WASHINGTON, D.C.--The White House's $3.6 trillion budget, outlined Thursday, provides a broad plan for government spending during the next decade and a road map for slashing the deficit from $1.75 trillion to $533 billion by 2013. But its true value may be in what it says about how Americans will be taxed during that same period.
Specifics of the Obama administration's budget plan won't be unveiled until April--standard procedure for a first-year president. But many of the broad strokes are campaign promises finally put to paper, causing worry from some quarters of the business community. "There's a significant business tax increase suggested in this budget," says Clint Stretch, a tax expert at Deloitte Tax LLP in Washington.
Among them is the closure of tax "loopholes" for the oil and natural gas industries, raising revenue by $32 billion over the next decade. In part, the money would come from reinstating an excise tax on oil and gas from the Gulf of Mexico. It would take away a tax deduction that treats oil and gas as manufactured goods. And it would repeal provisions that allow some drilling costs to be counted as expenses instead of an investment.
The industry, obviously, is not happy. "New taxes could mean fewer American jobs and less revenue at a time when we desperately need both," says Jack Gerard, president of the American Petroleum Institute. Less revenue? Higher taxes would discourage oil and natural gas investment domestically, sending it overseas, he argues.
Another major concern is a very vague line item that calls for better implementation of international tax enforcement, reform of tax deferral for income earned and kept overseas, and "other tax reform policies." It's expected to raise revenues by $210 billion during the next 10 years.
Business groups don't like what they see. "We've all been invited to the dinner, but some of us turn out to be the main course," says Martin Regalia, chief economist for the U.S. Chamber of Commerce.
Of course, not all proposals affecting business are tax hikes. As he proposed on the campaign trail, Obama's budget calls for an elimination of capital gains taxes on small businesses, which would begin to take effect in 2014. A permanent expansion of the "research and experimentation" tax credit would take effect in 2010, costing $74.5 million over a 10-year period.
Also assumed is an expansion of a tax provision that allows businesses to carry back current losses to prior years when they were profitable. That means they can get big refunds from the Treasury now from the taxes they paid in their profitable years. The details aren't spelled out, but PriceWaterhouseCoopers tax expert Lindy Paull says the figures indicate that the "carryback" period will be five years for all businesses.
In late November, Louisville, Ky., abruptly abandoned plans for a Christmas display based on the story "How the Grinch Stole Christmas."
It wasn't because of public uproar, or the big green meanie terrifying small children. No, it was the cease-and-desist letter from lawyers representing the estate of legendary children's author Dr. Seuss, threatening to sue for copyright infringement if the city went ahead with the Grinch-themed display.
"It appears these lawyers' hearts are two sizes too small," Louisville Mayor Jerry Abramson told reporters at the time.
Same thing happened in Medford, Mass. The town narrowly escaped a copyright infringement suit for a Christmas celebration called "Jingle Bells Festival." Medford officials agreed to rename the festival next year after Black Crow Media, a company based in Valdosta, Ga., filed a lawsuit alleging infringement.
So be warned. Christmas may be a lot of things, but it's also a boon for lawyers, as owners of some of your most beloved holiday traditions defend their intellectual property rights from all comers.
Santa Claus is a case in point. Father Christmas, a British company and owner of Santa-Claus.com, owns a trademark for "Santa Claus." Trademark experts say that "Santa Claus" has become part of the public domain and that the trademark probably would not pass muster in a legal challenge. But apparently, the U.S. Patent and Trade Office didn't agree. In 2000, it added the “Santa Claus” trademark to the long list of approved holiday-themed, legally recognized trademarks, which include everything from "Santa's Elf" clothing to "St. Nick's" beer to "Santa Claws" pet apparel.
Domain names are also a holiday legal hot spot. GlobalAccess, an obscure company located on the equally obscure Isle of Man, has owned Christmas.com since 1994. Versimedia, which also owns GreetingCards.com, has owned Hanukkah.com since 1997. P. Gordon, owner of Getaway.com and UnitedStates.com, owns Holidays.com.
The
economic downturn is renewing interest on Madison Avenue in a marketing
mainstay that is particularly popular during tough times: cash
giveaways.
Contests and sweepstakes with money prizes rather than
merchandise like cars, furniture or trips are appearing more frequently
as the financial crisis continues. In some instances, the dollar
amounts are as high as seven figures, as in a contest with a $1 million
bonus being sponsored by the Doritos brand of snack chips sold by
Frito-Lay.
Who wants to be a millionaire? These days, just about everyone -- even people who a few months ago were billionaires.
"Everyone is trying to get you to buy
something at a time when no one is buying," said Michael Watras,
president at Straightline International, a brand consultancy in New
York. "They've got to do what they can."
The trend includes these other examples:
"Secret
Millionaire," which Fox Broadcasting will introduce on Dec. 3. The
reality series features wealthy men and women who live incognito in
everyday neighborhoods, deciding whether to give up to $100,000 of
their own money to deserving residents.
Although Fox, part of the
News Corporation, announced the show in May -- when the Dow Jones
industrial average was about a million points higher than today -- "it
comes on at a time when people are more attuned to the fact many of our
fellow citizens are having a hard time," said Chris Coelen, chief
executive of RDF USA in Santa Monica, Calif., which is producing the
series.
Dubai Duty Free is dangling a $5 million prize in a
raffle that is being called "the world's biggest duty-free promotion."
The winner will be chosen from among the purchasers of 5,000 tickets,
each costing about $1,360.
"Wheel of Fortune," the game show
syndicated by a unit of the Sony Corporation of America, is celebrating
5,000 episodes by giving away $5,000 a day through May 24, 2009, to
members of the Wheel Watchers Club. There is also a "Spin ID
sweepstakes," with a $50,000 prize, for viewers who have Sony Card Visa
credit cards.
The trend echoes what took place during the
Depression, when marketers eagerly gave away cash prizes on radio quiz
shows and in contests advertised in magazines and newspapers. Some,
like a puzzle contest sponsored by Old Gold cigarettes, which offered
what Time magazine described as an "unprecedented $100,000 first
prize," became national crazes.
Two decades later, when
television supplanted radio, the dollar amounts ballooned; the radio
quiz "The $64 Question" became "The $64,000 Question" on TV. More
recently, the money multiplied again, with shows like "Who Wants to Be
a Millionaire" and "Deal or No Deal."
"Money has been an
incentive for a long time," said Andrew Keller, vice president and
co-executive creative director of Crispin Porter & Bogusky, part of
MDC Partners. "Certainly the notion of offering money at a time like
this is more appealing."
For a client, Volkswagen of America,
Crispin Porter worked with @Radical.Media on a series for the Speed
cable channel that chronicled a race among 30 drivers, ages 16 to 26,
featuring Volkswagen Jetta TDI clean-diesel cars. In a 90-minute
documentary, "Racing Under Green," that Speed showed on Saturday, the
winner of the race, Josh Hurley, 23, of Cooper City, Fla., won $100,000
from Volkswagen to begin his racing career; he will win another
$150,000 if he lands a berth with a professional team.
"For young
people getting into racing, they've experienced for some time what
might be termed a financial crisis," Mr. Keller said, "because it's an
expensive sport."
However, at a time when many companies have
less to spend on marketing, Mr. Keller wondered whether giving cash to
consumers amounts to " 'renting' them to participate in your
advertising."
That thought was echoed by David Melançon, chief
executive at the Ito Partnership, a brand consulting company in New
York, who warned about the long-term implications of what he described
as "selling out your brand for a couple quarters of growth."
"While
you can say, 'If I don't make it through the next two quarters, there
is no long term,' certain marketing tactics are like taking a mortgage
against your brand," Mr. Melançon said, "and mortgages are what got us
into this."
A cash giveaway can make sense "when it connects in
the consumer's mind to the brand's purpose," he added, citing a contest
sponsored by CNBC called the CNBC.com Million Dollar Portfolio
Challenge. The first prize is $500,000 in cash, the second prize is
$200,000, and the third prize is $100,000.
"The prize money is
certainly attractive," said Tom Clendenin, vice president for marketing
at CNBC, part of the NBC Universal division of the General Electric
Company. "But people like the opportunity to learn more about the
market and about the cnbc.com site."
This is the third time for
the contest, which was first played in spring 2007 and returned in
spring 2008. The fall run began its make-believe trading on Nov. 17 and
ends on Feb. 6, 2009.
"We're trying to capitalize on the traffic to
the site," Mr. Clendenin said, referring to the increasing number of
visitors to cnbc.com, "as well as drive people to the site." The
contest has "thousands of players," he added, declining to be more
specific.
For the Doritos contest, Frito-Lay, a unit of PepsiCo,
is somewhat more forthcoming with statistics. The $1 million bonus has
resulted in "a pretty significant increase" in entries, said a
spokesman for Frito-Lay in Plano, Tex., Chris Kuechenmeister to more
than 1,700 from about 1,100 for a previous contest.
The Crash the
Super Bowl contest asks consumers to create commercials for Doritos for
a 30-second time slot during Super Bowl XLIII on Feb. 1, 2009. Five
finalists will be announced in January; each wins $25,000. Computer
users will be able to vote online from among the five spots for the
commercial they want to see during the game.
If that commercial is ranked first in the annual Ad Meter poll conducted by USA Today, the creator gets the $1 million bonus.
Although
the idea for the bonus came well before the financial crisis began,
"certainly the $1 million prize is something we thought people would
find attractive," Mr. Kuechenmeister said.
Asked whether a
million dollars seemed more valuable today than when the idea was
developed, he replied, laughing, that even "a dollar seems more
valuable today."
Back in 2004, when Edgar Bronfman Jr. and his private equity partners took control of storied Warner Music Group (WMG), expectations for the new management were anything but lofty. After all, Bronfman was widely derided in those days as a dynastic bumbler who while at Vivendi Universal lost billions of his family's fortune. And the music business was in crisis. Even now, Bronfman equates running Warner with flying a plane while fixing the engine.
Yet he has managed to do something that has eluded his rivals over the past four years: boost album sales, which still account for the vast majority of revenues in recorded music. Even as such rivals as Sony/BMG and EMI were sidetracked by management turmoil, Bronfman, 53, focused on the basics—nurturing artists who can move records. He and his lieutenants declined to comment, citing a quiet period ahead of Warner's fiscal-year earnings report on Nov. 25. But amid all the industry upheaval, Bronfman's achievement hasn't gone unnoticed. "Edgar," says Laura Martin, an analyst at Soleil Securities Group, "has shown real leadership."
None of this is to say Bronfman has solved the music industry's central conundrum: how to prosper in a digital age. Like most of its rivals, Warner continues to post anemic operating profits and essentially flat revenue growth. But closely guarded industry sales numbers reviewed by BusinessWeek show that Warner has opened up a surprising edge over its competitors. Warner's album sales—which include physical CDs, digital albums, and digital tracks (10 singles are now counted as one album)—are up 5% for the first 10 months of 2008 vs. the same period in 2004, when Bronfman arrived. Sounds less than thrilling—until you consider that Warner Music's rivals suffered double-digit declines.
How did Bronfman do it? He cut Warner's artist roster nearly 30%, ditching more than 50 acts that were no longer selling well. He refused to pay big bucks to keep the likes of Madonna and Nickelback out of rivals' hands. And he found some $300 million in annual cost savings. Result: Warner had more time and money to focus on new potential hitmakers.
FRESH ANGLES
Other music companies have slashed budgets for artists and repertory (A&R), the department that finds and nurtures talent. Not Bronfman, whose hundreds of scouts spend their nights in clubs, from Manchester to Seoul, and their days on MySpace (GOOG), finding new chart toppers such as James Blunt, Gnarls Barkley, and Panic At The Disco. The strategy is paying off: Warner's share of U.S. sales of new releases is up 7% since 2004, vs. a decline of 2% for the rest of the industry, according to Nielsen SoundScan, which tracks music sales.
All to the good. But doesn't the recording industry need to reinvent itself big time? It does, and Bronfman knows that. He was the first to package interviews and concert footage with digital albums as bonus features and charge a premium for them. Like his rivals, he's embracing ringtones and ad-supported music Web sites. He is licensing more songs for TV and movies. He is taking a piece of artists' concert and merchandising earnings. But making serious money from these initiatives remains a ways off. In the meantime, Bronfman is shoring up the traditional side of his business: finding hot acts and selling millions of their albums.
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