360b / Shutterstock.com

360b / Shutterstock.com

The recent death of David Bowie brought an enormous wave of eulogies focused on his revolutionary career in rock music. Many of the laudatory discussions concerning Bowie’s countless musical and performance innovations mentioned his trailblazing contribution to the world of finance: the asset-backed securities known as “Bowie Bonds”.

How They Began

There are nearly as many explanations for the 1997 genesis of Bowie Bonds as the number of articles dealing with the subject. Some claim that Bowie foresaw the impending hardship for the music industry, resulting from the advent of digital recording and “streaming”. Many of these discussions focused on the singer’s 2002 interview with Jon Pareles of The New York Times, which included this prophecy:

“I’m fully confident that copyright, for instance, will no longer exist in 10 years, and authorship and intellectual property is in for such a bashing.”

Bowie’s prediction actually extended to the entire area of intellectual property rights, beyond those impacted by digital recording. In fact, this idea has its roots in the assertions by Marshall McLuhan, who wrote in the spring, 1966 issue of the American Scholar:

“Xerography is bringing a reign of terror into the world of publishing because it means that every reader can become both author and publisher.”

Despite Bowie’s prescient notion that copyright protection would become a major challenge for the music industry, the most logical explanation for his 1997 decision to issue bonds was that he simply needed money.

The Project Begins

Tom Espiner of BBC News reported that in the 1970s David Bowie first learned that he did not own all of the rights to his music catalog. Tony DeFries, who had been Bowie’s manager until 1975, owned 50% of the rights to the music Bowie created up to an unspecified point in time.

Bowie was eventually able to purchase the rights held by DeFries for an estimated $27 million. In the mid-1990s, Bowie’s financial manager, Bill Zysblat, put the artist in touch with investment banker David Pullman, who was working for Gruntal & Co. at the time. Pullman was working forFahnestock & Co. when the bond offering finally came in 1997.

With the help of Bill Zysblat, Bowie entered into a licensing agreement with record label, EMI. The deal gave Bowie the right to securitize the royalties for 25 albums released between 1969 and 1990.

The royalty stream backed the issue of $55 million in $1,000 bonds, underwritten by Fahnestock & Co. The bonds paid 7.9% interest for ten years, after which point 100% of the royalties would be payable to David Bowie.  Prudential Insurance Company of America purchased the entire bond issue.

After founding Pullman Group, L.L.C., David Pullman created similar bonds for Ashford & Simpson, James Brown, the Isley Brothers, and Marvin Gaye. Pullman eventually used the term “Pullman Bond” to describe these securities. At the Pullman Group website, a diagram illustrates the entertainment-asset securitization process for Pullman Bonds.

Battle Royale

In a November 20, 2000 article for The Observer, Landon Thomas described the feud which eventually arose between David Pullman and David Bowie’s financial manager, Bill Zysblat. Zysblat began competing with Pullman immediately after the Bowie deal, at which point both Zysblat and Pullman believed that the music royalty market could be worth as much as $1 billion.

By 2000, Zysblat concluded that the music royalty market was worth no more than $100 million, with rising interest rates making the situation even less lucrative. On the other hand, the Observer article highlighted Pullman’s boast that he had booked $105 million in deals since the Bowie offering. The article also pointed out that in September of 1999, the U.S. Patent and Trademark Office refused to issue a trademark for Pullman’s use the name “Bowie Bonds”.

After selling the Bowie Bonds to Prudential, Bill Zysblat, acting as principal for Rascoff/Zysblat Organization, Inc. (RZO), entered into a joint venture, whereby Prudential and RZO would jointly engage in creating securities backed by future entertainment royalties. As a result, in November of 1999, Pullman Group L.L.C. filed suit against Prudential, RZO, a law firm, which advised Fahnestock on these matters and several other defendants.

Pullman Group’s lawsuit asserted 25 separate causes of action alleging misappropriation of trade secrets, intellectual property and innovative expertise. In August of 2000, Judge Beatrice Shainswit of the New York State Supreme Court (the trial level court in the state of New York) granted Defendants’ motion to dismiss the suit on the basis that the Pullman Group’s founding came in 1998, after the 1997 consummation of the Bowie deal.

Pullman Group therefore lacked standing to sue. The dismissal was affirmed by the Appellate Division of the Supreme Court of the State of New York on November 1, 2001, as reported in Pullman Group, L. L. C. v. Prudential Insurance Company Of America et al., 733 N.Y.S.2d 1 (First Department, 2001).

Conclusion

The novelty of Bowie bonds has been exaggerated in many instances. A January 12, 2009 article by Evan Davis for the Daily Mirror asserted that Bowie bonds “may have started the credit crunch.”

That theory ignores the fact that mortgage-backed securities have been in existence since the 1970s. On a more sober note, a recent article in Billboard explained that Bowie bonds were an outgrowth of the type of “off balance sheet” funding provided to production studios by firms such as Silver Screen Partners in the 1980s.

A January 11, 2016 report in The Wall Street Journal disclosed attempts by both Royal Bank of Scotland and Nomura to create bonds based on bundled future income streams from a group of artists. These plans never materialized because the stream of cash flows necessary to back bonds required a significant body of work, beyond what the artists involved created.

It remains doubtful that securitization of royalties will continue in the music industry because royalty rates and sales of recorded music are shrinking. On the other hand, The Wall Street Journal noted that Fantex Holdings has begun issuing securities tied to the earnings of professional athletes.

Will the flow of publicity about Bowie bonds since the artist’s death have the ironic impact of breathing new life into the use of securities based on royalty streams? Time will tell.

The post Do Bowie Bonds Have a Future? appeared first on Economy Watch.

Cybersecurity software has been a major focus in pop culture since the release of the 1995 film, Hackers starring Angelina Jolie. Computer break-ins have since been a significant theme in countless movies and television programs. The entertainment industry has provided cybersecurity firms with the best promotion imaginable; film and program content that induces widespread fear of hackers.

Cybersecurity software has been a major focus in pop culture since the release of the 1995 film, Hackers starring Angelina Jolie. Computer break-ins have since been a significant theme in countless movies and television programs. The entertainment industry has provided cybersecurity firms with the best promotion imaginable; film and program content that induces widespread fear of hackers.

Software manufacturers and other companies involved in the cybersecurity industry were able to benefit from the heavily-publicized hack of the Sony Corporation, which took place in November 2014. Three weeks before Sony was scheduled to release its highly-publicized movie Annie, hackers stole the film and leaked it to many “file sharing” websites. The Sony hack also resulted in the theft of the film, Fury, starring Brad Pitt and Shia LaBeouf. Fury was downloaded over one million times within the first month after it was pirated.

Cybersecurity company FireEye was perhaps the most significant beneficiary of the publicity resulting from the Sony hack. FireEye’s Mandiant subsidiary was heavily involved in the investigation of this incident and FireEye was able to generate a good deal of publicity as a result. Mandiant offers security management services along with its proprietary line of security incident management products. Mandiant’s client list includes several high-profile financial institutions and Fortune 100 companies.

Immediately after the Sony hack, Wall Street investors made a priority of allocating a significant amount of capital toward stocks issued by cybersecurity firms. One of the Wall Street’s biggest beneficiaries of the Sony breach was a newly-created exchange-traded fund, the PureFunds ISE Cyber Security ETF (ticker symbol: HACK). In fact, the inception date of this ETF was November 11, 2014. The HACK ETF tracks the performance of the 35 components of the International Securities Exchange Cyber Security Index.  A list of the HACK securities appears at the end of the article.

The cybersecurity industry benefits from the constant reminders to individuals and corporations that there is always a vulnerability to new security threats. Individual computer users are often provided with “pop-up” messages, advising them about how their firewall or anti-virus program just saved them from a significant threat. These messages reinforce the need for product renewal, and they help ensure customer loyalty.

From the corporate perspective, highly-publicized cyber-attacks highlight the unpleasant reality that even the most sophisticated cybersecurity systems can be penetrated. As a result, most major corporations keep their information technology and cybersecurity departments in a constant state of alert, with review protocols that could lead to significant expenditures on new security software and equipment.

Ongoing media attention to the “hacktivist” group, Anonymous keeps the issue of cybersecurity a leading concern, enhancing the subject’s importance as a “talking point” for politicians during the 2016 campaign season. Recent announcements by Anonymous that it was targeting the Ku Klux Klan brought a wave of publicity, which was immediately followed by a second wave of publicity concerning the group’s campaign against ISIS. The threatening image of a hacker wearing a Guy Fawkes mask helps the cybersecurity industry benefit from the resulting fear of having confidential data compromised.

Corporations failing to provide adequate security for their customer’s confidential information can face lawsuits and customer attrition. The unwanted publicity resulting from a widely-reported cybersecurity breach can be devastating for business. As a consequence, corporate customers of cybersecurity firms are taking a proactive approach to this issue, making life easy for the sales departments of the leading software and security services companies.

Concern has also arisen concerning corporate exposure to liability suits as a result of sharing information with the government in an attempt to address cybersecurity threats. This led to the passage of the Cybersecurity Information Sharing Act of 2015 (S. 104) which was passed by the Senate on October 27, 2015. The bill was sent to the House of Representatives for consideration on the following day. If that this bill is enacted into law, there could be a new release of cybersecurity software and equipment for the corporate customers of cybersecurity firms.

The August 2015 publication of customer lists from the Ashley Madison marital infidelity website resulted in a barrage of lawsuits, including a $578 million class-action suit filed in Canada. It is easy to assume that this event helped escalate the anxiety levels of those responsible for providing security for customer data across a broad spectrum of businesses. This event reinforced the idea that the money spent by a company in making extraordinary efforts to protect the confidential information of its clients could be significantly lower than the amount spent on defending and resolving lawsuits resulting from the failure to adequately implement such customer protection.

Fear is the strongest motivator, driving demand for cybersecurity products and services. With each new headline concerning a data breach, the cybersecurity industry can expect a new surge in business. As a result, many investors redirect their attention to this sector in the hope of profiting from this surge.

What follows is a list of the 35 companies, which are the elements of the PureFunds ISE Cyber Security ETF, their ticker symbols and their “weight” in the HACK ETF indicated as a percentage:

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Twinsterphoto / Shutterstock.com

Twinsterphoto / Shutterstock.com

Twenty years ago, it would have seemed impossible to imagine that an Internet-based business, known as “Amazon Books” would grow to become one of America’s top-ten retailers. The company, now known as Amazon.com, or simply “Amazon,” expanded to sales of CDs, DVDs, software, video games, toys, televisions, computers and a myriad of other electronic gadgets.

Most notably, Amazon’s Kindle reader for e-books revolutionized the reading experience for many people, as the software was developed to allow non-Kindle products (such as “pad” computers) to read e-books published for the Kindle. Amazon’s Fire line of “tablet” devices evolved from the Kindle concept, with price tags as low as fifty dollars. The company also offers television set-top boxes featuring the Fire trademark.

Amazon began actively selling books online in July of 1995, following incorporation the previous year. As the company continued to grow, its list of corporate acquisitions included Brilliance Audio in 2007 and Audible.com in 2008. The enormous size of Amazon’s retail footprint was epitomized with its acquisition of the online shoe merchant Zappos in July of 2009 at a cost above $925 million. The Zappos trademark is a footprint.

Most recently, the company introduced Amazon Dash on March 31, 2015. Amazon Dash ties in with the company’s Amazon Prime Fresh grocery delivery service by the use of a small, Wi-Fi device, which takes the shape of a small activation button. For example, an Amazon Dash button with the Tide logo sticks directly onto the control panel on one’s washing machine.

When the customer runs out of detergent, he or she can simply press the Tide button to order more. This button could prove especially profitable as customers accidently make contact with the button while doing their laundry. The company allows customers a brief period to cancel the order, confirmed via telephone, but there remains the possibility that some customers will not cancel such accidental orders within the allotted time.

Amazon Studios was recently in the spotlight when Jeffrey Tambor won the Emmy Award for Outstanding Lead Actor in a Comedy Series for his contribution to the company’s first season of Transparent. Amazon Studios will continue to expand its original series offerings, available on Amazon Video, with Sneaky Pete, produced by Bryan Cranston of Breaking Bad. Sony Pictures Television will co-produce the series, although the ten episodes, scheduled for 2016, will be available exclusively through Amazon Video. Woody Allen is producing another series, currently in development for a 2016 debut.

Amazon Studios is getting involved in making movies, too. Its first release results from a licensing agreement with Spike Lee for the film Chi-Raq, scheduled to premiere in theaters on December 4. The plan is for Amazon Studios to release its original movies to theaters for a brief run, the period is unspecified, after which point they will become available exclusively for Amazon Prime members. Eventually, these original films will be available to all Amazon Video customers.

Establishing merchant partnerships allows Amazon to provide online sales for Bebe Stores, Lacoste, and several other enterprises. Amazon Marketplace allows customers to sell used books, DVDs and CDs, listed on the same pages where Amazon sells corresponding new versions of the same product.

Amazon’s common stock trades on the Nasdaq Stock Market, under the ticker symbol, AMZN. The initial public offering (IPO) of Amazon stock took place on May 15, 1997, at a price of $18.00 per share. As Amazon’s share price continued to soar, the company saw fit to implement stock splits on three separate occasions during the late 1990s to facilitate liquidity and make the shares available to less affluent investors. Because of those splits, the $18 IPO price now translates to approximately $1.50.

Investors who have retained their Amazon shares since the 1997 IPO were obviously feeling quite comfortable, despite the stock’s 3.49 percent price drop on November 13. After all, at the closing bell, Amazon ended the trading session at $642.35 per share – after hitting a record-high closing price of $673.25 on Wednesday, November 11. Nevertheless, Amazon is the most expensive stocks of the S&P 500 components, with a trailing twelve-month price/earnings multiple of 920. The company’s top status among cloud-computing service providers, through its Amazon Web Service (AWS) business line, is responsible for a significant degree of investor excitement.

Amazon’s $311 billion market capitalization dwarfs that of Wal-Mart. Although Wal-Mart had been America’s largest retail enterprise, when measured by market capitalization, its $180.9 billion market cap is currently nowhere near that of Amazon.

The National Retail Federation (NRF) currently ranks Amazon as the ninth-largest retailer, headquartered in the United States. According to NRF data, Amazon’s $49.353 billion in retail sales during 2014 accounted for 59.2 percent of the company’s worldwide sales for that year, which reached $83.391 billion. When compared to the previous year, Amazon’s domestic sales growth expanded by 22.6 percent during 2014.

By 2013, Amazon’s online sales created such a heavy flow of shipping that a partnership between the company and the United States Postal service had to be established, by which Sunday deliveries would be in New York and Los Angeles. Sunday delivery service expanded to New Orleans, Houston, Dallas, and Phoenix during the following year.

The company has established 65 order fulfillment centers throughout the United States. Amazon has also established order fulfillment centers throughout Europe, Canada, China, Japan, and India. These centers serve as warehouses and shipping points to provide faster delivery than what had been previously experienced from the company’s warehouse in Seattle. The company recently gained a good deal of publicity for its plans to use aerial drones for making deliveries to homes.

Amazon’s most expensive items are on Amazon Art. In August of 2013, Amazon Art sold Claude Monet’s L’Enfant de la Tasse for $1.45 million. When Norman Rockwell’s Willie Gillis: Message from Home was offered for $4.85 million, many commentators described the move as a publicity stunt, to counteract initial criticism that Amazon Art would be an unloading point by which art dealers would dispose of their unwanted inventory.

Throughout last summer, many articles described harsh working conditions, which extended from Amazon’s order fulfillment centers to its home office in Seattle. CEO Jeff Bezos received criticism for being an ambitious overachiever with unreasonable expectations about employee performance.

On the other hand, many current and former Amazon employees have defended the company’s corporate culture. From the bystander’s perspective, it is easy to understand that there must be a very significant force driving Amazon to achieve such impressive results.

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