The headquarters oligopsony: playing hardball
One of the funders of the proposed acquisition of Disney by Comcast is not a bank or a wealthy private investor. It is, according to an article in the Philadelphia Inquirer, none other than the taxpayers of Philadelphia and Pennsylvania where Comcast headquarters is located. Columnist Andrew Cassel ("If Comcast can afford Disney, it can pay state, local taxes," 2/18/2004) explains the sweetheart deal Comcast is getting from government to build its headquarters building in downtown Philly.
The Pennsylvania government has proposed to declare a single block in one of the most desirable areas of the city an "opportunity zone." While the idea of opportunity zones has traditionally been used to encourage business and create jobs in depressed city areas, the block to be designated in Philadelphia is decidedly not depressed. It is, in fact, down the street from the exclusive Four Seasons hotel and is surrounded by law offices and banks. In fact, it is one of the few areas in Philadelphia that is definitely not blighted.
Designating the area an opportunity zone will allow the company to avoid paying state and local business taxes for up to 15 years. Of course, the company will spend money on building a new skyscraper in the city, and estimates that 1,000 or more jobs will be added to the city's payrolls. It's worth it, say state officials, to back a winner.
However, as the article points out, that's a wager on the future of a single company. Pennsylvania, like other states, has rolled the dice before, and has lost big. Pennsylvania, Cassel points out, spent hundreds of millions to attract Norwegian shipbuilder Kvaerner to the old Philadelphia naval yard, only to find out that Kvaerner later wanted to get out of the shipbuilding industry, The hospital chain Tenet Healthcare received major incentives to take over the Medical College of Pennsylvania and now has plans to shut it down. The city invested a lot in clearing land for an urban amusement park called "DisneyQuest", only to see Disney back out to leave a big hole in the ground a few blocks away form the Liberty Bell. And so on, and so on. (And we're not even talking about sports stadiums).
Over a billion taxpayer dollars have gone into a series of development projects that have failed to reap the expected awards. Those hundreds of millions have fallen into lots of pockets. And now when the city and state are having budget problems, when essential infrastructure maintenance work sits undone, and when regular businesses and ordinary taxpayers get no relief, the state and city are still pursuing these phantoms hoping they'll get it right this time.
As Cassel points out, the chances aren't good. "Corporations come and go. Business conditions change. Markets grow and shrink unpredictably. Today's blue-chip is tomorrow's corporate has-been."
The problem of course, that losing Comcast, now located in the city, would be a dire blow to Philadelphia, which has few enough major corporate headquarters. They can hold the city at ransom, as other corporate leaders and sports owners have, by threatening to move out the suburbs, across the river to New Jersey, or to some Southern state with low cost of living and no labor issues.
That's because big corporations (and sports franchises) are oligopsonies. There are only a limited number of Fortune 500 headquarters on the market, and a large number of cities, counties, and states bidding to have them locate their headquarters in their locales. And with the Internet, headquarters are less tied than ever to any specific location. Even Boeing can move its headquarters overnight to Chicago and leave Seattle in the lurch.
These "consumers of location" can be very picky and make demands of the suppliers, just like beef producers hold all the aces when they negotiate with the cattle ranches. And that's why states and city are willing to make risky bets on gaining a long term advantage in return for a major shortfall in tax revenue.
