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?
$8 billion – this is the likely cost of the BP oil leak, which spilled 206 million gallons of oil into the Gulf of Mexico. Whilst the oil leak has been stopped for some time, there were ongoing concerns that the leak would re-appear due to the underwater pressure. The cost of stopping the leak has been substantial, but BP will face further costs, as the company begins to pay out compensation.
$20 billion is the compensation that residents of the Gulf of Mexico will receive. Further to this, BP has said that it will invest more money in promoting the tourism industry there, which has suffered from the oil spill. However, what about the fishing industry? Although compensation will be paid for the losses incurred, will this continue in the long term? The oil may cause a loss in productivity in certain populations of sea-life. How will this impact us? If certain fish became scarcer, then their price will rise accordingly, whether you purchase the fish at a shop or have it as a meal in a restaurant. To make matters worse, the hurricane season has arrived in the affected areas, which will make the clean-up effort even harder.
As BP’s share price has fallen, individuals have suffered from lower dividends. Jupiter Income Trust had almost 10% of their portfolio invested in BP, which largely explains the 9 per cent drop in their payout.
Articles
BP oil well ‘poses no further risk’, says Allen BBC News (5/9/10)
BP oil spill fallout hits Jupiter dividend Mail Online, Richard Dyson (4/9/10)
Gulf Oil leak: biggest ever, but how bad? BBC News, Richard Black (3/8/10)
BP oil spill didn’t hit tourism too hard Jabber Lounge, Gloria Rand (5/9/10)
BP oil victims face strings on $20 billion oil fund Telegraph, Rowena Mason (20/8/10)
BP share price data
BP historical share prices Yahoo Finance
BP share price chart Interactive Investor
Questions
- Which industries have been affected by the oil leak? Don’t think too close to home – look at the wider picture.
- Is the oil spill an example of a negative externality? Can it be illustrated on a diagram and, if so, how?
- What has happened to BP’s share price since the beginning of the oil spill? Put this on to a graph to trace the trend. Try to explain the changes in the share price using a demand and supply diagram.
- How would BP have calculated the compensation to be paid to residents of the Gulf of Mexico? Would cost–benefit analysis have been involved?
What’s going to happen to stock market prices? If we knew that, we could be very rich! Nevertheless, financial analysts constantly try to predict the movements of shares in order to decide when to buy and when to sell. One thing they do is to look at charts of price movements and look for patterns. These ‘chartists’, as they are sometimes called, refer to something known as the ‘death cross’ or ‘dark cross’.
So what is the death cross? Imagine a chart of the movements of share prices, such as the FTSE 100 in the UK or the Dow Jones Industrial Average and S&P 500 in the USA. These movements can be shown as a moving average. In other words, for each day you plot the average of the past so many days. Typically, 200-day (sometimes 100-day) and 50-day moving averages are plotted. The 200-day (or 100-day) is taken as the long-term moving average and the 50-day as the short-term moving average. In a falling market, if the short-term moving average crosses below the long-term moving average, this is called the ‘death cross‘ as it signifies growing downward pressure in the market. The fall in the long-term average in these circumstances will indeed lag behind the fall in the short-term moving average.
Markets around the world are experiencing the death cross. So should be be worried? Or is this like looking for patterns in tea leaves, or the stars, and using them to make bogus predictions? So: science or mumbo jumbo?
First the science: the death cross indicates a fall in confidence. And at present, there is much for investors to worry about. Burgeoning debts, austerity measures and fears of a double-dip recession are spooking markets.
Now the mumbo jumbo. Just because markets are falling at the moment, this does not prove that they will go on falling. Markets are often spooked, only to recover when ‘sanity’ returns. People may soon start to believe that a second credit crunch will not return, given all the regulatory and support measures put in place, the huge amount of liquidity waiting to be invested and the support packages from the ECB and IMF for Greece and, potentially, for other eurozone countries having difficulties servicing their debts. In other words, patterns may repeat themselves, but not necessarily. It depends on circumstances.
Articles
Market’s Swoon Prompts Fears Of the Dreaded ‘Death Cross’ CNBC, Jeff Cox (1/7/10)
Death Cross in S&P 500 May Not Lead to Rout: Technical Analysis Bloomberg Businessweek, Alexis Xydias (30/6/10)
Are the markets about to encounter the”Death Cross”? BBC News, Jamie Robertson (1/7/10)
MarketBeat Q&A: Debunking the ‘Death Cross’ Wall Street Journal blogs, Matt Phillips (30/6/10)
Technical analysis and market data
Moving Average Crossovers TradingDay.com, Alan Farley
Death Cross Investopedia
FTSE 100 historical prices Yahoo Finance
S&P 500 historical prices Yahoo Finance
Dow Jones historical prices Yahoo Finance
Questions
- Explain what is meant by the death cross and use a diagram to illustrate it. What is menat by the golden cross. Again, use a diagram to illustrate it.
- Under what circumstances would speculation against stock market price movements be (a) stabilising and (b) destabilising?
- What is the implication for stock market prices of a ‘wall of money’?
- How much faith should be put in chartist explanations of stock market prices? Do criticisms of chartism apply to all time-series analysis that is used for forecasting?
- Look back at newspaper articles from a year ago and see what they were predicting about stock market prices. Have their preductions been borne out? If so, why? If not, why not?
Research from the Halifax estimates that the total wealth of UK households at the end of 2009 was £6.316 trillion. Putting this into context, it means that the average UK household has a stock of wealth of £236,998. In real terms, so stripping out the effects of consumer price inflation, the total wealth of households has grown five-fold since 1959 while the average wealth per household has grown three-fold while. The growth in wealth per household is a little less because of the increase in the number of households from 6.6 million to 26.6 million. For those that like their numbers, total household wealth in 1959 was estimated at £1.251 trillion (at 2009 prices) while the average amount per household was £72,719 (at 2009 prices).
But, do changes in household wealth matter? Well, yes, but not necessarily in a consistent and predictable manner. That’s why so many of us love economics! For now, consider the prices of two possible types of assets: share prices and house prices. The prices of both these assets are notoriously volatile and it is this volatility that has the potential to affect the growth of consumer spending.
It might be, for instance, that you are someone who keeps a keen eye on the FTSE-100 because you use shares as a vehicle for saving. A fall in share prices, by reducing the value of the stock of financial assets, may make some people less inclined to spend. Housing too can be used as a vehicle for saving. Changes in house prices will, of course, affect the capital that can be realised from selling property, but also affect the collateral that can be used to support additional borrowing and, more generally, affect how wealthy or secure we feel.
The Halifax estimates that the household sector’s stock of housing wealth was £3.755 trillion at the end of 2009 while its stock of financial assets (such as savings, pensions and shares) was £4.024 trillion. In real terms, housing wealth has grown on average by 5% per year since 1959 while financial assets have grown by 2.8% per year. Of course, while households can have financial and housing assets they are likely to have financial liabilities too! We would expect households’ exposure to these liabilities – and their perception of this exposure – to offer another mechanism by which household spending could be affected. For instance, changes in interest rates impact on variable rate mortgages rates, affecting the costs of servicing debt and, in turn, disposable incomes.
The Halifax reports that the stock of mortgage loans was £1.235 trillion at the end of 2009, which, when subtracted from residential housing wealth, means that the UK household sector had net housing equity of £2.519 trillion. It estimates that the stock of mortgage loans has increased on average by 6.5% per year in real terms since 1959 while net housing equity has grown by 4.5%. The stock of households’ unsecured debt, also known as consumer credit, was £227 billon at the end of 2009. In real terms it has grown by 5.3% per year since 1959.
The recent patterns in household wealth are particularly interesting. Between 2007 and 2008 downward trends in share prices and house prices contributed to a 15% real fall in household wealth. The Halifax note that some of this was ‘recouped’ in 2009 as a result of a rebound in both share prices and house prices. More precisely, household wealth increased by 9% in real terms in 2009, but, nonetheless, was still 8% below its 2007 peak.
Given the recent patterns in household wealth, including the volatility in the components that go to comprise this stock of wealth, we shouldn’t be overly surprised by the 3.2% real fall that occurred in household spending last year. Further, we must not forget that 2009 was also the year, amongst other things, that the economy shrunk by 4.9%, that unemployment rose from 1.8 million to 2.5 million and that growing concerns about the size of the government’s deficit highlighted the need for fiscal consolidation at some point in the future. All of these ingredients created a sense of uncertainty. This is an uncertainty that probably remains today and that is likely to continue to moderate consumer spending in 2010. So, it’s unlikely to be a time for care-free shopping, more a time for window shopping!
Halifax Press Release
UK household wealth increases five-fold in the past 50 years Halifax (part of the Lloyds Banking Group) (15/5/10)
Articles
Household wealth ‘up five-fold’ UK Press Association (15/5/10)
We’ve never had it so good: Families five times richer than in 1959 Daily Mail, Steve Doughty (15/5/10)
Household wealth grows five-fold in past 50 years BBC News (16/5/10)
Average household wealth jumps £150,000 Telegraph, Myra Butterworth (15/5/10)
Questions
- Draw up a list of the ways in which you think consumer spending may be affected by: (i) the stock of household wealth; and (ii) the composition of household wealth.
- What factors do you think lie behind the annual 5% real term increase in the value of residential properties since 1959?.
- How might the sensitivity of consumer spending to changes in interest rates be affected by the types of mortgage product available?
- Why do you think consumer spending fell by 3.2% in real terms in 2009 despite real disposable income increasing by 3.2%?
- What would you predict for consumption growth in 2010? Explain your answer.
In 2007, BT, Virgin, Top up TV and Setanta complained about Sky’s dominance within the pay-TV industry. Sky, who have an estimated 85% share of the market were investigated by Ofcom and a decision has now been made. Sky will be forced to reduce the price it charges to other Broadcasters for showing premium sport channels. The wholesale price of Sky Sports 1 and 2 (two of my favourite channels!!) will each be reduced by just over 23% to £10.63 a month each. The idea is that this decision will benefit consumers by increasing choice. However, Sky argues that it will be to the ‘detriment of consumers’ as incentives to invest and take risks will be blunted.
Furthermore, there are also concerns that it will mean less money going into sport. Rugby, football, tennis etc benefit from some very lucrative TV rights deals and if Sky is forced to reduce prices (it is appealing the decision), then the value of these deals is likely to decline, which may lead to less investment in grass-routes participation.
Whilst progress has been made within this area, critics argue that Ofcom have not gone far enough and should have extended their decision to more sport channels (not just Sky Sports 1 and 2) and even to the premium movie channels. This would again increase consumer choice and provide more people with access to premium TV. This would work alongside more innovation within the pay-TV industry, which has seen Sky being given permission to offer pay-TV services on freeview, which will open up pay-TV to millions more consumers. Whilst no action has been taken regarding Sky’s dominance of premium movie channels, this issue has been referred to the Competition Commission. Is Sky’s dominance over sporting events about to come to an end?
Articles
BSkyB ordered to cut sports channels rates Reuters, Kate Holton (31/3/10)
Sky forced to cut price of sports channels Telegraph (31/3/10)
Consumers are big winners in BSkyB ruling Financial Times, Ben Fenton and Andrew Parker (31/3/10)
BSkyB should shake hands and move on Financial Times (31/3/10)
Sky told to cut wholesale prices by regulator Ofcom BBC News (31/3/10)
Ofcom v Sky BBC News blogs: Peston’s Picks, Robert Peston (31/3/10)
BSkyB ‘restricting competition’ BBC Today Programme (31/3/10)
Ofcom orders Sky Sports price cut Guardian, Mark Sweney (31/3/10)
Sky ruling: Culture Secretary challenges Tories to back Ofcom Guardian, Mark Sweney (31/3/10)
Sky forced to cut the price for top sports events: Q and A Telegraph, Rupert Neate (31/3/10)
New ruling lets fans see Premier League on TV for just £15 a month London Evening Standard, Jonathan Prynn (31/3/10)
Regulator sets the fuse for shake-up of pay-TV Independent, Nick Clark (31/3/10)
Ofcom report
Delivering consumer benefits in Pay TV Ofcom Press Release (31/3/10)
Pay TV Statement Overview (31/3/10)
Pay TV Statement Summary (pdf file) (31/3/10)
Pay TV Statement Full document (pdf file) (31/3/10)
Questions
- To what extent will Ofcom’s decision to force Sky to reduce prices lead to an increase in consumer choice? Why is consumer choice good?
- Why has Sky been able to charge such high prices in the past, in particular for sports channels?
- According to the BBC News article, Sky shares were the biggest risers on the FTSE by midday on the day of the announcement. Why do you think this was the case?
- Would a similar decision on premium movie channels significantly increase consumer choice?
- Into which market structure does the Premium TV industry best fit? Consider the characteristics of the pay-TV industry. Into which market structure does it best fit?
- Why may Ofcom’s decision lead to less investment in sport at the grass roots?