SPRING 2015 www.theifj.com
“The link between xenophobia and economic troubles in France stretches as far back as the 1800s.”
“In the long term, Musk and Branson share similar aspirations: to colonize other planets.”
“Apple’s and Google’s cultures are drastically different, and yet both have made for very successful companies.”
THE TERROR OF THE FRENCH ECONOMY
COMPARING APPLES AND ORANGES
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Intercollegiate Finance Journal
TABLE OF CONTENTS
Markets 4 Europe’s Bogeyman Story Syriza’s Surprisingly Reasonable Plan to Restructure Greece’s Debt Christopher Dederick, Omar Ben Halim, and Nikolaos Melachrinos
6 Sink, Swim, or Float? Uncapping the Swiss Franc Sarah Park
7 New Wolves on Wall Street Fama and French Challenge the Alpha Michael Golz
8 The Hong Kong-Shanghai Connect A Step Forward for China’s Capital Markets Carter Johnson
9 Seeing Green Why Companies Are Paying More Attention to the Environment Matthew Janigian
Political Economy 12 Broken BRICs A Shifting Center of Gravity Among the Emerging Market Giants
26 Extraterrestrial Capital What Does It Take to Finance Frontiers of the Human Imagination?
14 Declining Fortunes Served with a Side of Texas Tea How Falling Oil Prices Are Threatening America’s Boomtowns
28 Quant Geeks on Wall Street How Quant Funds Are Dominating the Market
15 Money Compass How the Financing of US Campaigns has Distorted Politics Lindsey Currier
16 The Terror of the French Economy Moving Past Charlie Hebdo Nikhil Kumar
17 Trimming the Family Tree India’s Sterilization Policy Sarah Park
10 Choc-o-nomics When Chocolate Turns Sour
The IFJ Online www.theifj.com The Blog Shortselling the Market Scott Theer What’s Mine Is Yours: Trade, Trust, and the Sharing Economy Edward Li A Frank Move: The New Ascendancy of Central Banks in the Post-Crisis Era Carter Johnson Gravity’s Interest Rate: Europe’s Dive Below Zero Jonah Goldberg It’s An Alpha Dog Eat Dog World Kerry Yan Follow Us Facebook: facebook.com/theifj1 Twitter: @the_ifj
18 Brick-and-Mortar No More? Why the Physical Store Still Matters Rachel Binder
20 Fluctuation Fad Why Airline Prices Are so Unstable Angela Marie Teng
21 The Price is Right An Interview with Airline Pricing Strategist Eytan Kurshan Rachel Binder
22 Not so Fast How French Fries Are Gobbling up Your Wallet Tiffany Chen
29 Need for Speed Making the Case for Net Neutrality Tom Pesce
30 Up-Tempo Trading How You Can Save Your Favorite Band Liz Studlick
31 Changing the Beat of the Music Industry Can Groovebug Transform the Way You Listen to Music? Andrew Yin
32 Hack@Brown A Different Way to Hack Kerry Yan
Careers 36 Boys’ Club 2.0 Silicon Valley’s Quest for Inclusive Company Culture John Palmer
38 University Summer Housing Finding the Right Home for Your Summer in New York City Mariana Carvalho
40 So You Want to Run the Yankees? How the Rise of Sports Analytics May Get You There Nikhil Patel
41 Paying $50,000 to Expand Your LinkedIn What You’re Really Paying for by Attending Business School FA ST
11 Scary Profits for Scary Movies The Success of Low-Budget Horror Films
N pg OT 22 SO
Startups & Technology
42 Apples and Oranges Comparing the Cultures of Silicon Valley’s Most Prized Companies Adrija Darsha
SINK, SWIM, OR FLOAT? Uncapping the Swiss Franc, Sarah Park 6
Europe’s Bogeyman Story SYRIZA’S SURPRISINGLY REASONABLE PLAN TO RESTRUCTURE GREECE’S DEBT by Christopher Dederick, Omar Ben Halim, and Nikolaos Melachrinos
Varoufakis and Prime Minister Alexis Tsipras are looking less and less like the bogeymen they’ve been made out to be.
ver the past month the press has been abuzz with panicked speculation over Greece’s future under Syriza, its newly elected leftist government. A loose coalition of left-wing groups united in opposition to Greece’s current bailout framework, Syriza runs the gamut from moderate leftists to Marxist radicals. No wonder then that Syriza’s election has caused so much anxiety among Greece’s creditors and the financial press. But Syriza has surprised even its most ardent critics. Capital markets rallied when Greek Finance Minister Yanis Varoufakis unveiled a reasonable plan to restructure Greece’s debt. The Eurozone’s creditor countries, to whom Greece owes the bulk of its official debt, responded with a regrettable rigidity that surprised few. Syriza then proved its flexibility again by backtracking and extending the existing and highly unpopular bailout for several months to prevent a looming liquidity crisis. There are ongoing concerns about Syriza’s domestic agenda and the fringe elements of such a politically diverse government. Varoufakis and Prime Minister Alexis Tsipras, however, are looking less and less like the bogeymen they’ve been made out to be. Beholden to voters that have been sold a moralistic narrative casting Greece as Europe’s prodigal son, the governments of Germany and other creditor countries increasingly seem to be the biggest impediment to a long-term solution to Greece’s solvency problem. A PAPER TIGER? In spite of pre-election hysteria among Greece’s creditors, the new government dropped calls for a haircut that would have reduced the face value of the country’s debt. Instead, Varoufakis’ initial proposal included a “menu of debt swaps” that would swap Greece’s current debt for growthlinked bonds, whereby interest payments are linked to economic performance. The proposal would entail maintaining 70 percent of the structural reform commitments demanded by the European Commission and International Monetary Fund, while the remaining 30 percent would be overhauled to reverse their toxic impact on the Greek economy. Under the current bailout program, Greece is also meant to run a primary surplus (the amount by which revenue exceeds expenditure prior to interest payments) of 4.5 percent of gross domestic product (GDP), requiring a painful degree of fiscal austerity. But the “bitter pill” prescribed by the German doctor has only made the patient sicker. Varoufakis’ plan sought to reduce primary surplus targets and lift the crushing pressure of the austerity they demanded. THE SWORD OF DAMOCLES Ironing out the details of such a proposal will require time. Unfortunately, time is exactly what Syriza did not have during negotiations with its creditors the week of Feb. 16, 2015. Billions in interest payments come due in March and June, and Greece’s bailout was scheduled to expire
at the end of February. Normally, Greece’s government could have temporarily tapped capital markets for its short-term financing needs. However, Greek banks, traditionally willing buyers of government treasuries, faced the beginnings of a run on their deposits as the deadline approached. The withdrawals, along with the European Central Bank’s decisions to limit lending, sapped Greek banks’ liquidity and their scope to participate in treasury auctions. Greece’s creditors, in particular Germany and the Netherlands, ultimately refused to agree to a restructuring even in principle. Greece’s cash-strapped government was thus forced to concede and accept a four-month extension of the bailout in its current form in order to ensure a flow of financing, avert a default scenario, forestall the potential collapse of its financial system, and allow for more time to negotiate a long-term solution. The sword of Damocles hangs heavy when the stakes are this high. TYRANNY OF THE MAJORITY Unfortunately, public opinion in northern Europe is deeply hostile to anything resembling debt forgiveness. One would hope that Varoufakis’ debt swap would be more palatable given that it wouldn’t require a haircut and would contribute to the end goal of sustainable Greek solvency. So far the Germans have yet to bite; a recent press conference between Varoufakis and Germany’s Finance Minister Wolfgang Schäuble was notably icy. Creditor countries aren’t the only ones where politics may interfere.
NEW WOLVES ON WALL STREET Fama and French Challenge the Alpha, Michael Golz 7
HONG KONG-SHANGHAI CONNECT A Step Forward For China’s Capital Markets, Carter Johnson 8
SEEING GREEN Why Companies Are Paying More Attention to the Environment, Matthew Janigian 9
CHOC-O-NOMICS When Chocolate Turns Sour, Yashil Sukurdeep 10
SCARY PROFITS FOR SCARY MOVIES The Success of Low-Budget Horror Films, Jack Du 11
Greece managed to extract at least one long sought-after concession from its creditors by extending its current bailout: a potential reduction in its primary surplus target, which has inflicted enormous pain on the Greek economy. The details are still amorphous; what is clear, however, is that the Germans need to show more flexibility. A long-term restructuring to address Greece’s unmanageable debt burden would give its government more fiscal breathing room still, help restore its access to capital markets, and foster a sense of stability amongst investors, who have understandably shied away from the country.
DON’T TAKE MY MONEY Protesters in Greece rally against austerity measures proposed by the European Union. The governments of Ireland and Portugal have fiercely resisted Greek restructuring and an end to the kind of austerity they have struggled to justify to their own populations, fearing that a successful Greek restructuring could empower far-left parties in their own countries. Despite an eventual agreement by Eurozone finance ministers to extend rather than restructure, at the time of writing there were still fears that euro member parliaments might derail the deal. The tension between Greece’s domestic politics and those of its creditors is a volatile mix. The Greeks are in an especially difficult position, hemmed in on one side by hawkish creditors and on the other by their long-suffering constituents. On Feb. 11, Syriza won a vote of confidence in the Greek parliament, supporting their bid to renegotiate the wildly unpopular bailout program that has undoubtedly contributed to a 5-year recession. During his election campaign, Tsipras promised to significantly increase government spending, raise the minimum wage from €534 to €751 per month, rehire over 2,000 public workers, and provide free electricity to the poorest 300,000 households using some hitherto unseen financial gymnastics. Tsipras’ eager promises and populist rhetoric are deeply concerning. While restructuring Greek debt would help support an economic recovery, the aforementioned policies could turn out to be a nightmare. Germany’s obstinate efforts to avert moderate restructuring may ironically force Tsipras to pursue more populist reforms to appease voters and avoid an
internal party insurrection. Syriza is, after all, an amalgam of left-wing coalitions that partnered with the right-wing Independent Greeks to eke out a parliamentary majority. Its stability, both internally and externally, is very delicate and Tsipras does not possess a strong enough base to stray far from his election mantra. GIT ‘ER DONE The multitude of concerns and divides over the crisis response will have to be muddled through. There are clear moral and economic imperatives demanding a solution from the European political leadership. The current program has been tremendously costly to Greek society, creating a humanitarian crisis, with a quarter of the population unemployed. Austerity has been intellectually crippled by its high-profile failure in Europe and the success of the more Keynesian crisis response in the United States. The drawdown of government expenditure and simultaneous private sector deleveraging has savaged GDP. In many cases, the fall in GDP is so severe that debt as a percentage of GDP rises instead of falling. In Greece it jumped from 130 percent of GDP in 2010 to 175 percent in 2014. Ireland went from 64 percent to 123 percent in the same timeframe. The pattern is similar across Europe. As Nobel laureate Paul Krugman calculated in a recent piece for The New York Times, if Greece were to run a primary balance rather than a 4.5 percent surplus, GDP would be 12 percent higher, tax revenue 9 percent greater, and unemployment 10 percent lower.
A MISDIAGNOSIS Greece in particular is an inappropriate candidate for austerity. It is conceivable that austerity applied to an export-led economy would have beneficial effects: expenditures would fall, reducing prices, boosting competitiveness, and leading to an economic resurgence. But Greece is not an export-led economy. Its three major sources of economic output are tourism, agriculture, and shipping, and only a portion of agriculture is export-focused. Tourists are scared away by protests and tear gas, while shipping is an international business that has been undermined by a contraction in spending amongst most of Greece’s trading partners. Compounding this reversal is the fact that almost all of Europe engaged in austerity at once, meaning that each country became poorer, spent less, saw prices fall, and yet failed to secure any advantage over their neighbors because they were all doing exactly the same thing. FIRE AND BRIMSTONE Past Greek governments should not be absolved of blame for their reckless and dishonest fiscal management. However, Germany also shares responsibility for the current mess alongside its partners in southern Europe, and should refrain from Old Testament justice. The euro was formed at a time when German goods were exceptionally competitive relative to the rest of the Eurozone. Eurozone members permanently locked in a fixed exchange rate between each other by adopting the same currency. This left price adjustments as the only available means of rectifying differences in competitiveness. But systematically cutting wages – the fastest way to change prices – is economically and politically painful in comparison to simply allowing the exchange rate to depreciate, a tool they no longer have. This effectively set Germany as the most competitive member of the Eurozone, to the detriment of their partners. North-south capital flows also contributed to Greece’s exorbitant debt pile and the further erosion of Greek competitiveness over time. During the boom years, German banks were only too willing to invest in Greek government bonds, which carried higher interest rates but were supposedly backed by an implicit guarantee that the Eurozone would never let one of its members default. The flood of investment
INTERCOLLEGIATE FINANCE JOURNAL • SPRING 2015
into the Greek private sector meanwhile led to credit creation and spending that caused inflation and undermined competitiveness. Finally, let’s not forget that Germany’s own creditors demonstrated flexibility during past restructurings of German debt – flexibility which Germany has not repaid in kind. Merkel and Co. might therefore be somewhat more circumspect when ascribing blame or judgment for the ongoing imbroglio. EASY ANSWERS, HARD CHOICES Rarely are there any easy answers in crisis management. We are lucky that this time the way is clear: austerity has been attempted with considerable resolve and persistence but it is making things worse. It is time for the German establishment to admit there has been a mistake and to refocus on what can restore growth and stability to Greece, yet this is easier said than done. German politicians have been spending the best part of the past five years waxing lyrical on the virtues of thriftiness and the legitimacy of the troika. It would be difficult to pull such a conspicuous U-turn. Sometimes, however, leaders must lead and not simply follow from the front. They must find a new direction, not allow themselves to be driven over the cliff by the stampeding herd at their backs. The Germans should be more attuned than most to the parallels with their own history. Their leaders should be willing to make the sacrifices to lead Europe back from a particularly unpleasant cliff.
Sink, Swim, or Float? UNCAPPING THE SWISS FRANC by Sarah Park
hile the rest of the world has made large strides toward recovery, the Eurozone is suffering from a stagnant economy that is in desperate need of revival. Unemployment is high, inflation is dangerously low, and consumer demand is poor. Recently, the Eurozone’s ongoing economic woes have
resulted in dramatic political consequences, such as the European Central Bank’s decision to launch an unprecedented €60 billiona-month quantitative easing program and Greece’s election of radical anti-austerity party Syriza. However, perhaps the biggest surprise of recent months was the Swiss National Bank’s (SNB) announcement on Jan. 15 that it would no longer be fixing its currency to the euro, instead allowing the franc to float for the first time in three and a half years. First introduced in September 2011, the cap on the franc pegged Switzerland’s currency at 1.20 francs per euro and was intended to help stabilize the Swiss economy. In the aftermath of the global financial crisis, Switzerland – seen as a safe haven – experienced large inflows of foreign capital, driving up the value of its currency. In an effort to protect the country’s export and tourism industries, which both comprise a significant chunk of the Swiss economy, the SNB decided to implement a currency cap. ANCHORS AWEIGH However, according to SNB President Thomas Jordan, the cap was always intended to be temporary and would not have been sustainable in the long run. Jordan claims the franc’s overvaluation is no longer high enough to justify the continuation of the ceiling. The SNB’s means of defending the cap involved printing francs to buy euro-denominated assets, thus reducing the market value of francs relative to euros. Because of the attractiveness of the Swiss franc, the SNB would have had to expand its balance sheet by the equivalent of $116 billion in January alone to hold down the value of its currency and maintain the cap. Fearing that such a dramatic expansion in the supply of francs could trigger inflation, the SNB decided to abandon the policy. Many also believe that the timing of the SNB’s decision is linked to the start of the ECB’s quantitative easing program, which was expected to trigger a fresh wave of capital into Switzerland, forcing the SNB to intervene on a much larger scale than before. Now that the currency is allowed to float freely, this means the franc’s value will in essence be determined by supply and demand in the financial markets.
In order to mitigate the appreciation of the franc, the SNB simultaneously announced that it will be raising the rate it charges banks who choose to keep their reserves at the SNB. The hope is that the higher fee will encourage banks to store their excess money elsewhere, thereby preventing further appreciation of the franc. ROUGH WATERS Switzerland’s decision will have far-reaching repercussions not only for the country’s banks and citizens, but for the rest of the world as well. On the day of the announcement alone, the Swiss Franc spiked 30 percent in value against the euro and 25 percent against the dollar. The extreme reaction to the announcement in part resulted from the fact that it truly was a surprise to the international community. The SNB deliberately kept its decision a secret to prevent traders from engaging in improper trading. However, some analysts believe the SNB’s secrecy has only heightened volatility in global markets and further eroded confidence in central banks, something which could ultimately hamper further recovery. Switzerland’s export and tourism industries are particularly concerned about the effect that the SNB’s decision will have on their businesses. A stronger franc makes exports more expensive and therefore less competitive abroad. Swiss companies – who rely heavily on the Eurozone as a market and on exports in general for revenue – may see their profits and margins suffer. Swiss companies such as Swatch have already begun raising prices in reaction to the stronger currency and many have stated layoffs may be necessary as well. Particularly worrisome are the machinery and electrical goods industries, which export close to 80 percent of all of their production, 60 percent to Europe alone. And while the Swiss Alps have always been a popular tourist destination, skiers may now decide to spend their vacation days elsewhere. A RISING TIDE Although the exact effect of the stronger franc on Switzerland’s economy is uncertain, many worry that its magnitude may be large. KOF and BakBasel – two of Switzerland’s leading research institutes – have predicted the country may fall into a recession by the end of the year, and several banks have cut their growth outlooks for the country’s GDP. Although companies in Switzerland have cause for concern, other corporations are looking forward to taking advantage of record-low borrowing costs. The spike in demand for Swiss franc-denominated debt has resulted in negative yields on government bonds. In fact, several companies have already completed Swiss-franc bond sales. Among them is Apple, who raised 1.25 billion francs on Feb. 10. With the future of Greece’s economy and
SWITZERLAND’S CURRENCY WOES Euros per Swiss Franc 1.50 1.40 1.30
Swiss Central Bank pegs to Euro
Swiss Central Bank abandons peg to Euro
1.20 1.10 1.00
2010 2011 2012 2013 2014
place in the Eurozone uncertain, the political turmoil in the Middle East and Russia, and the recent terror attacks in France and Copenhagen, international markets are on edge and easily spooked. The SNB’s decision is just one among many announcements this year that have underscored the recent volatility and uncertainty in the global markets. Although the SNB is resolute in its support to allow the franc to float, it remains to be seen whether its decision will only further exacerbate Europe’s economic woes.
New Wolves on Wall Street FAMA AND FRENCH CHALLENGE THE ALPHA by Michael Golz
he daily decision of what to wear: certainly mundane, yet surprisingly complex. Standing before your closet, a swath of questions often runs through your brain. What is the weather like? Where am I going? Who might I meet? Is that interview this afternoon, or tomorrow? Upon leaving your room, you have already processed a long list of factors before even eating breakfast. So why does the Capital Asset Pricing Model (CAPM), the most common model used in the process of determining a company’s value, rely on only one factor? A BIRD IN THE HAND For investing to be profitable in the long run, we need a system for determining whether stocks are under or overpriced. Well-chosen stocks offer a return over time, but how do we decide if an asset is really worth more than its market price? The key is to examine expected future earnings, but to do so we must account for the time value of money. With a dollar in my hand, I can invest it in a risk-free asset, like a government bond, or put it in an interest-bearing savings account. Therefore, having a dollar now is worth more than being
promised a dollar a month from now. For this reason, future cash flows must be translated into their present value, or “discounted.” If a firm expects to make $20 million next year, we must account for it being a future value of money. Once we can discount properly, we are able to obtain a measure of how much an asset is really worth to us presently. Then we can make informed decisions about expected appreciation. HUNTING FOR BETA To do so, we need a rate at which to discount these future amounts. That is where the CAPM comes in. The CAPM formula requires three inputs. The first is a measure of the risk-free interest rate, which is the rate of return on a riskless investment. Most investors use the return on a government bond to estimate this value as they are considered to be very safe. The model also uses the expected market return. For example, the S&P 500 holds the stocks of 500 different sized companies from many industries and changes in value relative to the collective daily change of all the companies. This gives a sense of how the market is faring as a whole. Generally, the market grows about 10 percent each year. When combined with the third input, the volatility of an asset’s price relative to the market (aka beta), the CAPM outputs a required rate of return to compensate an investor for a security’s inherent risk. We discount at this rate. The riskier the stock, the higher the beta, which leads to a higher discount rate. This makes sense: we “trust” the future earnings of a riskier asset less than a safer one. With the CAPM-generated interest rate, we can discount the future cash flows of a company to determine a fair value. Whether the fair value is above or below the market price determines whether an asset is undervalued or not; undervalued stocks are an opportunity to make a profit. The fundamental idea behind CAPM is that only one factor is relevant to the return of an asset: risk. As an investor, I can invest my dollar in a safe investment like a government bond. On the other hand, I can buy a stock. But to make the stock worth it, it must compensate me not only for losing the guaranteed return of the safe bond, but also for the risk of holding the stock. Since the market appreciates 10 percent on average, a stock needs to return enough to justify its volatility relative to the market. However, despite the value of its simplicity, the CAPM leaves us with one lingering question: is risk really the only factor relevant to the return we expect from a security? THE NEWCOMERS ARRIVE Eugene Fama, a Nobel laureate in Economics, and Kenneth French, Professor of Finance at the Tuck School of Business, argue that we cannot justify it. Their research in the early 1990s challenged the efficacy of the prevailing reliance on beta as a predictor of return rates.
When regressing stock returns on beta, beta alone explains only 70 percent of returns. However, they noticed that when you account for the size of company and value factors such as high dividend yield, you can explain a much higher percentage of a stock’s performance. They offered a new three factor model that enhanced the CAPM by requiring measures of size and value to be inputted into the formula. While it is not fully understood why small value stocks outperform, the model explains around 90 percent of an asset’s performance whereas the CAPM falls 20 percent short of that. As a testament to their confidence in the model, Fama and French have made it a centerpiece in their portfolio design at Dimensional Fund Advisors (DFA), an investment firm that emphasizes the use of new quantitative methods designed by financial academics in creating portfolios. DFA has designed highly successful funds, many of which consistently outperform market indices. TAKING ON THE ALPHA The Fama-French model is bad news for active fund managers. Historically, the talent of a firm’s stock pickers was supposedly essential in the success of its portfolios. Active managers continuously revise their portfolios, whereas passive managers choose stocks once and avoid revising them if possible. The industry has developed a measure of this difference between the results of active and passive management strategies. When a stock predicted to return 11 percent actually returns 14 percent, we call the difference its alpha value. The discrepancy is partly due to random error, but active fund managers say that the remaining difference is a result of their natural ability to choose lucrative portfolios. But what if the prediction is systematically wrong? In that case, we would be crediting managers for returns above expectation that could have been predicted if we accounted for factors other than risk. When considering size and value factors, the Fama-French model more reliably explains stock performance. A predicted return of 11 percent under the CAPM might be 13 percent using Fama-French, leaving an alpha value of 1 percent rather than 3 percent. The improved model decreases the gap between predictions and realized returns, leaving far less room for managers to attribute unexpected results to their talent in creating portfolios. This begs an interesting question: given the progress of mathematics in providing more intricate quantitative models for use in asset pricing, how stable will the job market for active fund managers be in the future? Advanced computation has carved away at the windfall gains once attributed to active management. It is likely that a good reputation in the fund management industry will become less about having the knack for picking stocks and more about effectively integrating new quantitative methods into your firm’s investment scheme.
INTERCOLLEGIATE FINANCE JOURNAL • SPRING 2015
The Hong Kong-Shanghai Connect
A STEP FORWARD FOR CHINA’S CAPITAL MARKETS by Carter Johnson Cartoon by Linda Navon Chetrit
s 2015 begins, many investors around the world are bearish about China. They point to slowing GDP growth, ballooning government debt, a potentially shaky housing market, and political turmoil as unprecedented corruption scandals unfold, as evidence that China’s “rise” is becoming China’s “landing.” It is undeniable that the government’s 7 percent GDP growth target for 2015 is comparably low for a country that, for 25 years, has enjoyed double-digit growth. As the rest of the world confronts anemic growth, quantitative easing, and currency shocks, however, China can look to a fundamentally sound economy and a burgeoning stock market for comfort. SHARES SURGE ON A TOP DOWN OPENING Against a backdrop of uncertainty, the Chinese tiger still growls. One need only look at the Shanghai stock market to see a strong figure: the CSI 300, an index of Shanghai’s largest listed companies, has risen 36 percent since Nov. 17, 2014. The date is important; on that day Chinese and overseas investors welcomed the open-
Cartoon by Linda Navon Chetrit
ing of the Hong Kong-Shanghai Stock Connect, which allows Shanghai and Hong Kong stocks to freely trade on both exchanges. First announced by Premier Li Keqiang in April 2014, the project was conceived and planned in a remarkably short amount of time. The Connect marks another, more radical step forward for a Chinese government that has consistently, if slowly, been opening the nation’s capital markets in the 37 years since Deng Xiaoping and the Chinese leadership began China’s transition to a market economy. The first steps came with earlier quota programs, which allowed overseas investment in Chinese shares but limited
INDEX OF FINANCIAL STOCKS HEAVILY TRADED UNDER THE HONG-KONG SHANGHAI CONNECT 250 200 150 100 50 11/1
China Mer. China Pac. ICBC
Above is the indexed performance of the seven most traded Chinese financial stocks under the Hong Kong-Connect program. Though these seven have all performed differently, in aggregate they are up 65 percent since trading opened under the Connect.
trading to major institutional players. The Stock Connect opens Shanghai stocks to smaller institutions – like overseas hedge and mutual funds – as well as individuals. MISSING CONNECTION Contrary to what the aforementioned rise in shares might imply, investors have not been rushing to use the Connect. Aggregate and daily trading quotas, one of the methods by which regulators manage capital inflows and outflows, have proved unnecessary. In the first month after the launch, only 22 percent of the monthly quota, which is measured by trading turnover – the value of stocks bought and sold in a given month – flowed from Hong Kong to Shanghai. That number was higher in January, but it was still just a third of the allotted amount. Moreover, the CSI fell 7 percent in that same month. There is also the possibility that loose monetary policy – when the central bank injects more money into the economy to encourage spending – has caused the surge in Shanghai stocks since November, not the opening of the Connect. In November, the People’s Bank of China cut its benchmark interest rate for the first time since 2012. It is very likely that with more money available, investors are more willing to put their money into the stock market. FINANCIAL OPPORTUNITY ABOUNDS Stocks in Shanghai are booming and, for the first time, the average individual investor in the United States can partake in a Chinese rally. According to Fortune magazine, China alone is home to more of the world’s largest 500 companies than Germany, England,
and France combined. In the past decade, global investors have seen a remarkable shift of capital away from the United States and Europe to Asia and China, a phenomenon Fortune labels “the great eastward migration.” The value of the Hong Kong-Shanghai Connect in a world where 95 of the globe’s 500 biggest companies – nearly 20 percent – are now headquartered in China cannot be overstated. Such opportunities have been brought to light by the Hong Kong-Shanghai Connect. Looking at the ten most-traded stocks on the Hong Kong program, one quickly finds an investor emphasis on financials. Of the top ten traded stocks under the Connect, seven are blue-chip equivalent financial companies. These seven yielded an average return of 65.2 percent from Nov. 17, 2014 to Jan. 5, 2015. The Connect itself does not yet herald a truly free capital market. For example, the program offers no mechanisms for primary market activities in which stocks are first sold or floated, such as through an initial public offering (IPO). Hong Kong investors will have to wait to invest in any Shanghai IPOs, although some Chinese companies prefer to list in business-friendly Hong Kong anyway. The Connect does herald the continuation of the long process of China’s economic opening. Now, 25 years since the establishment of the Shanghai Stock Exchange, the nation has decided to further reform its capital markets. Talks are already under way to introduce a connect program for China’s second stock exchange in Shenzhen. Ultimately, the Hong Kong-Shanghai Connect represents another step on the way to true integration with the global financial markets. Even a China bear can be bullish about that.
Seeing Green WHY COMPANIES ARE PAYING MORE ATTENTION TO THE ENVIRONMENT by Matthew Janigian
n The Lorax, a popular children’s book written by Dr. Seuss, furry trees fall to the ground by the bushel, cut down indiscriminately for factories that purge their waste into the environment. However, today, Dr. Seuss would likely be pleasantly surprised: whereas large companies once stood at odds with environmental issues, many of those companies now back sustainability efforts in the name of social betterment – and improved financial performance. CHANGING CLIMATE Industrialization in 19th century America
had an undeniably positive impact on the economy: new technologies emerged, jobs were created, and wages rose. At the time, environmental regulations were of no concern to businesses as the focus wasn’t on the environment but instead on economic prosperity. Fast-forward to today and it becomes clear that tensions exist between businesses and environmental regulatory agencies. Yet, the business climate has undoubtedly changed dramatically. With growing concerns over climate change, businesses have been thrust to the center of the debate. Oftentimes, there must be a choice between profits and sustainability. Now, however, businesses are achieving sustainable profits by investing in sustainability efforts. MONEY GROWS ON TREES Looking at data for companies that put extra emphasis on promoting sustainability efforts shows that they have not underperformed their less sustainable peers. In fact, in some cases, they even outperform similar THE ENVIRONMENT PAYS Evolution of $1 invested in value-weighted stocks ranked by sustainability metrics $20 High Sustainability Focused Companies
$10 Low Sustainability Companies
companies. These companies are constantly demonstrating that it is possible to engage in sustainability efforts without sacrificing shareholder return. Part of this is related to the perks that come with being an “environmentally friendly” business. For one, it can be used as a marketing effort: many people support pro-environment efforts, so they are more likely to prefer a company like Chipotle – which buys from local farms with antibiotic-free livestock – than a company like Taco Bell. SUSTAINABLE GROWTH Perhaps more important to the solid performance of these environmentally friendly businesses is their underlying philosophy. Investing in the environment and in ways that aim to curb climate change is a long term investment. They are big goals that take decades to realize. Rather than focusing on
the short run, these companies are looking well into the future. Increasingly, investors are noticing the benefits of such a focus. And that’s largely why they’re so successful. By avoiding myopia and by tackling increasingly important issues through a focus on environmental issues, these companies are setting a foundation for consistent improvement. Rather than looking for short term gains, they are striving for long term sustainable growth. RISING TIDES There is no doubt that more work is needed to promote sustainability. Indeed, it can sometimes seem that certain supposedly sustainable initiatives are in place more for their marketing power than because of a genuine desire to promote sustainable practices. But businesses recognize now more than ever that sustainability efforts work in their favor. So why is it still not the norm to hear of a business going out of its way to save the environment? Part of the problem is that there is not enough investment in the companies that most emphasize sustainable practices. Institutional investors – pension funds, hedge funds, mutual funds, and the like – are typically the largest players in financial markets. The onus is on these investors to choose to invest in green efforts. In the past, investors avoided these companies because those efforts were often equated with slimmer profits and underperformance. However, with such a focus on long term growth, these companies are showing that they can still provide shareholder value. A recent Harvard Business School study showed that businesses that adopted sustainability efforts early on outperformed their peers by about 48 percent. The study specifically looked at early adopters starting in the 90s. It should be noted that the Dow Jones World Sustainability Index has offered a mere 48 percent return compared to a 70 percent return for the S&P 500 over the same time period. MORE PEOPLE, MORE PROBLEMS Ultimately, the decision to adopt sustainable practices, such as reducing carbon emissions or conserving water, may be up to politicians and the broader society. However, it’s worth considering the potential ramifications of an increasingly large middle class – predicted to include 4.9 billion people by 2030. More middle class consumers means more consumption of goods, which by definition means there will be more trash and more pollutants expelled into the environment. For the first time, it makes sense to invest in sustainable companies from both a societal and financial point of view. But from an investor’s point of view, we have only begun to scratch the surface. Going forward, it seems likely that the seeds planted by sustainable companies will flourish. And that sounds like a bright future.
INTERCOLLEGIATE FINANCE JOURNAL • SPRING 2015
Photo by Keegan Quigley
hocolate lovers, brace yourselves for the darkest period in the history of chocolate: Nestle’s Kit Kat, Cadbury’s Dairy Milk Chocolate, and Mars’ Maltesers will soon be unavailable in the United States. The big bad guy responsible for this doomsday scenario is none other than Hershey’s, North America’s largest chocolate manufacturer. In August 2014, the company brought and won a lawsuit against importers of British chocolates. As a result, chocolate products manufactured in the United Kingdom have effectively been banned from import into the United States. The days of Kit Kat, Cadbury’s, and Maltesers in the United States are numbered. CHOCOLATE-COATED LIES Why would Hershey’s be opposed to imports of British chocolate into the US? Let’s look at two opposing answers: the one Hershey gives and one that is closer to the facts. According to Hershey’s, they filed the lawsuit in order to protect the interests of chocolate consumers in the United States. Indeed, several British chocolates share similar names and packaging to Hershey’s own products. Mars’ Maltesers and Hershey’s Malteser immediately spring to mind. As a result, Hershey’s was concerned that American consumers were being misled into buying the wrong products, in this case British chocolates. Hershey’s filed its lawsuit in order to get rid of the British chocolates altogether, so that no American consumer would ever be misled in the future. How sweet of them. HERSHEY’S SHARE OF THE CAKE But should we really believe Hershey’s version? What are the true motives behind Hershey’s lawsuit? In 2010, on the heels of the Great Recession, Kraft Foods, Inc. closed a $19.4 billion deal to buy Cadbury. The resulting economies of scale allowed Kraft to undercut its competitors’ prices and gain market share. Hershey’s generated 85 percent of its profits in North America, and existing competition from Mars and Nestle made their position extremely precarious. Some analysts even believed that it would be best for Hershey to sell itself to a competitor rather than risk incurring losses. Drastic action was needed in order to stave off this threat, so Hershey’s turned to the courts. Hershey’s now looks set to reclaim a huge share of the chocolate cake – I mean, market.
Choc-o-nomics WHEN CHOCOLATE TURNS SOUR by Yashil Sukurdeep Photo by Keegan Quigley
THE AFTER-CHOC Now that chocolate from the UK cannot be imported into the United States, how will this affect stakeholders in the chocolate industry? British firms that produce chocolate for export to the United States will be hit hard by the ban. In the short term, they face a sharp drop in total revenue as they lose the North American market. In the long run, some might even be forced out of business. On the other hand, U.S. chocolate producers will be licking their lips in
anticipation of the ban. U.S. producers face reduced competition and a likely surge in profits. #BOYCOTTHERSHEY That’s unless a Twitter campaign is successful in convincing consumers to #boycotthershey. This hashtag rose to prominence in the aftermath of the lawsuit, and has gained support from British chocolate lovers in the United States and abroad. Should the campaign succeed, Hershey’s will likely see sales drop as people flock away. But that’s not going to happen, because no one can resist chocolate, right? We can’t be so sure about that. Indeed, in the wake of the ban, it was revealed that in order to qualify as “chocolate” in the United States, products must contain at least 10 percent cocoa solids. In the United Kingdom, the minimum is 20 percent. Chocolate consumers in the United States have voiced concerns about the quality of American chocolate products, and a growing number of them might be willing to #boycotthershey and other American chocolate producers. It is too early to tell how this revelation will affect chocolate sales in the US. SWEET ENDING? The Great Chocolate Ban of 2015 has generated great uncertainty over the future of the chocolate business. While consumers weep inconsolably about the loss of their favorite chocolate products, British and American chocolate producers wait with bated breath for upcoming sales figures. They are all praying for a sweet ending.
Scary Profits for Scary Movies THE SUCCESS OF LOWBUDGET HORROR FILMS by Jack Du
an you remember the last time a horror flick won an Academy Award? In recent times, it seems like every horror movie released is increasingly generic, low-quality and lacking any semblance of what could be interpreted as plot; you know without a doubt that the main characters will always venture out alone into the eager arms of the killer. No other genre of film is so consistently panned by critics and subject to parodies. For these reasons, fans are often surprised to discover that horror is the most profitable film genre and horror films are the best investments studios can make. STUDIOS GET PARANORMAL RETURNS Most horror movies rarely generate any buzz. The truth is, these movies don’t need to be popular. They can be produced on minuscule budgets compared to blockbuster epics like “Lord of the Rings.” What that means is that
a $5 million dollar horror movie can generate a greater return on investment (ROI) than a larger-than-life movie that doesn’t break through enough at the box office to warrant its prodigal budget. Just think of “John Carter” or “Green Lantern,” which had net losses $108 million and $90 million, respectively. “Paranormal Activity” had a $15,000 budget and generated $193.4 million at the box office, making a revenue 12,893 times its total cost. Another huge hit, “The Purge,” made $89.3 million at the box office on a budget of $3 million. In comparison, “Interstellar,” a huge blockbuster by renowned director Christopher Nolan, generated $671.1 million on a budget of $165 million, generating just over four times the initial costs. With possible returns like that, it is no wonder that many studios don’t mind taking gambles on low-stakes horror films, even if nine out of 10 turn out to be busts. And when that one gem that does turn into an international success comes around, you can be sure they will make an endless string of highly-profitable sequels. BIG MONSTERS ON SMALL BUDGETS Scary movies rarely cast any stars, preferring relatively unknown actors and actresses to give the movie a realistic feel, as if the events taking place could be happening to your next door neighbor. These movies also don’t need heavy scripting, as yelling and screaming take up a large chunk of the dialogue. In a similar vein, horror films rarely use special effects, if at all, and those that do can just add CGI post-production rather than messing with physical effects. Many are even able to eliminate the need for a camera crew by relying on home video cameras and limited editing – another way of keeping the budget manageable and giving the movie a more realistic feel. Numerous films in recent days, including “Cloverfield,”“REC,” and “The Devil Inside,” have notoriously relied on this “found footage” gimmick. And ultimately, what is more realistic than “real” video recordings left behind by missing or dead protagonists? Although people often complain about the shaky, nausea-inducing style of filming, these types of films have been outstandingly successful for their producers. In addition, the “based-on-true-events” label is frequently used to captivate moviegoers, especially in this genre. “The Fourth Kind,” “The Haunting in Connecticut,” and “The Conjuring” are all recent titles that deviate far from their tenuously connected original content but have nonetheless incorporated the label to fascinate and frighten viewers. SCARY THEN, SCARY NOW? In the horror film industry, a few standout movies tend to define their generation and inspire countless adaptations. From “Nosferatu” (1922), to “Psycho” (1960), the “The Exorcist” (1973), and “The Blair Witch Project” (1999), these films created their own subgenre of horror or spawned a bevy of imitations. Early horror films used to primarily draw
inspiration from the literary works of the likes of Edgar Allen Poe or Lord Dunsany. Horror movies have also capitalized on and drawn source material from real world developments. The launch of the Russian satellite Sputnik inspired alien invasion movies, the popularity of analog photography resulted in movies with ghosts appearing in developed photos, and serial murderers like the Zodiac Killer and Charles Manson also prompted slasher flicks. Although in the past horror movies relied heavily on special effects, there has been much less emphasis on them recently. You might remember the special effects of “Poltergeist” and “The Thing,” but directors are finding new ways of scaring their audience with lighting, sound effects, and the counterintuitive logic that not seeing the monster is actually scarier than seeing it. FRIGHT IS INELASTIC “The Devil Inside” was given a 6 percent critic rating and 22 percent audience rating on Rotten Tomatoes, yet generated $101 million on a budget of $1 million. No other genre of film can even fathom such wild success when the movie is regarded as universally awful. Fans of this genre don’t care about the actors and actresses as much as they do about the cheap scares. There have been connections drawn to increases in horror film ticket sales during recessions in the United States. Perhaps this is because it allows the viewer to momentarily forget the burdens of reality in favor of a world of virtual terror. But regardless of the reason, it shows a wide consumer base is dependably going out to see these films. Historically, the horror industry has been geared towards young males, but recently the demographics have shifted to the point where the audience makeup of “The Conjuring” during opening weekend was 53 percent female and that of “The Purge” was 56 percent. According to Callista Lee, a professor of psychology at Fullerton College, the rise in the female teen demographic can be attributed to strong female leads, more coherent storylines, and a non-gender-discriminating focus on engendering psychological fear, terror, and angst. While the gender shift is surprising to many, it isn’t surprising that adolescents make up a majority of the viewers. IT NEVER ENDS The horror genre is alive and kicking. From 1995 to 2014, horror films have had a 13.15 percent box office market share. And according to a Redbox survey of moviegoers, 70 percent watched a scary movie last Halloween. With that kind of demand and interest, there is no wonder a new lame horror movie with a seemingly recycled plot turns up at the theater every other week. Studios love to take on these low-budget projects, hoping to find the next generation-defining scare. If worst comes to worst, they can be content to simply make their money back several times over.
DECLINING FORTUNES SERVED WITH A SIDE OF TEXAS TEA Falling Oil Prices & America, Gillian Lee 14
MONEY COMPASS How the Financing of US Campaigns Has Distorted Politics, Lindsey Currier 15
THE TERROR OF THE FRENCH ECONOMY Moving Past Charlie Hebdo, Nikhil Kumar 16
TRIMMING THE FAMILY TREE India’s Sterilization Policy, Sarah Park 17
A SHIFTING CENTER OF GRAVITY AMONG THE EMERGING MARKET GIANTS by Christopher Dederick
RICs: strong, solid, steadfast, quite literally the building blocks of growth. First coined by Goldman Sachs’ Jim O’Neill in 2001, the umbrella term for the major emerging market economies of Brazil, Russia, India, and China made for a compelling story among investors by capturing widespread views over the trajectory of the global economy. BRICs became a household phrase following the onset of financial crises and recessions among advanced economies in 2008. The United States was struggling to escape stagnation, the Eurozone found itself shackled by a common currency, and Japan’s decade-long deflationary malady intensified. Meanwhile, the BRICs enjoyed near double-digit GDP growth, with no more than a brief interruption in 2009, and a flood of capital from yield-hungry investors looking for an alternative to the low returns on U.S. bonds and equities. EMERGING PROBLEMS Unfortunately, the BRICs’ fortunes have reversed. China’s export prowess has faltered and its economy has slowed. The “commodities super cycle,” which saw Brazil and Russia supply China with the raw inputs it needed to sustain a massive trade surplus, has ground to a halt, contributing to historically low oil prices. Portfolio investment may continue to recede as the United States prepares to raise interest rates, exposing cracks in the BRICs that could be signs of difficult times to come. Weaker exports and portfolio investment hamper growth. Since the foreign currency used by consumers and investors to purchase exports and portfolio securities
eventually winds up with central banks, their access to foreign exchange reserves may come under strain. Dwindling reserves limit central banks’ scope to prop up currencies by intervening in foreign exchange markets. This undermines their capacity to guarantee the foreign-denominated debts of their governments and financial systems. The fiscal positions of governments reliant on revenue from state-owned oil companies will also deteriorate in the face of low prices. As currencies depreciate, the relative value of revenues denominated in domestic currency and used to service foreign-denominated debts declines, imposing a growing debt burden on borrowers. To make matters worse, inflation may take off as the price of imports increases, in effect reducing consumers’ real income via higher prices. MISERY LOVES COMPANY Brazil and Russia share some unhappy similarities. Both economies are reliant on petroleum and commodities exports and are already feeling the pinch from dramatically lower prices. Both have highly indebted corporate sectors, and since much of this debt is denominated in dollars, the weakness in their currencies may yet cause a string of defaults. Where they differ is in their willingness to reform and woo investors. Brazil’s President, Dilma Rousseff, has taken bold steps to try to improve the country’s bloated government finances, though her left-wing congress may still thwart her efforts. While Brazil’s economy may languish as a result of its leader’s inability to reform, Russia’s will more than likely continue to suffer thanks to President Putin’s unwillingness to do so. A de-escalation of the war in Ukraine and the lifting of sanctions would help reverse the 50 percent depreciation in the value of the ruble since August 2014. Unfortunately, his record of intransigence is less than encouraging. It’s all downhill from here unless oil makes a comeback, which some industry leaders have suggested. China is beginning to suffer growing pains as it attempts to transition from an export-led economy to a consumer-based one. Rising wages and the appreciation of the renminbi as the government attempts to achieve reserve currency clout have undermined China’s export competitiveness. Manufacturers reliant on cheap labor no longer look to China, preferring Vietnam or the Philippines. Several trillion dollars of public investment spent trying to counteract the shock of the Great Recession have dried up – much of it was wasted.
Consumption and private investment meanwhile haven’t grown enough to pick up the slack left by shrinking government expenditures. China’s opaque and extensive shadow-banking system worries many investors, leaving them to wonder if complex debt liabilities of an unknown scale represent a ticking time bomb. THERE’S A NEW SHERIFF IN TOWN India, on the other hand, is a net importer of energy products; falling prices will actually improve its current account. Narendra Modi, India’s newly elected Prime Minister, has demonstrated his pragmatism and desire for reform, taking advantage of the fall in energy prices to cut wasteful state fuel subsidies. He now plans to reform complex labor laws and invest in public infrastructure. Previous government failure to do so has prevented India from becoming a manufacturing economy on par with China. India is one of the only countries in the world that requires large industrial employers to get approval from public officials before firing employees. Thanks to its import composition and Modi’s reputation as the darling of international investors, India looks best positioned to weather the storm of capital flight and falling oil prices. India’s currency has outperformed most of its emerging market peers by miles. To be fair, the divergent fundamentals of the BRICs economies have been longstanding. However, unlike the BRICs of the boom years, the BRICs of 2015 are no longer the engines of global growth, but are instead being superseded by advanced economies and their smaller emerging market peers. Ultra-low interest rates in the Eurozone and Japan will hopefully keep yield-hungry investors actively engaged in emerging markets; otherwise, the BRICs can BRICS ECONOMY Real GDP Growth per Year 15% 10% 5% 0% -5% -10%
no longer expect to be the joint beneficiaries of easy money. All this calls into question the wisdom of conflating a group of countries with radically divergent profiles. The BRICs are cracking, some more worryingly than others. Their leaders must take bold steps to reinforce the foundations of their economies through structural reforms, lest their houses come crashing down around them.
Declining Fortunes Served with a Side of Texas Tea HOW FALLING OIL PRICES ARE THREATENING AMERICA’S BOOMTOWNS by Gillian Lee Cartoon by Linda Navon Chetrit
or years, we have listened to our parents and our grandparents fondly reminisce about the days when gas cost one dollar a gallon, not four. In recent months, however, the price at the pump has declined, and we have experienced a taste of the life our parents spent years bragging about. Falling gas prices are the result of a nearly 50 percent drop in the price of a barrel of crude oil since this past June. But while lower oil prices are a source of relief for consumers, oil-producing cities that have built their infrastructures in the heart of the U.S. oil patch are suffering. A SLIPPERY DECLINE Supply and demand factors are both at the core of the fall in oil prices. The falling oil prices can partially be attributed to a decrease in China’s demand for oil. In
2001, China opened to world trade, and China’s subsequent increase in demand for oil helped drive the price from $20 a barrel to $100. Nowadays, China’s economy is slowing and the manufacturing sector is facing losses due to excess supply. Both of these problems point to a reduction in the demand for oil. It is unlikely that the oil market will find another country that will demand the same amount of oil China once did, thus driving down the price. The Organization of the Petroleum Exporting Countries, or OPEC, a cartel that produces about 40 percent of the world’s crude oil, decided to allow prices to keep falling. Venezuela and Iran wanted to cut back production to intervene in the oversupplied market for oil, but Saudi Arabia refused. OPEC is now effectively engaged in a price war with the United States in the hopes that U.S. shale production will lose profitability due to declining oil prices, causing American producers to shut down. The cartel faces a Nash equilibrium problem of production because Venezuela and Iran must choose their best strategy given the fact that Saudi Arabia is choosing not to curtail production. While all three countries may be best off collectively by agreeing to cut production, each country has an individual incentive to produce as much as possible. As no such agreement can be made, it does not seem as if oil prices will rise anytime soon. BLACK GOLD BOOMTOWNS Midland, Texas is among the cities that underwent the transformation from a forsaken, sleepy town to a brilliant, bustling city buoyed by oil production. After the discovery of oil in Midland in 1923, the boom and bust cycle of
OPEC doesn’t function as a cartel. They are a political club with political standing and a big microphone. There is no evidence of collusion.
— JEFF COLGAN Richard Holbrooke Assistant Professor in the Department of Political Science
Photo by Madeleine Johnson
Cartoon by Linda Navon Chetrit
INTERCOLLEGIATE FINANCE JOURNAL • SPRING 2015
the oil industry came to dictate the quality of life. In the early 1980s, economic prosperity in Midland was characterized by a Rolls Royce dealership, a steep increase in construction, and opulent parties where champagne flowed freely. Then came the oil bust, and by 1989, nine of Texas’ largest banks failed and the Rolls Royce dealership was replaced by a tortilla factory. In the past decade, the fortune of Midland was once again transformed by the advent of technologies in fracking and horizontal drilling, which allowed oil companies to exploit the multiple layers of shale deep beneath the ground in the Permian Basin. A repeat of the early 1980s was imminent. The population of Midland grew by almost 40,000 people from 2010 to 2014, and large companies such as Chevron built their local headquarters in Midland. However, this good fortune may soon grind to a halt. WOES OF THE WILD WEST Although the United States Energy Information Administration estimates that households will save about $750 on gasoline this year, the fall in oil prices is a serious threat to local economic activity in the heart of the oil industry. In light of the recent drop in prices, residents of boomtowns are growing nervous that another bust is around the corner. Executives of oil companies lament that at prices less than $50 a barrel, drastic measures must be undertaken in order to sustain business, including laying off workers and shutting down rigs. People have been leaving the industry in search of opportunities elsewhere. In fact, it is estimated that for every 25 percent drop in oil prices, employment
could decline by 0.6 percent in Texas and 0.8 percent in Louisiana. Wall Street banks are predicting that the price of oil will hit a low of $40 a barrel before recovering. For now, consumers can give their wallets a brief respite while the oil boomtowns must buckle up for a wild ride.
Money Compass THE FUTURE DIRECTION OF US CAMPAIGN FINANCE by Lindsey Currier
here are a lot of things you could buy with $900 million dollars: a coffee for every person in America, a round trip to the moon, or all the goods and services produced in the Netherlands for a year. But could you also buy a U.S. federal election? This is the amount the Koch brothers have revealed they plan to spend on the upcoming election cycle. Their political organization, opaque and private, will spend an amount commensurate to both political parties’ budgets. Clearly, this enormous individual expenditure violates many people’s innate sense of fairness: as of 2014, 96 percent of Americans believe it is important to “reduce the influence of money in our politics.” So why does campaign finance continue to move in the other direction? KNOWN KNOWNS AND KNOWN UNKNOWNS Candidates are spending more and more money. According to the Federal Election Commission, in 2012, Obama and Romney together spent about $3.2 billion while political parties spent another $2 billion. The government still imposes limits on donations – albeit increasingly less strict ones. Recently, regulation of direct donations took another step backwards with the well-received 2015 Appropriations Bill. A piece of rider legislation attached to the bill dramatically raises donation limits, allowing individuals to contribute ten times as much per year, up to $324,000. Money spent to affect the election of a candidate without consultation from a candidate plays by an entirely different set of rules, which is to say, very few. Organizations that engage in this kind of spending are called independent expenditure groups, or Super PACs, made infamous after the Citizens United decision which ruled that there could be no limit to “independent” spending, which is protected as free speech. As a result, independent spending contributed another $2.1
billion to the 2012 election. That’s the money that’s easy to track. Then there’s dark money – all the spending that, essentially through tax loopholes, either does not have publicly disclosed donors or is not registered at all. The Koch brothers’ political network operates in this field as a complex organization that weaves together funders, tax-exempt groups, and limited liability companies to funnel money to various politically active nonprofits and Super PACs. In 2012, the Kochs’ organization spent $400 million, with virtually no information released regarding the donors. All in all, the money going into campaigns has ballooned. The average expenditure necessary to run for Congress has risen 555 percent from 1884 to 2012, and for victorious candidates, average expenditure is now over $10 million. Intuitively, this sounds alarming – and it is. DOMINANT DONORS A government by the people is designed for each citizen to have an equal voice. But the legal circumvention of campaign finance regulations means that the majority of the money injected into the system comes from an elite few. The donors that really matter constitute no more than .05 percent of the population. For example, in 2012, 132 people made 60 percent of all contributions to Super PACs. Simultaneously, candidates need increasingly large amounts of funding to even be able to compete, to the extent that congressmen spend between 30 percent and 70 percent of their time raising money. The result is simply a game of incentives. In order to have enough funds to be a viable choice, candidates have to appeal to a few special interests. But the problem is also greater than that. Politicians don’t merely need the money to get on the metaphorical ballot, there’s also a direct correlation between how much they spend and how big they win. In the 2012 election cycle, the candidates that outspent their opponents were victorious 95 percent of the time. BAD ECONOMICS, NOT BAD PEOPLE Despite what “Scandal” and “House of Cards” would have us believe, politicians tend not to seek office with the intention of being duplicitous schmucks. If the goal is to have representatives who are responsive to the opinions of the public, the focus should not be on who is elected as much as how they are elected. To this end, there are a number of reasonable proposals circulating to realign incentives. Most ambitiously, some are hoping to reverse the effects of Citizens United. This would stem the flow of money from
independent expenditure groups and level the playing field for everyone else. But it would also require a supermajority in both the House and the Senate, which, to understate it, is unlikely given the political climate. Perhaps an obvious solution would be to do what was done to voting over a hundred years ago to prevent corruption: make it secret. The logic is that preventing politicians from knowing where their funding comes from eliminates the possibility of them favoring those special interests. Having an anonymous donation booth is not a new idea, rather it was proposed more than a decade ago by Ian Ayres and Jeremy Bulow of Yale Law School, who designed an elaborate system of releasing donations in small amounts to candidates to ensure anonymity. This idea has never gained much traction politically, perhaps because of its perceived complexity and perhaps because of its potential for creating disincentives. As occurred with a blind trust set up in – but soon removed from – Florida’s Dade County, it’s possible that people will simply stop funding campaigns. Currently, the ideas with the most life are built on the concept of small donor public funding. There are two competing general proposals. The first, a voucher system, would give every voter a voucher of say, 50 dollars, to contribute to candidates of their choice. For a relatively small tax burden, the result would be a total of $6 billion in financing for federal elections. This would far outstrip the amount currently spent and reweigh the system in favor of average voters. The second solution proffered is a matching funds system, in which the government would match small donations to candidates. Both proposals only need a simple majority in Congress. However, both are trapped in partisan politics and suffer from lack of voter awareness. MORE THAN THE POOR In the Federalist Papers No. 57, James Madison described the electors of the government as: “Not the rich, more than the poor.” It’s been over 200 years since, and somehow, in the intervening time, the system has deviated from that ideal. It did not happen as the result of willful action, but from the general effects of individuals responding to structural incentives – the ability to spend money to make laws more favorable and the need to find money to stay in office. If a responsive government is what we seek, change starts not with chastising politicians or the Koch brothers for failing to live up to our moral standards. It would be far better to focus on restructuring the system so it naturally produces a truly representative democracy.
INTERCOLLEGIATE FINANCE JOURNAL • SPRING 2015
The Terror of the French Economy MOVING PAST CHARLIE HEBDO by Nikhil Kumar
he string of terrorist attacks that struck Paris and the surrounding Île-deFrance region in January engendered an outpouring of sympathy and solidarity on a global scale. Debates about freedom of expression and French identity sprang up in countless living rooms, town squares, and websites. And, unfortunately, Islamophobic violence escalated rapidly in France, with 128 incidents reported between Jan. 7 and 20. Although much analysis of the situation has been framed in terms of a clash of cultures, there is, in reality, a single common enemy: the French economy. The country’s recent stagnation has fanned hostility towards Muslim immigrants, creating an environment ripe for both terrorism and the resulting backlash. THE LAND OF THE SUN KING… Economic indicators paint a portrait devoid of the vibrancy one would expect from the birthplace of Versailles and macarons. In France, the unemployment rate reached 10.4 percent in the third quarter of 2014; it has risen almost without fail since 2008. Inflation in December 2014 was just 0.1 percent, stoking fears of deflation. And GDP grew by a mere 0.4 percent in 2014 – below the Eurozone average of 0.8 percent – thanks in part to an outstanding budget deficit and declining investment. France’s economy may not be in recession, but its sluggish performance is hardly reason for optimism. High-ranking officials in the French government have demonstrated their desire to address the country’s lagging economy. In December, Socialist President François PRAYING FOR PROSPERITY Muslims peacefully gather in the banlieus for Friday prayers
Hollande and Prime Minister Manuel Valls backed the “Macron law,” named after Emmanuel Macron, the economy minister. The law would, among other measures, make some professions more competitive and allow select retailers to open on Sundays. In response to the proposal, many Socialists voiced their concerns, including the influential leader Martine Aubry, who wrote in the French newspaper Le Monde: “Do we want to make consumption the alpha and the omega of our society?” That the former head of the French Socialist Party would have a tense relationship with liberal capitalism is unsurprising, but in such a political environment, it is difficult to envision the French economy regaining the intensity of the sun that symbolized Louis XIV, during whose reign France became the most powerful country in Europe. …MEETS THE STAR AND CRESCENT Ms. Aubry’s point might be compelling if not for the economic situation of many of France’s six million Muslims. According to a study from the Brookings Institution, unemployment among immigrants in France is twice as severe as among the general population, and young people of North African origin are even worse off; the study calls unemployment “the biggest obstacle to integration and the biggest impediment to advancement for immigrants.” In 2013, unemployment among immigrants from outside the European Union was 10 percentage points higher than among French nationals. Muslim communities suffering from high unemployment, which often exist in the banlieues surrounding French cities, cannot afford tightening government expenditure alongside a conspicuous absence of convincing liberalizing reforms. Adding to the headaches of many French Muslims is the anti-immigration rhetoric of right-wing leaders such as Marine Le Pen, the president of the conservative party Front National. In an op-ed for The New York Times written in the wake of the January attacks, Ms. Le Pen called mass unemployment “an additional burden…which is itself exacerbated by immigration.” It is clear, then, that much of
the French nationalism and Islamophobia that have recently gained strength stem largely from economic fears. Indeed, the link between xenophobia and economic troubles in France stretches as far back as the 1800s, when immigrants came from Southern Europe rather than North Africa. THE PLOT THICKENS Of course, France’s troubles have roots that extend beyond the economy, and even beyond France itself. The French policy of laicite (secularity), an extreme separation of church (or mosque) and state, led to a ban in 2011 on any clothing that covers the face, which disproportionately affects Muslim women who wear the niqab or burqa. As recently as last October, a Muslim tourist was asked to leave the Opera Bastille in Paris because she was wearing a niqab. In addition, Muslims represent 60 percent of French prisoners but constitute just 7.5 percent of the general population. Both the “burqa ban” and the disproportionate incarceration of Muslims point to the difficulty of North African immigrants in fully integrating into French society, a problem that is compounded by economic stagnation. Furthermore, this story has played out and continues to play out throughout the European Union, if somewhat less markedly than in France. In 2010, 13 million Muslim immigrants made their home in the Union, and that number has since grown. A Pew Research study from 2014 actually found that 72 percent of the French had a favorable view of Muslims, making it more accepting than any country surveyed and thus highlighting the complexity of the situation. And xenophobic, nationalist parties similar to the Front National have gained momentum across the region, from the UK Independence Party to the PVV in the Netherlands and the Golden Dawn in Greece. Like the Front National, these parties have capitalized on economic worries in the wake of the Great Recession to target immigrants as scapegoats. A NEW DAWN France’s economic woes undoubtedly played a role in the radicalization of the terrorists responsible for the January attacks, who came from banlieues plagued by high unemployment and scant opportunity. But it is also apparent that the ensuing attacks against Muslims, who suffer disproportionately from such hate crimes, were caused in part by fears over job security and economic well-being. Standing by policies that advance the economy appears to be the French government’s best bet for reducing the risk of future terrorism and preserving the open, harmonious society that it covets so dearly. And in light of the proliferation of xenophobic sentiment throughout Europe, it seems likely that an EU-wide economic boost would ease tensions across the continent.
Trimming the Family Tree INDIA’S STERILIZATION POLICY by Sarah Park
PRO-CHOICE OR NO CHOICE? Women in India recover from mass sterilization surgeries at the infamous “sterilization camps”
hile China’s one-child policy has sparked widespread controversy and garnered significant attention within the international community since its introduction, few are aware that India was actually the first country to implement a population control policy in 1950. With a population of 1.3 billion people currently growing at an annual pace of 1.6 percent, India is just shy of being the most populated country in the world; it is predicted that its population will surpass China’s to become the world’s largest by 2030. Due to fears that overcrowding and resource scarcity would breed political, economic, and social instability, India decided to establish a mass sterilization program. Since the program’s inception over half a century ago, millions of women have been sterilized at the behest of public health workers that are paid to encourage women to undergo the procedure. It is the most common method of birth control in India today; some estimates state that 37 percent of married women are sterilized. According to the Indian government, doctors performed upwards of four million such sterilizations in 2013 and 2014 alone. In addition to raising ethical questions about what is an essentially coercive practice – the government pays public health workers and doctors to push the sterilization program – these procedures have come at a high price, economically and in terms of human lives. THE STORY BEHIND STERILIZATION The Indian government is the first country to have instituted a mass sterilization program specifying target numbers for doctors. Although the government asserts that it stopped setting sterilization goals in the 1990s, doctors claim that they still exist, if only now at the local rather than federal level. These locally mandated quotas place tremendous pressure on doctors to perform an unrealistic and unsafe number of procedures each day, often with tools and supplies that are insufficient or obsolete and in makeshift, unsanitary conditions. DANGEROUS OUTCOMES In order to maximize efficiency and the quantity of operations performed, women are typically shuttled to what are known as “sterilization camps,” where doctors mindlessly execute surgery after surgery. The health workers or “motivators” responsible for bringing women to the camps are paid 200
rupees, or $3.25 USD, per head. Not only are they compensated based on how many women they bring to be sterilized – undoubtedly incentivizing them to assemble as many patients as they can – but their payment is in no way affected nor do they suffer any consequences if the women they bring contract illnesses or die as a result of the procedure. Because of this immunity, motivators are solely interested in bringing as many women as they can to these camps. In order to entice women to agree to the procedure, they often downplay the severity of the surgery. A combination of unrealistically high quota numbers, a lack of sufficient doctors, and the fact that doctors and “motivators” are paid for each operation performed regardless of the outcome has led to surgeries that are conducted haphazardly and in dangerously short periods, often producing devastating consequences. Some doctors are forced to perform as many as 85 surgeries in six hours, meaning that the time spent on each patient is minuscule, only a matter of minutes. Patients are rarely properly INDIA’S STERILIZATION In Millions of People 5
4 3 2 1 0 4 200
examined before the operation and are usually discharged immediately without any follow-up care. As a result, many end up suffering from illness or infection post-operation, some even succumbing to death. PUTTING A PRICE ON FERTILITY Although the sterilization program is technically voluntary, the compensation
– 1,400 rupees, or the equivalent of $23 USD – can equate to as much as a month’s salary in rural India. For many, that is an offer too tempting to turn down. Moreover, many local governments include additional incentives such as cars and electrical appliances for those who undergo sterilization. Health officials argue that offering economic incentives to women in exchange for undergoing sterilization limits their contraceptive choices and is exploitative, given that many of these women are uneducated and poor. Many of them often do not even realize the extent or gravity of the procedure they are undergoing, and lack the resources to learn more properly in order to make an informed decision. Furthermore, the intense focus on sterilization has detracted attention and funding for other contraceptive options, such as condoms – which also protect from STIs – and birth control pills. THE HARSH REALITY OF COSTS Between 2009 and 2012 alone, the Indian government awarded compensation for 568 deaths resulting from sterilization, although many believe the number of deaths from sterilization during this period to be much higher. This number also does not account for the hundreds of women who have become ill or contracted infections after the surgery. Families of women who die receive compensation packages of 400,000 rupees. Over the past 10 years, 12 women have died from sterilization each month on average, meaning that each year the Indian government spends nearly 58 million rupees alone on death compensation. However, this number does not even begin to cover the true costs of these deaths. When the salaries of health workers and doctors are considered together with the cost of establishing and supplying the sterilization camps, it becomes evident that the financial costs of mass sterilization are quite immense. The money currently being poured into sterilization should instead be used to reform India’s health system and to fund the spread of safer forms of birth control. The existence of many other types of cheap, accessible birth control and the clear economic and moral costs of sterilization provide hope that one day, mass sterilizations will be a thing of India’s past.
No More? WHY THE PHYSICAL STORE STILL MATTERS by Rachel Binder
rick-and-mortar stores are crumbling. Shopping malls continue to grow vacant and foot traffic in stores has consistently fallen. The traditional store once served as a place of gathering and socialization. With the increasing popularity of social media and online shopping, it no longer serves the same purpose. Now, when thinking about the future of personal consumption, all bets are on online retail. At the same time, online retailers such as Amazon and Warby Parker, which have had success selling products exclusively online, have decided to open brick-and-mortar stores. This competing dynamic begs an interesting question: if the brick-and-mortar store is growing obsolete, what is driving these online retailers to open up physical stores?
nel retail, an approach that integrates online, mobile, and in-store shopping. Omnichannel retail allows consumers to complement the resourceful online experience of price comparison and consumer ratings with the in-store experience of interacting with and physically having the product at the time of purchase. A current consumer trend that reflects the central aim of omnichannel retail is “webrooming,” a process in which customers research a product online and then go to the store to purchase it. Webrooming brings customers back into the store, a scenario that many consumers actually prefer. A study by the International Council of Shopping Centers found that when shopping, six out of every ten people who research the product online will ultimately buy it in the store.
WHEN TWO WORLDS COLLIDE Part of the reason for the push for physical stores rests on the fact that many younger consumers, especially millennials, have embraced a new style of shopping. In order to make the most of their shopping experience, consumers now utilize the online space as well as the physical store. A consumer survey by The Intelligence Group found that 72 percent of millennials do research online before going to the store or mall. In response, retailers are adopting a strategy known as omnichan-
THE PRIME APPROACH The incorporation of the multi-channel approach by retailers is reflected in Amazon’s recent decision to open a physical store in New York City. Amazon has an enviable e-commerce business model, including its Prime membership that provides free shipping and two-day delivery. Last year, Prime memberships increased by 50 percent, and the service achieved a 96 percent approval rating among its subscribers. Despite this success, the company is having trouble delivering on
time given the high demand for two-day shipping. As a result, Amazon is looking to acquire the vacant stores of the soon-to-be-bankrupt Radioshack so that customers can pick up online orders as well as process returns and exchanges. Warby Parker, another online retailer known for its affordable, trendy eyeglasses, has already opened several brick-and-mortar locations and plans to keep expanding its physical presence. The company originally sold its glasses exclusively online in order to avoid the over-
BUY IN STORE
WEBROOMING SHOWROOMING BUY ONLINE
SEE IN STORE
FLUCTUATION FAD Why Airline Ticket Prices Are so Unstable, Angela Marie Teng 20
THE PRICE IS RIGHT An Interview with Airline Pricing Strategist Eytan Kurshan, Rachel Binder 21
NOT SO FAST How French Fries Are Gobbling Up Your Wallet, Tiffany Chen 22
LET’S GET PHYSICAL The physical store is now providing consumers with an interactive shopping experience, satisfying the urge for instant gratification.
head expenses that come with owning a store. Soon after opening its first store, however, it realized that the in-store experience combined with the reduced costs of shipping was extremely profitable. The company now caters to consumers who prefer an in-store experience, and as a result, the eight storefronts sold an impressive average of about $3,000 per square foot in 2014. TUNING TO THE RIGHT CHANNEL Using the omnichannel approach, retailers can directly cater to the preferences of consumers, especially millennials who are and will continue to be the main drivers of retail sales. Although millennials enjoy the plethora of information that the internet has to offer, many prefer to touch and feel an item before purchasing it. Millennials also crave the experience of browsing just as much as they enjoy purchasing goods, making the physical store not only a place to pick up goods but also a form of entertainment. This desire for instant gratification has led many consumers back into the store – but not just any store. The most successful stores have been the ones that truly cater to the consumer experience. These stores incorporate what many have termed a “multisensory experience,” or the opportunity for customers to interact with and test out products within the store. This engagement with the product, on both an emotional and physical level, creates
a feeling of ownership over the product as well as a sense of brand loyalty. Creating such an experience in the store makes the activity of shopping no longer just a chore, and allowing interaction with the product allows consumers to connect with the product instead of simply viewing it on a screen. AN APPLE A DAY By designing their stores around this multisensory experience, many companies – most notably Apple – have succeeded in bringing customers back into the store. In an Apple store, customers walk in to find an open, expansive room with internet-connected devices perfectly spaced out across clean, refined wooden tables. The Apple store’s design, in itself, is an open invitation to test out their products. Before even purchasing an iMac or an iPhone, customers know what it’s like to really use the device. Another component to Apple’s in-store success is the expertise of their in-store customer service. When originally designing the store, then-CEO Steve Jobs and retail strategist Ron Johnson looked to the Four Seasons Hotel’s concierge as a model for their customer service strategy. Like a concierge desk, Apple’s Genius Bar offers in-store support for Apple products from trained and certified employees, providing another incentive for the consumer to visit the brickand-mortar store. By offering one-on-one customer service
and the ability to interact with the products before purchase, Apple has figured out a way to keep the brick-and-mortar store alive. Among all in-store retailers, the company now earns the highest annual sales per retail square foot. At the end of 2014, it was the 24th largest retailer in the US by store sales. And although Apple trails in in-store sales behind Best Buy, another electronic retail giant, its share of the market has risen from 6 percent to 14 percent in just 4 years. In that same time period, Best Buy’s share has dropped from 33.5 percent to 29 percent. NO BULLDOZER NECESSARY Despite the common argument that brickand-mortar retail is approaching its downfall, what is really needed is a reinvention of the traditional store and the utilization of multiple channels to reach consumers quickly and easily. Although the future of retail may be dominated by e-commerce, the role of the physical store is still critical for a new generation of shoppers who, despite growing up with the Internet, still appreciate the experience of shopping. If retailers can complement the multisensory experience of the brick-andmortar store with the convenience and ease of e-commerce, the traditional store does not have to be rendered obsolete.
INTERCOLLEGIATE FINANCE JOURNAL • SPRING 2015
Fluctuation Fad WHY AIRLINE TICKET PRICES ARE SO UNSTABLE by Angela Marie Teng
nyone who has ever ridden a plane has faced turbulence – not just in the ups and downs of the plane ride but also in constantly changing ticket prices. Even with a drastic decrease in the price of oil over the last seven months, airline fares continue to remain volatile. What causes these oscillations, and is there any way to get the better end of the deal? THE FREQUENT FLIER PROBLEM Say you check the catalogs for a oneway ticket from Manila, Philippines to Providence, RI. On average, a roundtrip ticket costs about $1,500 to $1,700 for an economy seat. It’s not too bad of a deal, but a lower price and a more comfortable seat would definitely be preferable. You decide to make do with the overpriced tickets, but wait a few days to finalize your schedule. Three days later, you visit the airline’s website to purchase the ticket. For the exact same route and the exact same seat, you find that the price has jumped to $3,500. However, it is imperative that you get those tickets. Perhaps, like me, you are a student who is about to arrive late for the opening of spring semester. So you get the tickets despite the huge jump in price. The days roll on, and two days before your flight, just out of curiosity, you check the airline website again. Ticket prices have dropped down to $900. DELTA, DISCOUNTS, AND OTHER DILEMMAS It turns out that airlines do intentionally vary their fares. According to CheapAir, United Airlines has 43 distinct one-way economy tickets for flights from LA to Chicago. These tickets can range in prices from as low as $109 to as high as $1,765 – more than 16 times the money for the same seat! By charging individual consumers the price that they are willing to pay, airline companies are able to maximize their profits. This practice is compounded by the increasing presence of oligopolies among airline companies. Delta Airlines has now merged with Northwest Airlines, Continental Airlines with United Airlines, and American Airlines with US Airways. In effect, these airline companies have increased their market power:
consumers have fewer options to choose from when looking for flights, which allows the airlines to keep their prices high. THE HIGHS AND LOWS Throughout the week, airline companies use special programs and technologies to track the buying and selling of airline tickets. They divide the number of seats in each section so that there are three main pricing groups: low, medium, and high. This creates a range of prices for similar seats in the economy section. Once the companies reach their quota for each pricing group – for example, if all the cheap seats are taken – then they can charge a higher price for a similar seat. On the other hand, when there is an abundance of empty seats a few days – or even hours – before a flight, airlines typically practice incremental pricing. As long as customers will still buy the tickets, and the price level contributes marginally for the recovery of the airline’s fixed cost, the airline will still offer it. This is why it isn’t uncommon to see airlines like Cebu Pacific offering one-way tickets for $5 throughout the Philippines. To maximize their benefits, some airline companies have made it a practice to overbook their flights, assuming that there will be some “no-shows” based on their previous experience. WANTS VS. NEEDS To help explain the constant fluctuation of prices, we can also look at the concept of price elasticity of demand.
Let’s say there are two types of ticket buyers–those who need the tickets, and those who just want the tickets. The buyers who need the tickets will buy them no matter what the cost. Their demand is inelastic, meaning that they’re more likely to buy the tickets despite the price increase. The neediness of these people could range in intensity depending on how much they are compelled to purchase the tickets. These buyers could be business-people planning to attend a company conference, a desperate customer trying to make it in time for a personal crisis, or an overseas worker booking a flight for the holidays. On the other hand, the buyers who just want the tickets would buy them only if the fare were within their predetermined budget. Whether this buyer is a recent graduate trying to travel the world in 80 days, a couple planning their honeymoon in Paris, or a businesswoman just searching for a week of relaxation in the sandy beaches of Palawan, the buyer is very conscious of the varying airline ticket prices. Effectively, their demand is elastic. If the prices of the tickets increase too much, the customers won’t buy the tickets. MAXING OUT Airline companies understand price elasticities, and take advantage of this information to generate considerable income. Through a type of price discrimination method called yield management, airlines are able to magnify the amount of money each consumer pays for a single ticket. Because flights
Oil or Nothing
DECLINING IN OIL PRICES AND AIRLINE TICKET PRICES
by Angela Marie Teng
lthough oil prices have been consistently falling, fuel only accounts for 35 percent of ticket prices. Despite this effect on a small percentage of the ticket price, the decline in oil prices should still influence ticket pricing. In the past, lower oil prices and a decreased demand for oil have had an effect on the price of airline tickets. This time, however, it appears that the change in oil prices is due to an increase in oil supply, as America is now a leading oil producer. What this means for airline companies is that their consumers will still have enough money to purchase tickets because the drop in oil price is a supply rather than a demand issue. Moreover, the airline industry is doing much better than it has in the past, with airlines filling up about 85 percent of their flights. If people are buying tickets at the current prices, there is no need for airlines to lower their prices.
are a perishable resource and airplane capacities are fixed, firms in the industry have increased market power. Strategically studying consumer behavior and timing allows airlines to factor this variable in when pricing flights, thus allowing them to find the price that is most profit-maximizing. With improved and innovative technology, airlines are able to charge consumers different prices for the same good. This third-degree price discrimination allows airline companies to segregate their consumers into different groups: tourists and business fliers, round-trip and one-way ticket purchasers, peak-season and off-season travelers, and so on. For the most part, these groups have different budgets. By charging each group with exactly the maximum amount of money they are willing to pay, airlines get the upper hand. FLYING HIGH It’s important to note that some of these high prices come with actual benefits for the traveler. For example, economy comfort, which provides a few more inches of legroom than the typical economy seat, commands a higher price than the economy class. Business class and first class, although much more expensive, also have significantly better food options. Priority members also benefit from various perks such as being allowed to board the aircraft first and having access to an airport lounge. Ticket prices also increase during peak seasons. Going to the beach is more expensive in the summer, and ticket prices are higher during the holiday season than at other times of the year. More often than not, buying in bulk, as in under the same account or credit card, allows for individuals to gain cheaper per-person tickets while the airline gains more expenditure as a whole. Even when accounting for these variables, however, airline flight prices are still very unstable. While airline ticket buying is an acquired skill that requires a lot of planning, experience, and strategy, it is still a constant struggle to find that perfect price. In the end, despite the persistently decreasing trends in oil prices, the unpredictability of the prices of airline tickets is still dependent on consumer behavior and airline capitalization. Many questions, like which ticket deal is better than the other, or whether or not this pricing method is ethical, are still somewhat ambiguous. But with the rise of online travel booking websites like Orbitz and Expedia, consumers may soon be able to start outsmarting the airlines.
The Price is Right
AN INTERVIEW WITH AIRLINE PRICING STRATEGIST EYTAN KURSHAN
by Rachel Binder
EYTAN KURSHAN BROWN ‘08
IFJ: WHAT FACTORS INFLUENCE THE PRICING OF AIRLINE TICKETS? EK: There are many factors that airlines consider when it comes to pricing, but at its core pricing is based on supply and demand: how much demand exists at every price-point, and how much supply, or seats, are offered by airlines on routes. Supply is fixed, but demand is the unknown. That’s why airlines have Revenue Management teams like mine. We use all kinds of data to forecast demand and then use our forecasts to determine the right fares to offer. IFJ: WHAT ARE SOME OF THE PROGRAMS AND TECHNOLOGIES THAT AIRLINES USE TO FIGURE OUT TICKET PRICES? EK: Our system needs are two-fold: data and optimization. All companies store and analyze data, so it’s the optimization side that is unique to airlines. The optimization system starts by developing demand forecasts from observed demand on similar flights in the past. It then turns those demand forecasts into “inventory allocations,” or recommendations on how many seats to sell at various price-points. Assuming no change to the inventory allocations, the lowest fares will sell first followed by the more expensive fares. In reality, though, the inventory allocations are adjusted whenever actual demand diverges from the forecast. Rarely are forecasts perfect, which helps to explain price fluctuations. IFJ: WHY HASN’T THE RECENT DROP IN OIL PRICES LOWERED AIRLINE TICKET PRICES? EK: Lower fuel prices, though always welcome, do not change our business strategy. Our long-term growth plan as an airline is based on an assessment of network demand over time, and we have no plans to change our capacity guidance based on short-term swings in the price of fuel. IFJ: WHAT ARE SOME TIPS TO AVOIDING HIGH AIRLINE TICKET PRICES? EK: Whenever possible, travel on days that are in less demand. Tuesdays and Wednesdays are often cheaper than Fridays and Sundays. Traveling in the early-morning or late-night can also be less expensive than midday flights. Fares also tend to be lower if purchased more than two weeks before travel dates. IFJ: WHAT IS YIELD MANAGEMENT AND WHAT EFFECT DOES IT HAVE ON PRICES? EK: This is the process (described above) of analyzing customer demand to determine the right price to offer for any given flight at any given time. IFJ: DO TRAVEL BOOKING WEBSITES LIKE ORBITZ OR EXPEDIA HAVE AN IMPACT ON HOW AIRLINES PRICE THEIR TICKETS? EK: Travel sites make it easy for customers to shop around, so it is important for fares to be competitive.
by Tiffany Chen Photos by Madeleine Johnson
INTERCOLLEGIATE FINANCE JOURNAL • SPRING 2015
OVER THE PAST FEW DECADES, AMERICANS HAVE BEEN LOOSENING THEIR BELTS UNDER THE PREMISE THAT JUNK FOOD IS CHEAPER THAN HEALTHY FOOD. THAT IDEA, OF COURSE, IS COMPLETE GARBAGE. WITH THE RISE OF TECHNOLOGY AND SOCIETY’S CONSTANT DEMAND FOR “QUICKER” AND “CHEAPER,” THE FAST FOOD INDUSTRY HAS BOOMED. REFLECTING AMERICANS’ GROWING WAISTLINES, THE INDUSTRY HAS EXPANDED FROM A MODEST $6 BILLION IN 1970 TO A BLOATED $160 BILLION LAST YEAR. HIGH CALORIE, LOW COST Many might argue that fast food can be bought for a greater amount of calories per dollar. Individuals can purchase a 360-calorie McDonald’s McChicken sandwich for $1.69, yielding around 213 calories per dollar. If every member in a family of four wanted to eat a McChicken sandwich for lunch, only $7 would be required for the entire meal. For an even bigger bang for the buck, Dunkin’ Donuts offers its Chocolate Coconut Cake Donut for $1.50, packed with 550 calories that sits nicely in the palm of your hand (and later, your stomach). That’s 367 calories for every dollar spent. Assuming a 2,000 daily calorie limit and an insane craving for Chocolate Coconut Cake Donuts, one would only have to spend $5.45 to fulfill his or her daily caloric (and donut) intake. Important to note, however, is the fact that not all calories are created equal. Bodybuilders don’t gorge themselves on junk food to increase muscle mass precisely for the same reason that super models don’t adhere to calorie-limiting diets of fries and chicken nuggets. Essentially, junk food’s energy benefits are diminished by a glaring lack of nutrients. A BANANA A DAY Interestingly, healthier foods can be cheaper than fast foods – even on a per calorie basis. According to the Bureau of Labor Statistics, bananas currently cost about $0.59 per pound and carry
around 400 calories for every pound, which is about 678 calories for every dollar spent on bananas. The average banana weighs in at less than half a pound, so not only does it provide more energy for the amount of money spent but it also beats out junk food in terms of the quantity that can be purchased at a given price. Despite these lower costs, people still cling tightly to fast food for its convenience: a meal is ready faster than one can say “bananas,” and one doesn’t even have to cook it yourself. And woe is he who finds himself subjected to an extra five minutes of washing the dishes. Another thing to consider is the difference between caloric and nutritional needs. While a Happy Meal at McDonald’s might pack a whopping number of calories for a handful of dollars, there is a much higher cost for nutrients per dollar hidden in a box of chicken nuggets when compared to a bunch of bananas from Costco. One banana contains one gram of fat and six grams of dietary fiber while a box of chicken nuggets boasts
twelve grams of fat and one gram of dietary fiber. As such, fast foods sacrifice quality for quantity at low prices and low nutritional value. FAST BUT FATTENING While it may seem as though the only cost tied to fast food is the price of the meal and drink, another cost – both pricier and more dangerous – lies hidden around America’s waistline. Over the past three decades, obesity rates have more than doubled, driving up health care costs and threatening the lives of affected Americans. The lack of nutrients and the detrimental effects of high fat and carbohydrate levels suggest that junk food is the main perpetrator behind our country’s current bloated state. Among children in the United States, pizza is one of the most preferred foods – second only to bread-based desserts such as doughnuts and cupcakes. With a significant amount of fat, and sodium – approximately 25 grams and 700 milligrams, respectively – a single slice of Domino’s pizza can account for 30 percent of a child’s recommended daily fat and sodium intake. A study conducted by the University of Illinois at Chicago observed that each day, around one out of every five American children between the ages of six and 19 will consume pizza. Obese children face an extra $19,000 in lifetime medical costs when compared to the average child,
Assuming a 2,000 daily calorie limit and an insane craving for Chocolate Coconut Cake Donuts, one would only have to spend $5.45 to fulfill his or her daily caloric (and donut) intake.
TIME IS MONEY Despite the belief that eating at fast food restaurants is cheaper than cooking healthier foods at home, purchasing health foods at a grocery store is actually much more cost-effective than buying a Big Mac at McDonald’s. Researchers at the American Dietetic Association assert that eating well to lose weight is no more expensive than opting for junk food. They found that when an individual purchased three fast food meals per day, the cost totaled to approximately $87 per week. Less than half of that amount – $43 per week – was required to purchase enough whole ingredients from grocery stores to prepare three meals per day. Thus, by buying healthy foods and preparing all three meals from home, the average American saves around $45 per week, as compared to eating out. An opportunity cost still exists though: how much money would you need to be paid to wash dishes and take the time to
A WHOLE IN ONE Despite the immediate, more tangible loss of time, there isn’t much doubt that eating fruits and vegetables creates a more sustainable, healthier diet over the course of an individual’s lifetime. Junk food reduces that amount of time in the long run. As such, cost should not serve as an excuse for consuming junk food over healthy food. The rise of the fast food industry and its promises of convenience, low prices, and instant gratification have resulted in a misguided preference for french fries and chicken nuggets over vegetables and nutritional value. More importantly, fast food chains drain money more quickly than their menu prices seem to imply. It’s time to both acknowledge and practice healthy eating as a more sustainable, salutary lifestyle. Individuals might be lovin’ it now – but junk food certainly won’t leave anyone’s wallet feeling full and satisfied in the future.
fewer calories per dollar
cook for yourself? Certainly, it must be acknowledged that there is an advantage to buying fast food: it’s fast. What McDonald’s, Burger King, KFC, and In-N-Out have in common is that they all provide ready-to-eat, fresh (to an extent), portion-controlled foods. Regardless of how often pundits and health advisors tout the benefits of home-cooked meals, at the end of a long work day when an individual returns to his apartment tired and hungry, a burger from McDonald’s is a glorious thing. And in a society that never sleeps, craves immediate satisfaction, and values its time over most other things, fast is good – and faster is better. In addition to the time an individual spends cooking, a meal at home also involves a trip to the supermarket, washing and vegetable-peeling time, and later dish-washing time. Minutes add up, and because time is money, the costs of a home-cooked meal also add up. It can indeed be argued that the convenience of fast food significantly outweighs its cumulative monetary costs, especially when factoring in the degree to which Americans value their time.
price: $1.59 / 1 gallon calories: 0
$1 = 0 calories
Wild Yellowﬁn Tuna Steak price: $12.00 / 8 oz calories: 339 $1 = 28 calories
Chunk Light Tuna In Water price: $1.19 / 5 oz calories: 125 $1 = 105 calories
Spam price: $3.99 / 12 oz calories: 1080 $1 = 271 calories
Russet Potatoes price: $.99 / 1 lb calories: 337 $1 = 340 calories
Eggs price: $1.49 / 6 eggs calories: 540 $1 = 360 calories more calories per dollar
suggesting that fast food is not as cost efficient as it appears. The numbers for adult obesity are even more overwhelming: more than one third of adults in the United States are obese, with each adult requiring an additional $1,360 in health care costs per year. While the average American ostensibly spends around $25 for two meals every week on junk food, the value doubles to around $50 when factoring in annual health care. Obesity also stirs up other hidden costs and opportunity costs including health education, suppressed job productivity, and health counseling. The average American – and the nation at large – needs to recognize that in the long run, consistently consuming fast food is actually much more expensive than just the sticker price.
Poland Spring Distilled Water
McDonald’s McChicken Sandwich price: $1.69 calories: 360 $1 = 360 calories
Dunkin’ Donuts Chocolate Coconut Cake Donut price: $1.50 calories: 550
$1 = 367 calories
Coca-Cola price: $1.79 / 2 liters calories: 800 $1 = 447 calories
STARTUPS & TECHNOLOGY
Extraterrestrial Capital WHAT DOES IT TAKE TO FINANCE FRONTIERS OF THE HUMAN IMAGINATION? by Frank Chiang
QUANT GEEKS ON WALL STREET How Quant Funds Are Dominating the Market, Tiffany Chang 28
NEED FOR SPEED Making the Case for Net Neutrality, Tom Pesce 29
UP-TEMPO TRADING How You Can Save Your Favorite Band, Liz Studlick 30
CHANGING THE BEAT OF THE MUSIC INDUSTRY Can Groovebug Transform the Way You Listen to Music?, Andrew Yin 31
HACK@BROWN A Different Way to Hack, Kerry Yan & Keegan Quigley 32
he prospect of exploring space has captivated people for centuries. From ancient stargazers to 20th century space missions, we have already come a long way. Today, with NASA’s space missions defunct, two private enterprises are leading the way into space: SpaceX and Virgin Galactic, and each brings with it a different set of aspirations and motivations for how space will impact life on earth. OFF TO SPACE SpaceX’s Falcon 9, the first commercial rocket to visit the International Space Station, prepares for new journeys at Spaceport America.
TWO MAD GENIUSES Tucked away in the Jornada del Muerto desert basin of New Mexico, Spaceport America is a $220 million, taxpayer-funded facility that houses both SpaceX and Virgin Galactic. This is where the cutting edge research and development for tomorrow’s space vehicles and technology takes off, thanks to the capital from some of the world’s most financially eminent entities. Before delving into the varied investors in Virgin Galactic and SpaceX, it is worthwhile to take a look at the two founders behind these risky businesses. Richard Branson, founder of Virgin Galactic, is chairman of the massive British conglomerate Virgin Group Ltd. You might be familiar with some of the group’s subsidiaries, including the mobile carrier Virgin Mobile and the airline Virgin America. But it doesn’t end there — Virgin Group’s offerings span industries as diverse as Virgin Books, Virgin Hotels, and even Virgin Rail Group. Elon Musk, founder of SpaceX, has his own share of past successes, including the founding of Tesla Motors and PayPal. It is thanks to the patronage of these two entrepreneurs that Virgin Galactic and SpaceX have gained the momentum that carries them today. CRASH AND BURN What would you do with $250,000? For over 700 ultra highnet-worth individuals, including celebrities like Justin Bieber and Lady Gaga, the answer to that question is to purchase a seat on SpaceShipTwo, Virgin Galactic’s aircraft that is slated to bring passengers into space next year. During each 150-minute voyage, passengers aboard SpaceShipTwo will be suspended in zero-gravity for all of only five minutes. Through this extravagant campaign, Virgin Galactic has generated almost $200 million. Last October, however, a test flight of SpaceShipTwo resulted in a deadly crash, killing one test pilot and injuring the other. Such tragedies as these are reminders of how risky and unknown this emerging industry is. Yet Branson stands by his mission to bring people into space. It seems that no setback is too great to deter the zeal of one of the world’s most storied entrepreneurs. And if the financial markets are any indicator of investor sentiment, the initial public offering of Branson’s separate airline venture, Virgin America, which was announced days in the wake of tragic SpaceShipTwo crash, outperformed analyst expectations by 25 percent. In spite of Branson’s resilience, the SpaceShipTwo crash casts an indelible shadow of doubt on Virgin Galactic’s entire space tourism model’s ability to generate profit. Passenger safety is a top priority. This concern only compounds with Virgin Galactic’s already precarious financial position, which relies heavily upon debt, drawn from the surplus of Branson’s own Virgin Group Holdings. There are fears that further accidents would delay Virgin Galactic’s profitability past the point of solvency, since rumor has it that Virgin Galactic has already used up most of the $380 million of equity invested by Aabar, an Abu-Dhabi based investment fund. CYBER SPACE On the other side, SpaceX’s primary undertaking today is not bringing humans to space, but rather launching 4,000 microsatellites that will bring Internet to the 60 percent of the world’s population without it. Though the details of this $10 billion project are nebulous at best to the public, Musk insists that these objects in
INTERCOLLEGIATE FINANCE JOURNAL • SPRING 2015
orbit will not only connect all of the earth, but will also form the basis for connecting Mars to the internet years down the line, all while generating opportunities for monetizing SpaceX’s business model. Like Virgin Galactic, SpaceX has steered clear of traditional capital markets. Rather than undergoing an initial public offering, like many large companies that seek to finance their operations, SpaceX has stuck to private investors. At the start of 2015, Google and Fidelity invested $1 billion into SpaceX, for a respective 7.5 percent and 2 percent stake in the company. It seems that with the prospect of providing Internet access to many, the interests of SpaceX and Google have aligned. LIFE ON MARS In the long term, Musk and Branson share similar aspirations: to colonize other planets. Musk asserts that humans may inhabit Mars as soon as 2026. As absurdly optimistic and audacious as that assertion may sound to the average person, many analysts and experts agree. At the very least, Musk and Branson have made a case convincing enough to get investors to fork over billions of dollars. Over a decade into the making, SpaceX and Virgin Galactic seem unfazed by the many setbacks to their grand scheme, and it seems that the human race may be on the cusp of a new era, propelled onward by several visionaries with unprecedented resources of private capital. For today, SpaceX and Virgin Galactic continue to push the frontiers of what today’s highly speculative investors are willing to actualize. Each rocket that is launched represents millions of dollars of financial backing, and an ambition that transcends this planet.
Quant Geeks on Wall Street HOW QUANT FUNDS ARE DOMINATING THE MARKET by Tiffany Chang
ost-crisis, the word “quant” has oft been regarded with alarm. Quants, or traders and money managers who use sophisticated mathematical techniques and computer models to make decisions in the market, were blamed by the media for propagating a domino-effect of stock-selling which led to a market meltdown and billions of losses. With books such as Scott Patterson’s “The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It” becoming New York Times bestsellers, it
QUANT HEDGE FUND RETURNS VS S&P 500 RETURNS Quant Hedge Fund
0% -20% -40%
Although in years of financial turmoil like 2008 quant funds strongly outperformed the S&P 500, these funds fall short of market returns many years.
is unsurprising that quantitative hedge funds have been so widely criticized. But do quants really deserve this bad rep? Model-based, or algorithmic, hedge funds as tracked by the Newedge Trend Index have returned an average of 19.7 percent during 2014, compared to the hedge fund industry average return of approximately 2 percent. Notably, quant fund Two Sigma Investments, LLC produced a whopping net return of 57.6 percent on one of its funds as reported by Forbes. Clearly, the quants are doing something that other market players can’t replicate. AGE OF QUANTS Hedge funds, or managed investment portfolios whose usage of leverage is unregulated, were first created in 1952 by Alfred Jones and gained traction in the late eighties with media coverage of spectacular returns. The first quantitative funds, centered on model-based techniques, emerged in the late sixties, and their popularity has since grown. Part of their increasing popularity comes from their seeming ability to make returns in the toughest of times: in 2008, quant funds returned nearly 21 percent, while the average hedge fund lost 19 percent and the S&P 500 lost 38 percent. Similarly, the recent crash in oil prices has caused a slew of losses for discretionary traders at the end of the year while quantitative hedge fund returns were boosted. With their data-driven algorithms, quant funds capitalized on the major drops in oil and government bond prices which their human counterparts were unable to react quickly enough to. Many quant funds, especially those who focus on high-frequency trading, count speed as their main competitive advantage. However, it is important to note that returns are not always so impressive. Since 2008, quant funds have, on average, lost money in three of the six years compared to a positive industry average return in all years except for 2011. WALL STREET UTOPIA FOR QUANTS? One of the most interesting aspects of the
quant hedge fund success story is that they employ mathematicians, physicists, and computer scientists, who are not regarded as traditional finance-types, as their masterminds. This opening of Wall Street to a different demographic that is — let’s face it — slaying it is a remarkable event. However, quant funds have also been shrouded in mystery, with many of the firms being media-shy and their strategies remaining well-kept secrets. Enter Quantopian, the first crowdsourced quant hedge fund. Introduced in private-beta in 2013 and released to the public in 2014, and with over $20 million funding from venture capitalists, Quantopian invites both amateur and professional quants to “come hack Wall Street” together on its cloud algorithmic trading platform. It gives users access to a suite of tools and an environment where they can build and test algorithms against over a decade of historical market data — thereby making Wall Street even more accessible to math and computer science whiz-kids. Quantopian also allows and encourages its users to collaborate on developing investing strategies and code. HEDGING YOUR BETS For those interested in trying out their algorithms with real money, the platform allows you to connect to your own Interactive Brokers account and trade your own money. Notably, the company plans to invite its most successful community members — those who consistently create returns on their own accounts — to be part of an elite Quantopian Managers Program, and manage up to $1 million of the capital invested in Quantopian and while earning a share of the returns. If you don’t want to put any of your own capital at risk but still want a chance to prove your quant ability, Quantopian also offers a monthly contest in which users can submit their best algorithms, which will be kept confidential and remain part of the submitter’s intellectual property. The winner will get to manage $100,000 of Quantopian’s funds, and keep 100 percent of the returns. Think you have what it takes to be a quant? Give it a go.
STARTUPS & TECHNOLOGY
MAKING THE CASE FOR NET NEUTRALITY by Tom Pesce
magine you’re driving on the highway when you come to a fork in the road. On the right is a tollbooth charging the standard fee; on the left is another tollbooth charging double the price. Most people take the right lane, of course, but if you’re willing to pay extra you can take the fast lane on the left. Which side would you choose? Now imagine you are not a driver but a business. Would you pay extra to have your website on the “fast lanes” of the Internet? This is the choice that large Internet providers want you to make. On February 26th, the Federal Communications Commission voted 3 to 2 in favor of Chairman Tom Wheeler’s proposal for new regulation on the Internet. While this vote is a step in the right direction for net neutrality, the new adopted rules will likely be taken to a federal appeals court by Internet providers and unapproving Republicans. The fight for the Internet highway will continue. LIFE IN THE FAST LANE Net neutrality is what you are used to. As of now there are no “fast lanes” to the Internet. All websites load to your computer at the same rate. Some of the large Internet providers such as Time Warner and Comcast would like to see this change and be able to charge websites for faster access to their content. While this means that regular web users would not be directly charged, websites may have to charge more for subscriptions or other products as their costs increase. In what Harvard economist Greg Mankiw
describes as standard economic theory, producers will shift costs to consumers as much as possible. In other words, while consumers may not be directly given the choice to pay more for fast lanes, we may end up paying more for our monthly Netflix subscriptions anyway. TRAFFIC JAM While Netflix Inc. is only one of the companies that would be affected by changes in net neutrality, it is certainly one of the most prevalent. At peak times, Netflix constitutes one-third of all Internet traffic in the United States. Streaming videos uses a lot of bandwidth. Netflix, along with other Internet content providers, is obviously in support of net neutrality, as they do not want to pay Internet service providers for streaming. However, if Netflix had to pay for Internet fast lanes, user subscriptions would probably be more expensive, but all that video streaming to your computer would be done a lot faster. Think about it next time House of Cards is buffering. Should Internet providers be able to break net neutrality and charge more for fast lanes? The Obama Administration does not think so. In his State of the Union Address on January 20th President Obama said, “I intend to protect a free and open Internet, extend its reach to every classroom, and every community, and help folks build the fastest networks, so that the next generation of digital innovators and entrepreneurs have the platform to keep reshaping our world.”
SPEED BUMPS Some conservatives, however, disagree. Back in November, Senator Ted Cruz tweeted “‘Net Neutrality’ is Obamacare for the Internet; the Internet should not run at the speed of government.” While many of the senator’s opponents have since poked holes in his comparison, Cruz’s comment typifies the Republicans’ response to proposals of government regulation for the Internet. Conservatives and telecom companies both fear that new government regulation will slow down the Internet in general, hurting businesses and consumers alike. Conservatives have also played the socialist card against those who call for net neutrality. Their claim is that such regulation is another attempt to destroy our free market system. After all, our capitalist society has run based on a “you get what you pay for” motto. Why should the Internet be any different? Ultimately, however, the FCC has good reason to preserve net neutrality. The Internet has succeeded on a basis of individual creativity. New ideas have been able to take hold because of the freedom that the Internet provides. Companies such as Facebook and YouTube began in dorm rooms. If these companies had to pay for fast lanes, there would be much larger barriers of entry to this new industry. While established companies may welcome this, it could stifle new creations that simply do not have the capital. Even conservatives should support rules that keep our industries competitive. Net neutrality keeps the roads open for the next big thing.
INTERCOLLEGIATE FINANCE JOURNAL • SPRING 2015
Photo by Cadence Lee
SAGE DELISSER BROWN ‘15 TEMPOTRADER FOUNDER
ike many startups, TempoTrader began with a few close friends trying to solve a problem they were passionate about. Like few others, however, it started with listening to rapper Earl Sweatshirt. “We were listening to some of his mixtapes before he dropped his first album, Doris, and we were like, ‘This is amazing, I would totally buy stock in Earl Sweatshirt,’” Sage Delisser, Brown ’15, recalls. “We just ran with it.” It ended up being an attempt to fix an increasingly broken music industry that Delisser and his two co-founders, Max Riahi, McGill ’15 and Sam Bradshaw, FSU ’15, had seen firsthand leaves artists in the lurch. The three Sarasota-raised musicians brainstormed a system for bands to leverage their fan bases through crowdfunding. Though the challenges of the system are huge and complex, their solution is deceptively simple: convince fans to invest in the musicians they love. TAKING STOCK The central piece of TempoTrader is, somewhat appropriately, a Tempo. A Tempo is more or less a subscription to an artist, who then releases a stream of perks like free songs, discounts on merchandise, and behind-the-scenes sneakpeeks to fans. Tempos are traded by users on an open market just like stocks, with bands getting funding through IPO-style releases and offerings – though the team is quick to point out that Tempos don’t represent equity, just a way to support bands. Those who buy into a band that ends up making it big could profit off their earlier support by trading it after the value of the Tempo rises. For musicians, TempoTrader could prove a great way to connect with fans directly and raise funds without intermediaries like record labels, a perfect system for the kind of up-and-coming artists the service is targeting in its initial release. The site would also serve as a social media platform, allowing bands to manage all their content in one place. And fans receive not only the chance to support artists and get exclusive content, but also to discover new musicians, seeing what their friends listen to – and choose to invest in.
HOW YOU CAN SAVE YOUR FAVORITE BAND by Liz Studlick Photo by Cadence Lee
(BLUE)GRASSROOTS Although Earl Sweatshirt may have sparked TempoTrader’s creation, the inspirations behind the project have even deeper roots. Bradshaw and his brother released their own music on YouTube for years, garnering over a million views on their channel, but they ran into the same problem facing many independent musicians: the struggle to make it as a small player in the market. Riahi has been passionate about finance for years,
STARTUPS & TECHNOLOGY
trading stocks and commodities since he was in high school. For all three, the project presents a novel way to support small musicians, a mission they have found those around them to be passionate about. “A lot of our internal growth has been friends who were excited about the project and wanted to help out with it,” Delisser says. Split across three campuses, the team has signed up a couple dozen alpha artists to test the platform and be featured on TempoTrader’s blog and social media. As Riahi was the only coder among the founders, the team reached out to programmers at Brown, tapping Alfie Subiotto ’16 and Ben Koatz ’16 to develop the backend for the web-based demo, which is set to launch this spring. A WORTHY GOAL A project with such big ambitions inevitably leads to a daunting amount of work. Both Delisser and Koatz emphasized how much time they’ve plowed into the project these past few semesters. According to Koatz, “Last semester, the project was constantly evolving and it was easy to be thinking about it every second.” Although he added that the development team has since refined their goals, balancing a startup with school can be challenging. However, for this team, the time invested seems to be worth it. Although making it as a startup is hard, and the music industry is an even harder niche to break into, the prospect of helping musicians succeed has driven TempoTrader forward. “Music is something that surrounds my life,” says Koatz. “To be involved in this project and to be able to bring about creative destruction is incredible.”
Changing the Beat of the Music Industry CAN GROOVEBUG TRANSFORM THE WAY YOU LISTEN TO MUSIC? by Andrew Yin
f there’s anything that college students get, it’s music. It permeates almost every aspect of student life, from jamming out with friends to just enjoying your guilty pleasures while walking around campus. In fact, many people would say that you can tell a
lot about a person just by knowing what music they listen to — just look at anyone who’s ever introduced themselves on a college Facebook group. Ask any student how they listen to their music and most will say Spotify, the 2008 start-up from Sweden with now over 60 million users. 15 million of these users, including many students, pay for Spotify’s premium service and generate over $897 million in revenue. Spotify has revolutionized how consumers experience music by adding a social component where users can share what they are listening to with their friends. But after Spotify, what’s next for the music-savvy college student? (R)EVOLUTION As college students’ music tastes developed, so did their demand for a deeper experience. No longer satisfied by simply listening to music, they wanted to experience it — to feel closer to the artists and the art itself. Demand shifted from music to the community that music embodies. In fact, 2014 saw record concert ticket sales with almost a one billion dollar increase to a record shattering $6.1 billion annual revenue. This shift has caused an explosion in new music start-ups which hope to engage their listeners more closely with the music. The next step in the evolution of the college music experience might be Groovebug. Founded by Northwestern University alumni Jeremiah Seraphine and Neal Ehardt, the iPad app aims to usher in a new generation of technology that changes how consumers will experience music, combining both social media compatibility and a variety of other content to produce an elevated multimedia experience. DIVING IN But what does all this jargon really mean? Say that your library features a lot of U2. Groovebug scans through your music library to assemble a picture of your tastes. From this information, it puts together a variety of disparate content like music, video, images, interviews, and concert datesin one place for a seamless experience. The app will also suggest similar artists and all of their related content, including previews of their music, for you check out, even adding the percentage it matches up with your own music tastes. You can see how your Facebook friends’ music tastes match up to yours, adding a social component to the immersive music experience.
the self-described music aficionado — the music lover who fanatically follows their favorite groups in a variety of ways and would say that music is their life. According to Nielsen, this segment of the music consumer market accounts for about 61 percent of global music revenue, which comes out to about $9.2 billion in 2014. However, despite how seemingly lucrative this market is, these businesses have yet to turn a profit. Spotify — though it seems to be on every college student’s laptop — took an $80 million loss in 2013, despite the music streaming industry growing over 51.3 percent in the same year. Spotify’s inability to turn a profit comes from its inability to fully monetize its streaming service, even when it has become practically ubiquitous among music consumers. Advertising and premium users can only go so far. What does all of this mean for you, the college student who loves music more than could possibly be healthy? Spotify’s inability to make a profit, even after getting so large, shows how hard it is for a music start-up to attain profitability. Small start-ups like Groovebug rarely make it to the level of ubiquity of Spotify and are unable to bring their innovative experience to music fans everywhere. It’s hard to turn the tides of an established industry. Ultimately, this means that the way that we experience music and the beat of the music industry probably won’t be changing for quite a while.
RIGHT ON TARGET The target market for Groovebug is
SATURDAY, 12:10PM The inside of Sayles Hall is mostly empty in terms of people but filled with anticipation.
A DIFFERENT WAY TO HACK
by Kerry Yan Photos by Keegan Quigley This February, Brown University hosted Hack@Brown, its second annual hackathon, attracting some 350 hackers from 71 different schools. For those unfamiliar with the term, hackathons are massive programming conference where participants collaborate over the course of a few days to design and create their own software project. Just about anything imaginable – from computer games to more practical programs to iOS apps – is fair game for a hackathon project, and there’s usually some selection process where the best-performing groups receive prizes. However, competition is just one small part of the hackathon experience; many hackers attend to meet new people, network with potential employees, and learn more about programming in general.
SATURDAY, 12:30PM Hackers everywhere are mingling, talking to their peers and looking for project teammates.
SATURDAY, 2:00PM The “hacking” part of Hack@Brown has officially started. Though most groups are still discussing potential project ideas at this point, a few are already hard at work coding.
STARTUPS & TECHNOLOGY
Organizers of this year’s Hack@Brown had a particularly strong focus on an inclusive, educational environment, making the event beginner-friendly; this was reflected in the diverse pool of participants, which included experienced programmers, first-year CS students, and everything in between. But despite this wide range of participants, Hack@Brown – with its wellrun leadership team and large community of mentors – managed to create a fulfilling weekend that anyone could enjoy.
SATURDAY, 8:10PM Every room in Sayles is filled with hackers coding away and a humming of discussion fills the air.
SUNDAY, 2:00PM Most of the hacking is done at this point, save for finishing touches.
SUNDAY, 2:00PM Smiling faces are abundant throughout the room; whether or not their projects ultimately came together, just about everyone seems satisfied.
INTERCOLLEGIATE FINANCE JOURNAL • SPRING 2015
LEFT - SPONSOR EVAN STITES-CLAYTON “I’m really happy that there is a hackathon now. We didn’t have it when I was at Brown – I wish that they did. I love seeing the hackathon community and being part of it as a sponsor, even though I never had chance to participate in a formalized hackathon.”
ABOVE - PARTICIPANTS JACKIE, LOUISA, ANJALI Jackie: “Brown CS classes are very theory-based, and the projects you do tend to be not very usable outside of the Sunlab and Brown CS. It’s very satisfying to make things [at the hackathon].”
STARTUPS & TECHNOLOGY
LEFT ORGANIZER RICKY MEDINA
ABOVE - PARTICIPANTS YUTA, EDWARD, SAHIL, SOOJOO Yuta: “I didn’t sleep at all. Like zero, But I learned a lot.” Sahil: “Looking back at it, we actually accomplished a lot in less than a day.”
“I started getting involved on hackathon scene with HackNY, and I took a lot of time off after freshman year to pursue those interests. CS at Brown is a very academic and singular approach, and I come from another side of CS more about building and hacking. When I got to Brown, I wanted to see that here. Last year, I got involved with the founding team for Hack@ Brown. I’m so grateful that I’ve been able to help create a Hackathon with our own flavor.”
ABOVE - PARTICIPANTS ANDREW AND TRU Tru: “At most hackathons they ask how many people’s first hackathon it is. Usually the number is in the 20s, but at this one it’s more than half.”
CAREERS Photo by Jonah Blumenthal
Boys’ Club 2.0
SILICON VALLEY’S QUEST FOR INCLUSIVE COMPANY CULTURE by John Palmer Photo by Jonah Blumenthal
all Street culture has long been known as somewhat of a boys’ club. Full of assertive alpha-male types, most people’s image of an investment bank (IB) can be pretty intimidating. It’s an image that has changed very little over the past several decades, and remains quite representative of today’s IB culture - men make up 64.6 percent of the workforce at investment banks and investment companies, according to U.S. Equal Employment Opportunity Commission. In fact, the IFJ’s fall issue contained a piece highlighting one woman’s experience in the investment banking recruiting process, where she noted several instances of companies
seemingly appealing only to men. When new tech companies started popping up everywhere in the 1990s and early 2000s, they were dominated by a different breed. Two computer science Ph.D. students at Stanford named Sergey Brin and Larry Page founded Google in 1998. Founded a few years later, Facebook was the creation of a computer science student named Mark Zuckerberg. These were the people who had never been celebrated by traditional Wall Street culture, the “geeks” who spent long hours coding away at computer terminals. POWER SURGE Computer scientists had a new and
highly valued ability that rapidly shifted them into power. This allowed them to assume executive roles much more commonly than in previous decades, when fewer large companies had been founded by technologists. As young tech companies began to form their own work environments, many rejected the culture that had historically excluded them in favor of a fun new culture where they felt at home – a culture where food was prevalent, pay was high, and the hours were flexible – though still long. In the eyes of many, this new tech culture was an awesome transformation. Google has topped Forbes’ list of best places to work for several years now.
UNIVERSITY SUMMER HOUSING Finding the Right Home for Your Summer in NYC, Mariana Carvalho 38
The problematic trend, however, is that women in technology repeatedly feel distanced from an office culture usually consisting of around 80 percent men. So how did an industry that so intentionally separated itself from traditional banking culture retain one of its biggest problems? And what is the industry doing to try to change? HIRING IS NOT ENOUGH In recent years, diversity statistics have been a hot topic of conversation for employees in the technology industry. Google released its own diversity statistics in 2013, revealing that its technology-related employees were 83 percent male and have remained the same since. Other companies such as Facebook and Microsoft have released similar numbers. While most of these employers are attempting to increase their diversity, many cite women’s high turnover rates as a big challenge. The National Center for Women and Information Technology reports that 56 percent of women in technology leave their careers at the “mid-level” point, more than double the quit rate of men in the industry. One significant cause is the lack of proper maternity leave accommodations in many tech startups, where so few employees have ever needed to take such a break. However, Inc.com writes that even though motherhood is sometimes the straw that breaks the camel’s back, so to speak, these camels were pretty unhappy before they became pregnant.” For many female employees, an initial willingness to deal with an isolating
EVENLY DIVIDED? Women only make up 17 percent of Google’s tech workforce culture wears off over the years. Kieran Snyder, who spoke with Inc.com, stated that “the simple discomfort of not fitting in an otherwise homogeneous setting” is what drove many women to quit. The lesson to be learned here is that simply hiring more women isn’t enough in an office culture that makes them feel unwelcomed. Before employee diversity can effectively be changed,
SO YOU WANT TO RUN THE YANKEES? How the Rise of Sports Analytics May Get You There, Nikhil Patel 40
PAYING $50K TO EXPAND YOUR LINKEDIN What You’re Really Paying for by Attending B-School, Fran Whitehead 41
office culture needs to take a step in the right direction. A GLANCE FROM WITHIN I talked with a female computer science student at Brown, whom we will call Amy, about her experience of working at Google last summer. She had positive things to say about Google, remarking that the company places a heavy emphasis on training people to be aware of how they interact with all employees of the company. In particular, she praised Google’s attention to “unconscious bias.” In the technology sector, the term is commonly used to describe a situation in which employees unintentionally treat men with more respect, or assume that talented programmers are men. This issue often goes unmentioned or unnoticed, and it is a great point for Google to address. But can a company’s executives control culture completely on their own? It’s hard to believe that they can. No matter what training is given and what core principles are emphasized by a company’s human resources department, it is the employees themselves who ultimately determine the culture as a whole. In the tech industry’s current state, this places a heavy dependence on large groups of men behaving in a way that welcomes and encourages underrepresented groups. Amy and I continued our conversation, and she told me about her recruiting experience with Facebook, which stood out as a perfect example of a company’s employees failing to reflect its cultural ideals. During one employee’s presentation, he told interns they would each get a mentor and “he’ll give you all kinds of advice,” or that “sometimes you might get to work with some of the guys from another team.” Amy told me that this talk, coupled with the rest of her experiences that day, influenced her decision not to consider working there. This is particularly disappointing given the company’s forward-thinking leadership. Sheryl Sandberg, Facebook’s Chief Operating Officer, is the author of the best-selling book, “Lean In: Women, Work, and the Will to Lead,” and a prominent advocate for women in business. Sandberg has told several publications in the past about her dedication to women in technology, and she has pointed out that CEO Mark Zuckerberg is very supportive in this. Maybe Amy’s experience was a rare incident, and maybe Facebook does a fantastic job of promoting inclusive behavior in its offices, but even if this type of “unconscious bias” happens infrequently, it is clearly
APPLES & ORANGES Comparing the Cultures of Silicon Valley’s Most Prized Companies Adrija Darsha 42
still having an effect. Even for those women who have mostly positive experiences in tech, awareness of this issue can instill a mentality of discomfort about the future. Another female student I spoke with said, “Yes, I’m getting a degree in computer science, and I’m planning on entering the industry, but how long am I going to last?” MOVING FORWARD I wish I could put together a list of ways to fix this problem, but I’m too distanced from the issue to be capable of doing so. Even those who have more experience with this culture and those who
GOING DOWN In 1980, 37 percent of computer science degrees were earned by women, compared to 18 percent in 2012 run these tech companies don’t seem to have a simple solution. And given the complexity of the problem, it’s not likely that there is one. However, despite the fact that I have never been and will never be a woman in technology, I know enough to see that the issues they deal with are now at an important point in time for the future of these companies. The topic has been in the forefront of discussion in the industry, which makes me reflect on investment banks once again. Because despite the fact that the same issue seems to exist there too, I rarely hear it discussed with the same urgency. Maybe that’s because investment banks work at such a fast pace that they don’t have the time to stop and talk about social influences in the office. Maybe it’s because the problem has existed there for so long that people have just gotten used to it. Both possibilities are scary, and since technology companies seem too dedicated to their laid back culture for the former ever to be their problem, hopefully they can find a way to fix this issue before the industry just gets used to it.
INTERCOLLEGIATE FINANCE JOURNAL • SPRING 2015
University Summer Housing FINDING THE RIGHT HOME FOR YOUR SUMMER IN NEW YORK CITY by Mariana Carvalho
nce you’ve figured out your plans for the summer, signed off paperwork, and burned all your interview prep notes, the next step to ultimate relief is finding housing for the summer. Applications for university housing opened recently, so now is the time to start evaluating your options. The first two things to establish are your budget and your priorities. Housing in New York City will generally be expensive, but knowing how much you’re willing to spend towards accommodation for the summer will help you narrow down your search. The next thing to consider is which attributes are most important to you. Proximity to work? A hip neighborhood? Size? Price? Depending on the nature and intensity of your internship, the features you look for in housing may vary greatly, as will your willingness to live with roommates. One of the more common options when looking into summer housing in New York City is to look at university residence halls. They provide safe, comfortable, and convenient housing whether you are taking classes, working, or interning in NYC. This type of housing can also be advantageous from a social perspective, since many interns tend to choose this option. Note that some residence halls have set dates for check-in and checkout or minimum lengths of stay, so make sure that these align with your summer plans. RESIDENCE HALLS OPTIONS New York University (NYU) residence halls are located in some of the most vibrant neighborhoods of New York City, including Greenwich Village, SoHo, and Union Square. Residents of these
buildings receive memberships to NYU’s gym facilities for the duration of their stay. All residence halls have a public safety officer posted in the lobby of the building. When entering their residence hall, residents must show their NYUCard with their hall validation sticker. All guests must be signed in by their resident host. Singles range from $255 to $410 per person per week, while shared rooms $187 to $330. Most single bedrooms are in shared suites/apartments and are very limited. Some buildings have air-conditioning, but not all, so make sure to check each building’s amenities before committing. New School housing offers housing in two suite-style residence halls interns, Stuyvesant Park Residence and Kerrey Hall, both a short walk from Union Square. All housing accommodations are suite-style and have shared kitchens and bathrooms used by other suitemates. Residents are required to register each guest at the front desk. Singles range from $3,750 to $4,200, while doubles start at $3,150 for ten weeks. The residences have an abundance of amenities and large common spaces, including a main TV lounge, study room, a laundry room, a gym, an art room, mailboxes, and music practice spaces. Columbia University residence halls are located on the Upper West Side, in their East Campus facilities, in suite form, with both single and double rooms available. Interns receive a full gym membership to the Dodge Physical Fitness Center for the entire period of their stay. In order for a guest to enter and exit their hosts’ residence hall, a Guest
Housing in New York City will generally be expensive, but knowing how much you’re willing to spend towards accommodation for the summer will help you narrow your search. 38
Pass must be issued. Columbia’s campus is also close to the 1 subway line, so it is easy to get downtown if need be. Twelve weeks in a double costs $2,960, while the price for a single is $3,510. Session dates and rates will become available in mid-February 2015. Fashion Institute of Technology (FIT) dorms for interns are located on West 31st street between 9th and 10th Avenues. Students pay $4,256 for a shared apartment, and $6,608 for a single apartment for ten weeks. Suites consist of single, double, triple, and quad style apartments with full kitchens and private bathrooms. Residents will be charged $10 per overnight guest. The International House, located in the Morningside Heights neighborhood of Manhattan, offers interns private dormitory-style bedrooms, suites, and apartments. Along with a dining room, the complex houses a fitness center, computer lab, pub, and laundry room. There is also free wireless access, two television lounges, and a community kitchen. The only concern may be that its location is pretty far uptown, so it is probably not a place you want to stay if you know you’ll have lots of early mornings or late nights at work. Singles range from $941 to $2,363 per month. The average room size is 8’ x 11’ and some rooms have sinks. Single occupancy rooms in apartment suites with shared kitchens and bathrooms for 3 to 5 people are fully furnished and range in size from 10’ x 13’ to 14’ x 16’. These vary from $1,253 to $1,738 per person, per month. School of Visual Arts (SVA) summer housing is spread throughout the city, with dorms in Gramercy Park, Midtown South, and Lower East Side. For interns at JPMorgan, Morgan Stanley, and Credit Suisse these residences are generally closer to work. The subway line for the 6 train travels the East side of Manhattan, and stops at both Grand Central and Union Square stations, giving you easy transfers to other lines. Single rooms fluctuate between $3,600 for 12 weeks to $4,700 for 14 weeks. Doubles go from $3,100 to $3,800 per person. On average, single rooms are 8 x 10’, small singles are 6 x 8’, and double rooms are 16 x 20’.
Navigating NYC Housing
Map of housing in Manhattan neighborhoods
INTERNATIONAL HOUSE Singles range from $941 to $2,363 per month. Single occupancy rooms in apartment suites with 3 to 5 people vary from $1,253 to $1,738 per person, per month.
COLUMBIA 12 weeks in a double costs $2,960, while the price for a single is $3,510.
FASHION INSTITUTE OF TECHNOLOGY Shared apartments go for $4,256 for 10 weeks. Single apartments go for $6,608 for 10 weeks.
NEW SCHOOL HOUSING Singles range from $3,750 to $4,200, while doubles start at $3,150 for 10 weeks.
SCHOOL OF VISUAL ARTS Singles fluctuate between $3,600 for 12 weeks to $4,700 for 14 weeks. Doubles go from $3,100 to $3,800 per person.
CHELSEA MIDTOWN SOUTH GRAMERCY PARK
LOWER EAST SIDE
NYU Singles at NYU housing go for $255 to $410 per week and shared housing could range from $187 to $330 per week.
INTERCOLLEGIATE FINANCE JOURNAL • SPRING 2015
All rooms have air-conditioning, a mini-fridge, and will either have private bathrooms or suite-style bathrooms. All guests must be signed in by their host. MAKING A DECISION The SVA George Washington residence was the housing option I chose for my past two summers in NYC, mainly because it was located two blocks away from Credit Suisse, where I interned, and was walking distance from Union Square. My rooms both times were in good condition and the 24-hour security was a plus. The only disadvantage of this dorm is that maintenance support is quite inefficient, so any necessary repairs may require patience and insistence. Overall, if you have little time to look online for apartments like I did, I would recommend staying at residence halls. Making a decision can be difficult, especially if you aren’t sure of what to expect of your summer internship or plans. Doing additional research, reading reviews online, and speaking to friends who’ve been through the process can all help you improve your chances of landing housing that suits your priorities.
So You Want to Run the Yankees?
HOW THE RISE OF SPORTS ANALYTICS MAY GET YOU THERE by Nikhil Patel Illustrations by Madeleine Johnson
n March 28, 2014, baseball had a new richest man. The Detroit Tigers signed star third baseman Miguel Cabrera – the first winner of the Major League Baseball Triple Crown in 45 years – guaranteeing him $292 million over ten years. But who influenced the decision to offer Miguel Cabrera this contract, and how can you become that person? In the case of the Detroit Tigers, the man in charge of negotiated contracts with players is Dave Dombroski, the general manager of the team. In the past, the road to be-
come a general manager was easy to define. One merely had to have the brawn to break into a professional sports league and the brains to see the game with clearer vision than his counterparts. Today, the rise of big data is changing this path. Minds adept at analyzing and developing meaningful statistics are quickly being promoted through sports franchises, and in some cases have become the general manager of the franchises themselves. One obvious example is Billy Beane, the general manager of the Oakland Athletics who incorporated advanced statistical analysis into his baseball decisions, described by Michael Lewis’s “Moneyball.” SPORTS ANALYTICS ON THE RISE Sports analytics is the application of statistical methods to sports, such as soccer, baseball, basketball, or hockey. Oftentimes, baseball analytics is referred to by a second name: sabermetrics. As the field of sports analytics developed, baseball was seen as the first frontier. This is because baseball is a discrete sport where observations are distinct and measurable after every play. There is a pitching team and a batting team, and the teams only switch after three outs have been recorded. In other sports, possession is dynamic – as the New York Rangers carry the puck down the ice, the Pittsburgh Penguins can steal the puck and instantaneously become the offensive team. Dynamic possession – the possibility of quickly transitioning between offense and defense – is the key characteristic of continuous sports games. Possession is not defined in sports like hockey and basketball as easily as it is in baseball, so analytics has been less applied in these sports. However, the tides are turning. Teams in basketball and hockey are adopting analytical methods as core pieces in business decisions. A quick look over the NBA and NHL careers websites shows internship and entry-level opportunities in basketball analytics with organizations such as the Houston Rockets and the Charlotte Bobcats, and senior-level management roles in hockey analytics with the New Jersey Devils.
BEHIND THE DATA In sports, the “eye test” refers to what fans and management think of players and teams when solely watching the game, while looking at no advanced statistics. When sabermetrics was growing in popularity, the results would oftentimes support the prevalent eye test result, which led to sabermetrics being easily adopted by fans and management alike. However, in hockey and basketball, advanced analytics have made us rethink the games down to their cores. As an example, consider turnovers in both basketball and hockey. From common sense and the eye test, we tend to value players with more takeaways than giveaways. However, the analytics from both sports have supported the opposite – in other words, the statisticians have said that we should generally value players with more giveaways than takeaways. How does this make any sense? To most people, it doesn’t. This is why analytics has had such a hard time breaking into sports: the people in charge tend to doubt the counterintuitive claims made by sports analytics workers, who have generally “never played the game,” and thus are seen as inferior. However, after being pushed to the sidelines sports analytics workers were brought back into the game when year after year, the data supported their counterintuitive claims. Now, sports analytics is on the major rise throughout all sports. To address the turnover argument, statisticians have shown why net negative turnover players are generally more valuable. It is obvious that players with the puck can only give the puck away, while players without the puck can only take the puck away. If a player has more takeaways then giveaways, then that player is often without the puck more often than he is with the puck. In other words, if a player has a lot of takeaways, then that player was on defense for longer than normal, which means the other team was scoring more often. As such, the turnover ratio serves as an indicator for possession, which serves as an indicator for scoring – the bottomline in sports. SO…YOU SAID SOMETHING ABOUT RUNNING THE YANKEES The business ladder exists in sports. However, instead of the top of the lad-
der being the CEO of the company, the top position is the general manager of the sports club. To ascend to this position of authority, one has to work his or her way up from being an entry-level worker. Before analytics, there was no set career path in a sports organization for someone with a mathematical background. Now, sports clubs are hiring mathematically-inclined people who are also passionate about the sport. The work done within the analytics department has much broader implications than other entry-level positions in a sports franchise. Decisions from the analytics department affect everything from which prospect the team should draft to what would be a fair return if the team opted to trade their star player. Because sports analytics positions are so important, when it comes time for promotions, the sports analytics employees are often given serious consideration. General managers used to be selected from the best and brightest former players, but now they are being selected from a candidate pool of all people. Consider the case of Daryl Morey, the general manager of the Houston Rockets, who studied computer science and statistics at Northwestern and MIT: Morey is well-known for applying Billy Beane’s Moneyball philosophy to basketball. There are 122 general manager jobs in the four biggest North American sports leagues, but there is nothing anyone could do to guarantee themselves one of these coveted positions. However, the rise of sports analytics shows that the path with the highest probability of success could come from participation in analytics.
school? Will it really make you a more effective employee? THE BROCHURE Business schools have long been promoting their brands. They tell corporations, banks, and consulting firms that their school is the best way to make their workers exceptionally productive. It will provide students with an edge in competitive business fields, and there is the added bonus that companies won’t need to teach employees themselves. Students who have just graduated from college might find this to be an appealing option, but most MBA programs do not accept students with this profile, preferring graduates with around two years of work experience. Many business school attendees have worked in finance or consulting, and lots of students with this background return to the same company after their two years in business school.
by Fran Whitehead
THE CURRICULUM Banks and consulting firms pride themselves on training employees – some of whom have no prior experience – in many of the skills taught in business school. There are also plenty of successful business people without MBAs, such as Steve Jobs, Bill Gates, Jeff Bezos, Sam Walton, and Anita Roddick. This clearly shows that there are other ways to obtain these skills. So why do so many large corporations still foot the forever increasing bill for these MBAs? If you can learn the skills on the job, what value does it bring? Well, one thing it seems to add is confidence. When interviewing for a prestigious firm, having many experiences to talk about may create a stronger impression. Business school graduates have the ability to show concrete examples of teamwork skills and accomplishments whilst attending a prestigious institution. At the very least, this gives the impression of more experience, something that many young people struggle to demonstrate. But can you not achieve these experiences through your own drive and determination? And are extra credentials really the same as being more educated? Stanford Business School reported that in 2008, over 94 percent of their students had jobs lined up post graduation. In 2013, only 75 percent of their graduates had jobs secured. The benefits seem to be diminishing.
f you are looking at good MBA programs, you presumably already have a degree from a good college and have already started a career. What is the value of another degree? Are you really learning more by going to business
THE EXTRACURRICULARS Despite the fact that business school may not be necessary, there are some obvious benefits from attending. Possibly the most significant benefit is for those who are seeking a career change. If after two years
Paying $50,000 to Expand Your LinkedIn
WHAT YOU’RE REALLY PAYING FOR BY ATTENDING BUSINESS SCHOOL
MBA CLASS OF 2014 STATISTICS Median Base Salary Upon Graduation $150k
$100k $50k $0k
Harvard Stanford Wharton Columbia
of working in the healthcare industry someone wants to move into banking, consulting, or some form of management, then going to business school can quickly provide new applicable skills to make this transition as smooth as possible. It provides students with the means to become more competitive candidates. Business school can also help those seeking a company change. Going to a respected business school provides access to a network of people who work at many different companies in a variety of industries. Access to such a diverse group of intelligent people will not only help form some great friendships, but if used wisely, will create a widespread network of people to collaborate with in the future. One Harvard Business School graduate said, “All of my best friends are people I met in business school. It was all about connecting with people.” Business school may be seen as a signal to employers that you are a qualified candidate. They can trust that you are capable of doing good work, or at the very least have a solid ground for them to continue teaching you. If so many other applicants you are competing against have an MBA, why not level out the playing field in such a competitive job market? THE CHOICES Depending on your own plans for the future, business school, just like college, may or may not be for you. Quartz writes that “MBAs were not designed to help you advance your career, they were designed to make you a great employee at a large firm.” If you aspire to start your own company, business school is less beneficial, especially when considering the cost. It may be totally irrelevant to your interests and your desired career path, or you may not be in strong enough of a financial position to afford it. However, if you find an employer who is willing to pay for it, it can be hard to turn down the experience. It’s important to be aware that what people actually discover in business school is not always what’s advertised. When making the decision of whether or not to attend, you should consider how it will tangibly benefit your career.
INTERCOLLEGIATE FINANCE JOURNAL • SPRING 2015
APPLE HEADQUARTERS OFFICE
GOOGLE HEADQUARTERS OFFICE
COMPARING THE CULTURES OF SILICON VALLEY’S MOST PRIZED COMPANIES by Adrija Darsha
hen it comes to tech companies, greatness is an adjective reserved only for the best: the most powerful, the most innovative, the most profitable. Every company wants to be great, but few make it to the point where they stand out from the rest. The few who do succeed, however, do so in many different ways. Two perfect examples lie right in the forefront of public attention. Google and Apple, two tech moguls based in Silicon Valley, both have extensive impact in their markets but drastically different corporate cultures. THE CORE OF THE APPLE Working at Apple comes with a typical, if not more stringent, corporate atmosphere. Former employee Chad Little says, “Apple is a pretty divided mix of typical corporate red tape and politics mixed in with startup level urgency when the direction [came] from Steve. If you [had] a project that Steve [was] not involved in, it [would] take months of meetings to move things forward.” In fact, the late CEO of Apple was notorious for his temper tantrums and perfectionist attitude. “Employees would often be reduced to tears, and if Jobs saw a mistake in someone’s work, it wasn’t unusual for them to be fired,” an anonymous source reveals. While this caused a general uneasiness within the atmosphere, Steve Jobs’ attitude was undeniably effective in motivating employees to strive for perfection and work harder than ever. “If Steve [wanted] it done, it’s done faster than anyone thinks is humanly possible. The best way to get any cross departmental work done was to say it [was] for Steve and you’d probably have it the same day,” Little said. A NEW COOK IN THE KITCHEN Current Apple CEO Tim Cook is said to achieve a similar effect, but with fewer words. Cook holds weekly meetings that could last up to five or six hours. Employees cram for meetings, making sure they know the answer to every possible question Cook could ask. The Wall Street Journal writes, “Cook also knew the power of silence. He could do more with a pause than Jobs ever could with an epithet. When someone was unable to answer a question, Cook would sit without a word while people stared at the table and shifted in their seats.” In addition, Apple’s company benefits are not as plentiful as those of other tech companies. The cafe provides food at a high cost, and the gym on campus requires a fee. Little writes, “I recall one person asked Steve why these benefits were so low, and the main response was, ‘it’s my job to make
your stock go up so you can afford these things’.” The few perks Apple does offer its employees include one computer system at 25 percent off per year, and 50 percent off all software sold in the campus store. Although Apple’s culture is strict and focused, it has worked remarkably well for them – the company has a market value of over $676 billion. In addition, Apple recently posted the most profitable quarter of any company in history: as of Jan. 27, 2015, it holds the world record for the highest profit earned in a fiscal quarter, at $18.04 billion. After looking at Apple’s huge success, it may come as a surprise that Google has such a different culture. Google’s offices are famously laid-back, with the main goal of keeping employees happy and healthy. Even their website claims, “We strive to maintain the open culture often associated with startups, in which everyone is a hands-on contributor and feels comfortable sharing ideas and opinions.” LET ME GOOGLE THAT FOR YOU In accordance with this claim, Google’s chain of command is not as strictly engrained as it is in Apple. “Googlers” are encouraged to ask questions directly to Larry Page, Sergey Brin, and other executives. At Google, mistakes are celebrated as a learning opportunity: in 2009, a product launch failed miserably, but the product launch team was celebrated and given a bonus and a Founder’s Award. Eventually the failed launch evolved into what is now known as Google Plus (which, ironically, has been seen as another disappointment). In stark contrast to Apple employees, Google employees have access to many benefits. With physicians on site, free fitness classes and gyms, organized intramural sports, and extended time off, Googlers are encouraged to keep themselves healthy and follow their passions. With over 15 cafes on the main campus and additional mini-kitchens, Google also provides free breakfast, lunch, and dinner every day. To top it all off, Google takes care of its employees even after they’ve passed away. If a Google employee dies, their surviving spouse receives half of the employee’s salary for the next 10 years, as well as an additional $1,000 a month for any of their children. INSIDE THE GOOGLEPLEX With all these benefits, its hard to see a downside to working in Google, but alas, too much of a good thing is never good. A former program manager at Google from Mountain View, CA lists the cons of
working in such a consuming environment: “Work/life balance. What balance? All those perks and benefits are an illusion. They keep you at work and they help you to be more productive… You may not hear management say, ‘You have to work on weekends/vacations’ but they set the culture by doing so.” While Google’s culture makes for an environment conducive to productivity, it seems as if employees still maintain a certain level of stress. The former employee writes, “I don’t know if Google inadvertently hires the work-a-holics or if they create work-a-holics in us. Regardless, I have seen way too many of the following: … colleagues choosing work and projects over family, colleagues getting physically sick and ill because of the stress…” Google’s employees may not be quite as happy as the company boasts, but quarterly data shows the company to be steadily increasing its revenue. During the last quarter of 2014, Google posted a gross profit of $11.2 billion, more than a billion higher than its previous quarter profits of $9.8 billion. THE RECIPE FOR SUCCESS There are many factors that determine a company’s success. Financially, Apple seems to beat Google regardless of the standards used. Apple’s quarterly profits are more than $6 billion higher than Google’s, and Apple’s CEO’s net worth at $56.6 billion tops Google’s at $33.3 billion. In addition, as of 2015, Apple’s market capitalization – the market value of its outstanding shares – is greater than that of Google. Perhaps at such high levels of achievement, employee issues and criticisms are inevitable. Both companies have their strengths and weaknesses, but judging from their numbers, their different cultures seem to be working for them. Apple continually boasts high profits and market value, but Google’s quarterly earnings are on the rise. One thing is certain: both companies have made remarkable contributions towards technological advancement, and these tech giants won’t be going anywhere soon. The moral of the story is that there are many roads to success. Apple’s and Google’s cultures are drastically different, and yet both have made for very successful companies. How can a company figure out what kind of culture will benefit it the most? Perhaps it boils down to the company’s leadership and which culture that leadership can best create. Or maybe it comes down to the company’s strategy within the market, and a culture that mimics the same attitude. Either way, Apple and Google seem to have found what works for them.
Are you ready for the real world? Ready to get a job, compete, and succeed?
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