The Other Kind of Inequality The decline of American social egalitarianism is more worrisome than differences in how much people earn

The Other Kind of Inequality

The decline of American social egalitarianism is more worrisome than differences in how much people earn.


Jan. 26, 2014 5:15 p.m. ET

The problem with the Democrats’ new war on inequality (“the defining challenge of our time,” says President Obama ) is that there are two kinds of growing inequality—and the Democrats are attacking the wrong one.

When I started writing about income inequality in the 1980s, I expected to make a reassuring argument that incomes weren’t growing unequal. That article couldn’t be written. An unceasing barrage of data described an income scale that was pulling apart like taffy. The rich were getting richer faster than anyone else. But even within skill levels or professions—including journalism—the stars were making big money and everyone else was stuck or in decline.

This pulling apart has continued for more than three decades, through Republican and Democratic presidencies, including Mr. Obama’s. It seems to be driven largely by deep tectonic forces within the economy: global trade, which has devalued the labor of unskilled Americans, and technology, which has replaced labor with machines while empowering (and rewarding) those with skills.

Harsh Truth No. 1: Democrats aren’t proposing anything that comes close to reversing this three-decade trend. They got nothin’, as the comedians say. Raising the minimum wage may be a good idea, but it affects a sliver of the labor market. It’s not going to stop the top 10% from taking home 50% of the nation’s income, or 51%. The same goes for extending unemployment compensation. Even the tax increases fought for by Mr. Obama are a blip. On paper they might cut the incomes of the very richest Americans by 6%—until the rich find ways to avoid them.

If Democrats are going to get voters to play along they should maybe give them at least an idea of what they propose to do and how it will achieve their goal—without toxic side effects. A better plan is to ask why we care about economic inequality anyway. If the poor and middle class were getting steadily richer, would it matter that the rich are getting richer much faster?

There’s some confusion among egalitarians on this score. Many argue that inequality per se hampers growth, though the academic support for this theory is soft. Others argue that it hampers mobility, though if skills are now more important to getting ahead that in itself will hamper mobility, whatever the level of inequality.

Harsh Truth No. 2: If it’s not enough for everyone to work hard—if you now have to be smart enough to learn—only some people will make that jump.

When we think honestly about why we really hate growing inequality, I suspect it won’t boil down to economics but to sentiments. No, we don’t want to “punish success”—the typical Democratic disclaimer. But we do want to make sure the rich don’t start feeling they’re better than the rest of us—a peril dramatized, most recently, in the “Wolf of Wall Street” and its seemingly endless scenes of humiliation and rank-pulling.

“Whether we come from poverty or wealth,” President Reagan said, “we are all equal in the eyes of God. But as Americans that is not enough. We must be equal in the eyes of each other.” Worry about this social equality lies at the root of our worry about economic equality.

Social equality—”equality of respect,” as economist Noah Smith puts it—is harder to measure than money inequality. But the good news is that if social equality is what we’re after, there may be ways to achieve it that don’t involve a doomed crusade to reverse the tides of purely economic inequality. As Reagan’s quote suggests, achieving a rough social equality in the midst of vivid economic contrast has been something America’s historically been good at, at least until recently.

We can, for example, honor the universal virtue of work by making it the prerequisite for government benefits wherever possible. There’s a reason Social Security checks are respectable and politically untouchable—unlike food stamps, they only go to Americans who’ve worked.

We can also pursue social equality directly, through institutions that mix people from all income levels together, under conditions of equal status—institutions like the draft, for example, or national service. Do we remember the 1950s as a halcyon egalitarian era because the rich weren’t rich—or because rich and poor had served together in World War II?

The draft isn’t coming back anytime soon. But the great social egalitarian hope—mine, anyway—was that Mr. Obama’s health plan might perform a similar function, offering the poor and middle class the same care, in the same hospitals, with the same doctors—and the same respect—that the affluent get (much as Medicare already does).

The tragedy is that the Democrats readily abandoned this goal. In order to save money and extend maximum coverage and subsidy to the maximum number of the uninsured, Democrats signed off on a system in which affluent Americans sign up for totally different medical networks than people who have less to spend, while the poorest get shunted to Medicaid and the richest bail completely into a private world of concierge medicine.

It’s not easy to imagine a modern medical system that would make Americans feel less like equals, even if they get subsidized. But it is still more likely that ObamaCare

can be changed so that the nation’s health-care system will reinforce social equality than that the tax-and-transfer system will produce economic equality.

Social egalitarians always will be tempted or bullied to abandon their real goal for a more concrete, economistic type of equality—the green-eyeshade fairness of “tax progressivity,” Gini coefficients and income quintiles. Democrats have already sacrificed their biggest recent legislative achievement—and best hope of preserving social equality—chasing after the shallow democracy of what is, after all, only money. They shouldn’t make that their template for the future.

Mr. Kaus is the author of “The End of Equality” (Basic Books, 1992). He blogs for The Daily Caller.

How Constraining Are Limits to Arbitrage? Evidence from a Recent Financial Innovation

How Constraining Are Limits to Arbitrage? Evidence from a Recent Financial Innovation

Alexander Ljungqvist, Wenlan Qian

NBER Working Paper No. 19834
Issued in January 2014
Limits to arbitrage play a central role in behavioral finance. They are thought to interfere with arbitrage processes so that security prices can deviate from true values for extended periods of time. We describe a recent financial innovation that allows limits to arbitrage to be sidestepped, and overvaluation thereby to be corrected, even in settings characterized by extreme costs of information discovery and severe short-sale constraints. We report evidence of shallow-pocketed “arbitrageurs” expending considerable resources to identify overvalued companies and profitably correcting overpricing. The innovation that allows the arbitrageurs to sidestep limits to arbitrage involves credibly revealing their information to the market, in an effort to induce long investors to sell so that prices fall. This simple but apparently effective way around the limits suggests that limits to arbitrage may not always be as constraining as sometimes assumed.

Asia Hedge Fund PCA Investments, Backed by China Sovereign Wealth Fund, Has Shut Down

Asia Hedge Fund PCA Investments Has Shut Down

China Sovereign-Wealth Fund Was Hedge Fund’s Only Major Outside Investor


Updated Jan. 26, 2014 10:59 a.m. ET

A hedge fund with financial backing almost entirely from China’s giant sovereign-wealth fund closed down last week less than three years after it was launched, according to people familiar with the matter.

PCA Investments was formed in 2011 and attracted notice for the involvement of China Investment Corp., the country’s $575 billion sovereign-wealth fund, which is tasked with investing part of China’s vast foreign-exchange reserves. PCA had operations in both Hong Kong and Beijing.

The involvement of one of the world’s largest sovereign-wealth funds with a hedge fund startup with no record of performance was unusual. CIC is better known for investing in established funds.

People familiar with the fund said CIC was PCA’s only major outside investor, adding even more opaqueness to the privately run firm, which was estimated by these people to be managing more than $500 million.

PCA was founded by Hang Hu and former Merrill Lynch executive Wing Lau, who left the firm last year.

The reason for the fund’s closure wasn’t known. A call to PCA’s Hong Kong office wasn’t returned and CIC representatives didn’t respond to request for comment late Sunday.

The sovereign-wealth fund is going through management changes, with a new chairman, Ding Xuedong, appointed last year amid China’s leadership change and its president, Gao Xiqing, set to be succeeded by Executive Vice President Li Keping.

A website for PCA describes it as a “multiasset and multistrategy” investment firm running an Asiawide equities strategy, a global fixed-income strategy and a global macro strategy, the latter a catchall phrase for funds that try to predict and profit from global economic trends.

The closure goes against the current interest in Asian hedge funds, many of which are catching the eye of investors with strong performances. Average returns for funds last year investing in Asia excluding Japan beat peers in the U.S. and Europe for the second year running, rising 13% versus an 8% average return for the industry, according to data from industry tracker Eurekahedge.

Emerging market oil groups out of favour

January 26, 2014 11:01 pm

Emerging market oil groups out of favour

By Ed Crooks in New York

National oil companies from emerging economies have fallen out of favour on stock markets over the past year relative to western energy groups, as the North American shale revolution continues to attract investors.

Companies such as PetroChinaPetrobras of Brazil and Gazprom and Rosneft of Russia all suffered significant falls in their share prices in 2013, while Chevron andExxonMobil of the US, and Total, BP and Royal Dutch Shell from Europe all rose.

The combined market value of state-controlled national oil companies’ shares fell 15 per cent, while the value of the large western groups rose 9 per cent, according to IHS, the analysis group.

The figures mark a reversal from the prevailing trends of the 2000s, when it seemed that national oil companies, with greater access to resources and government support, would inevitably eclipse the western groups.

Daniel Trapp of IHS said: “With the national oil companies, investors are asking where their priorities lie. Are they with shareholders, or will they follow the government’s priorities?”

The boom in US shale oil and gas production has created an alternative for investors concerned about the risk in state-controlled companies.

Among the best-performing companies last year, according to an analysis published by IHS on Monday, were some of the largest producers of US shale oil: EOG ResourcesContinental Resources and Pioneer Natural Resources.

The markets have also rewarded companies such asOccidental Petroleum and Hess that are moving to cut back their global exposure and focus on North American production.

The largest western oil groups were slow to develop shale production and have been paying the price, with Shell and others forced to write down the value of their assets.

However, they have been acquiring skills that should leave them better placed to develop shale resources than their rivals from emerging economies, which are generally even further behind.

Concerns about increased supplies of US shale oil putting downward pressure on prices have been a particular issue for Petrobras, which is facing the challenge of developing Brazil’s difficult deep water oilfields, and concerns about political interference. Its shares fell 24 per cent last year.

Other companies that thrived in 2013 included the large oil services groups that have the skills and technology needed for shale oil and gas production, includingSchlumbergerHalliburton and Baker Hughes.

They were hit by overcapacity in the industry in 2011-12, but markets for oil services have now tightened.


ESPN’s Internet Rollout Tests Television Cash Cow; Sports Channel Seeks to Profit From Demand for Online Video Without Pushing Away Pay-TV Customers

ESPN’s Internet Rollout Tests Television Cash Cow

Sports Channel Seeks to Profit From Demand for Online Video Without Pushing Away Pay-TV Customers


Jan. 26, 2014 11:02 p.m. ET

BRISTOL, Conn.—In the control room of ESPN’s headquarters, a row of screens shows video feeds going out to cable providers for each of its television channels. But a growing part of ESPN’s future lies across the room, where a similar setup tracks transmissions to the Internet.

On a recent Saturday, technicians were busy streaming several dozen games, some at the same time as they were on television and others that weren’t televised at all. Damon Phillips, in charge of the service, used a tablet computer to monitor how many people were watching online.

“I’m obsessed with this,” he said, pointing to the usage tally, which he starts checking at 5:30 a.m. while on his exercise bike. “I look at it all day long.”

The app, called WatchESPN, is part of an aggressive push by ESPN into online services as pay television matures. ESPN pioneered sports TV on that medium and for three decades rode a steady rise in U.S. cable and satellite TV subscriptions. These now have leveled off and appear to be contracting. ESPN is at the forefront of the TV industry’s efforts to expand into Internet distribution.


The company, which generates about 40% of majority owner Walt Disney Co.’s operating profits, sees the app as a way to cash in on growing demand for online video. But with its TV offerings still lucrative, ESPN is walking a fine line, trying to avoid doing anything that might encourage customers to drop their pay-TV subscriptions.

It is a challenge others in the business also are wrestling with. ESPN’s strategy is to allow only pay-television subscribers to stream games that air on ESPN TV channels.

The sports network has devised a complex business model. Although the app is delivered over the Internet, ESPN collects money for the app from pay-TV providers such as cable companies, which pay for the right to offer it to their customers. For ESPN, a second revenue stream comes from advertising on the app.

The WatchESPN app also includes a strictly online channel, called ESPN 3, that shows lower-profile sports such as rugby, polo and small-college athletics. For that, in most markets, users don’t need to be pay-TV subscribers.

The dual strategy results from years of experimentation and debate inside ESPN, and in the industry more broadly, over how to deal with the saturation of the pay-TV industry and thirst for online video. Time Warner Inc. TWX -2.04% ‘s HBO, for instance, has said it might offer a version of its HBO Go app to Internet users for a subscription fee, depending how the pay-TV industry evolves, though for now HBO plans to continue limiting access to subscribers who pay for the premium channel.

Most network owners, including ESPN, say the risk of cannibalizing their pay-TV businesses is too great to offer stand-alone online subscription services. It isn’t clear they could charge enough to be as profitable as deals with pay-TV providers. Revenue from mobile advertising, while growing, isn’t nearly enough to replace TV ad dollars. Media companies also would have to take on customer-service responsibilities now handled for them by cable and satellite companies.

Yet content providers face the reality of weakening pay-TV subscriptions. ESPN lost roughly 1.5 million subscribers between September 2011 and September 2013, according to Nielsen data provided by the company. Part was from dropped pay-TV subscriptions and part from downgrades to lower-cost packages not including ESPN. The company says the changes haven’t affected its TV ratings materially.


ESPN President John Skipper calls the losses “marginal,” given that the sports network reaches into 98.4 million households. Still, he doesn’t dismiss the threat.

“Pressure on the system provides peril for ESPN,” Mr. Skipper said in an interview. “But ESPN, as long as the system doesn’t break up, is in fine position.” He said WatchESPN makes pay-TV subscriptions more valuable.

Several hurdles lie in ESPN’s online path. Professional sports leagues, which already collect huge sums for TV rights, see an opportunity in the next decade from selling their digital rights or offering games via their own streaming-video services. For ESPN, acquiring streaming rights is complicated and becoming more costly.

Pay-TV providers such as cable companies, for their part, are likely to push back as ESPN, which is already the most expensive cable-TV network, raises its prices to offer WatchESPN.

Limiting the online viewing of TV channels to pay-TV subscribers, a strategy also pursued by most other TV-channel owners, carries risks. Besides excluding customers who have “cut the cord,” it excludes “cord nevers”: sports fans, mostly younger, who have never subscribed to a cable or satellite service.

And if operators such as cable companies pass on to subscribers the fees ESPN charges them, the higher cost could prompt more to disconnect. Some pay-TV executives say rising prices are a major reason customers bow out.

Mr. Skipper, a 59-year-old former Spin magazine executive who took the helm of ESPN in 2012, acknowledged a “dissonance” between its instinct to disseminate its content as widely as possible and the usage restrictions designed to safeguard the core television business. “There’s no denying there’s a certain element of protection and defense,” he said.


Though the company has internally considered a stand-alone broadband offering, “it’s not close yet.”

As for what ESPN’s endgame is, Mr. Skipper said the company plans a lot of online experimentation, but its priority is to protect pay-TV profits: “Our calculation right now is we’re going to ride this. We’re going to ride it as long as it makes sense.”

ESPN still has growth opportunities in TV, Mr. Skipper added, including a new college sports network it is launching this year with the Southeastern Conference and expansion in Latin America.

ESPN first tried online distribution in the early 2000s, well before most other networks. Leading the effort was Sean Bratches, who dealt with cable and satellite companies. Known for his vast cuff link collection and coordinated ties and pocket handkerchiefs, Mr. Bratches cut an unlikely figure for a technology innovator.

He came up with an unorthodox initial business model for ESPN: It would charge the providers of high-speed Internet service a per-subscriber fee to make sports available online to their customers.

The idea faced opposition internally from executives who wanted a more traditional Web approach of giving away content while making money on ads. Mr. Bratches argued that ESPN could extend to the Internet its cable model of earning money from both ads and subscriptions. He prevailed, and in 2001 ESPN launched its first broadband service.

It struggled to gain traction. Some Internet-service providers balked, not used to paying for content. ESPN executives blamed the rough start also on their website’s clunky design and lack of live events. To lift usage, they started putting online some games airing on their flagship TV channel.

But by 2010, when ESPN began a round of contract renewals with pay-TV distributors such as cable companies, the industry’s subscriber growth had slowed sharply. Both sides worried that making TV content available online could encourage more pay-TV subscribers to disconnect. In negotiations with Time Warner CableTWC -0.63% ESPN hashed out a deal to combat that with the limit on online access.

The result was the WatchESPN app. Its simple design, which grew out of a paper sketch by Mr. Skipper, allowed tablet and smartphone users to tap on-screen boxes to play ESPN channels. It launched on mobile devices in April 2011.

The earlier broadband service, by then named ESPN 3, could be accessed through the new app, but phased out televised games. It has charted a new course as a place for thousands of events that the company has the rights to but that don’t make it to TV, such as cricket and collegiate gymnastics. ESPN has enlisted some colleges to handle production of their own events, to expand offerings while keeping costs down.

Though ESPN 3 can be accessed without a pay-TV subscription in most markets, the company is careful not to market it as a product for cord cutters.

“We want to be conscientious that we don’t overplay our hand,” Mr. Bratches said in an interview at his New York office, stuffed with all manner of sports paraphernalia: books on Jerry West and Muhammad Ali, football helmets, a bowling pin, a punching bag and baseball bats.

The WatchESPN app has been downloaded 25 million times. Its viewership remains far below television’s. Some 26 million people watched college football’s national championship game Jan. 6 on television, but just 773,000 saw it online with WatchESPN.

Still, as ESPN has renewed deals with cable and satellite operators, it has cited the app as a justification for rate increases. Its flagship channel is already by far TV’s costliest, at $5.54 a month, according to market researcher SNL Kagan.

Access to the app raises the price. Time Warner Cable and Verizon Communications Inc.VZ -0.48%

‘s FiOS service, which offer the app to their subscribers, pay ESPN 19 cents more per subscriber each month than does Dish Network Corp. DISH -1.28% , which doesn’t support the app, according to papers from a court case involving ESPN and Dish last year. Dish is currently in negotiations with ESPN for a contract renewal.

DirecTV has balked so far at ESPN’s asking price for streaming video access, said a person familiar with the matter. However it is likely to negotiate for those rights when its contract with ESPN expires at the end of this year.

At ESPN, the broadband push has meant a cultural shift for a TV-centric company.

Getting software engineers to move to ESPN offices in the sleepy Connecticut town of Bristol wasn’t easy. A key hire last year was Ryan Spoon, an eBay Inc. alum and former venture capitalist, who has hired veterans of major Silicon Valley companies.

Now a team of ESPN engineers is developing algorithms to link online programming options to users’ tastes and affinity for certain teams, sports or cities. ESPN executives have taken product advice from the likes of Apple Inc. AAPL -1.82% Chief Executive Tim Cook, a fan of the Auburn Tigers, and Google Inc. GOOG -3.13% Chief Business Officer Nikesh Arora, a fan of cricket.

In ESPN’s control room, balloons on an overhead screen track how heavily WatchESPN is being used around the country, while analysts monitor bandwidth usage to make sure the video streams don’t hiccup en route to users.

Getting streaming rights can be problematic. ESPN has had the right to televise Monday Night Football since 2006 and struck a deal with the National Football League in 2010 that allowed streaming of the game to desktop, laptop and tablet computers. Yet ESPN can’t stream it to smartphones.

Mobile-phone rights to the Monday game weren’t on the table when ESPN last renewed its deal with the NFL. Verizon owns the streaming rights to Monday night, Sunday night and Thursday night NFL games, and has just agreed to a four-year contract extension that will also allow people to watch Sunday afternoon home-market games on mobile phones.

ESPN keeps having to pay leagues more. In the contract it negotiated with the NFL in 2011, the network agreed to pay an average of $1.9 billion a year, up 58% from before. And last year, ESPN and Major League Baseball reached an eight-year deal that, at $700 million a year, was double the earlier price. Streaming rights were a factor in the increase, said a person familiar with the matter.

ESPN is working on perfecting sales of ads for the app. It says it sold app ads to some 200 brands in 2013. But these haven’t been enough to fill every available ad break.

Partly that is because the technology to serve up ads into the app isn’t yet very advanced and can’t always find spots of the proper length to insert. When TV viewers see commercials, app users are sometimes shown filler material.

ESPN is talking to broadband providers about other Internet products, such as an ultra-high-definition version of its TV channels that would be offered only to people who upgrade to faster tiers of broadband.

“We innovate with the consumer in mind and with the philosophical default that we are going to adopt new things,” Mr. Skipper said. “We are not going to resist.”


The Surface and the Chromebook Offer Lessons on Innovation

January 24, 2014, 5:04 PM ET

The Surface and the Chromebook Offer Lessons on Innovation

By Steve Rosenbush

Deputy Editor

Well after their initial release, two devices—the Surface tablet and the Chromebook laptop—finally are gaining some traction in the market. Microsoft Corp.MSFT +2.08%’s Surface was a bright spot in the company’s latest earnings report, the WSJ’s Shira Ovide says. The Chromebook—a stripped-down laptop that is designed to be used over the Internet with Google Inc.GOOG -3.13%’s Chrome operating system and its cloud-based apps–is increasingly popular among schools, the WSJ’s Rolfe Winklerreports.

Neither product was an instant sensation, but that is exactly what makes them interesting. Conversations about innovation focus all too often on the iPads and iPhones of the world, the outliers that redefine markets and the way that people go about lives and their business. It’s great to understand the stories behind their success, but given that few successful products can match that arc—and that the ones that do tend to come about in a unique and unpredictable way—the Surface and the Chromebook may have more to teach us.  As Gartner Inc. analyst Tuong Nguyen says, “the process of progress in technology is often more evolutionary than revolutionary.”

As readers of CIO Journal are well aware, the Surface failed to live up to initial expectations in 2012. But as Ms. Ovide writes, “fresh versions of Surface went on sale in October, and Microsoft sharply discounted the first-generation Surface models. It looks like the one-two punch of new Surface models and cheap, older Surface models helped drive a surprisingly good showing from Microsoft’s hardware business.” Reviews of early Chromebooks, launched in 2011, determined that the devices suffered from basic flaws—they were under-powered and had poor screens, even given the price range of about $300. But prices have come down even more, and the quality steadily has improved.  “A Chromebook could soon become a truly viable notebook,” the Verge’s David Pierce wrote last year in a review of the Hewlett-Packard Co. Chromebook 14.

“We’re always listening to what our customers may need, and Chromebooks are always gaining new features based on that feedback,” a Google spokeswoman told the WSJ. That may seem obvious, but the fact is that businesses often don’t listen to their customers, and even if they do, then what? What do they do with all of that feedback and how do they use those insights to improve their products and bring them to market?

CIO Journal has focused on those questions for nearly two years now. As PwC principal Chris Curran wrote in a guest column back in 2012, many companies have the ability to generate or capture innovative ideas, but “a rare few have instilled the systemic organizational processes to harness those ideas and to repeat the process over and over again to sustain successful innovation.”

Innovation draws together a broad range of people and skills and flows organically from a company, from its culture, leadership and structure. As Mr. Curran notes, technology and IT leadership is a major factor in that success, which depends upon the collection, dissemination and analysis of data.


The innovation process should be segmented into phases and talent should be managed accordingly. Creativity fuels the idea generation phase of innovation and is necessary to identify potential breakthrough products and services. The second phase, idea exploration, employs more left-brained talent that is capable of sorting, prioritizing, and prototyping and testing ideas. Discriminating scrutiny is required to boost the odds that the innovation is aligned with business goals and has a chance of generating a return on investment. At the final stage, idea scaling, the art of innovation takes a back seat to the engineering. Corporations need to marshal the necessary resources along the innovation conveyor belt to mobilize, scrutinize, enhance, scale and implement inspired ideas.***

While it’s unlikely that this sort of prosaic work will yield the next iPhone or iPad, it may play a key role in helping save the next promising, but flawed , idea from failure. In the aggregate, those relatively minor successes are greater than the sum of their parts.

In Music, the Money Is Made Around the Edges; In Pre-Grammy Tradition, Executives Seek Ways to Boost Profits With Freebies, Interactive Videos

In Music, the Money Is Made Around the Edges

In Pre-Grammy Tradition, Executives Seek Ways to Boost Profits With Freebies, Interactive Videos


Jan. 26, 2014 7:22 p.m. ET

LOS ANGELES—While much of the music industry was busy last week feting Grammy nominees, several dozen artist managers, technologists and record-label executives met for breakfast at a private club on the Sunset Strip to discuss a more urgent matter: how to make more money.

A pre-Grammy tradition that started several years ago known as the Big Bang Forum, the tech-focused discussion highlighted an uncomfortable reality: While Grammy wins and performances still boost record sales and exposure, the glory is increasingly muted as record sales make up a shrinking piece of most artists’ income.

The speakers included Tim Quirk, GoogleInc. GOOG -3.13% ‘s head of programming for music and digital-media store Google Play. Mr. Quirk talked candidly about Google’s long-term strategy to make a “profit center” by charging different consumers different prices for the same songs.

Yoni Bloch, founder of Israeli technology startup Interlude, showed why low-cost interactive music videos—such as recently released clips for Bob Dylan’s “Like a Rolling Stone” and Pharrell Williams’s “Happy”—garner far more advertising dollars than the traditional videos. Helping drive interest, fans can click on the videos to customize everything from the song lyrics to the instruments band members play.

SFX Entertainment Inc. SFXE +2.72% plans to make more money from social media than from selling tickets to the dozens of electronic-dance-music festival’s the promotion company has snapped up in recent years, said Chris Stephenson, SFX’s chief marketing officer.

“There’s a 5% to 10% margin on these events—that’s not what the business is. People are reliving that moment 365 days a year,” said Mr. Stephenson, noting that one of SFX’s festivals, Tomorrowland, was streamed live by 16.9 million people last year, and has been viewed 100 million times. The company plans to capitalize on that ongoing interest by corralling social-media followers onto a central platform where brands can advertise.

Google’s Mr. Quirk said his vision to make money in music involved catering to three different groups: fans looking for free tunes; fans willing to pay a small amount to rent or stream music from its subscription service, All Access; and superfans who will pay almost any price for a memento associated with their favorite act. As an example, he cited devotees of the rock band Kiss who want to be buried in a “Kiss coffin.”

The trick, Mr. Quirk said, is to market to all three groups at once. Albums, for example, should be presented as free apps, including access to some content but requiring eventual purchase for certain songs, features, or merchandise, he said.

Google Play’s early experiments have yielded mixed results, he said. A global promotion for the now defunct British punk pioneers The Clash in September—for which Google paid “a significant amount” to produce documentary interviews with the band’s four surviving members—did “not necessarily recoup” the video investment, he said, and only sold several hundred downloads in Belgium, for example. But the promotion, which also featured free Clash cover songs and $175 box sets, helped to significantly increase Google’s share of the music market, he said. Google doesn’t disclose its music sales.

“We have to get people used to buying stuff on Google,” Mr. Quirk said.

Among the other lessons Google has learned: It’s far easier to funnel fans from free to paid content on genre-specific sites than it is on a general-music home page. While the company struggled to get country-music fans to connect with general Google Play promotions, its country page has become its most lucrative.

Google also started eking out more revenue from its emerging artists page, “Antenna,” when it began offering a multi-artist sampler free of charge instead of focusing on one artist at a time.

“When it was single [artists] we could not get people to download these tracks—now the site has the best conversion rate,” he said. “Free is where you have to start, but free is not enough.”

Google is also gathering data on which types of fans are most likely to make purchases if given freebies. While track and album giveaways generally pay for themselves within a week, Mr. Quirk said, some generate far more sales than others.

A decade ago, as a member of the alternative rock band Wonderlick, Mr. Quirk said that to fund the completion of an album, the band ran a presale letting fans name their price and promising fans who paid more than the average that their names would be published in the CD liner notes. Fans paid an average of $32 an album, he said, with no one paying less than $5.

“So this [stuff] works, basically,” he said.


One in Three Audits Fail, PCAOB Chief Auditor Says

January 24, 2014, 3:12 PM ET

One in Three Audits Fail, PCAOB Chief Auditor Says


Senior Editor

More than one in three audits inspected by the U.S. government’s audit watchdog were so deficient the auditors shouldn’t have signed off, an official said this week.

While the Public Company Accounting Oversight Board inspects audits where is suspects problems, the high failure rate is raising questions about whether auditors are getting adequate training and oversight to provide high quality audits for investors.

“When we look at an audit, the rate of failure has been in a range of around 35 to 40%,” Martin Baumann, chief auditor of the Public Company Accounting Oversight Board said on Thursday in comments to a New York State Society of CPAs conference.  In those cases, the watchdog said it found that auditors did not have sufficient evidence to support their opinions.

That doesn’t necessarily mean the underlying corporate financial statements are incorrect, but the audit failures could start to undermine investor confidence, Mr. Baumann said. “Investors are relying on the audit,” he said.

The board is working on creating audit quality indicators so that firms could potentially measure their performance against a common standard in the future, Mr. Baumann said. It expects to issue a concept release on the indicators in the first quarter.

The PCAOB has found five common trouble spots for auditors: complex “fair value” measurements for hard-to-price financial instruments, management’s estimates, revenue recognition policies, internal controls, and relying too heavily on the use of data prepared by the company being audited.

“In many cases [auditors were] just taking the report that management prepared and using that as evidence without getting behind what that’s all about,” Mr. Baumann said.

The board’s inspections are the finding problems — at both large and small audit firms — stemmed from ineffective supervision, ineffective quality reviews and monitoring, a lack of professional skepticism, and inappropriate tone at the top of the audit firm.

“Most industries have some way in which they monitor the quality of their products,” Mr. Baumann said.


Italy launches big privatisation push

January 26, 2014 6:03 pm

Italy launches big privatisation push

By Guy Dinmore in Rome and Rachel Sanderson in Milan

Italy’s coalition government has embarked on what it calls its largest privatisation programme since the late 1990s with a plan to raise €12bn, but questions are already being raised over the value of state-owned companies to be put on the block and why only minority stakes are to be sold.

“We want to hurry up and take advantage of this market window,” Fabrizio Pagani, senior economic adviser to prime minister Enrico Letta, told the Financial Times on Sunday, confirming that the four sales would be made through initial public offerings.

Details of the privatisation programme were outlined after a cabinet meeting late on Friday, with Mr Letta saying proceeds would allow Italy to reduce its crippling public debt of over €2tn for the first time in six years.

The government intends to retain controlling stakes by selling 40 per cent of postal services operator Poste Italiane and 49 per cent of air traffic controller Enav.

Separately, Cassa Depositi e Prestiti (CDP), a Treasury-controlled funding vehicle which manages the postal savings deposits taken by Poste Italiane and also operates a strategic investment fund, plans to sell stakes in Fincantieri, Europe’s largest shipbuilding group, and Sace, an export credit agency.

Also to go are the government’s four per cent holding in energy group Eni; a 13 per cent stake inSTMicroelectronics, a semiconductor manufacturer which is partially owned by the French government; Grandi Stazioni which manages Italy’s largest railway stations, and CDP holdings in Snam and Terra, operators of the gas and electricity grids.

“This is the largest privatisation programme since the 1990s, when Italy prepared to enter the euro,” Mr Pagani said.

However the sell-off, pushed by the European Commission, depends on a period of political stability to see the legislation through parliament. Mr Letta’s nine-month-old coalition aims to stay in office until 2015 but has to navigate the danger of snap general elections this May if Matteo Renzi, leader of Mr Letta’s Democratic party and aspiring prime minister, fails to make progress with his agenda of sweeping institutional reforms.

The government’s intention to retain majorities in key companies, such as Poste Italiane, may help placate trade unions and leftwing parties but has raised questions over the validity of the process.

“When the government keeps control of the company and shares it with the unions, leaving an old bureaucrat to run the company, I don’t call this a privatisation,” commented Francesco Giavazzi, economics professor at Milan’s Bocconi university.

“It is a bit of a wishy washy process of privatisation as the state has said it only plans to sell minority stakes,” said a senior banker, saying sales of energy group Eni and utility Enel – not on the agenda – would be more appealing.

Bankers were also sceptical about the sale of Enav because of the parlous state of the Italian airline industry and political sensitivities.

Fabrizio Saccomanni, finance minister, said the 40 per cent stake in Poste Italiane could raise from €4bn to €4.8bn, while the partial sale of Enav could yield €1bn. The government has previously set a total target of €12bn for its privatisation programme.

The sale of Poste Italiane, which employs 144,000 workers, is the most controversial, with the government aiming for an IPO by as early as July. Leftwing trade unions have already voiced objections. Susanna Camusso, leader of the CGIL federation, has warned that past lessons taught that privatisations were “not the way to help the economy”.

The more moderate CISL union has welcomed the planned sale, which the government says will make shares available to employees and could leave unions with representation on the board. Mr Pagani said shares could be offered to workers at a discount “to get the support of employees and unions”.

Poste Italiane’s privatisation has been on the agenda of successive governments. The group reported a net profit of €1bn in 2012 on revenues of €24bn, with €19bn coming from its financial and insurance services. Massimo Sarmi, the chief executive, who is lobbying to keep his post after the sale, has said the group would be sold as a whole, rather than broken up.

Bankers remain sceptical that Poste Italiane will be ready to float this year, given its close relationship with the state. This was highlighted last year when, under pressure from the government, Mr Sarmi agreed to acquire a 19.5 per cent stake in Alitalia in a recapitalisation that saved the privately owned airline from bankruptcy.

Fincantieri is expected to be first off the block. Banks launched their pitches to manage the IPO last week. Mr Pagani said part of the proceeds would be reinvested in the shipbuilder while the CDP could make a special dividend to the Treasury that would also go towards debt reduction.


First HSBC Halts Large Withdrawals, Now Lloyds ATMs Stop Working; Furious Backlash Forces HSBC To Scrap Large Cash Withdrawal Limit

First HSBC Halts Large Withdrawals, Now Lloyds ATMs Stop Working

Tyler Durden on 01/26/2014 14:43 -0500

Update: things are back to normal – Lloyds will gladly accept your deposits again:

First HSBC bungles up an attempt at pseudo-capital controls by explaining that large cash withdrawals need a justification, and are limited in order “to protect our customers” (from what – their money?), which will likely result in even faster deposit withdrawals, and now another major UK bank – Lloyds/TSB – has admitted it are experiencing cash separation anxiety manifesting itself in ATMs failing to work and a difficult in paying using debit cards. Sky reports that customers of Lloyds and TSB, as well as those with Halifax, have reported difficulties paying for goods in shops and getting money out of ATMs.

All three banks are under the Lloyds Banking Group which said: “We are aware that some customers are unable to use their debit cards either to make purchases or to withdraw money from ATMs. “We are working hard to resolve this as swiftly as possible and apologise for any inconvenience caused.”

Further from SkyNews, TSB, which operates as a separate business within the group, issued a statement saying: “We are aware that some TSB customers are unable to use their debit cards either to make purchases or to withdraw money from ATMs. “This has impacted all Lloyds Banking Group brands. We are working hard to resolve this and unreservedly apologise for any inconvenience caused.”

TSB chief executive Paul Pester said in a tweet: “My apologies to TSB customers having problems with their cards. I’m working hard with my team now to try to fix the problems.”

Clients were not happy:

On the microblogging site, one TSB customer Nicky Kate said: “Really embarrassed to get my card declined while out shopping, never had any problems with lloyds then they changed my account.”

Hannah Smith: “I am a TSB customer with a Lloyds card still (like everyone else). And I’ve been embarrassed three times today re: card declined.”

Another customer Julia Abbott said: “Lloyds bank atm and card service down. 20 mins on hold to be told this. Nothing even on website. Shoddy lloyds. … shoddy.”

Helen Needham said: “#lloyds bank having problems with there card service… Can’t pay for anything or get money out!”

Another Twitter user wrote: “This problem is also affecting Halifax debit cards as I found out trying to pay for lunch with my wife!”

And Jane Lucy Jones tweeted Halifax, saying: “Why can’t I get any money out of any cashpoints, what is going on?

What is going on is known as a “glitch” for now, and perhaps as “preemptive planning” depending on who you ask. Sure, in a few months in may be called a bail-in (see Cyprus), but we will cross that bridge when we get to it.


Furious Backlash Forces HSBC To Scrap Large Cash Withdrawal Limit

Tyler Durden on 01/26/2014 13:23 -0500
Following the quiet update that HSBC had decided to withhold large cash withdrawals from some if its clients – demanding to know the purpose of the withdrawal before handing over the customers’ money – it appears the anger among the over 60 thousand readers who found out about HSBC’s implied capital shortfall just on this website, has forced HSBC’s hands.

The bank issued a statement (below) this morning defending their actions – it’s for your own good – but rescinding the decision – “following feedback, we are immediately updating guidance to our customer facing staff to reiterate that it is not mandatory for customers to provide documentary evidence for large cash withdrawals.” After all the last thing the bank, which over the past few years has been implicated in aiding an abetting terrorists and laundering pretty much anything, wants is an implied capital shortfall to become an all too explicit one.

Via HSBC – Statement On Large Cash Withdrawals

25 Jan 2014

As a responsible bank we ask our customers about the purpose of large cash withdrawals when they are unusual and out of keeping with the normal running of their account. Since last November, in some instances we may have also asked these customers to show us evidence of what the cash is required for. The reason being we have an obligation to protect our customers, and to minimise the opportunity for financial crime. Large cash transactions have inherent security issues and leave customers with very little protection should things go wrong, by asking customers the right questions, we can explore whether an alternative payment method might be safer and more convenient for them.

However, following feedback, we are immediately updating guidance to our customer facing staff to reiterate that it is not mandatory for customers to provide documentary evidence for large cash withdrawals, and on its own, failure to show evidence is not a reason to refuse a withdrawal. We apologise to any customer who has been given incorrect information and inconvenienced.

Indeed, as one HSBC customer exclaimed, “you shouldn’t have to explain to your bank why you want that money. It’s not theirs, it’s yours.”

Banish ‘inequality’ from the economist’s lexicon; True equality may not not even be possible in death – Mozart was buried in a paupers’ grave

January 23, 2014 12:58 pm

Banish ‘inequality’ from the economist’s lexicon

By Samuel Brittan

True equality may not not even be possible in death – Mozart was buried in a paupers’ grave

An American philosopher, CL Stevenson, coined the term “persuasive definition” for attempts to smuggle in contentious views in the guise of defining terms. An example would be defining democracy in terms of universal franchise. We now have a danger, not so much of persuasive definitions as of persuasive abstract nouns, the one most in vogue being “inequality”.

This has become a cliché subject in the social sciences. The assumption being smuggled in is that equality is a normal state of affairs, departures from which have to be justified.

In fact this type of discussion actually harms those whom it is intended to benefit. For once it is realised that true equality is possible only in the grave (and maybe not even there – Mozart was buried in a paupers’ cemetery) it is all too easy to divert attention from genuinely disturbing changes in the distribution of income and wealth.

Debating points against egalitarians are not hard to find. Whose income is meant to be equalised, the individual citizen or the family? Are those with limited capacity for satisfaction – whether for physical or psychological reasons – to be given more or less than the average?

Non-egalitarians used to make great play with sums purporting to show how little the average citizen – or even those at the bottom of the income and wealth distribution – would gain if the better-off were deprived of their excess earnings or wealth. This led to the charge that egalitarians were motivated by jealousy and envy. More positively it was said that “a rising tide lifts all boats”. An unemployed labourer in the west has access to all manner of services, from television to modern medical treatments, unavailable to King Edward VII.

This line of defence is no longer available. Some estimates suggest, for instance, that there has been no rise in average US real wages since 1970. In the UK there has been similar stagnation or worse. Even in relatively egalitarian Scandinavian countries there has been a squeeze on real earnings.

One can speculate forever on the forces behind these trends. One of the plausible candidates is the impact of new technology, which has put the squeeze on a mass of workers, white-collar as well as manual. But I doubt if this would have been enough without the impact of globalisation, which has brought billions of poorer workers from Asia into competition with their brethren in Europe and North America. Some academics say that there has been an increase in inequality inside certain countries offset by greater equality between them. But that is only to redescribe the problem.

More video

Many of the remedies advanced by the left would only make things worse. And the right are inclined to copy them. For instance, in Britain we have had the strange spectacle of a conservative chancellor, who is not on the progressive wing of his party, urging a rise in the minimum wage. A medical acquaintance of mine, with no pretensions to economic expertise, immediately saw through this ploy. If earnings rose, more tax would be gathered. Even if many of those immediately affected were below the tax threshold, an increase at the bottom might raise the whole earning structure in nominal terms and thus benefit the exchequer.

There was a time when rightwing academics were quick to point out that an increase in the cost of labour would put more people out of work. In any case, tackling the problem by pushing up wages would increase costs and make matters worse. This could be offset by devaluations. But what would then become of the inflation targets on which governments have set such store? And would real wages benefit? A devaluation is normally regarded as a way of cutting real wages by the back door.

Many of the other suggestions for easing the pressure on the mass of wage-earners belong to the list of worthy policies that have been espoused by most governments since the end of the second world war, if not even earlier. Some of them echo the less successful aspects of Franklin Roosevelt’s New Deal, an example being the rebuilding of union strength.

I would look at much simpler ideas. Inequality on most conventional measures would be reduced if tax thresholds affecting the poor were raised and selected social security benefits increased. Whether the cash for these changes should come from more taxes on the middle and upper ranges or be paid out of budget deficits ought to depend on the economic conjuncture, a simple piece of economics that George Osborne, UK chancellor, refuses to understand.

How far one can use fiscal measures to distribute income and wealth more evenly depends in part on the geographical scale of the action. A government of a small or medium-sized country acting on its own does risk losing entrepreneurs to foreign lands where taxes are lower; but the more countries act in concert the less likely these bolt-holes are to be used.


A Lawyer and Partner, and Also Bankrupt; For the last 40 years, all firms had to do was answer the phone from clients and lease more office space. That run is over

The rising economic pressures on non-equity law firm partners


January 25 at 3:10 pm

New York Times business page columnist James B. Stewart has a profile in today’s paper, “A Lawyer and Partner, And Also Bankrupt,” recounting how a Manhattan partner at the now-gone Dewey & LeBoeuf law firm, Gregory M. Owens, gradually slid into personal bankruptcy on December 31, 2013.  It’s a candid profile, filled with many personal details of an upper middle class professional in financial distress, on the one hand, and offering a dismaying assessment of the structural economic pressures on the highly compensated senior lawyers at many of the large New York and other big city law firms in the United States, on the other.  Although Owens filed for bankruptcy, he is in fact employed – no longer as an equity partner, however, but as a non-equity “service” partner, at White & Case. That’s the firm to which his mentor (the equity partner rainmaker who had brought about the M&A deals on which Owens had done much of the detailed, technical work) departed before Dewey & Leboeuf collapsed.

The article contains a lot of personal financial information – salary, alimony and child support, rent, etc.  I suppose one could spend a lot of time picking over the details and primly lecturing Owens on what he should have done differently, how he’s misspending his money, or why someone who made $356,000 in 2013 should scarcely be a pity project in the Times.  But that’s too vulture-ish for me, and I’m sure I’m not alone in thinking, “There, but for the grace of God …” — more so, in that though the article doesn’t exactly say, it’s hard not to think that financial and professional turmoil had something to do with the breakup of Owens’ marriage.

But Stewart wrote the column, presumably, and Owens revealed his personal and financial situation, in an effort to explain something that goes beyond one individual’s story — the article aims to illuminate structural economic issues that have emerged in the last few years in large-firm, high-end law practice.  These lawyer positions were long understood to be a haven in a heartless world for certain smart, technically skilled, professionals, once they achieved a certain level of seniority — but a haven  no longer.  Indiana University law professor William Henderson, who has certainly done as much as any academic to try and understand the business models of the legal profession and law schools, takes this as a cautionary tale of the many new uncertainties in big firm law practice compared to earlier decades:

“In almost any other context, $375,000 would be a lot of money,” said William Henderson, a professor at the Indiana University School of Law and a director of the Center on the Global Legal Profession. “But anyone who doesn’t have clients is in a precarious position. For the last 40 years, all firms had to do was answer the phone from clients and lease more office space. That run is over. The forest has been depleted, as we say, and firms are competing for market share. Law firms are in a period of consolidation and, initially, it’s going to take place at the service partner level. There’s too much capacity.” He added that law firm associates and summer associates had also suffered significant cuts, which has culled the ranks of future partners.

Professor Henderson goes on to talk in the article about the implications for law schools, which are seeing rapid fall-off in LSAT takers and applications to schools.  As he has said in many venues, the pressures on Big-Law business models are not cyclical and merely an overhang of the 2008 recession; the shifts are structural and the returns are simply not, and won’t be, what they were.  Although some would contest that big law firm practice is undergoing a genuinely structural shift, I think it is pretty widely accepted in the legal marketplace.  But significantly lower returns even to big firm, high end law practice eventually has to have an impact on law school business models, to the extent that they have priced themselves to students on the basis of certain expectations (themselves likely always unrealistic) about the returns to lawyers from legal education


A Lawyer and Partner, and Also Bankrupt

JAN. 24, 2014


Anyone who wonders why law school applications are plunging and there’s widespread malaise in many big law firms might consider the case of Gregory M. Owens.

The silver-haired, distinguished-looking Mr. Owens would seem the embodiment of a successful Wall Street lawyer. A graduate of Denison University and Vanderbilt Law School, Mr. Owens moved to New York City and was named a partner at the then old-line law firm of Dewey, Ballantine, Bushby, Palmer & Wood, and after a merger, at Dewey & LeBoeuf.

Today, Mr. Owens, 55, is a partner at an even more eminent global law firm, White & Case. A partnership there or any of the major firms collectively known as “Big Law” was long regarded as the brass ring of the profession, a virtual guarantee of lifelong prosperity and job security.

But on New Year’s Eve, Mr. Owens filed for personal bankruptcy.

According to his petition, he had $400 in his checking account and $400 in savings. He lives in a rental apartment at 151st Street and Broadway. He owns clothing he estimated was worth $900 and his only jewelry is a Concord watch, which he described as “broken.”

Mr. Owens is an extreme but vivid illustration of the economic factors roiling the legal profession, although his straits are in some ways unique to his personal situation.

The bulk of his potential liabilities stem from claims related to the collapse of Dewey & LeBoeuf, which filed for bankruptcy protection in 2012. Even stripping those away, his financial circumstances seem dire. Legal fees from a divorce depleted his savings and resulted in a settlement under which he pays his former wife a steep $10,517 a month in alimony and support for their 11-year-old son.

But in other ways, Mr. Owens’s situation is all too emblematic of pressures facing many partners at big law firms. After Dewey & LeBoeuf collapsed, Mr. Owens seemingly landed on his feet as a partner at White & Case. But he was a full equity partner at Dewey, Ballantine and Dewey & LeBoeuf. At White & Case, he was demoted to nonequity or “service” partner — a practice now so widespread it has a name, “de-equitization.”

Nonequity partners like Mr. Owens are not really partners, but employees, since they do not share the risks and rewards of the firm’s practice. Service partners typically have no clients they can claim as their own and depend on rainmakers to feed them. In Mr. Owens’s case, his mentor and protector has long been Morton A. Pierce, a noted mergers and acquisitions specialist and prodigious rainmaker whom Mr. Owens followed from the former Reid & Priest to Dewey, Ballantine to Dewey & LeBoeuf and then to White & Case.

“It’s sad to hear about this fellow, but he’s not alone in being in jeopardy,” said Thomas S. Clay, an expert on law firm management and a principal at the consulting firm Altman Weil, which advises many large law firms. “For the past 40 years, you could just be a partner in a firm, do good work, coast, keep your nose clean, and you’d have a very nice career. That’s gone.”

Mr. Clay noted that there was a looming glut of service partners at major firms. At the end of 2012, he said, 84 percent of the largest 200 law firms, as ranked by the trade publication American Lawyer, had a class of nonequity or service partners, 20 percent more than in 2000. And the number of nonequity partners has swelled because firms have been reluctant to confront the reality that, in many cases, “they’re not economically viable,” Mr. Clay said.

Scott A. Westfahl, professor of practice and director of executive education at Harvard Law School, agreed that service partners faced mounting pressures. “Service partners need a deep expertise that’s hard to find anywhere else,” he said. “Even then, when demand changes, and your specialty is no longer hot, you’re in trouble. There’s no job security.” He added that even full equity partners were feeling similar pressures as clients demanded more accountability. “Partners are being de-equitized,” he said, as Mr. Owens was. “That’s a trend.”

Mr. Owens specializes in financing and debt structuring in mergers and acquisitions, a relatively narrow expertise where demand rises and falls with the volume of merger and acquisition deals that his mentors generate. Former colleagues (none of whom would speak for attribution) uniformly described him as a highly competent lawyer in his specialty and, as several put it, “a lovely person” who relishes spending time with his son. But he does not seem to be the kind of alpha male — or female — who can generate revenue, bring in clients and are generally prized by large law firms.

At Dewey & LeBoeuf, Mr. Owens’s name was perennially among a group of partners who were not making enough revenue to cover their salaries and overhead, according to two former partners at the firm. But each time, the powerful Mr. Pierce, then the firm’s vice chairman, protected Mr. Owens, they said.

“He was very good at what he knew,” a former Dewey & LeBoeuf partner said. “But he wasn’t built to adapt. To make it as a law firm partner today, you have to periodically reinvent yourself.”

As partners were leaving Dewey & LeBoeuf in droves as it neared bankruptcy in 2012, Mr. Pierce went to White & Case. Mr. Owens followed, but this time as a salaried lawyer, not an equity partner, even though he has the title of partner.

A spokesman for White & Case said Mr. Owens and Mr. Pierce had no comment. Neither did the firm.

Mr. Owens has been well paid by most standards, but not compared with top partners at major firms, who make in the millions. (Mr. Pierce was guaranteed $8 million a year at Dewey & LeBoeuf.) When Mr. Owens first became a partner at Dewey, Ballantine, he made about $250,000, in line with other new partners. At Dewey & LeBoeuf, his income peaked at over $500,000 during the flush years before the financial crisis. In 2012, he made $351,000, and last year, while at White & Case, he made $356,500. He listed his current monthly income as $31,500, or $375,000 a year. And he has just over $1 million in retirement accounts that are protected from creditors in bankruptcy.

How far does $375,000 a year go in New York City? Strip out estimated income taxes ($7,500 a month), domestic support ($10,517), insurance ($2,311), a mandatory contribution to his retirement plan ($5,900), and routine expenses for rent ($2,460 a month) transportation ($550) and food ($650) and Mr. Owens estimated that he was running a small monthly deficit of $52, according to his bankruptcy petition. He has gone back to court to get some relief from his divorce settlement, so far without any success.

In his petition, Mr. Owens said he didn’t expect things to get any better in 2014.

And they could get worse. The most recent deal on White & Case’s website in which Mr. Owens played a role was the relatively modest $392 million acquisition of the women’s clothing retailer Talbots by Sycamore Partners, in which Mr. Owens (working with Mr. Pierce) represented Talbots. That deal was announced in May 2012. The White & Case spokesman did not provide any examples of more recent deals.

“In almost any other context, $375,000 would be a lot of money,” said William Henderson, a professor at the Indiana University School of Law and a director of the Center on the Global Legal Profession. “But anyone who doesn’t have clients is in a precarious position. For the last 40 years, all firms had to do was answer the phone from clients and lease more office space. That run is over. The forest has been depleted, as we say, and firms are competing for market share. Law firms are in a period of consolidation and, initially, it’s going to take place at the service partner level. There’s too much capacity.” He added that law firm associates and summer associates had also suffered significant cuts, which has culled the ranks of future partners.

All this “has had a huge effect on law school enrollment,” Professor Henderson said.

Mr. Clay, the consultant, said many firms had been slow to confront the reality that successful service partners were probably going to need to work more hours than rainmakers, not fewer, to justify their mid- to high-six-figure salaries. Many of them “seem to have felt they had a sinecure,” Mr. Clay said. “They’re well paid, didn’t have to work too hard, they had a nice office, prestige. It’s a nice life. That’s O.K., except it’s not the kind of professional life that will do much for a firm. These nonequity positions were never meant to be a safe place to rest and not work as hard as everyone else.”

And these lawyers may have to give up the pretense that they’re law firm partners. In his bankruptcy petition, Mr. Owens describes himself as a “contract attorney,” which has the virtue of candor.

“From a prestige standpoint, being called a partner is something that’s very important to people,” Mr. Westfahl observed. “Lawyers tend to be very competitive, and like all people, titles and status matter. But to the outside world, where people think all partners are equal, it’s deceptive. And inside the firm, everyone knows the real pecking order. When people see that partners are treated disparately, it causes unnecessary dissonance and personal frustration.”


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