Early November last year, 150 marines backed by helicopters took down the notorious leader of the Mexican Gulf Cartel. Ezequiel “Tony Tormenta” Cardenas was the 4^th kingpin to lead the Gulf Cartel in its operations of trafficking, extortion and assassination across Mexico and Central America. The death of Cardenas has given little relief to President Felipe Calderon, who has led the war against organized crime since 2006. Since his initial campaign to crush organized crime, a shocking 31,000 people have been killed in relation to the drug war. As bullets riddle the streets of inhabited cities, a daunting truth unfolds for Mexico and its economy.

Mexican drug cartel activity occurs all throughout the nation as well as in cells throughout the United States. However, the majority of operations take place in Northern Mexico; its industrial hub. Many American industrial companies are focused there for manufacturing processes. Of these companies, 15% have postponed investment plans and 80% have realized the violence and drug war as a long-term threat to business in the country. Even more concerning, a third of the companies have experienced extortion from the cartels and at least half of the companies have been affected by drug-war related violence.

This unstable socio-political environment poses dire implications for Mexico’s already weakened economy. Foreign investment from the US flows into Mexico solely for the advantage of low cost labour and close proximity to consumers and markets. With violence from the drug-war, these American companies are forced to increase expenditure on security as well as expenses for extortion and abduction of employees. Some companies have also had reductions in sales and revenue. These higher costs make manufacturing in Mexico less attractive as opposed to emerging Asian nations that have lower labour costs. The withdrawal of these American companies will result in hundreds of thousands of newly unemployed Mexican workers. Mexico’s economy, after starting to recover from the recession, will be stripped of the foreign investment that pumps a vital lifeline of income and jobs.

The turmoil and violence caused by the drug-war acts as a deterrent to trade and investment. Exports will ultimately decrease as American firms leave and the country will encounter an increase in their trade deficit. This will mean increased taxes to support the deficit and a curb to private investment as average wage income is decreased. Even more dangerous to Mexico`s economy is the possibility of American firms relocating the bulk of their manufacturing processes to other more stable nations. China, Taiwan and other Asian nations offer lower labour costs and fairly stable political environments. These developing Asian countries also now have greater intellectual property protection and business regulations that provide a fertile environment for foreign investment. If the majority of American companies realize that Mexico`s drug-war violence is too great a risk to business, they will have to relocate production across the Pacific.

It now comes to a cost-benefit analysis for firms where they consider whether low costs and proximity to Mexico is worth risking extortion, theft and even murder. Moving production to Asia will mean higher shipping costs and shipping time, but a decrease in labour costs and violence related risks.  This relocation of most American firms to Asia will facilitate excessive unemployment in Mexico as well as a decrease in economic activity in the nation. The only clear move by the federal government is to increase national spending on law enforcement to hinder the drug-war violence. Mexico should realize that they are in a full-fledged war and if left unchecked, their once prosperous nation will be decimated by the dark hand of the drug cartels.

For decades, television remained as the unrivalled medium for household entertainment. As an industry it has churned out culturally relevant and acclaimed programming ranging from Friends on NBC to HBO’s The Sopranos and even Comedy Central’s The Daily Show. Much of this success can be credited to the networks that have developed strategies to brand and sell quality programming in what is ultimately a bid for greater viewership. Recently however, these networks have been challenged with an increasingly competitive environment as new entrants continue to join the industry and steal away market share. This competition has had the profound effect of damaging the business model that once brought television to its dominance in household entertainment.

Most households that demand quality entertainment will subscribe to standard cable packages for their basic broadcasting networks such as NBC, CBS and Fox.  These major networks compete on levels of ratings which describe the number of viewers who watch their programming. Pragmatically, better shows lead to better viewer ratings and better viewer ratings drive up the bid for advertisement spots. These spots serve as primary revenue for broadcast networks, thus better shows have always meant higher revenues. As viewership for each network dwindles, however, the incentives that broadcasters face to create a ‘better’ show have begun to deteriorate.

The majority of successful television programs undertake large fixed costs per season that need to be justified by advertising revenues. With viewers now having a larger variety of channels to be entertained by, companies that spend heavily on television advertising have begun to witness a shift in audience appeal away from their favourite broadcast networks. Their money has no doubt followed, but not to the other channels or networks that one would expect. Advertisement spending continues to move towards the internet which promises to be a viable spot for a growing viewership, slowly pushing down demand for advertisement spots on television. Television advertisement took its largest hit in the 2008 to 2009 year by declining 21.2% to $41 billion dollars, putting a severe dent in broadcaster profits. As a result of smaller audiences and lower revenue potential, standard broadcast networks are less willing to spend on grandiose production sets with successful television writers, and instead opting to focus on low budget attention grabbers. Reality television has been the recent champion of this approach to widen network margins.  What follows can best be described as a vicious circle. A smaller audience discourages these networks from spending more on quality programming, and the audience shrinks further due to that very lack of competent entertainment value on television.

The importance of having a focus on higher quality programming for any television network is quite visible. Premium cable networks, as opposed to broadcast networks like NBC and Fox, have effectively conditioned their circle to be a virtuous one.  Premium networks such as HBO and Showtime have developed their brand and convinced consumers to pay for it on a subscriber basis. To sell, HBO relies on the quality and class of its products and the way in which it presents them; high end programming with no advertisement breaks. By positioning itself in the market with an array of must-watch shows, they have garnered a growing viewership where broadcast networks are now losing their retention.  HBO’s boisterous new production of Boardwalk Empire does well to exemplify their strategy. Spending upwards of a record $50 million on production and securing an all-star creative team has allowed HBO to tap into its competitive advantage and produce a show that boasts 10 million total views per episode by paying subscribers.  In contrast, the broadcast networks have done little to set themselves apart as channels that viewers should continue to watch.

Viewers are now looking towards the internet and its expanding scope as a substitute for their leisure as well. The advents of interactive entertainment such as YouTube, blogs and Facebook have finally created rivalling alternatives for viewers in sight of lower quality programming and they are poised to steal away the pastime viewers that television networks were able to take for granted. Television, it seems, may no longer remain as the staple form of pastime and entertainment in many households.

The battle between Smartphone empires in 2010 has heated up with the launch of the iPhone 4, Blackberry Torch, Windows Phone 7, and the rise of the Android OS. But what will determine success going into 2011?

Many think that it’s technological innovation, others believe it will boil down to pricing. Truthfully, the real success will be determined by the applications that are available for the operating system.

An application is a program that runs on smartphones and other devices that connect them to internet services, games, information, news and lifestyle interests. Its importance is vital to an operating system as the larger the amount of “apps” increases the amount of consumers it can appeal to. Variation in apps is needed as they are an indirect reflection of the owner’s personality. These apps result in making phones more useful and “cool”.

Functionality of a phone is pivotal as the average person has certainly become busier over the past decade. Going into 2011 this trend should not change. As a result of this busier lifestyle, consumers are more reliant upon their mobile devices. Knowing this, improving the wireless experience through app creation is top priority for companies. This has led to an increase of mobile companies demanding developers to make applications available for all platforms, as opposed to being platform specific. This leads to a game of “catch-up” for every player in this fast-paced market.

By having useful apps a phone has more value to the consumer, and therefore they are more likely to go with that choice. Although consumers may have different preferences, this does not go without saying, “time is money”. If one can provide a vast selection of applications while still keeping a broad consumer base in mind, it will not be a surprise that that particular operating system will have the majority of consumers. The quality of its apps will be the competitive advantage of any cellular company in the future.

The Economic Outlook for January 2011 has officially been published. The issue made for a number of interesting viewpoints on current topics and will be found on campus during the following week. The ESA Executive sincerely thanks all analysts for their work on the quality and depth of the issue’s analysis.

The Economic Outlook, January 2011

If a consumer thought that choosing a cell phone was hard, that decision has just become even more difficult. On November 8, 2010 Microsoft launched their line of phones running Windows Phone 7 across North America, making them the fourth big player in the mobile market joining Google, RIM, and Apple.

At first glance, such news seems insignificant due to Microsoft’s struggles to create a revolutionary mobile operation system since 2000. Within that time they have released 8 different versions, not including Windows Phone 7. Their most recent software disappointment came in May 2009 when they released Windows Mobile 6.5.  The new Windows Phone 7, however, brings a totally different look from its predecessors.  The new operating system uses tiles to navigate the home page while boasting flawless email syncing and a useful Microsoft office that allows for creation, viewing and editing of PowerPoint, Word, and Excel.

This leads to the following question, what is the significance of having one more competitor in a mobile market that seems to already have an abundance of players?

The emergence of Microsoft in the mobile OS market has the potential for a massive shift in the competitive landscape as Windows Phone 7 poses reliable document and email functions. This provides many businesses with a mobile option that does not require the extra hassle and cost of registering and building an OS to cater to the business programs when it is much more natural with a phone running Windows. As a result, Microsoft offers a perfect substitute for BlackBerrys, making them a serious threat to RIM. This seems to be the beginning of a new rivalry; Dell, an early supporter of the Microsoft OS and aiming to push their own piece of hardware has equipped their business professionals with their new Venue-Pro device that supports Windows Phone 7 – swapping away 25,000 BlackBerrys in the process. This may simply be a cost cutting measure, however, if Dell reports success in the switch then it will only encourage and harvest device change within other organizations.

The majority of the business world runs on Windows. Running a mobile OS that is readily integrated with a company’s IT infrastructure is both easy and affordable. It is also important to keep in mind that there has been a growth in the ability to complete daily tasks through a phone and it is evident that Microsoft realizes this through its platform development. It will be interesting to see what the future holds for Microsoft as they could potentially achieve great success by obtaining a large portion, if not the majority, of business consumers over time. Let the battle begin.

The American public has recently shown a strong interest in adding gold, both in ‘paper’ form and physical form, to their investment portfolios. This interest has grown concurrent with the dramatic increase in gold bullion’s market price. This buying interest spans the entire investible universe for the precious metal including; gold-based exchange-traded funds (ETFs), precious metals mutual funds, gold futures and options – as well as physical gold in the form of gold coins and small gold bullion bars. Indeed, at year end 2010, SPDR Gold Shares, with over US$ 58 billion in current market capitalization (representing the equivalent of approximately 42 million ounces of gold or almost one-half year’s worth of current global gold production) ranked as the largest gold exchange-traded fund and second-largest exchange-traded fund in the world based on market capitalization.

Many financial commentators and analysts have proffered several reasons for this gold-buying interest ranging from; heightened fear of potential U.S. dollar depreciation and a possible resurgence of inflation, particularly as a result of the U.S. government’s and the Federal Reserve’s policies implemented to offset the potential negative impacts of the 2008 financial crisis, through to increased buying interest from the rapidly growing middle class in China, and to a lesser degree in India.

However, this increased interest in gold bullion investment by U.S. citizens has also recently caught the interest of the U.S. government. Interestingly, the current U.S. administration has recently passed legislation, buried deep within President Obama’s healthcare reform legislation, requiring all U.S.-based vendors or traders of physical gold to report all purchase and sale transactions in excess of US$ 600 per year for each individual taxpayer, whether it is personal or corporate.

Did the U.S. government implement this in order to increase its tax base, or could this be the first step in a process that eventually leads to government control of the domestic gold bullion market as happened last century?

In 1933, under President Franklin D. Roosevelt, all gold bullion and equivalents held by U.S. citizens was confiscated by the government. American citizens woke up on the morning of April 5^th, 1933, to discover that Executive Order 6102 “forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates by U.S. citizens” had been enacted.

The next milestone in the 20^th century U.S. gold bullion market was the decree by President Nixon in 1971 to eliminate convertibility of the U.S. dollar into gold bullion that had been in place since its establishment under the Bretton Woods Agreement in 1944, thus permitting gold to find its U.S. dollar value based on market mechanisms.

The Executive Order 6102 remained in force for almost 41 years until then President Gerald R. Ford repealed the legislation in 1974, thus permitting U.S. citizens to once again invest in gold bullion without any restrictions.

As Figure 1 depicts, U.S. dollar price of gold bullion hit a (then) historic high of almost US$ 875 per ounce during January 1980 as a result of the highly inflationary economic environment brought on primarily by the Arab Oil Embargo. Subsequently, the price of gold fell in a dramatic manner as Fed Chairman Volker’s aggressive monetary policies brought inflation down to long term policy levels. The price of gold then traded in a relatively narrow range of US$ 250 to US$ 500 for the remainder on the century.

Figure 1

Gold began its most recent secular price rise early in the past decade and continued to increase with the concurrent buoyant global economic growth environment and hit its non-inflation adjusted peak price of US$ 875 per ounce in January 2008.

However, the gold price rally ‘grew new legs’ in early 2009. The year end 2010 gold price of nearly US$ 1,400 per ounce represents an almost 60 percent increase in the price of the commodity over past two years, and an increase of over 350 percent since the turn of the century. The publics’ interest in gold continues unabated with a number of national mints announcing depletion of their fine-gold inventory due to an inability to meet demand.

Now that the public has ‘shown their hand’ in terms of interest in gold bullion investment, it will be interesting to see what the U.S. government does with the new gold bullion transaction information and what their next steps will be.

“Government big enough to supply everything you need is big  enough to take everything you have. The course of history shows us that as a government grows, liberty decreases”

-        Thomas Jefferson
3rd president of US (1743 – 1826)