Blockbuster US has become the latest in a long line of companies filing for bankruptcy. With huge debts and a need to restructure the business, given the huge competition in America, Blockbuster has made agreements with its creditors to cut its debts from $1 billion to $100 million. Blockbuster has suffered from mail-order and online film rental services, in particular in America.
Blockbuster is a worldwide phenomenon with stores ranging from the UK to Mexico. However, as legally separate entities, the non-US branches of Blockbuster are protected from the bankruptcy. While the UK branches will remain unaffected, there are concerns that they may suffer from a lack of new DVD stock, especially with the approach of Christmas.
As news of Blockbuster’s bankruptcy spread, Netflix – a key competitor – saw its shares soar. Netflix was a catalyst in the demise of Blockbuster US and it has seen its market share increase rapidly over the past few years, with subscribers increasing from 1 million in 2002 to 15 million in 2010. Blockbuster responded by ending late fees and started its own online services, but it has been unable to compete effectively in this competitive market. Although restructuring of Blockbuster has begun, only time will tell what the future is for this once dominant movie rental firm.
Blockbuster files for Bankruptcy in US BBC News (23/9/10)
Blockbuster fizzles in US, but renters overseas haven’t switched to Netflix – yet The Christian Science Monitor, Stephen Kurczy (23/9/10)
Blockbuster files for Chapter 11 protection Guardian, Richard Wachman (23/9/10)
Blockbuster wins Court’s approval to draw $20 million from bankruptcy loan Bloomberg, David McLaughlin and Tiffany Kary (23/9/10)
Fitch lowers debt rating on Blockbuster Bloomberg BusinessWeek (23/9/10)
Netflix shares hit high after Blockbuster bankruptcy Reuters, Sue Zeidler (23/9/10)
Debt, changing media habits topple Blockbuster The Associated Press, Mae Anderson (23/9/10)
Questions
- What are the key factors behind Blockbuster’s decline?
- New competitors have entered the market for movie rental. Illustrate this on a diagram. How can we use this to explain Blockbuster’s problems?
- Online services and mail-order have become increasingly popular services in this market. Is the extra competition in the market in the best interests of consumers?
- What type of market structure is the rental movie industry? Explain your answer.
- What type of legal structure does Blockbuster operate under? What are the key advantages and disadvantages of this?
- Why are the non-US chains not affected by the bankruptcy of Blockbuster US?
- Have a look at the share prices of Blockbuster and Netflix. What has happened to them over rthe past year? Is this consistent with recent developments?
The price of gold has hit a record high of over $1282 per ounce. By contrast, in 2007 it was trading at under $700 per ounce and in 2001 at under $300 per ounce. Various uncertainties in the world economy have led to large rises in the demand for gold by both central banks and investors in general.
But why has the gold price risen so dramatically and what is likely to happen to the price in the coming days and months? Some commentators are saying that the gold price has further to rise. Others are saying that it is already over priced! The following articles look at the explanations and the arguments.
Articles
Monetary easing fears lift gold to record high Financial Times, Javier Blas (17/9/10)
Five-fold rise in gold price ‘is not a bubble’, claims industry body Independent on Sunday, Mark Leftly (19/9/10)
Gold Prices Today Are Increasing to Record Levels Business and Finance News, Aidan Lamar (18/9/10)
Gold hits new peak of $1,283 Telegraph, Richard Evans (17/9/10)
Gold hits new record high Guardian, Julia Kollewe (17/9/10)
Gold prices – the highs and lows since 1971 Guardian, Julia Kollewe (17/9/10)
Gold is overpriced, so be wary of those ads to buy it Idaho Statesman, Peter Crabb (17/9/10)
Data
Gold prices World Gold Council
Commodity price data (including gold) BBC Business: Commodities
Questions
- Why has the price of gold risen? Illustrate your arguments with a demand and supply diagram.
- How are these demand and supply factors likely to change in the near future?
- What is the role of speculation in the determination of the gold price? What particular factors are speculators taking into account at the moment?
- Why have actions by the Bank of Japan (see A Japanese yen for recovery) influenced the gold price?
- Why have possible future actions by the US Federal Reserve Bank influenced the gold price?
Rising costs of cloth and a rise in VAT could mean that clothes prices are set to rise. Does this spell the end of cheap fashion from the likes of Primark and H&M? Or can they absorb the cost increases?
The following articles look at the causes of the rise in costs of clothing and what the cheap fashion chains can do about it.
Articles
Primark follows fashion rivals as it warns of rising costs Guardian, David Teather and Zoe Wood (13/9/10)
Primark warns on costs as growth slows Telegraph, James Hall (14/9/10)
Is this the end of cheap clothes era? Price of cotton has rocketed because of floods, Primark warns Mail Online, Sean Poulter (14/9/10)
Fashion chains far from cheerful about future of cheap chic Observer, Zoe Wood, David Teather and Julia Finch (19/9/10)
Data
Commodity prices (including cotton) Index Mundi
Cotton futures BBC Business: Commodities
Questions
- Why have cotton prices been rising? Illustrate your arguments with a demand and supply diagram.
- Would you expect a rise in the price of cotton of 45% to lead to a rise in the price of cotton clothes of 45%, or of more than 45% or of less than 45%? Explain.
- For what other reasons are the prices of clothing rising?
- How did the process of globalisation keep the price of clothing down?
- Next’s chief executive, Lord (Simon) Wolfson said that if prices of Next’s clothes go up 8% then the number of units sold will fall by 10%. What is the value of the price elasticity of demand that he is assuming?
- Why is the ‘Fairtrade system so important’?
- “Some retailers have already increased prices but there is more to come. The products most under threat are T-shirts, underwear and socks. More complicated garments such as heavy jeans will be less affected.” Why are the prices of more complicated garments likely to rise by a smaller percentage than those of simple garments?
- What has been happening to the demand for cheap fashion clothing and why? Combine this effect with those of costs on a demand and supply diagram.
- What type of market structure is the market for fashion clothing? What are the implications of this for the profits of retailers?
There has been talk for some time about the possibility of standing room on flights, but it is hardly surprising that this has been rejected by the Civil Aviation Authority. Not the safest option, you might say, nor the comfiest – certainly not for a long haul flight to the other side of the world! However, this could be coming closer to reality, as we see The Skyrider, which is a new saddle-style airplane designed by Avioninteriors. It has yet to be snapped up, but Ryanair could be top of the list with their plans for a new style of flying.
It may not be quite what you imagine – you don’t literally stand up in the stalls at the front of the aircraft. Passengers will have seats, but these seats give a completely new meaning to ‘upright seats’. Seats would be 23 inches apart (some 10 inches closer than we’re used to), but they would only be available for flights up to 3 hours. Despite the publicity, the design is yet to be approved. Ryanair believe that such a design would increase passenger capacity by some 40%. However, passengers remain rather skeptical, as many struggled to fit in to the seats when it was unveiled in New York.
Technological development is vital in any dynamic industry, but is this one step too far? One day, it could be a game of sardines when packing passengers into a plane!
New airline seat for Ryanair resembles a saddle Irish Central, Molly Muldoon (18/9/10)
New plane ‘saddle’ would pack in passengers Edmonton Journal (19/9/10)
Ryanair one step closer to fulfilling dream of getting more people on each plane Travel News, Natalie Cooper (16/9/10)
Budget airlines love bad new stories about how cramped their planes are Telegraph, Harry Mount (15/9/10)
Behold! The world’s most cramped airline seat Reuters, Charlie Sorrel (13/9/10)
Questions
- Is it a rational decision for a passenger to travel in a new upright seat?
- Is it a cost-effective strategy for Ryanair or any other airline to adopt? Explain (a) why it is, but also explain (b) why it may not be cost-effective.
- Using a diagram, illustrate the opportunity cost to an airline of providing more upright seats.
- If successive airlines adopt the new saddle style seats, what is likely to happen to the price of such seats?
- As passengers become aware of these cheaper seats, what is likely to happen to the market price? Illustrate this on a diagram.
- If Ryanair were the only airline to offer such seats, does this mean it would have a monopoly? Explain your answer.
What is the future of the Royal Mail? One thing for certain is that it needs an injection of money, which has led the government to consider either privatisation of the Royal Mail or selling it. Over the past years, we have seen continued strikes by the postal service in response to proposed changes in working practices. Mr. Cable commented that:
‘Royal Mail is facing a combination of potentially lethal challenges – falling mail volumes, low investment, not enough efficiency and a dire pension position.’
However, there are concerns that the privatisation or sale of the Royal Mail could lead to higher prices, job losses and further pension problems. The transfer of the Royal Mail to the highest bidder could shift the pension deficit, currently standing at £13.3 billion, to the taxpayer, potentially costing each taxpayer £400. The choice for the public is stark: either lose the right to send a letter anywhere in the UK for the same price or take on postal workers’ pensions.
Expecting massive opposition from the Communication Workers Union (CWU), Ministers are looking to pursue an arrangement similar to that of John Lewis, whereby staff are given shares in the company. This will give the staff an incentive to perform well to improve the performance of the company and hence increase their future dividend. Read the following articles and then try answering the questions that follow.
Royal Mail is to be privatised, government confirms BBC News (10/9/10)
Royal Mail sell-off is confirmed BBC News, Hugh Pym (10/9/10)
Royal Mail privatisation backed Press Association (10/7/10)
Royal Mail sale could cost £400 per home as taxpayers set to fund £13.3 billion pension deficit Mail Online, James Chapman (10/9/10)
Royal Mail pension plan challenged by regulator BBC News, Ian Pollock (30/7/10)
Ministers consider offering 20 per cent of shares in Royal Mail to staff Telegraph, Christopher Hope (10/9/10)
Cable to privatise ‘inefficient’ Royal Mail Independent, Cahal Milmo and Alistair Dawber (11/9/10)
Royal Mail revolution needed, say bankers Telegraph, Louise Armitstead (10/9/10)
Questions
- What are the problems that the Royal Mail is facing? Why have they occurred?
- What are the arguments for and against privatisation of the Royal Mail?
- How might privatisation lead to job losses and higher prices?
- What type of business arrangement does John Lewis have? Explain why this may improve overall performance of the company?
- If the pension deficit is passed on to the government, why will it cost the taxpayer? Is such an arrangement (a) efficient (b) equitable? Explain your answer.