The Tuesday Barter Report - February 28, 2006

From the desk of Bob Meyer... 2/28/06

This past week I’ve been communicating, via e-mail and phone, with a company that’s located in a LDC (lesser developed country).

Experiencing, second-hand, the effort they must expend and routinely face to secure a simple purchase of a product, once again reinforces how fortunate those of us are who live and work in a more developed country. It’s certainly something we generally take for granted.

Because of our considerable infrastructure, technological advancements, and grounding in capitalism we can accomplish so much more within the same time-frame.

I admire the tenacity of these entrepreneurs who must struggle continually. By doing so they are providing a valuable piece of the groundwork that will help their country move forward, from a business perspective, in the years ahead.

The Message In Disney’s Experiences

The Walt Disney Co., an icon of mainstream America, is going against the grain of conventional business strategy this spring as it will stop distributing their 80-page catalog that has filled the mailboxes of tens of millions of households for the past decade. Instead it is embarking on a solely electronic initiative—pushing its products via the Internet.

The decision was made after the recent holiday season, wherein Disney spent $9 million to mail 15 million catalogs and then experienced a 45% drop in phone orders. At the same time customers responding to their online marketing efforts skyrocketed.

Disney won’t stop using print materials altogether, but rather than producing and sending a weighty catalog they will save a pile of money by mailing out a postcard or invitation which will be used to drive traffic online.

How Barter Became An Integral Part Of The Olympic Games

The Olympic logo of five interlocking rings represents the union of the five continents and the meeting of athletes from around the world at the Olympic Games. In addition, by staging the games every two years (alternating between the winter events and the summer events) it offers the world an opportunity to observe man’s many similarities and the hope for a more united world.

Today eleven major corporations, ranging from McDonald’s and Coca-Cola to Chinese computer manufacturer Lenovo and Canadian insurer Manulife, are paying $80 million each to be top-tier Olympic sponsors from 2005 through 2008. A large part of the payment is through barter, i.e. payment in kind, because the Olympic Committee needs an enormous amount of goods and services to stage the 16-day global event.

These in-kind barter payments were first introduced in the 1984 Summer Games in Los Angeles, when Peter Ueberroth was the young and dynamic U.S. Olympic Executive Director. In the book he authored, Made in America, he chronicled the use of barter and how he traded the licensing rights to the Olympic logo for $116 million in needed goods and services.

Because of his trading savviness, the ‘84 Games turned a phenomenal profit of $222 million which was subsequently used to fund amateur athletes nationwide. But it was his barter strategy that forever changed how sponsors would handle the payments for licensing rights. And both parties benefitted...the Olympics get what they need and the sponsors appreciate the economics of in-kind payments.

Business People Love Barter—It’s A Proven Business Tool

There are many reasons for loving the barter technique. But one that’s seldom mentioned is the insurance it provides against unexpected downturns. In the financial arena, for example, the most common insurance derivative is a swap wherein two parties exchange portions of their risk as a hedge against failure.

A good illustration of this occurred when movie producer George Lucas bartered a 1% share of the profits in his yet to be released Star Wars for a 1% share in John Milius’ surfing film, Big Wednesday. They bartered because it provided a safety net...neither producer was certain what his movie’s future earnings would be.

Although Big Wednesday proved to be a big bust, Milius’ small share of Star Wars netted him more than $300,000. Lucas, of course, made less money on the deal, but it could just as easily have gone the other way. And on many levels it does.

In the case of investment bankers the purpose of a typical swap between two client companies would be for added cash-flow security. It might involve a company exchanging 5% - 10% of its annual cash flow with that of a similar-sized company in another region of the world. Such an arrangement insulates each company from the financial volatility of its local market, interest rates, and currency.