Coinstar and Self-Service Retailing

Coinstar is a company that was founded just over two decades ago by Jens Molbak, who as a Stanford University graduate student, realized there wasn’t an easy way to spend the spare change piled up in a jar on top of his dresser. Since that time the company has become known for its Redbox kiosks, its movie rental subsidiary. Redbox has largely overshadowed its parent company’s broader ambitions to reinvent vending machines by applying them to new categories of retailing.

Questions:

1. What percentage of Coinstar’s revenue came from Redbox last year?

2. Based on the percentage of Redbox’s investment in Verizon’s online movie services, how should this be accounted for in Redbox’s financial statements?

3. According to the article, Coinstar has about eight or nine kiosk ideas in various stages of development. In general, how should the company account for these?

4. In 2009, Redbox signed Sony to $460 Million distribution agreement, which was a five-year deal that guarantees that the studio would provide DVDs to the kiosk rental company. How do you think Redbox accounted for this agreement? How do you think Sony accounted for this agreement?

Source:
Wingfield, N. (2012) Thinking outside the Redbox. The New York Times, Feb. 17 (Retrievable online at http://www.nytimes.com/2012/02/18/business/coinstar-ventures-beyond-its-redbox-success.html?_r=1&ref=business)

Do great products translate into great profits?

So far the summer of 2011 has seen its share of giant wildfires. Recently GelTech Solutions, Inc. was profiled in CNN – Your Money’s segment on small businesses for its product – FireIce. The company is committed to continuing the work of developing sustainable solutions that solve common problems and maintain the integrity of the earth – today and for generations to come. The FireIce product appears to be incredible stuff if you are in the path of these destructive fires. While it appears to be remarkable, why isn’t the company doing so well? See if you can come up with some answers, based on their financial statements.

Questions:
1. Go to the company’s website at http://geltechsolutions.com/geltech/default.aspx. Then look at GelTech Solutions, Inc. 10K for 9/28/10 (found at http://ir.stockpr.com/geltechsolutions/filings?qm_page=8102). What amount has the company spent on Research and Development over the last two years? What was most of this spent on? Explain how you would account for R & D in terms of journal entries.
2. What is the company’s experience and expenditures for marketing?
3. Where is the company headquartered?
4. How old of a process did they say the FireIce concept was on the video?
5. What are the contingencies that the company is facing?
6. Are there any clues to why the company is not profitable? What are they?
7. Would you consider buying this stock? Why or why not? Explain.

Sources:
CNN.com. (2011). Blowtorch your hand without a wince, June 6 (Retrievable online at http://money.cnn.com/video/smallbusiness/2011/06/06/n_fireice.cnnmoney/)

Intellectual Property Disputes

The proper valuation and management of intellectual property is an area where accountants add value to their client services.  Often companies engage accountants and other financial experts to defend both plaintiffs and defendants in intellectual property (“IP”) disputes. As this video shows, similarity in names or trademarks can be at the heart of these disputes. 

In this David versus Goliath case, a small software firm, specializing in business management and cost accounting software for bakers got tired of being confused with the popular reality show known as Cake Boss. They had been using the name since 2007, which was well before Discovery Communications, The Learning Channel’s parent company began in 2009.  After co-owners  John and Kelly Masters were ignored by Discovery communications, they filed suit to protect their trademark and in July 2010, a federal court judge in Seattle, Washington issued a temporary injunction that barred the show from using the name “Cake Boss” following the last episode of the show’s third season.  Despite a multi-million dollar investment in the show, it was found that Discovery did not even make a rudimentary attempt to make sure the name was not in use by Masters. At stake was not only the show, but sales of related merchandise.

The case was eventually settled at the end of 2010 so that  ”Cake Boss” Buddy Valastro can use the name on the show and Masters can still use it for its software and other items.   The injunctive relief in this case proved to be quite expensive.  In the end, the case serves to remind accountants and other financial experts concerned with the valuation of trademarks that performing and documenting fundamental internet searches on trademarks, trade names, etc., should be part of the due diligence process for any company.

Questions:

1. What is “reverse confusion” in an intellectual property trademark dispute? 

2. What evidence did the plaintiffs in the case present as documentation?

3. What did the Learning Channel and Discovery fail to do before beginning the show?

4. How should either company report the settlement of this litigation in their financial statements?

Source:

The case cite is Masters Software, Inc. v. Discovery Communications, Inc., No. 10-405 (W.D. Wash. July 16, 2010) (Jones, J.).

YouTube.com Cakeboss vs. Cake Boss Lawsuit – Intellectual Property Lawyer (B), World News- Hoboken Magazine, July 2010. (Retrievable online at http://www.youtube.com/watch?v=VcOUBRzmf5c)

Colaneri, K. (2010) ‘Cake Boss’ will keep his name, settles ‘amicably’ with software company. The Jersey Journal, October 22. (Retrievable online at http://www.nj.com/hobokennow/index.ssf/2010/10/cake_boss_will_keep_his_name_s.html)

The Avandia Disaster

GlaxoSmithKline (GSK)’s $3.4 billion legal charge on the diabetes drug Avandia probably isn’t the last of the costs the company will record against this drug. That means Avandia will probably be a lossmaker for GSK, proving that former CEO Jean-Pierre Garnier 1999 failure to follow up on worries about heart attack deaths associated with Avandia was a strategic disaster for the company, costing it billions in actual dollars and billions more in lost-opportunity dollars. Avandia had only been on the market for one month in 1999 at the time the CEO raised concerns in an email to his staff, yet the drug remained on the market until 2010.

Questions:

1.  What are some examples of opportunity costs this drug had for the company?

2.  Based on the article by Edwards, what types of contingency disclosures do you think the company should disclose for 2011?

3.  According to the 2010 article by Edwards, what settlement was made in July?  How should that be reported in the accounting records?

 Source:
Edwards, J. (2011). How GSK’s CEO Ignored His Own Worries and Wasted $16B on a Failed Diabetes Drug, BNET.com, January 18 (Retrievable online at http://www.bnet.com/blog/drug-business/how-gsk-8217s-ceo-ignored-his-own-worries-and-wasted-16b-on-a-failed-diabetes-drug/7094?tag=mantle_skin;content)

Edwards, J. (2010) Glaxo CEO Worried in Email Over Heart Attacks From Avandia — in 1999, BNET.com, July 13 (Retrievable online at http://www.bnet.com/blog/drug-business/glaxo-ceo-worried-in-email-over-heart-attacks-from-avandia-8212-in-1999/5110?tag=content;drawer-container)

Happy Birthday! Microsoft is 35 years old!

From modest beginnings, Microsoft, started by college dropout Bill Gates, gave birth to an entire
industry, changing the way we live and work and became one of the largest software companies on the
planet. As this article points out, not everything has been notable during its history. In particular, look at
this parody video of Clippy, the cute but much maligned animated paper clip introduced with Office 97.
Microsoft turned off the Clippy feature by default in Office XP, promoting it as part of a $30 million
marketing campaign, and removed it altogether in Office 2007.

Questions:

1. What type of journal entry or entries do you think that Microsoft make for the $30 million campaign to silence Clippy?

2. The article talks about Microsoft’s surprising investment when in August 1997, rival company Apple desperately needed cash. Microsoft came to their rescue and bought $150m in stock. What do you see as the reasons for this event?

3. What journal entries do you think Apple would have made in the exchange mentioned in Question 2?
What journal entries would Microsoft have made?

Sources:

YouTube Video. (2006) Annoying Microsoft Paperclip, November 23
(Retrievable online at http://www.youtube.com/watch?v=1zr2-_ap4O8)
Sanjay. (2010) Happy 35th Birthday Microsoft, Access India, August 27.
(Retrievable online at http://www.mail-archive.com/accessindia@accessindia.org.in/msg40506.html)

Research and Development (R & D): Does This Indicate a Crack in the Foundation of IFRS Convergence?

When the IASB and FASB began the convergence process in 2002, they considered R & D as a high-priority project, where differences between US GAAP and IFRS were seen as particularly straightforward. However, as this article notes, still no consensus has been reached because IASB’s R&D treatment  appears to defeat comparability in the eyes of the FASB.

Questions:

1. The author refers to SFAS 2 as support for R & D reporting under U.S. GAAP.  What is SFAS 2?

2.  What are the capitalization criteria from IAS 9 that became part of IAS 38 to distinguish research costs from development costs?

3.   Briefly summarize the article’s presentation of why FASB ruled  in the 1970’s that all R&D expenditures must go straight to the income statement.

Source:

Selling, Tom (2010). Failed Convergence of R & D Accounting: Only Politicians and Opportunists Would Have Downplayed the Implications, The Accounting Onion, June 5 (Retrievable online at http://accountingonion.typepad.com/theaccountingonion/2010/06/failed-convergence-of-rd-accounting-only-politicians-and-opportunists-would-have-downplayed-the-implications.html)

Starbucks’ Social Media Strategy

It is not an accident that Starbucks is the leading consumer brand on Facebook. CEO and Chairman Howard Schultz explains that Starbucks gained prominence on Facebook by making a significant commitment to investing in social media. Executives at Starbucks have learned that they can’t push a product on a consumer. Rather, they must engage consumers in conversation so that the consumer can trust the source. Social media provides the ideal platform for this conversation. As a result, social media platforms such as Facebook and Twitter have become an integral part of business at Starbucks.

Questions:
1. What sort of costs do you think Starbucks incurred when CEO and Chairman Howard Schultz said Starbucks made a very significant investment in the people and the category of social media?
2. How do you think the costs discussed in Question #1 were accounted for and why? That is, were costs expensed or capitalized and what is the rationale for your answer?
3. The reporter says Twitter is fun and interesting, but that it’s difficult to monetize. What is meant by “monetizing” in this context? How is it important in terms of how Starbucks accounts for the costs associated with Twitter and Facebook?

(Retrievable online at: http://money.cnn.com/video/technology/2010/03/24/t_starbucks_social_media.cnnmoney/)

Green Accounting Roadmap

A new report by Ceres, a leading coalition of investors, environmental and public interest organizations in North America, stresses that companies must make immediate envrionmental improvements to remain competitive in the 21^st century global economy.  Sustainable performance, not short-term environmental initiatives, will position companies to plan and innovate in an increasingly resource-contstrained economy.  Included in the report is a roadmap for integrating sustainability into the “DNA of business – from the boardroom, to copy rooms, and across entire supply chains”. Also detailed in the report are examples of how PepsiCo, IBM, General Mills, and other corporations are aligning their practices with four key chapters of the Ceres Roadmap – governance, stakeholder engagement, disclosure, and performance.

1.  How might an organization report its environmental intiatives to the public? 

2. The Ceres report proposes tying carbon emmission goals to executive  compensation. Can you think of any other environmental incentives a company might adopt to remain competitive in a “green economy”?

 (Retrievable online at http://www.ceres.org/Page.aspx?pid=1227)

Instant-Coffee Wars

Starbucks has been working on a closely guarded secret for 20 years – Via Ready Brew instant coffee. A month after its launch, Nestle, the maker of Taster’s Choice, has begun an aggressive campaign against the new interloper. This campaign includes free samples of Nescafe’s “sticks,” direct mailings, and Web commercials.

QUESTIONS:

1. How should Nestle account for the free samples of coffee?
2. Starbucks rolled out Via after 20 years of secretive internal research and development (R&D). Assuming that Starbucks spent a million dollars each year for the R&D, how would this be reflected in their financial statements?
3. Use some of the following facts laid out in the article:

Assume that Starbucks and Nestle are the only major companies in the instant coffee industry, which generates $21 billion worldwide in annual sales with 5% in the U.S.

Starbucks sells a 12-pack of single-serve pouches for $9.95.

Nestle sells seven 12-packs of single-serve pouches for $12.16.

If Nestle sells seven 12-packs for every one 12-pack sold by Starbucks, what amount of U.S. sales would each company share? How many pouches should be produced by each company to meet this demand?

SOURCE: Andrejczak, M. “Instant-Coffee War: Nestle Takes Aim at Starbucks,” Wall Street Journal – Market Watch (Retrievable online at http://www.marketwatch.com/story/instant-coffee-war-brewing-nestle-vs-starbucks-2009-11-18)