Your guide to The Economist: Week of July 7, 2007


The music industry: A change of tune: The record industry deals with being cut out of artists’ ancillary incomes 
Valuing urban trees: Green gold: Putting a price on tiber, maybe one that will translate to book value…
Food: No ketchup, please: French officials aren’t keen on Kraft’s bid for LU, but can’t find a decent reason to oppose it, unless ‘ketchup doesn’t really go with biscuits’ counts as one…  
Neuroeconomics: Money isn’t everything: Testosterone and single-round games…

The music industry: A change of tune
Remember in early 2000 when Napster was huge –and amid record company moaning sage voices stepped forward to present the notion that free music would free consumers’ ‘mental budgets’ for expenses related to pre-recorded music? Well, that time is upon us, but because the ancillary revenues are being routed to management agencies and…the artists themselves, record companies are still moaning.

Seven years ago musicians derived 2/3rds of their income, via record labels, from pre-recorded music, with the other 1/3rd coming from concert tours, etc… But today those proportions have been reversed—cutting the labels off from the industry’s biggest and fastest-growing sources of revenue. Concert-ticket sales in North America alone increased from $1.7 billion in 2000 to over $3.1 billion last year…

According to the chairman of Warner Music, “The music industry is growing. The record industry is not growing” –but, it (the record industry) is fighting back, with the following: 

*Distracting artists from lining their own pockets by keeping them far too busy promoting records. Record companies have also been known to hoard rights to artist names for use on the web in order to “prevent musicians from launching websites to promote tours, sell merchandise, and communicate with fans as they see fit.”

*‘360° contracts,’ which “offer artists broader contracts that encompass live music, merchandise and endorsement deals.” Only artists we haven’t heard from in many years seem to be interested in these –artists with a brand, false sense of talent –whatever you want to call it, prefer to stick with hand-holding management agencies, which brings us to record companies’ best and only real chance…

*Acquiring artists’ rights enablers: management agencies. The agencies are known for coddling respecting their artists and their interests. Last month Universal Music made a $205m offer for Sanctuary, which has its own artist-management arm (represents Elton John) and owns 2 others along with a merchandising operation… Warner Music has expressed interest in Front Line Management, one of America’s biggest agencies, and last month announced the formation of Brand Asset Group, an artist-management JV with Violator Management, a firm that negotiates acting roles for rappers and licenses their names/images to promote merchandise.

“The logical conclusion is for artists to give away their music as a promotional tool.” Hey, I’m all for free music, it frees up my budget for other things, like [insert (in)appropriate habit]… because I much rather sit on a beach w/ my iPod than in a smelly, crowded pit wondering if the stampede after the concert will kill me –barring intimate venues; I prefer to consume live music together with drinks or platters of food.

Valuing urban trees: Green gold
I’m a peak timber theorist (not to mention, dividend rates on timber REITs are somewhat comparable to the current treasury rate). At the current global rate of deforestation, timber, which in theory is a renewable resource, is disappearing more like a non-renewable resource. Trees have flown under the radar with respect to being priced anywhere near accurately (unless you live in California where people pay tens of thousands a piece to put them on the front lawn).

Trunk size, the tree’s condition, its species and location—one in Manhattan will be worth more than a comparable specimen in Buffalo—will all affect values.

A recent “tree census” in New York City, conducted at the behest of Mr Bloomberg, values the city’s nearly 600,000 trees at $122m. A rough breakdown: $11 million for filtering out air pollutants; $28m saved in energy consumption (less need for air conditioners); $36m for stemming storm-water run-off; and $53m in “aesthetic benefits”. The Forest Service values the urban canopy in all of America at $14.3 billion.

What is the use of all these (rather shady) numbers? Mr Bloomberg cannot sell off trees to patch a hole in his budget, after all. They are, literally, a fixed asset. But for politicians, numbers help. By claiming that every $1 put into New York’s trees returns $5.60 in benefits, he may find it easier to galvanise New Yorkers to plant more and chop down fewer.

Amid the growing acknowledgement of global warming and promises to curb carbon emissions, my thought is that cap and trade programs will take over as the primary means with which governments will address the problem –turning the problem over to the markets, novel idea, and already shown to be successful in California. If/when cap-and-trade programs take off, timber companies, and governments, will have some serious value on their books in the form of sellable credits.

Food: No ketchup, please
The French, culturally, are not keen on Kraft’s $7.2B offer to buy LU, the ailing (debatable, 3.1% sales growth) biscuit segment of Danone (disclosure: Le Petit Ecolier Dark’s are a favorite of the author’s). Official France economy minister’s response to the offer: “We are not yet ready to put ketchup on our petits LU” –which is absurd. Kraft is looking to expand overseas (Danone has a strong presence in the emerging markets) and Danone’s CEO is ready to unload the business, which doesn’t fit in with the company’s healthy image and is dragging down aggregate sales growth figures. “In two years the growth rates of water and dairy will make up for the loss of biscuits,” according to Riboud. To appease French officials, Kraft has promised not to shut down French factories, and to keep the company’s headquarters in the outskirts of Paris for the next three years. The Economist rules out the possibility that a slimmed-down Danone could be a takeover target for Coca-Cola (who already added water to the portfolio earlier this year with their acquisition of Vitamin Water), PepsiCo (who according to the mag, has had its ‘fingers burnet once already by Danone’), or Nestle (who flat out says they aren’t interested). The company will most likely make their own acquisitions or buy back stock. Kraft, on the other hand, with activist Nelson Peltz on their arse, faces some serious house-cleaning ahead.

Neuroeconomics: Money isn’t everything
I wonder about the usefulness of one-round games, and whether they have any practical application to the real world (industries pose small worlds to their inhabitants, you usually see faces over and over) –especially when scholars concede that single-round games do not simulate real world situations, yet continue to run experiments around them. Terence Burnham (formerly of Harvard University) had a group of male, microeconomics students play the ultimatum game. With a total of $40, one player was asked to choose between offering the other $25 or $5, responders were then able to accept or reject the offer –and this was all done alongside Burnham’s measuring the players’ testosterone levels.
When there are many rounds in the ultimatum game, players learn to split the money more or less equally. But Dr Burnham was interested in a game of only one round.

As he describes in the Proceedings of the Royal Society, the responders who rejected a low final offer had an average testosterone level more than 50% higher than the average of those who accepted. Five of the seven men with the highest testosterone levels in the study rejected a $5 ultimate offer but only one of the 19 others made the same decision.

They would rather accept less themselves than see a rival get ahead
. That is likely to be particularly true in individuals with high testosterone levels, since that hormone is correlated with social dominance in many species.
The results shed light on the notion of differential rationality, in which the definition of rationality is not purely objective in terms of choosing the higher monetary payoff. “The things that money can buy are merely means to an end…that brings desirable…opportunities. If another route brings that status more directly, money is irrelevant.” Too many people forget this, economists especially. Best line: Psychologists have known for a long time that economists are wrong.

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