The annual report is an imperfect source of information for evaluating a record company’s performance.  Companies constantly are redefining their operating segments, buying and selling divisions and restating previous years’ results.  Despite supposedly-uniform accounting standards and generally-accepted accounting principles (“GAAP”) each company presents its financial information differently.  In particular “record company” or “music” results almost always commingle record sales with music publishing.

These anomalies make it difficult to ferret out pertinent information and compare it year-to-year, much less company-to-company.  To address these problems partially and in the most feasible way possible I used the annual report for each separate year rather than the “historical results” section set forth in a single year’s report, which is where the restatement problem most likely is to occur.  I took special care to maximize the likelihood I was using comparable data on a year-to-year basis to the fullest extent possible.  Frequently this information is not found on an income statement but rather is buried in a footnote to the accounts.  One would think there ought to be conventions establishing rules for presenting this information but there aren’t.  This is highly annoying.  All I can say about this is that inconsistencies and discrepancies are likely to occur uniformly.

Return on Sales

Raw economic statistics in the applicable currency such as the amount of turnover and pre-tax operating income (“PTOI”) are not useful in evaluating a company’s performance and they particularly are not useful in comparing one company’s performance with that of another.  For this reason percentage-based measures are more informative.  Net sales typically is defined as gross sales less variable and fixed costs but before interest, taxes, depreciation and extraordinary items such as write-offs due to reorganizations.  Sometimes an allocation for costs incurred by the corporate group also is deducted.  Pre-tax operating income (“PTOI”) is net income from running the business.  Another roughly comparable measure used today is “earnings before income taxes, depreciation and amortization”  (“EBITDA”).

Return on sales (“ROS”) is the ratio of pre-tax operating income (“PTOI”) to sales.  Because individual divisions are wholly-owned by the parent company and their financial results are consolidated it is not possible to use other typical measures of company performance such as return on investment (“ROI”).  Return on investment is the ratio of PTOI to shareholder’s equity.  Shareholder’s equity however is not broken out by operating segment.  The same principle is true with return on assets (“ROA”).  Most balance sheets break out assets under management by business segment.  However this information is not reliable because of different accounting conventions pertaining to asset allocation, valuation and depreciation.  For example a company can exaggerate its asset base by appraising its assets unreasonably high or writing them off unreasonably slow, all the while remaining within GAAP boundaries.  This leaves ROS by default as the best available measure to use subject to these caveats.

One of the issues with ROS is that to some extent it may be one-dimensional.  For example a well-run small division in an oligopolistic market may appear to outperform dramatically a huge division with ten times the turnover constrained by more competitive trading divisions.  What’s missing is scalability.  For a company with several business segments it is interesting to evaluate segment PTOI as a percentage of total corporate PTOI, against segment revenue as a percentage of total corporate revenue.  This measure is more sensitive in that it accommodates both contribution to turnover and contribution to PTOI as independent variables.  It also is more specific in that it evaluates the opportunity cost of allocating corporate resources to one segment as opposed to another.

Not measurable by any of these formulations is what I will call “return on time” (aptly, “ROT”).  ROT asks the question: what else could management be doing instead of whatever it is doing, which potentially would add more value to the firm?  What other opportunities could management pursue, which it has foregone in favor of its present course of action?  Every business decision carries with it real-world consequences – not only in terms of the direct causal effects from having taken that decision but also because it precludes you from doing other things which, had you chosen them instead, might be even more rewarding or lucrative for the firm.  To some extent ROT is speculative as one never will know for sure.  However it is valid when assessing management decisions in an environment where several different options are available and have been deliberated thoroughly.  It also is valuable when assessing these decisions retrospectively.

Graphs and Figures

Line charts are easy to read.  They are presented temporally.  One simply cross-references specific data points, which appear at the imaginary intersection of a location on the horizontal axis (the “x” axis, which typically is for years) and one on the vertical axis (the “y” axis, which typically is for results such as ROS).  Figure 1 is an example of a line chart.  Scatter-plot charts on the other hand can be somewhat more challenging.  In this case each data point also represents a single year and appears at the imaginary intersection of the “x” axis with the “y” axis.  The data points however do not appear consecutively.

One of the advantages of the scatter-plot is that data points can be forced against an imaginary line running from the lower left-hand corner of the chart to the upper right-hand corner.  Points falling on the line mean the “x” axis data are perfectly correlated with the “y” axis data.  Points below the line in the south-west quadrant are deficient on both “y” axis and “x” axis data.  This is the worst place to be.  Points above the line in the north-west quadrant are superior on “y” axis data but deficient on “x” axis data.  Points below the line in the south-east quadrant are superior on “x” axis data but deficient on “y” axis data.  Points above the line in the north-east quadrant are superior on both “x” axis and “y” axis data.  This is the best place to be.

Knott’s has undergone tumultuous upheaval since its origin as a roadside tourist stop in the 1940’s. In the process it became an iconic Southern California institution and a repository for its symbols and semiotics. As a child growing up in La Jolla, every year or so we would make a two-day pilgrimage to Disneyland, with a one-day stopover at Knott’s. Knott’s always seemed realer, a more authentic invocation of a mythical past.

There came a time when we stopped going and then I lost track of it until a few years ago, when we went there for somebody’s holiday party. I was shocked at how much it had changed. Even though their construction probably was dictated by economics, the giant large-scale, roller-coaster type rides were utterly incongruous. One of my favorite exhibits always had been something called “Death Valley Days.” It was no more than a diorama, really. One would walk into a small room and see miniature figurines of a mule-driven wagon crossing the desert. A plaintive tape-recording played in the background.  A small girl asked her mother, “is there any more water?” The mother tried to comfort her, but one knew in one’s mind they both were goners. An aged lady attendant sat next to railing separating the attendees from the set. The scene was poignant and even at 10 years old it affected me deeply. In fact I still think about it. I asked her, “I hope you keep this open as a reminder of California’s past.” She replied, with a combination of optimism and wisdom, “It always will be here.”

Another set-piece I remember clearly was a circular pathway around a park-like parcel, with dioramas of all of California’s missions. Having been to most of them I could discern the murals had been constructed with a high degree of versimilitude. Walking around the enclosure that last day I was astonished and shocked to see the park and the walkway were being demolished for yet another massive theme-park ride. The mission dioramas had fallen into a state of abject decrepitude. With a few inquiries I found the construction crew’s foreman. “Take them away,” he said, “you can have them.” I would have, too, if I had anywhere to store (and restore) them. I don’t know what happened to them in the end, but I suspect they were demolished on the spot.

I look back on that earlier version of Knott’s with a wistful melancholy. It is redolent with association. It is reminiscent not only of my youth but also of an earlier time in Southern California history. It also is a metaphor for the passage of time, the lack of any cultural or institutional memory, and (ultimately) the transience and impermanence of culture and the institutions that support it.

Mr. Woods and his handlers evidently do not completely understand this dynamic.  He has been slow to book time on talk shows with a view towards expurgating his sins.  The well-worn path lade down by other sex-maniac pop celebrities such as Kobe Bryant and (more recently) David Letterman provides a better template.  They were able to get out in front of the controversy rather than lag behind it.  On the other hand this tended to truncate media coverage of their peccadilloes, not prolong it, so perhaps Mr. Woods has the better strategy after all.

The Tiger Woods story conceals a deeper implication, which is the transitory nature of pop culture celebrity status to begin with.  Whither art thou Paris Hilton, Britney Spears, Jessica Simpson and Lindsey Lohan?  They seem to have vanished.  In their place are people like Tareq and Michaele Salahi, the Virginia socialites-White House gate crashers and Richard and Mayumi Heene, who alleged their son Falcon flew off in a balloon.  The aspirations of these dynamic duos are no more ambitious than appearing on reality-TV shows.  In the meanwhile there is the astonishing case of Lady Gaga, a piano virtuoso who learned how to dance and now has captivated the pop music scene (I have been meaning to listen to one of her tracks, hopefully I’ll get around to doing so, soon).  A recent column in the Los Angeles Times by Dan Neil deconstructed one of her music videos and proclaimed it the most successful product placement advertising of the year.

The media depend as much on celebrity cannon-fodder as actual and would-be celebrities do on the media.  It is hilarious when celebrities complain about paparazzi and adverse media coverage because the simple fact of the matter is they revel in it.  They depend on it for their very existence, both mercantile and existential.  It makes one wonder whom will be carrying the crucible for pop culture this time next year.

Tiger Woods

Not everything sells for $.01.  Most titles sell for 25% – 50% of their original list price.  Depending on elasticity of supply and demand prices can be higher than the original list price.  Many sellers believe scarcity justifies an astronomically higher price.  These titles however never will sell because on margin the value of the information is less than the asking price.  One of the most salient features of consumer entertainment software (books, CDs, DVDs) is that it can be duplicated, or the informational or entertainment content extracted, at marginal cost.  It is not uncommon for Google News to provide hypertext links to over 1,000 sites per story.  Knowledgeable websites such as www.wikipedia.com distill (with varying degrees of success) the knowledge content of every conceivable topic (to the extent Wikipedia is deficient, there are thousands of other sites to fill the gap).  The web site www.hulu.com gives away copies of television shows and clips readily are available on www.youtube.com.  Once Google finishes digitizing every book there is then the value of a physical copy of a work in principle could decline to zero.  These are just a few examples; the $.01 title on Amazon is a precursor to this effect.  As a general rule of thumb if the used price is much higher than the original list price then there will be little demand for the title.

The existence of this active secondary market creates a dilemma for the original creators of the work – the proprietor of the copyright, who may be the author of the book, the band who recorded the CD, or their corporate assignees.  There is a copyright law principle called the “first sale doctrine,” which means that only the original retail sale of the copy attracts a royalty.  Subsequent resales of used copies are non-royalty-bearing.  This is one of the main factors permitting a secondary market for used copies to exist to begin with.  As a consequence every time a used copy is sold for less than the retail price it displaces a potential retail sale and thereby destabilizes the market for royalty-bearing copies.  Reciprocally if a used copy is sold for more than the retail price then it misallocates the entrepreneurial rents potentially realizable from the sale.

There may be many reasons why this doesn’t matter.  The author may be dead and his/her estate inconsequential; the cost of looking to the publisher for royalties is less than the amount of royalties that practically could be obtained.  The band may have broken up or never recouped the amount of any advance and recording costs paid by the record company.  Repeated successive editions of a work (e.g. a college text book) tend to reduce the price of earlier editions to zero.  The vast majority of works simply no longer are consumer-demanded except by a very small minority probing the esoterica of a given subject.  Perhaps only one out of a million copyrights survives its initial release.  Nobody wants the title, even if it is priced at $.01, and on margin demand falls off quickly or is nonexistent if the title is priced even pennies higher.

For active bands or writers, on the other hand, this presents a real theoretical problem.  Not only are there economic issues, but cheaply-priced goods also intrinsically derogate from the perceived value of the work, thereby impairing the creator’s future prospects.  There is a practical solution to the surfeit of copies in the secondary market, which is that the creator or owner of the work actively can intervene in the secondary market by buying up used copies, to the point where a first-sold royalty-bearing copy presents the lowest-price alternative to the consumer.  The creator of the work should continue doing so until the price to the consumer equals or exceeds the amount of the anticipated royalty-bearing unit (with an allowance for transaction costs).

There remains the possibility that a perceived increase in demand for secondary-market copies will increase the number of secondary-market copies available, potentially driving up the buyer’s cost.  Practically however this does not seem to be the case; only rarely are more than say 100 used copies of a secondary-market title listed for sale.  Amazon is not a perfectly efficient marketplace and only motivated sellers tend to use it.  The vast majority of potentially-demanded secondary-market copies simply seem to disappear, thus capping the secondary-market buyer’s potential liability.

In many cases copies can be repurposed.  CDs for example can be re-sold by the artist at performances for something approaching a retail list price.  In this case the creator will capture and retain a margin that may be considerably higher than the royalty payable on the first sale of a copy through a distributor.  If the price for used copies consistently exceeds the list price this should be a signal to reissue the work (duplicate more copies for first sale).

The same principle pertains to some extent to items for sale on eBay, although eBay’s offerings are more diverse.  The biggest enemy of most manufacturers of durable goods is everything they’ve previously sold.  For manufacturers of long duration it would be impractical to stabilize the secondary market.  Most goods become obsolete, not more valuable.  There is however a thin tier or tranche of sellers who are competing directly in the marketplace with recently-sold in-demand durable goods, which may be sold on eBay for significantly less than the retail price.  This not only reduces the volume of the seller’s potential sales but also depreciates from the perceived value of the goods.  These sellers are making a serious error by not actively stabilizing their secondary markets.

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Michael Jackson’s financial travails have been well-reported in both the mainstream and tabloid press. In an April 14, 2009 article in the New York Times, “Shuttering Neverland: Michael Jackson’s Effects Go to Auction,” Ben Sisario reported that many objects owned by Michael Jackson evidently were for sale. These included ephemera such as a king’s crown, scepter, ice cream cart and life-size Lego model of Darth Vader. “In a preview for the news media on Monday, workers carried signs from Neverland painted with Maxfield Parrish-like pastorals, while inside Mr. Jackson’s goods were arranged in loose, thematic sections: glittering stage costumes over here, Disney collectibles over there, paintings of Mr. Jackson as an Elizabethan noble here and there.” It was not clear if the auction was voluntary or court-ordered. In any event it was called off several days before it was scheduled to occur.

Mr. Jackson’s continued popularity is paradoxical. Even as he continues to enact his eccentric and bizarre public persona he can sell out a 50-concert run at London’s O2 arena. The arena has a capacity of approximately 20,000 persons per show. These engagements alone should go a long ways towards replenishing his depleted coffers.

The Louis Vuitton handbag incident was described in an April 23, 2009 article by Mike Boehm in the Los Angeles Times, “Louis Vuitton suit adds fraud allegation.” Two years ago the artist Takashi Murakami had a showing at the Los Angeles Museum of Contemporary Art. Seeking to illustrate the permeable boundaries between art and commerce, he sold Louis Vuitton handbags in the actual gallery within the context of the exhibition itself (as opposed to, say, the museum’s store). Thus he intended to “blur the lines between art and manufacture.” Aficionados of his work paid upwards of $6,000 for one of the handbags. However they turned out (or so it is alleged) to be factory leftovers from Louis Vuitton’s standard production line, not works of art. Furthermore they were unaccompanied by a “certificate” of genuineness or authenticity required by California law.

The idea of somebody coveting ownership of Mr. Jackson’s rhinestone-encrusted socks is ludicrous. So is the idea of somebody paying thousands of dollars in the name of “art” for what essentially is a factory reject. What are the new owners of these objects going to do with them? Put them on display in their homes? Let them molder in boxes in the attic? Have them buried with them, like some latter-day Tutankhamen? Pop culture ephemera like these direct our interest towards them, and accrete value, only by reason of their celebrity association. They have no other intrinsic worth. The best thing that could happen to them would be that they are repurposed in a manner suggested by their original function, i.e. somebody wore Michael Jackson’s glove to keep their hands warm, or somebody used the Louis Vuitton handbag to carry around their belongings. Without this connection to a practical, real-world activity, they’re pretty useless.

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I thought he was a genius, certainly one of the most articulate people I’ve ever met. Politically, I didn’t agree with him all that much. This doesn’t reduce my admiration for somebody who was so good at expressing complex thoughts, which (as it turns out) is a difficult task

Now I know there’s been a lot of talk about how the Tribune Company, which owns the Los Angeles Times, recently has undergone what euphemistically might be referred to as a “change of ownership.” Furthermore, there’s this new-fangled thing called the Internet, which seems to be wreaking havoc on most old-school media, particularly newspapers. “[T]he entire newspaper industry, is struggling. It is suffering a slow decline by a thousand cutbacks. … The current state of financial affairs — caused by the continuing withering of print advertising revenues, shifting reader demographics and the seismic upheaval of the Internet — has made it extremely hard to continue,” Sorkin, A., “What to Do When Rupert Calls?” New York Times (May 6, 2007).

The transition from physical goods to their ephemeral digital counterparts has significant ramifications, not only for the flow of information throughout society, but also for the poor wretches still laboring in the newsroom. Many of whom evidently are startled to discover that their work now must be re-purposed for on-line delivery, in addition to (and maybe soon, in lieu of), newsprint. The key demo – younger readers – “have grown up immersed in the Internet and with the ability to adapt rapidly to new technologies, giving them a comfort level with things that newspapers are just discovering, like blogs, podcasts and video clips.” As a result, newspapers are “just buying out the people who are earning at the top and replacing them with people at the bottom, but those people at the bottom know how to put up podcasts and video,” Seelye, K., “Times Are Tough for News Media, but Journalism Schools Are Still Booming,” New York Times (May 15, 2006).

One consequence of these trends is a rabid scavenging for revenue, where ‘ere it may be found. Newspapers, conventionally understood, only have so many ways to make money (in addition, of course, to cutting costs). One is subscribers. Unfortunately, subscriber attrition is at an all-time high (i.e., retention is at an all-time low), as (ex-)subscribers migrate to more palatable information-providing alternatives. “[N]ewspaper executives are watching anxiously as the number of online readers grows while the number of print readers declines,” Seelye, K., “Can Papers End the Free Ride Online?” New York Times (Mar. 14, 2005).

Another is classifieds. Let’s get real, though, when was the last time you looked at a newspaper classified column? A recent report from the New York Times on its 2^nd quarter 2007 financial results: “‘Classified advertising has been much more difficult than we expected going into the year,’ … [the spokesperson] cited weak demand for help wanted and real estate ads in particular, with the latter segment affected by a broader downturn in the national real estate market,” Schwartz, N., “Weakness in Advertising Reduces Earnings at Times Company,” New York Times (Jul. 26, 2007). Fact of the matter is, The Recycler took over print classifieds years ago, and Craig’s List has done the same thing, on-line. Which particularly is annoying, as the people at Craig’s List seem to be motivated primarily by eleemosynary purposes, which is a real drag when you’re trying to compete with them as a for-profit company.

This leaves display advertising, which is where the real money is. And which is where the greatest erosion of newspaper revenues has occurred. No longer content to swallow their ad rep’s palaver about the reach and effectiveness of full-page, four-color inserts, major advertisers increasingly are redeploying their assets to on-line media. It’s not a complete transition, and there still is a lot of newspaper advertising (particularly from department stores, car dealerships, national accounts, and their ilk). However, the trend is undeniable and, for the newspaper, frightening.

“The newspaper industry broadly is suffering through a decline in advertising revenue, its main source of income, and analysts say that trend is a fundamental, long-term shift, not part of up-and-down cycles. A report on the industry published last week by Goldman Sachs said that in light of the expanding economy, ‘the magnitude of the recent declines is extraordinary,’ and that May was ‘the worst month we’ve ever seen in a nonrecession period.’ … 2007 is shaping up much worse than even the dourest predictions, with ad revenue among the major newspaper companies down about 5 percent through May,” Pérez-Peña, R. & Story, L., “Job Cuts Averted as Bid for Journal Stays Open,” New York Times (Jul. 9, 2007).

One consequence of this – or so goes my thesis – is that newspapers increasingly are grateful for marginal advertisers. These are small firms who never would have dreamed of placing an ad in a big-city newspaper, say, a decade ago. One of the main reasons why is, they would have been shunned, spurned and laughed out of the lobby by the paper’s ad sales team. They would have been rejected for cultural reasons, that is, reasons specific to the culture of the newspaper ad sales team, which, like the big-game hunters of yore, predominantly was schooled in bagging large, national account advertisers. Today, however, the noses no longer are upturned, and these entrepreneurs (let’s call them) are embraced with open arms. Because they bring with them a scarce and valuable economic commodity – money. It doesn’t matter who they think they are, or who they think they’re reaching demographically, or what objectives they’re attempting to accomplish ideologically. All they have to do is pay their bill.

And this leads to ads like the ones placed almost every day in the Los Angeles Times by Donald T. Sterling. Mr. Sterling evidently operates a local sports team. He has a law firm. He owns a number of apartment buildings, which seem to have trouble attracting minority tenants. He endorses a number of charitable causes, primarily sponsored by a certain prominent Old Testament religion. And he has a very large head. I know all of these things, not because I’ve done any background research on Mr. Sterling, but because I’ve seen multiple iterations of ads he’s placed in the Los Angeles Times over, say, the past year.

This one is not atypical. Like the village square of some tribe of aborigines, it features a row of disembodied heads, each of which person (when connected to their head, that is) has, or purports to have, some connection with the event in question. Without fail, all of the heads are slightly smaller than Mr. Sterling’s; his always is slightly larger. The ads always are in shockingly bright primary colors, never in black-and-white. They always seem to be congratulating someone – either the heads, Mr. Sterling, or some organization. They never seem to have any apparent or ostensible purpose, like, f’r instance, advertising a product or a service.

In contrast to Mr. Sterling, we have the series of ads placed by a firm called Beverly Hills Jewelers, featuring someone who goes by the name of Odette. These definitely have a purpose, which is, to attempt to induce people to purchase merchandise from the store. Ms. Odette’s name typically is followed by the initials, “V.P.” For a long time, this was suggestive, as if it might comprise part of, or stand as an abbreviation for, say, part of her surname. Lately, though, this has been clarified, and it now is clear they stand for the (undoubtedly, honorific) title, “Vice President.” Unlike any number of CEOs who enjoy appearing in their ads, Beverly Hills Jewelers must have a very ego-free President, for only Odette ever has been featured. Either that, or Odette really is the President, merely masquerading as Vice President. There is plenty of precedent for this – one only need consider Dick Cheney vis-à-vis George Bush. Odette always is posed jumping with excitement at the terrific bargains to be found at the company; or, with her finger to her lips, pursed, as if about to tell a secret re: same. Yes, 80% off does seem like quite a deal, maybe I should check it out!

I cannot speculate about the effectiveness of the Beverly Hills Jewelers ads, because their target constituency clearly is Persian women (Iranian families now comprise something like 1/3 of the demographic of the City of Beverly Hills). From a McLuhan-esque standpoint, they are “hot” ads, in that they aggressively “pitch” the product or service being offered, as opposed to being illustrative, or suggestive, like (e.g.) ads by Apple, or Nike. They personally annoy me, but then again, I’m not in the right demo. At least they offer a product or service. Therefore, they are far less annoying than the Donald T. Sterling ads, which have no discernible purpose, and, as mentioned, typically feature the row of heads. I don’t believe I’ve ever seen this in ads before, and it troubles and disturbs me greatly.