Categorized | happenings

The Roundup September 7

Slot machines free stock photo
It now costs less to lose all your money.

Even sin is discounted in this recession.

Vegas’ ability to weather previous declines made it seem recession-proof. No longer. The carnage left by the economic downturn that began last year is unlike anything this town has seen. . . .

Room rates on the Strip are so steeply discounted that the top resorts will put you up today for the same price that downscale hotels charged two years ago.

At the Encore, which Vegas impresario Steve Wynn opened in December as an extension of his luxe Wynn resort, some customers were offered two-night stays this summer for $99. For some nights this fall, promotional rates as low as $90 are being offered at Bellagio, a premier Strip hotel where rooms customarily can reach $500 or more.

Some of the city’s top gourmet restaurants have offered half portions for (not quite) half price during slow times of the day. Cirque du Soleil, the acrobatics juggernaut that dominates the Strip with six shows, has done something that veteran Vegas watchers find more mind-blowing than anything it presents onstage: It’s knocking as much as 40% off ticket packages for two.

(“Luck runs out on Vegas boom,” Los Angeles Times, September 7) Vegas strip hotels are now claiming that they’ve got occupancy past the 90% mark, but they’ve done it by giving away the store. The Bellagio at $90 a night is, well, staggering. The best way to understand the economics and business of Vegas is that it is one giant real-estate/gambling/entertainment Ponzi scheme. The whole system depends on building — producing more residential and hospitality inventory — which means attracting more visitors and real estate purchasers. It’s been estimated that Vegas needs to attracted almost a quarter million new visitors every year just to keep up with the increases in hotel/motel inventory. The value of each visitor is largely determined by the amount of money they’re willing to flush down the toilet — excuse me, gamble away at the slots and the tables. As long as both those numbers — visitors and the amount of money they’re willing to throw away for no good reason — goes up, the Ponzi scheme pays off. When one contracts, then people start losing money. When both contract, it’s a perfect storm.

A trip through the hinterlands of Vegas has a surreal quality as you drive through developments that have roads and even road signs, but no houses, driveways, or lawns. Perfectly laid out little community. Roads and dirt, like some phantom artwork at Burning Man. Something, I’m telling you, has changed. It’s rare that sin is significantly affected by business recessions. When even sin industries are offering discounts, you know you’re in trouble. Now that Vegas is hurting, the only sin canary left in the mine is the porn industry. When they start discounting, it’s time to panic.

If the U.N. really wanted to give Michelle Bachmann a stroke, they could have waterboarded her with butter and cinnamon rolls. I guess this is just collateral damage.

The dollar’s role in international trade should be reduced by establishing a new currency to protect emerging markets from the “confidence game” of financial speculation, the United Nations said.

UN countries should agree on the creation of a global reserve bank to issue the currency and to monitor the national exchange rates of its members, the Geneva-based UN Conference on Trade and Development said today in a report. . . .

Emerging-market countries are underrepresented at the IMF, hindering the effectiveness of enhanced SDR allocations, the UN said. An organization should be created to manage real exchange rates between countries measured by purchasing power and adjusted to inflation differentials and development levels, it said.

(“UN Says New Currency Is Needed to Fix Broken ‘Confidence Game’ ,” Bloomberg, September 7) Regular readers of this blog know better than Rep. Bachmann, with her multiple Ivy League PhDs in economics, global trade, and finance, how reserve currencies work. If you want to pain yourself with the economic details of reserve currencies, feel free to follow that last link and make yourself at home. But without going into details, decisions about global reserve currencies and how they are priced in financial markets do impact small businesses and start-ups. In general, as more countries rely on some other currency — it doesn’t matter which — other than the American dollar, import prices here in the U.S. will increase slightly. That includes the prices for services, such as outsourcing software development.

Currently, about 65% of global reserves are held in American dollars, as opposed to some other currency (the number two reserve currency is Euros, accounting for 25% of reserves). If all those reserves currently denominated in American dollars were replaced by some other currency, then we’d see significant — not painful, but significant — increases in import prices, including outsourced services. So these decisions will affect an outsourcing/offshoring business model.

Redbox is changing the Hollywood game . . . are you taking notes?

Redbox’s growth — it started with 12 kiosks in 2004 and now processes about 80 transactions a second on Friday nights — has Hollywood’s blood boiling. Furious about a potential cannibalization of DVD sales and a broader price devaluation of their product, three studios (20th Century Fox, Warner Brothers and Universal) are refusing to sell DVDs to Redbox until at least 28 days after they arrive in stores. . . .

Redbox and its vending rivals now have 19 percent of the rental market, compared with 36 percent for rent-by-mail services (Netflix) and 45 percent for traditional stores, according to the NPD Group, a market research company. NPD estimates that vending will grow to a 30 percent share by the end of next year, at the expense of traditional stores.

(“Movie Studios See a Threat in Growth of Redbox,” New York Times, September 7) The competitive model is simple. Traditional DVD rental involves paying wholesale for the disc ($25), paying immense amounts of overhead (building, staff, computers), and pocketing any money left over from the rental. Typically, if you rent a disc at Blockbuster, 80%-90% or more of a DVD rental pays for fixed costs (building, property taxes, insurance, and corporate staff) and variable costs (staff, utilities, benefits, insurance). So if you rent a video for $4.99, probably four bucks or so is just paying for the privilege of renting that DVD from Blockbuster. Even so, the $4.99 price tag set a value on movies, a value that made the $25 price of the disc reasonable. You can rent for five bucks or own for 25 bucks, a five-fold multiple.

Here’s the Redbox advantage: they eliminate most of that overhead. No store, no property taxes, no staff, no benefits, little insurance, much reduced corporate staff — you don’t need things like HR, after all. Just the cost of making deals, amortizing the cost of the vending machines, stocking them, and a tiny dollop of insurance and corporate staffing. So they don’t need to charge $4.99. They can charge a buck for a one-day rental and profit just as handily as the video store with all its lazy staff and carbon-spewing sodium lighting. Redbox’s model: buy the DVD ($25 bucks), pay almost no overhead, pocket almost all the money people pay to rent after, oh, about 25 or 26 rentals of the disc.

But here’s the problem. The $1 Redbox rental substantially increases the multiple to own. You can rent a new DVD for $1 or own it for $25, a twenty-five fold multiple. This changes the dynamic of consumer choice: you can watch twenty-five movies if you rent or watch a measley one movie if you buy. Which means that every movie you buy should be one that you’re going to watch at least 24 times (my toddler has made me sit through Wall*E some 70 times now, so that was a good purchase).

That’s why studio executives are positively bilious over this one. But, if you’re an independent filmmaker, Redbox has added one more arrow to your marketing quiver. If you try to deal with the studios as an independent, Redbox is one more reason they’ll say no to you. But if you go it alone, Redbox is one more tool to build the success of your film.

If, however, you’re inclined to pity the video store owners, don’t. This is how economies and innovation work. Every industry is a horse-and-buggy story ready to happen (and this, by the way, includes industries like video rental kiosks, which shall, alas, see their horse-and-buggy days, too). And who can argue with a lower price while reducing the immense carbon footprint of video stores?

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