Predictions for 2003
by Susan Eldred, John Parker & Norman Birnbach

1. Economy: Recovery? Depends on whom you ask

• Despite slower economic growth, which could lead to deflation, and the presence of so many former Ford administration staffers in the current administration, we won't see "WDN" buttons. But President Bush's new economic team faces a tough challenge: to jump-start the economy before the 2004 election. John W. Snow, the nominee for Treasury secretary (replacing Paul O'Neill), will be confirmed. But he and Stephen Friedman, the President's new senior economic advisor (replacing Lawrence Lindsey), will have to finesse Bush's proposed freeze across non-military spending and his tax-cutting economic package (which could cost up to $300 billion over 10 years). Meanwhile the deficit will continue to increase in order to pay for Homeland Security costs, a military build-up and possible Gulf War II (one in which U.S. allies will not contribute financially, as they did in GWI).
• As new SEC Chairman, William H. Donaldson could have a long honeymoon period with the media and investors as the anti-Harvey Pitt. It will help that the president has proposed a bigger budget and more resources for the SEC. But Donaldson will have to score points early on to prove that he is not a caretaker, but someone who will lead the SEC in regaining investors' confidence in the markets. His first move should be to name a strong, experienced, independent, credible and reform-minded chair of the Public Company Accounting Oversight Board. He'll have to move quickly over a range of initiatives to restore confidence, including establishing new rules to:
• remove analysts' conflicts of interests
• improve corporate governance
• change Wall Street firms' method of allocating IPO shares
• protect investors around electronic exchanges
• ensure consistency in expensing stock options.
• After careful study, the Public Company Accounting Oversight Board, mandated by the Sarbanes-Oxley Act, will find that many points in Sarbanes-Oxley put an unfair and oppressive burden on small public companies and on foreign-based U.S. listed companies – for whom the Act goes against local custom and laws. The bill will need to be overhauled to keep small companies competitive and foreign companies on U.S. exchanges. (Recently Porsche decided against listing in the U.S., citing Sarbanes-Oxley as the main factor in its decision.) The one part of Sarbanes-Oxley that won't get changed: the Public Company Accounting Oversight Board.
• SEC wins funding to increase enforcement staff, but gets at least 30% less than it requested.
• The National Accounting Standards Board adopts new guidelines for financial reporting, substantially changing the accepted definition of "earnings."
• At least one major accounting firm declares bankruptcy in the wake of scandals involving its major clients.
• By June 1, the Dow stabilizes at or around 9,000 points; NASDAQ hovers between 1,500 and 1,600 points.
• Wave of acquisitions as major IT vendors scoop up companies involved in document management, portal technologies, and application-development software. Following this: New wave of software-development layoffs, offset by hiring in the CRM sector.
• Residential real-estate market rebounds from March/April slump; median housing prices hit new highs in Northeast, Southwest.
• Many U.S. companies will continue to pare their payroll. Congress will have to look at extending unemployment benefits as a proven economic tool to help stimulate the economy.
• Most states will raise taxes and cut services. New York, Massachusetts, California and every other state are hemorrhaging red ink, and desperately need an infusion of revenues. Legislatures will certainly raise taxes. Another factor likely to impede business growth is that states will refrain from any monetary deals favorable to attracting new industry or business expansion.
• "Flat-tax" and other proposals for reforming the federal tax codes emerge as major issue for the 2004 Presidential campaign.

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2. War (and rumors thereof): What is it good for?

• Weapons inspection in Iraq proves inconclusive. The Bush administration initiates targeted bombing of suspected weapons sites, but holds off invasion.
• Panel investigating 9/11 prevention finds Clinton administration to blame.
• Osama Bin Laden remains at large, and will continue to appear on al-Jazeera, via audio tape, several times in 2003 – but without as much debate as to the authenticity of the tape as was the case in 2001; he is unlikely to appear on videotape, however.
• The bill for the war on terrorism comes due: Defense prospers but other economic sectors lobby for government protection, economic incentives. American manufacturing should get a boost, especially in the defense sector. The industry marches into 2003 riding several consecutive months of increased factory orders, and should there be a war with Iraq, manufacturers will get a bite of the estimated $14B tab. This, coupled with new Homeland Security measures, should strengthen the outlook for production.
• Antiglobalization (i.e., Anti-American) sentiments increase around the globe. Expect more protests in unfriendly parts of the world, in partly US-aligned countries (such as some of the EU), and even in closely aligned countries (U.K.). This will hurt well known multinational U.S.-based companies, from McDonald's and Starbucks to Coke and others. Tony Blair and his pro-U.S. stance will come under attack as the U.K.'s economy continues to falter.
• North Korea will continue its nuclear saber rattling in an attempt to blackmail Japan, China and the U.S. into providing additional funds and resources for the financially-strapped dictatorship. To get Japan and China on its side in targeting Iraq, the Bush administration will follow their lead with regard to North Korea.

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3. Security: Insecurity Complex

• Everybody knows my name: Expect Congress to pass sweeping legislation aimed at protecting personal privacy even while new Homeland Security measures are criticized for violating the rights of individual citizens. New laws will address everything from Internet security to those annoying telemarketing phone calls that come at the dinner hour to anti-spamming legislation. (The anti-spamming legislation, no matter how well-conceived or well-intended, will not be 100-percent successful.) The recent outbreak of identity thefts and the amalgamation of personal information on large, interconnected databases have made consumers nervous and have galvanized civil liberties organizations, the insurance industry and financial institutions to pressure the government to take action.
• The Transportation Security Administration will continue to miss deadlines, but will continue to score positive marks with airlines, passengers and Congress as the agency establishes new procedures, installs new security technologies and trains new federalized security workers and air marshals.
• Cyber Security is the watchword: As part of the emphasis on national security, there will be increased focus on warding off cyber attacks. Government agencies and contractors will be directed to shore up their firewalls and other security precautions, such as taking extraordinary care to limit the distribution of passwords. New government cyber security regulations might also apply to financial services firms and other corporations, if hacking their systems would result in disruption to the economy or in endangering citizens.
• House and Senate debate new "right to (digital) privacy" legislation.

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4. What Healthcare? Calling Dr. Kildare!

• Health insurance and Social Security move up on the legislative agenda as boomers and Gen X-ers get older, the economy becomes less predictable, and new health threats emerge.
• Even while the U.S. government faces the budget-busting costs of military activities and Homeland Security programs, it's a safe bet that the current administration will advance some concrete proposals to solve the nation's health care dilemma. The current system is loathed by patients, health care providers, insurance companies and employers alike. While the overall quality of care declines, some doctors are leaving their practices due to spiraling malpractice insurance premiums. At the same time, more medical facilities in border states will close their doors because they are overwhelmed by illegal immigrants seeking treatment but unable to pay for it. As a result, the federal government is expected to introduce pilot programs featuring new types of medical facilities and payment schemes.
• Because recent changes in the health care system have somewhat ruptured the traditional doctor-patient relationship, increasingly, patients will turn to outside sources for medical advice. These non-traditional sources will include Web sites, where patients can access information provided by others with similar maladies, local and national news broadcasts, which almost daily carry medical news features, and pharmaceutical advertising, which blankets the broadcast and print media with solutions for everything from arthritis to depression to impotence.
• Frequently, consumers are introduced to these pharmaceutical wonders through paid celebrity endorsements. In addition, celebrities often are used to create "awareness" programs for certain diseases and to promote the use of increased public funding to find cures for these illnesses. However, the media will continue to be skeptical about celebrity awareness programs for diseases and medical conditions and for endorsements of products that can "cure" those afflicted. In 2002, ABC and CNN issued policies about identifying celebrities as paid endorsers when they talk about a condition/drug during their appearances. Other media will take their lead, with debate strong on both sides. One camp argues that it is misleading not to cite a celebrity's paid connection to a company; the other argues that celebrities are often more effective than doctors to generate attention for these conditions, noting that NBC's Katie Couric has raised millions for colon research and screening, saving untold number of lives. This debate could significantly impact marketing direct-to-consumer (DTC) products across broadcast, print and online media – as well as consumer perception of doctors (and, perhaps, medical associations) if they, too, must disclose relationships with health care companies. The FDA has not issued any rulings, and is not likely to do so, since the concerns seem to be generated by the media, not the consumer.
• More procedures will be available and conducted away from traditional hospital settings. Already, hospitals have been branching out with new locations to be closer to their patients. But now, the malls will become important locations for medical diagnoses and fast, simple procedures. Following LASIK surgery and medical scans, which are now widely available at malls, we can expect to see a rush of quick, non-invasive procedures that involve a significant emotional upside and little pain and quick recovery times. The reason: even for issues that are not medically necessary, patients have already demonstrated they are willing to pay for treatment – even when most of these services fall outside insurance coverage. At the same time, because these procedures are not covered, expect to see ads and Web sites touting "affordable fees."
• The Department of Health and Human Services, Department of Homeland Security, FEMA, the Red Cross and the health care industry will have to contend with threats of bioterrorism. The anthrax scare in 2002 demonstrated how ill prepared government agencies and the industry are in dealing with a biochemical attack. Concerns about smallpox vaccination policies will heat up if war occurs.

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5. Telecom: Can no longer say, "We're the phone company. We don't care, we don't have to."

• The Telecom sector will continue its downward spiral in 2003, with recovery not likely until 2004.
• The FCC, Congress will study ways to basically overturn the Telecommunications Act of 1996. Bipartisan groups of legislators will voice support for embattled group of Baby Bells (Verizon, BellSouth, SBC and Qwest). But none of the plans or potential legislation will actually benefit customers, who aren't complaining about the Telecom Act. The Bells are spending a lot of time, and resources lobbying to overturn the Telecom Act; if successful, expect prices to increase.
• Qwest could teeter on the edge of bankruptcy while telcos that emerge out of Chapter 11 will have shed their debt but not their unsustainable business models, signaling more trouble. Wireless network services emerge as the only savior of profitability since long distance is basically a commodity. But expect consolidation among the six national wireless players. T-Mobile (formerly VoiceStream) will continue to be the focus of rumors that it will be acquired (most likely by AT&T).
• European carriers have the infrastructure but lack the applications; major EU battle rages over EMEA-wide technical standards, privacy rules.
• Short Messaging Service (SMS), which is a big cellphone application in Asia and Europe will still not take off in the US. And neither will mobile commerce (m-Commerce), which promises transactions (i.e., at soda machines) paid for by cellphones or PDAs.
• Prices for DSL and wireless data services, which cost $600 annually (or more than most PDAs), will not drop, which breaks the standard technology model. This will have an impact on DSL and wireless acceptance, which will continue to be too expensive for the majority of Americans.

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6. Travel & Transportation: As they say in Maine, "ya can't get there from here"

• The travel industry, particularly the airlines, will continue to be hit hard by the economic slump. Following on the heels of United's actions, other airlines might contemplate bankruptcy, and the House and Senate will debate bailing out the carriers, as well as a restructuring of the entire industry. Should the government extend loans to save U.S. carriers, the EU will complain about unfair subsidies and a Republican government that does not appear to believe in a free market. It will be a repeat of the charges hurled at the administration after subsidies were approved for the steel and agricultural industries.
• Carriers will have to reassure passengers that their flights will continue as scheduled – and they won't always use advertising to do so. (Perceived as expensive, advertising campaigns will be cut and replaced by increases in public relations campaigns. United has already said this is its plan.) And carriers will continue to charge for ticket changes, raise prices, eliminate services, and charge for old-fashioned paper tickets (vs. offering discounts on e-tickets); they are also likely to increase requirements for frequent flyer programs. If other airlines contemplate bankruptcy, expect industry representatives and Congress to study restructuring proposals for the nation's carriers, including that the government pick up all security-related expenses.
• Cruise lines will have to reassure passengers their ships are clean, in the wake of passengers on several ships (across several cruise operators) who were stricken by the Norwalk virus.
• In a time of uncertainty, travel agents may beat back inroads made by online travel sites. Travelers will still be price conscious but may feel more comfortable being able to have an agent intercede with the airline/cruise line. The American Society of Travel Agents will continue to list tips for its members and passengers about people flying on United "or any airline that has declared Chapter 11 bankruptcy.
• The travel and tourism industry will experience a decline in tourist travel, but the business travel segment should remain flat, unless, of course, war breaks out with Iraq. If this happens, expect the business travel segment to suffer the same fate as that of tourist travel.
• Freight companies will delay as long as possible before developing new procedures to safeguard the more than 10 percent of freight currently screened. The new procedures, they will rightly claim, will increase the cost and time involved, whether freight is transported by truck, rail or sea – an additional drag on the economy.

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7. Media & Entertainment: The media are the message – and the end of reality as we know it (reality programming)

• The lines between news, entertainment and advertising get even fuzzier:
  • The networks' morning news programs will increasingly resemble variety shows, featuring interviews, performances and clips by major stars and comeback-staging celebrities. (A recent morning featured Whitney Houston singing several songs on "Good Morning America" while Mariah Carey sang on "The Today Show.")
    • If war occurs, the networks will cover the initial days with wall-to-wall coverage. But they will then look at counter-programming to offset the war news with lighter fare. As a recent example, New York City is facing its most serious budget crisis since 1974, with across-the-board deep spending cuts, a massive increase in property taxes, significant private sector layoffs, especially on Wall St., (which will have a significant trickle-down impact on the economy). Yet, the recent covers of New York Magazine, which once would have covered this bad news in depth, have been: "The New Rules of Power Dressing" and "Food Fight: Meat vs. Carbs."
  • Time elapsed between major news event and network made-for-TV movie about the event shrinks to 3-4 weeks. "Special reports" on sensational news items, sponsored by corporate advertisers, proliferate on the networks. Promotion of upcoming special reports becomes a staple feature of evening news broadcasts.
  • Ability to poll viewers and readers in near real time accelerates the move toward personalized news delivery and creates advertising opportunities for companies targeting specific audiences
• IT trade publications move wholesale to the Web, increasingly syndicating research, product demos, and technology Webinars. Only a handful of publications remain in print by July 1.
• The lines between corporate entities will get even fuzzier, too:
  • The trend toward consolidation in broadcast media will continue, as evidenced by the merger talks between ABC and CNN. (The merger has the support of FCC Chairman Michael Powell and his chief supporter, Sen. John McCain.) Look for consumer advocates to complain about consolidation, pointing out that we will soon get our newspapers, TV and radio news, entertainment and cable/DSL from a handful of corporate entities: AOL Time Warner, News Corp (Fox), Disney (ABC), General Electric (NBC), CBS, AT&T, Tribune Co., Clear Channel, etc.
  • Following the sale of Bravo Networks in 2002, other cable networks will be put on the block, as some companies seek to reduce debts and others (Viacom, Liberty Media) look to boost market share through acquisitions. Previously some of these networks would have been merged (i.e. Fox Family Channel was combined with Disney to form the ABCFamily Channel), but digital cable allows more channels to survive.
  • Print-Cable/TV alliances continue: Forbes reporters appear on Fox; Wall Street Journal reporters appear on CNBC; New York Times continues to co-produce stories with ABC. Increasingly, top reporters at top print news organizations are required to be ready for their close-ups.
  • Meanwhile, online publications are still struggling to find a way to be profitable. As advertising revenues stay flat or decline, electronic magazines and newspapers increasingly will move their content into a "pay per view" category, offering basic information for free but charging for "premium" content. Plus, even access to the free information will increasingly require the reader to "subscribe" to the publication, and while the subscription doesn't always require payment, it does require the user to accept cookies, which results in more of those pop-up ads that temporarily, but annoyingly, obscure the content on the screen.
• Conservative vs. liberal media: Conservative pundits, both on cable and radio, will continue to win the ratings game against their liberal opponents by playing the political "outsider," even while Republicans are in charge of the White House, Senate and House. Liberals may need to find a sane and stable Howard Beale-type to get "mad as hell, and I'm not going to take it," and find the issues that resonate with the public.
• The American media/entertainment hegemony is declining. American television shows like "Dallas" and "Baywatch" once ruled the airwaves. Several factors have played a role here. Non-state-owned channels have had time to develop their own programming while fees for licensing American programming have increased. And anti-globalization/anti-American sentiments have increased even in Western countries. This provides a great opportunity for non-U.S. media.
• Copyright laws and file-sharing continue to be major issues for global media players, who will lobby each regulatory body to standardize laws in the interest of a global economy. Big companies will claim that "piracy" will ultimately hurt consumers because media companies will no longer be able to afford to be in business.
• Al-Jazeera, the Qatar-based 24-hour Arabic news channel, will continue to be an important player. Western critics may deplore Al-Jazeera's standard of journalism, but its coverage is probably the least censored in the Arab world, and is doubtless the only news outlet non-Arabs know by name. If there is a U.S. war against Iraq, Al-Jazeera will become more significant.
• Business publications were among the first to be hit hard by the advertising slump and the global recession. They will be the last to recover. The media relations implication is that with fewer ad pages, these magazines will have few editorial pages – making generating coverage even more challenging.
• The end of reality as we know it: Reality programs will tank in the March sweeps period. A few will survive, including "Survivor" and another "American Idol," but borrowing from Harry Potter, Lord of the Rings, Spiderman, etc., Hollywood and network TV will replace reality programming with fantasy. In times of uncertainty, people will want distractions; they will want larger than life stories and happier endings.
  • This holds significant implications for companies like Endemol, the Dutch-based production company that basically "owns" reality TV, and is the most prolific pan-European TV producing, having produced 15,000 hours of programming in 2001. Reality TV is cheap to produce, but Endemol will have to come up with event-type programs or consider buying its own distribution channel, which opens the company to new risks and costs structures.
• Today's boy bands and their single-girl equivalents will stop selling as many records as they attempt new "serious" music in a quixotic attempt at credibility. (It's hard to sing to a teen audience when you're approaching AARP membership). The current batch will stop appearing in so many commercials, but will keep on appearing on countless music-industry award programs and try to launch film careers. The worst news: they will be replaced by other groups selling to the same lucrative pre-teen audience.

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8. Technology, Consumer Services and Personal Technology: 3-letter acronyms rule!

• Communications technologies will continue to converge, linking email and voice mail, expanding and improving GPS data delivery and merging PC and television functions. However, most of the focus in the technology arena during 2003 will center on security. Efforts will grow exponentially in securing databases, in screening baggage and packages, in interconnecting databases to identify potential terrorists and in monitoring water, chemical and electrical plants.
• Some of 2003's hot new consumer trends:
  • Apartment-sized home theaters, featuring flat-panel screens and combinations of DVD, Internet (MP3), PVR (personal video recorders like TiVo) and cable TV service.
  • Smart phones that combine voice, text messaging, and PDA-like screens and applications will continue to sell – despite the fact that wireless data access costs another $600 annually on top of voice access.
  • Vehicle communication and navigation systems that permit hands-free telecomputing/telecommuting.
  • Personal security products, including GPS-based location monitoring devices to be worn by adults as well as by children.
• Wi-Fi, a wireless Internet access standard (also known as 802.11) will overtake take off in popularity and media hype in 2003, as restaurants (like Starbucks) and airports, etc. install them in thousands of locations. Major players like AT&T, IBM and Intel have jumped on the bandwagon. Wi-Fi is cheaper to roll-out than some competing technologies, but no one will make money on it. Service providers won't be able to charge much for it, not when there are many "hotspots" available for free. Wi-Fi providers could be in the same position as high-speed Internet providers: offer a service that's too expensive for 80 percent of the population. Only the hardware manufacturers could make some money. But prices of Wi-Fi chips and networking equipment are plummeting even as sales are soaring.

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9. Environment: The forest for the trees

• House of Representatives will debate "Anti-SUV" legislation concerning auto safety and fuel-consumption.
• Following their successes in California, environmental organizations will gain ground at the state level.
• The Bush administration will re-think its environmental policies, acknowledging a major role in generating greenhouse gases and conceding that global warming is real. Major factors at work:
  • Quid-pro-quo for other nations' tacit or explicit support for the Bush administration's military action against Iraq.
  • Escalating damage from the massive oil spill off the Spanish coast increases pressure for government support of energy alternatives.

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10. Education & Nonprofit: Good news & bad

• With unemployment still at (relatively) high levels, many people are considering going back to school. Non-traditional students have been the fastest-growing sector – and that trend will only continue through at least 2005.
• With a flat economy, a possible war, a significant hit to 401(k)s, and the prospect of war, donations to charities will drop. Nonprofit institutions will need to be more aggressive in marketing their successes and in being accountable for failures to an increasingly demanding group of givers. This has been true at the million-dollar-level of benefactors, but it will affect the middle class too.

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11. Food: Food fight!

• The battle of carbs vs. non-carbs continue. Each side will tout diets that work, people who have lost weight. It almost doesn't matter because there is no silver bullet: exercise and moderation will still be the most reliable and safe ways to manage weight.
• Obesity will continue to be an important health issue but the courts will dismiss suits against McDonald's, Burger King and other fast food chains.
• Consumers will continue to want comfort foods, as they have for the past decade. And they will continue to super-size their portions. They will continue to want easy-to-prepare meals, many of which they can buy at supermarkets. And while more concerned about their weight, they will want their diet foods to taste like non-diet foods.

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Tell us what you think. Did we get it right? Are we way off base? Drop us a note at birnbach@birnbachcom.com.