Co. went into bankruptcy not because its newspapers were unable to survive but because its management took on far too much corporate debt.

Clearly, large metro papers are suffering from the effects of competition from television, cable, and Internet. But that same pain is not being felt by most of the nation’s papers that operate in small and mid-sized towns and are the primary or only significant provider of news in their communities. They will continue to survive for many years because their content is unique and because their local advertisers are not well served by other media options.

What we need is a dose of realism in the discussion of the journalistic situation today. Most papers are NOT in the hospital, let alone comatose. The dead and the dying may be there and if so it is because they can't figure out how to give readers something worth paying for.

Thursday, 5 March 2009

Mr. Stronach: Build Up That Wall!

For those too young too remember, or old enough to have forgotten, one of actor Ronald Reagan’s best lines as President, delivered on a visit to Berlin, was “Mr. Gorbachev, tear down that wall!” And when the Berlin Wall was indeed torn down – by ordinary Germans rather than by Mikhail Sergeyevich – Reagan’s credentials as an anti-Communist were assured.

Frank Stronach seems to have learned something from Reagan as well.  If nothing else, Magna Entertainment’s bankruptcy filing today was a remarkable exercise in tearing down walls, especially the walls that are supposed to exist between different corporations with different sets of shareholders.

[The Magna bankruptcy has been dutifully, and reasonably well, covered by the racing press and by the leading newspapers in areas where Magna tracks are located.  The best of the stories are collected at The Paulick Report and at Raceday 360, and quite a lot of detail is available on Magna Entertainment’s own web site.  I’ll try not to repeat any more of that coverage than is absolutely necessary.]

The most unusual aspect of the bankruptcy filing is that “DIP” (for debtor-in-possession) financing to fund continuing operations of the Magna tracks and affiliated companies is being provided not by a commercial or investment bank, or even by a financing company like GE Financial.  Instead, the DIP financing, to the tune of $62.5 million, is being provided by MI Developments (MID), another Stronach-controlled company, which had already lent several hundred million to Magna Entertainment, over the strenuous objections of its minority shareholders.

DIP financing occupies a special, privileged place in bankruptcy proceedings.  Typically, the DIP lender gets a security interest in all the debtor’s assets and moves to the head of the queue of those entitled to repayment. Since MI Developments is already the single largest creditor of Magna Entertainment, one might have thought that MI Developments already had a fairly strong position in the bankruptcy, but Stronach apparently wanted to ensure that his own company wouldn’t have to take second place to any mere bank.

But wait, there’s more.  Not only did MI Developments provide the DIP financing that will keep Magna tracks’ doors open, but it also submitted a “stalking horse bid” for some of the Magna Entertainment assets that will, presumably, be disposed of as part of the bankruptcy proceedings.  Specifically, MI Developments offered a total of $195 million -- $44 million in cash, $15 million for assuming a Magna Entertainment lease and $136 million in partial payment of MEC’s existing debt to MID –- for Golden Gate Fields, Gulfstream (including MEC’s interest in the Gulfstream condo/retail extravaganza), the Palm Meadows training center, Lone Star Park, AmTote and the XpressBet online and phone betting operation.  So, if no other bidder emerges for these assets, MI Developments will end up with them, and Stronach will still have large parts of his tottering empire under his control.

The MID stalking horse bid does not include Santa Anita, the Maryland Jockey Club (Laurel and Pimlico), Remington Park, Thistledown or Portland Meadows.  Nor does it include MEC’s Austrian interests or its real estate in Ocala and Dixon, California.  And it excludes MEC’s interest in the TrackNet simulcasting partnership with Churchill Downs, Inc. Apparently even the captive directors of MID thought that to take on all of MEC’s assets, which have, in the aggregate, produced losses of some $600 million since Stronach got into the race track business a decade ago, would be going too far.

The effrontery of it all takes one’s breath away.  Stronach runs his race track operations into the ground, props them up with money from the real estate company, MID, that he controls, then puts MID in a position to emerge with a bigger share of the debt than outside creditors and with a substantial chunk of the assets.  If he succeeds, it’ll become part of bankruptcy lore that will be taught in the casebooks for years to come.

Of course, there’s always uncertainty any time one goes to court.  Who knows, the bankruptcy judge (the case was filed in the US bankruptcy court in Delaware, a state that, I hear, might even have a race track) may actually know something about racing. There are seven judges on the bankruptcy court in Delaware, and I haven’t seen anything indicating which of them will be handling the Magna case.  Judges in the corporate milieu that is Delaware should, though, be thoroughly cognizant of the corporate shenanigans in evidence in the Magna case. And if the minority shareholders in MI Developments can find a way to make their views known, perhaps the court will be able to rebuild some of those walls that Frank Stronach has so assiduously torn down. 

A Closer Look at the Calder Sale Numbers

Given the economic climate, the Calder sale of two-year-olds in training yesterday could have been worse, but for most of the pinhookers and other sellers, it was bad enough.

The sale, always the most prestigious and most expensive juvenile auction, had a total of  272 horses in the catalog, the same number as last year.  But final figures show a total of 111 horses sold for gross receipts of $25.2 million.  That's 25% off last year's gross, and, because more horses were reported sold than the 102 in 2008, the average and median price declined by more, 31.5% for the average and 34.8% for the median, compared to published 2008 results. 

Boyd Browning, CEO of auction company Fasig-Tipton, was quoted in the Blood-Horse as saying that the sale "wasn't as bad as my worst fears, and it wasn't as good as I'd hoped for." In fact, if you look critically at the numbers, it was a good deal worse than appears on the surface, bad as that appearance is. At least three factors make the published results less than completely transparent.

First, Fasig-Tipton for the first time this year reported private sales made on the sales grounds and booked through the auction house as "sold" for purposes of the results totals.  It's common at sales for horses that fail to meet their reserve to be sold privately soon thereafter (usually at a discount off the final bid) as consignors weigh the risks of trying to take the horse home and sell it somewhere else. Often, these sales are processed by the auction company, which helps to assure the consignors that they're likely to get paid.  But, until this year, those horses had been reported as RNAs, which is, in fact, what they were.  By changing the reporting treatment, Fasig-Tipton was able to raise its total of horses sold from 102, the same as last year, to 111.  If Fasig-Tipton had stuck to the reporting methods of prior years, the Calder sale's buy-back rate this year would have been 40.7%, pretty much the same as last year's 40.4%.  Instead, by including the post-auction private sales in the totals, F-T was able to show a decline in the buy-back rate to a somewhat more respectable 35.4%.

Here's a comparison of the Calder results, adjusting the 2009 figures by taking out the horses that were reported as RNA's sold privately:

Sold:                 102 (same as in 2008)

RNA:                   70 (same as in 2008)

Buyback %:       40.7% (0.3% worse than in 2008)

Gross:               $25,226,000 (down 28.1% from 2008)

Average:            $247,313 (also down 28.1%)

(For those who want to check my arithmetic, or see if they can find even more anomalies, the horse-by-horse sales results are here.)

The differences from last year are not earthshaking, but if there's one thing we should have learned from the past year's financial turmoil, it's that we should insist on understanding the numbers produced by any company, and ensuring that when comparisons are made, those comparisons are truly of apples to apples.

The second reason for questioning the published results of the Calder sale is common to just about every horse auction: the key percentage that never gets reported in news of the sales is the percentage of the total catalog that is actually sold.  At Calder this year, there were 272 horses in the catalog, but only 172 of them even went through the auction ring; 100 were scratched before, or during, the sale.  So the true number of horses sold at Calder is 111 -- the 102 that were actually hammered down in the ring plus the nine RNA private sales. That's barely 40% of the horses that started out in the catalog.  True, some of the scratches were likely the result of injury, as happens even in the best of years, but, as has been happening all of this year’s sales, a lot of them were for economic reasons, as consignors realized they would be getting nowhere near the price they wanted and, rather than be embarrassed in the sales ring, began searching for other options.

Horses that failed to sell at Calder may get one more chance later in the sale season, but from now on, at the OBS sales in Ocala in March and April, at Barrett's in California in March, at Keeneland in April, and at Timonium in May, there aren't any second chances.  With nowhere else to go, it's likely that consignors will lower their reserves still further and make more post-auction private deals, with the result that average prices will be falling even further. 

The third factor that helped to keep Calder sale results respectable, if not great, was the very significant investment that Fasig-Tipton's new owners – a corporation called Synergy Ltd., which, if not outright owned by Sheik Mohammed, is closely associated with him -- made to treat prospective buyers well, including a new tent in the parking lot with areas for watching breeze videos, logging onto the internet, and, most important, eating. Free, and good, food provided by the auction house is a welcome addition to the sales scene.  Even more imprtant was the help that Fasig-Tipton provided to bring European and Japanese buyers to Calder, including paying some of their travel expenses.  These innovations, or, rather, borrowings from the best practices of auction companies in Europe, Asia and Australia, are a welcome addition to the auction scene (I'm waiting to see what Fasig-Tipton has in mind for the terminally gloomy sales pavilion at Timonium), but the greater than normal presence of foreign buyers as a result of Dubai's ownership of Fasig-Tipton and its willingness to spend money to make money probably did raise the Calder results above what they would otherwise have been.

Another sign of Dubai’s interest in having the sale go well was the presence, and strong purchasing, of bloodstock agent par excellence John Ferguson, who represents Sheikh Mohammed and related Dubai interests.  Ferguson was listed as buying six colts, including the only three horses that sold for $1 million or more at the sale. The six he bought averaged $865,833, close to four times the sale's overall average price of $235,595. 

Ferguson has been an important presence at the Calder sale for many years; he was the under-bidder in the infamous 2006 duel to acquire the then- and still-maiden The Green Monkey, who went to Demi O'Byrne of Coolmore for $16 million.  But one wonders whether Ferguson's spending spree this year was, at least in part, a result of Dubai's Synergy Ltd.'s purchase last year of the Fasig-Tipton auction company.  It would, to say the least, have been an embarrassment for Dubai's ruler had his newest acquisition in American racing failed miserably at one of its two flagship sales (the other is the Saratoga yearling sale in August).

The colts that Ferguson bought at Calder were very nice thoroughbreds, and had he not been there, they would have sold for serious money.  But perhaps not so serious as with his presence.  The other prospective buyer at the top of the market, Coolmore's O'Byrne, was conspicuous by his absence from the Calder sales results. Just a guess, but perhaps $1 million or so of the gross at Calder could have been the result of Ferguson's upholding the honor of his employer. 

Pinhookers were hit pretty badly by the Calder outcome, except for those lucky, or smart, enough to have the horses that John Ferguson wanted. Back last September, when the pinhookers were buying yearlings, prices were down only 10-15% from the previous year. Now they're down more than 30%. That has to squeeze the pinhookers' margins, and makes the outlooks for this coming summer's yearling sales even bleaker