2015 | World Finance

Nigeria cleans up its act

Posted on January 19, 2015January 20, 2015 by Ashton Wenborn

The time has come around once again to call an end to poor governance and unruly corporations. With the introduction of yet another corporate governance code in another country plagued by corruption and mismanagement, the message put forward by regulatory authorities in Nigeria this time around is little – if at all – changed from previous ones. “With this Corporate Governance Rating System (CGRS), it is anticipated that there would be an improvement in the overall perception of capital markets and business practices”, said Oscar Onyema, CEO of the Nigerian Stock Exchange (NSE), speaking on the country’s new mandatory rating system.

Following in the footsteps of the Shanghai, Mexico, Johannesburg, Korea, Istanbul, Lima, Borsa Italiana and Brazil BM&FBOVESPA stock exchanges, the NSE marks another major name in a long list of national institutions looking to introduce corporate governance indices. Crucially though, the NSE development is perhaps the most significant of the lot so far, taking into account the country’s close associations with corruption; (see corruption perception index) and by choosing to tackle the issue head on, regulators can begin to answer the questions asked of them concerning the issue.

Corruption perception index

136 out of 175

Rank

27 out of 100

Score

(zero = highly corrupt, 100 = very clean)

“It is expected that companies will enjoy tangible business advantages from risk-oriented and/or ethically sensitive business partners and investors. In addition, competitors would be challenged to establish the same level of good governance by setting standards of excellence”, says Onyema. “Companies would not only set themselves apart from their peers, but also contribute to improving the climate for doing business in Nigeria”, as, indeed, they most probably will.

But the rules are far from an all-encompassing fix to the all-pervading issue of corruption, nor do they strike at the heart of the problem. Yet the measures – however limited they be – mark an important step in a continued attempt by regulatory authorities to disassociate some of the country’s leading names from the issues stifling Africa’s most populous country from realising its true potential.

“Weak governance in both private and public sectors has contributed to endemic corruption in Nigeria. This has made the country’s economic potential reticent. While corporate governance in Nigeria has witnessed some achievements in the last decade, it remains marred by weaknesses in terms of regulatory effectiveness”, says Emmanuel Adegbite, a leading expert on corporate governance in Nigeria, and Deputy Director for Ethics, Organisations and Society Research Centre at Durham University.

Nigeria’s reputation
As a result, Nigeria is today synonymous with corruption, and the casual observer need only look so far as the oil sector for an understanding of what the issue has inflicted on state finances – not to mention Nigeria’s reputational standing. Though the country is rich in oil (see Fig. 1), widespread corruption means the industry – and to a lesser extent the economy – is haemorrhaging finances, and poor governance is turning the extractive industries into a risk not worth taking for investors worth their salt.

At the beginning of 2013, the soon-to-be-suspended central bank Governor Lamido Sanusi said that $20bn in oil revenue was missing from the government’s books for the period spanning January 2012 and July 2013; allegations that President Goodluck Jonathan called “patently untrue”. However, the seriousness with which the public greeted the allegations shows what little trust is shown to the oil sector – in particular with regards to state-run Nigeria National Petroleum Corporation (NNPC).

Worst of all is that the allegations are far from the first of their kind. Another confidential report seen by Reuters in 2012, for example, revealed that mismanagement and improper conduct had cost the country $35bn in lost revenue over the 10 year period – an amount that eclipsed the year’s government spending as a whole.

Among the items included in the document was one that showed the NNPC had made $86.6bn throughout the period, chiefly by using overly generous exchange rates in dealing with the government. Here, the contents of the 146-page report showed in grizzly detail the self-serving nature of the country’s elite, and served only to exasperate the country’s reputation for poor governance.

To paint a clearer picture of the issue, one Gallup survey conducted in 2012 showed that 94 percent of Nigerians agreed with the phrase “yes, corruption is widespread”, therein offering a damning indictment of the country’s shortcomings. The findings were so bad even that the perceived level of corruption is rivalled only by Kenya in last place, and without taking steps to improve transparency the figures will rank among the world’s worst far into the future.

Looking at Transparency International’s data for 2013, the figures show that 73 percent of the citizens included in the sample felt that corruption in the country had increased in the years from 2007 to 2010, and that 40 percent believed government efforts to fight corruption were ineffective. With a score of only 25 out of 100 in the organisation’s Corruption Perceptions Index, Nigeria is ranked 144 of 177 nations surveyed worldwide. What’s more, the WEFs Global Competitiveness Index puts Nigeria at 127 of 144 nations worldwide.

Creating a starting point
Taking into account its less-than-stellar reputation, Nigeria’s new CGRS is a crucial part of what will surely prove to be a marathon task in quashing the country’s close ties with corruption. “The rating system is based on a holistic multi-stakeholder approach that uses a diverse information collection and verification approach, which relies not only on self-assessments of companies but also on experiences of stakeholders and experts”, says Soji Apampa, Executive Director of the Convention on Business Integrity (CBi). “It is envisioned to be more transparent on rating procedures and rating governance than other Corporate Governance indices.”

The mandatory rating system will see listed companies evaluated on the quality of corporate integrity, corporate compliance, and an understanding of fiduciary responsibilities by directors and corporate reputation. From this, it can be said that there exists a sustained push in Nigeria to improve corporate governance, and so, protect stakeholder interests while boosting investor confidence.

“Many become induced in their thinking that this in large part is the way things are done in Nigeria and corruption has become institutionalised”, says Apampa. “The CGRS seeks to raise the general levels of corporate governance in Nigeria, by strengthening the efficacy of corporate governance rules through a market mechanism. It helps listed companies resist the pressure to be corrupt through the incentive system put in place to encourage them to “do well” by “doing right”.

“Well-governed companies stand to attract greater levels of investment and the poorly governed ones are more likely to be shunned”, adds Apampa. However, critics have highlighted the failure of like-minded policies in years passed, and seen little reason why this one should be any different, after codes like it have yielded very little in the way of results and come at great expense.

Along with a number of industry-specific policies introduced over the years, the Companies and Allied Matters Act, Investment and Securities Act and the Securities Exchange Commission Corporate Governance Code in 2004, 2007 and 2011 respectively have each failed to overturn negative associations.

“Although I welcome recent indigenous initiatives aimed at corporate governance assessments and ratings, one must remember that the massive investments in corporate governance reforms in the recent past have not yielded much good”, says Adegbite. “Often these initiatives lack the appropriate balance between an Anglo-American styled response to global economic activities and a vibrant corporate governance framework which addresses peculiar challenges of corruption and overbearing influences of single/family owners in corporate Nigeria, for example.”

More than one side to consider
Adegbite’s comments touch on an often-neglected factor in the country’s fight against poor governance, and recognises the part played by smaller enterprise in the wider economy, and the extent by which SMEs are often excluded from the discussion on corporate governance. As recently as 2002, SMEs accounted for 98 percent of all manufacturing businesses and over three quarters of the workforce, and while the share has fallen since, the fact remains that these businesses are the engine room of what is today Africa’s largest economy.

Taken from the example set by larger enterprises, the common assumption among SMEs is that good governance is a costly endeavour, and for as long as large and listed companies are unwilling to take action, the opinion will stay the same, and so, corruption will continue to inhibit the country’s development.

Still, there is cause for optimism moving forwards, and Nigeria – for all its flaws – is among the continent’s leading names in making clear the benefits of good governance. “Alongside South Africa, Nigeria is leading the debate on corporate governance in Africa, in terms of practice, policy and research”, says Adegbite. “So, despite the daunting challenges, a lot can be learnt by neighbouring African countries from the Nigerian experience. But, first – Africa’s biggest economy must lay a worthy example.”

Looking at the country’s track record, it’s easy to assume that the new CGRS will have little bearing on the country’s close associations with corruption. “The rating agencies that submit Nigeria could have been rated better had it made more progress with reforms and with dealing with corruption”, says Apampa. “Its inability to deal decisively with corruption is underpinned by factors within its political economy, which seem to constrain the behaviour of both companies and the political elites. So, to me, poor governance is a consequence of these constraints that the elites believe they are bound by and non-inclusive economic development is the ultimate result.”

However, judging by the sheer number of steps taken to clamp down on poor governance, it’s fair to say that regulatory authorities are legitimately concerned about the issue at hand. And should listed firms comply with the new code, the example set by leading names will likely filter down to smaller enterprises and have a measurable influence on the country’s development.

China keeps low profile over Russian-relations at AFF

Posted on January 19, 2015 by Ashton Wenborn

Call Putin a thorn in the side of Europe, even the West’s next big mafia hit. Just don’t expect an insipid Chinese government and its financial behemoths to react.

That unofficial doctrine seemed to bleed through Ding Xuedong, Chairman and CEO of China Investment Corporation, when pressed to discuss China’s potentially game-changing role in assuaging geopolitical tensions following the annexation of Crimea and resultant embargoes.

Clearly, expanding Chinese growth into Europe is an ambition the country’s top tier is not afraid to hide

By translation, Xuedong did an effective job of presenting a Europe in need of development in terms that stood to only enthrall his bosses in Shanghai. He referred to the continent as being broken with conflicting economic agendas of reducing EU fiscal stimulus measures while encouraging national purses. A ‘healthy’ alternative: enter emerging market investment funds, such as the CIC, with unabated confidence in European economies even as volatile as Russia.

“We are still optimistic about certain investment opportunities in Europe,” he said through a translator. “We’ll continue to identify investment opportunities…it won’t change my investment strategies.”

Such unflinching loyalty – just as the ruble is in crisis.

Whether missed by the translator or not, what the man at the helm of a $200bn state-owned firm holding a significant chunk of European capital (mostly Russian) did not say spoke volumes. Political intervention is not an option.

The larger issue Europeans are beckoned to acknowledge: the wave of Chinese investors dominating the continental investment sector.

Historically entrenched Sino-European relations became most pronounced as Europe was in the grips of financial crisis. According to a 2014 Deloitte report, investors took advantage of stimulus spending in China, creating an eastward bias for investments. Yet after a weak 2012, the report states there was a rebound by 18 percent of European investments into the country by 2013.

Now, it’s the Asian investors’ momentum that is worth noting and reflected in Xuedong’s measured response. By 2012, China has emerged as the third largest foreign investor globally measured by its share of global outbound investments. Chinese FDI has grown from €6.1bn in 2010 to €26.8bn in 2012. Yet, the US remains overwhelmingly the EU’s strongest trade ally.

Clearly, expanding Chinese growth into Europe is an ambition the country’s top tier is not afraid to hide. Chinese officials want it all: strong investment ties with the EU and further entrenchment in Russia. In an increasingly globalised world economy, all nations must be privy to the conversations around Putin with a more nuanced understanding of what is really at stake.

China is a big country with a small appetite for a Russian impasse, at least for the time being.

Global review: a look at average monthly disposable income

Posted on January 19, 2015April 30, 2015 by Ashton Wenborn

Global review 1

1. Switzerland (Rank 1)
With an average monthly salary of $6,301.73 after tax, the Swiss population ranks as the highest-earning in the world. The cost of living is relatively high – the country comes in the top 10 for restaurant, clothing and food prices, and ranks second in the consumer price index category. It is the 11th most expensive country for rent; a three-bedroom apartment in the city centre costs an average of $3,021.19 per month. Switzerland also takes the number one spot in terms of purchasing power, which is not surprising given the salaries. Solid regulations, a robust financial sector and an investment-friendly climate ensure it retains its long-held reputation as one of the world’s richest countries.

2. Zambia (Rank 3)
Ranking third in the world for monthly disposable income, Zambia’s salaries average at $4,330.98 per month. With the rate of economic growth hitting a steady six percent over the past few years and a high level of foreign investment boosting the country, Zambia’s salaries are a reflection of its strong economy. Basic utilities and food are comparatively very cheap, although real estate is expensive – the fourth priciest in the world. Renting is more affordable; a three-bedroom apartment would set the average consumer back by $1,400 per month, which puts it in 49th place. Zambia is one of the world’s cheapest countries for buying a car, ranking 133rd out of 140 nations.

3. Australia (Rank 10)
Australia is well-known for its generous salaries, which average at $3,780.69 per month after tax, putting it in 10th place. The country ranks 11th in terms of local purchasing power. It comes ninth in the consumer price index category; food is fairly expensive compared to the rest of the world, with the country ranking in the top 20 for basic staples such as potatoes, bread and eggs. It’s the most expensive in the world for cigarettes and the 10th priciest place for beer. Australia’s public transport is also costly, landing it in fourth place, while petrol is relatively cheap, costing $1.35 per litre. Much like Zambia, cars are also relatively affordable given the comparatively high salaries.

4. Japan (Rank 24)
The world’s third-biggest economy lays claim to the highest average pay packages in Asia. It ranks 24th with its average monthly salary of $2,782.43, and comes 18th in terms of purchasing power. Japan ranks 22nd in the consumer price index – aligning it closely with wages in relative terms – while rent puts it in 29th place. Internet usage is comparatively expensive, costing a monthly average of $36.58. The country is the 31st most expensive country for basic utilities, and it comes 18th for local purchasing power. Japan has a high GDP, ranking 22nd in 2013, and has been taking action recently to put an end to the deflationary trend that has characterised the economy for more than a decade.

Global review 2

5. Oman (Rank 44)
An average monthly wage of $2,087.14 puts Oman in 44th place. The country has one of the highest levels of local purchasing power in the world – it’s ranked fifth – with relatively low consumer prices. For rent it’s ranked in the top 50 most expensive, while clothing, cars and basic utilities are all comparatively affordable. One of its only relatively expensive products is internet access; it ranks 29th for broadband prices. Oman is among the world’s cheapest countries in which to buy, and fuel, a car – it’s ranked 137th for petrol prices. By contrast it’s the world’s second most expensive country for monthly public transport passes – even though an average one-way ticket only costs $0.52.

6. Argentina (Rank 68)
As one of South America’s largest economies, Argentina comes 68th in terms of salaries, which average at $1,018.58 per month. It’s ranked 50th for local purchasing power, with clothing proving relatively expensive. While internet is quite cheap, costing an average of $34.53 per month, which puts it at 88th place, Argentina is the world’s most expensive place for buying an iPad (which costs an average of $1,094.11). Relatively affordable transport and food – it ranks at number 61 for grocery prices, for example – put it 52nd for the consumer price index. The average city centre three-bed apartment costs $809.76, making it 91st most expensive in the world for rent.

7. Russia (Rank 95)
Wages are relatively low in Russia, with the average working person earning $686.16 per month. A fairly high cost of living puts the country at number 79 in terms of local purchasing power – for rent it ranks 50th, for example, a three-bedroom apartment in the city centre averaging at $1,369.09. It ranks 47th in terms of real estate costs, and it comes 67th with regard to consumer price index (excluding rent). Internet is meanwhile very affordable, costing an average of just $11.47 per month (for broadband six megabytes per second, uncapped). Transport is also comparatively affordable, with petrol prices at $0.85 per litre – making it the 25th cheapest country for fuel.

8. Cuba (Rank 176)
With salaries averaging $25.05 per month, Cuba comes out as the lowest paid country in the world according to the NationMaster rankings. It’s also the cheapest for basic utilities, which cost $13.50 per month, as well as for buying a property in the city centre. Rent is also relatively cheap, with a city centre three-bedroom apartment costing a monthly average of $455.60. Its prices for consumer goods such as eggs, bread and cigarettes likewise rank among the world’s lowest. However, it’s the second most expensive country for internet. The governing Communist Party passed reforms in 2011, but economists argue that the government needs to do more to increase economic growth in the country.

How can countries use international economics to stop terrorism?

Posted on January 19, 2015 by Ashton Wenborn

World Finance: Steve, you were a senior economist for former US President Ronald Reagan; considering one of the major issues in global politics today is tackling terrorism, how can countries use international economics to deter terrorism?
Steve Hanke: When the Soviets invaded Afghanistan in 1979, President Jimmy Carter put an embargo on grain sales to the Soviets.

(You’re using the word ‘terrorism’ – I’m using a little bit larger context when I start with the Soviets invading Afghanistan, obviously.)

I’m against sanctions in principle

The US stopped exporting grain to the Soviet Union, and phosphates and other things. And the Soviets went to Argentina. They increased their imports of agricultural products enormously from Argentina. It was a big boon to the Argentines!

What was interesting is that that’s when the military junta was in power. So it was very beneficial for the Argentine junta, because the soviets were actually paying a little bit of a premium for the agricultural imports they were pulling in from Argentina.

So, you see how these things are connected? It’s like pushing on a balloon: you push the balloon in one place, and it pops out someplace else.

Once you start meddling with the free trade regime, you end up creating all kinds of unintended consequences and costs.

Now, one thing Reagan did right away was that his economic advisors advised him to stop this, which he did in 1981.

I’m against sanctions in principle, because I think the best way to have good relations is to have free trade.

Global IP Law Group: business leaders must keep abreast of patent changes

Posted on January 19, 2015January 18, 2015 by Ashton Wenborn

With a mix of expertise in patent litigation, high-value international patent transactions and IP public policy, Graham Gerst, a partner with US-based law firm Global IP Law Group, has a unique perspective on developments in the international patent system. According to him, that system is undergoing dramatic changes today that business leaders need to understand as they plan investment in this class of assets.

“Patents exist to foster innovation. They incentivise research and development”, says Gerst. By giving inventors temporary legal monopolies over their inventions, patents allow inventors to earn back both their invested capital and additional profits before facing competition. Companies are less likely to invest in research and development without protection from copying by competitors.

But Gerst also points to a somewhat counterintuitive benefit of that patent system: sharing technology. “It’s important to understand that public disclosure is a critical part of the patent system. Patents are published and available to everyone to analyse, dispersing information about new inventions. Others may get new ideas of their own by reviewing a particular patent, or they may choose to license the patented technology and build upon it. Either way, it leads to further innovation”, says Gerst.

New opportunities also exist for using patents as collateral for loans

Growth and strategy
Historically, patents were a quiet, US-centric industry. “Patents were viewed more as a defensive tool rather than one to be leveraged for strategic advantage or licensing revenues”, says Gerst. That thinking began to change with the patent boom that began in the early 1990s. More than ever before, companies started competing aggressively through the patent system, particularly in high-technology areas. One aspect of this change was a sharp increase in patent litigation.

In the US, the number of patent lawsuits tripled between 1991 and 2000. Other countries with robust enforcement regimes soon saw similar growth. In Germany, for example, the number of patent suits doubled from 1995 through 2004. China went from having no patent lawsuits in the late 1980s to more patent lawsuits than in the US today. Another aspect of this boom was an explosion of patent applications. From 1990 through the present, applications worldwide increased almost 250 percent (see Fig. 1).

This increase in patent activity became particularly frenzied over the last five years, with major implications for business strategy. “Since 2009, we have seen an array of patent strategies that are either new, or are being used with a frequency and on a scale greater than ever before”, says Gerst. For example, the last five years has seen patent transactions larger than anything seen before. The Nortel Networks $4.5bn patent sale in 2011 started this trend, with just a subset of Nortel’s patent assets generating more than the sale of all of its operating businesses combined.

In 2012, Microsoft spent $1bn on 800 legacy AOL patents, and then sold a significant portion of those assets to Facebook for $500m. Even Google’s $12.5bn acquisition of Motorola Mobility was viewed as patent-driven, and Twitter acquired 900 patents from IBM last summer. “These are the large deals. Many technology companies also have personnel focused on smaller patent transactions that do not get headlines but are significant”, says Gerst.

New opportunities also exist for using patents as collateral for loans. That practice has long existed on a small scale, with companies collateralising single patents or small groups of patents. But nothing like the massive scale of Alcatel-Lucent’s successful $2.6bn patent-backed debt offering in 2012 had ever been tried.

Gerst also points to a new strategy that appeared over the last several years, known as ‘patent privateering’. “Companies with large patent portfolios transfer some of their patents to patent holding companies, which then litigate and license the patents, paying the granting entity some of the proceeds.” This model helps companies capitalise on their R&D investment by generating revenue from patents that otherwise would generate nothing. As Gerst explains, “companies are often reluctant to assert patents themselves because of the risk of countersuits, which typically end with both companies cross-licensing each others’ patents with little money changing hands except that paid to lawyers for pursuing the litigation.” According to Gerst, “although many large companies criticise the privateering strategy publicly, some of them quietly employ it nonetheless.”

Pure patent holding companies have always existed, but they have grown dramatically over the last 10 years, and some are even publicly traded. Companies like Intellectual Ventures, Acacia, and InterDigital today possess thousands of patents and focus solely on generating revenues from those assets – and entirely new types of entities have sprung up.

There are also now defensive patent holding companies like RPX and Allied Security Trust. These companies acquire patents on behalf of dues-paying members to protect those from the patents being acquired. New platforms have been tried or are being developed for auctioning patents and trading patent licenses. “Not all will succeed, but the fact that they are being tried illustrates the creative ways people are thinking about patents”, says Gerst.

Tumultuous times
Against this backdrop – one in which patent actions are litigated with greater frequency than ever before, patents are the subject of massive corporate transactions, and are employed as the central asset in a growing number of offensive and defensive business strategies – the patent system is taking on an increasingly international character. Even though a patent only grants rights within the country that issued the patent, traditional patent strategy often involved filing patent applications in just one or two countries. In the early 1990s, however, the Uruguay Round of GATT resulted in patent harmonisation standards. Greater worldwide uniformity and consistency in patenting procedures and rights followed, encouraging more investment in patents worldwide.

Patent applications

The entry of China in the global economy and the emergence of South Korea as an economic power also fostered more patent internationalism. Both countries have grown dramatically over the last 25 years, and patents are important to the products driving that growth – consumer electronics and telecommunications. Moreover, these countries are not just manufacturing centres; they are also giant markets, and, increasingly, the place where new innovation occurs. Each has improved its patent system and strengthened enforcement through the courts. Whereas 25 years ago, few considered filing patents in either country, both are an important part of many corporate patent strategies today.

In addition, international patent litigation strategies are more common today. One of the characteristics of the current smartphone patent wars is the simultaneous prosecution of multiple cases around the world. Courts in Japan, China, South Korea, Germany, France, the UK, and the US have been active. Lawyers today are more familiar with foreign enforcement and more willing to use it.

Antitrust regulators around the world are more active in the patent space. Officials in the US, EU, and China have all issued guidelines for the enforcement of patents that are essential for making or using a particular technology standard, such as the LTE wireless communications standard. Recently, China’s Anti-Monopoly Bureau investigated Qualcomm’s patent licensing after previously reviewing the patent implications of Google’s acquisition of Motorola Mobility. “Neither inquiry was limited to Chinese patents”, says Gerst.

This international aspect will increase, particularly in Europe. The next few years will see the creation of the Unitary Patent, a patent enforceable throughout Europe, and the Unified Patent Court, a body capable of making patent rulings covering the entire EU. “These changes will likely make Europe the most attractive venue for patent enforcement, given the size of the market, the reliability of the courts, and the low cost of enforcement”, says Gerst.

All these forces leading to greater internationalism are only enhanced by the fact that the US is becoming less hospitable to patent rights. This trend has been building for a decade, but it accelerated over the last few years. An array of court decisions by the US Supreme Court and the US Federal Circuit – which hears patent appeals from across the federal court system – weakened patent rights in many respects. In the last year, for example, the Supreme Court issued four unanimous anti-patent decisions. Gerst notes, “Obtaining injunctions on directly competing infringing products is now quite difficult. Damages are lower. And many previously granted patents are now likely invalid.”

Moreover, the 2011 American Invents Act is having an impact, creating new procedures for challenging the validity of patents. Few patents have survived, and more anti-patent legislation is being planned. One may wonder why the US would be scaling back patent rights when the rest of the world is strengthening them. Part of the reason is that US patent rights may have been too strong for too long. But, according to Gerst, “perceptions of judges, lawmakers, jurors, and the media have not caught up with the realities of the current US environment, which may prove detrimental to long-term US innovation.”

Gerst ends on an optimistic note however, stating: “Regardless, these worldwide developments make patents an exciting area with great opportunity. Companies and countries that understand these changes will be able to position themselves to benefit from the new and evolving environment.”

There’s no escaping product placement for the ‘skip’ generation

Posted on January 19, 2015 by Ashton Wenborn

Product placement is big business. Companies have spent a staggering amount of money in an attempt to part us with our hard-earned cash and purchase their latest product offering, with global product placement spending growing an estimated 11.7 percent in 2012 to $8.25bn according to research carried out by PQ Media. The increase, claims the media research company, is due to strong expansion in BRIC countries, as well as accelerated deployment of TV integrations in Europe and a resurgent US market.

It may come as a bit of a surprise to some that businesses are still ploughing so much money into having TV and movies show of their next big thing – a technique that has been around for more than 100 years – especially with the rise in prominence of smartphones and tablets, it would seem more logical to switch focus and spend more of their budget on digital advertising and marketing online.

Still relevant
“The simple answer is eyeballs versus technology”, says Patrick Quinn, President of PQ Media. “TV remains the most consumed medium worldwide, as witnessed recently by the large global audience for the Super Bowl in the US.” The Super Bowl, he concedes, is an anomaly, as many of the people choose to stay tuned in, rather than skipping or changing channels in order to enjoy the extra special lengths that advertisers go to on this particular day. For the other 364 days of the year people are not so generous with their time. More often than not viewers are more than happy to skip adverts altogether by recording the show first on their DVR or just watching it via a streaming service like Netflix, which offers consumers all the shows they want, ad-free. Meaning it is harder for advertisers to get consumers eyeballs fixed on anything long enough to sell them something.

$8.25bn

Product placement spend in 2012

One place where consumers do not have the luxury of fast-forward is the cinema and where a lot of that $8.25bn is being funnelled. “A major reason product placement spending grew at a double-digit rate in 2012 is the rising level of sophistication being employed to integrate brands into TV programmes and movies worldwide”, says Quinn. “This is especially true in the emerging BRIC countries.” Though product placement in these countries, he says, has been done a little haphazardly, lacking the sophistication of Hollywood. But BRIC countries are starting to step their game up, with a number of professional agencies being formed in order to polish up the product placement and integrate brands into TV and movies with a the subtlety of Hollywood. Though, perhaps that is the wrong word to use. Not all of Hollywood’s attempts at incorporating household names into the silver screen necessarily work, with some efforts even upsetting moviegoers. For the record, Bond, James Bond does not prefer the ice cool refreshment of a Heineken. He likes his Martini shaken, not stirred and definitely not with a head on it.

Mobile marketing
But the fastest-growing platforms for product placement are no longer found at the movie theatre. They are based online and developed specifically for our mobile devices, which have now become our chosen medium to view content.

YouTube alone gets a billion unique users visiting the site every month, making it a relative goldmine for advertisers. Though they face a pretty big challenge. How can they get their message across to consumers about what to buy when most of us are frantically bashing away at the ‘Skip Ad’ button as it counts down from five, four, three, two, one. Frankly, five seconds is just not enough time to sell something, especially when the audiences eyeballs are more focused on a small box to the bottom right-hand corner of the screen waiting for the opportunity to send an advertisers carefully crafted sales pitch on its merry way.

The Skip Ad button is an advertiser’s worst nightmare. But what if, rather than the commercial coming at the beginning or at a designated ad break, it was embedded into the content itself. Though we are not talking about the traditional product placement, like when Will Smith unashamedly unboxes a fresh set of Chuck Taylor’s during the opening scenes of iRobot or when Mike Myers manages to simultaneously mock and monetise product placement in the movie Wayne’s World. The technology that is now being used by advertisers is far more sophisticated than that. In fact, the software is so good the product does not even need to be in the original shot. Though a brand can be superimposed so flawlessly that it makes it appear that it was.

One of the most impressive uses of this technology, which seamlessly integrates brands into digitally consumed content, was when it was used in the British version of Deal or No Deal. Those familiar with the format of the show will know that it involves a contestant, and a host, in the form of Noel Edmonds, both doing their best to make what is essentially a game of chance look like a tense episode about someone who is able to channel the ancients from on high in order to help them “get the right feeling” about a random box that could contain £250,000 or one pence. Throughout this whole ordeal, the contestant clings to their coffee mug, which they sip intermittently throughout the course of the show like it contains the source of their predictive powers. On the mug is a red ‘?’ which is part of the shows branding, but in a re-run of one particular episode it was nowhere to be seen. In its place was the brand of a popular brand of tea, PG tips. But how did they do it?

Product replacement
The answer is a clever piece of software developed by a company called Mirriad. Launched in 2008, the company uses its patented computer vision technology in order to perfectly integrate brand images and even products into our favourite TV shows, movies, music videos and YouTube clips. Seeing the before and after video that shows the software in action is more than impressive. It’s actually a little frightening. The ease in which they import brands into the final cut of content is seamless. And that is the real beauty of the technology. It can be used to add in advertising on anything you like. It doesn’t matter if the original movie is from the 1950s. If an advertiser paid them, Mirriad could give every one of Sidney Lumet’s 12 Angry Men an iPad resting on the table where they deliberate whether or not to send a young man to his death. They can even replace products, such as phones with other devices with perfect precision.

The fact that Mirriad can do this and in a way that looks authentic opens up a world of possibilities for advertisers at a time when it looked like consumers were coming close to living in an ad-free world. “There’s a growing realisation that we’re being trained to be blind to advertising”, says Mark Popkiewicz, the CEO of Mirriad in an interview with The Guardian. “That is undoubtedly going to drive a very hard equation between the people who are putting the advertising dollars on the table and the people who are distributing the content and trying to make the economics work. Certainly something has to change.” Mirriad has certainly brought the change, but to call it that would be a disservice, what they bring to the table is revolutionary.

product-placement-2 — The scene from Rocketeer with the Grand Marnier advert

Subtle transitions
Traditional product placement is all well and good, but it is a massive chore. You need to have the product or brand in the actor’s hand or placed on the set somewhere in the background and then the director has to try and shoot the scene in a way that makes the advertisers happy, but without making it so obvious that is distracts the audience from the plot, which it inevitably fails at. Probably the worse thing about traditional product placement is that it eats into the script. A horrible example of this can be found in Sylvester Stallone’s dystopian future movie Demolition Man, where the only restaurant to survive the franchise wars was Taco Bell. But with Mirriad’s native advertising technology allowing for brands to be digitally inserted wherever, however, a company wants, there need not be a shameless segway in the script.

Another huge benefit of the technology it that it allows for more moneymaking opportunities for content creators. Take popular US rapper 50 Cent as an example. There is a reason why he is showing off the first edition iPod in the music video for his track PIMP, they paid him, but how useful is that product placement now? Not useful in the slightest. But imagine that Apple decide to employ the services of Mirriad’s revolutionary technology to replace the old model iPod that sat so perfectly in the hands of Mr 50 Cent with their new iPhone 6. Well, then that product placement is all of sudden relevant to a contemporary consumer.

Now let’s look at it from a present day perspective. Say you use the technology to superimpose a billboard for Coca-Cola in the background of a Miley Cyrus music video on YouTube, but the company only wants the digital advertisement space for a short run. No worry, just call up a few other big brands and see if they want to take up the opportunity to have their company name in the background, as Miley comes flying in like a wrecking ball. The technology goes even deeper than that. With this style of product placement, a content creator could tailor advertising to different demographics. That same billboard in the same background of the same music video could be marketed to different types of consumers, based on who clicked the link. A campaign could target younger people by showing an ad for Tinder, or if the user is a middle-aged man why not show a beer brand like Budweiser?

“Our algorithms monitor down to a pixel level the actual exposure on screen, time, size, location and orientation of the brand so that we’re always meeting and exceeding a minimum level of exposure”, says Popkiewicz in an interview with engadget. “Our technology is monitoring that, so that when you buy a campaign from us, you’re going to get a guaranteed level of exposure… for the brands, it takes the uncertainty out of advertising.”

With the entertainment industry having to compete with the likes of Spotify, Netflix and other streaming services, not to mention the onslaught of illegal digital downloads, that all undercut their bottom line, it will welcome this guaranteed revenue raiser with open arms. Mirriad can expect a similar welcome as they pitch their software to advertisers around the world, who are going to be salivating at the range of avenues this technology opens up to them, as well as providing a means of defeating their Skip Ad nemesis.

Just when we thought we were free from the advertisers’ clutches it looks like they have just found their secret weapon. Get ready fellow consumers, we are in for one hell of an onslaught of adverts.

India’s slow industrialisation threatens its prospects

Posted on January 19, 2015January 20, 2015 by Ashton Wenborn

“A major new national programme designed to facilitate investment, foster innovation, enhance skill development, protect intellectual property, and build best-in-class manufacturing infrastructure. There’s never been a better time to make in India.” This is the message plastered on the dedicated makeinindia.com homepage and the one that best sums up Prime Minister Narendra Modi’s ambition to turn the country into a manufacturing powerhouse.

Here is an economic and marketing campaign aiming to up the sector’s share of national GDP from 15 percent to 25 percent – comparable with that of similarly sized emerging economies – though still a ways off China’s 32 percent. With this ambition, policymakers have laid down a bold marker that says the country is not merely an emerging marketplace, but a hotbed for production talent. “Government is committed to development. This is not a political agenda, but an article of faith”, said Modi, before a crowd of key industry names in Delhi. “We do not want any industrialist being forced to leave India. I can say that we have been able to bring about a change in last few months.”

A change in perception
Not long ago, the country’s headline growth clocked in at over eight percent, and talk of India soon rivalling the rate of development in China was widespread. However, in the years since, difficult circumstances have taken lumps out of the rupee’s value, and the currency in 2013 lost over 20 percent of its value as growth sunk to its lowest rate in a decade. Ongoing political ineptitude didn’t do much to calm investors, and when India’s current account deficit hit an all-time high, those with a share in the market pulled investments numbering in the billions.

Experts have long pointed to India’s snail-pace industrialisation as the single biggest reason why the country has failed to keep pace with others like it. Tellingly, manufacturing as a percentage of GDP has changed very little – if at all – since 1960, and without a head lunge into industrialisation, the country will struggle to make a name for itself as an accommodating business climate.

Experts have long pointed to India’s snail-pace industrialisation as the single biggest reason why the country has failed to keep pace with others
like it

Suggestions that India is about to enter a shining new era of manufacturing dominance, therefore, are difficult to stomach. Yet Modi has moved quickly to position himself as an economic saviour, despite – in his own words – not being much of an economist. The IMF’s annual report on the state of the Indian economy shows that policy actions have reduced the country’s vulnerabilities, and that it’s now better positioned to handle financial shocks than it was previously.

“Several important policy decisions have been made that should help revive investment activities”, said Paul Cashin, IMF Mission Chief for India. “We are confident that India can easily go back to an eight percent growth trajectory if further structural reforms, particularly in the fields of energy, agriculture, the labour market, are implemented quickly.” Also, McKinsey and Company have forecasted that the manufacturing sector will tip $1trn, occupy 25 to 30 percent of GDP and create 90 million jobs by 2025, showing that India may not be the down-and-out economy so many believe it to be.

Even still, the vast majority of analysts were taken aback in August, when the Ministry of Statistics unleashed the country’s most impressive growth numbers in two-and-a-half years – at a rate of 5.7 percent in the three-month lead-up to June. And from what has been said in the months since, India’s economy shows no sign of slowing in the years ahead.

The Modi effect
With the appointment of Modi to office, investor sentiment towards India has improved markedly, with many in agreement that the leader of the Bharatiya Janata Party is capable enough to kick start the faltering economy and guarantee a swift return for investors. “The people of India have given a clear mandate”, said President Pranab Mukherjee after the election results were announced last year. “They want to see a vibrant, dynamic and prosperous India. They want to see a resurgent India, regaining the admiration and respect of the international community.”

With only a few months under his belt, arguably Modi’s greatest achievement so far is the influence his time in office has had on business confidence. Renowned for his distinctly pro-business streak, the former chief minister of Gujarat represents a welcome change from Manmohan Singh, who was slow to instruct change towards the latter period of his tenure in office. Such is his clout in the international community that business confidence in 2014’s third quarter sat at a 15-quarter high, as shown by the CII Business Confidence Index. United in the opinion that Modi’s new government will set in motion an upward growth trajectory and improve a lacklustre investment market, it appears that leading business names have been taken in by the PM’s Make in India campaign.

Nonetheless, critics of Modi’s manufacturing push insist that it lacks teeth, with some going so far as to assert it’s little more than a marketing-friendly strapline. As it stands, India’s business climate is ridden with uncertainty and red tape, factors that have succeeded only in driving business owners away in search of more accommodating alternatives. As of 2014, the country sat at a dismal 134 in the World Bank’s Doing Business ranking of 189 countries, which, for an economy of India’s size and strength, does not bode well for its future prospects.

In answer to the country’s low standing, the PM has promised to loosen the obstacles standing in the way of setting up shop, and by replacing the red tape with a red carpet – as Modi so eloquently put it – he hopes more companies will see India as fertile ground. It was in October last year that the government sounded the starting gun on the Make in India campaign, beginning with a list of key labour market changes to boost both manufacturing and employment. And though the decision marked a step in the right direction, many of the reforms are long overdue, given that a number of the country’s laws have been unchanged since the nation won independence over 60 years ago.

Still, the reforms – which include streamlining labour laws and factory checks – have been welcomed with open arms by the national press, though the criticism rings loud and clear that the government has been far too slow to enact the necessary changes. The ever-so-slight steps taken since the PM’s Make in India announcement are indicative of a much wider trend for the Indian economy, in that any progress made from now on will likely be subjected to the too ‘little, too late’ tag. Of the 1.2 billion strong population, 65 percent are under 35, and, by the turn of the decade, the average Indian will be the ripe old age of 29, which makes for perhaps the healthiest available workforce on the planet.

However, without first taking major steps to overturn a market plagued by bureaucracy and red tape, the country will fail to make good on a huge opportunity. Whereas India’s untapped workforce is often flaunted as a major selling point, the asset could soon become one of the country’s biggest problems should the government allow the skills gaps to widen any more than it has done.

Counter productive
To compound the country’s woes, many multinationals have already set up shop in China, and in doing so, have reaped the rewards of low labour costs. Also, names there have already built up a network of suppliers in and around the region, and by choosing to take their business to India, they would only lose out on the supply chain efficiencies they’ve gained already.

However, the situation is perhaps not as forlorn as some fear, and there’s optimism to be taken from the fact that China’s economy is finally slowing and its wages are rising. Countless businesses have made their way to the world’s number two economy in the last decade and a half, buoyed by the easy availability of low-wage workers in a time where bottom lines are being squeezed. However, the China of today is different to the one that has wooed so many businesses in the past.

The World Bank’s Justin Lin asserts that China will shed 85 million manufacturing jobs in the years ahead, and as businesses begin to look elsewhere for greater cost efficiencies, India is arguably the only country with a pool of available talent equal to that of China.

True, Modi’s Make in India pledge has been followed by little in the way of tangible reforms so far, though the renewed focus on manufacturing comes at an opportune time, as the country positions itself to soak up employment opportunities born of China’s changing status. In the meantime, merely stating that manufacturing constitutes an important part of India’s economic strategy is enough to convince outgoing businesses to at least consider the country as an alternative. However, if Modi hopes to turn India into a manufacturing giant, the tentativeness with which he has introduced reforms so far must be switched out for immediate and radical action.

Forex brokers hit by soaring Swiss franc

Posted on January 19, 2015January 19, 2015 by Ashton Wenborn

The decision last week by Swiss authorities to abandon attempts to peg its currency – the Swiss franc – to the euro has sent shockwaves through foreign exchange markets, and led to the closure of one prominent forex broker, as well as heavy losses for others.

Alpari lost around £30m as a result of the soaring value of the Swiss franc

These include the UK arm of Alpari, known as the main sponsor of West Ham Football Club. Alpari lost around £30m as a result of the soaring value of the Swiss franc during last Thursday, which rose by as much as 39 percent at one point, before settling at around 20 percent up. New York-based FXCM was hit with a $225m loss as a result of the trading.

The Swiss National Bank’s (SNB) decision came after a decade long period of trouble for the country’s currency that saw it attempt to peg it to the euro in 2011. However, in light of signs that ECB chief Mario Draghi was due to begin a round of quantitative easing within the Eurozone, Swiss authorities decided that the consequence of this would be too great on its exports.

Switzerland has traditionally been seen as a safe-haven economy for investors, and its’ currency has long been favoured as one that will be immune from too much risk. However, because of this reputation, the value of the Swiss franc jumped 30 percent over the last decade against the euro, meaning that its exports – the key part of its economy – became unsustainably costly.

The attempts at pegging the Swiss franc to the euro were seen as a way of bringing down these export prices. However, such an influx of euros into the economy would have meant Switzerland would need to follow suit to maintain its cap, therefore harming its exports.

Does energy hold the future for Egypt?

Posted on January 19, 2015January 19, 2015 by Ashton Wenborn

On January 09, Egypt signed a new contract with six companies for the drilling of over 40 discovery wells in the western desert and the Gulf of Suez. Of the foreign partners invested in this project are Shell, BP, IEOC and Canada’s TransGlobe Energy. Two state-owned companies are also involved in the initiative, Tharwa and the General Petroleum Company, as part of a push for greater participation of domestic companies in the exploration and production sector. While on January 14, Italian-owned Eni announced signing new agreements with the state to explore two gas fields in the Egyptian Mediterranean. This is in addition to Eni’s recent acquisition of the South-West Melehia block, as forms of repayment for outstanding arrears. Egypt is also seeking new partners for upstream activities in the South Sinai region, in which the GPC aims to maximise the production of discovered reserves, as well as to explore new areas. Greater efforts to increase domestic output suggest that the Ministry of Petroleum is attempting a reversion from net importation to exportation of oil and gas, as was the case during the 1990s.

Currently the Egyptian economy is under severe strain, largely resulting from recent social and political unrest, in addition to an overblown energy budget

Inflated budget
Currently the Egyptian economy is under severe strain, largely resulting from recent social and political unrest, in addition to an overblown energy budget. Approximately half of the population relies on subsidies for food and fuel, which accounts for a quarter of the state budget. According to the BP 2014 Statistical Review of World Energy, Egypt’s consumption of oil was 35.7 million tonnes in 2013, an increase of 9.8 million tonnes in one decade. Natural gas on the other hand increased by 21.7 billion cubic metres within the same period. This exponential growth in energy consumption is largely due to increased manufacturing output, energy-intensive upstream projects, a growing population and an expanding automotive industry. “The soaring consumption in the last years is one of the factors, as well as the decline in production”, says Passante Adel, Editor in Chief at information providers, Egypt Oil & Gas. Egypt’s domestic output is simply unable to meet with this growing demand, resulting in the diversion of profitable exports to domestic supply in order to meet the nation’s growing needs. Under the strain of a swelling population of 85 million and rapidly increasing energy consumption, the economy has been strangled by escalating energy bills and amassing foreign debt for years. As a result, Egypt heavily relies on financial assistance, chiefly in the form of donated gas and petroleum products, from the Persian Gulf states.

Following the election of Abdel Fattah Al Sisi in June of last year, a new fiscal strategy was introduced in an attempt to bolster Egypt’s struggling economy. The pressing matter of the country’s strenuous energy subsidy bill was amended in July so as to begin alleviating its mammoth strain on the state. Citizens have since faced an exponential rise in the price of fuel, averaging an increase of 61 percent. This reduction in energy subsidies has created much-needed fiscal space for the repayment of some debt owed to foreign energy firms. Repayments made in the fourth quarter of 2014 comprised of $1.4bn in October and a further $2.1bn in December, thereby reducing arrears to $3.2bn. Lessening the debt owed to foreign oil partners is an important step in boosting confidence for the Egyptian General Petroleum Corporation, which has experienced delays of further investment into new and existing projects in recent years. Plummeting oil and gas prices worldwide have also had a positive impact on the Egyptian economy within a relatively short period. The lowest prices since 2009 have gone a long way in reducing the state’s hefty energy bill; petroleum product subsidies decreased from EGP 126bn in FY 2013/14 to EGP 100bn in FY 2014/15. With less expenditure on oil, gas and petroleum products, the state budget can be stretched further into the exploration of new oil and gas sites, as well improving production at existing sources.

Restricted output
Existing challenges for the energy sector are induced by state policy. For example, several areas of gas discoveries within the Mediterranean Sea remain undeveloped despite substantial potential for profit due to a price cap introduced by the state. In 2000, the Ministry of Petroleum set a maximum limit of $2.65 for the price of natural gas produced in Egypt by foreign companies. Doing so has made developmental projects unattractive, and in some cases even unviable. “With the fixed price for gas purchases from the foreign partners, it was very difficult to develop these fields due to the high cost associated with deep-water drilling. Technology is also an issue that is more linked to cost and investments, rather than availability,” Adel tells World Finance. Another factor restricting foreign operators is the governmental decree which states that gas produced in Egypt must remain in the country. A number of policy changes, such as addressing price caps and exportation restrictions, are therefore required in order to make much-needed foreign investment more inviting.

Additionally, expanding output is currently limited due to production capabilities and refinery utilisation. OPEC’s Annual Statistical Bulletin revealed that in 2013 the output of Egypt’s refined petroleum products was only approximately 62 percent of proven reserves. This can be attributed to ageing infrastructure and refineries, which have greatly reduced current yield capabilities. Moreover, importing additional crude oil is part of a policy for debt repayment to foreign oil producers, resulting in less domestically produced crude oil for refining within the nation. Several projects to improve Egypt’s refineries are due to start this year, thereby presenting the possibility of these sites reaching full potential output in the near future.

Energy mix
It is also of great importance for the state to continue its efforts to diversify the current energy mix produced within Egypt. Currently, the third greatest source for energy, after oil and gas, is hydroelectric power. As a result of previous activities, the two largest sources for hydroelectric power, the Aswan high Dam and the Aswan Reservoir Dam, have been largely exploited. Consequently, the New and Renewable Energy Authority is pursuing other types of renewable energy, namely wind and solar power. The two areas are currently seeing greater international investment, as foreign operators seek to cash in on the promising prospects. A resolution adopted by the state in 2007 pledges that renewable energy will supply 20 percent of the country’s electricity requirements by 2020. Wind energy will comprise 12 percent of this energy strategy, which is achievable by tapping into Egypt’s vast wind power.

At the Offshore Mediterranean Conference in December, the Ministry of Petroleum announced upcoming research initiatives into other new areas, specifically the exploitation of unconventional energy such as shale gas and deep-water resources. “As we have witnessed in recent weeks, the potential for shale gas in the Western Desert is there,” says Adel. “Apache and Shell Egypt, a subsidiary of Royal Dutch Shell, recently signed the first agreements with the Ministry of Petroleum to explore in the area after the success of their trials in Apollonia. In regards to deep-water resources, the potential is there, but again the problem is the high exploration costs. With the Government changing its approach towards foreign energy firms, Egypt’s shale gas and deep-water resources are set to improve significantly this year.”

Egypt’s growing influence
As social unrest and political instability continues to settle in Egypt, a greater focus can be made on rebuilding the economy. Tourism, a major source of income, will also begin to increase again as a result. As can foreign investment. Given the fiscal break that the state is benefitting from, by means of reduced global oil prices and subsidy reductions, the prospects for increasing energy output looks increasingly promising. Once a level is reached in which domestic energy demand is satisfied, the state can then begin to profit from exporting oil and gas. To contend with is a global oil market that is increasingly competitive and less buoyant than it has been throughout the previous decade. Yet, despite declining Chinese demand and increasing supply from the US, there is still space within the market for another player, particularly, one that is not tied down to the obligations of OPEC membership.

Notwithstanding the various challenges that exist for Egypt’s energy sector, as evidenced by recent activities the state is making a rigorous effort to improve its output. As its economy strengthens and dependence on foreign imports and aid diminishes, the nation’s autonomy as a state will vastly improve. Egypt is thus stepping up its role as an influential player in the Middle East and the Mediterranean. The potential of gas and oil exports, partnered with the importance of the Suez Canal and SUMED Pipeline, therefore places Egypt in an increasingly enviable position within the region, and indeed the world market.

Audio streaming services rock the music industry

Posted on January 18, 2015May 2, 2018 by Ashton Wenborn

Once upon a time, teenagers with questionable 1970s haircuts crowded round dressing rooms, mobbing their favourite band for a scribbled autograph on the cardboard casing of their new vinyl LP. Roll on 40 years and there’s been a fair few changes, and not just in the hairstyles.

Instead of demanding illegible signatures, fans snap selfies from the very device on which they have access to almost every song in the world – the smartphone. Instead of obsessing over one favourite star, they hit festivals where a whole line-up of artists rule the roost.

Those changes have been driven by the digital revolution in the early noughties, with the rise of iTunes and other download platforms. Now, with the increase of subscription-paying and ad-supported streaming services such as Spotify, the industry is undergoing another digital transition – one that is arguably even more dramatic. According to music analysts, streaming services are set to define the future of the industry in a world where fast, on-the-go consumption is the new normal.

But so far they remain unprofitable, while artists are suffering from falling revenue. Total music sales fell 3.3 percent between June 2013 and 2014. If the right business model can be found, however, streaming services could just be the saviour for an industry that has been on the decline financially for more than 10 years. Finding that model, and striking a balance between pleasing artists and making profit, is where the challenge lies.

Fig 1. Comparative paying customer bases

To-date totals | 2014 figures

200m iTunes buyers

Apple

6m paying subscribers

Spotify

5m paying subscribers

Deezer

4m paying subscribers

Pandora

2m paying subscribers

Muve Music

1m paying subscribers

Rhapsody

Dawn of the digital age
The digital download era impacted on physical sales (mainly CDs), replacing them in a number of key markets. It also made piracy via illegal download platforms easier than ever. Music revenues tumbled, plummeting from $15bn in 2003 to just $7bn in 2013 in the US, according to the Recording Industry Association of America (RIAA). A number of music stores collapsed under the pressure. Retailer Tower Records went into liquidation in 2006 after 46 years, and British store HMV followed suit in 2013. The industry had reason to fret.

Since then, digital music has grown to represent 39 percent of global music revenues, according to a report by the International Federation of the Phonographic Industry (IFPI). It accounts for the majority of sales in the world’s 10 biggest markets (representing 60 percent in the US, for example), with global CD sales still on the decline, dropping from 56.1 percent in 2012 to 51.4 percent in 2013, according to the IFPI. Furthermore, those physical sales now have less value; revenues from them plummeted 11.7 percent in 2013.

Sales are likely to continue plunging as Generations X and Y take over. “It’s a product which has been dead for a long period of time,” said Mark Mulligan, an analyst and the founder of Music Industry Blog. According to him, CD sales have another five or so years of strong growth before their demise properly begins.

Now the likes of Spotify, Rdio, Pandora, Beats Music (recently acquired by Apple) and a host of others have started to replace download sales with streaming figures, creating an eerie sense of deja vu for those in the industry (see Fig 1). Revenue from subscription services climbed a staggering 51.3 percent in 2013, reaching more than $1bn, according to IFPI. Streaming is dominant in parts of Europe, including in Italy and France, whereas in Sweden, only 47 percent of internet users said they use streaming services, while only seven percent download. It’s expected to account for 70 percent of total digital revenue in 2019, if forecasts by Music Industry Blog are anything to go by.

The impact on sales is clear: according to a Forbes report, downloads fell 5.7 percent from $1.34bn to $1.26bn in 2013. Although downloads still make up 67 percent of digital revenue globally, revenue from them is expected to drop 39 percent by 2019, according to Mulligan. “Streaming does cannibalise sales, because people stream instead of buying,” he says. Overall, music sales revenue is already falling, dropping 3.9 percent in 2013 to an estimated $15bn according to the IFPI.

Artists are therefore fretting once again (see Fig 2). Taylor Swift recently pulled her music from Spotify, hitting the headlines and sparking widespread debate within the industry. That move seems to mirror the initial reaction to downloads: in 2007, record company Universal Music reportedly threatened to pull its music from the iTunes Store out of concern for lower revenues. “Now you won’t find any artists who will look at iTunes as anything other than one of the most successful revenue streams,” Mulligan told World Finance. He believes we’re likely to see the same thing with streaming over the next five years or so.

Apple customers take photos while waiting outside the Apple Fifth Avenue flagship store in NYC

Fighting the pirates
Although streaming may well be responsible for declining sales, this new form of music consumption seems to be the only option among consumers hungry for cheap, if not entirely free, music; a culture fuelled by the likes of YouTube and other sites. That’s a reality the industry is going to have to face up to if it is to benefit from the potential that streaming offers.

As Spotify CEO Daniel Ek pointed out in a statement defending his company against Taylor Swift’s move, it’s a choice between free, illegal music (which generates no revenue for the industry) or free, ad-supported streaming services that do make a contribution. An Institute for Policy Research report found that music piracy costs the US economy $12.5bn in revenue and other measures every year. If streaming services can combat that, they could instigate a very real change across the industry. According to Ek, that’s precisely Spotify’s goal: “Our whole reason for existence is to help fans find music and help artists connect with fans through a platform that protects them from piracy.”

The prevalence of piracy is hard to ignore; research by music industry campaign group La Coalición discovered in 2014 that a staggering 84 percent of all digital content being consumed in Spain was illegal. NBC Universal, meanwhile, estimated in a report that nearly 25 percent of total global internet traffic breached copyright laws, according to GlobalPost.

Demand for free entertainment, especially music, isn’t new: in the era of cassettes, recording songs from the radio was common, and in the era of CDs, ripping was rife. What the digital downloads era seems to have done is bring that to light more clearly, and now the likes of Spotify are highlighting it even more.

While there’s a risk that legalising free music amplifies that attitude by sending out the message that music doesn’t have to be paid for – which seems to have angered Swift – streaming services are ultimately obeying, and monetising, a market calling out for cheaper options. Google argued in a report on piracy that the market is partly to blame: “Piracy often arises when consumer demand goes unmet by legitimate supply.” By creating an extremely competitive marketplace, music and video subscription services such as Netflix are giving consumers greater pricing power than ever before. There has to be some benefit, even if it’s not immediately felt by those in the industry.

Fig 2. Global Music Revenues 2013

$4.3bn

Non-artist revenue

$9.3bn

Superstar artist revenue

$3.6bn

Remaining artists’ revenue

Subscription services have indeed gone some way to replacing piracy: illegal downloads fell 26 percent between 2011 and 2012 according to NPD Group’s Annual Music Study 2012, and streaming was the motivating factor behind almost 50 percent of those who stopped downloading illegally. “The increased use of legal and licensed streaming services has proven to be an alternative for music fans who formerly used P2P networks to obtain music,” NPD Senior Vice President Russ Crupnick said in a press release. Curbing piracy has been seen to an even greater extent in Norway, where the number of illegally copied songs fell from 1.2 billion in 2008 to just 210 million in 2012, according to The Telegraph.

By legalising and monetising free music, streaming services could start to play a major role in growing the music industry in emerging markets (see Fig 3). IFPI CEO Frances Moore wrote in the Digital Music Report 2014 that “rampant digital piracy” was “the one overriding obstacle to market development”. Streaming services could hold the key to overcoming that. Spotify has already entered Malaysia, Hong Kong and Singapore, while Taiwanese start-up KKBOX is also proving popular, counting 10 million users halfway through 2014.

The power of streaming services to drive growth in the music industry is already being seen in Denmark, Norway and Sweden. The latter’s music market grew 5.7 percent in 2013 to reach $409m. If emerging markets can follow that lead, the likes of Spotify could bring good news to a global music scene already largely reliant on free, mainly illegal music.

Unprofitable model
Some fear subscription services won’t provide enough revenue to offset the fall in physical and download sales. That was a concern voiced by Lucian Grainge, Chairman and CEO of Universal Music Group, at The Wall Street Journal‘s WSJ D.Live conference in October. While that fear is sending shockwaves through the industry, Spotify and other similar services are themselves struggling to create actual profit.

Even with its domination of the music scene in parts of Europe and beyond, Spotify racked up global net losses of $115m in 2012. That marked an increase of $59m from 2011, according to Businessweek, despite the Swedish start-up’s paradoxical growth. In 2013, its revenue exceeded $1bn, but the service was still unprofitable, with net losses of $80m.

Spotify’s CEO Daniel Ek has been very vocal about the importance of ad-based streaming services

“Each user that comes in is basically bringing more losses,” said Andrew Sheehy, Chief Analyst at Generator Research. Spotify recently celebrated news of its first net profits in France and the UK, where it reached £2.6m ($3.2m) in 2013 after an £11m ($14.5m) net loss the previous year. But that’s not necessarily an accurate indicator of Spotify’s total finances, given that its regional arms don’t include the overall costs incurred by the parent company.

Spotify’s losses aren’t surprising given the somewhat risky pay structure on which it operates: the service agrees to pay a sum to the record label and publisher, and is held to that regardless of what the company actually ends up earning.

According to both Sheehy and Mulligan, Spotify’s structure has to change if it is to become profitable on a global scale. Both argue that a tiered model could work. Sheehy noted: “Existing brand positioning in the market wouldn’t be affected, but they’d be able to extract more from users who are less price-sensitive.”

Tiered pricing seems logical given that relatively few Spotify users seem willing to pay the current prices for its ‘premium’ service; three quarters of the 50 million users use the free, ad-supported streams, according to Ek. Different price bands catering to different levels of music interest could expand the paid subscriptions to a wider demographic. Mulligan says 50 to 100 million subscriptions would be needed to achieve profitability.

Ek doesn’t believe a tiered system is necessary, however. “We know if you do [stream free], you’re going to be like, ‘Hey, 10 bucks is nothing’,” he told Businessweek. But if Netflix is anything to go by, consumers are heavily influenced by small shifts in pricing: following a $1 subcription increase in May 2014, Netflix’s growth in the US dropped from 1.3 million customers in 2013 to one million in 2014. Netflix’s total global forecast of 3.7 million customers was undermined by the reality of a confirmed three million.

Even getting people to pay low monthly subscription prices could prove challenging given the availability of completely free services such as YouTube. Sheehy suggests an alternative way of achieving profitability, which is to cut back on the royalties Spotify pays the music industry. He adds that a reduction of around 30 percent would be needed to make a real difference.

That’s likely to anger artists and the rest of the industry even more, however, and it’s highly improbable such terms would be accepted. Mulligan agreed: “There’s been a case for record labels to reduce royalties for 10 years and it hasn’t happened, so what you’d need is probably a market collapse for the record labels to start treating it more seriously.” That’s in spite of the fact that record labels make a fairly substantial amount of money from streaming services, receiving nearly 70 percent of Spotify’s revenue.

Struggling artists
While the record labels might be reaping the rewards, artists stand to lose out, receiving an average cut of around 10 to 15 percent from their labels, according to Mulligan – far lower than the more generous splits seen in the past. “For the really big superstars, [streaming] can be a very real jump, at least in the near term, in terms of revenues declining,” he said. However, it’s perhaps not surprising that some are kicking up a fuss, and in the short term, it appears to be working: Taylor Swift’s album 1989 hit nearly 1.3 million sales globally in its first week after her well-publicised Spotify withdrawal – breaking the record for 2014.

Given the general trend toward streaming, however, shying away from subscription services seems unsustainable in the long term. Furthermore, Swift’s decision to pull her music from Spotify didn’t stop people obtaining it for free: according to Ek, the Pirate Bay found that it topped the list for illegal downloads just after the news broke. That once again demonstrates the reality that a large number of consumers simply aren’t prepared to pay for music.

Swift herself is optimistic that this is not the case. She wrote in an article for The Wall Street Journal: “It’s my opinion that music should not be free, and my prediction is that individual artists and their labels will someday decide what an album’s price point is.” But the sheer number of streamers, and the trend toward consumer-driven pricing that it’s a manifestation of, suggests differently.

It’s true that the legalisation and monetisation of free music through the shift to streaming doesn’t come without a price. By replacing sales, subscription services are arguably spurring on the metaphorical death of the fan devoted to just one or two favourites, as multiple-artist playlists take the place of single-artist albums. Album sales in 2014 fell 8.4 percent from the previous year, according to Forbes. Bar 2011, when there was a slight uptick, this follows part of a consistent downward trend.

That cultural shift and overall change in perception does pose a very real threat to the budgets of artists largely financed by live tours, as Mulligan recognises: “The problem is if people aren’t spending much time with your album because they’ve got all the music of the world in their fingertips, then that also has an impact on how much money you can make live.”

Fig 3. China’s online usage, 2014

21 World Ranking Music Market

618m

Active internet users in 2013

500m

Mobile web users

But he believes that if artists can use streaming services as platforms to engage with consumers, they could maintain a strong fan base and counteract the otherwise damaging effects of streaming on music perception. That’s likely to prove challenging given the sheer volume of music available to streamers, but if it can be achieved then there’s every hope that a finance model primarily based on live shows can continue.

Sheehy believes that in the future, artists could potentially bypass the need for record labels completely, by signing up with streaming services directly. “Now they wouldn’t have the advantage of the record label marketing, so that’s a problem, but if Spotify has enough marketing tools, that isn’t a problem,” he said, suggesting that subscription services could act as platforms for free marketing. That would certainly solve the problem of low revenue for artists, but it would also mean an entire restructuring of the industry, which seems highly unlikely – at least in the near future.

According to Sheehy, the industry will change regardless: he predicts a 20 to 30 percent contraction in its size. He also believes that the music heyday is over: “The thought that the music industry is ever going to get back to where it was in the CD days, which was sort of the golden era of recorded music, is just an illusion.”

But if the potential to stem illegal downloads and grow the music industry in both developed and emerging markets can be harnessed, streaming services may well be able to offset the decline in sales, and at least go some way towards reversing the downward trend spurred on by the first phase of the digital era. Even if subscription services don’t succeed in that, what they are likely to achieve is a more balanced market where pricing power is more evenly split between producers and consumers. That’s huge news in itself, and it’s arguably that very shift in power that’s upsetting the industry’s biggest names.

Is it time to cash in on cannabis?

Posted on January 18, 2015February 6, 2015 by Ashton Wenborn

It’s a war that has been waging for approaching half a century, and one that governments have shown little enthusiasm for ending. However, gradual moves in recent years by a number of US states to legalise the sale of cannabis is not only damaging the profits of drug cartels, but also bringing in much needed tax revenues (see Fig. 1).

Despite these positive results, there still remain many critics of this relaxation of laws, with fears over the impact on people’s health, and in particular the possibility of cannabis acting as a gateway vice towards harder drugs. Should governments around the world legalise cannabis as a means of tapping into new tax revenues, or is it one step too far towards a morally decadent society?

During the US midterm elections in November, two more states joined the growing number of regions that are allowing the sale of marijuana. Both Oregon and Alaska passed legislation that legalised the use of recreational marijuana for people over the age of 21. Oregon was in fact the first state to decriminalise the possession of small amounts of cannabis as far back as 1973. It would later be the first to legalise the use of medical marijuana in 1998.

The victory for legalisation campaigners was echoed in other parts, with voters in Washington DC approving laws that would allow the possession of small amounts of cannabis. The news comes two years after both Washington State and Colorado legalised recreational use, and shows signs that attitudes across the US are sharply changing in favour of a softer approach to the drug.

Supporters for the legalisation efforts have come from a variety of interested parties, including billionaire investor George Soros, whose Drug Policy Alliance (DPA) donated around $800,000 to the campaign in Oregon. However, despite the trend of states moving towards legalisation, federal laws remain in place against cannabis use. It seems unlikely that there will be a countrywide lifting of the ban while there remain so many conservative states – predominantly in the south and Midwest – that oppose legalisation. However, with presidential elections on route in 2016, many other states are looking at proposing similar legislation during the vote. California, Massachusetts, Nevada, Arizona and Maine are all thought to be the next wave of states to relax their laws.

Bumping-up tax revenue
Many supporters of legalisation point to the huge amount of potential tax revenue that could be brought in. According to some analysts, if all of the US’ 50 states were to legalise and regulate marijuana; tax revenues of more than $3bn could be achievable each year. That figure was predicted by online personal finance website NerdWallet, which says that if the flat 15 percent tax rate used in Colorado was applied, $3.1bn would be put back into the government’s coffers. Another study in 2010 by Harvard economist Jeffrey Miron predicted that law enforcement agencies would save $8bn each year if marijuana were legalised.

All this new money for local and national governments could, in theory, be spent on boosting public services in the same way that revenue from alcohol and tobacco taxes do. A number of advocates have said that the potential health issues arising from more marijuana smokers can be addressed through vastly increased funding for health services.

Jill Harris, the DPAs director of strategic initiatives, told reporters that this shift in attitudes meant that drug problems would be treated as a health matter rather than one of crime. “It’s pretty clear the American people support marijuana legalisation by decent margins and there’s been a shift toward reform in less punitive, more health based attitudes to drugs in general, and certainly with respect to marijuana.”

One recent consequence of the relaxation of marijuana laws in parts of the US is the harm it is doing to the business of Mexican drug cartels. According to reports in May, cannabis farmers in the region of Sinaloa have stopped planting because of the dramatic collapse in the price. According to The Washington Post, the wholesale price has dropped from $100 in 2009 to just $25 in 2014. One Mexican farmer told the paper that there was no alternative way of making a living in the region, but that, “It’s not worth it anymore. I wish the Americans would stop with this legalisation.”

Speaking to Vice News, former federal agent Terry Nelson said legalisation was severely harming Mexico’s drug gangs. “Is it hurting the cartels? Yes. The cartels are criminal organisations that were making as much as 35-40 percent of their income from marijuana. They aren’t able to move as much cannabis inside the US now.”

Bagged medicinal marijuana. The use of marijunana for medical reasons was legalised in the US in June 2014

Growing pains
There are seemingly many benefits towards legalising cannabis, ranging from financial to social. Treating drug users not as criminals but as patients will relieve a huge amount of pressure on prisons and law enforcement agencies, while the tax revenues will help to fund new health services designed to stop people becoming addicted to drugs in the first place.

Other countries that have long been fighting the war on drugs are watching the US with great interest. While successive British governments have rejected calls for legalisation, it is thought that many politicians privately feel it would be the right move, but are too afraid of upsetting constituents and the media by ever proposing it. Cannabis law reform group CLEAR recently estimated that the British economy would gain £6.7bn were it to tax and regulate marijuana, for example. However, whether politicians are brave enough to offer the electorate a say – as many US states have – remains to be seen.

While the industry in the US is thought to be heading towards a value of around $10bn by 2018, the experiment in fostering a legal cannabis market has not been without its problems. Many banks have been reluctant to house money from legally run marijuana businesses, fearful of federal laws. This also means it’s difficult for new marijuana businesses to get started. However, it’s clear that the experiments started in Colorado are spreading, and with every new state that legalises, the US gets closer to a federal-wide reform of the laws.

It is an industry that is growing by the day, and could potentially rival that of the tobacco and alcohol industries in how it contributes to the economy. Those two industries provide a combined $17bn in federal tax revenues each year. With government budgets so constrained, it would seem inevitable that sooner rather than later, prohibition on marijuana will come to an end in the US.

The graduates turning their backs on the finance industry

Posted on January 18, 2015May 9, 2018 by Ashton Wenborn

Millennials (also known as Generation Y) are apparently far less concerned about money than previous crops of young people. Some will argue that their lack of concern for cash is down to their over-doting parents running around frantically after their precious creation, throwing money at them to the point where they would be forgiven for thinking that money did in fact fall from the sky. Or perhaps it is due to this new generation being bombarded with news headlines telling them that they are the ‘lost generation’, with no hope of landing a job, let alone a career – because their parents who came before them inadvertently mortgaged their future and gobbled up all the cheap energy, leaving them to have an existential crisis a little earlier than normal. Whatever the reason for millennials monetary nonchalance, big business, and in particular the finance industry, needs to wake-up if it is going to keep attracting top young talent.

The aptly named iOpener Institute, which analysed responses from tens of thousands of young professionals from the digital generation, supplied the science that showed that this new batch of youngsters value job satisfaction over everything else. “The digital cohort[s] born after the early 1980s are motivated to stay with their employer, and to actively recommend their organisation to friends, by the level to which they are fulfilled in their job”, claims the study.

Businesses will, therefore, need to think about their company culture and restructure it in order to cater for a new generation of graduates who demand engagement, empowerment, and above all, a sense of purpose in their chosen career path, if they stand any chance of fostering and holding onto the young people that they invest in through various graduate programmes and internships. The study concludes its analysis contending that companies hoping to attract Generation Y by “simply throwing money” at them will find that it is not enough to retain them.

44%

Of millenials look for attractive wages

59%

Seek employers that reflect their values

25%

Expect to work regular office hours

Source: PWC

More than money
Millennials choosing to downgrade money’s significance in their lives in favour of job satisfaction is bad news for finance, because it has long had a hold over graduates by enticing them with the allure of money, and lots of it. The financial sector is certainly going to struggle to attract young people with anything other than cash, as 90-hour weeks are sure to send students, who are used to waking up at midday, running for the hills. After all, Generation Y has grown up in a world obsessed with climate change. It has made young people extremely eco-conscious, causing them to question the way things have been done over the last century. Many are thinking about how they can shape the future in order to right the wrongs of previous generations.

Climate change has also been the driving force behind a flourishing green-technology sector, as well as one of the reasons why recent university graduates like Arthur Kay, who set up the social business Bio-bean – an enterprise that collects waste coffee grounds and turns them into fuels – opted out of a career based purely on financial gain.

“I am interested in the planning and management of cities, and the challenges and opportunities of the future”, says Kay. “With two-thirds of the 9.7 billion people in the world forecast to live in cities by 2050, we need to rethink much of the existing infrastructure… creating a business that is environmentally and socially conscious provides this platform.”

This statement alone does a great deal in highlighting the differences between these new graduates and those that have come before them. Kay represents a generation that has been brought up alongside arguably the greatest technological achievement ever created; the internet. This generation is the first to be what American writer and speaker on learning and education, Marc Prensky called ‘digitally native’. A term that is used to describe this new tech-savvy set, whose lives and daily activities are centred on digital technologies, which have in turn given them a far broader and deeper understanding of the world around them, as well as the challenges that it faces.

“Young people have a strong, holistic social conscience now, based on a bigger picture ambition that wishes to solve wider social problems”, says Kay. “This is essential for our future. There is a growing appreciation of happiness as a form of wealth, as evidenced by movements like Action for Happiness.” The social conscience that exists within millennials, as a result of the increased connectivity and access to information that is provided to them through the world wide web, is why a career for Generation Y is much more than merely a method for paying bills, “but a pathway to explore their passions”, says Kay. This was illustrated in a recent PwC survey that revealed 59 percent of millennials would seek an employer whose corporate responsibility reflected their own values (see Fig. 1).

Lure of the city
Having said all that, money is still an incredibly pervasive force within society, and it always will be. And just because it may have fallen down a peg or two in terms of its importance to this digitally native generation, they are not all ready to flee the hustle and bustle of city for the sanctity of an eco-village just yet. The same PwC survey, for instance, showed that competitive wages and financial incentives ranked as the second most attractive factor for millennials when looking at prospective employers (see Fig. 2).

This is good news for the finance sector, because money is something it has an abundance of, which it uses with great effect to attract the latest legion of students entering into the workforce. “The lure of the city is the idea that money equals happiness, which remains an entrenched cultural attitude”, says Kay. “Despite the changing fortunes of the financial sector, the view exists that it is the place to get rich quick.” Though millennials are more in tune with the world around them, making them more interested in the concept of social enterprise, one thing that it has most certainly inherited from their parents is an insatiable appetite for consumption, even though their habits have deviated vastly from previous generations.

An article by The Atlantic explains how Generation Y prefers to splash its cash on “new experiences and adventures and to reward socially responsible companies that they can connect with and that they deem to be authentic.” Unsurprisingly, the industry that holds the least favour with millennials is big banks, with one study finding that large financial institutions, such as Bank of America and Citigroup have managed to make it to the top of this generation’s least-liked brands. “In the wake of the financial disturbances in recent years, there are many negative perceptions around the financial industry, some of which are unfounded and unfair”, says Kay. That may be true, but in order for banks to not just attract this socially aware group of individuals as customers, but as its next wave of workers, it is going to need to beef up efforts at shaking off its tarnished image.

Corporate culture
Kevin Roose, writer and author of Young Money – a book that focuses on the lives of eight young bankers who entered into the industry in the wake of the financial crisis – offers a fascinating insight into how millennials feel about working within a sector that has seen its position and prestige within society fall in recent years. The book also explores how this fall from grace has impacted its appeal as a career for young people, as well as providing CEOs at top financial firms valuable information for improving their corporate cultures.

“Banks are very good at recruiting”, says Roose. “They show up on university campuses and say exactly what a nervous, insecure student wants to hear, which is ‘that you will have a job, you will be working with other smart young people and you do not have to do this forever… and we will pay you well’, which is a big part of their success.” No matter how socially conscious millennials may be, they are not stupid and for most graduates the allure of big money is just too strong, especially when most students will leave university with an average student loan debt of $33,000 according to government data analysis by financial aid experts at Edvisors. Student debt is a real burden. It also makes a job in finance an attractive proposition, especially when the average starting salary is $57,300 (see Fig. 3), which to anyone, let alone a financially insecure graduate, is nothing to scoff at. That sort of money will buy a lot of skinny lattes and help line the pockets of socially responsible companies that millennials love.

But money, as mentioned already, is apparently not enough for young people these days. It is also not enough for the budding bankers in Young Money to not have reservations about their chosen career when protestors vented their anger at Wall Street as the occupy movement went into full swing. “I remember one of them saying it is bizarre to be on this side of the divide, he was working at Goldman Sachs at the time”, says Roose. “For a lot of young people that hit them especially hard, because they were young and the protestors were young also, and some of them were their friends from university and I think they identified strongly with the protestors, but also felt conflicted because they were apart of the industry that was being protested against.”

It is this conflict he believes is part of the reason why many top graduates are beginning to look at other industry sectors. “I think there are a ton of jobs out there that young people are attracted to and I think that what we are seeing now is that more of them are moving into technology based jobs, which is a great way to make money, while doing it in a way that feels good.”

This sentiment has been reflected in the attendance of recruitment drives at university campuses up and down the country, with more and more students preferring to hear a pitch from members within the trendy technology sector. “If you go to Harvard Business School or you go to Stanford, I have been to some of these recruitment sessions and they are much smaller than they used to be”, says Roose. “You definitely see a shift among higher achieving young people away from finance, and actually the banks have had to sweeten their deals in order to get young people to stay.”

Sweetening the deal
But how can financial institutions add a little sugar to their job offering? Well, for starters they are saying goodbye to working on weekends, with Bank of America Merrill Lynch offering employees the opportunity to take a much-needed break from the daily grind. Their decision was then echoed by the other big banks, such as Credit Suisse, who have encourage their new recruits to let of some steam on Saturdays. Moves like this show that the industry is willing to make adjustments in order to better facilitate the requirements of this new generation. Indeed, according to PwCs millennial survey, 70 percent of respondents expect some sort of flexible working hours (see Fig. 4).

Financial organisations are also doing a great job of giving their brand a facelift at recruitment fairs. In the UK, Barclays was giving prospective students the opportunity to have their bike checked, and even passing out smoothies as they waited. The Big Four have also jumped on the bandwagon and found novel ideas of engaging with the youth of today. KPMG travelled up and down the British Isles with its ‘KPMG photo booth’ in an attempt to cash in on peoples penchant for a selfie, while PwC opted for giving out free coffees on campus and then tweeted photos of the happy campers with the hashtag #PWCFreeCoffee.

It may not be that entirely revolutionary, but it is a step in the right direction if these institutions want to pander to Generation Y’s change in attitude and improve the overall image of the industry. But the author of Young Money argues that for all the effort, it may not be enough. “I think [the industry] is going to have to do some sort ground level reimagining of what banking is”, says Roose. “Banks are maybe going to have to reform their practices and certainly they are going to have to reinvent their sales pitch. It is not enough to just tell a 22-year-old ‘come here and you will make a boat load of money’ you actually have to give them a purpose as well.”

However, it begs the question, does the finance industry really even want to attract these kinds of individuals to its ranks? If young people want a ‘cool’ job in technology or elsewhere then that is where they should go. Rather than try and compete with the likes of Silicon Valley for precious graduates who want pool tables and free yoga classes, perhaps they should be thankful to other industries for steering these slackers away from their gruelling graduate programmes. Maybe then the hardcore financiers will be all that is left, and in the end, that is really what Wall Street wants. Hard working hopefuls that favour sharp suit over a t-shirt and jeans. “I think that young people and everyone should be choosing careers based on what they want to do and what they feel they are capable at”, says Roose. “If that is banking that is okay, but if it is not, which for many young people it is not, there are a lot of easier ways to make money.”

Finance should not be marching to the tune of the millennials’ drum. Instead, it should be designing its graduate programmes and internships to better suit those that really want to progress in the industry. That is not to say that a few extra hours shut eye or improving the overall company culture would not go a miss. But finance has always been a place that puts profits first, so why should it try and attract people that do not?

AKD Investment Management on Pakistan’s growing economy

Posted on January 16, 2015April 14, 2016 by Ashton Wenborn

Pakistan’s economy is said to be getting back on track, with overall macro-economic conditions in the country improving. World Finance speaks to Imran Motiwala, Chief Executive Officer of AKD Investment, about what this means for investments in the country.

World Finance: Well Imran, Pakistan’s economy is said to be improving, but it is still at a crossroads – where the government may be forced to abandon its IMF programme. So economically speaking, what’s the situation on the ground today, and how does that impact investments?
Imran Motiwala: I see the most important part of the IMF programme for a country like Pakistan is the fiscal discipline that it brings with it.

While the government has a great deal of resolve to pursue this programme, it is essentially I think the most important aspect that investors are looking at. That fiscal discipline essentially brings a great deal of opportunities as far as the economy is concerned. And while we remain in that programme – provided that the government has that resolve – we believe that those opportunities will continue throughout the economy.

I think [Pakistan’s] overall economic performance still has a great deal of potential to yield very firm returns over the coming years

World Finance: How does the Pakistan capital market compare with other world markets?
Imran Motiwala: Essentially we try to compare ourselves more to competing regional markets; peer markets, as we would put them.

And essentially, we are still relatively cheap compared to our immediate peers, from a price earning point of view, from a dividend yield point of view. With a very firm earnings growth outlook in place. And essentially, I think it’s that attractiveness that has been able to gauge a number of foreign investors looking at Pakistan as a very serious investment avenue. And we hope to see that continue – provided, as we discussed earlier, that the economic reforms with the IMF programme remain intact.

World Finance: Foreign investors own over $3bn of Pakistani equities; so is the Pakistani market still the investment it has been over the previous years?
Imran Motiwala: Definitely. I think that Pakistan… it’s characterised as a frontier market. Obviously when investing in a frontier market compared to an emerging market, there are essentially certain risks involved in investment in such a market that investors assume. And that’s perhaps why they expect a premium return while investing in a frontier market.

And yes: the investment opportunities that we see in Pakistan are still very consistent, as far as our earnings growth are concerned. And I think the overall economic performance still has a great deal of potential to yield very firm returns over the coming years.

And if you compare how Pakistan as a frontier market has performed with other peer frontier markets, you’ll still see that it has very comfortably been able to outperform. And I think that Pakistan is still a very good destination for foreign money, and I believe that the returns will continue hopefully to outperform other frontier markets as well.

World Finance: Well the country does have its problems with political unrest; so how safe a place is it to invest?
Imran Motiwala: What we see in Pakistan today is something that we’ve been seeing for a number of years. It’s a developing democracy, it’s a developing country.

Essentially, people are still in the process of understanding their rights, speaking out about their rights. And we believe that the political opposition parties still have yet to play a role. But this is something that we’ve seen recently.

Needless to say, this unrest is a part of the risk of when you’re investing in a place like Pakistan. Essentially, we believe that the returns more than justify taking that risk.

The more important thing that we need to consider is that this political unrest that we are talking about is essentially taking Pakistan in the right direction: where every institution works within its domain, and hopefully have a more fruitful, and more importantly a more stable, democratic situation in Pakistan than we have today.

[Pakistan is] a developing democracy, it’s a developing country

World Finance: Well finally, what future trends do you foresee impacting the market?
Imran Motiwala: The number of uncertainties that we’ve seen in Pakistan – be it political, be it the war on terror. Essentially the economy has to some extent not been able to perform as well as we would have liked it to. And hopefully, stability on those fronts will not only yield much improved numbers as far as our companies are concerned. But the overall investment environment will improve as well, resulting in hopefully more money being invested in Pakistan from abroad, and giving a better local environment for investors as a whole.

We still believe that while these uncertainties have been incorporated into the prices of various stocks in the market today, these are I think the most important triggers that we’re looking at. I think that a successful IMF programme is something we need. And I think definitely we need another democratic government to fulfil its obligations from a governance point of view, and hand over its reins to the next democratic government.

Essentially, these are the triggers that we definitely have our eye on. And hopefully if we see some stability there, Pakistan as an investment avenue will continue to blossom.

World Finance: Imran, thank you.
Imran Motiwala: Thank you.

Will Russia crush Latvia’s chance of economic prosperity?

Posted on January 16, 2015February 13, 2017 by Ashton Wenborn

At the height of 2008’s global financial crisis, there were many economies that suffered sharp downturns. While much has been written about the economic mess left in the US and UK, other countries endured especially harsh financial collapses. In the post-Soviet state of Latvia – freshly absorbed into the EU just four years prior – the crisis struck particularly hard.

Fuelled by the bursting of a previously booming economy, creating soaring unemployment and the collapse of many companies, Latvia’s economy contracted by a staggering 10.5 percent during the final quarter of 2008. A few months later, the government called for a €7.5bn ($9.36bn) bailout from the EU and the IMF, and nationalised the country’s second largest financial institution, Parex Bank.

Nevertheless, the aftermath of this economic mess has been met with the sort of stable and sustained growth that has been the envy of all the other countries that suffered so badly during this period. By 2010, Latvia’s economy had experienced a recovery and now its GDP growth rate is among the strongest in the EU (see Fig. 1), leading to enthusiastic praise from IMF Managing Director Christine Lagarde.

A large structural deficit accumulated throughout the boom years in Latvia largely defined the severity of the crisis

Could Latvia teach the rest of Europe about how to recover from an economic catastrophe? On a recent trip to Latvia’s capital, World Finance discovered a dynamic economy after years of economic turmoil. However, while there was a sense of cautious optimism, there was also an atmosphere of worry regarding events nearby. The looming presence of Russia to the east, and the scars from Latvia’s time as part of the Soviet Union, means that the country is looking at the conflict in Ukraine with great concern.

Amid the turmoil of the eurozone crisis, it went largely unnoticed that one of the EU’s newest members had chosen to join the embattled currency. When Latvia officially installed the euro as its currency on January 1, 2014, it did so just as the rest of the eurozone was struggling to get back on its feet.

A hugely unpopular decision domestically, the joining of the euro represented yet another important step towards Latvia’s ascension into the EU. Initially joining in 2004, Latvia has sought to bind itself to the EU over the last decade as a means of turning its back on the influence of Russia.

Cash flow
Latvia’s economy, in the immediate aftermath of joining the EU, saw a dramatic upswing in activity. Money flowed into the country as investors sought to harness a region that had previously been closed off (see Fig. 2). Speaking in October at the annual conference of the Bank of Latvia (BoL) – the country’s central bank – the governor Ilmars Rimsevics said that the boom years had led to a structural deficit forming, which in turn caused the crisis of 2008. “A large structural deficit accumulated throughout the boom years in Latvia largely defined the severity of the crisis,” he said. “Experiencing the fastest economic expansion and extremely strong cyclical upturn in tax revenue, Latvia still continued to spend more than it earned. Needless to say, this added extra fuel to the already severely overheated economy. Between 2004 and 2008, expenditure grew two and a half times, and most of that was of a structural nature. While deficits remained moderate in nominal terms, they were extremely large when cyclically adjusted: they amounted to seven to eight percent of GDP. It became widely obvious only with the burst of the bubble. Guess where the extra revenues went? Of course, to a large extent they were used for increasing wages.”

These wage increases, said Rimsevics, severely damaged the country’s competitiveness.

The governor believes that Latvia’s response to the crisis is down to its quick reactions to reform its public finances. “We returned to growth in a few short years because of the policy mix activated at the very outset of the crisis. When cornered, Latvia carried out reforms of public finance management and structural reforms, quickly shifting the economy back into motion and onto the path of growth.”

One of the key milestones in Latvia’s return to economic prosperity was marked with its adoption of the euro at the beginning of 2014 as its currency. Initially, adopting the euro was a deeply unpopular move by Latvia’s government, with many in the country wondering why it needed to stop using the lats that had been in circulation for the previous two decades, in favour of a currency beset with problems. And although adoption has not been without its problems, the euro provided Latvia with a number of advantages in how it deals with the rest of the world, according to the BoL.

A representative of Deputy Governor Zoja Razmusa told World Finance that international SEPA (single euro payments area) credit transfers had been greatly reduced from €7 to just €0.36, while annual savings of €70m ($87.36m) had been made on removing fees for converting lats to euros. The euro had also provided Latvia with the benefits of using the global reserves’ currency in daily settlements, while also removing the risk of devaluation. Latvia’s sovereign debt has also become easier to manage, with the removal of servicing fees, and both Standard & Poor’s and Moody’s have subsequently upgraded its credit rating. The BoL believes that with the right use, the euro can help to boost Latvia’s investments and growth over the long term.

The bank says that the changeover has been largely successful, with people enthusiastically backing the new cashless payment systems that have come about as a result of the euro adoption. Indeed, the amount of cash in circulation in Latvia has halved over the last year.

Burgeoning industry
Alongside this new economic stability has come a swathe of successful domestic companies that are exporting to the rest of the world, contributing impressive figures (see Fig. 3). Joining the EU has helped too, allowing additional funding and concessions to start-ups and businesses looking to expand their operations. The country has developed a burgeoning range of industries in recent years. Widely known for its woodworking sector, thanks to the proliferation of forests, and accounts for 13 percent of Latvia’s exports. It has also seen a large amount of logistics and transport flow in recent years.

Individual manufacturing companies have also grown in recent years. One such company is glass manufacturer Groglass, which has grown to become one of the leading makers of high quality anti-reflective glass in the world over the last decade. Speaking to the company’s Head of Marketing Arturs Rozkalns, it’s clear that Latvia is a good fit for ensuring there is a quality workforce, the legacy of which largely stems from the AS Siderabe research centre that provided much of the Soviet Union’s aerospace and nano technology.

Rozkalns also cites the efficient logistics network and favourable business environment as reasons for Latvia being the home of the company. Part of this is down to the support of the government, he says. “The government has been very supportive, as export-oriented high-value added production is Latvia’s priority for development.”

It is being part of the EU and eurozone that is helping the company get its products to a wider market. “Today, Groglass products are being delivered to more than 40 countries, and of course, being a part of EU, has helped to develop what we have achieved today, e.g., with a help of Latvian Development and Investment Agency, Groglass has received support from EU funds to develop new products and improve production efficiency. Having most of our customers within the eurozone makes it easy to trade without any currency risks or transactional costs”, says Rozkans.

There are even very niche industries in which Latvia is enjoying success, and in direct competition to an industry famously dominated by its former Soviet rulers – caviar making. While Russian caviar is widely regarded around the world, the methods of extracting the eggs from fish has seen bans placed on imports in many western countries.

One Latvian company based just outside of Riga has developed a sustainable form of farming for sturgeon eggs that kills no fish in the process. Mottra Caviar has been warmly embraced by some of the leading restaurant groups and retailers in the West, with well known British chef Mark Hix using their caviar in all his restaurants and high-end department store Selfridges stocking it too.

Russian sanctions
Despite this economic optimism, there are concerns about the future, most notably in relation to the situation with Russia. Latvia’s relationship with Russia has been fraught with conflict and distrust. Swallowed up by the Russian Empire in the 18th century, it briefly enjoyed independence after the First World War, before being subsumed once again by the Soviet Union in 1940. Following 50 years of oppression, civil resistance came to an end alongside the collapse of the Soviet Union in 1991.

Ever since, relationship has continued to be troubled, with accusations of Russian meddling in elections in the Ukraine over the last two decades coming alongside its strong opposition to the Baltic States joining the EU and NATO, which they did in 2004. In 2005, when Vladimir Putin agreed to develop the Nord Stream gas pipeline that passed through the Baltic Sea to Germany, it was seen as an effort to bypass traditional transit countries that include Ukraine, as well as the Baltic States. They see it as an effort to make Europe increasingly dependent on Russian gas, while exerting greater influence on the politics within the east of the EU.

As a result of the conflict in Ukraine, the EU has imposed sanctions against Russia, including on various powerful individuals and state-owned energy companies. However, while it is damaging Russia’s economy, these sanctions will also have an impact on Europe’s too, and the impact of sanctions against Russia on Latvia could be considerable. Moscow is likely to impose retaliatory sanctions on the west, which will likely hurt Latvia harder because of its proximity and the trade between the two countries.

Karlis Eihenbaums, Press Secretary to the Ambassador of Latvia’s Ministry of Foreign Affairs, told World Finance, “According to the information of the Ministry of Economy, the direct impact of Russia’s retaliation sanctions could reach 0.25 percent of Latvia’s GDP. Primary negative impact is on the Latvian farmers and food manufacturing companies, as well as transportation companies related to food supply. At the same time it should be noted that more danger for regional economy occurs from Russia’s own recession. The domestic economic situation in Russia has done more to pull down GDP than any application of sanctions.”

Specific industries might be harmed even more. Back in 2007 the influence of Russia on its neighbours’ economies was shown through the petty way in which it reacted to the removal of a Soviet-era war memorial. In the Estonia’s capital Tallinn, the bronze statue of a Soviet soldier was taken down as it represented to many in the country an example of communist oppression by Russia.

While there were vocal and violent protests by some young ethnic Russian protestors, the move was widely supported by the majority of the country. Putin’s response was to divert Russian merchant ships from Tallinn’s docks, while at the same time heavily investing in domestic Russian ports that would take business away from Tallinn. According to some, Tallinn’s port lost around 60 percent of its business as a result.

In nearby Riga, many fear that similar sanctions against Russia as a result of the Ukrainian crisis will lead to Moscow doing similar economic damage to its growing port. Visiting the growing port of Riga, it is clear that the huge transformation that it being undertaken to modernise and expand could be severely jeopardised by a reduction in the amount of trade with Russian ships.

EU Presidency
With this backdrop of geopolitical tension, Latvia will take centre stage. From the beginning of this year it will hold the position of President of the Council of the EU. Lasting six months, the presidency will see Latvia’s President Andris Berzins shape EU policy at a time when conflict with Russia seems its closest for a generation. While it won’t be the only issue facing the EU during Latvia’s tenure, it will certainly loom large over all the decisions made.

Latvia’s ambassador to the EU told reporters in late November of the country’s priorities going into its presidency. Ilze Juhansone said that the three priorities will be boosting competitiveness, enhancing Europe’s digital services, and fostering greater engagement between members states.

She also talked at length about the current system of sanctions being imposed on Russia by the EU as a result of the conflict in Ukraine. “From our national perspective and also from the EU perspective sanctions are not a policy, sanctions are an instrument, a foreign policy instrument, not a goal. So we have supported sanctions when the EU immediately reacted, but have always also said that if the situation de-escalates, which unfortunately is not the case, we are also ready to look at reducing sanctions.”

Russia hasn’t reacted well to the prospect of Latvia heading up the EU, and in particular statements made by Juhansone regarding propaganda emanating from Moscow. Juhansone had said in November during a discussion with journalists that Russia was lurching back towards the propaganda-driven tactics of the Soviet era. “With the latest developments in Ukraine, we felt a massive increase of propaganda on Russian-speaking channels.”

The government has banned Russian state-television broadcasts in Latvia as a result of the propaganda. “Unfortunately, when I’m looking at those channels, my feeling is that I’m back to the 1980s”, said Juhansone.

Stepping away from Russia, Latvia intends to promote itself as a forward-thinking, modern country, but with a rich cultural heritage. Events planned during Latvia’s six months in charge of the EU include a number of cultural, historical and diplomatic showcases throughout the country. Nearly 200 events will promote the idea of a united Europe, as well as the end of the Second World War, contemporary arts, and social developments as art. Tours and concerts will run throughout the six months, largely based in Riga, and will include contributions by the Latvian National Symphony Orchestra, Latvian Radio Choir, Sinfonietta Riga, and Kremerata Baltica.

Energy surge
With such a heavy reliance on Russian oil and gas, Latvia is in need of diversifying its energy mix. It is looking at boosting various forms of renewable energy, and is Europe’s second largest consumer of renewable energy. Latvia is also enthusiastically supporting calls for a EU Energy Union.

In November, Foreign Minister Edgars Rinkēvičs gave a speech at the Copenhagen Energy Security Dialogues event, where he said that energy was not merely an economic issue for countries, but also a geopolitical one. Citing the problems in Ukraine, he said that a European Energy Union would be a priority of Latvia’s presidency in the first half of 2015. This would mean the building and upgrading of infrastructure between EU member states, and in particular the grid network with the Baltic States. Some of this might come from the huge €350bn ($437bn) fund of investments set out for the EU in the coming years.

Jean-Claude Juncker, the newly installed President of the European Commission, has talked at length about the need for greater cooperation between member states over energy issues, and Latvia’s support for an energy union will have been warmly received.

Juncker said that the recent Transatlantic Trade and Investment Partnership (TTIP) between the US and the EU would be a good starting point for collaboration over energy needs. It’s unsurprising that Latvia would like to see the US relax its restrictions on energy exports, and it is hoped that such a move might eventually allow the US to fill the gap left by continued sanctions against Russia.

Uncertain future
Latvia represents one of the few former Soviet states to successfully embrace the EU and the euro, while at the same time skillfully navigating what was a disastrous financial crisis. As a member of the EU it can teach a lot of its partners about how to deal with massive economic problems and get back to growth. However, the optimism that abounded in Latvia at the start of 2014 was quickly turned to concern over the actions of its domineering neighbour to its east.

While Russia can no longer lay claim to Latvia now that it is part of the EU, its attitude towards Ukraine is quite different. In the coming months, if Russia continues to destabilise the region, Latvia’s economic optimism will take an even greater hit. Its leadership of the EU council should present Latvia with the perfect opportunity to shape EU policy towards ensuring that its interests are taken care of. While a harder line against Moscow could severely harm Latvia’s economy, allowing Russia to further meddle in the region will have much more serious long-term consequences for a country with so much economic potential.

A protester in Kiev. Latvia must be wary of the Russia/Ukraine conflict

Remove profit from crime; stop the violent criminal

Posted on January 16, 2015January 16, 2015 by Ashton Wenborn

World Finance: A lot of people might say that financial crime is nothing compared to violent crime, so surely the government should put more resources in addressing this than constantly banker bashing?
Stephen Platt: A great deal of financial crime underpins or is closely related to violent crime. So whether we take drug trafficking as an example, human trafficking, piracy, all of these are examples of predicate crimes which generate vast sums of money, which are then laundered through the financial services industry and therefore would form what you would define as financial crime. But they are predicate crime types that are committed by incredibly violent individuals who are responsible for a great deal of misery throughout the world. If what we do is take more effective steps to remove profits form those crimes by focusing on the financial aspect, we will see less violent crime.

A great deal of financial crime underpins or is closely related to
violent crime

If we take the drug industry, estimates are that it generates about $400bn a year. If you combine that with other criminal activity, you get to about $2.1tn. It’s a huge amount of money, ultimately controlled through the industry by some of the world’s most violent criminals.

World Finance: So what are your thoughts on illegal activities such as prostitution and drugs being put towards GDP figures?
Stephen Platt: It’s an incredibly difficult thing to do accurately. By definition, most of this is hidden conduct. It’s very difficult, economically they have their own reasons for doing it, but whenever I hear and read about it I’m instinctively uncomfortable with guesstimates of that nature, particularly given my experience of knowing just how well hidden much of the proceeds of that kind of conduct can be within the legitimate economy.