Scooters, Start-Ups, and Stifled Innovation

Today, if you walk through a number of major cities, you will likely see an electric scooter laying on a nearby sidewalk. These new e-scooters are a part of a recent boom that began in Santa Monica, California. The scooters offer customers a quick and efficient form of travel, similar to that of an Uber and Lyft while also creating less of an environmental impact. The process of acquiring this new efficient form of travel is simple: download the proper application to select the scooter and then leave the scooter at the end of your ride for the next person.  Although the process sounds simple enough, the regulations governing the use of these scooters are vast and have become a source of contention between start-ups and city officials.

This contention has been consistent in recent years as many startup businesses have flooded major cities with their new inventions without seeking proper permission from officials and agencies. This has subsequently lead to feelings of frustration amongst city officials, who quickly have to accommodate and regulate these new products.

The city of Portland is seeking to get ahead of this budding issue, and the eventual flooding of e-scooters, by creating a four month pilot program to investigate data regarding their everyday use. This program allows the city to place a limit on the overall number of scooters within the city and create a detailed report regarding usage and injuries. At the conclusion of the program, the city was successfully able to access and research the use of the e-scooters and provide permits to businesses accordingly. Although the permits and limitations allow the city to regulate the e-scooter market, these regulations have begun to limit the agency of start-ups and have reciprocally affected the ability to run a profitable business.

This leads us to question whether it is possible to balance the two competing interests of the businesses and cities alike. In reality, there is a way for both budding tech companies and the cities to reach a combined solution. An effective solution would be to allow for businesses to innovate while maintaining safety and efficiency within the city. This solution would require adequate transparency between both start-up businesses and cities alike. Transparency, along with a similar pilot program used in Portland, would provide tech companies the agency needed to create while also offering the city the necessary information to create regulations that would govern technological innovations. If other cities are successfully able to recreate both the pilot program and the relationships between e-scooter businesses and city officials in Portland, similar mutual relationships are possible in other cities.

Scooters, Start-Ups, and Stifled Innovation

Upheaval at PG&E Spurred by Deluge of Potential Tort Liabilities

The Camp Fire was one of the most devastating in California history. In addition to devastating over 18,000 structures and 153,336 acres, the Camp Fire claimed the lives of 86 people and the entire town of Paradise, California. While recently cleared of liability for the Tubbs Fire in Sonoma, many fire victims and Californians are still asking if PG&E, California’s gas and electric utility provider, is to blame for the Camp Fire and many others. PG&E and the public are still investigating to what extent electric sparks from its power lines may have contributed to the ignition of these fires.

Nevertheless, PG&E finds itself in a unique position among parties bearing potential liability for the fire. First, as a public utility, it has faced significant pressure from the California Public Utilities Commission to make operational changes that would reduce the risk of fire in the future. Second, as one of the few entities from whom a successful liability action may yield substantial damages for the lost lives and property of the fire victims, PG&E is one of the few possible defendants with the ability to pay.

It is precisely PG&E’s size and pocketbook that has led to a deluge of potential suits against the company for damages and for public regulation interests. These suits have led PG&E to prepare for bankruptcy as its CEO, Geisha Williams, makes her departure from the company.

What does it mean when a company like PG&E files for bankruptcy? A utility company with a state-sanctioned monopoly over the foundational provision of power to a state of nearly 40 million people can’t just fold and exit the marketplace. It is ultimately in the state’s and its people’s interest to ensure that some company is providing power and heat. In this sense, a Chapter 11 filing is one means of limiting the extent of operational costs while continuing operations. Another means to deal with the cost of these liabilities is to simply pass them on to consumers as higher utility prices.

The public may, however, see another option for reining in an essential service provider. While it wouldn’t be helpful to break PG&E’s natural monopoly by licensing other utility providers to build electric lines and generators, it may make sense to break PG&E up into regional divisions. Much like the breakup of Bell Corporation into regional entities like Bellsouth, these regional PG&Es could be held more accountable by the state and local public.

This possibility of breaking up PG&E is contingent on whether PG&E is too large to sufficiently monitor its vast infrastructure for safety, or even too large to be sufficiently punished into making changes by lawsuits and the state public utility commission. If it turns out that the best means of regulating PG&E to be more attentive to how it contributes to the state’s fires, we may see the state pioneer a new wave of antitrust action centered on the utilities it controls. From a legal torts perspective, however, showing that PG&E’s alleged negligence was either sufficient or necessary to start the fires still remains a difficult obstacle for many fire victims seeking damages.

Upheaval at PGE

Eccentric Bargain Store Chain Takes Advantage of Toys R Us Bankruptcy

After closing the last of its U.S. stores in June 2018, Toys R Us signed off with a sincere message on its website to “Play on!” While the message was probably meant to thank the fallen retail giant’s millions of loyal customers, companies like Ollie’s Bargain Outlet may have taken it as business advice.

Ollie’s is a discount store that specializes in selling household name items at extremely low prices. Despite its wacky cartoon mascot and advertisements that poke fun at itself, the company has experienced serious growth. Since its IPO in July 2015 at $16/share, Ollie’s has continued to surpass its quarterly growth projections. Ollie’s stock price has more than quadrupled to $78/share, and the company has expanded to over 300 “semi-lovely” locations.

Much of Ollie’s success comes from its business strategy of purchasing mass amounts of brand name items in liquidation sales. Ollie’s passes most of that discount to its customers. As a result, Ollie’s can sell many items at prices below even Amazon listings.

Ollie’s CEO Mark Butler admitted that the recent surge in large retailer bankruptcies “created a perfect storm” for his company. Toys R Us opted to completely liquidate rather than continue to pursue reorganization. The company’s main suppliers, Hasbro and Mattel, were therefore left with tons of inventory and no buyers. Ollie’s happily stepped in and spent $70 million to purchase the overstock at a significant discount.

Ollie’s also strategically takes over the vacant stores of bankrupt companies. Ollie’s purchased 12 former Toys R Us stores for just $42 million in a bankruptcy auction. The move may boost Ollie’s brand recognition and facilitate the company’s expansion into states like Texas.

Ollie’s is looking forward to taking advantage of the closings of other retail giants like Sears. While the dominance of online retailers has contributed to the downfall of businesses like Toys R Us, it has provided fertile ground for companies like Ollie’s to thrive. Perhaps business models like Ollie’s will be all that remains of the brick and mortar store in the next few decades.

Eccentric Bargain Store Chain Takes Advantage of Toys R Us Bankruptcy

The Woes of IPOs from the Government Shutdown

The recent government shutdown has significantly affected the initial public offering (IPO) timelines of startups hoping to go public in 2019. Due to the shutdown, law firms and investment banks ventured into the unfamiliar territory of trying to complete an IPO without a fully functioning SEC. Among the companies affected include tech startups Airbnb, Uber, Lyft, and Pinterest. Normally, the SEC employs 4,436 workers, but during the shutdown, only 285 were working. Furthermore, with the recent stock market volatility due to factors like the U.S. trade war with China and fears of an upcoming economic downturn, companies are eager to go public as soon as possible while valuations are still high.

Despite the inability of the SEC to sign-off on pre-IPO documents, companies have opted to bypass the SEC’s approval. Under the Securities Act of 1933, an IPO registration statement can become automatically effective, without SEC input, 20 calendar days after filing with the SEC. Biopharmaceutical company Gossamer Bio, leveraged this loophole and commenced its IPO on January 24th, offering 14.375 million shares at $16 per share. This approach, however, is not without both market risk, as companies need to price their stock 20 days before listing, and legal risk, with potential future litigation pointing to the irregular IPO circumstances.

Although the government shutdown has temporarily ended, the damage may have already been done. Over the last two years, on average, it took tech companies seven exchanges with the SEC over 144 days from first engagement to IPO. Therefore, with a long IPO process, a record breaking government shutdown, and an unpredictable Trump administration, companies may strategically favor private financing or M&A over raising capital from the public markets. This combined with an IPO market that is quickly cooling down may further delay startups from becoming publicly traded companies.

The Woes of IPOs from the Government Shutdown

The End of the Petroleum Vehicle?

For many in the United States, electric vehicles (EVs) are practically synonymous with Tesla. In the past eight years, Tesla has almost singlehandedly launched the EV marketplace into the public eye. Its stock has risen from $19 in its 2010 IPO to right around $300 today – a 1,700% increase.

That market dominance might soon change, however. Big-time corporate investors have flooded into the EV marketplace, placing huge bets on a variety of EV startups across the globe. For example, Lucid, an EV startup based in Silicon Valley, has secured a $1 billion investment from Saudi Arabia. The company, through its Lucid Air vehicle, is aimed at the luxury market. Proterra, a company aiming to launch electric buses, has attracted corporate investments from GM, BMW, and Daimler totaling nearly $900 million. The boom in EV startup investments has taken many by surprise and possesses huge implications for the auto industry, but also a variety of other markets and industries as well.

The biggest question that everyone seems to be asking: is it really the end of petroleum-powered cars? Even a few years ago, that prospect would seem highly unlikely, if not outlandish. Indeed, even today, many remain skeptical about the prospect of EVs becoming mainstream. In a survey executed by KPMG last year, three quarters of auto industry executives remained highly skeptical of EVs overtaking the traditionally petroleum-based marketplace. Most expressed concerns about the often prohibitively high infrastructure costs while others found issue with technological deficiencies like recharging times.

But the sheer magnitude of the latest corporate investments may potentially assuage many of these concerns and change that discussion. With these heavy bets placed on the development of more effective electric technology, corporations and governments alike seem to be moving in the same direction. Norway and India have each discussed 2030 deadlines for banning gasoline and diesel cars; France, Great Britain, and even California have discussed bans by 2040. Automobile companies like GM have already pledged to going all-electric in the near future.

How viable these bans and their timelines actually are is another discussion fraught with its own issues. But in any event, this massive boom in investment is signaling an equally massive change in the more than century-old petroleum vehicle marketplace. Whether the electric vehicle will become the dominant player is anyone’s guess, but plenty of corporate players are now willing to bet that it is.

The End of the Petroleum Vehicle?

BuzzFeed Starts to Layoff 15% of its Workforce to Hit Profitability

Last Wednesday night, January 23, 2019, BuzzFeed announced its layoff plan in a memo sent to employees by Jonah Peretti, the company’s CEO and co-founder. The leading digital media company plans to reduce its workforce by 15%, or a total number of about 220 employees.

The layoff plan first affected the news division of BuzzFeed last Friday. Many teams within the news division, including the health desk, national desk, and LGBT desk suffered reductions in their workforces. While BuzzFeed News has received awards for its reports, it recently faced some scrutiny after publishing an article alleging President Trump directed his former lawyer, Michael Cohen, to lie to Congress.

According to the memo, the purpose of the layoff is to “reduce costs” and “maintain growth.” This restructuring may also help BuzzFeed to have more control over its operations and direction in the constantly changing digital media market. Peretti assured employees these layoffs would “improve [Buzzfeed’s] operating model so [the company] can thrive and control [its] own destiny, without ever needing to raise funding again.” Simply put, BuzzFeed is trying to “hit profitability” this year in an effort to ease the pressure imposed by venture capitalists. The profitability of a financed company is a major concern for VC firms. The more profitable start-ups are, the more proceeds VC firms can secure. As time passes by, VC firms then tend to push the company’s management to make changes in order to increase profitability.

BuzzFeed is a typical example of digital media companies struggling to survive in light of declining advertising revenue. After Facebook cut down the “visibility of articles and videos from publishers,” many media companies, like BuzzFeed, Vox Media, Refinery29 and Group Nine, faced diminishing advertising revenues. These companies had to figure out new revenue sources in this new landscape. Last November, Peretti even suggested a merger between the top internet publishers in the hopes of having greater bargaining power against tech giants like Facebook and Google.

In a recent interview with the New York Times, Peretti said: “From a business standpoint, money is a means to an end.”

BuzzFeed Starts to Layoff 15% of its Workforce to Hit Profitability

As “Front-Loading” Decreases, China’s Trade Slows, Signaling Looming Recession

On September 17,  2018, the Trump Administration imposed a 10% tariff on a slew of Chinese products, ranging from tuna to fertilizer to cranberries and steam turbines. The Administration threatened a further increase in tariffs, set to take effect the following January. Caught in the midst of an escalating trade war, Chinese companies reacted swiftly. Fearing the impending January tariff-hike, these companies drastically increased their exports to the United States, desperately trying to squeeze in as many sales as possible before the expected tariff increase. Reciprocally, U.S. companies (many of which assembled their products in China and imported the finished commodities to be sold in the U.S.) rushed to import their Chinese-made products before the higher tariffs were to become effective. The result: a massive surge in China’s net exports to the United States. By November, China had posted a record trade surplus with the United States. Ultimately, the January tariff-hike was never implemented—the new tariff regime was postponed after both nations committed to work towards a long-term trade agreement.

Now that the panic-fueled rush has subsided, China’s exports to the U.S. have slumped. Through November, Chinese exporters were frantically shipping goods to the U.S. in anticipation of possible tariff increases; now, as this “front-loading” fades, China’s December exports posted at 4.4% lower than the previous year.

Interestingly, China’s imports are also down. This, however, cannot be attributed to the trade war. Instead, it is indicative of a slowdown in China’s domestic economy—a reduction in its domestic demand. Simply put, Chinese consumers are demanding fewer goods. To combat this, China is expected to implement a series of stimulus measures, including reducing interest rates, cutting taxes, and decreasing banks’ reserve requirements. Taken together, these measures should stimulate a flood of investment and lending, which may bolster Chinese economic growth. However, such policies may have detrimental impacts on an already-ailing U.S. stock market.

Some have suggested that high Asian savings rates actually promote U.S. economic growth. In short, underdeveloped Asian capital markets cannot efficiently absorb all those savings—the Asian capital market is simply not large enough to utilize all that deposited money. So, where do the excess savings go? They are invested in foreign capital markets—most notably, the United States. Essentially, the Asian “savings glut” feeds U.S. capital markets. Now, China is considering slashing interest rates, which could lead to a sharp reduction in Chinese savings. As a result, we could see a further slowdown in U.S. economic growth—this may be the straw that breaks the economic camel’s back, sending the U.S. into an overdue recession.

As Front-Loading Decreases, China’s Trade Slows, Signaling Looming Recession

Volkswagen in Trouble Again?

Many of us remember the mass recall of hundreds of thousands of Volkswagen (VW) cars in 2015. Some may recall that it had to do with the company installing illegal software in diesel engines to cheat U.S. anti-pollution tests. Most thought that the recall would long deter such behavior. But, here we are. Less than four years later, VW faces another investigation by the Kraftfahrt-Bundesamt (KBA) and another potential recall.

The KBA launched an official investigation into VW models equipped with the 1.2-liter diesel engine, including popular models like the Passat. The vehicles’ software allegedly allows VW to cheat emissions tests — a charge with which the company is intimately familiar. The charge could be a special blow to VW’s reputation following the company’s public denial of illegal activity in 2016. However, VW has hitherto cooperated with the KBA.

VW managers could face prosecution for fraud, and the KBA could take as many as 30,000 cars off the road. Such a recall could have a gigantic economic impact on the company. In a much less dire — and far more likely — scenario, the KBA could order VW to perform further remedial work.

The potential economic trouble comes at an unfortunate time for the company as it enters the electric vehicle battery race. Fraud charges could put a damper on the speed with which VW enters the vehicle battery market, leaving an opening for other European competitors.

Volkswagen in Trouble Again?

Apple Plans to Release 3 New iPhones in 2019 Amidst Backlash Over iPhone XR

For the fourth year in a row, Apple plans to release three new iPhone models in 2019. In 2018, Apple released three phones, the latest being the iPhone XR, which went on sale in October. The XR is the most affordable phone within the “X” series, in large part due to its LCD display, which has significantly lower resolution compared to the OLED display used for the rest of the iPhone family. The XR costs $749 while the smaller XS costs $999 and the larger XS Max costs $1099. Analysts expect that the prices of the 2019 generation will closely reflect the prices of the current “X” series.

Though Apple has not yet reported earnings from its fiscal 2019 first quarter, which ended on December 29th, in early January CEO Tim Cook wrote a letter to investors expressing the anticipated earnings to be about $84 billion. This figure is down from a prior estimated range between $89 billion and $93 billion. Apple blamed the anticipated sales drop on lower than expected iPhone sales in China. China’s economic growth has been slowing dramatically over the past year, likely due at least in part to the ongoing trade war between China and the United States. Though the XR was Apple’s best seller in the U.S. in 2018, its performance in China fell far short of what was expected. In fact, Japan Display Inc., the multibillion dollar company that makes the XR’s LCD screens, now needs a bailout as a result of the low sales.

Though the most affordable of the three iPhones in the 2018 releases, the XR is likely just too expensive to compete with local smartphone companies in China, especially given the troubled Chinese economy. According to Fortune, Chinese companies build devices that look and operate a lot like the iPhone, but come with a much cheaper price tag. Though they are close copies, the companies reportedly get sympathy from the Chinese government and are not often prosecuted for intellectual property crimes. It appears that Apple has not yet found a way around this problem, but it seems it will not be able to increase sales until it creates a more affordable iPhone. At $749, the XR is considered the “most affordable” iPhone but certainly is not cheap. If Apple needs to rely so much on sales in China while the country’s economy is in decline, it will need to tailor its products to that customer base.

The Wall Street Journal reported that Apple plans to release a second addition of the XR in 2019 despite its poor sales because it has been in the product pipeline for too long and would be very difficult to scrap. It will be interesting to see how investors react to this news as there is little reason to believe the new XR will do any better in 2019. Indeed, Apple will likely beef up certain features of the phones with new camera systems and the like, but this is unlikely to solve Apple’s low phone sales in China.

Apple Plans to Release 3 New iPhones in 2019 Amidst Backlash Over iPhone XR

SpaceX Plans to Lay Off Ten-Percent of its Workforce

SpaceX, Elon Musk’s rocket company, announced last week that it plans to lay off ten-percent of its nearly 6,000 workers. The company, based out of Hawthorne, California, says it is aiming to become  “leaner” as it attempts two very expensive projects that have “bankrupted other organizations.” As a result, nearly 600 workers in California, Texas, Washington and Florida will lose their jobs. SpaceX has given little details as to where the layoffs will come from, but it appears to be mostly engineers and technicians. Those affected will receive eight weeks’ pay along with assistance in finding new jobs.

While layoffs of this size often signal corporate trouble, SpaceX insists the company is doing well and that the layoffs are not a result of financial struggles. SpaceX, a private organization, was recently valued at $30.5 billion. Last December, it raised nearly $500 million in funding. The company has two known projects in the future that are estimated to cost up to $10 billion each, which may help explain the need for a leaner workforce and the decision to cut employee costs.

Founder Elon Musk has set high ambitions for SpaceX, but the company is currently “years behind the projections it made” when setting its earlier timelines and goals. Musk, who is known to fire workers when they fall behind their projected timelines, famously fired members of the Starlink team, who were responsible for an ambitious broadband project, when their work pace was too slow.

It is unclear how trimming the company’s workforce will better help SpaceX meet its tight timelines and ambitious feats, especially when they are already behind on many projected deadlines. The salary of 600 employees is arguably a drop in the bucket of a $10 billion project. On top of this, there is reason to believe that SpaceX is already a leaner company than other rocket companies given its smaller size and young history. Only time will tell whether the layoffs were a savvy strategy that will help the company in the future.

Interestingly, Tesla, Elon Musk’s other star company, also announced layoffs last Friday. Tesla announced in a letter to its employees that the company would layoff seven-percent of its 45,000-person workforce. Musk said cutting jobs at Tesla would allow the company to offer its Model 3 car at a lower price.

SpaceX Plans to Lay Off Ten-Percent of its Workforce