One Challenge Too Many

For a few decades, I have seen data on the death rate of restaurants. A study from The Ohio State University, released in 2019, mirrored the results that I have observed forever. In brief, they found that 60% of restaurants failed in the first year and 80% did not stay open long enough to celebrate their fifth anniversary. Reasons are many but big ones include the owners chasing a dream but not having enough experience in the field and not realizing how hard the job of running a profitable restaurant can be. Also, financial issues dominate led by poor cash flow management.

Today, as the shutdowns of businesses continue due to the Covid 19 pandemic, it appears that many restaurant owners consider this horrible event to be one challenge too many. They have survived previous recessions, blizzards, hurricanes, change in consumer tastes but many much loved dining establishments are closing for good. A restauranteur in the midwest put it to me this way: “Mr. Cole, we tried to do curbside for a few weeks. It went okay, I suppose, but, even with a skeleton staff, we are losing money. Few people are ordering alcohol and that is where are big margins always were. No one wants to hear about my spectacular wine pairings these days when we put  a to-go dinner in their trunk. I am 62 and my wife and I are tired. It is time to go.” Another in the Northeast wrote that most restaurants operate on the edge and, even if you last a while, you are often not super profitable. “Why work 12 hours a day when you will be in a deep hole for at least 18-24 months. My landlord is a decent sort but I have to start paying him soon.”

Others have hinted plus the media has covered that with 25-50% capacity allowed as states “open up” their economies, most restaurants can not make money. Others fear that many regulars (the mainstay of successful independent restaurants) will stay away out of fear of the virus. So, the outlook, always a challenge, is now scary.

Some financial analysts have hit the issue from another angle. There are some very high end restaurants that cater to the wealthy. They have what analysts might call “fortress balance sheets.” They can ride out this unpleasantness not forever but for a long time. The individual restaurants that are unique and perhaps small but part of our lives are really under siege. So some pundits say our choices in dining out in about two years will be the high end who will be a bit bruised but resilient and chain restaurants which have stronger investor backing. Also, it will be harder for dreamers to get funding for a new restaurant as Angel investors will be more gun shy than ever when it comes to funding a dining establishment.

Casualties may also be in places that are not top of mind. The small lunch counters in the backroads of rural America may not reopen. Many faced closure when the talk of a $15 minimum wage was floated a couple of years ago. If such a plan takes hold or something close to it, the little guys in small towns will likely not survive in most cases.

So, there is one thing that we all can do. Each week since the lockdown my family and I have picked a couple of local places that we have always liked. We get a lunch or dinner from them and will continue it for some time to come. These restauranteurs have brightened our lives and survived while most have not. As they face their greatest challenge ever, they deserve our business. So support your favorite local restaurants. If you help them get through this once in a lifetime event, they just may be around when some sense of normality returns.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Greedy Landlords?

I hate to admit it but 50 years ago this week I was introduced to economics by reading a little book by Henry Hazlitt entitled ECONOMICS IN ONE LESSON.  It set me back 75 cents! The paperback changed my life as I shifted from being a history major to an Economics major and I have never looked back. While Hazlitt, a journalist who is widely respected in libertarian and conservative circles was prolific (he lived to be 98), his little book had a different message. Simply put, the one lesson was that most people think only of the immediate effect of government policy actions in the economy and few, especially politicians, think of how their actions effect the long term. The erudite Thomas Sowell of Amherst and Stanford fame, expanded on the argument in a brilliant but much heavier book entitled APPLIED ECONOMICS. I recommend both highly.

Okay, what does that have to do with our title of greedy landlords? A lot. Our friends in the media continue to do slice of life stories about people suffering horrible economic conditions due to the pandemic. Some are heart wrenching and the stories need to remain front and center to the national dialogue during an election year. To their great credit only CNBC, our leading business cable channel, has effectively expressed how small time real estate operators better known as landlords are also in a terrible bind.

When one hears the term landlord most people conjure up the presence of an older person who is very affluent or wealthy with dozens or hundreds of rental homes or apartments. While they exist and most are fair sized corporations, several million landlords are basically what I would describe as bootstrap entrepreneurs. They may live in a duplex and rent out the upstairs to a tenant who helps them pay for their home. Or, they may have a small apartment building with six to 10 rental units. Almost all are leveraged unless they have held the properties for 15-20 years. So, what is happening to these greedy millionaires? Many are in a spot not dissimilar to many of their tenants. If you have a 10 unit apartment building, you easily may have a million dollar mortgage on it depending on its location.
If your tenants, who have been legally excused from paying rent for a few months, do not pay as many are out of work, you still owe the bank the mortgage payment.

A small player in central California who has read MR for years put it to me this way: “Don, for the moment, I am really lucky. I have 10 tenants. Two are in small bungalows and eight are in my apartment building. Only two have not paid rent the last two months. One honest young woman came to my office and paid her May rent saying that with her $600 weekly bonus in federal unemployment pay, she is more flush than when she is working. She could have not paid for a while but has earned my everlasting respect. Many times, I have vacancies and repainted or repair a place after a tenant leaves so missing two payments for a few months will not kill me. Yet, I still to have pay my real estate taxes at the end of June and, so far, our county has not offered any delay in payment. I have been doing this for 30 years so I know dozens of small real estate players across the state. I even mentor some of the young ones. They are really in a bind. One wonderful 35 year old immigrant has eight properties. All of her tenants have lost their jobs and no one is paying her. She does not have the kind of relationship that I have with my community bank and is getting hassled. She is a complete wreck even though she is the hardest working and most resourceful person that I have ever met.”

There is another shoe to drop as time goes on. Let us say the country opens up and many of these tenants get their old jobs back. Remember, a few years back when the Federal Reserve published the now famous report that more than 40% of American households could not readily pay for a $400 auto repair bill or an emergency room visit? The Fed was telling us that a huge minority of Americans were living on the edge. They were a paycheck or two from being close to homeless. So, assume many of the renters get their jobs back after a four month hiatus from paying rent. They still owe the rent and the landlords still owe the bank for their mortgages and the counties for their real estate taxes. If people were fighting to pay their rent PRIOR to the pandemic, how will they be able to come up with the money to pay the back rent. Most landlords will stretch out the payments to be sure but if you were living hand to mouth before the crisis, can you afford an extra $150-200 per month in rent once work resumes. Am I exaggerating? Well, Fed chair Jay Powell rattled markets a few weeks ago when he stated that 40% of persons earning less than $40,000 per year were currently unemployed. A few will take their extra unemployment compensation and $1200 recovery checks and be very disciplined about using it. Many, not used to such a cash infusion, will likely not plan properly for a “return to normalcy.”

So, I did not post this to defend landlords. I am not one and have never been one. My point is that the media, with few exceptions, have done a poor job to date, of really examining the ripple effect that the pandemic is having on many people whom you may think are sitting pretty.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Media in the Era of Coronavirus

Since most of the readers of MR are sitting at home, I thought it best not to comment over the last few weeks about the impact of the Coronavirus on the media world. Now seems as if it is an appropriate time to make a few observations.

Here goes:

1) Clearly, conventional over the air TV is generating higher ratings. Some broadcasters, invariably in smaller Designate Market Areas (DMA) have written to me with a certain amount of breathless excitement. They think that the newly acquired viewing that they have over the last month will be “sticky.” People will enjoy local news and weather and come back to over the air TV. I try to be kind in my replies but I just do not see it. A big problem many local stations face these days is the lack of car sales. With millions out of work and more millions sittingat home, car sales at a standstill and dealers are not advertising. In some DMA’s, it is not unusual for car dealers to be 40% of a station’s revenue in a given month. Yes, broadcasters in certain markets will get a nice boost in the second half of the year from political spending, but things will still be tough.

2) The streaming services are getting great usage and trial. Netflix reported an eight figure jump in global subscriptions in figures released early this week regarding first quarter performance. Many have e-mailed me saying that they are binge watching series after series that were on their “to do list.” A lady in Spain wrote to me that she felt guilty about letting her children watch so much video but it kept peace in the family.  Speaking of Spain, Disney + had an impressive launch in several Western European countries in late March. On day one, some five million people downloaded the Disney + app. Clearly, Disney as a company is taking it on the chin with movie theaters empty, theme parks and cruise ships closed, and ESPN now posing as ESPN Classic 24/7. Long term, Disney + should gain faster traction than projected earlier due to the global lockdown. Corporate earnings of Disney may be down for a couple of years, however.

3) The pipeline of program content is getting empty as production is shut down around the world. Disney and Netflix with their extensive libraries have something to offer. Rumor has it that some smaller movie producers have approached Netflix to offer their new films to them as they do not know when they could get theatrical release. Amazon Prime could buy the rights to certain series and films as they have deep pockets.

4) Quibi TV—this mobile only service has gotten off to a hot start with 750,000 subscribers in the first few days. They may have a severe pipeline problem as their content tends to be in 10-12 minute segments. We wish then well.

5)) What about sports?  This is a big one and not just in North America. Sports starved readers have been emailing me from all over the globe. One fellow told me it was fun to watch the Golf Channel cover tournaments from many years ago for several days. Now, many people crave some live action. Baseball fans have lamented that it was not April without opening day and I agree. A few people have told me that sports will not do as well when societies open up as people will have found new outlets to spend their time. I do not see that happening. Pent up demand with be great. Fans may not visit their favorite event or hometown stadium for a year or so but they will be glued to the tube across the world.

6) Newspaper—as critics mount about the ham handed approach of some politicians toward the crisis, major papers such as The New York Times, Washington Post and The Wall Street Journal have for sure generated more readership. Whether this sticks and lasts into 2021 is iffy at best.

7) Radio—probably getting a bit hurt as millions more people are at home and using video for their media preference. Little in car listening these days.

In future weeks, I will fulfill reader requests that I address what might happen as the economy in North America opens again.

Until then, stay safe, my friends.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Update on the Global 1%

As markets are in turmoil with the spread of the coronavirus, many of us have a bit a time to put things in perspective.

The World Inequality Database recently released data on what it takes to be in the top 1% of annual income in many countries around the world. The results were a bit surprising and here is how things fall in a number of countries:


NATION INCOME NEEDED TO BE IN TOP 1%*


India $77k
Italy                                 169
Canada                             201
France                              221
United Kingdom              248
Bahrain                            485
UAE                                 922
China.                               107
Brazil.                               176
South Africa.                    188
Australia.                          246
Germany.                          277
United States.                   488
Singapore.                        722

Source: World Inequality Database, 2020

*all figures in US dollars

In the U.S., the top .1 (one tenth of one percent) earned approximately $2 million while the .001 earned an eye-popping figure close to $10 million

Surprised by these numbers? I thought that Canada and Germany would be somewhat higher but was not surprised by low population countries in the Middle East nor Singapore, long a high growth country in Asia.

As we have often written, there will always be some measure of inequality in free market nations but it seems to be cresting right now. When I can get clear data on median income for these nations plus wait for the fallout to settle from the pandemic, I will update this information and provide more detailed comments.

Meanwhile, stay safe my friends.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

The Streaming Wars--Conclusions

This post will conclude (at last!) our series on The Streaming Wars


When you look at the media landscape, most of us who analyze the streaming arena come to pretty much the same forecast—Netflix and Disney will likely be the big winners when the smoke clears in five years or so. Here is how I have come to that conclusion:


1) Netflix is without question the global leader in both usage and content in January, 2020. RBC Capital (Royal Bank of Canada) projections are that 95% of their subscriber growth will come from OUTSIDE the U.S. going forward. They still may add two to three million per year in the U.S. but the explosive growth will come from overseas. Also, they are developing original content (programming) in many languages and with interest to people in far flung places around the globe. For the foreseeable future, Netflix has won the streaming war if you look at the company from a global perspective. They do have one big problem and that is that producing the tremendous amount of quality content they air each year costs a great deal of money. Last year, they were said to have spent $12 billion and some of that was borrowed. At some point, their new competitors with deep pockets such as Apple and Amazon might be a white knight and form an alliance with them. Apple would be a great partner as would Alphabet. They could provide endless financial resources and let Netflix produce world class content. If we ever go in to a global economic downturn, this might happen faster than you think. Netflix is a wonderful service but they may have to blink if competition gets fierce and money gets tight. Remember, as more financial powerhouses enter the streaming space, it will be very expensive for Netflix to bid for old TV series and films and even to produce new content. Also, and very importantly, when Netflix had streaming largely to themselves, they had pricing power. This is no longer the case so they need to grow even faster to cover their production commitments and still make money.

2) Disney is the global leader in entertainment. Their streaming service is off to a fine start but, on a worldwide basis, they have a long way to go to catch Netflix. They should get significant traction in the U.S. with their inexpensive trifecta package consisting of Disney +, ESPN + and Hulu in the U.S. Their movie studio continues to grind out blockbuster films and the merchandising profits from their franchisees are significant. Remember that they have been realistic about Disney + growth projecting that they may not see a profit until 2025. Disney is in the game for the long term but they will not kill off Netflix even though they have a lot going for them. Also, don’t forget Hulu.

3) Amazon is now the world’s leading retailer. They have positioned  Amazon Prime Video as “free” with an Amazon Prime subscription. Content is improving each year and they can buy up the rights to a great deal of high quality content if they wish. A relative handful of people get Amazon Prime Video on a subscription basis but are not Amazon Prime members. As Amazon Prime expands overseas in the next few years, their now small video division may get a real lift.

4) Apple’s foray into streaming does not make huge sense to me. They have some big names and billions to sink into content although, to date, not much is there. As written in earlier posts they have HUGE cash balances that they can deploy in to developing or buying content. So, they can do what they want. When I think of them re streaming, I wonder about Warren Buffett’s famous comment about sticking to your “circle of competence.” Why are they doing this? However, when the inevitable shakeout occurs in the space with 24-36 months, Apple could buy their way in by purchasing struggling smaller services or even an elephant such as Netflix.

5) Cable has to be in a bad spot looking ahead. Every month, thousands of American households “cut the cord.” As people analyze the new offerings, you can receive Amazon Prime Video, Netflix and Disney + for around $21 per month. Add Apple and maybe HBO and you are still under $40. Cable defenders tell me it will be hard for Disney. They are not used to service. What if they do not get billing right? What if there is a service issue with transmission? Are they equipped to respond? That is truly the pot calling the kettle black? How many of you have been tickled with the service you received from Time Warner and Comcast over the years? Disney is a mega-company. They can handle billing and will learn quickly how to best deal with service issues.

I have also been told of a straw in the wind as streaming services are gaining ground. Reputedly, some 500,000 Americans have over the last few years purchased a TV with rabbit years and a basic antenna. So, if they cancel cable and put together their customized package of streaming venues, they can get over the air TV as well. Apparently this has some appeal and there is no monthly bill. It this turns in to a trend, it may gallop modestly at some point. Cable would really get hurt. People have learned that they do not need or use 250+ channels. Streaming services give them content and that is what they want. Why spent $150 per month for cable when you can get the streaming services that you want for $20-40 per month and you still would not have time to digest all the good content? Also, whenever the next recession occurs  a number of people who will be struggling may cancel cable but still have significant entertainment options by subscribing to a few streaming services for a fraction of their then cable bill. They may never go back.

6) ROKU—their long term hope to me is to be a server for competing services. One stop shopping has lots of appeal.

7) Over the Air TV—the slow death will continue. The reversion back to rabbit ears will not be done by everyone and young adults are addicted to streaming and are deep in to commercial avoidance.

8) Minor players—consolidation will take place in a few years and programming will shift over to the majors. Some sports channels may move from cable to a successful streaming king.

So, Netflix and Disney look like good bets although Netflix may be short on cash at some point. Amazon, Apple and Alphabet (Google) have the money to do what they want for a long time and AT&T’s new HBO entry may survive as well.
The consumer will have a field day sorting through the options and financial people will do some sharp figuring sorting through the rubble of failed streamers and seeing what can be salvaged.

It is going to be very interesting and fun to watch. As Yogi Berra allegedly said, “The future ain’t what it used to be.”

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

The Streaming Wars--Part V

Special Situations

If you take a look at the whole cavalry charge of players that is unfolding in streaming it is clear that several large players have the best chance of surviving and ultimately winning. Yet, there are a host of other players out there who are worth a look or may go the distance when consolidation occurs in the space in a few years. Today, we talk about a few of these players:

Roku

This is a both a hardware company and content platform. They provide some free content from the internet and also take some advertising and have subscriptions. They serve the majors such as Netflix and Amazon Prime plus have a modest service called Roku TV and well as sell actual TV boxes. The service could thrive if they can maintain relationships with the major providers—their low cost may have appeal to the likely wave of cable“cord-cutters” to come.

Quibi TV—this was profiled quite a while back in MR (see update on Quibi TV--MR, 5/30/19). Available only on mobile phones this spring, they will provide some original video content in “bite size” offerings of 12 minutes or less. The assumption is that it will be a go-to place for millennials and those on the move in the course of a day. Have strong management team led by Meg Whitman and Jeff Katzenberg. Here is the link to a 1/8/20 interview on Bloomberg TV—https://www.youtube.com/watch?v=3B0Of5XV7no

My bet is that Apple TV Plus, Disney, or Amazon Prime will gobble this service up if it clicks.

IMDB TV—somewhat quietly owned by Amazon, this contains some original programming and it’s FREE!

You Tube TV—You can view live TV here and over 70 channels from parent Google. This is not cheap—$49.99 per month at present

Acorn TV—a personal favorite with a nice mix of British and international shows, some of very old vintage. Has narrow appeal but only $5.99 per month.

There are dozens of others that are free, sports oriented, or with very narrow breadth of content. Candidly, the average consumer will have a hard time sorting them all out which may help a non-controversial carrier such as Roku that can offer several for one stop shopping.

Next up—Conclusions

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

The Streaming Wars--Part IV

The Financial Giants

As the streaming wars heat up, the obvious question is what will some of the greatest companies in history do? Perhaps not as obvious, but still important, is why are they are getting involved?

Let us take a look at several of the emerging players in streaming who are not pure entertainment companies:

1) Amazon—The success of the massive on-line retailer made founder Jeff Bezos the wealthiest man in the world recently. Why would a retailer get in to streaming video? Not easy to say from my perspective. Sometimes Amazon Prime Video is positioned as a free service that you receive with your Amazon Prime subscription. That certainly would have some real appeal especially with younger audiences who depend on Amazon for some much of their shopping needs. Also, if you have been following it at all closely, the service is improving quite rapidly. Some videophiles that I know gave it low marks a couple of years ago but now say it has improved. The made for Amazon films and original programming are also getting stronger and more interesting. By positioning Amazon Prime Video as a “perk” for Amazon Prime members, the retail giant has reinforced their reputation for one stop shopping. And, they can afford to get some of the best content out there if they want it. The service is “free” with Amazon Prime membership but a few prefer to get it freestanding for $8.99 per month to see award winning content such as “The Marvelous Mrs. Maisel” or “Fleabag.”

2) Apple—As alluded to in early posts, I was more than a bit surprised when Disney honcho Bob Iger resigned from the Apple board and then Apple announced Apple TV Plus at $4.99 per month. The tech/hardware giant is reportedly spending more money than Disney right now on new programming although admittedly they are starting from zero. They signed big stars, Jennifer Aniston, Reese Witherspoon, and Steve Carrell for “The Morning Show” which received lukewarm critical reviews and Oprah is returning with her book club now and then. Steven Spielberg will be a creative consultant. They have the cash to play the long game if they choose. Right now, the content available is thin. That can change fast if they get out their checkbook.

3) HBO MAX—now owned by debt laden AT&T, HBO is not going away but getting deeper and maybe stronger. They are keeping HBO but adding new series. A sequel to “Gossip Girl” will be featured and “Sesame Street” and “Friends” will be on board as well. HBO got it right for decades. They produced several good, some outstanding series per year. The programming developed a big following (people still talk about The Sopranos and Sex in The City). It will be interesting to see what happens as they branch out. Set for a May launch, HBO MAX will be $14.99 but their will be a free year for some AT&T users. Do not play them short.

4) Alphabet (Google)—the kings and queens of search have owned YouTube for nearly a dozen years. They have not done much with it except for a few tepid tests. You Tube gives them a powerful platform to launch a streaming service (Google Tube + ?). Also, as we write, they have surpassed Apple in net free cash at over $105 billion (Apple has been buying back shares with both hands in recent years). With You Tube in place, they have a global and much loved platform plus record cash to enter the streaming game in a big way.

5) Peacock—set for a Spring, 2020 launch, this NBC Universal service (a division of Comcast) will be advertiser supported. It will have new versions of “Battlestar Galactica”, “Saved by the Bell” and “Punky Brewster”. Remember “Punky Brewster”? I used to watch it with my kids in the 1980’s. What I remember the most is that it was opposite “60 Minutes” at Sunday nights at 7 pm EST. “The Office” is shifting back from Netflix. Pricing has not been announced yet.

Okay, people say to me that Sports will save legacy properties for a number of years. Really? Does the NFL care who pays their rights fees as long as they are huge? As a viewer, would you watch the Super Bowl with commercials on You Tube? I think that I know the answer. Someone listed above with deep pockets can easily jump in to sports. Disney, of course, has experience with ABC and ESPN.

All of these players have the financial wherewithal to play the streaming games for either several years or forever.

More to come. Stay tuned in early 2020!

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com