Three Stories About China: Yum Brands, the Venture Capital Market in China and More, and Hollywood

Several years ago, Yum Brands, the company that owns KFC (Kentucky Fried Chicken), Taco Bell and Pizza Hut, was lauded as the company that had figured out how to succeed in China.  Indeed, a substantial portion of its profits were based on its sales in China—specifically KFC (4,200 restaurants in China) and to a lesser extent Pizza Hut (almost 800 restaurants in China).  When asked about the cause of its success, a representative from Yum Brands said “a first mover advantage.”  And, a big part of that first mover advantage was a very strong brand.  Unfortunately for Yum Brands and its investors, times have been very tough for Yum—a strain of bird flu plus regulatory challenges based on claims of “excessive antibiotics and hormones” have led to empty restaurants.  Consumer confidence is dropping and the value of the brand with it.  How should Yum Brands rehabilitate its brand in China?  Any suggestions?

Stanford business school professor Steve Blank recently visited China on a book tour concerning startups and has many, many interesting observations concerning venture capital and startups in China in his five blog posts titled “China -- The Sleeper Awakens.”  Blog posts three and four are very interesting; although I believe they are all worth reading.  Here are his lessons learned from his fourth post titled “Zhongguancun in Beijing – China’sSilicon Valley”:

• China has the biggest Venture Capital industry outside the U.S
• For software, the action is in Beijing
• China has closed its search, media and social network software market to foreign companies
• Beijing’s VC’s primarily invest in the Technology, Media and Telecommunications segment
• Liquidity is via IPO’s not buy outs

Finally, the New York Times recently reported on how Hollywood’s latest releases are not doing as well as expected in China.  The reason given is something between Hollywood’s blockbusters have no depth and are just bunch of explosions, and China’s moviegoers are more interested in domestic films.  Interestingly, several of the Hollywood movies discussed in the article concern films arguably with a “built in” fan base that loved an earlier work the movie is based upon.  I wonder if they will move to capturing the power of nostalgia by reworking more Chinese tales.  What do you think? 

The Long and "Short" of Derivatives in Box-Office Receipts

Back in May, I published a post entitled "From Bonds to Bond?" here, in which I discussed the pros and cons of creating a futures exchange to trade derivatives based on box-office take. The motivation for the creation of the exchange was to enable the major studios as well as independent producers to spread their financial risk, in the case of the former, and to improve their ability to obtain financing in the case of the latter. The post discussed the pros and cons of establishing such an exchange.

It seems that the issue is being resolved in the context of the financial services legislation ("Wall Street Reform and Consumer Protection Act", known fondly as the "Dodd-Frank Act" in honor of its two main Congressional sponsors) that is apparently in its last legislative phase before securing final Congressional approval. One of the issues in the legislation has been an attempt to "rein in" the trading of derivatives, principally by creating exchanges intended to make the terms of such derivatives more transparent to the parties.

But it appears that enhanced transparency via public exchanges is not the only way that the legislation seeks to regulate the trading of derivatives. Another tack is simply not to allow exchanges to operate at all, at least for certain kinds of instruments. Among the victims here seems to be the nascent (read: still-born) effort to create an exchange for derivatives based on box-office receipts. That seems, at least, to be the case as reported by ML Strategies of Washington, D.C., in its June 28 update on the legislation. The report states:

"In a big win for the Motion Picture Association of America (MPAA) and most of Hollywood, the financial reform conference committee voted to retain Sen. Lincoln’s language banning futures contracts on box office receipts. As recently as Monday, the CFTC had announced a narrow decision that would haveallowed the Cantor Futures Exchange to trade a derivative based on the motion picture The Expendables.

Though the CFTC found this contract to not be in violation of the Commodity Exchange Act, reg reform conferees bowed to pressure from the movie industry to quash the new investment market before it even began.The movie futures contracts were intended to allow film investors to hedge their financial commitment,but key players in Hollywood objected to the concept because of its potential to give shorting investors an incentive to sabotage a project."

I repeat my caveat from the earlier blog post that I am far from being a commentator on the world of finance and derivatives. Still, it seems to me that the argument that the exchange would allow investors, especially insiders, to short the instruments and reap the presumed benefit has a populistic tinge to it. The attack on shorting has been a recurring theme in seeking blame for this or that financial failure (witness the German response to shorting in connection with the Greek debt crisis).

I am more persuaded by the argument that shorting sends a signal to the market about the underlying value of an asset, rather than being a cynical attempt to manipulate price downward. If so, shorting might play a constructive role in providing useful information about a movie.

In addition, there might be additional reasons why the big studios sought to trash this initiative, where the appeal to shorting was a political expediency to hide the real motives to the objections. (If anyone can enlighten me on this point, that would be great). And finally, I wonder whether the result of the legislation will simply be to drive such efforts "underground", where opacity prevails and the ultimate risk may be greater than any presumed threat from an investor engaged in shorting.

Whatever you do, don't you dare short