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Holding individuals responsible for the financial crisis

Thu, 2014-07-31 13:41

In the aftermath of the financial crisis, there have been relatively few individuals held responsible for the roles they played, or the bad mortgages they issued and bundled together to pass along to investors. However, a former employee of the mortgage lender Countrywide Financial was fined Wednesday as part of a civil fraud case.

It was nicknamed "the Hustle" – a program in which Countrywide is alleged to have passed bad mortgage products onto investors. Since Bank of America acquired Countywide in 2008, the bank was fined nearly $1.3 billion for the fraud. Additionally, a former Countrywide employee, Rebecca Mairone, was fined $1 million, which the judge specified she should pay herself.

Unlike previous financial crises, pursuing individuals for their misdeeds has not been the norm in recent years, says Ken Thomas, an independent bank consultant and economist.

“We’re seeing companies paying fines, but little actions against the people involved,” he says. “After the savings and loan crisis, there were many savings and loan executives that went to jail. Here, we don’t see that.”

Countrywide’s former CEO and CFO were also fined coming out of the financial crisis.

However, most individuals who have been targeted are typically lower-level employees who worked directly on the bad deals, says Michael Santoro, a professor at Rutgers Business School.

“It’s a little more difficult to present evidence against people who have set policies in motion or who might turned the other way or who may have winked at something,” he says.

According to the Securities and Exchange Commission, 174 companies or entities have been charged arising from the financial crisis. About 40 percent of those charges have been against CEOs, CFOs or other senior executives. 

Many of those actions were on a different scale than this case, says David Zaring, associate professor of legal studies and business ethics at the University of Pennsylvania’s Wharton School.

“Ms. Mairone, she’s in a unique place,” says Zaring. “There’s an actual jury verdict that came in against her and a fine that was duly awarded after that verdict. Almost everything the SEC has done has been a settlement.”

Zaring says earlier failed criminal cases against a pair of Bear Stearns employees might have been a deterrent, and that if the wrongdoing was such a widespread practice in the financial industry, it can be hard to single out individuals. 

What other individuals have paid fines?

It's exceedingly rare for an individual to be singled out by the SEC and it's just as rare for those folks to pay any more than a couple hundred thousand dollars -- chump change. There are only a few other exceptions: here are the biggest penalties levied by the SEC in the wake of the Great Recession:

  • Angelo Mozilo, former CEO of Countrywide, is the biggest exception to the rule by far. As part of a settlement with the SEC, Mozilo agreed to pay a record $22.5 million penalty, on top of another $45 million in "ill-gotten gains" to be returned to investors. Mozilo was also banned from running a public company for life. His CFO paid a relatively puny $130,000 penalty.
  • Former Brookstreet CEO Stanley Brooks didn't settle with the SEC and a federal judge hit him with a $10 million fine. In addition to the penalty, the maximum allowed for his charges, Brooks had to pay another $110,000 to investors.
  • From here, the penalties drop pretty quickly and leave the executive suite. Fabrice Tourre, a Goldman Sachs trader turned academic, was accused of defrauding investors and became a symbol of the economic crisis for many. The SEC sought nearly $1 million in fines from "Fabulous Fab," but he was eventually ordered to pay $825,000.
  • Former Bear Stearns portfolio managers Ralph Cioffi and Matthew Tannin were notably aquitted of securities fraud in 2009, but they settled in a later civil case, agreeing to pay about $1.05 million.

How driverless cars could injure insurers

Thu, 2014-07-31 13:41

Pretty much everything bad that happens behind the wheel today is our fault.

“Today, 95 percent of accidents are actually driver error,” says Robert Hartwig,  president and economist at the Insurance Information Institute, an industry association.

When cars drive themselves, he says, people hope to see a lot fewer accidents.

“The data seems to support that these cars will be better drivers than most people, because they don’t get distracted, they don't turn around and talk to their kids, they don’t play with their cellphone," says Chris Shultz, deputy commissioner of community programs and policy initiatives at the California Department of Insurance.

And while you might think this would mean cheaper insurance policies, Schultz says the future of auto insurance has actuaries getting anxious.

“We might see decreased frequency of collisions, but increased severity,” he says.

While policy holders might pay less, because your car is involved in fewer accidents, you might pay more because the cost of high tech repairs is higher.

Then, there's the liability question.

"What happens if I put my five-year-old in the back and press the button and say 'drive my five-year-old to kindergarten'? I don’t think any policy makers know what to do with that yet," says Schultz.

“The question really turns into 'who is in control of the driverless car?'” says Frank Douma, a research fellow and associate director of the State and Local Policy Program at the Univeristy of Minnesota's Humphrey School of Public Affairs and a research scholar at its Center for Transportation Studies.

The answer, says Douma, could mean analyzing data from the car after an accident – looking at its black box.

But while the knowledge may prove a relief to no one but insurers, self driving cars still have classic problems, in which liability is clear.  So although we can expect to see a significant number of autonomous cars on the road by 2020, Robert Hartwig says, don’t plan to cancel your insurance policy.

“Cars could still be stolen, trees could still fall on your car.”

Kellogg's has a cereal problem

Thu, 2014-07-31 13:41

Kellogg's, maker of Froot Loops, Apple Jacks and Corn Flakes, could be drying up.

Americans aren't buying cereal like they used to. And that's led to a sales slump: Profits were down 16 percent last quarter.

Another factor is that cereals like Special K used to be popular because they were low-calorie. Now, however, Kellogg's CEO says Americans have become more interested in foods that are "more nutritious."

Don't bother shopping around for your contact lenses

Thu, 2014-07-31 12:50

 The other day, an email came in from a big online contact lens store that said, starting Aug. 1, we can all forget about getting a deal on the most popular contact lenses.  

What’s happening is something called unilateral pricing. Johnson & Johnson, which makes the top-selling Acuvue brand, is joining other manufacturers, like Alcon and Bausch & Lomb, in telling eye doctors, big box retailers and online stores that they can’t charge less than a certain amount. 

“If the retailer sets the lenses for below that price, then the supply of that particular contact lens would be cut off,” Senator Amy Klobuchar, Democrat of Minnesota, said as she opened a Judiciary Antitrust Subcommittee hearing on the new practices. 

“If the point is to save consumers money, I don’t know why we have a minimum price we can’t go below,” R. Joe Zeidner, general counsel at the discounter 1-800-CONTACTS, told the panel.  

The lame police are making us raise prices soon. Stock up now. #NeverRunOutOfContacts http://t.co/may0A1I2FS pic.twitter.com/fcqQdFth8B

— 1-800 Contacts (@1800CONTACTS) July 30, 2014

But pricing experts say unilateral pricing is not always bad for consumers. 

“They can compete on other things,” said Barbara Sicalides, a partner and antitrust expert at the law firm, Pepper Hamilton. Companies like Bose use unilateral pricing to maintain cachet. Others, like Samsung, use minimum prices to help combat “showrooming,” helping stores staffed with knowledgeable salespeople compete with online sellers.

“One benefit is that you’re going to have more services provided to you when you buy some very complex products,” says John Zhang, a pricing expert and professor at the University of Pennsylvania’s Wharton School.  

But buying contacts is different. Your doctor has already told you what to buy, and gets paid separately for the exam. 

Eliminating discounts may make you more willing to buy directly from the optometrist. That’s the accusation made by contact lens discounters like 1-800-CONTACTS. 

At the hearing, Dr. Millicent Knight, Johnson & Johnson Vision Care's head of professional affairs, said the new pricing is simpler and cheaper for most. It eliminates cumbersome rebates, and has “a price that is actually lower than the current national average selling price to consumers," she said. 

But that’s just the average. For the roughly 10 percent of shoppers who buy online, according to Euromonitor, prices will likely go up.  

And, all of this is perfectly legal, as long as manufacturers aren’t actively coordinating prices among themselves or with retailers.

Policy change in effect

Dan Bobkoff/Marketplace

Meet the baseball player who invented the high five

Thu, 2014-07-31 11:35

It was October 2, 1977. The Los Angeles Dodgers were up against the Houston Astros on the last game of the regular season. Dodgers’ outfielder Dusty Baker was at bat. He swung and knocked it out of the park, his 30th homerun of the season - making the Dodgers the first team in history to have four position players with 30-plus homeruns each.

But, this story isn’t about those hitters.

"As Baker was rounding the bases, a young rookie came out and just spontaneously threw his hand up in the air, and slapped Baker five," says Mike Jacobs, director of Grantland’s short documentary, "30 for 30: The High Five".

That young rookie was Glenn Burke, outfielder number 12 for the Dodgers. Jacobs says Burke was a young and enthusiastic baseball player, who was just excited to be playing in a major league. He enjoyed making his teammates laugh.

"The Dodgers rallied around the high five and they even trademarked it," says Jacobs. "They made these fliers that they handed out for spring training in the 1980 season."

The Dodgers and their fans eventually moved on.

"Burke soon found himself out of favor in the Dodgers organization, amidst rumors of his sexual orientation," says Jacobs. "He was traded to the Oakland A's."

However, Burke didn’t fit in quite as well during his time with the Oakland Athletics, and within a year was forced out of the game.

Glenn Burke passed away in 1995 from AIDS-related pneumonia. He was 42-years-old.

"Unfortunately, he died too early," says Jacobs. "But really, the high five gives us an opportunity to share his story and to celebrate his legacy in that way."

What it's like to write 'Guardians of the Galaxy'

Thu, 2014-07-31 10:17

When Marvel hired writer Nicole Perlman, they offered her a list of superheroes she could delve into.

Perlman chose "Guardians of the Galaxy" because she loved the characters.

“Each one brought something very specific to the team.” Perlman says. Gamora, an alien assassin and adopted daughter to Marvel baddie Thanos, seemed like an exciting one to write.

“There’s a lot of [female characters] in comics but in terms of movies that are focused primarily on a female lead, I think it’s something that will become more common as we go. But it’s still considered a bit of a risk.”

The setting was also familiar: “I had a background in writing science and technology-related scripts. A lot of projects that were space-related."

She wanted the chance to write an action filmm but admits she wasn't well-versed in the Marvel universe before she started working for the company. That meant a lot of nights reading comic books. A research assistant helped her further explore Marvel lore.

“I could call him up and say, ‘Bring me anything you have that involves a character that’s a genius and that’s his super power.’ And he would bring me 16 different characters, going back to the 1950s."

Perlman’s background in science  came in handy, even if the scientific accuracy of "Guardians" had to bend a little.

“After all,” she says, “we do have a talking raccoon.”

Students and families are borrowing less for college

Thu, 2014-07-31 09:56

Families are taking fewer loans and using more of their own money to pay for college than at any point in the last five years. That’s according to a new study from Sallie Mae, the student-loan and financial-services company.

The study, which has been conducted annually for the last seven years, found that while families are still spending just as much on college as they were before, they paid 22 percent of costs through loans in 2014, compared to 27 percent both in 2013 and 2012.

The remaining costs were covered by out-of-pocket spending (42 percent), scholarships and grants (31 percent), and friends and relatives (4 percent).

The study also found:

  • The average family spent $11,012 on two-year, public schools in 2014. For four-year public schools, the figure was $21,072. Spending on four-year private schools was $34,855.
  • Low-income students are borrowing less than the general population.
  • More students are turning to two-year schools to cut costs. Enrollment is at 34 percent this year, compared to 30 percent last year.
  • Common cost-cutting strategies included attending in-state schools (69 percent), spending less on entertainment (66 percent), living closer to home (61 percent), and living at home (54 percent).
  • Only 38 percent of respondents said they had a plan to pay for all college costs before enrolling in college.
  • One-third of families said they were surprised by some expenses, especially textbooks.

Graphic courtesy of Sallie Mae

Bank of America will pay a $1.3 billion penalty

Thu, 2014-07-31 09:00

Federal judge Jed Rakoff has imposed a civil penalty of $1.3 billion on Bank of America. 

This is the first time a jury has found a bank — or an individual banker — guilty of mortgage fraud in the financial crisis. A former mid-level Countrywide executive, Rebecca Mairone, was found liable and fined $1 million. Bank of America did not say whether it will assist her in paying the penalty.

The ruling comes after a jury in October 2013 found the bank liable for risky mortgages that were deliberately misrepresented as safe and sound, and sold to government mortgage guarantors Fannie Mae and Freddie Mac. The mortgages were marketed by Countrywide Financial, which Bank of America purchased for $2.5 billion in 2008.

The fraud took place in 2007-2008 (before Bank of America's acquisition of the troubled bank), during the run-up to the financial crisi - just as the housing market was crashing. The marketing plan for the risky mortgages had a name in Countrywide’s corner offices, says analyst Chris Whalen at Kroll Bond Rating Agency: It was called “the hustle.” That came from the acronym for “High Speed Swim Lane,” or HSSL.

“The hustle program was about selling as many loans as possible as fast as possible, regardless of the defects of those loans,” said Whalen.

In his ruling, Judge Rakoff said the program was “driven by a hunger for profits and oblivious to the harms thereby visited, not just on the immediate victims but also on the financial system as a whole.”

Bank of America has fought this case, asserting that it should not be held fully accountable, nor pay such a severe penalty, because it didn’t own Countrywide when the fraud and other shoddy mortgage practices occurred. Bank of America and several of the country's largest banks were at the time being pressured by federal banking regulators to acquire institutions like Countrywide that were teetering on collapse, to prevent them from causing a cascade of panic and failure throughout the financial system.  

“I find it troubling that B of A is effectively being penalized for having done a public good, which was to acquire Countrywide so that it would not have otherwise failed,” said banking analyst Bert Ely. “We want to get rid of too-big-to-fail, but if you have large financial firms that are in trouble for whatever reason, who wants to buy them?”

Cleaning up Countrywide has cost BofA approximately $55 billion in legal settlements so far, more than 20 times what it paid for the bank. 

Thanks for the economy, Boomers

Thu, 2014-07-31 06:00

Commentators have a habit of blaming whole generations for various economic troubles. Case in point: Millennials have been in the crosshairs a lot lately, accused of everything from shackling the housing market to setting the stage for the next global crisis with student loan debt.

These days, Baby Boomers are getting abuse, too. Some market watchers worry that as they sell their stocks to pay for retirement, the whole market will sag.

Click the media player above to hear Marketplace senior economics contributor Chris Farrell in conversation with Marketplace Morning Report guest host Mark Garrison.

As an added bonus for listening to the audio above, you'll hear the word "boomers" mentioned an impressive 18 times in two minutes.

PODCAST: Ambulance tech

Thu, 2014-07-31 03:00

First up, a look ahead to the Jobs number for July, which comes out on Friday. Plus, more on the announcement that Sony will offer certain classic Playstation games for streaming via a subscription service. Also, EMS workers have on-the-job fatality rates that are nearly three times the national average of other professions. That’s prompted many in the industry to call for better, safer ambulances.

India plays chicken with the W.T.O.

Thu, 2014-07-31 02:00

U.S. Secretary of State John Kerry visits India on Thursday, just as India has thrown the world economy a curve ball by refusing to sign a World Trade Organization agreement at the last moment.

“They believe progress on discussing food security is not moving as quickly as it should, and so they want to use what they see as leverage,” says Alyssa Ayres, a senior fellow at the Council on Foreign Relations.

That leverage is the Thursday deadline for the WTO deal to cut the red tape on international trade, specifically targeting the bureaucracy around customs.

Boosters say the deal would result in one trillion dollars worth of economic stimulus and create as many as 21 million new jobs worldwide.

“I don’t know how many jobs it’s going to create, and I think the numbers are exaggerated. But I think that it’s critical that this agreement happens so that we have this system of international rules under the WTO,” says Kimberly Elliott, a senior fellow with the Center for Global Development.

She says the WTO helps protect small, developing countries which – unlike India – would otherwise be at the mercy of their more powerful trading partners.

Sony streams PlayStation games online

Thu, 2014-07-31 02:00

Sony is experimenting with streaming some of its classic PlayStation games over the internet. The company says it will open up the market and increase its audience.

The PlayStation Now streaming service will allow gamers access to classics like Saints Row 4, Metal Gear Solid, and Ratchet and Clank.

Janelle Bonanno is Editor-in-Chief of the online gaming magazine, GameFront.com.  

“It kind of widens the field up for those who, let’s say, don’t have a $599 PlayStation 4,” she says.  

But you’ll need a Sony Bravia television or a tablet.

Sony says the plan is to introduce PlayStation to more customers on devices they use every day.

But analyst Michael Pachter with Wedbush Securities is skeptical. He remembers the problems with OnLive’s streaming service.

“So the only thing you are going to see from Sony is really old stuff with really low value," says Pachter. "And they’re not paying much for it, and because it has low value, they’re not going to attract a lot of subscribers.” 

Sony hasn’t released its full pricing list yet, but says most games will rent for between $2.99 and $19.99.

On Twitter, addition by gender subtraction

Thu, 2014-07-31 02:00

Earlier this week, Twitter surpassed investor expectations on both revenue and user growth.

However, for frequent users, one of its challenges is that depending on whom you follow, the conversation can feel repetitive. Katie Notopoulos, senior editor at Buzzfeed, decided to solve the problem by unfollowing men on Twitter. 

Notopoulos drew much of her inspiration from a similar social experiment of only retweeting women for a year

While she started the unfollowing six months ago as part of a stunt, she says she stuck with it because it markedly improved her Twitter experience. 

"It turns out it's really nice," Katie says.

She says a major reason this has turned out so well is that being forced to follow a new set of people exposed her to a whole new set of voices and perspectives. 

How to make ambulances safer

Thu, 2014-07-31 02:00

The professional lives of emergency medical services workers are often intense and dramatic. But dangerous?

It is dangerous — EMS workers have on-the-job fatality rates that are nearly three times the national average of other professions. That’s prompted many in the industry to call for better, safer ambulances.

The U.S. Department of Homeland Security’s science and technology division has taken up that challenge, drafting new rules and recommendations for ambulance safety, including new standards for crash testing. 

Ambulances are long overdue for a redesign, says Skip Kirkwood, a director and chief paramedic at Durham County Emergency Medical Services in North Carolina.

“Today’s ambulance design is essentially unchanged since about 1974,” he explains.

Prior to the mid '70s, Kirkwood says ambulances were often adapted from a Cadillac hearse design. They then moved to the truck or van chassis we often still see today.

“Essentially, those ambulances have been boxes built by ambulance manufacturers, many of whom had their original heritage as motor home or Winnebago or travel trailer builders,” he says.

The body style means that accidents can be dangerous for EMS workers and the patients they are transporting.

“Let’s say the ambulance rolls on its side, the stretcher is now hanging up in the air and will fall out of [its] mount,” says Kirkwood. “If the ambulance decelerates quickly, that mount comes loose from the floor and the patient may fly forward like a torpedo.”

The emergency medical technician or paramedic might not be properly restrained either, says Jim Grove, a senior advisor in DHS’s interagency office of science and technology and a former EMS worker.

“When I would ride in the back of an ambulance, it was not uncommon to stand up and be doing chest compressions on somebody and having someone be holding on to my bunker pants and going down the road at 35, 40, 50 miles per hour even,” he recalls.

Based on DHS research, Grove says future ambulances might feature pivoting chairs that slide along a track, so EMS workers can treat a patient and reach their gear while properly restrained. DHS is also working on crash-test standards for ambulances going 30 miles per hour.

“I can’t answer for why it’s taken this long to get to this point,” Grove says. “There has been crash testing done, but not to level [Homeland Security’s science and technology division] has been doing, and especially with crash testing dummies.”

One potential hurdle could be cost. Grove says early estimates say these new features could add $10,000 to $15,000 to the price of an ambulance. 

It will eventually be up to individual states to adopt any new safety requirements and take on those costs.

This headline was plagiarized, please don't Google it

Thu, 2014-07-31 01:00

As the Public Editor of the New York Times says, journalistic plagiarism is in the news.

(I didn't steal that idea, I attributed it, which is a key difference between plagiarizing and not plagiarizing.)

Some of the people in the news for committing journalistic plagiarism have the same name as me. Don't get confused: I am not Benny Johnson.

I did not work for a paragon of modern journalism called The Blaze before being hired to cover politics in inventive ways at Buzzfeed in 2012. I did not plagiarize parts of 41 stories I wrote at Buzzfeed, before being admirably fired by Buzzfeed.

By the way, I do like Buzzfeed. A lot. Even when Buzzfeed doesn't like me. I just talked to one of the site's senior editors about why she stopped following people like me (read: dudes) on Twitter. 

But even though I go by Ben instead of Benny, I have been thinking a lot about plagiarism this week. It's one of the things journalists are most scared of, and for good reason. Even if it's a mistake, it's rarely an honest one. Unlike in the world of fiction, journalistic plagiarism is a scarlet letter -- a final judgement. Plagiarism is the thing you do that almost immediately undermines all of the other work you've ever done.

What's interesting is that media in the Internet age spins ever closer to regular idea theft. Rewriting or re-contextualizing the hard reporting work of others is its own kind of job, and hard-working people are doing it all the time. I was just talking with a Marketplace reporter yesterday who was excited about an idea -- an angle, really -- but was worried she was actually plagiarizing her own work from a few years back. She was Googling like mad to try and avoid it. 

That's what's also strange about the Internet age. It is at once easier than ever to plagiarize and easier than ever to catch plagiarizers. The number of sources you could steal from has increased tenfold, but the nature of how those sources are organized online makes it easy to catch people. Yet another problem solved by big data.

That's how Benny Johnson got caught. Ironically, he was shaming another website for plagiarizing his work. And then some bloggers took a closer look at his work. It soon became clear, as Slate's David Weigel noted: "Anyone with a working Google machine can compare Johnson's text, which typically consists of captions below photos or gifs, to existing content on Wikipedia or Yahoo -- the sleuthing has turned up more short phrases and sentences that look cloned."

Maybe some day writers of all kinds will work in software that is constantly Googling each sentence we write to see if it's been written elsewhere. And maybe that's good news. Today I'm just glad that on the searchable Internet, I go by Ben, not Benny. 

Film directors want to give Kodak another artsy moment

Wed, 2014-07-30 13:45

Recent years have been tough for the Eastman Kodak Company. It emerged from bankruptcy in 2013 with a focus not on consumer products but on business consumers.

As film has gone digital, the company’s says its sales of motion picture film have declined by 96 percent over the last ten years.

But the company that gave us the “Kodak Moment” is getting some help from friends in Hollywood. Directors like Judd Apatow and Quentin Tarantino are pushing movie studios to commit to buying a certain amount of film from Kodak for the next several years.

The directors want to preserve the option to shoot film in the future, and Kodak CEO Jeff Clarke says in a statement that the company praises the “ingenuity in finding a way to extend the life of film.”

David Reibstein, a professor at The University of Pennsylvania’s Wharton School, says having that option in the long-term will depend on what Kodak does with these sales.

“If you’re just getting more money to continue to do what it is that you were going that wasn’t working, that’s not going to be a successful strategy,” he says.  Reibstein notes that when General Motors invested in saving its ailing but iconic Cadillac brand, it undertook a major redesign and targeted a new demographic of customers.

Propping up a product in the short term can be like a finger in the dike, says Ken Doctor, a media analyst for Newsonomics. He sees a parallel between Kodak’s deal and one pushed by former French President Nicolas Sarkozy to help ailing newspapers.

“He had the government fund one year subscriptions to… the students graduating from high school in France as a way to stem the tide,” he explains. “That was a short-lived program.”

But there is still value in Kodak’s brand, because now it has an "artisanal" quality to it, says Douglas Holt, president of the Cultural Strategy Group, a brand consultancy. He says Kodak used to be a symbol of mass culture; now the culture it recalls has become antiquated and cool.

“Pabst Blue Ribbon, Polaroid – a lot of these brands that were mass cultural brands of the [past decades], the '50s, '60s, '70s, have the same possibility to push back against the mass culture of today,” he says.

Editor's note: An earlier version of this story failed to say Kodak had emerged from bankruptcy. Further, the story lacked sufficient context concerning the agreement the company and movie studios are pursuing, and it failed to include a comment from Kodak. The text has been amended.

Drones have a new celebrity spokesperson

Wed, 2014-07-30 13:45

The Motion Picture Association of America is a big fan of drones — or, officially, "unmanned aerial systems." The organization asked the Federal Aviation Administration yesterday to make it easier for directors to use drones in filming.

Another big fan of drones? Martha Stewart.

Drones are trending.

— Martha Stewart (@MarthaStewart) July 30, 2014

She has written a piece for Time, called "Why I Love My Drone."

Someone gave her one last summer as a gift. And, we learn, her mind "started racing" as she "imagined all the different applications" for it.

Stewart and her staff have been taking drone pictures of her beach house in Maine and her farm in New York.

"An aerial shot of the vegetable garden looked very much like my Peter Rabbit marzipan embellished Easter cake," she writies. "Which was designed without the help of a drone."

How the McDonald's ruling impacts the franchise industry

Wed, 2014-07-30 13:45

The general counsel of the National Labor Relations Board (NLRB) has handed down a decision that could have implications for the millions of Americans who work for franchises.

After investigating claims that some McDonald's restaurants broke labor laws by firing or penalizing workers who took part in pro-labor activities, the NLRB's general counsel said if the owner of a McDonald's fast food franchise commits a labor violation, the McDonald's corporation can be held jointly liable for the franchisee's bad behavior.

For now, the decision affects only the McDonald's corporation and McDonald's franchises. There are 3,000 other brands with franchise operations in the U.S., employing 8.5 million people across a range of industries, according to the International Franchise Association (IFA).

The IFA's Matthew Haller says the decision could destroy the franchise industry. Franchises may bear the names of big companies, he said, but they are owned and run like small businesses. 

"They set the wages, they hire and fire the employees, determine the appropriate benefits for employees and are responsible for all decisions that take place at the employee level," Haller said. 

The NLRB's general counsel said the McDonald's Corporation exercises enough control over how franchises are run to make it a co-employer of the people who work for franchises.

"They do exercise quite a bit of control over their franchisees in order to protect their brand," said Wilma Liebman, a former chair of the NLRB who has been advising the SEIU, a union that is working to organize fast-food workers. 

What McDonald's Corp. controls and what it doesn't is laid out in the terms of its franchise agreement. So even though other franchisees in other industries are watching the decision closely, it's not yet clear how this will affect other companies. McDonald's said in a statement that it plans to contest the NLRB's decision.

Twitter is relying on the Underwear Gnomes Profit Plan

Wed, 2014-07-30 13:45

Twitter released its quarterly results and they were impressive — shares jumped nearly 20 percent today.

The social media giant says they have picked up 16 million users in the last few months, making a grand total of 267 million users on Twitter. On top of that, revenue more than doubled thanks to new types of mobile ads.

Of course, revenue and profit aren’t quite the same thing. Twitter is still losing money.

That might sound surprising, but it’s actually pretty typical for tech companies, which tend to have a business plan that strongly resembles the business model of the Underpants Gnomes from South Park.

South Park Underwear Gnomes Profit Plan (full) from Jane Lu on Vimeo.

"It’s actually a very good business model," says Erich Joachimsthaler, CEO of Vivaldi Partners.

OK, he’s actually not talking about the underpants gnomes, he’s talking about Twitter and other tech companies, which tend to follow a plan that looks something like this:

PHASE 1: Attract millions of users with free services.

PHASE 2: Figure out some way to exploit those users.

PHASE 3: Make millions of dollars.

We’ve seen this work time and again, says Joachimsthaler - think Google and Facebook.

"As habit forms and as millions of people become hooked, Twitter has an opportunity to add advertising [and] some e-commerce functions, basically monetizing the asset," Joachimsthaler says.

But that could be tricky for Twitter. Advertisers love Facebook because it knows so much about its users and there are so many of them, says Ken Wilbur, assistant professor of marketing at UC San Diego's Rady School of Management.

He says they don’t love Twitter quite as much.

"When you put ads into the Twitter feed itself, it lowers the utility of Twitter to its users," Wilbur says. "And they don’t have a great platform for putting ads next to the feed."

Wilbur says it remains to be seen whether Twitter can find a way to fully monetize its users. It could either be the next Facebook or the next Friendster. At one time, Friendster was the biggest social network on the web, with more than 100 million users and now it’s a gaming site based in Malaysia.

Ah, the pitfalls of phase two.

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