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Tornadoes Devastate Midwest and Southern States

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Last week, a series of tornadoes ripped across the Midwest and Southern United States, killing dozens and crippling infrastructure in Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri, Ohio and Tennessee. While Karen Clark & Company has estimated that the insured loss from the tornado outbreak will be about $3 billion, and credit rating agency Fitch predicted that losses would total $5 billion, Dr. Joel N. Myers, AccuWeather founder and CEO, estimated that the tornadoes are expected to cost about $18 billion in total damage and economic loss. Mark Friedlander, director of corporate communications at The Insurance Information Institute, said, “Based on preliminary assessments of the extensive property damage we are seeing across multiple states, this weekend’s tornado outbreak has the potential to be the costliest on record in the U.S.”

As of Monday, 88 deaths across the region had been confirmed, but over 100 people are also missing, which means the death count may be higher. The cyclones killed more than 70 people in Kentucky, the hardest-hit state, leaving thousands homeless and knocking out power for more than 25,000 in the western region of the state. Additionally, 10,000 Kentucky homes and businesses reported being without water, and another 17,000 were under boil-water advisories, according to the Kentucky Division of Emergency Management.

Across the entire affected region, 750,000 customers were left without electricity. These outages have complicated search and rescue efforts, as rescue workers excavated destroyed buildings, searching for people who are still missing. In Mayfield, Kentucky, for example, the city’s main fire station and multiple police stations were inoperable, and the city was scrambling to find new ways to field emergency calls.

Also in Mayfield, at least eight people died at a Mayfield Consumer Products scented candle factory after workers reportedly pleaded with supervisors to let them leave the building after warning sirens sounded and an initial twister had passed with little damage, only to be threatened with firing if they did not continue working. Over 100 workers were trapped inside the building after the next tornado leveled it. Several survivors have already filed a lawsuit against the company, citing “flagrant indifference” to worker safety, and that the company “knew or should have known about the expected tornado and the danger of serious bodily injuries and death to its employees if its employees were required to remain at its place of business during the pendency of the expected tornado.”

Another tornado struck an Amazon warehouse in Edwardsville, Illinois, killing six people and injuring another. Amazon claims that it took all necessary precautions, but family members of victims have alleged that the company prioritized productivity over worker safety by not heeding tornado warnings and not adequately preparing employees for emergency weather safety responses. Amazon pledged to help workers and their families affected by the tragedy by donating $1 million to the Edwardsville Community Foundation, a charitable trust that benefits regional communities. OSHA is reportedly investigating the Amazon warehouse, and Kentucky state regulators are investigating the Mayfield Consumer Products event.

While an Amazon spokesperson noted that the company’s warehouse was up to code, Illinois governor J.B. Pritzker also promised an investigation into whether building codes needed to be updated, “given serious change in climate that we are seeing across the country.” Scientists say that climate change may have changed normal weather patterns and led to these tornadoes’ increased intensity and reach, with record warm temperatures across the region potentially exacerbating the disaster.

Businesses and risk professionals should prepare now for more frequent and intense weather events. The following recent Risk Management articles may help:

No More Kindles for Walmart

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In the March issue of Risk Management, I wrote an article that discussed, among other things, how brick-and-mortar retailers were struggling with the phenomenon of “showrooming,” where shoppers browse store shelves to examine items that they ultimately buy online from competitors like Amazon for a lower price. One strategy that Target was using to keep customers in their stores was to offer more exclusive items, such as clothing lines from famous fashion designers like Kirna Zabete, Jason Wu or Missoni. Then in May, Target upped the ante by announcing that it would no longer sell Amazon’s Kindle e-readers and tablets. Although the retailer didn’t offer much in the way of explanation, it was obvious that Target now considered Amazon to be a real competitor capable of disrupting the market and was going to treat it as such.

Yesterday the world’s largest retailer followed suit as Walmart announced that it was dropping Kindles as well. Although the Kindle has been around since 2007, it seems that the debut of the Kindle Fire tablets were the last straw. Unlike their predecessors, which were purely e-readers, the Fires are portable web browsers and media players that enable customers to more easily purchase many more items online, especially from Amazon.

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“The Kindle Fire is the Trojan horse,” said Andrew Rhomberg, the chief executive of Jellybooks, an e-book recommendation site. “It’s a shopping platform that covers so many more categories than e-books. It affects Walmart in a different way than the early Kindles and e-readers did.”

Basically by stocking Kindles, Walmart and Target were providing their customers with the keys to the online retail world, which could, in effect, wind up cannibalizing their own sales figures and brand strength. It’s probably wise not to be the instrument of your own destruction.

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Of course, whether or not this move will have any effect remains to be seen.

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After all, Walmart still sells iPads.

Digital Book Wars

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A piece I wrote for the upcoming May issue of Risk Management:

In 1999, the Department of Justice found that Microsoft had violated the Sherman Antitrust Act. It had essentially created a monopoly in the market for operating systems designed to run on Intel-compatible PCs, claimed the government. In a settlement, Microsoft was ordered to share its programming interfaces with third-party companies, a punishment that only recently expired. United States vs. Microsoft was arguably the most closely watched corporate legal case in recent history. Now, one may eclipse it.

On April 11, the DOJ filed suit against Apple and five large, traditional publishing houses, alleging that they committed antitrust and price-fixing violations in the e-book market. According to the allegations, Apple, HarperCollins, Hachette Book Group, Macmillan, Penguin Group Inc. and Simon & Schuster Inc. conspired to increase digital book prices and force Amazon to abandon its discount sales strategy.

As the first real player on the e-book scene, Amazon was able to dictate pricing to publishers, and it frequently sold digital books below cost to boost sales of its Kindle reader. Though book publishers largely opposed the practice, they didn’t have much choice since there were few other viable options for publishing and selling e-books at the time.

But when Apple came along with its iPad and got wind of publishers’ unhappiness with Amazon, the tech company decided to make a move. Apple introduced an agency pricing model under which the publishers set digitial book prices and Apple received 30% of the sale. For publishers, this was obviously a more attractive option than Amazon’s pricing strategy. And eventually, as more publishers threatened to withhold their titles from Amazon, the retailer adopted the agency pricing model as well.

The new model allowed Apple to gain a toehold in the potentially lucrative e-book market. And just as when it debuted the iPod and iTunes in the same year, the company was now positioned to profit from sales of both iPad hardware and content, rather than just from the hardware alone. “This would be sound commercial logic,” said Frances McLeod, managing partner at Forensic Risk Alliance, “but all commercial
activities must take place within the bounds of the law.”

The DOJ is not the first to question Apple’s influence on e-book pricing. The alleged conspiracy to raise e-book prices was the subject of a class action lawsuit filed against the same parties in a California district court last year. And in December 2011, the European Commission opened a formal antitrust probe for similar reasons.

So what does all of this mean to the parties involved? While publishers are likely pleased with the move away from Amazon’s discount pricing, it is their investors who will be keeping a close eye on the legal proceedings. “The actions of the DOJ will also have been observed by shareholders and by those who feel they have been wronged, raising the possibility that owners and litigants may also act to investigate alleged bad behavior,” said McLeod.

As for the retailers, Amazon has already made a few other enemies in the book publishing industry. Scott Turow, best-selling author and president of the Author’s Guild, has called the retail giant “the Darth Vader of the literary world,” suggesting that the company’s tactics will unfairly undermine brick-and-mortar booksellers and, ultimately, the publishing industry itself.

Apple is not faring much better. For a company that prides itself on its reputation and ability to understand consumers, its customers could turn on the tech giant if they believe that it is Apple’s fault that they are now paying more for digital books. In fact, after the price war began, Amazon was forced in some cases to raise e-book prices as much as 50% from its initial consumer-friendly $9.99 price point.

The DOJ lawsuit has already led to other changes. HarperCollins, Simon & Schuster and Hachette settled with the government, agreeing to grant retailers the ability to reduce prices. Under the agreement, the three publishers will also be forced to create new contracts with Apple and other e-book sellers.

But this story is far from over. The DOJ is vigorously pursuing claims against Apple, Macmillan and Pearson, all of which opted not to settle. States including Texas and Connecticut—and let’s not forget Europe—are also seeking separate litigation against the involved companies.

Ultimately, many players in the market still have unfinished business. It seems one thing is finished for good, however: the agency pricing model.

Zappos in the News: A Reputation Nightmare

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Zappos, the world’s largest online shoe store, has taken a beating in the press this week after it became apparent that private information of its 24 million customers became compromised.

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CEO Tony Hsieh issued the following statement via email:

“We’ve spent over 12 years building our reputation, brand, and trust with our customers. It’s painful to see us take so many steps back due to a single incident.”

I’m sure it’s also painful for Hsieh to scan the headlines about his company that have surfaced in the last few days. The following are just a few:

  • Even Big Companies Cannot Protect Their Data — a blog piece from the New York Times, which states that more often than not, companies are resorting to telling their customers that it is up to them to protect their data stored on the company’s servers. The piece notes that even though the company claimed to have a security breach response plan in place, Hsieh provided no explanation about why the data was vulnerable.
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  • Zappos Data Breach Response: Good Idea or Panic Mode? — PC World ran an online article Tuesday that highlighted both sides of opinion spectrum. While some analysts praised Zappos for their response to the incident, others, including John D’Arcy, professor of information technology at the University of Notre Dame, called the overall response plan “not a good idea.”