In the near future, TV is going to be available anywhere, on any device, at any time. Just don’t expect it to be free.
That’s because of the big, unanswered question being asked by networks, cable companies, advertisers and technology providers: How do we make money from it?
Viewers are already taking full advantage of online television. Broadcast networks make many of their shows available on Web sites like Hulu and YouTube a day after they air, and many cable stations also put their shows on the Web.
In December, more than 178 million Americans watched TV online, streaming 33 billion shows, according to online data tracker comScore.
But the business model for free Internet television doesn’t work yet. Networks can’t get advertisers to pay the same as they do for broadcast and cable TV, and networks and cable providers are reluctant to lose their mutually beneficial partnerships.
In the traditional TV model, networks get paid tens of billions of dollars by advertisers and billions more in retransmission fees by cable and satellite providers. Satellite and cable providers get paid in subscription fees by customers.
The free Internet TV model cuts out the middle man: Networks post their content directly online and advertisers pay for the right to place their ads on the Web site and within the video. Satellite and cable providers aren’t part of the equation, and networks lose out on their licensing fees.
Advertisers hesitant to join in
The loss of revenue from cable and satellite companies isn’t the only reason why free Internet TV isn’t working yet. Advertisers remain coy: Broadcast and cable TV advertising is a $70 billion a year business, but Internet TV advertising has yet to crack $1 billion, according to Matt Wasserlauf, chief executive of online advertising network BBE.
Many advertisers are wary of sponsoring online TV, primarily because the measures of those ads’ effectiveness and reach are still up in the air, say media analysts.
"Advertisers aren’t going to pay for the right to sponsor content unless they know how many people are watching it," said Todd Dagres, general partner at Spark Capital. "The technology is available, but it is still in the process of being implemented."
The online video ad world is also a different ball game than the TV commercial sphere. Internet TV ads are interactive, unlike traditional TV ads, and effective Internet TV ads require a whole new level of creativity. Advertisers are still trying to determine the best way to reach potential customers online.
"The way people approach online ads is qualitatively different from the way they approach TV ads," said Shishir Mehrotra, director of video monetization at Google (GOOG, Fortune 500). "The biggest blockers to advertisers from making the jump to the Internet from TV are creative ones."
The lack of live TV online — and the big advertising bucks that come with it — is another huge factor preventing online TV from being successful. Though some networks have begun to air some live content online, notably CBS’s online coverage of the NCAA basketball tournament, live Internet TV is far from pervasive.
Live sporting events like the Super Bowl and live shows like American Idol command the biggest advertising dollars fast cash without a hassle. But separate licensing fees, bandwidth limitations and a low return on investment have held networks back from putting more live content online thus far.
With the business model still shaky, media company CEOs have suggested that free online TV is coming to an end.
How the online TV business can work
With free heading out the door soon, subscription services are the likely replacement.
Media CEOs like News Corp’s (NWS, Fortune 500) Rupert Murdoch, Disney’s Bob Iger and NBC’s Jeff Zucker, who co-own Hulu, have all hinted at making Hulu a subscription-based service. They just haven’t said how much users will have to pay.
Netflix (NFLX) has been operating a successful subscription-based streaming service for quite some time, and on Monday, Walmart (WMT, Fortune 500) announced that it had purchased Netflix’s online streaming video competitor Vudu. In December, Apple said it had negotiated deals with CBS (CBS, Fortune 500) and Disney (DIS, Fortune 500) to launch a streaming subscription-based service for Apple TV.
Cable companies have gotten in on the action as well. CNNMoney.com parent company Time Warner (TWX, Fortune 500) partnered with Comcast (CMCSA, Fortune 500) last summer to test its subscription-based "TV Everywhere," which made Time Warner content available online to Comcast subscribers for no additional charge. Comcast deemed the project a success, and has continued the TV Everywhere partnership on its Fancast Web site.
Subscription services generally bring more content to the Web than free services, including some cable shows that have been exclusively available on TV or for purchase on iTunes.
There’s something in it for the cable companies too: As technology improves and consumers begin watching more online, on-demand content directly on their television sets, cable and satellite providers could have a role in bringing that content to consumers by providing customer service for Internet TV like they do for "regular" TV.
"If consumers want high-quality content with a high-quality experience and high-quality service, there’s a place and a role for companies that have cables piped into your house," said David Wertheimer, executive director of the Entertainment Technology Center at the University of Southern California.
In the end, experts say that the free, advertising-supported model may exist for some content, but the subscription model will have to at least run along side it.
Experts say commoditized programming like news, cooking programs and how-to shows will stay free, because there will always be another site offering the same content for free. But your favorite shows that can’t be duplicated and cost millions of dollars to produce are something you will have to pay for.
"Every piece of content that is commoditized by nature has to be free," said Ran Harnevo, chief executive of 5min Media, an independent digital media group. "On the other hand, if everything were free, you would lose the production value of good shows. So people will have to pay for content that’s not commoditized."
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Fixing millions of gas pedals and brakes and convincing customers their vehicles are safe could end up being the least of Toyota’s challenges. Some experts think the price tag from legal settlements could end up topping the company’s estimate of $2 billion in recall costs.
There are already more than 30 U.S. lawsuits filed against Toyota involving the problems with its gas pedals alone, according to Craig Hutson, senior investment grade analyst at Gimme Credit, a bond research service firm. And there are more lawsuits are in the works.
"Lawyers are champing at the bit to get at these guys, and the company has come out and largely admitted mistakes in respect to these issues," said Hutson. "It’s hard to put a dollar amount on it, but multi-billion dollar costs are not out of the realm of possibility."
Hutson isn’t alone in worrying about how much lawsuits could hurt Toyota. Credit rating agency Moody’s cited the litigation risks when it warned Tuesday that it might downgrade Toyota’s credit ratings.
The company also faces at least one class action suit involving problems with the brakes on 2010 models of the Prius and other hybrid vehicles. Toyota announced a recall for those hybrids Tuesday.
New reports of problems with the steering of its Corolla could mean more lawsuits against Toyota.
Safety experts estimate official complaints involving Toyota gas pedals show there have been 19 fatalities involving the recalled vehicles.
But Gary Robb, an attorney in Kansas City who is looking at filing cases, says he believes that number will increase significantly as people look more deeply into accidents for which no cause was ever determined.
"We’ve had so many calls from so many people now that this news has come out," he said. "Accidents that were heretofore attributed to driver error are very likely due to a malfunction of the gas pedal. There’s going to be dozens of those incidents arising."
Cases involving death or serious injury will likely be handled in individual lawsuits.
Suing to reclaim lost value. Robb said he’s also looking at a class action case to try to recover billions of dollars he claims were lost in the resale value of the recalled vehicles. He said his experts estimate total losses could be in the $6 billion to $8 billion range paydayloans. "For many people their car is their second largest investment," he said.
Other experts suggest that the loss in resale value is not as high as Robb’s figure, but that it is still likely in the billions.
Kelley Blue Book, a leading used-car value service, is lowering its estimated prices for the recalled models this Friday by 2.5% to 3.5%. That’s enough to lower the value of each vehicle by between $250 and $800.
The National Highway Transportation Safety Administration estimates that more than 6 million U.S. vehicles are affected by the recall. So based on Kelley Blue Book’s estimates, the overall loss in resale value is likely to be at least $2 billion.
Toyota wouldn’t comment on its legal exposure from the recalls. As to the reduction in resale value by Kelley Blue Book it said, "Historically Toyota and Lexus vehicles have held their value very well relative to other vehicles. We expect that to be true in the future as well."
It’s not clear whether courts will allow plaintiffs to collect that much money. James Henderson, a law professor at Cornell University, said legal precedent is against them.
But Henderson does think the recall opens Toyota for a rash of new personal injury cases. He added that if it is determined that Toyota knew of problems with the gas pedals and did not warn a driver involved in an accident, the company could be hit with punitive damages.
Hutson said beyond the cost of any jury verdicts or settlements, the lawsuits have the potential of causing continued damage to Toyota’s reputation, keeping the problems and company’s failures in the news. That could cost the company additional sales going forward.
He said if any documents come out which prove Toyota engineers knew something needed to be fixed, it will be difficult for Toyota to ever regain consumers’ trust.
"When your image is one that has been largely built on quality and dependability, you can’t afford that kind of smoking gun," Hutson said.
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OTTAWA–Prime Minister Stephen Harper will test drive his priorities for the G8 and G20 summits this week at an elite conference in Davos, Switzerland, and he’s expected to highlight the environment, development and global economic growth.
While Canada’s official agenda for the end-of-June summits is not yet finalized, climate change will figure prominently at both meetings, a senior government official said.
Economic recovery, banking regulations, aid for mothers and children in poor countries and global security are also top of mind for the prime minister as he leaves Tuesday night for a quick three-day trip.
His speech on Thursday will be the first public unveiling of how Harper sees the two summits unfolding – starting with the Group of Eight industrialized countries meeting in Huntsville, Ont., at the end of June, and followed immediately by the larger Group of 20 summit in Toronto.
While Canada has been widely pilloried for its lack of plans to reduce greenhouse gas emissions, Ottawa wants the two summits to push the world closer to a binding international treaty on emissions reduction, based on the agreement-in-principle reached in Copenhagen last month.
"We want to see a long-term agreement on climate change," said the Canadian official, speaking on background. He stressed that final decisions will need to be made through the United Nations.
The summits, he said, "can play a supportive role online payday loans."
For the G8 summit, Harper plans to make child and maternal health a central theme, several sources said, although it was unclear whether Harper was ready to focus on that topic in his Davos speech.
Ottawa wants to foster collaboration among the richest countries to improve hospitals and health care for mothers and newborns in poor countries.
The federal government also wants to set an example by increasing its own spending on maternal and child health in developing countries – although money has not yet been allocated for this effort.
Stopping the spread of nuclear weapons and other security concerns will also be on the G8 discussion list.
For the G20, Harper will use his Davos speech to signal that the Toronto summit in June will focus on entrenching the global economic recovery.
Specifically, Harper is expected to stress that the rebound is fragile, and that the world won’t really feel like recovery has taken hold until employment rises.
He is expected to signal that he wants all G20 countries to demonstrate that they are living up to their unprecedented commitments to stimulate their economies.
Kellwood Co., a privately held apparel company based in Town and Country, announced today that it has bought ISIS, an company that focuses on women’s outdoor apparel. Terms of the deal were not disclosed.
ISIS, which is based in Vermont, sells its clothes mostly through various outdoor retailers such as REI and the Alpine Shop.
Kellwood said in a news release that it has been impressed by ISIS’ consistent growth since its founding in 1998. Kellwood hopes to double ISIS’ sales over the next four years by continuing to aggressively expand its distribution channels through more speciality dealers and through its online business.
"In an otherwise challenging retail and fashion marketplace, ISIS continues to perform well, with solid operations, a loyal customer base, and a track record of growth," Michael Kramer, president and CEO of Kellwood, said in a statement.
Option-ARMs: File under, "It sounded good at the time."
These exotic mortgages allowed homebuyers to come to closing with little cash and choose, monthly, how much to pay: interest and principal, interest only, or a minimum amount less than the interest due.
Of course, the last option is the one 93% of option-ARM buyers selected, according to a new report released this week by Standard & Poors.
But eventually, everyone has to pay the piper.
Nearly all of the 350,000 option-ARM borrowers owe more than when they first bought their homes thanks to the unpaid interest accumulating. And many loans written during the first big wave, which started in 2004, are getting ready for their five-year reset, when they become standard amortizing loans. Additionally, some newer loans will reset early if the accumulated interest has pushed the loan-to-value ratio above 110% to 125%.
That means borrowers are about to start paying very hefty prices for their homes. In one scenario outlined in the S&P report, the payment on a $400,000 mortgage jumps from $1,287 to $2,593.
25% default rate
But that doesn’t just spell bad news for borrowers. Some industry pessimists say the looming default problem could have the power to derail the nascent housing market recovery. "The crux of the matter is that as soon as these mortgages recast, the history is that they will default," said Brian Grow, one of the S&P report’s coauthors.
And the newer the loans, the worse they will perform, the report said. The last year that any option-ARMs were issued was 2007. In the first 20 months after issuance, this vintage of option-ARMs had an average default rate of just over 22%.
That includes all option-ARMs issued in 2007. But if you calculate default rates for only 2007 option-ARM borrowers who are now underwater, the default rate jumps to 25% after just 20 months, according to S&P.
So, while there may not be an awful lot of these loans out there, their high default rates will have an outsized influence on housing markets, adding to already bloated foreclosure inventories and driving prices down further.
Bubble markets
And the markets where they’ll produce the most foreclosures are still among the most vulnerable in the nation.
Option ARMs were most popular in bubble markets — California, Nevada, Florida and Arizona — where double digit home annual price increases put the cost of buying a home out of reach.
In fact, 60% of these loans went to residents of California and other Western states, places where prices have fallen the most, according to report coauthor Diane Westerback. "The geography is negative for these products," she said.
Many borrowers in these places could only afford a home if they chose the option ARM. Many counted on continued hot market conditions to add value to their homes. The extra equity could then be tapped to pay their bills.
We all know how that worked out.
Home prices in many of the markets where option ARMs are most concentrated have fallen 30%, 40% or more. When the loans recast, most borrowers will find themselves severely underwater.
"Because borrowers of [options ARMs] are in a much worse position," said Westerback. "You’ll see defaults rising very rapidly."
And most option ARM borrowers will not be good candidates for refinancing or mortgage modifications because their loan-to-value ratios will be far too high. Under the administration’s Making Home Affordable program, for example, mortgages with balances that exceed 125% of the home’s value are not eligible for help.
Not so white lies
There is another little problem that many option-ARM borrowers seeking refinancing would face: "Upwards of 80% of were stated-income loans," said Westerback.
These are the so-called "liar loans" in which lenders did not verify that borrowers earned as much money as they said they did. Lenders may not be able to modify mortgages because many of the borrowers’ income could not stand up to the scrutiny. Borrowers may also not want to go through underwriting again because they could be held legally liable for deliberate inaccuracies on their original applications.
Add to those conditions the still fragile economy and high unemployment rates, and you have a recipe for disaster.
Spanish producer prices fell the least in six months in October as oil prices rose.
Prices of goods leaving Spain’s factories, mines and refineries declined 4.2 percent from a year earlier, the National Statistics Institute in Madrid said today, after a 5.4 percent drop in September. Prices were unchanged from the prior month, today’s report showed.
The price of crude oil rose 14 percent in the year to the end of October and traded at $76.94 today. Weak demand is still pulling producer prices lower as the Spanish economy contracted for a sixth quarter from July through September even as Germany, France and the euro region expanded.
Spanish consumer prices have been falling in annual terms since March, as inflation slows more sharply than in the euro region overall. The Spanish economy may contract 0.7 next year, the International Monetary Fund forecast on Oct. 1, while the euro area, the U.S. and the U.K. post full-year growth.
Industrial production in Spain decreased 12.5 percent from a year earlier in September, declining for a 17th month as companies reduced staff to weather the slump. Nissan Motor Co. cut production of cars and light trucks 57 percent in September from a year earlier, compared with a global decline of 8.5 percent, it said on Oct. 28.
U.S. private equity firm Bain Capital is finalizing a roughly 100 billion yen ($1.1 billion) deal to buy Japanese telemarketer Bellsystem24 from Citigroup Inc, three sources familiar with the matter said.
It would be the largest buyout by a foreign private equity firm in Japan in nearly two years.
Bain has beaten off rivals Permira PERM.UL and a team of CVC Capital and Blackstone, which had also made offers in the final round of bidding for Bellsystem24, the sources said, speaking on condition of anonymity because the talks are not public.
Bain is working on final details and an official announcement could be made within the next few days, the sources told Reuters.
“A deal is imminent,” one of the sources said.
Bain had been tipped as the likely buyer when it secured exclusive negotiating rights earlier this month.
But the door was thought to be still open to the other bidders after the deadline for Bain’s exclusive rights passed on November 6 with no deal announced.
Talks had been ongoing with the CVC and Blackstone team after the exclusivity period ended, and that team had improved its bid, one source familiar with the move told Reuters.
Citigroup put Bellsystem24 up for sale as part of a global effort to raise cash and replenish its capital. It has already raised more than $7 billion by selling other assets in Japan including a broker, a trust bank and a fund management arm same day payday loans.
The sale of Bellsystem24 initially drew strong interest from a number of private equity firms including Kohlberg Kravis Roberts & Co KKR.UL, which teamed up with trading house Itochu Corp before dropping out of the race.
The deal will likely reach or exceed 100 billion yen, sources said, making it Japan’s largest buyout by a foreign private equity firm since March 2008, when Permira bought agrichemical company Arysta LifeScience Corp for more than $2 billion.
Bellsystem24 is Japan’s largest telemarketing firm. It competes against Moshi Moshi Hotline Inc and Transcosmos Inc in Japan.
Bellsystem24 is now owned by Citigroup Capital Partners, which was known as Nikko Principal Investments, a private equity arm of brokerage group Nikko Cordial, which was bought by Citigroup in 2007.
Nikko Principal paid 220 billion yen to buy Bellsystem24 in 2004. The sale price would be lower than the purchase price but Citigroup had made returns from the investment by restructuring the company’s debt to take some cash out, a method known as recapitalization.
Bain’s financing will be supported by banking units of Mitsubishi UFJ Financial Group Inc, Mizuho Financial Group Inc and Sumitomo Mitsui Financial Group Inc, according to sources familiar with matter.
Calpers, the nation’s largest public pension fund, does not face “moral hazard” despite state guarantees of pension solvency, the funds chief investment officer said on CNBC on Wednesday, in comments responding to a Reuters report.
“Does the ultimate taxpayer guarantee mean we take excessive risk? No,” California Public Employees’ Retirement System Chief Investment Officer Joseph Dear said, when asked if the prospect of a state bailout if the fund ran low on funds created incentives to take extra risk.
Public policy and financial industry experts and officials in a Reuters special report on Calpers risk management published last week argued that the California pension system’s risk management policies put taxpayers at risk and needed reforming.
“Well, all pension funds for the public sector have the nature of a public taxpayer backup for what we do,” Dear said on CNBC.
Calpers has told government agencies using the fund to manage their pensions that their contribution rates to the system are at risk of rising as a result of the fund’s losses.
Critics note the California state guarantee of Calpers is more clear than the implicit federal promise to save Wall Street banks “too big to fail” savings account payday advance. The Wall Street bank bailouts sparked widespread debates about “moral hazard”, the idea that bailouts only encourage risk taking.
Calpers recently raised its asset allocation to private equity, considered one of the riskiest areas of investment. A rise in the commitment to private equity in June to 14 percent of the fund from 10 percent looked “gigantic”, Dear said, but reflected the reality that the fund’s allocation had already passed its 10 percent target, hitting 13 percent.
“Again, if you have a long horizon and you have a reasonable return target, and you have a globally diversified portfolio, you’ll be able to make, in our case, 7.75 percent return we need,” he said.
Other financial professionals quoted in the report questioned that outlook. Laurence Fink, chief of gargantuan asset manager BlackRock told the Calpers board in July he didn’t think the fund would hit its target 7.75 percent return target. “I think it’s going to be subpar for many years,” he said, suggesting that cuts in benefits be considered.
Tough talk from the Bank of Canada briefly pulled the rug from under Canada’s rebounding currency this week, but strong commodity prices and a weak U.S. dollar mean the rant likely won’t have a lasting impact.
Last week, the Canadian dollar nearly climbed above the U.S. dollar for the first time since July 2008, something the central bank fears would endanger the economic recovery, given Canada’s reliance on exports to the United States.
Clearly anxious to contain the currency’s surge off a four-year low hit in March, the Bank of Canada on Tuesday renewed its commitment to keeping interest rates low and forecast delays in the economic turnaround.
The statement extinguished any talk that the Bank of Canada would follow Australia’s central bank in hiking interest rates quickly, and Canada’s currency fell 3.6 percent from the 14-month high it hit last week.
But the currency nudged its way higher on Wednesday, and seems set to resume its march toward parity with the greenback once the sting of the central bank statement wears off.
“This is a short-term trend reversal but it’s really not a game changer,” said Jack Spitz, managing director of foreign exchange at National Bank Financial in Toronto.
“The reaction to the statement, not surprisingly, was to bid dollar/Canada higher, but the sustainability is going to be based on ongoing fundamentals which continue to advocate for a stronger Canadian dollar over time.”
Spitz said this week’s pullback in the Canadian dollar was driven mainly by speculative accounts, which he described as sensitive to short-term volatility driven by news like the Bank of Canada statement payday loans with low fees.
The Canadian dollar has risen 17.5 percent this year, helped by lofty prices for oil and gold, economic data that hinted at a rebound, and surging equity markets.
When those factors reclaim the spotlight, many experts say the currency could climb again as investors sell the greenback and buy assets that are more closely correlated with economic recovery.
“Can we trade down to parity? Yes, we absolutely can. Are we going to stay there? I don’t think so,” said Steve Butler, director of foreign exchange trading at Scotia Capital.
“We had an upside day last Thursday which technically says we are overdue for a correction, but I just don’t think (the C$ upside) is over yet because I don’t think the pressure is off the U.S. dollar right now.”
Some experts even suggest the Canadian dollar could keep rallying until the U.S. Federal Reserve starts raising interest rates again, which it is not expected to do until the second half of 2010.
C$ NEAR UPSIDE LIMITS
But foreign investors may also opt to sell Canadian dollars and buy higher yielding growth sensitive currencies, a move that could boost to the Australian dollar and Norwegian crown and limit the upside for the Canadian currency.
General Motors Co’s bid to find an outsider to replace its chief financial officer is being complicated by pay restrictions imposed on companies that got big U.S. government bailouts, The Wall Street Journal said on Saturday.
GM executives met recently with U.S. Treasury pay czar Kenneth Feinberg and left with the understanding the automaker would be able to offer a significant amount of stock but no more than a $1 million annual salary, the newspaper said, citing people familiar with the matter.
Sources have told Reuters that GM directors in September backed a plan for CFO Ray Young to leave the company.
GM emerged from bankruptcy in July after receiving $50 billion in emergency U.S. financing.
A spokesman for GM would not comment on whether the CFO search specifically was being hindered by the pay restrictions.
“We’ve consistently said that one challenge to filling any position from outside might be the pay restrictions,” GM spokesman Tom Wilkinson said.
(Reporting by Brad Dorfman; Editing by Peter Cooney)
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