Category: Business

The Profit Calculator

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Michael Idov:

You can’t live in New York—arguably, you can’t spend an hour in New York—and remain oblivious to the machinery of profit pumping away under every surface. This city makes money, loses money, houses money; lately, with luxe condos stacking up like casino chips along the waterfront, the city looks like money. What’s amazing, then, is how little we truly know about the inner workings of this beast we feed, and milk, daily: How does New York make its money?
Every company setting up in the city finds itself plugged into its myriad historical, cultural, and regulatory quirks. The biggest one, of course, concerns our island’s most precious commodity and its most enduring obsession: real estate. New York businesses live and die by the rent; if you’re a retailer leasing here, “making the rent” becomes the yardstick of solvency. The unofficial golden rule of restaurants dictates that the rent be made in a week and take up no more than a quarter of revenue. The bar version of the rule is even simpler: The rent should equal your Friday-night take. With each year, another company succumbs to the strange realization that where it sits may be more valuable than what it does. Even Macy’s, that icon of consumerism, may be worth more as a building than as a store. We’ve picked a disparate cross section of New York institutions and examined their inner workings. Some are nonprofits (a soup kitchen, a private school), some are not profitable (a fledgling yoga studio, the Yankees—at least on an annual basis), and at least one, Goldman Sachs, is stratospherically lucrative (though a lazy meth dealer ekes out a higher margin). A note: Where companies wouldn’t provide figures, our estimates are based on analyst reports, tax filings, and interviews with former and current employees.
We also asked Edward Glaeser, a pioneering urban economist at Harvard, to analyze the New Yorkonomics of the businesses we profile. His insights are in italic. Glaeser is an expert in how New York’s great density makes our lives—and livelihoods—hugely dependent on one another. We’re all plugged, at different entry points, into the same awesome web. A failing restaurant keeps a printer in the black with its incessant flyering. The sex-toy market rises and falls with the consumer-confidence index. An eight o’clock Nobu reservation provides a cabdriver with his golden hour. And everyone—everyone—is cursing the rent. Except the landlords.

Interesting.

Shattering the Bell Cure: The Power Law Rules

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David Shaywitz:

Life isn’t fair. Many of the most coveted spoils–wealth, fame, links on the Web–are concentrated among the few. If such a distribution doesn’t sound like the familiar bell-shaped curve, you’re right.

Along the hilly slopes of the bell curve, most values–the data points that track whatever is being measured–are clustered around the middle. The average value is also the most common value. The points along the far extremes of the curve contribute very little statistically. If 100 random people gather in a room and the world’s tallest man walks in, the average height doesn’t change much. But if Bill Gates walks in, the average net worth rises dramatically. Height follows the bell curve in its distribution. Wealth does not: It follows an asymmetric, L-shaped pattern known as a “power law,” where most values are below average and a few far above. In the realm of the power law, rare and extreme events dominate the action.

For Nassim Taleb, irrepressible quant-jock and the author of “Fooled by Randomness” (2001), the contrast between the two distributions is not an amusing statistical exercise but something more profound: It highlights the fundamental difference between life as we imagine it and life as it really is. In “The Black Swan”–a kind of cri de coeur–Mr. Taleb struggles to free us from our misguided allegiance to the bell-curve mindset and awaken us to the dominance of the power law.

Used Cars Rule

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Steven Lang:

Every year over ten million vehicles pass through U.S. auto dealer auctions. This decades old free market has always been dependent on you, the consumer. Dealers will bid up those models that are popular with buyers, while those with a limited audience are stuck in what’s commonly called ‘wholesale heaven’. This is a place where thousands of unappreciated and unloved models go until the market dictates otherwise. Over the course of time, consumers dictates the winners… and the losers.

Over the last few years, The Big 2.5 have been downsizing their domestic production capacity to match falling demand, and compensate for their decision to wean themselves from low-profit fleet sales. Enormous assembly plants that once produced hundreds of thousands of new vehicles are now shuttered. The theory: as production sinks, new car prices will eventually hold firm and profits will follow. Unfortunately, the latest patchwork of new product has already come apart, and th

State ready for energy research lab

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This column by Tom Stills, president of the Wisconsin Technology Council, ran in the Stevens Point Journal:

A joint proposal was filed Feb. 1 by the UW System, UW-Madison and Michigan State University to open a federal energy research lab in Madison. Molly Jahn, dean of the UW-Madison College of Agriculture and Life Sciences, has described the proposal as a strong fit with faculty, staff and student projects related to bio-energy. Those projects are taking place in disciplines that encompass biology, agriculture, engineering, natural resources and the social sciences. . . .
It will be months before the next phase of the federal selection process begins, but the collaborative effort should merit a hard look in Washington. If Wisconsin is successful, it could mean several hundred jobs and tens of millions of dollars within five years.

Airlines Learn to Fly on a Wing and an Apology

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Jeff Bailey:

Airlines are getting serious about saying they’re sorry.

After a spate of nightmarish service disruptions, American Airlines, JetBlue Airways and others are sending out more apologies, hoping to head off customer complaints and quell talk of new consumer-protection regulations from Congress.

But no airline accepts blame quite like Southwest Airlines, which employs Fred Taylor Jr. in a job that could be called chief apology officer.

His formal title is senior manager of proactive customer communications. But Mr. Taylor — 37, rail thin and mildly compulsive, by his own admission — spends his 12-hour work days finding out how Southwest disappointed its customers and then firing off homespun letters of apology.

Fascinating look at Southwest Airlines’ culture. I hope they fly into Madison soon.

Wake-up Call

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Niall Ferguson:

AT AGE 42, NIALL FERGUSON HAS BECOME one of the world’s most famous and provocative historians, with high-profile posts ranging from Harvard to Oxford to Stanford University’s Hoover Institution. Born in Scotland and educated at Oxford, he is not only a prolific author of books, including Colossus (2004), an examination of American empire, and The War of the World (2006), a study of World War II, but a media star with a weekly newspaper column and numerous television projects. Ferguson also has developed a growing fan club on Wall Street and in British financial circles, where he has stressed in speeches that investors are too complacent about geopolitical risk, notably growing instability in Iraq and elsewhere in the Middle East.

Geopolitical issues and economic history are Ferguson’s specialty, and he approaches both with uncommon intelligence, style and vigor. His rightward-leaning views have been embraced by those who believe that the American empire can and should be a force for good in the world. Some on the left have attacked him, perhaps unfairly, as an apologist for imperialism — Britain’s in days of old, and the American strain that critics charge has mired the U.S. in Iraq. In a recent column, reprinted in the Chicago Tribune, Ferguson berated Democratic presidential hopeful Barack Obama, “with his melting-pot roots and his molten-hot rhetoric,” for calling for a withdrawal of U.S. forces from Iraq by March 2008, in the misguided notion it would hasten a peaceful solution to that nation’s “internecine conflict.”

Amplifying this theme, Ferguson told Barron’s that America’s speedy departure likely would transform Iraq into “as violent and unstable a place as Central Africa was in the 1990s.” An ardent supporter of Britain’s former prime minister Margaret Thatcher, he is about to be named an adviser to Republican presidential candidate John McCain.

FERGUSON IS FASCINATED by what he calls the “paradox of diminishing risk in an apparently dangerous world.” By that, he means ebullient global stock markets and record-tight yield spreads between risk-free U.S. Treasuries and junk bonds and emerging-market debt. He also cites declining volatility in stock, bond and foreign-exchange markets, and an abiding faith in the ability of the Federal Reserve and other central banks to rescue the investment community from any potential financial crisis. Although the global stock-market selloff two weeks ago wasn’t spurred by geopolitical events, it validated his concern that investors have willingly downplayed risk.

2006 Letter to Shareholders

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Warren Buffett [pdf]:

Our gain in net worth during 2006 was $16.9 billion, which increased the per-share book value of both our Class A and Class B stock by 18.4%. Over the last 42 years (that is, since present management took over) book value has grown from $19 to $70,281, a rate of 21.4% compounded annually.*

We believe that $16.9 billion is a record for a one-year gain in net worth – more than has ever been booked by any American business, leaving aside boosts that have occurred because of mergers (e.g., AOL’s purchase of Time Warner). Of course, Exxon Mobil and other companies earn far more than Berkshire, but their earnings largely go to dividends and/or repurchases, rather than to building net worth.

All that said, a confession about our 2006 gain is in order. Our most important business, insurance, benefited from a large dose of luck: Mother Nature, bless her heart, went on vacation. After hammering us with hurricanes in 2004 and 2005 – storms that caused us to lose a bundle on super-cat insurance – she just vanished. Last year, the red ink from this activity turned black – very black.

In addition, the great majority of our 73 businesses did outstandingly well in 2006. Let me focus for a moment on one of our largest operations, GEICO. What management accomplished there was simply extraordinary.

Some Good Reasons for Governments NOT to invest Taxpayer Money in Schemes

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Richard Aboulafia:

Finding Two. If a state plays this game it quickly reaches an absurd level. Just after the LoPresti micro-triumph New Mexico announced a $100 million investment to build…a spaceport (I really wish I was making this up). This will service Richard Branson’s Virgin Galactic and is obviously a necessary subsidy, because Branson, for some reason, has no cash. (See the December 2005 press release at http://ww1.edd.state.nm.us. Title: Richardson Announces $100 Million Commitment to Build World’s First Spaceport. Implicit subtitles: “Private Sector Baulks At Risky Project; We’re enlisting New Mexico Taxpayers To Provide Generous Help” and “Hooray! We’re Morons!”). Today, Kansas and Florida. Tomorrow, Low Earth Orbit. Who can stop New Mexico from operating like an aerospace banana republic? In search of good government I asked my friend Jeff Schwartz what could be done. Jeff is one of the smartest government guys I know, and he works for the Appalachian Regional Commission, which funds development work in states in their jurisdiction. “We’re on it,” he reassured me, referring me to their code (http://www.arc.gov/index.do?nodeId=1242#chap8). The ARC prohibits its money from going to “(A) Any form of assistance to relocating industries; (B) recruitment activities that place a state in competition with another state or states; and (C) projects that promote unfair competition between businesses within the same immediate service area.”

Brenda Konkel recently wondered about the City of Madison’s $700K loan to Tomo Therapy. Generally, I think governments should stay out of this. We’re all better off if they spend time simplifying processes, taxes and paperwork.