10
JUL
2015

In the Headlines-July 10th, 2015

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In The Headlines

Inflight Internet: Why You Might Be Paying More for Less

It is summer time, and that means millions of vacation-bound Americans are beginning to fill airports across the country. An amenity featured on more and more flights these days is Internet access delivered directly to your laptop, tablet, or smartphone via an onboard Wi-Fi hotspot. But, in-flight Internet experiences can differ vastly, depending on the airline.

The inflight Internet market in the U.S. does not seem to follow any basic rule of competition. On an American or Delta plane you could wind up paying $10 to $20 to surf for the duration of your flight, and “surf” might be a generous word in this case. If there are a lot of other people using the same network on your plane, speeds might be so slow you will wind up paddling your way through the web. At the other end of the spectrum, JetBlue offers complementary Internet access to all of its passengers. Instead of delivering a sluggish Internet experience, its Fly-Fi service is the fastest in the business, delivering speeds over 10 Mbps, and it does not restrict high-bandwidth applications like Netflix on its networks.

Why is there such a huge discrepancy in pricing and speeds? It is a combination of business model and technology, according to Tim Farrar, satellite telecom analyst for TMF Associates. Different airlines use different types of networks to connect their planes, and some are old and pokey, while others are new and speedy. However, the main reason you might find yourself paying more for less onboard some flights has to do with how inflight Internet fits into your airline’s overall business plan, Farrar tells. For most major airlines, Internet is a revenue generator. For instance, the biggest player in onboard Wi-Fi, Gogo, has built its business on the idea that business travelers will pay almost any price to work above the clouds, because ultimately they are not footing the bill—their employers are.

“Gogo has figured out that you make more revenue by charging as much money as possible to a very small number of people,” says Farrar. Typically, only 7% of passengers opt to pay for Internet on Gogo flights, but that is enough for Gogo to cover its costs and send a big check to its airline partners each month. On the flip side, smaller airlines look at inflight Internet as a differentiating service, the same way they might treat checked-bag fees. In those cases, revenue flows in the opposite direction. JetBlue cuts a check to its provider, ViaSat, for all of the bandwidth its passengers consume, Farrar explains, and that is certainly no paltry amount. JetBlue claims that more than 40% of its passengers connect to the free network each flight.

While the airline business model usually determines price, the actual speeds you see are determined by the type of network they connect to. Airplanes get their Internet connections either from above (linking to satellites in orbit) or from below (linking to ground-based cell towers). Depending on the technology used, and the types of antennas in the aircraft, those networks can support connections anywhere from 3 Mbps to 70 Mbps. But keep in mind, that is shared capacity. You are not only splitting that bandwidth with all of the other passengers in the main cabin, but all of the other planes sharing the same airspace.
Paying a lot of money clearly does not guarantee you a good Wi-Fi connection in the skies. But there are some positive trends to look forward to in the near future. Inflight Wi-Fi is gradually getting faster as airlines upgrade their fleets, and Internet is becoming commonplace on more and more routes, both international and domestic, Farrar says. More competitive airlines will likely move to free or discounted Internet to make them stand out from their larger competitors.

The bad news is that if you pay one of the major airlines a lot of money for inflight Internet today, then you will probably wind up paying even more in the future. Gogo, for instance has been gradually raising prices, not lowering them. As long as business flyers with corporate credit cards are out there, then Wi-Fi in the sky is going to be a luxury on the big airlines. “I’ve seen prices as high as $35 a flight for a cross country flight,” says Farrar. “That pricing isn’t widespread yet, but there appears to be no limit to what people are prepared to pay.”

Citations

1. http://for.tn/1RVjEFr – Fortune


The CF Foundation Pursues a Cure with Venture Philanthropy

By the late 1990s, the Bethesda-based Cystic Fibrosis Foundation had spent decades searching for ways to alter the course of the deadly lung disease. Researchers had identified the genetic cause of the condition a decade earlier, and incremental improvements in care meant that many patients were living into their 30s. But frustrated that no game-changing treatments were in sight, 1999 saw the group’s leaders place what many considered a risky bet by deciding to invest millions of dollars in a small California biotech firm. Robert J. Beall, the foundation’s president, believed that putting money into drug companies directly, rather than merely making grants to academic investigators, might persuade the industry to focus on the disease and turn research into real-world treatments.

That initial bet grew into a $150 million investment and has paid off in a big way. It led to the approval in 2012 of a breakthrough drug—the first that treats the underlying cause of cystic fibrosis rather than the symptoms, in a small subset of patients. Recently, the Food and Drug Administration approved a second drug for which the group also helped fund development. That drug eventually could aid roughly half of the 30,000 cystic fibrosis patients in the United States. And last fall, the CF Foundation sold its rights to future royalties from the drugs for $3.3 billion, the largest windfall of its kind for a charitable organization.

The pioneering success of Beall and the Cystic Fibrosis Foundation in the practice of “venture philanthropy” is prompting a growing number of nonprofit groups to explore whether they, too, might be able to benefit their patients, and bottom lines, by investing in similar ways. Dozens of organizations, from the Michael J. Fox Foundation to the Multiple Myeloma Research Foundation to the National Multiple Sclerosis Society, have embraced the approach over the past decade. Typically, though not always, groups take an equity stake in a company or negotiate a percentage of future royalties for approved drugs in exchange for their investment. They also have shared their scientific expertise and patient registries, which can be invaluable for companies conducting clinical trials of new medicines.

Venture philanthropy has its skeptics who argue that patient groups risk harming their reputations and their bank accounts by forming partnerships with the drug industry. Some experts worry that the relationships create inherent conflicts of interest and that nonprofit organizations could allow financial motives to undermine their primary mission of putting patients first. For instance, the initial drug that the CF Foundation helped fund, Kalydeco, costs more than $300,000 a year per patient. Orkambi, the drug just approved, will cost $259,000 a year. Critics say such price tags inevitably will place burdens on patients, even as they increased the value of the CF Foundation’s recent royalty deal and create significant revenues for Vertex Pharmaceuticals, the company that developed both drugs. A group of specialists wrote to Vertex after Kalydeco’s approval, calling the price unconscionable. “There’s a reason why corporate America exists, and there’s a reason why philanthropic organizations exist,” said David Cornfield, a Professor of Pediatric Pulmonary Medicine at Stanford University. “When that distinction becomes invisible, it becomes very difficult to know where philanthropy ends and venture capital begins.”

Proponents counter that venture philanthropy has helped to fill a persistent gap that exists between basic academic research funded largely by the government and later-stage clinical trials typically funded by large pharmaceutical companies—a gap known as the valley of death. “It’s where great ideas, unfortunately, go to die,” said Francis Collins, Director of the National Institutes of Health, who, as a researcher at the University of Michigan, helped identify the gene for cystic fibrosis in 1989. “If foundations can pitch in there, that’s great. . . . We need as many models to get there as possible.”

For companies, a kind of partnership that once seemed strange is becoming more common. Paul Negulescu was Director of Cell Biology for Aurora Biosciences in the late 1990s when the CF Foundation asked the company to begin screening for drug compounds that might treat the genetic cause of cystic fibrosis. “It was an unusual, unprecedented request,” recalled Negulescu, now Senior Vice President of Research at Vertex, which later acquired Aurora. “We were used to working with larger pharmaceutical companies. . . This was basically a patient group saying, ‘Can you help us?’ ” He went on to comment that logistical and financial support from the foundation over the years made the company’s scientists feel invested and set it on a course it would not have pursued otherwise. “The scope of the goal definitely motivated people here,” Negulescu said. “For us, as a very small biotech, it put us on the path of drug discovery.”

Emily Schaller, a 33-year-old cystic fibrosis patient from Detroit, said she is grateful that the CF Foundation took its long-ago gamble that led to the development of the drugs. “I just don’t think drug companies would spend time and money on small groups like cystic fibrosis unless there was an incentive,” said Schaller, who has been taking Kalydeco for several years and now runs half-marathons and operates her own nonprofit group. “I’m alive, and I’ve never been more alive because of this drug. . . . I’m now starting a retirement fund, which is something I never thought that I would need.”

Citations

1. http://wapo.st/1LIzC64 – Washington Post
2. http://bit.ly/1hmWckE – Cystic Fibrosis Foundation


The Good News Is . . .

• Home prices continued to rise in April, but at a slower pace than the previous month, according to the latest S&P/Case Shiller Index report. The 20-city index rose 4.9% year-over-year. Sales of new and existing homes have risen in recent reports and construction of new homes enjoyed strong gains in May. At the same time, the proportion of new construction that is apartments rather than single family homes remains high.

• Constellation Brands, Inc., leading international producer and marketer of beer, wine, and spirits, reported earnings of $1.26 per share, an increase of 17.8% over year-ago earnings of $1.07. The firm’s earnings topped the consensus estimate of analysts by $0.02. The company reported revenues of $1.6 billion, a 6.9% increase. Management attributed the company’s results to stronger than expected growth in its beer business.

• The health insurer Aetna said that it had agreed to acquire its smaller rival Humana for $37 billion in cash and stock. Under the terms of the offer, Humana stockholders would receive $125 in cash and 0.8375 Aetna shares for each share they hold in Humana. The deal would bring together two of the biggest health insurers in the United States. The combined company would have estimated operating revenue of $115 billion this year and serve more than 33 million people. The proposed merger occurs as the nation’s largest for-profit health insurers seek ways to reduce costs and capitalize on growing opportunities in the government and individual markets.

Citations

1. http://bit.ly/1ewjLul – S&P Dow Jones Indices
2. http://www.cnbc.com/id/18080780/ – CNBC
3. http://bit.ly/1HG7S2h – Constellation Brands, Inc.
4. http://nyti.ms/1dGrLbi – NY Times Dealbook


Planning Tips

Tips for Investing in Rare Stamps

There are reputed to be 30 million stamp collectors, or philatelists, worldwide. Rare stamps have proven to be a good investment. Stanley Gibbons rare-stamp indices—the GB30 and GB250—have shown 10-year compound annual growth rates of 9.06% and 11.78%, respectively. As with other forms of tangible asset investment, though, there are traps of which you need to be aware. Below are some guidelines to be aware of when investing in rare stamps. You should consult with your financial advisor before investing to determine if this is suitable for your situation.

Invest in quality – Five key considerations when investing in stamps are:

  • Rarity: Only invest when there is a small number of surviving examples of a stamp or when the stamp is unique.
  • Condition: Only invest in the best-quality examples. Many factors influence the condition of a stamp, from the margins around it, to the gum on the back, to freshness of color.
  • Authenticity: Ensure authenticity can be proved—a certificate is only as good as the person or body issuing it. Seek items with documented history and provenance.
  • Liquidity: Only invest in areas where there are a healthy number of collectors, as collectors drive prices.
  • Price: Seek to buy at or below fair value.

Invest for the long term – A stamp portfolio is a long-term play. Experts recommend a minimum investment of about $15,000 to build a balanced portfolio, with a minimum holding period of five years, but ideally 10 years or more. The market for rare stamps tends to be stable and is not subject to the kind of speculation that can result in high volatility.

Be aware of the limited liquidity – The same market dynamics that make stamps stable also make them illiquid. Thus your allocation should be a small percentage of your overall portfolio—for example about 3% or less. The stamp market is known for big spreads between bid and offer prices. If the spread is, say, 10%, your investment would have to increase by this amount before you made a profit.

Get professional help – The key risk for investors is that they try to go it alone. As with any market where there is money to be made, you will find fakes; only buy through reputable dealers and auction houses, and aim to buy the best. Make sure that your stamps are stored correctly. Heat, light, and damp can wreak havoc on rare stamps. Keeping them with a specialist also means you do not have to insure them.

Consider a guaranteed minimum-return contract – These contracts are offered by Stanley Gibbons, the world’s largest dealer. These specify a level of investment and give a fixed minimum return, calculated on the basis of simple, rather than compound, interest. The contracts are backed by a dedicated portfolio of stamps. For example, invest $15,000 for 10 years and you are guaranteed to receive $18,000 at the end of the term. If the stamps are worth more than this, you can either keep them, or sell them commission-free through a Gibbons auction, or sell them back at 75% of catalog value. Contracts for shorter periods offer lower returns. A five-year contract will return 125% of the amount invested at the end of the period, for example. The stamps are stored by Gibbons free of charge.

Citations

1. http://on.ft.com/1gih2WB – Financial Times
2. http://bit.ly/1G2c3ho – Investor’s Chronicle
3. http://www.cnbc.com/id/102306304 – CNBC
4. http://bit.ly/1CURnbl – YourMoneycom
5. http://linkd.in/1ffenwH – LinkedIn.com

 

Please don’t hesitate to give us a call if you need help with any component of your financial planning.

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