why taylor swift is re-recording her first six albums

I have to admit I don’t pay the most attention to Taylor Swift. I’ve never cared for her music, even when it was country-ish. Now that it’s pop-ish, I like it even less. I always respected her for having a hand in writing many of her songs, though, because it means she’s not just some pretty little singer, belting out whatever her producers tell her to so they can all make money.

No, she makes her money the old-fashioned way – writing songs, making albums, touring, etc. Like a real musician.

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Earlier this summer, a man called Scooter Braun bought Big Machine Records, the home of Swift’s first six albums. She was not happy about that deal, because it gave Braun control over the majority of her back catalog and a huge number of her hits.

The Braun deal for Big Machine pissed Swift off, not just because Big Machine offered her an insulting deal if she re-signed with them that would have allowed her to recover her first six albums’ masters one at a time as she recorded new albums for Big Machine, but because Swift has accused of Braun of bullying, rude and even unethical actions towards her. Suffice it to say Swift is unhappy Braun is set to continue profiting off her work.

The solution? She’s going to re-record her first six albums for her new label, Universal Music Group. What happens after that is this:

  • UMG will issue new recordings of Swift’s greatest hits to radio stations across the country, and threaten to pull all UMG artists from the station unless they agree to only play the new versions.
  • UMG will only issue new licensing agreements to film and TV projects that agree to use the new versions.
  • Every re-recorded album release will be accompanied by much hue & cry in the marketing world, with UMG (and probably Swift, too) encouraging her fans to buy copies of the new albums, which will no doubt come with bonus material such as extra songs (previously unreleased demos, remixes, whatever) as incentive.

From there, UMG and Swift will be making more money off her re-recorded hits than Big Machine is off the original versions. UMG is bigger and more powerful than Big Machine could ever hope to be, and everybody will quickly fall in line behind UMG’s demands. Scooter Braun’s purchase of Big Machine will not end up being the windfall he thought it would be, and it will remain to be seen if he ever recoups the $320 million he spent on Swift’s former label.

Music is music, but music is also business. Crossing Swift in the music business world is probably not the smartest move anybody could make. She has enough influence in the music business that she was able to force UMG into agreeing to pay Spotify royalties to all its artists – not just her. Read that again. ALL OF THE ARTISTS ON UMG get Spotify royalties now thanks to Swift’s contract with UMG.

Swift is not the first and won’t be the last artist to re-record music after switching labels or booting key band members.  Styx did it, Suicidal Tendencies did it, Squeeze, Def Leppard, ELO (aka Jeff Lynne), Dave Mustaine (as MD.45), Ozzy Osbourne (with the specific intention of pushing out Bob Daisley & Lee Kerslake’s contributions so they wouldn’t get any more money from albums sales), and more. In the case of Styx and Squeeze, they re-recorded all their big hits, then forced radio stations to stop playing the original recordings in favor of the new ones.

Like I said – music is music, but music is also business.

understanding tariffs and how they work

Tariffs have been big news lately, part of the news cycle that overhypes everything Trump-related for the glory of clicks and views. It’s a little crazy, and it’s a bit hard to understand everything related to tariffs, so I’m here to give you a little basic info.

A tariff is a tax, that’s the bottom line. Tariffs are levied by governments, which is why they are a type of tax, and they are levied specifically on goods of one sort or another.  Traditionally, tariffs are levied on imported goods, that is, items made outside the United States and brought into the country to be sold to Americans for fun and profit.  Another word for a tariff is a duty; while the two words have slightly different connotations when it comes to imported goods, we use them as equivalents for each other. I’ll be using tariff throughout this post.

(You can read another post I wrote about tariffs, “protective tariffs, motorcycles and the beef lobby.”)

The first tariff in US history came from the Tariff Act of 1789, and indeed it was the first law of any sort passed by the new government established by the US Constitution (also created in 1789).  The new US government needed to not just boost, but create an economy that would sustain its efforts, and they still (to a certain extent) held a grudge against England.  It’s no joke that England was an economic powerhouse in the late 18th century – the British Empire legit ruled most of the world at that point.  However, the new US government found itself needing to promote business and manufacturing at home, so that’s where the impetus for the Tariff Act of 1789 came from.

The US and UK signed a treaty in 1783 that ended the American Revolution; one of the aspects of that treaty allowed the British unfettered navigation of the Mississippi River.  This greatly benefitted the British, but did not benefit the Americans much.  The British pushed the favor by passing the Navigation Acts (in 1783), which forced non-British ships – especially American ones – to pay heavy duties (i.e. taxes) when they offloaded their goods in British ports.  The Brits followed this law up with two others that further restricted American goods getting into British hands, so the Tariff Act of 1789 was in part a retaliation against this sequence of laws enacted by the British Parliament.

The Tariff Act of 1789 required foreign ships offloading goods in US ports to pay 50 cents per ton, while US-registered ships paid just 6 cents per ton.

Here’s an easy way to understand the situation.  Let’s say you make sails, and you charge $5 for a ton of sails.  You can sell your sails in America for $6 a ton and do well.  If you make your sails in England, and ship them to the United States, your distributor/importer has to pay $6.50 for one ton of sails.  If you make sails in the US (and transport them via ship), your distributor has to pay $6.06 for their ton of sails.

boat-classic-clouds-173910There’s the kicker, then. If you, as the distributor, sell both US- and UK-made sails, you can sell them to retailers at the same price, $7 a ton.  If you do that, you make just 50 cents on the UK-made sails, while raking in 94 cents on the US-made sails.

Let’s take it a step further, though, because what retailer makes just 50 cents on something?  No, as the retailer, you’re going to sell your UK-made sails for $10 a ton. This ups your profit to $3.50 a ton, but you can justify that higher price because those sails are made in England, and of course everybody knows British ships are awesome and they have been ruling the oceans for decades, so UK-made sails command a premium for their real or perceived quality difference over US-made sails.  Raising the price of the imported sails enables you to absorb the cost of the tariff.  Get this, though – everybody knows there’s a 50 cents-per-ton tariff on UK-made sails, so you can charge $10.50 per ton and now you’re making $4 per ton in profit without anybody complaining, because they know that 50 cents is going to the government, which of course is protecting you and American business/industry.

Jump back and look at the US-made sails, though.  Sure, they’re slightly inferior quality to the premium UK-made sails, but ships gotta have sails, right?  Instead of selling them for $7 a ton, you can sell them for $8 a ton, which gives people the impression they’re still getting a deal over the UK-made sails, but now you’ve upped your profit to $1.94 per ton, and because of the $2 per ton price difference, you’re likely to sell more US-made sails than UK-made ones, which improves your overall bottom line.  You can even up the price to $8.50 a ton, which still keeps them $2/ton below the cost of the UK-made sails (profit now $2.44/ton). You can safely buy fewer tons of UK-made sails, knowing you’ll sell more US-made ones at the now artificially higher price.  Plus you can feel good for supporting US industry!

There’s some lessons in there to unpack.

  1.  Tariffs are taxes charged to import goods into a country.
  2.  Tariffs can be absorbed by the importer or passed on to the consumer.
  3.  Because tariffs artificially raise the price of imported goods, domestic goods can be priced high and still look like a bargain to the consumer.

Think about this, though: What distributor in their right mind is going to eat the cost of the tariff?  That’s not good business, especially if your margins are razor-thin, like they are for many goods.  We’re talking mere cents of profit, with businesses relying on volume to really make money.  Wouldn’t you, a smart business owner in a capitalist economy, pass the cost of the tariff straight on to your customer?  Yes, you would, because you need to maintain your margins for your business to succeed.  You were already selling your goods for as low a price as you could, so you can’t really absorb the cost of the tariff.  The importer passes it on to the distributor, the distributor passes it on to the retailer, the retailer passes it on to the consumer.

Thus, the most important lesson of all: THE CONSUMER PAYS THE TARIFF.

This is not unique to the United States.  European consumers pay their tariff costs, Chinese consumers pay their tariff costs, Indian consumers pay their tariff costs and so on, just like American consumers do.

You might be wondering who benefits from higher tariffs, or really from tariffs at all. The government levying the tax is who benefits.  They collect the tariff up front at the ports.  They collect taxes on the money made by the distributor, the wholesaler and the retailer.  They then collect a sales tax when the consumer buys the product.  The government benefits every step of the way from tariffs, and that, my friends, is the whole reason tariffs exist in the first place – no matter where you live, no matter what form of government you are under and no matter what types of goods you’re buying.

Remember that.

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Why Harley-Davidson is building a factory in Thailand

There’s a lot going on in Harley-Davidson world, and some of it may have escaped your attention.

While it’s not always the best practice to focus on one company as the bellwether of how an industry is doing, Harley-Davidson is such an iconic American brand that it does serve as a beacon of sorts for not just American industry, but the overall motorcycle industry as well.

We’re constantly bombarded with “America First” and “Make America Great Again” from the Trump administration, but as recent moves from Harley-Davidson show, manufacturing and business are far more complex than slogans can account for. Capitalism is, of course, built up and torn down at the altar of the Market, and what the Market giveth the Market can taketh – often in one quarter.

harley-thailand-fullOn 23 May 2017, The New York Times broke the story that Harley-Davidson is establishing a factory in Thailand. HD officials say the purpose of the factory is to build motorcycles for Asian and other overseas markets, and that the motorcycles will not be brought into the United States.

This move has been roundly denounced by union officials, such as:

  • Robert Martinez Jr., president of the International Association of Machinist and Aerospace Workers: “It’s a slap in the face to the U.S. workers who built an American icon.”
  • Press Release from the United Steelworkers: “[Harley’s] decision to offshore production is a slap in the face to the American worker and hundreds of thousands of Harley riders across the country.”

Indeed, in a lot of places, Harley-Davidson IS America. Harley has spent decades building its image and carefully crafting the perception that riding a Harley motorcycle is part of a lifestyle worth achieving. To a certain extent, all the motorcycle manufacturers do this, but none perhaps so successfully as Harley-Davidson.

What the critics of this Thai factory are missing are two incredibly important aspects of the motorcycle industry.

Displacement

MY17 107 Engine. Milwaukee Eight.There is a common adage among motorcycle riders that there is “no replacement for displacement,” meaning that the bigger a motorcycle’s engine, the better the motorcycle is. This is not a sentiment shared by the majority of the population of the world, and certainly not in countries where gasoline is more expensive than Americans can possibly imagine.

For example, the average price of a gallon of gasoline in the USA on 19 April 2017 was $2.57 a gallon. In Thailand, it was $3.72; in India, $4.32. The highest average price in the Bloomberg article used as a reference was $7.23 in Hong Kong; the lowest was $0.91 in Saudi Arabia.

The average gas price isn’t enough to form a solid picture of the real cost, however. In the USA, the average worker enjoys a daily income of nearly $163, while in Thailand, the average worker’s daily income is just over $17. That difference is critical – no matter the price difference in gasoline between the USA and Thailand, gas is simply more affordable in one country than the other.

What this means is that where the rubber meets the road, the American motorcycle rider simply doesn’t have to care about fuel efficiency as much as the Thai rider does. That $3.72 the Thai rider spends on a gallon of gasoline has to last him (or her) much longer than the $2.57 the American rider spent.

As a result of this need for extreme fuel efficiency in nearly every country that isn’t the USA, large-displacement motorcycles are a luxury item. For example, in 2014 Americans bought 466,000 motorcycles of all brands. In the same year, TVS Motor in India sold 784,000 units. Neither of them even holds a candle to Honda, however, which sold over 15 million units in 2013, most of them (13 million) in Asia. Even with 15 million units sold, motorcycles are only Honda’s THIRD biggest source of revenue!

The majority of these motorcycles are vehicles that American riders wouldn’t even identify as such, calling them mopeds, scooters or even just toys. Motorcycles with 50cc engines dominate foreign markets – and in the USA, the average walk-behind lawn mower has a 150cc engine! In every other place on Earth besides the United States, most motorcycles come in under 300cc, and many of those are well under even that mark.

In the long run, the motorcycles Harley-Davidson makes are only hugely popular in the United States, and they’re losing market share on this continent, primarily to Indian Motorcycles (manufactured by Polaris Industries).

Putting factories in other countries gives Harley-Davidson access to people and companies who have been building smaller displacement motorcycles for decades, and it won’t be long before we see Harley’s Street 500 being built in overseas factories. Harley may well start making motorcycles smaller than that as well.

Taxes

Income taxThe simple matter of import taxes (tariffs) is the other aspect of why Harley-Davidson is looking to build bikes in Thailand.

Importing a 125cc motorcycle into Thailand carries an immediate 60 percent upcharge. Add to that another 5 percent for the excise tax, 7 percent for the value-added tax (VAT) and 10 percent for the interior tax, and the cost for a run-of-the-mill Harley-Davidson Road Glide jumps from $21,999 in the US to $43,499. The reality of it is, though, that the Road Glide is not a 125cc motorcycle and its import taxes would be exponentially higher, driving the cost closer to $60,000.

In India, the import tax on a 300cc motorcycle is 100%. The price of a small imported motorcycle doubles before it even hits the showroom floor – yet India continues to be the hottest, fastest-growing market for companies like Trimuph, whose sales rose 37 percent … to 350 motorcycles. Triumph’s smallest displacement motorcycle is about 675 cubic centimeters, so even with that ridiculously small number of sales, there is clearly a market in places like India for foreign brands with higher displacements than are traditionally built in India.

When it comes down to the economic bottom line, it makes excellent economic sense to simply build these motorcycles in the countries where the manufacturer wants to sell them. With the Trump Administration backing out of the Trans-Pacific Partnership early in 2017, it really shouldn’t be a surprise to see Harley-Davidson initiating the manufacturing of its motorcycles in Thailand, because Asian nations won’t have the same tax rates for products coming from other Asian nations as they will for products coming from the United States.

It’s smart business.

In the past several years, another well-known motorcycle manufacturer, BMW Motorrad, has started making motorcycles and their components in Brazil and India. Branching out from their core manufacturing homeland of Germany has enabled them to not only keep costs down from a manufacturing standpoint, but to also get around some of these massive import taxes used by some countries to protect their home-grown industries.

When it comes to protection, that’s exactly what Harley is trying to do. Polaris Industries bought the rights to the Indian Motorcycle name in 2011 from UK private equity firm Stellican Limited (majority owner, at any rate). At the time they already owned Victory Motorcycles, and Victories were well-regarded bikes despite their low sales numbers. Two years after the acquisition, they announced their 111 cubic inch engine – that’s 1,820 ccs for you metric folks – and started selling motorcycles based around that “Thunderstroke” engine in August 2013. Here it is only four years later, and Polaris has shut down Victory completely to focus on the ten current models Indian offers – a number that is likely to continue to grow.

Harley-Davidson did a similar thing in 2009 when it closed the doors on Buell. Buell motorcycles were touted as technologically advanced, but they didn’t sell in numbers high enough to warrant their continued existence under the HD banner. Many riders cried foul when Harley unceremoniously dumped Erik Buell’s bikes in the dustbin of motorcycling history, but shares of $HOG began to steadily rise through the end of that year. It’s that perceived value, as represented by the stock price, that appeals to shareholders, board members and investors, not how cool or high-tech the motorcycles are.

Even though Indian is still selling a fraction of the number of motorcycles Harley is selling every year, Indian is selling more and more bikes every year while Harley is selling fewer and fewer every year. With Victory out of the picture, Polaris can concentrate all its motorcycle efforts on one brand, and believe that they are doing exactly that as hard and fast as they can.

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The Pentagon’s parking lot the morning of the annual Rolling Thunder ride.

Harley-Davidson reacted, of course, by coming out with a new engine and redesigning a number of the bikes that use their new “Milwaukee Eight” engines (there are two, air/oil cooled at 107 ci/1750 cc and liquid cooled at 114 ci/1870 cc). Nobody will know until their 2017 annual report comes out if that effort will translate into a slowdown in the loss of market share, and Harley still owns close to 50 percent of the large-displacement, cruiser-style motorcycle market in the USA. However, in the same year (2015) that Polaris’ motorcycle income surged 67 percent, Harley’s fell 5 percent.

However, if Harley continues to lose market share in the United States, long its most lucrative market, they will obviously have to do something to boost their bottom line. Unlike Honda and Polaris, Harley doesn’t have other vehicle sales to fall back on. They cannot afford to continue losing market share year after year, not even to a brand as iconic as Indian. Expanding overseas makes sense, and doing so in a fashion that allows them to minimize their tax burden and maximize their profits makes even MORE sense.

They also have to find a way to reduce labor costs. They’re doing it to a certain extent through layoffs, and Harley has reduced the number of workers at its York, Pennsylvania, facility by over 50 percent since 2009. They recently announced that another 118 jobs will leave the York factory, as the company transfers construction of its Softail line to its Kansas City factory. Nobody is under the illusion that labor costs in Thailand are anything but FAR lower than what they are in the USA, where the average union worker earns about $1,000 a week. In Thailand, the average weekly wage in manufacturing jobs is about $230 a MONTH (based on exchange rate on 24 May 2017).

There’s an old saying in scientific circles that a species that fails to adapt to its changing environment is doomed to become extinct. When it comes to capitalism, the same can be said by substituting in a few words: Any company that fails to adapt to the changing market is doomed to go bankrupt. The people running Harley-Davidson clearly see this, which is exactly why they’re following BMW Motorrad’s lead in India and building a factory in Thailand.

While the “slap in the face” referenced by Robert Martinez Jr. and the United Steelworkers may indeed be more literal than metaphorical, there are solid economic reasons why Harley-Davidson is building a motorcycle factory in Thailand. It has little to do with the American worker and everything to do with the company’s future profit-and-loss statements.


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