December, 2003

Americans swarm to anything that’s free–both literally and rhetorically–so corporate PR departments naturally employ rhetoric like “free trade” and “free markets” to advance their agendas. But it’s a mystery why opponents of trade agreements that elevate corporate interests above democracy concede the terms of debate by calling for “fair trade, not free trade.”

International trade agreements erect trade barriers as often as they remove them. As Wayne Andreas, CEO of agribusiness giant Archer Daniels Midland, said, “There is not one grain of anything in the world that is sold in the free market. Not one. The only place you see a free market is in the speeches of politicians.” Well acquainted with both illegal price fixing and legally wielding political power to extract taxpayer subsidies, Andreas knows of what he speaks.

Not only do treaties like the proposed FTAA outlaw forms of protectionism that serve the public interest–such as safeguards for healthy air, drinkable water and a safe workplace–they also preclude or destroy competition in many business realms.

A driving force behind most existing and proposed trade agreements is politically-powerful corporations’ pressure to expand the most costly and anti-competitive forms of protectionism–patents, copyrights and other monopolies grouped under “intellectual property rights.”

Many such rights are essential to ensure writers, researchers, musicians and others receive just compensation for their work. Often, however, what’s patented is taxpayer-funded research. Rather than benefiting the public, it is given away or sold for a pittance to corporations that reap huge profits under trade agreements that internationalize their monopoly on a product.

Take the hotly-debated prescription drug market. According to a 1995 Massachusetts Institute of Technology* study, eleven of the 14 most medically significant drugs developed in the United States between 1970 and 1995 originated with government-funded research.

$500 million in public money funded research and testing for Taxol (the best-selling cancer drug ever), beginning in the 1960s–decades before its commercial debut.

So what return did taxpayers get from this potentially lucrative investment that could have reduced our taxes or made cancer treatment affordable to all? Nothing.

Actually, worse than nothing.

First, the National Institutes of Health granted exclusive production rights to Bristol-Myers Squibb Inc. for a pitiful 0.5% royalty. Then Americans paid the corporation $687 million between 1994-1999 alone for Taxol purchases via Medicare at markups that would make street drug dealers blush–up to 2000 percent over production costs! Such profit margins would be impossible without the government-created monopoly that resembles corporate socialism more than a free market.

Meanwhile, we’ve collected just $35 million in royalties, and Squibb executives gain more through investments in politicians than Taxol research. And while import tariffs rarely increase product prices more than 25 percent, patent-protected monopolies can gouge us for 20 times the cost we’d see in a free, competitive market. Thus pharmaceutical manufacturers enjoy a stunning median profit margin of 17 percent–more than five times the median for Fortune 500 industries.

Imposing these obscene profit margins abroad (through trade pacts that poor countries often have little choice in signing) effectively mandates suffering and death to bolster corporate profits in many instances. For example, poor countries that import generic AIDS drugs that save thousands of lives have been sued to halt the practice as a violation of trade treaties.

Such market distortions aren’t unique. From another angle, the Consumers Union recently issued a detailed report showing that independent pharmacies beat chain competitors in price, service and overall satisfaction. So why have more than 10,000 independent pharmacies disappeared since 1990?

In addition to massive advertising power to falsely convince shoppers that those chain stores provide better value, government discrimination again is a major factor.

Congress forbids states from letting local businesses compete against mail order or Internet vendors in a free market by prohibiting states from collecting sales tax from remote vendors on interstate sales. So in 45 states, a community-serving business competes against an effective federal handicap that averages 8.3 percent of a product’s cost.

Amplifying such handicaps are corporate actions like that of the “big three” U.S. automakers inserting last-minute language into the United Auto Workers’ latest contract that says workers’ insurance will cover only mail-order prescriptions.

Another recent report noted that Pennsylvania’s health plan for state workers mandates that they fill prescriptions at Rite Aid or via online vendors. The automakers and the state government may save a few dollars, while their employees lose important personal service and communities lose irreplaceable businesses.

Where are those politicians and “free market” think tanks that object loudly to “limiting choice” or advocate for “states rights” when it’s small businesses who are disadvantaged? Apparently they don’t like to confront the fact that political power now determines which markets will or will not be free.

“Free market” mythology aside, the core reason for citizens to reject any new trade agreements that expand corporate power is the creation of international commerce rules that trump democracy. But in doing so, citizens should not concede the false premise of these pacts being about “free trade.”

We should shift debate to democratic terms and reject language that stacks the deck against us. Distinguishing theoretical free markets from our reality of corporate capitalism would be a fine place to start.

First published by The New York Times Book Review
September 14, 2003

”Nothing is illegal if 100 businessmen decide to do it.”

After two years of corporate scandals, billions of dollars in investor losses and a tawdry parade of guilty-pleading corporate princelings — the latest, on Wednesday, was Ben F. Glisan Jr., a former treasurer at Enron — it’s hard not to love a book that opens with that ruefully apt observation, attributed to Andrew J. Young Jr., the former Atlanta mayor and ambassador to the United Nations.

That was just the first laugh-out-loud moment in ”Gangs of America” (Berrett-Koehler Publishers), Ted Nace’s provocative and entertaining examination of the rise of corporate power in America. It is followed by wonderful vignettes of the obscure jurists, lobbyists and business executives who helped slap together the intellectual bricks and legal mortar of the American Corporation.

The often lopsided conclusions drawn from this engaging history will infuriate or exasperate many readers. Mr. Nace successfully founded the Peachpit Press, a technology publishing house, and is thus a baptized capitalist himself, but he nevertheless thinks that corporations have too much power and he wants citizens to do something about it. Even if you disagree with his conclusions, no one but the most humorless acolyte of the capitalist religion could be bored by the evidence he gathers.

That is a surprising and welcome achievement, because most of the business-bashing books that tumble down on us these days are the literary equivalent of fingernails scraping across a blackboard. And that’s a shame, because behind all the caterwauling about ”Corporation Rex” are some profoundly important questions about the balance between the virtues of our civic institutions and the demands of our corporate interests. America is long overdue for a less rapturous re-examination of its continuing experiment with the joint-stock, limited-liability business form that we call the corporation. Despite its unfortunately pugnacious title, ”Gangs of America” addresses both needs with lively insights and refreshing research.

Mr. Nace opens with a succinct account of how General Motors and a handful of other giant corporations helped engineer the eclipse of America ‘s electric streetcar system in the 1930’s and 40’s. But, thankfully, this is not another catalog of corporate conspiracies and corruption. Instead, Mr. Nace is curious about how corporations — those merely imaginary constructions of legal paperwork — acquired their power and rights.

His research took him deep into the archives of the 14th Amendment, at least as important for corporate Americans as it was for African-Americans. He dusts off some shocking but largely forgotten discoveries about the Supreme Court case that is the Rosetta stone of corporate law. And he examines the little-noticed contributions to corporate power made by Lewis F. Powell Jr., the Supreme Court Justice who died in 1998.

”Powell tended to be a bridge builder between conservatives and liberals on social issues such as abortion,” Mr. Nace writes. ”But in his advocacy on behalf of large corporations, Powell was anything but moderate.” In 1971, two months before his nomination to the Supreme Court, Mr. Powell drafted a memorandum for the United States Chamber of Commerce warning that free enterprise was fighting for its life against passionate antibusiness forces in American society. ”As every business executive knows, few elements of American society today have as little influence in government as the American businessman,” Mr. Powell wrote just three decades ago. He added, ”One does not exaggerate to say that, in terms of political influence with respect to the course of legislation and government action, the American business executive is truly the ‘forgotten man.’ ”

How we got from there to the point where energy executives are intimately involved in the drafting of American energy policy is just one of the fresh strands of historical evidence woven into Mr. Nace’s story.

Of course, there are flaws, two of them fairly serious. Mr. Nace almost entirely ignores the American shareholder. He approaches corporations as ”them,” separate and threatening. In fact, in the spirit of Pogo, the Walt Kelly cartoon character, we must increasingly say that we have met the corporation and it is us. Mr. Nace also slights the contributions the corporate form has made to average Americans’ prosperity — aside from a whimsical acknowledgment that ”this book owes its existence to a computer made by Toshiba Corp., software from Microsoft Corp., electricity supplied by Pacific Gas & Electric Corp. and coffee roasted by Peet’s Inc.”

Fortunately, Mr. Nace’s case for the prosecution is ably balanced in bookstores these days by the case for the defense, ”The Company: A Short History of a Revolutionary Idea” (Modern Library) by John Micklethwait and Adrian Wooldridge, two writers for The Economist. By itself, ”The Company” is too rosy by half about the history of the joint-stock corporation. Where are the greedy appetites, brazen vote-buying and courtroom arm-twisting? And unlike Mr. Nace, these writers think the future belongs to smaller, nimble corporations, not the multinational giants.

But ”Gangs of America” and ”The Company” agree that the corporate form is best thought of as a ”technology,” as potentially beneficial as gene-splicing, as potentially dangerous as atom-splitting. Together, they offer a stimulating point-counterpoint perspective on what may be one of the most important debates of this new corporate century.

© 2003 New York Times

by Martin Peers
First Published September, 15 2003 in the Wall Street Journal

Two years ago, Mattel Inc. gave CBS a choice. The network had refused to broadcast the toymaker’s movie “Barbie in the Nutcracker” in prime time. So Mattel threatened to pull millions of dollars of advertising from the Nickelodeon cable channel — owned by CBS parent Viacom Inc.

Viacom, which had spent a decade bulking up with acquisitions, now wielded its new clout, according to people familiar with the situation. If Mattel made good on its threat, Viacom said, it would be blacklisted from advertising on any Viacom property — a wide swath of media turf that also includes MTV, VH-1, BET, a radio broadcasting empire and even billboards. Mattel backed down, and the Barbie movie ended up running during a less-desirable daytime period.

Neither company will comment on the scrape, but Viacom says Mattel remains a “valued advertising partner.” More generally, President Mel Karmazin in an interview is blunt about his company’s strategy: “You find it very difficult to go to war with one piece of Viacom without going to war with all of Viacom.”

Viacom and its big media peers have been snapping up cable channels because they’re one of the few entertainment outlets generating strong revenue growth these days. More broadly, the media giants have discovered that owning both broadcast and cable outlets provides powerful new leverage over advertisers and cable- and satellite-TV operators. The goliaths are using this advantage to wring better fees out of the operators that carry their channels and are pressuring those operators into carrying new and untried channels. They’re also finding ways to coordinate promotions across their different holdings.

Entertainment giants such as Viacom, NBC parent General Electric Co. and Walt Disney Co., which owns ABC, now reach more than 50% of the prime-time TV audience through their combined broadcast and cable outlets. The total rises to 80% if you include the parents of newer networks — such as News Corp.’s Fox and AOL Time Warner Inc.’s WB — and NBC’s pending acquisition of Vivendi Universal SA’s cable assets, estimates Tom Wolzien, an analyst at Sanford C. Bernstein & Co.

The big media companies are quietly re-creating the “old programming oligopoly” of the pre-cable era, notes Mr. Wolzien, a former executive at NBC. Of the top 25 cable channels, 20 are now owned by one of the big five media companies.

The idea of owning broadcast networks as well as cable channels is “comfortable for people like ourselves,” says Bob Wright, chairman of NBC, which two weeks ago signed a preliminary agreement to acquire Vivendi Universal’s USA and Sci-Fi cable channels, along with the Universal film studio, bolstering a stable of cable channels that includes Bravo, MSNBC and CNBC.

For the past several years, Viacom and other media companies have pressed the Federal Communications Commission to relax restrictions on owning local TV stations. One of their main arguments: Their audience is shrinking as cable booms and the TV audience fragments. The original three broadcast networks now capture only 33.7% of the prime-time television audience, down from 69.3% in 1985-86. Cable now boasts a 49.3% share, compared with 7.5% in the mid-’80s, according to a Cabletelevision Advertising Bureau analysis of data from Nielsen Media Research.

But with the wave of consolidation and the increased reach of the media giants, some cable systems are fighting to keep restrictions on TV-station ownership in place. Cox Enterprises, parent of the fourth-biggest cable operator, Cox Communications, has argued that the big broadcasters are abusing protections granted them under federal law. The broadcasters, Cox argues, are using those protections to charge cable systems more for their cable channels. Cox and others have complained to the FCC that media companies make them accept less-popular cable channels in exchange for carrying their broadcast networks.

Media companies counter that their consolidation only puts them on a level playing field with cable operators, who are themselves merging into giants. Comcast Corp.’s acquisition of AT&T Corp.’s cable division last year gave it a reach of more than 21 million homes, for instance, almost 30% of homes served by cable. Comcast has already begun to tell cable channels it wants to save money on what it pays for programming, setting the scene for increasingly contentious negotiations with big media companies.

“There has been so much consolidation” among the distributors that “unless you are equally big … you risk a situation where you can be marginalized,” says Viacom President Karmazin.

Following the Money

In buying up cable channels, the media conglomerates are simply following the money. The music business is shrinking rapidly as piracy eats into sales. Universal Music Group, the world’s biggest, is now thought to be valued at $5 billion to $6 billion, less than half what it was a few years ago. The film business is volatile, with a quarter’s performance dependent on whether movies bomb or not. The publishing business is steady but grows at a slow pace. Broadcast television’s audience is shrinking, and its business model is entirely dependent on advertising revenue, a cyclical business.

Cable channels are gushing cash because they generate revenue from two sources — subscriptions and advertising. The subscriptions don’t come directly from customers, but through cable-TV services, which operate the vast array of wires and pipelines connected to homes, and through satellite-TV services that beam the signal. For the right to carry the programming on their systems, these cable-operating companies pay a range of monthly fees, from 26 cents a subscriber for VH-1 to more than $2 for ESPN. These fees, for the most part, increase every year, providing a steadily rising annuity for the channel owners.

As cable viewership has increased, so has advertising. Since 1980, cable-channel ad revenue has risen from practically nothing to $10.8 billion in 2002, according to the Cabletelevision Advertising Bureau. Some channels, meanwhile, are cashing in on strong brand names. Nickelodeon, for one, is a merchandising powerhouse, with products including Dora the Explorer backpacks and SpongeBob SquarePants videogames.

The result has been an explosion in profits. MTV earned just $54 million in 1989, estimates Kagan World Media, but is expected to make more than 10 times that much this year. QVC, the home shopping channel, generates so much money that Liberty Media recently agreed to buy full ownership of the channel at a value of about $14 billion — the same value put on all of Vivendi Universal’s film and TV assets.

Cable channels’ surging profits have transformed the bottom lines of their parent companies. E.W. Scripps Co., the 125-year-old Cincinnati newspaper publisher and TV-station owner, now relies on its cable division for much of its profit growth. In 1994, Scripps launched the Home and Garden channel on the initiative of a TV executive, Ken Lowe, amid widespread skepticism. One Scripps newspaper publisher approached Mr. Lowe at the time to complain “a lot of the cash that I’m making here is being shipped to you…. You better know what you’re doing,” Mr. Lowe recalls.

Nine years later, HGTV has become one of the most popular cable channels, with shows such as “Design on a Dime” and “House Hunters.” Scripps added a controlling stake in the Food Network in 1997. In the second quarter of this year, the impact of cable channels, including the Home and Garden channel and the Food Network, was clear: Newspaper and broadcast-TV profits both fell, while cable-channel profit jumped 70%, helping Scripps’s net profit more than double. Scripps stock is trading near its 52-week high of $90.65, up almost 30% for the past 12 months.

The publisher who had complained about the cable-channel investment recently thanked Mr. Lowe, now Scripps’s CEO, noting that the rise in Scripps’s stock price would put his three children through college, Mr. Lowe says.

Since 1990, almost half of the top 50 cable channels have changed hands. Among the big deals: Disney’s $19 billion acquisition of ESPN’s parent, Capital Cities/ABC, and Time Warner’s $6.7 billion purchase of CNN parent Turner Broadcasting, both negotiated in the summer of 1995. In 2001, Disney bought the Family Channel from News Corp. for $5.2 billion.

Last year, NBC bought Bravo for $1.3 billion. CBS, owner of The Nashville Network (now Spike TV) and Country Music Television, itself was gobbled up in 2000 by MTV’s longtime parent, Viacom. Viacom has since added channels such as BET and Comedy Central.

Mr. Karmazin recently boasted to investors that the company’s broadcast and cable outlets reach 26% of the nation’s viewers in prime time, a significantly bigger share than any other company. Having such a big market share is “real important for lots of reasons, in terms of dealing with advertisers and our cable partners,” he told investors.

Ad sales and marketing executives from the CBS and MTV Networks divisions meet regularly to share information and plot cross-promotional opportunities. In January 2001, MTV staged the halftime show for the Super Bowl, which was broadcast on CBS, featuring performances from Aerosmith and Britney Spears.

Last fall, CBS helped stem a slide in young women viewers of its reality blockbuster series “Survivor” with a documentary on the series that ran repeatedly on MTV before the new season of Survivor premiered. The premiere episode of “Survivor” on CBS saw a 23% jump in its young female audience, says George Schweitzer, executive vice president of marketing for CBS. CBS promoted its sitcom “King of Queens” through a special last Friday on Viacom’s Comedy Central cable channel.

Protecting One Another

The broadcast and cable sides of Viacom generally don’t try to sell ads jointly, but the common ownership allows them to protect each other’s flanks. At a presentation to advertisers last spring, MTV executives compared the audience reach for most of MTV Networks with ABC, NBC, Fox and WB — but CBS’s figures weren’t included in the breakdown, so that MTV didn’t siphon ads from its corporate cousin.

Meanwhile, Disney’s ownership of both ABC and ESPN allows it to spread out the cost of expensive sports packages such as its deals with the National Football League and the National Basketball Association. ABC Sports is, in fact, overseen by the same executive who runs ESPN, George Bodenheimer, and the two operations regularly promote each other’s programming and share talent.

Joint ownership of cable and broadcast is particularly valuable in negotiations with cable operators. A 1992 law allows broadcasters to regularly renegotiate the price for carrying TV stations’ signal on cable. While broadcasters could charge a cash fee, they usually offer the broadcast stations free in exchange for carrying a new cable channel they’ve launched. Few viewers would subscribe to cable if ABC, CBS or NBC weren’t on the channel line-up, so the cable operators have little leverage.

The strategy lets broadcasters add more cable channels, including many narrowly focused networks. Since 1993, big media companies have launched at least 35 new cable channels by bartering the right to carry their broadcast stations, estimates George Callard, an attorney with Cinnamon Mueller, a law firm that is counsel to the American Cable Association.

Using such a strategy, cable operators say, Disney has shoehorned its Soapnet cable channel, which features reruns of soaps such as “General Hospital,” into services reaching 33 million homes. Disney argues that fewer than half of those homes have the channel as a result of a barter arrangement.

Cox Enterprises complained in a filing with the FCC in January that Cox Communications had to agree to carry Soapnet nationally in exchange for the right to offer ABC stations in just a few of its markets. A Disney spokesman says Cox is a “savvy negotiator” that “wouldn’t have signed the deal unless they found value in it.”

Catalina Cable, a cable-TV operator on Catalina Island off the California coast, has only 1,440 customers. Ralph Morrow, Catalina’s owner, says he was asked to carry Soapnet when he tried to renew his right to carry a Disney ABC affiliate for the beginning of 2000. He says he suggested paying cash for ABC instead. Disney’s response was that the cash fee for ABC would be “really high,” he says. “They made it clear to me” that he didn’t have that option “at a reasonable price.” A Disney spokesman says Mr. Morrow mischaracterized its offer, noting that Disney offers operators “multiple options, including a stand-alone cash offer which we believe to be a fair offer and fair value.”

Mr. Morrow, who says he doesn’t see the need for a soap-opera channel, now pays Disney 11 cents a subscriber for Soapnet. Disney responds that surveys of viewers have shown Soapnet to be popular. The channel drew 97,000 viewers in July and August, according to Nielsen. In the same period, HGTV — which is available in about two and a half times as many homes — averaged 457,000 viewers.

–Joe Flint contributed to this article.

© 2003 The Wall Street Journal