Friday, May 30, 2003

BEATING A DEAD HORSE (BUT HEY, THAT'S WHAT THE MEDIA DOES) The Heritage Foundation makes the case the ownership rules that were written when DC residents only have 4 television stations to choose from are an anachronism and should go.
The case for changing the FCC’s ownership rules is clear. They were written in a different era, and don’t reflect the diversity and competitiveness in today’s media marketplace. And, they are likely hurting consumers, by limiting the ability of media outlets to use resources as effectively as possible. The best course would be for the FCC to eliminate the rules entirely (in which case competition would still be covered antitrust regulation, as it is for most other businesses). It is more likely, however, that the commissioners – in the fact of populist rhetoric -- will ease the rules, but leave them substantially in place.
In fact, easing the rules is all that has been proposed.

EDWARDS ON MEDIA CONSOLIDATION Senator Edwards' letter is nicely attacked here. Also, it appears WRAL and WRAZ, as mentioned below, are operated by the same Company under a "Local Marketing Agreement." Two other stations in the Raleigh market are operated together (are "sister" stations), these are WLFL and WRDC.

SCANDINAVIAN TAR HEELS Wow, Sweden has opened a consulate in Raleigh, recognizing the impact of Raleigh or RTP-based companies such as Volvo Truck NA, SAAB Barracuda, Sony Ericsson Mobile Inc., Pergo Inc., Sandvik Coromant and Husqvarna Turf Care Co.

MORE ON MEDIA CONSOLIDATION: WHO'S OPPOSED? Well, the opposition to the new rules being pushed by Chairman Powell (ostensibly because he believes the existing rules may be struck down by the courts, leaving no ownership restrictions whatsoever) need to come up with an argument better than the desire to restrict certain viewpoints.
"We're frozen out," said Karen Pomer, a member of the group Code Pink, which organized the protest and also rallied for peace during the war in Iraq. "All of this is benefiting conservative voices."

A protest in New York was organized by United for Peace and Justice NY, an anti-war group. About 150 people picketed outside station WWPR and carried signs that read, "Farewell Free Speech, We'll Miss You" and "The Airwaves Belong to the People, not Clear Channel."
Sounds like they'll be asking for a return of the king of content restrictions, the Fairness Doctrine. Let's hope that anti-Constitutional joke stays in its grave.

Thursday, May 29, 2003

MEDIA CONSOLIDATION AND SIMPLISTIC THINKING Well, simplistic thinking is what we seem to be getting on the Web, mostly concerned about some abstract notion of diversity of media voices and the conspiracy of AOL Time Warner, Viacom and Clear Channel to tell us what to think by controlling all media. Fine, there are problems with media consolidation (listen to the radio and find anything music remotely interesting), but there are also some sound economic reasons to allow media consolidation or at least allow the cap to be raised a little bit on national ownership and eliminate the limits on television duopolies and media cross-ownership.

For instance, in my practice I have seen numerous occasions where television stations are simply unprofitable in small markets, especially with the requirements for the digital buildout. So, we structure a transaction where one station provides certain services (actually, everything by programming) to another station...from sales to news. The stations don't exactly become co-owned, but the effect on the diversity of voices is really the same. Look at my market, Raleigh-Durham-Fayetteville. "WRAL News" is aired on WRAL (the CBS affiliate) and on WRAZ (the Fox affiliate), yet these stations are licensed to different entities. I suspect that there is a Joint Sales Agreement or Local Marketing Agreement or Shared Services Agreement between the two stations whereby the WRAL owner essentially runs WRAZ, although ultimate control over programming decisions would be left to WRAZ's licensee. The FCC allows this and that's a good thing for us lawyers (maybe that's why John Edwards is against changing the rules).

But it is short-sighted to simply say that we can't have consolidation because diversity is important, when the alternative is de facto consolidation, without which stations would go out of business. It is simply not profitable anymore to independently operate a television station in many mid-sized television markets. Sure, you can make money off of the WB or Pax affiliate in Miami, but how about in Corpus Christi or Shreveport or Fargo? Without co-ownership and taking advantage of economies of scale in these markets, those WB and Pax affiliates will go off the air. Now what's happened to your diversity of voices? Economies of scale is not just about efficiency and profit, but in the TV business, it's about survival.

And its deregulation that saved AM radio, and has caused additional FM station allotments throughout the nation. Sure, Clear Channel owns a lot, and many morning shows are syndicated, but I've noticed that in the middle of John-Boy and Billy, or Bill and Sherri or whoever, you still get local news cut-ins....often from local TV newsrooms...something else that would continue with the lifting of cross-ownership restrictions.

And, I wonder, if local, profitable television stations might attempt to publish a local newspaper if allowed by the FCC? Many cities have only one newspaper -- the other one went out of business years ago, unable to compete. But local television stations have a staff of reporters who could publish a newspaper at a lower cost than the existing monopoly paper. There would then be more than one editorial page in towns like Raleigh or Columbia or Richmond or wherever. But not under the current rules. No, you can't own a TV station if you own a newspaper, according to the FCC.

So, it seems there are a number of ocassions where media consolidation may actually help competition and the diversity of voices. Hmmmm. Heck, even Clear Channel saved stations that would otherwise have gone out of business and programmed them with country or jazz or sports talk -- formats that probably wouldn't have had competition in those markets if not for Clear Channel's expansion. I could go one, but facts are unlikely to sway the sky-is-falling crowd eager to make political hay out of evil Big Business.

Wednesday, May 28, 2003

ANTI-DILUTION PRICE PROTECTION A common feature of Preferred Stock issued to venture capitalists in privately held companies is anti-dilution price protection (here’s a simplistic definition), an especially relevant concept with the prevalence of down rounds. Let’s say that the VC purchases 1,000,000 shares of convertible preferred stock at $1.00 per share. The VC can later convert the stock to an equal number of common shares. The VC makes this deal because he knows that 1,000,000 shares of common stock will be equal to about 50% of the company (assuming that there are currently 1,000,000 shares of common outstanding) or are otherwise worth about $1M.

Let’s then assume that the Company later issues 10,000,000 shares to the founder’s mom for $10,000. Now, if the VC converts his preferred stock to common, he’ll have only 1,000,000 shares of common stock when a total of 12,000,000 are outstanding. Well, that’s not 50% of the Company. So, to protect itself, the VC insists that the articles of incorporation provide for an adjustment in the shares issuable upon conversion if the Company issues stock to anyone else at a price lower than paid by the VC. This could take the form of a “full ratchet,” which would allow the VC to convert at a price per share equal to the lowest amount paid by a subsequent investor. In the example above, that would mean that the VC could get to convert his 1,000,000 shares of preferred stock to 1,000,000,000 shares of common stock (that’s $1,000,000 worth of stock priced at mom’s price of $0.001 per share). Obviously, the full ratchet penalizes any shenanigans by the Company.

The other type of anti-dilution price protection is the weighted average. There are a number of varieties of this, but the basic point is to adjust the price per share upon conversion to properly reflect the new price per share paid in, on average, by all shareholders. So, since the VC paid $1 per share, and mom paid $0.001 per share, we see that there are now 11,000,000 shares bought by the VC and mom for at total of 1,010,000. How much is that per share? $0.101 per share. So, the VC should be able to convert its $1 million worth of preferred stock to a number of common shares priced at about 10 cents a share. Thus, the VC gets about 10,000,000 shares. The same as mom. Well, that doesn’t seem fair, so there are a number of other ways that the calculation is done, but I don’t have the space to get into them. Anyway, later I will discuss a time when an investor may be wise to refuse anti-dilution price protection.

WHAT’S MY BUSINESS WORTH That’s a question I’m asked a lot by clients who are interested in selling, and there’s no easy answer because valuation varies by industry and, of course, is dependent upon more than your income statement and balance sheet. The tender offer for Salix Pharmaceuticals, a public company, illustrates the difficulties with valuation – even when there is a public market for the company stock.

Wednesday, May 21, 2003

LLC VERSUS CORPORATION: OWNERSHIP INTERESTS It is possible to own an economic equity interest in a Corporation, yet not be a Shareholder. It is also possible to own an economic equity interest in an LLC and not be a Member. With an LLC, you might simply provide (in the LLC Agreement) that owners of what you might call "Units" or "LLC Interests" (which would be denominated like shares) are not Members unless they are "admitted" as Members. This seems easier than in the corporate context which would fall back on some Shareholder agreement to technically forbid the transfer of stock without approval of the Company. The SH agreement would say that any non-approved transfer of stock would be void....but that certainly isn't as clean as the LLC situation. And I don't even want to get into Phantom Stock, which isn't stock at all.

PROSCIUTTO AND PARMA Well, at least the Europeans are focusing on what they do best. Food. The protected designation of origin or PDO process is an interesting twist on IP issues for your clients in the importing/exporting business. Remember, if it ain't Chianti, it's Sangeovese.

Tuesday, May 20, 2003

THERE'S STILL VC MONEY TO BE HAD Although the terms are not as favorable to companies in 1999, there is still Venture Capital money available at all levels in the Research Triangle Park and elsewhere. Today's difference -- you might want to show some positive EBITDA to get it. Aurora Funds in Durham recently closed on a new $85 million fund, and CapitalSouth Partners recently put together about $80 million in its second fund.

SUPER DMCA AND MEDIA CONSOLIDATION Writing on Tech Central Station, Glenn Reynolds argues that the Super DMCA is an attempt by existing old media (telecom, cable) to restrict competition in the same fashion that Ma Bell used to. Because of this attempt to squelch competition by, for instance, preventing you from accessing a network with your wireless Bluetooth card without having to buy or rent that card from the network owner, this reduces the competition among media outlets that would have otherwise allowed for the FCC to permit concentration of broadcast and print media. Anyway, Reynolds explains it better.

But it is also helpful to consider whether the concentration of media such as radio has improved or reduced the quality of radio since 1996. There's no need to consider the impact of new media, such as the internet or satellite radio, because so far they have had no effect. The concentration of radio into fewer hands has not only lessened the "diversity" of voices, its really squashed innovation. The real point to competition is not about some feel-good sociologist's dream of skin-deep "diversity", but about innovation. Monopoly doesn't encourage innovation, competition does.

We haven't had a break-out new music style since radio was concentrated. Why? Because Clear Channel focus groups its formats and therefore takes no risks -- doesn't innovate. A focus group never would have decided to play Nirvana or even Pearl Jam when they could have gone on happily playing 80s pop. But they'll certainly decide to play knock-offs of those previous styles.

It's about innovation. The Super-DMCA will stop it with respect to emerging new technologies. Further consolidation will stop it not just because the internet is failing to compete with radio, but because radio doesn't compete with itself.

Tuesday, May 13, 2003


Lawyer files suit to ban kids from eating Oreos. This guy should be disbarred along with the lawyer that sued McDonalds for making his plaintiff fat.

Monday, May 12, 2003


The blogosphere is abuzz with talk of efforts to strengthen protections for the owners of intellectual property, see the opposition forces in Tennessee at Tennessee Digital Freedom Network. Of course the real issue is not whether you are for copyright laws, patents and intellectual property protection in general, it's how far do you want to go to protect what is very difficult to protect without invading people's homes to see if they are re-editing their DVD of The Matrix.

Thursday, May 08, 2003


Well, I'm not currently updating because I'm still trying to resolve the problem regarding the links -- you can't seem to click on the ones in the main column (left side).

Thursday, May 01, 2003


Tax guy Stuart Levine has the story at and here.

Yeah, I know that you can't click on the links and I'm trying to get this issue resolved with the Blogger folks. Remember, beta software.


The Full Employment for Attorneys Act, also called the Over-Reaction to Enron Act, also called the Sarbanes-Oxley Act, has spawned new practice areas at law firms as they scramble for market share. Key paragraph about the best laid plans of mice and men:
In the future, lawyers speculate that even more business could come from taking public companies private. "I think that will become a trend," says Jamieson, "because [Sarbanes] has ratcheted up not only costs in dollars but also in stress and anxiety over liability."