Are Pirates Bussinessmen?

Until recently, I thought of high seas pirates as a fiction or at least gone the way of the dinosaurs. This week's drama of an American ship's captain taken hostage by so-called pirates off the coast of Somali made the pirate thing quite real. Most interesting to me were experts calling these Somali pirates businesspeople, in it for the money and not for religious or political purposes. Could this be so -- or does such a comparison do injustice to real business concerns?

If these Somali pirates are an analogue to those Barbary Pirates 200 years ago (see this very interesting article by Jeffrey Gettleman), then you can make a case they do operate a business. First, Piratry did have a simple and effective business model. They offered their services to corrupt governments who provided them safe haven in exchange for a percentage of rich ransoms collected (called "tribute" back in the day). Pirates offered sailing ships an offer they couldn't refuse -- safe passage in exchange for a tribute. Pirates did not harm their hostages as long as they complied; a live hostage was an asset. Indeed, some in the current crisis have noted that the modern day Pirates will act in the best interest of their pocketbook. Also, the pirate entities actually had ambassadors representing in places like the U.S. and France. It makes me think of Robin Hood operating in Sherwood Forest, terrorizing rich travelers to guarantee their safe passage.

There are some rich ironies. First, while Robin Hood's band did terrorize otherwise innocent travelers, they did give back to the mostly poorer townspeople, and not the government under Prince John and the sheriff. These pirates raided a ship supplying needy people in order to line the pockets of corrupt government officials. Second, the U.S. ship coming to the rescue of the American captain was the U.S. Bainbridge, named after one William Bainbridge who was captured by Barbary Coast pirates in early 1800s and later was a hero in the War of 1812. A couple of centuries later I guess he finally got a measure of revenge.

All businesses eventually decline. First, will ships avoid the Somali seas? Different routes might become a substitute. If the pirates try to expand their operations then other nations will likely have to become stronger in their resposne (even more than what the U.S. did in rescuing the captain). Competition up to now has been weak, but it will get stronger as the Pirates become more successful (competition always follows success). According to Gettleman's article the Barbary Pirates' own hubris led to their demise. After today, with the re-capture of Captain Phillips by Navy seals, it looks like the Pirate business model has now taken 3 bullet holes.

Will Donald Trump Bolt NY?

One of the important tasks for companies that want to survive over the long term is to find new revenue sources. Unfortunately, many companies don't do this well. Sometimes they create one too many line extensions of an existing product. Consumers are pretty savvy and can judge when a line extension simply seeks to profit from the brand rather than offer something new. Some old line businesses are now openly seeking new revenues, such as newspapers where the Internet has changed the way people consume news -- and marginalized the importance of the presses that print news.

Government is no less creative at finding new revenue. The difference is that government doesn't create anything, it simply taxes those that do (or have the income to do so). States like companies have bottom lines they must face and those states are coming up with all kinds of creative ways to generate new revenue streams. New York is contemplating a millionaires tax to boost their paltry bottom line. This is a special tax for those making a million dollars -- only it turns out that the tax can kick in on an income as low as $300,000. The good news is that makes more people millionaires (effectively narrowing the income gap!).

When bad business ideas fail, the investment is lost and shareholders will probably suffer at least some. When politicians get creative on creating revenue unintended consequences are usually the result. For New York, increasing the tax on millionaires will likely chase some of them out of Dodge. You see, states operate in a market as well and it should not be hard for other states to offer these rich people a more hospitable home. Would Donald Trump shop his taxes and leave New York? Don't know if you could live with celebrity, but . . .

Does Julia Roberts want to Put a Ceiling on Pay?

An interesting survey shows that 30% of Americans say yes to the following question: "Do you think the government should limit the amount of money that companies NOT taking federal funds pay their executives?" Now admittedly over 60% said no, but still curious that a good number people think government should meddle in how people in private companies are paid.

This makes me wonder if others should have limits on how much they make. Consider the top stars of Hollywood for example. Routinely, stars like Denzel Washington, Jim Carey, Nicholas Cage, and Julia Roberts get what are called "first-dollar gross" deals where they get a percentage of every dollar of the movie's gross receipts. And this is guaranteed regardless of how well the movie does! For his role in "Meet Dave," Eddie Murphy earned a nice payday even though the movie lost nearly $70 million!). Now studios are "wising-up" and offerring only what are called "back-end" deals where the star gets a percentage only after the movie covers its costs.

This begs the question: "Why are studios so dumb for making these first-dollar deals?" To boil it down to basic Econ 101 -- it's the market. If a studio wants to have a big hit, they need to have mass appeal, thus the desire for a big headliner to help the draw. In addition, studios are relying more and more on international sales to drive their overall take--and these markets are even more dependent on known stars on the billing. Now add the supply component. Before the last year, so many movies were being made, top stars had options on the films they did. This further degraded the studio bargaining position.

Now it seems the supply and demand environment has changed. First, financing sources (usually from Wall Street) have dried up because of the financial crisis. This has caused studios to scale back on production, which has decreased the supply of movies for top actors to choose from. So now the studios have more leverage with these actors to get friedlier deals. Some actor agents lament that lucrative first-dollar deals may go the way of the dinasoar.

CEO salaries are too high on most objective measures -- and all subjective ones. Often critics of CEO pay point to the differential with other employees in the firm (e.g., they make 75 times of lower level employees); that differential is as great or greater in Hollywood as some stars make more than $30 million for one film (talk about bulging the gap between the and have-nots!). Yet, understanding the underlying market forces helps explain some of the behaviors.