In The Headlines

Is TV About to Lose its Hold on Brand Advertising?”

Television has long been the favorite entertainment habit in America and beyond, and as a result TV commercials have been the world’s favorite way to sell people soda and laundry detergent. But that is changing. Money spent globally on commercial spots in YouTube videos, Facebook feeds and news websites will overtake the ad dollars spent on TV commercials for the first time in 2017, research firm ZenithOptimedia confirmed in a new report.

Last year, internet advertising was about 30% of all ad spending globally and TV took about 37%. Next year, Zenith estimates ads online and on mobile devices will account for 36% of all advertising spent in the world, compared with 35% for TV.

It is hard to imagine TV losing its primary spot in our leisure time and in the budgets of advertisers. After all, television has continuously reinvented itself for more than 50 years to keep up with the times. From the invention of cable TV to “time shifted” viewing through DVRs and now TV programming online, the television industry is the world’s hippest baby boomer. Leila Abboud recently wrote about how the TV industry was fighting back against the technology die-hards predicting the demise of the 30-second commercial spot. But change is inevitable. Ad dollars eventually—even if it takes a while—follow eyeballs. And the eyeball demographics are not in TV’s favor.

Young people are still spending big chunks of their time watching TV, but they are also finding different ways to entertain themselves. On average, Americans 18 to 24 years old watch 16 hours and 18 minutes of TV each week, or more than two hours a day, according to media research firm Nielsen. That is a lot, but people less than a generation older in the 35-to-49-year-old range watch on average more than 32 hours of TV each week, or four-and-half hours a day, Nielsen estimates. This is the TV gap. An average 18-to-24 year old spends half as much time watching TV as a cohort just a bit older. Just two years ago, young adults watched more TV than they do now.

Young people who shift their time from TV to their smartphones are giving fuel to web companies that badly want to break TV’s hold on “brand” advertising—that is, commercials that make you feel good about drinking Budweiser or driving a Hyundai. Facebook, Google, Twitter, AOL, and every other web and media company is pushing into live web video in a grab for those brand ads. It is not as if Budweiser is going to stop advertising during the Super Bowl next year, but live web video will slowly, inexorably steal brand ad money from television.
So far, the internet’s advertising gains have come mostly at the expense of newspapers and magazines, and TV has carried on relatively unscathed. TV vs. internet also is not a clear-cut rivalry. The two sides are working together in ways that mean a dollar of advertising spent online does not entirely take a dollar out of the pockets of a TV company. For example, TV old guard Viacom struck a deal to sell ads on behalf of Snapchat, the favorite youth alternative to TV.

Still, the total market for advertising is not growing much and the internet’s gain will inevitably erode TV’s role as the advertising top dog. Change in advertising spending begins slowly, and then rapidly accelerates. You can almost see the moment around 2007 to 2008 when newspaper advertising fell off a cliff—many years after people had started to sound the alarm about Craigslist, Google, and other threats to the traditional advertising base for newspapers. It will only be obvious in hindsight if and when the same thing happens to television advertising spending.

Citations

1. http://bloom.bg/29TVNIx – Bloomberg
2. http://usat.ly/1rdcAgD – USA Today

Amazon Ventures into Student Loans

Amazon is taking its nickname—the Everything Store—quite seriously. Recently, the e-commerce giant and bank Wells Fargo announced a partnership to supply some Amazon customers with student loans. The bank will give a new interest rate discount of 0.5% to borrowers who are members of Amazon Prime Student, a subscription-based service for college students that costs half the price of regular Amazon Prime.

Wells Fargo explained the alliance as a marketing opportunity for the bank. John Rasmussen, head of Wells Fargo’s personal lending group, said in a statement that the company is “focused on innovation and meeting our customers where they are–and increasingly that is in the digital space.” Rasmussen added that Amazon’s goal is to increase its Prime Student membership, while Wells Fargo wants to “communicate more broadly that it’s here to help” students and families pay for college.

He said the program will enhance the discounts Amazon offers to students, and it will allow Wells Fargo to take advantage of Amazon’s access to college students. “Amazon, through all of their various channels and platforms, will promote Student Prime and its enhanced relationship with Wells Fargo,” Rasmussen said.

In a statement, Amazon said simply that the program adds to the benefits it provides to Amazon Prime Student members. The company is “excited to extend this new offering,” according to the statement. But in fine print on the program’s Amazon.com landing page, the company is clear to distance itself from Wells Fargo saying: “Amazon is not a lender and is not affiliated with Wells Fargo. Amazon is in no way involved in the underwriting or origination of loans from Wells Fargo.”

Matthew Chingos, who studies student loan debt at the Urban Institute, says the announcement matters little in the larger student loan landscape. “It’s basically one lender in a market that’s a very small part of the student loan pie,” he said. “It’s a marketing thing. Now Amazon can say, with Amazon Prime Student you get two-day shipping and a discount on your student loans.” That might sound appealing until the shopper reads that the discount only applies to private student loans and only to private student loans issued by Wells Fargo, he notes.

Undergraduate borrowers usually take out private student loans only if they reach the federal loan limit. (There is no cap for graduate students.) That makes the private loan market small compared to its federal counterpart, especially since it shrunk considerably in 2010, when the Obama administration overhauled the nation’s student lending system, forcing commercial banks out of the federal student loan market. (It has, however, logged mild upticks in the past three academic years, according to College Board data.)

Wells Fargo’s Rasmussen acknowledged that other players have “backed away from this space,” but he said it has been a “very consistent” business for Wells Fargo, with 3-5% growth every year. Student loans totaled $12.2 billion for the bank at the end of 2015, compared to $11.9 billion the year prior, according to its annual report. (By comparison, it had $60 billion in auto loans in 2015.) Wells Fargo is the largest bank by market value in the U.S. and the second-largest student loan lender in the nation behind Sallie Mae. Amazon declined to disclose how many Prime Student members it has, but Rasmussen said the anticipated reach of the program is “in the millions.”

Citations

1. http://for.tn/2ah8j6s – Fortune
2. http://wapo.st/29ZroYU – Washington Post

The Good News Is . . .

• U.S. home resales unexpectedly rose in June to their fastest pace in more than nine years as low mortgage interest rates drew buyers into the market, a positive sign for the economy. The National Association of Realtors said existing home sales increased 1.1% to an annual rate of 5.57 million units last month, the highest level since February 2007. Economists had forecast a 5.48 million-unit pace in June. Sales were up 3% from a year ago. Existing home sales jumped 3.8% in the Midwest and rose 1.7% in the West. Sales were flat in the South and fell 1.3% in the Northeast.

• General Electric Corp., a global manufacturing and industrial services company, reported earnings of $0.51 per share, an increase of 64.5% over year-earlier earnings of $0.31 per share. The firm’s earnings topped the consensus estimate of analysts by $0.05. The company reported revenues of $33.5 billion, an increase of 14.6%. Management attributed the results to strong revenue growth in the firm’s aviation, power generation, life sciences and renewables business segments.

• Exxon Mobil agreed to buy InterOil, a driller focused on projects in Papua New Guinea, for at least $2.5 billion as the petroleum giant seeks newer fields. InterOil’s holdings in Papua New Guinea are a potential source for liquefied natural gas. The deal includes interests in six licenses in Papua New Guinea covering about four million acres, including a field called Elk-Antelope where the proposed liquefied natural gas project would be anchored. Under the terms of the deal, Exxon Mobil will pay $45 of newly issued stock for each share of InterOil.

Citations

1. http://reut.rs/2a2A0QZ – Reuters
2. http://cnb.cx/1gct3xa – CNBC
3. http://invent.ge/2af7if7 – General Electric Corp..
4. http://nyti.ms/2a2zBOs – NY Times Dealbook

Planning Tips

Avoiding Tax and Inheritance Problems with Life Insurance

Most people need to own life insurance at different times for survivor income or estate planning purposes. Life insurance can be a complicated product. It is important to avoid some mistakes that might result in problems for your beneficiaries. Below are some considerations to help you avoid unnecessary taxation or disputes. Be sure to consult with your financial advisor to determine the best approach to take for your life insurance and estate planning needs.

Including the death benefit in your taxable estate – If you are both the owner and insured of a life insurance policy, the death benefit will be included in your gross taxable estate. With the federal estate tax exemption at $5,450,000 in 2016, federal taxation is probably not an issue for most people. However, many states have a separate inheritance or estate tax with a much lower threshold. For example, New Jersey has an exemption of only $675,000, and Massachusetts begins taxing estates at $1 million. To get the death benefit out of your estate and avoid this problem, consider having your spouse, significant other, or an irrevocable trust own the policy and also be the beneficiary.

Update your beneficiaries – One feature of life insurance is the ability to name beneficiaries and dictate how the death benefit will be distributed. However, if your spouse or partner predeceases you and no contingent beneficiaries have been named, the death benefit may revert back to your estate. This means the proceeds could be distributed according to the instructions in your will, or if there is no will according to state intestacy rules. So it is important to name contingent beneficiaries. Additionally, after the death of a spouse or a divorce, do not forget to update your beneficiary elections, including for group policies.

Policy loans and lapses – Insurance companies promote taking loans against the cash value in permanent life insurance policies. But many policyholders do not realize they need to pay back the loan. They just continue making the scheduled policy premium payments (or stop paying the premium all together) thinking the remaining cash value will carry the policy. If the loan is not paid back, interest starts to accrue and eventually the policy can lapse. The premium payment and/or remaining cash value may not be enough to cover both the interest on the loan and the cost of insurance that is withdrawn each month. If you own a policy that lapses and the amount of the loan and accrued interest exceed your cost basis, any gain will be reported as taxable income to the IRS. The cost basis of a policy is the cumulative amount of gross premium that you have paid over the years, less any withdrawals.

Surrendering a policy – If you own a permanent policy and no longer need the coverage, do not just surrender the policy. You could have a taxable gain if the accumulated cash value exceeds your cost basis. And do not just transfer the entire cash value to an annuity under Section 1035 of the tax code. An annuity has less favorable tax treatment and requires taxable earnings to be distributed first, followed by the tax-free return of basis. Instead, first withdraw (not loan) your cost basis from the life insurance policy, and then execute a 1035 exchange to move the remaining cash value (earnings) to a tax-deferred annuity. The cash value can continue to grow, and you can take distributions as desired, subject to the contract surrender schedule. All of the distributions would be taxable.

Taxable transfer – Under IRC Section 2035, the death benefit of a life insurance policy can still be included in the owner’s estate for three years if the policy is gifted to an Irrevocable Life Insurance Trust (ILIT). The three-year rule applies to any free transfer. However, the rule does not apply to the sale of a life insurance policy to an ILIT for full and adequate value. The ILIT should be drafted as a grantor trust, which allows the sale to skirt both the three-year rule and any transfer for value issues.

Citations

1. http://bit.ly/29SyfHu – Forbes
2. http://bit.ly/2a1kUdb – Nolo.com
3. http://bit.ly/29WmjzR – Investopedia
4. http://bit.ly/2a2bXEx – American Association of Individual Investors
5. http://bit.ly/1yxSDil – EstatePlanning.com