CNN IN THE MONEY
Potential Perils, Profits of Privatized Military; What Are You Funding by Buying Lottery Tickets?; Interview With John McCain
Aired July 13, 2003 - 15:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ANNOUNCER: From New York City America's financial capital, this is IN THE MONEY.
JACK CAFFERTY, HOST: I'm Jack Cafferty. Welcome to IN THE MONEY coming up on today's program, the corporate battlefield. As U.S. soldiers fight to bring order to Iraq, they're being backed up by companies that do everything from cook their meals to plan the war games. We'll look at the perils and potential profits of a privatized military.
Plus, hot tickets. Some of the biggest lottery prizes ever are being handed out this summer. We'll tell you where the lottery dollar winds up after you buy the ticket.
And blue movies and greenbacks from the back streets to main street. The pornography business is booming. We'll find out how some banks are profiting each and every time a customer pays to look.
With me as always, Susan Lisovicz of "CNN Financial News," and Shawn Tully, who is a senior writer of "Fortune" magazine. Welcome. Nice to have you with us, as always.
U.S. soldiers have been under fire again this week again in Iraq, and the casualty count continues to climb. President Bush warns that patience is needed, and he insists the United States is making progress toward peace in Iraq. For a look at the situation there we're joined now, by Nic Robertson live from Baghdad.
Nic, how are you doing? A lot in the news this week about the death toll, the lack of essential services, the tremendously high price of maintaining armed forces there, the possible time frame being for the military as long as four years. What can you tell us? What's the latest?
NIC ROBERTSON, CNN SR. INTERNATIONAL CORRESPONDENT: Well, of course, Jack, the highest price being paid has been paid, obviously, by those soldiers here who have been killed, and there have been a number of deaths over the week both in rocket-propelled grenade attacks on patrols -- on shooting attacks on patrols. What we've seen as well is a lot of mortar attacks on some of the bases here, as well. On several occasions soldiers injured in those mortar attacks. What we're being told by commanders here, is that their enemy, if you will, is more sophisticated, that there's a level of organization, even classifying the hostile actions as being perpetrated by professional assassins. Now, there are patrols being run. There's guard duty being run. But there's also raids being run to try and catch some of the people responsible for the attacks. But, some of these raids are being hampered by a lack of up-to-date good accurate intelligence. But, as far as the troops are concerned, with or without the attacks on them, they are still out there, still in the firing line, and still doing their job, Jack.
CAFFERTY: Nic, can you give us an idea of how their morale is holding up? I know the Washington line is that morale is fine. I was in the service. And serving in 125-degree heat, wearing all that gear, one of our people was killed -- shot in the head while standing in line to get a can of soda the other day. Pursuing an enemy that's elusive not knowing where the next attack might come from. What sense do you have of how well these young men and women are holding up under all of that?
ROBERTSON: Well, the 3rd Infantry Division perhaps has the greatest reason to want to get back home, and get back home now. And some of them are beginning to get their marching orders to go back, to redeploy back home. The reason is they fought the war. They've been away from home for over nine months. They hadn't seen an end to their peacekeeping duties here in Iraq, and that was a concern for them. But, the vast majority of other troops I've talked with here, from the 1st Armored Division, from the 4th Infantry Division, they all say, look, we're here to do a job, we knew the conditions were going to be tough.
The heat, yes, we'd rather not have the heat. Yes, we'd rather be at home. Yes, we'd rather put our feet up and have a beer. But, they all say this is what we do, this is what our profession is about, and if the security environment is tough then we react to that. We go to -- we watch -- cover your -- cover your mates back, you cover 360 degrees around you and you put extra troops out if that's what it takes to stay safe. But, as far as morale is concerned, and even away from the cameras, these guys tell us, look, we know it's a tough job, this is what we do and we'll get on and do it. So, I don't think all the talk of high morale is just for the cameras. I think the soldiers here recognize this is their duty and this is what they have to get on and do.
CAFFERTY: Incredible stuff. Nic, thank you very much. Nic Robertson reporting from Baghdad. In the 200-plus year history of this country, one of the most consistent performances always seems to be turned in by the military. They're always there. They always get it done. They seldom complain. And they're by virtue of that probably more efficient than any other part of the governmental apparatus.
Speaking of which, in Iraq private companies have worked with the military on everything from planning the war to training the country's, Iraq's, new police force. In fact, the military service business has grown into a $100 billion industry. And, for more on this now we're joined from Washington, D.C. by Peter Singer, the author of "Corporate Warriors, the Rise of the Privatized Military Industry." He's also a security analyst at the Brookings Institution.
Peter, nice to have you, thanks for being with us. PETER W. SINGER, AUTHOR, "CORPORATE WARRIORS": Thank you for having me.
CAFFERTY: A -- why -- a two-part question. Describe the disconnect between the public perception and the actual amount of privatization that occurs in today's military and then tell me why I should care as a taxpayer.
SINGER: Well, it's a good question. In a sense, this industry always lies right behind the headlines. In the war against Iraq these companies handled everything from the logistics to helping to maintain and operate some of our most sophisticated weapons systems like the B- 2 stealth bomber. In fact, the ratio between private contractors and military personnel was one contractor for every ten military personnel out there. That's a tenfold increase since 1991, where it was one in 100. It's this booming business we really don't hear a lot about. Now, the second part of your question is -- you now, why should we be concerned about it? Well, in some parts it gets us more efficient services, better-quality services, but also it means that we have all the sort of business dilemmas now taking place in the fog of war. You have not just concerns about over-billing and over-pricing, but also the fact that our soldiers' lives are now dependent on companies that are profiting from war.
SHAWN TULLY, SENIOR WRITER, "FORTUNE" MAGAZINE" But, isn't this just part of having a modern, efficient military? We're able to access the entire market to get the best deals on everything from catering to maintenance of tanks, training services. Isn't this a way that taxpayers are really getting a break and that the military's holding down the costs of war?
SINGER: Well, there's two parts to that. The first is yes, if it works the way we ideally plan it, privatization has a great deal of promise. The problem is -- is that often we don't have very good competition and so the market doesn't work like -- you know, Adam Smith would have anticipated, and so you have companies that are politically connected, getting these contracts. The big companies gobbling up the small firms. So, we don't have very good competition. The oversight is also not so good, so that these companies often over- staff or over-bill.
The second part of this is that sometimes you don't want to run your military like you want to run your business. Efficiency isn't always the goal that you're seeking. Sometimes in a military sphere you want to have redundancy. For example, you want to have the ability to shift support troops into combat roles, which if you privatize that it takes away that. Or you, for example, have the concerns of security risk. For example, when they subcontract to foreign companies, which brings in foreign nationals who might have other allegiances in place. Al Qaeda tried to infiltrate one privatized military field kitchen, in Afghanistan. You had another case in Kuwait where an Egyptian subcontractor inside a U.S. Military base drove his truck into 11 American soldiers, injuring them.
SUSAN LISOVICZ, CNN FINANCIAL NEWS CORRESPONDENT: So, is that something that Washington has been focusing on? Because that is something that, I think, I can say for the three of us we really haven't heard that before. Where you have these security problems now, because of the growing privatization of companies.
SINGER: The way I think about it is that we've had this huge industry that's moved at business pace. It's gone to $100 billion worth of activity in the last decade. And government's response, of course, has been that slow, bureaucratic crawl. And so, we really haven't caught up to it, and the type of regulation, the type of policy we deal with, there's really no laws that deal with this either on the national level, but more importantly on the international level. One of the things we haven't talked about is how there's other clients of this industry, not just the U.S. Military, but sometimes people we'd rather not see these kind of services. Drug cartels, Jihadi groups that were linked with al Qaeda, have also gotten this very sophisticated military assistance from the private market.
CAFFERTY: What has to happen? Privatization is nothing new, I mean, they privatize prisons, they privatize garbage pickup. A lot of government services are farmed out to the private sector. What has to happen, in your opinion, when it comes to the military to ensure two things, that the taxpayer is getting the proper bang for his buck and some kind of oversight so that, you know, he's not getting ripped off, and two, that the military is being dealt with fair and square and not, you know, being hustled for an extra couple of bucks in profit by ambitious private sector operations?
SINGER: At the end of the day government has to start thinking like a smart business client. No business...
CAFFERTY: Good luck.
SINGER: Yeah, I know. That's the problem.
CAFFERTY: Lots of luck there.
SINGER: Government shouldn't privatize something if it's not going to have people monitoring these contracts. And also, if you're going to have people monitoring them, you want to make sure they have the right skill set matched for it. One of these past multibillion- dollar contracts was actually overseen by an artillery officer. Now, this guy's very good at putting shells on target. But he's not -- his skill set doesn't match to, you know, looking over the details of contracts. The other part is at a broader level we have to think about are there some issues that maybe if we can privatize them it doesn't always mean that we should? Are there some things that are so important that soldiers' lives depend on that, maybe we want to keep that in government and just accept that it's going to be a little less efficient? Those are some of the issues we have to watch out for.
LISOVICZ: And they are very important issues that you raise. Peter Singer, author of "Corporate warriors: the Rise of the Privatized Military Industry," thanks so much for joining us.
SINGER: Thank you for having me.
LISOVICZ: Coming up on IN THE MONEY: gambling on a good cause. We'll tell you whether your lottery dollar goes to the fat cats or the folks who really need it.
Plus, skin is in. The line between porn and everyday entertainment is blurring, and for some banks that means big money.
CAFFERTY: A Missouri couple is now joining the ranks of lottery multimillionaires like multi, multi, multimillionaires. William and Claudia Walkenbach won half of the $260 million Powerball lottery Jackpot on Wednesday night. They now have a choice of taking 30 annual installments of $4.3 million or a lump sum payment of 73 and a half million bucks. Now, that's the kind of decision you should have to wrestle with everyday.
What about all the money that doesn't end up in the winners' pockets? Where does that go, and why? To help us understand where your lottery dollar goes, we're joined by gambling expert William Thompson from the University of Nevada at Las Vegas. Author of the book "Gambling in America."
William, nice to have you with us.
WILLIAM THOMPSON, AUTHOR, "GAMBLING IN AMERICA": I'm happy to be here.
CAFFERTY: Is there anything wrong with the way the current system works? I know some of the money goes to schools...
THOMPSON: Sure, sure.
CAFFERTY: ...and then to the states and a lot of the money, obviously, goes to the winners...
THOMPSON: Well, we have to ask a question, is the whole system faulty? We're taking money from poorer people, excessive players, and we're transferring it to political causes or to winners that become very, very rich people. It's a matter of poor people sending the money to the rich.
CAFFERTY: How is that different from a casino where I walk in and drop a couple of bucks on the 21 table and it winds up in the owners' pockets?
THOMPSON: Well, it won't be too different. It depends on who the player is. Is the player a poor person or an affluent person? If you fly into Vegas and go to the strip, you're likely to be an affluent person. If you're going to the corner store to play the slot machine, you're likely to be a poor person. And, it's the same with the lottery. But of $100 in lottery tickets, 55 of those dollars go back to the players. And of course they have to send 15 of those to the federal government for taxes.
THOMPSON: But, about $12 are spent in administration, $7 go to the person selling the ticket, the stores, five percent for advertising, and so forth. $33 remains with the state governments for good causes. About 10 of the states with 37 lottery states, plus District of Columbia, 10 give the money to education, 15 to education and other mixed causes, senior citizens, environments, parks, fuel bills for the wintertime, and 15 -- and 12 put the money in the general fund of the state.
When the money is dedicated to education or some other good cause, over the long run it blends in to the state budget. In the short run the money can be isolated. But, the money goes to particular causes, not because they are the most needed things in the state, but because they are politically popular causes.
THOMPSON: For instance, Georgia and some other states put the money into college scholarships. Well, this money goes to affluent people or middle-class and above, who send kids to college. They don't give it to the greatest need in the state of Georgia, they give it to the political cause that will give the greatest support to the lottery.
TULLY: Bill, isn't what you're really saying that if we wanted to raise money for education it would be a lot cheaper and more efficient just to have an additional tax to fund the schools and not to have this big jobs program on the side and also not to have a regressive tax that falls most heavily on poor people?
THOMPSON: Certainly. It's a very regressive tax. The middle- class and down buy the tickets. The benefits go to the middle-class and up, especially with college scholarships. But, the state should determine what their priority needs are. They should not determine what will help sell lottery tickets, giving the money to seniors because they vote, giving the money to education because it's popular. If the state needs prisons or highways or Medicaid funds, that's where money should go, and that would be a general fund allocation of money.
LISOVICZ: Professor, we have 40 state governments that are going broke. Shouldn't there be some sort of mandate from the public that these lotteries perform more efficiently?
THOMPSON: Well, it's not an efficient way to raise a dollar. I suggested for the $100 in ticket sales 33 goes to the state but $12 goes for administration. That means that for every $3 raised it costs over a dollar. That would be a very, very inefficient taxation guide. We should have more efficient lotteries, but we should also recognize the best lotteries only return two or three or four percent of the state budget. Lotteries are not going to solve state fiscal crisis. I might add, in Nevada our casino taxes provide 40 percent of our state funding, and we've got a major state fiscal crisis right now, too.
TULLY: Don't you find it scandalous that the education establishment is getting these big subsidies, in effect, from the lottery and is -- praises the lottery, supports it argues for it, and has become its biggest fan? THOMPSON: You know, I look at the United States Constitution. It says "provide for the common defense, domestic tranquility, and general welfare," and instead of that we have lotteries. It just is antithetical to the purpose of government and to the purpose of education. We're trying to get the point across of -- go to school, study, learn, read, go to college. And yet we have a lottery that says -- oh, get rich quick, it's easy, just buy a ticket, line up and we get poor people buying tickets. We get 5 percent of the people buying 45 percent of the ticket. It's poor people and excessive gamblers buying the ticket. This is a terrible way to run education in a state, and it's a terrible value to be trying to deliver to kids when we're saying -- learn how to read, get a skill, get ahead. But no, the way to get ahead is buy a lottery ticket and get rich without working.
CAFFERTY: Well, and -- and should something be done about the way the states market these things? I mean, I grew up in Reno, Nevada, and one of the things I learned when I was a kid is what's a good bet and what's a bad bet, and the lottery is the worst bet there is.
THOMPSON: Oh, my goodness.
CAFFERTY: I'm you've got to have rocks in your head to buy a lottery ticket.
THOMPSON: Yes, were you get a 55 percent return on a -- $55 back on a $100 purchase. You put the money in a slot machine you get 95 percent back, in Nevada you do.
THOMPSON: It's a terrible bet.
CAFFERTY: But they market this thing, you know, a dollar and a dream is all it takes, or you've got to be in it to win it, and they show these pictures of people in big fancy cars and I mean...
THOMPSON: Sure. They never show you the losers. They never show you the person that spent two, three, four hundred dollars a month or a week on these tickets. It's a bad bet, and they never say the money is a get rich quick scheme for the state. They always say. "the little children are going to benefit."
THOMPSON: And it's just garbage. It's a big lie and the -- we have had lotteries in the past that are different. These lotteries are run to try to maintain government funding and to maintain government bureaucracies.
CAFFERTY: All right, Professor, we've got to leave it there.
THOMPSON: Sure enough.
CAFFERTY: I thank you for joining us. Professor William Thompson, University of Nevada, Las Vegas, Author of the book "Gambling in America."
THOMPSON: Thank you.
CAFFERTY: Coming up on IN THE MONEY as we continue, the pornography business moves out of the shadows and into the limelight with billions at stakes, find out who's profiting as porn goes from no-no to, ah, so what.
And later, take me out to the ballgame. Or maybe not. The sports business is struggling. The fans are looking the other way; they're not going to the ballparks. They're not sitting down to watch Wimbledon the way they used to. We'll look at what's behind the slump in sports.
LISOVICZ: Here's a look at the top stories of the past week in our "Money Minute."
Microsoft is thinking about issuing its first ever stock dividend. It's a move that would be worth $10 million to shareholders. Microsoft is also ending its stock options program and will now give its employees shares of restricted stock instead. But, they'll have to hold on to those shares for some years before they can sell.
The nation's number two and three tobacco companies may be joining forces. RJR is in merger talks with Brown & Williamson. The combined companies would have a market value of about $6 and a half billion in a cigarette industry facing big challenges from lawsuits and discount brands.
And the nation's credit card users are still spending with a vengeance. The government says U.S. consumer credit card debt jumped by more than $3 billion in May, and overall consumer debt rose by more than $7 billion. That puts the total consumer debt in the country at $1 and three quarter trillion. That's "t-r."
Media giant and stock of the week Viacom was also in the news this week. CEO Sumner Redstone spoke out on a couple of big issues. First he said Viacom is interested in buying Vivendi Universal's cable TV networks, but not any of its other divisions. Secondly, Redstone said Viacom would love to buy CNN if AOL Time Warner ever put it up for sale. That's a story we're particularly interested in.
CAFFERTY: Could we -- could we get a raise if they did that?
LISOVICZ: It's one of the questions we're asking. Viacom already owns CBS and several cable powerhouse networks like MTV and Comedy Central, and as this chart shows its stock price hasn't been beaten up like some other media companies we know and love. So, I guess the question to put to our colleagues is -- is Viacom a good stock buy?
CAFFERTY: I, I don't know. I -- my guess is that if they're taking a look at AOL Time Warner it's probably because the price might be sort of right given what the current stock is selling for, but that's not an area I know a whole lot about. Along with a whole long list of other subjects on this program. Viacom's efforts to expand its cable empire come as Arizona senator, John McCain is blasting the cable providers -- the cable industry overall for "gouging" the public, the senator's word. McCain citing a new FCC report that shows cable rates jumped 8.2 percent in the last year while inflation was running at something less than 2. Joining us from Washington to talk about that and a few other topics we're happy to welcome Senator John McCain to IN THE MONEY.
Senator, nice to have you with us.
SEN. JOHN MCCAIN (R), ARIZONA: Thank you.
CAFFERTY: I hate my cable company. I pay $65 a month. They keep switching my channels around. I get religion where there used to be sports. The sports goes to a scrambled place and I can't get the reception, and the bill goes up and up and up. Is "gouging" too strong a word? What do you mean by "gouging?" And what ought to be done about it?
MCCAIN: Well, you also notice that the cable companies' profits are at an all-time high, and of course, they're all blaming circumstances beyond their control. A lot of the blame is placed on ESPN. You and I watch the sports networks, Fox Sports Network and ESPN, and they're blaming the rising costs there, which they say they can't do anything about.
It just so happens that ABC owns ESPN and it goes on and on. We've got a GAO study that's been going on for many months now that's due out in September. And the general accounting office, as you well know, is highly respected and highly regarded and we're going to have hearings after that to try to sort all this out because everybody's blaming everybody else, but the person who's really getting "gouged," if I may use that word, is the cable subscriber. And so it's also, by the way -- I worry about media consolidation, which then would decrease competition as far as cable rates are concerned rather than increase them.
TULLY: But, Senator McCain, you're a Reagan republican. You believe in markets and the markets can bring down prices, control prices, solve these problems. We've got a booming satellite TV industry that is competing in a lot of markets with the cable industry. Is that enough, or do we need price controls to rein in this -- what is still in some ways a monopoly?
MCCAIN: I am a deregulator. I believe in deregulation. But, the results of these constant increases in cable rates over the past several years indicates that there is not competition. I'm willing to examine all options. I'd prefer competition. I prefer that satellite be more competitive with cable. But, so far we have not seen any tangible results as far as competition is concerned. And we've seen more and more huge consolidation within the cable industry itself. As you know, 10, 15 years ago there were literally tens, if not hundreds of local little cable companies. They've been bought up, and now there's, what, three or four mega cable companies in America. LISOVICZ: And Senator, that's the question I want to ask, because it's directly tied in. Just a few weeks ago it seemed that there was this discussion, the FCC settled it, and eased the ownership rules that would enable these mega companies to buy even more companies. But, yet now it's stalled and congress has a backlash. Can you quickly just tell us what the status is? Will that not go through? Is congress really putting up a fight against this?
MCCAIN: Congress is reflecting the deep concern that Americans have about further media consolidation, most especially in the radio industry, but overall, including cross-ownership of newspapers, television stations, cable, radio, et cetera. A little straight talk, it'll be blocked in the House because the chairman of the House Commerce Committee and others have said that a rollback of the FCC rules will not be allowed in the House of Representatives. I accept their word.
But, you haven't heard the last of this at all. 750,000 people contacted the FCC in an unprecedented move. We've never had that many people involved. So, there's deep concern out there at all ends of the political spectrum. Bill Safire in the "New York Times" to some of the more liberal media people have highlighted this issue. I don't know the answer. We need more hearings. But, I do believe as the five commissioners of the FCC testified there's too much media concentration in radio and there is real concern when you have a situation, as could exist in Los angels, where the "L.A. Times" owns three television -- major television stations, several radio stations, and a cable network.
CAFFERTY: Wow. Unbelievable. Senator, let me ask you about the situation in Iraq while we have you on the program.
CAFFERTY: This week there were several developments on that front. General Tommy Franks, who prosecuted the war, saying that American military might be over there for as long as four years. It was thought that once the major combat ended we could do the job of policing what was left with about 50,000 troops, we have almost three times that many there. The costs are breathtaking, much higher than anyone anticipated -- 150-plus million dollars per day to maintain the forces in Iraq and Afghanistan. We had that situation develop over the questionable piece of information in the State of the Union Address about efforts on behalf of Saddam Hussein to obtain uranium in Africa to reconstitute a nuclear weapons program. What's your take on all this, and what sense do you have of whether or not the public is going to get worn out with this long before perhaps, President Bush gets everything done that he'd like to?
MCCAIN: You covered a lot of topics. I will try to be very brief. One, I believe that the American people will believe and do believe the war was justified and will support the president of the United States because -- if, and because the president needs to talk straight to the American people, which I'm sure he will do, telling them that this is a long, difficult, arduous mission, but it has had enormous benefits in Iraq, in the Middle East process and the democratization in the Middle East. It's been a very good thing. The day they saw the 8- and 9-year-old boys leave that prison, most Americans felt it was justified.
Having said that, though, the American people need to be told how much it is going to cost, how long we are going to be there, and given the complete story, which they haven't been so far but are starting to get, then they will support the president.
On the issue of the statement that was made by the president in the State of the Union message, we need to find out who was responsible for that. The president doesn't want to do that, he doesn't want to say anything that's untrue. But that would not change the justification for the war. The critics of the war and the President are trying to say, well, that would have changed the whole argument for war. That's not true. The American people still support it. But we need to find out who was responsible for it and take appropriate action, even if it means removing someone, because, obviously, you don't want that to happen.
CAFFERTY: Of course. Senator, we will have to leave it there.
CAFFERTY: I appreciate you joining us very much. Thanks for being on the program. Senator John McCain, Republican of Arizona.
Still ahead on IN THE MONEY as we continue, naked ambition. The pornography business -- who writes this stuff? The pornography business hustling for a crossover from lurid to legit, as Americans spend more on X-rated material. So, find out who is taking home some of the cash.
Plus love none. Sports fans turning down tickets for top events. With prices rising and demand falling, we will look at what it will take to put the sports business back on top. Stay with us.
CAFFERTY: In a matter of a decade or two, pornography in America has gone from out of sight to in your face. Porn stars are showing up on mainstream television shows and in magazines that you wouldn't necessarily hide from your mother.
But the sexiest thing about the business of pornography might be the balance sheets. "Newsweek" magazine puts the total revenues for porn at between $5-10 billion. And a lot of that money changes hands online through credit cards with banks handling those transactions. For more about that, we are joined from Los Angeles by Seth Lubove, who is the West Coast bureau chief for "Forbes" magazine. Seth, good to have you with us.
SETH LUBOVE, WEST COAST BUREAU CHIEF, "FORBES" MAGAZINE: Good morning.
CAFFERTY: The last time I checked the Internet pornography, it's all legal and above board. Where does the controversy come here?
LUBOVE: Well, start with the fact that it is controversial, no matter which way you slice it. And, certainly, in certain parts of the country, it's even illegal.
LISOVICZ: Can you break it down, Seth, the porn industry for us and how online fits into that picture? I mean, there's the traditional XXX theaters, and then there's the magazines that have the covers on in 7-Eleven stores, and then there's your pay-per-view. How big is online?
CAFFERTY: You know a lot about these, don't you?
LISOVICZ: As a journalist, I do, Jack.
CAFFERTY: (UNINTELLIGIBLE) on the waterfront.
LISOVICZ: Seth, save me on this!
LUBOVE: You know more about it than I do. We are talking multiples of billions of dollars that, as far as the Internet portion of pornography is concerned. There's other ways that pornography is delivered, from your pay-per-view to the magazines to CDs to videos. But the Internet has come from nowhere to suddenly become one of the most significant portions of the pornography market. And the only way you can buy porn on the Internet is using your credit card.
TULLY: Seth, there's a big interaction now between the pornography industry and the mainstream financial industry. Can you describe the process through which people are billed on their credit cards and how banks fit into this process?
LUBOVE: Sure, there's no pornography on the Internet unless there's credit cards, and there's no credit cards unless there's banks, and when you go and -- present company excepted, of course -- but if you go and you pornography on the Internet and you give them your credit card, the merchant, or the pornographer, or guy in his basement, or whatever -- he takes that credit card, and he passes along your credit number to his bank. That bank then passes it along to the bank that issued the credit card to you, Chase or whatever. And within an instant, the credit card transaction is cleared.
It's the bank that works with the pornographer or the merchants in this case. These are the ones we are talking about. There's really only a handful of banks that process this business because the bank that issues your credit card -- they can't tell you what to buy with or without their card.
CAFFERTY: I was going to say, how is it different than I use my credit card to buy a case of whiskey or a carton of cigarettes gamble in Atlantic City or do something else that certain members of society might take issue with? It's really no different. It is legal.
LUBOVE: It is legal, but, again, the bank that processes the credit card, they have a choice. They don't have to necessarily enable this business, as does Visa or MasterCard itself. American express got out of this business a couple years ago because they were tired of the fraud. They were tired of all the instances where somebody says, hey, I didn't buy the porn because my wife found out about it or something like that. And so, they got out of the business.
And so, Visa and MasterCard and the handful of banks that process this stuff, they have a choice about whether or not they will handle it. And if they get out of the business, there's no porn on the Internet tomorrow.
LISOVICZ: But, of course, what's so sexy to those handful of banks, Seth, is the rate that they can charge because they charge a lot more for the merchants who pedal porn.
LUBOVE: Exactly, they know that they can charge what the market will bear, and in this instance, there's so few banks that handle this work, that they can charge twice, three times as much as what they might charge from a normal transaction from when you go and use your credit card at a grocery store or a retailer or anybody else who isn't a pornographer.
TULLY: Right. But Seth, aren't so many people reversing the charges on these pornography sites that the processing costs are getting a lot higher, and hasn't this unleashed some lawsuits that are kind of shining a light into this area?
LUBOVE: Yes, that's exactly what's going on. That's why we know more about the business now than ever. Because there are lawsuits involving what the industry calls "charge backs." A charge back happens when you call up the credit card company, and you say, "I didn't pay for this," or "This guy ripped me off," or whatever. Under normal circumstances, retailers deal with this all the time because, you know, somebody stole their credit card, or they didn't like what they bought.
The pornography industry -- for them it is absolutely a nightmare because people -- typically what happens is a guy might by some porn, and his wife finds out about it, and he says, "I'm shocked that somebody stole my credit card. I never bought this stuff." And he calls up the credit card company, and he says, "Take that off. I didn't pay for it. Take it off my credit card."
What happens, though, is the Visa or MasterCard, they say to the bank, we are going to charge you for that because you messed up, and the bank, in turn, charges the pornographer or the merchant who is selling this stuff, and it's a huge fine, and there's a limit on these things. As of now, one percent of your revenues. If you go over that in charge backs, you are out of business, no more credit cards.
CAFFERTY: One quick question. We're out of time. Is it realistic to think that the banks somehow are going to back away from this on the high moral ground that it's just wrong to do? I mean, we were just talking about they can charge people two or three times the normal rate, and if Bank A says, I am not doing this any more, and Bank B down the street says, well, you can make three times the normal rate on the transaction, maybe I will do it. I mean, it's always going to be around in that somebody is always willing to take the money.
LUBOVE: There might be; there might not be. A lot of banks have gotten out of the business. We are down to three at this point in this country and them some foreign banks handling it. But if those three decide that their reputations are at risk and that it's just not worth the headache, they will get out of the business, and that's the end of porn.
CAFFERTY: Well, let's trash the banks' reputations. What are they, those three?
LUBOVE: The three are -- one is a subsidiary of First Data, the big giant credit card processor that owns Western Union and a bunch of other financial subsidiaries, and the other are two are small-town Northern California banks. One got out of it recently, actually. Humboldt Bank sold their credit card processing business to a private bank. And the third one is called National Bank of the Redwoods, as small town as it gets, and they are processing a lot of this.
CAFFERTY: And those three -- those three operations handle all the Internet pornography credit card business in the country?
LUBOVE: Within this country, yes. For the most part, they are the big three. And if you talk to any pornographer, as I do from time to time, researching, you understand.
CAFFERTY: Of course.
LUBOVE: These three banks are, like, you know, Chase Manhattan or JP Morgan to the porn guys.
LISOVICZ: The big three takes on new meaning.
CAFFERTY: Thank you, Seth. We have to leave it there. Seth Lubove, who is the West Coast bureau chief, "Forbes" magazine. Thanks for being with us.
LUBOVE: Thank you.
CAFFERTY: Appreciate it. Coming up next on IN THE MONEY, we will clean this up a little. The sports business strikes out. We will look at why a lot of fans have got from rah rah to blah blah. They just don't care. They are not showing up at the ballparks or in front of the TV sets.
And what would you talk about with the most successful investor of all time. Someone just shelled out a quarter of a million dollars to sit down to lunch with world renowned investor Warren Buffett. We will have that story coming up.
You are watching IN THE MONEY. We will be back.
CAFFERTY: Attendance at major sporting events way down this year, and people aren't watching too much television either. Joining us now to talk about some of the reason behind the falloff in interest in sporting events, "Wall Street Journal" reporter Sam Walker. Sam, nice to see you.
SAM WALKER, REPORTER, "THE WALL STREET JOURNAL": Good to see you, Jack.
CAFFERTY: I was reading the other day about the Wimbledon, the tennis tournament. TV ratings the worst they have had in a lot of years. Some of the baseball parks are not drawing like they used to. What's going on?
WALKER: Well, you know, it's almost like a foggy highway. One car has crashed, and another one keeps crashing behind it. It is amazing. Wimbledon, as you said, is latest casualty, down about 13 percent, both the men's and women's side. By my count, there are about 20 sporting events so far this year that have seen some kind of a decline. It's pretty substantial. I mean, as much as 36 percent for the NBA finals, 39 percent for the French Open women's finals.
You are also seeing just less buzz for events. The heavyweight champion fight with Lennox Lewis didn't even sell out.
CAFFERTY: Yes, but who was he fighting?
WALKER: Well, yes, that's true. It was Klitschko. But still, it was the heavyweight championship of the world.
LISOVICZ: But I mean, that's the point, isn't it? It's all about marquee players. I mean, I watched Wimbledon, and I turned it off because the Williams sisters don't play well against each other. Agassi was out. Who won? I forget. I mean, I'm not familiar with them. Funny Cide didn't win the Triple Crown. The New Jersey Nets, as much as I love them, don't appeal to a lot of other basketball fans who just, you know, considered a new franchise. Isn't it that's what it's all about? That people draw to their stars, and there just aren't any stars that are doing well right now?
WALKER: I think that's true. You know, the best argument I have heard is that in a way, we have been spoiled over the last few years. We've had so many signature performers, like Tiger Woods, Lance Armstrong, Mike Tyson, the Williams sisters. I mean, we have forgotten sort of how phenomenal they all are individually. And so, what we are getting now -- also networks now are very -- have a lot more invested in sports and sports rights, and it's more important for them to drive ratings.
So what we are seeing is a combination of these two factors and that networks are really -- they are not hyping the event, they are hyping individual performer. And this year, as you said, there have been so many instances where either these performers have not been in contention, or as you mentioned, Annika Sorenstam, she didn't make the cut at the Colonial. It was quite a disappointment. Funny Side didn't make the Triple Crown.
So, it's a series of flops and disappointments, and it's the thing with Klitschko. If you are thinking about a boxing fight...
LISOVICZ: Oh, yes, Klitschko.
WALKER: Right. Klitschko. That guy. But I mean, if you are thinking about a heavyweight championship fight, and you look at the marquee, and there's no Tyson, and it's some guy named Klitschko, I mean...
TULLY: But there are so many more choices now because I scroll through on my satellite TV system, and you can just get all these local games that you couldn't access before. So is there kind of overcapacity? Or are we drowning in options now? And is that taking away from some of the more -- the events that used to have bigger viewership?
WALKER: Absolutely. I think that's a big part of it. And anyone will tell you that fragmentation is really one of the problems with sports and with television right now. But beyond that, there's also this element of -- that I think -- and this is a crazy theory of mine, but I think television itself has change in terms of what's on the tube. It used to be that sports was the only reality television you had.
CAFFERTY: That's a good point.
WALKER. And you have every show is reality based, and I think a lot of fans can get their competition from "American Idol." They don't need to watch a lousy basketball game to get their fix.
LISOVICZ: But Sam, aren't people disappointed with their heroes, too? I mean, Sammy Sosa was hitting with a cork in the bat. I love Sammy Sosa, but -- and yet, you hear like for the farm teams, attendance is way up. People are disappointed with these prima donnas who are making a lot of money and not nice to their fans and let us down all too often.
WALKER: That's true. I agree 100 percent, and I think that's been -- there's been a sort of a cumulative effect there, and there have also been some scandals and disappointments as well this year. Sammy Sosa is a great example, But we also had the controversy over the Masters, It took some fun out of that. You know, we have these college coaches gone wild.
CAFFERTY: What about LeBron James? How much pressure is on this kid to do for the NBA what Michael Jordan was able to do? Or Kobe Bryant or, you know, somebody like that?
WALKER: I think the pressure is incredibly fantastic, unbelievable on him. The funny thing is -- I was thinking about this this morning. The NBA, in a way -- I think the worst thing that ever happened to it is the popularity of shoes and the fact that young kids and teenage kids really buy a lot of tennis shoes because if you look at LeBron James and his compensation, I mean, if he is filling out a tax return, he's a Nike employee. He's not -- he's making so much more money.
CAFFERTY: He doesn't work for the NBA. That's right.
WALKER: So, I don't know where his priorities are.
CAFFERTY: Sam, it's good to have you with us. Thank you. Drop it again. We'll kick this around some more. Sam Walker is a very distinguished sports columnist for "The Wall Street Journal." We appreciate having you on.
Just ahead as we continue, how much would you pay to sit down for lunch with the greatest investor in all the world? That man, the Oracle of Omaha. A quarter of a million dollars to have a burger and fries with Warren Buffett. Stick around. That's coming up.
LISOVICZ: Andy is off this week, but he filed yet another educational and entertaining edition of "Fortune Fundamentals." Here he is.
ANDY SERWER, EDITOR-IN-CHIEF, "FORTUNE" MAGAZINE: A lot of times people will come up to me and say, hey, I'm buying a $5 stock, it's really cheap. And I say, cheap relative to what?
It's not just a low stock price that matters. You have to compare that number to something. What are you getting for $5. Well, the measure people most often use is called the price earnings ratio or PE ratio, which is the stock price relative to a company's earnings.
To give you an example, let's say the stock of the fictitious Banana Company trades for $30. Now, Banana is expected to earn $3 a share this year. You divide the $3 by the $3 to give you a PE ratio of 10. Let's say the Cherry Company is also selling for $30, but Cherry is only going to earn $2 a share. It has PE ratio of 15, the 30 divided by 2. Now, both stock prices are the same, but Cherry, the one with the PE ratio of 15, is a more expensive stock because you are paying more for less earnings than with Banana. It doesn't mean Cherry is a better company than Banana. It just means that it's stock is more expensive, and should understand that.
CAFFERTY: A bidder on eBay is apparently very anxious to get some tips from the man known as the world's best investment expert. The still unknown bidder is paying $250,000 to sit down and have lunch with Warren Buffett. The Oracle of Omaha auctioned off lunch with him in New York City. It is for a charity called "Glide," which serves the poor, hungry, and homeless in San Francisco. So, if you have a quarter of a million dollars to pay for just one lunch, you probably don't need to get too much investment advice anyway. You are probably doing all right.
You have a Warren Buffett story, don't you, Shawn?
TULLY: Well, first of all, he likes burgers, hot dogs, meat and potatoes, steakhouses in Omaha.
LISOVICZ: That's part of his secret.
TULLY: That's part of his mystique, yes. And he hates companies that issue lots of stock options, so he's probably going to be telling this group if they are options abusers, to stay away.
CAFFERTY: All right. Time to check your responses to our e-mail question of the week. We asked what does it mean to be a patriotic American? Vicki from North Carolina wrote this, "It means to take the responsibility for fixing things and stop assuming the government or someone else will do it."
Pearl wrote to us, "A patriot is someone not afraid to stand up and speak out against corruption by a government, despite threats of retaliation. I think the true patriots today are those Americans who demonstrated against the war in Iraq."
But another viewer named Darren may have put it best when he simply said, "Being a patriot today means you must sue somebody." That weird guy.
It's time now for our e-mail question of the week, which you can weigh in over the course of the next week, and then, of course, we will pick two or three of your responses to read next weekend. Do you think U.S. corporations should be reparations to the descendants of slaves? You can send your answers or any other comments you have on the program to firstname.lastname@example.org.
That's it for this edition of IN THE MONEY. My thanks to our regulars, Susan Lisovicz of CNN Financial News, and Shawn Tully, a good, Irish lad who labors over there at "Fortune" magazine. Tune in next week, 1:00 Eastern time on Saturday, 3:00 on Sunday. Or if you want a dose of this kind of fun and excitement all week long, you can watch "AMERICAN MORNING" at 7:00 Eastern time from here in New York. Thank you. See you next time around.
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