SPRING 2016 www.theifj.com
THE
GREAT ESCAPE 10
22
34
How U.S. Corporations Abandon Uncle Sam and Get Rich Quick
Don’t Sleep on the Next Big Thing
Why Companies Should Embrace their Dark Side
THE GREAT ESCAPE
NAP TIME IS MONEY
SHADOW BRANDING AND THE MOB
THE IFJ TEAM EXECUTIVE BOARD
MATTHEW OSTROW PRESIDENT EMERITUS
Photo by Cadence Lee
AMANDA BEAUDOIN PRESIDENT CLAIRE SU PRESIDENT
BIANCA BARCELO HEAD OF WEB PUBLISHING
NATALIA SABATER-ANAYA HEAD OF WEB PUBLISHING GRAHAM ROTENBERG HEAD OF BLOG
LINDE CHEN HEAD OF MARKETING EMERITUS
LORI EBENSTEIN HEAD OF SOCIAL MEDIA & MARKETING
JACK KARAFOTAS HEAD OF SOCIAL MEDIA & MARKETING
SAMANEE MAHBUB HEAD OF DESIGN & LAYOUT EMERITUS PAUL MEUSER HEAD OF DESIGN & LAYOUT
MADELEINE JOHNSON ASSISTANT HEAD OF DESIGN & LAYOUT EMERITUS KERRY YAN HEAD OF INTERCOLLEGIATE EXPANSION
YUTA INUMARU HEAD OF INTERCOLLEGIATE EXPANSION DESIGN & LAYOUT
SAMANEE MAHBUB HEAD OF DESIGN & LAYOUT EMERITUS
PAUL MEUSER HEAD OF DESIGN & LAYOUT
ANNABEL RYU, KANA HAMAMOTO, CLAIRE SU, BROGHAN ZWACK GRAHAM ROTENBERG HEAD OF BLOG
EDWARD LI EDITOR ERIC HAN EDITOR
MICHAEL FIRN EDITOR
CARTER JOHNSON, CYRUS MADEN, EDWARD TIE, JEREMY SIA, JONAH GOLDBERG, KERRY YAN, MARIA JOSE HERRERA, RICHARD HAN
STEPHEN KEARNS, STEPHEN KIM, STEPHEN STAHR, SCOTT THEER, SOPHIE LEE, ZACK
ZAPOLSKY
SOCIAL MEDIA & MARKETING
LORI EBENSTEIN HEAD OF SOCIAL MEDIA & MARKETING
JACK KARAFOTAS HEAD OF SOCIAL MEDIA & MARKETING
ARTON DOKIC, XUECHEN (REBECCA) LI, EVAN PANDYA, JOE VUKEL INTERCOLLEGIATE EXPANSION
KERRY YAN HEAD OF INTERCOLLEGIATE EXPANSION
YUTA INUMARU HEAD OF INTERCOLLEGIATE EXPANSION
NITISHA BARONIA UC BERKELEY CAMPUS MANAGER ANKIT BILGI UNC CHAPEL HILL CAMPUS MANAGER BILL WANG UNC CHAPEL HILL CAMPUS MANAGER
FRANK CHIANG UNIVERSITY OF CHICAGO CAMPUS MANAGER
JOSH GOLDMAN COLUMBIA UNIVERSITY CAMPUS MANAGER
ABHI PANDYA VANDERBILT UNIVERSITY CAMPUS MANAGER DUSTIN CAI VANDERBILT UNIVERSITY CAMPUS MANAGER
MICAELA QUE UNIVERSITY OF THE PHILIPPINES DILIMAN CAMPUS MANAGER
ROWLAND MAYOR UNIVERSITY OF RICHMOND CAMPUS MANAGER MIRZA UDDIN HARVARD UNIVERSITY CAMPUS MANAGER
SHUN HAGIWARA UCLA CAMPUS MANAGER
HUMBERTO BRINGAS UIUC CAMPUS MANAGER
ARI SHUSTERMAN, JOSH GELBERGER, EILEEN MAYSEK, ALAN YU OPERATIONS & EVENTS
DHEERAJ NAMBURU HEAD OF OPERATIONS & EVENTS MINGYI WU HEAD OF OPERATIONS & EVENTS
ALEX HERNANDEZ, PENELOPE SHAO, MICHAEL BALL ADVERTISING
BRIAN LEE HEAD OF ADVERTISING
JOSH TARTELL HEAD OF ADVERTISING
EMMA CURRIER HEAD OF ADVERTISING EMERITUS BRIAN LEE HEAD OF ADVERTISING
JOSH TARTELL HEAD OF ADVERTISING
EDITORIAL BOARD
SARAH PARK EDITOR-IN-CHIEF EMERITUS TIFFANY CHEN EDITOR-IN-CHIEF
CHRISTIAN ACKMANN MANAGING EDITOR EMERITUS MATTHEW JANIGIAN MANAGING EDITOR EMERITUS
CARTER JOHNSON POLITICAL ECONOMY EDITOR EMERITUS CHRISTIAN ACKMANN CAREERS EDITOR EMERITUS
LIZ STUDLICK STARTUPS & TECHNOLOGY EDITOR EMERITUS MICHAEL GOLZ MARKETS EDITOR EMERITUS
RACHEL BINDER PERSONAL FINANCE EDITOR EMERITUS GILLIAN LEE MARKETS EDITOR
KATHARINE JESSIMAN-KETCHAM CAREERS EDITOR
KATHARINE JESSIMAN-KETCHAM STARTUPS & TECHNOLOGY EDITOR MICHAEL JANIGIAN POLITICAL ECONOMY EDITOR NIKHIL KUMAR PERSONAL FINANCE EDITOR
SENIOR STAFF WRITERS
ANGELA MARIE TENG , ARTHUR TRAN, BRIAN TUNG, CARIN PAPENDORP, DANIELA PATERNINA, EILEEN MAYSEK, GIANNA JASINSK, HARIS MEMON, KATHRYN SCOTT, MICHAEL GOLZI, ROBERT JU, STEPHEN KEARNS, VARUN NARAYAN, WAYLON JIN, YASHIL SUKURDEEP
STAFF WRITERS
AGNES CHAN, ANDREJ ARPAS, ANDREW XUE, ANDREW YIN, ANUJ
KRISHNAMURTHY, BENJAMIN WINSTON, BILL CAI, BILL WANG, BILL WANG (UNC), CALVIN CHU, DANIELLE YORK, EDUARDO MARTIN, EMMA CHO, EMMA CHOW, ERIC LI, ETHAN GRANT, FRANK CHIANG, GEORGE REYNOLDS, GILLIAN LEE,
JEFF GORTMAKER, JEFFREY MOK, LINDSEY CURRIER, LORRAINE SOPHIA SALIM, NICHOLAS HARTMANN, RAFAEL SCHWALB, RUBAN HUSSAIN, RYAN MA, SETH ROSENBAUER, SHIYING LUO, THEE MEENSUK, VADHANA RAVI
COPY EDITORS & FACT CHECKERS LILY ZHOU HEAD OF STYLE
ARIELLE SCHACTER, CATHY (YUE) BAI, CHRISTOPHER CHEN, JOSHUA GELBERGER, SAFIYA WALKER WEB
NATALIA SABATER-ANAYA HEAD OF WEB PUBLISHING BIANCA BARCELO HEAD OF WEB PUBLISHING
AFRA RAHMAN, CHRISTINA WARNER, JAMES COHAN, JERON IMPRESSO, KIMBERLY NGUYEN, PRANAVAN CHANTHRAKUMAR, PRATUL TANDON
INTERCOLLEGIATE FINANCE JOURNAL
TABLE OF CONTENTS
PERSONAL FINANCE
16 Raising the Bar for Gym Memberships Are they Really Pulling their Weight? Tiffany Chen 18 The Road to the White House is Littered in Green Should you Donate to Your Favorite Candidate? Nikhil Kumar
MARKETS 4 In Health Care We Don’t Trust Why Insurers Aren’t Turning a Profit on the ACA Exchanges Arthur Tran 6 On Cloud 9 The Behind the Scenes Dominance of Amazon Web Services Michael Golz 8 The Super Bank A Game for the Fans or the Economy? Waylon Jin
POLITICAL ECONOMY
8 The Great Escape How U.S. Corporations Abandon Uncle Sam and Get Rich Quick Anuj Krishnamurthy 10 What is Wrong with the Southeast Asian Giant? Indonesia’s Economic issues and How it Can Overcome Them Lorraine Sophia Salim 11 Oil for Dummies An Explanation of the Oil Crisis for Anyone and Everyone Varun Narayan 12 Swan Song It’s Not Never Until the Opera House Closes Eric Li
20 Abandoning the Titanic The Surprising Truth about Sunk Costs Lorraine Sophia Salim
STARTUPS & TECHNOLOGY
CAREERS 32 Working Outside The Box How Crossfit’s CEO Developed a Multibillion Dollar Network Mike Janigian 34
Shadow Branding and the Mob Why Companies should Embrace their Dark Side Vadhana Ravi
37 The Buzz Around Bumble Changing the Dating Game, One App at a Time Ryan Ma 38 All Hands on Tech The Rise of Online Handmade Marketplaces and the Surge of Crafting Gillian Lee
22 Nap Time Is Money Don’t Sleep on the Next Big Thing Nap time by Calvin Chu 25 Google’s Game-Changing Foray into Virtual Reality Cardboard Can Make all your Dreams Come True! Angela Marie Tang 28
o Sell or Not to Sell — T That is the Question The Online Marketplace for Class Notes and Study Guides Katharine Jessiman-Ketcham
30 Technology Innovation Amidst Political Unrest The Emerging Startup Scene in Kosovo Benjamin Winston
The IFJ Online www.theifj.com
blog.theifj.com An Unexpected Recession: Predicting Recession without a Yield Curve Inversion -Scott Theer Amazon Retail Stores: Could they Crash and Burn? -Cyrus Maden The Limits to Growth: The TPP and Intellectual Property Rights -Jonah Goldberg Fishing for Opportunity: Utilizing Economics to Prevent Fisheries Crime -Cyrus Maden
MARKETS
In Health Care We Don’t Trust WHY INSURERS AREN’T TURNING A PROFIT ON THE ACA EXCHANGES by Arthur Tran
4
On Cloud 9
The Super Bank
THE BEHIND THE SCENES DOMINANCE OF AMAZON WEB SERVICES Michael Golz 6
A GAME FOR THE FANS OR THE ECONOMY? Waylon Jin 8
TIMES ARE CHANGING
T
he Affordable Care Act (ACA) is no stranger to controversy, having faced extensive criticism leading up to and following its passage in 2010. Over the years, it has weathered a Supreme Court challenge, many failed Congressional repeals, and a disastrous website launch — but for better or for worse, the ACA is here to stay. Its implementation has triggered profound change in the health insurance market. Although the long-term effects of such changes are unclear, insurance giant UnitedHealth sent shockwaves across the industry by hinting at a possible exit from the ACA exchanges.
A GAME OF POOLING The ACA dramatically altered the health insurance landscape. Perhaps the most groundbreaking change was the establishment of essential health benefits that insurers must provide in order to participate in the exchange. Among these benefits are mental health treatment, laboratory tests, and preventative care, such as vaccines. While the establishment of minimum benefits enhances access to care for previously underserved or undertreated populations, it also drives premium costs up, which disproportionately affects individuals with highly elastic demand. The ACA also implements key reforms concerning risk pooling. Health insurers rely on risk pooling to remain financially viable; by pooling together low-risk individuals (healthy people with low healthcare utilization) and high-risk individuals (the chronically ill with high healthcare utilization) companies are able to spread out risks and costs. The result is an equilibrium premium in which low-risk individuals essentially subsidize costs for high-risk individuals.
5
INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015
Many ACA plans are finding themselves inundated with costly high-risk patients, but not enough low-risk ones to balance the pool. However, there must be enough economic incentive for low-risk patients to purchase coverage, otherwise they will forgo insurance and cause the risk pool to become skewed towards high-risk patients. The ACA attempts to mitigate such adverse selection by legally requiring all uninsured Americans to purchase health coverage or face a fine. The minimum fine in 2016 is $695, and while this represents an increase from $325 in 2015, many uninsured still choose to pay the fine because it is less costly than purchasing coverage. Consequently, many ACA plans, such as UnitedHealth, are finding themselves inundated with costly high-risk patients, but not enough low-risk ones to balance the pool.
A THANKSGIVING BOMBSHELL Around Thanksgiving of last year, UnitedHealth Group – the nation’s largest health insurance provider – warned that it may exit the ACA exchanges in 2017, effectively leaving its half million customers in limbo. The company cited losses of $350 million from its ACA plans in 2015, a figure that will balloon to $500 million in red ink for 2016. UnitedHealth downgraded its earnings forecast, blaming sluggish growth on low enrollment and high usage costs. In a conference call to investors, CEO Stephen Hemsley warned, “We cannot sustain these losses… We see no data pointing to improvement.” This news represents a sharp contrast from the previous year, when the company expressed optimism in the ACA and even proposed expansion into 11 additional state marketplaces. UnitedHealth’s potential exit from the ACA exchanges follows on the heels of other insurers, but its behemoth status could set a disturbing precedent. If one of the industry’s most reputable and experienced health plans cannot turn a
6
profit on the exchanges, then “one has to question whether the exchange as an institution is a viable enterprise,” noted one analyst. UnitedHealth is certainly not alone in this regard; in fact, fifty health plans exited the ACA exchanges in 2015 due to financial woes. A report by McKinsey found that there will be 10 percent fewer plans offered in 2016, limiting consumer choice in a marketplace that is already facing the pressure of higher prices. This situation will likely be exacerbated if UnitedHealth – which currently provides one of the lowest-cost plans available – terminates its ACA operations.
KEEPING UP WITH THE COMPETITION Other key insurers, however, are more bullish. Anthem and Aetna, with approximately 1.1 million and 800,000 exchange customers respectively, both say that they expect their ACA plans to reach profitability within the next few years. While conceding that the ACA market “remains challenging,” Aetna said it was too early to back down from such an enormous opportunity for the company. Kaiser Permanente, too, reaffirmed its commitment to participating in the ACA marketplace, claiming that the exchanges will help shake up the healthcare industry and make it more patient-centered. The ACA’s future as a permanent American fixture is clear. What remains murky, however, is the stability of the health exchanges. Greater enrollment and more diversified risk pools may just be what the doctor ordered. Innovation and administrative cost-cutting on the insurer’s part wouldn’t hurt, either. The question is: how long are insurers willing to bleed red before calling it quits and can patients trust their insurers to provide coverage?
On Cloud 9 THE BEHIND THE SCENES DOMINANCE OF AMAZON WEB SERVICES by Michael Golz
W
hile Amazon continues to dominate the online retail market, it is not textbook and clothing sales that are solely responsible for driving its operating income. Amazon is the current forerunner in the ever-growing market for rented computational power. In an era in which the manipulation of information is the key to innovation, the emergence of a market for computing power is not surprising. An immense volume of data is requisite in almost any question posed by modern researchers or business strategists. Oftentimes, however, these parties lack the capability to process the data that they gather. In some scientific investigations, for example, funding is concentrated into the equipment necessary to produce the data, whether that be particle accelerators, chemistry labs, or observatories. Unfortunately, such investments sacrifice a crucial element: the infrastructure to process volumes of data. In many cases, complex models and algorithms must be applied to innumerable observations. That is where Amazon’s Elastic Cloud Compute, or EC2, comes in.
COMPENSATING FOR SOMETHING? EC2, which became a fully-f ledged offering in 2008, is the foundation for Amazon Web Service’s (AWS) booming cloud-computing business. It is a platform that allows users to rent servers, granting access to computing resources they otherwise might not be able to acquire. Researchers in any location can pay by the hour to scale up their data processing and modeling operations via Amazon’s existing infrastructure. A powerful tool indeed, EC2 provides easily accessible computing resources so that deficient computational or development capital does not stall the progress of critical innovation.
MARKETS
The specifics of EC2 are quite complicated. To accommodate the complex and varied needs of consumers ranging from economists to physicists to theoretical computer scientists requires a commensurately varied system. EC2 offers a myriad of configurations to suit the needs of each unique project, and even has entry level options for smaller scale operations. See for yourself: in very little time, you can find yourself renting server
MONEY IN THE CLOUD Why should we care about this funny sounding abbreviation? Far from being some back page offering, EC2 is a fundamental driver of Amazon’s recent income. In the fourth quarter of 2015 alone, AWS report $1.67 billion in sales from its cloud computing operations, and in Q2 last year, AWS quintupled its operating profit to a whopping $521 million. Whereas the service only made up around 8 percent of Amazon’s total revenue at the time, it constituted over 50 percent of its operating profit.
For a company like Amazon, which has been notorious for very thin profit margins from the e-commerce side of the business, the growth of AWS is a breath of fresh air. On track for steady growth, the cloud computing operations promise to be a driver of operating income if Amazon can maintain the expansion of its server facilities. Of course, given the proliferation of the service, competition was a foregone conclusion. Microsoft and Google have rival platforms already on the market. A little competition may be healthy for the industry, however, as some commentators criticize Amazon for its aggressive pricing methods. Nonetheless, EC2 continues to be representative of the evolution of the services industry into the realm of ever-advancing technology, and shows no signs of disappearing from the foreground of the Amazon business model anytime soon.
7
INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015
The Super Bank A GAME FOR THE FANS OR THE ECONOMY? by Waylon Jin
A Punt into the Past
S
uper Bowl games have been among the nation’s most-watched television broadcasts and numerous big brand names have taken advantage of the game breaks by earning advertising revenues $330 million and gaining exposure through air time. Started in August 1959 by the son of billionaire oil man, H.L. Hunt, the Super Bowl was initially created as a game battling the ideas of the newly founded American Football League and it’s rival league, the National Football League. Now, the Super Bowl is analogous to big holidays like the Christmas season, reeling in 111.9 million viewers and $12.36 billion in game-related consumer spending. The Battle of the Advertisements The Super Bowl is an ultimate marketing competition in which brands compete to land a high stakes 30 second spot. Over the last five seasons, asking prices for air time increased an average of $11.1 a year to $5 million for a 30 second air time. With about 120 million viewers, the Super Bowl is the most watched broadcast in U.S. television history. A survey by the National Retail Federation concluded that 73 percent of viewers watch the game as entertainment and say that the commercials inf luence the products they buy. In preparation for the Super Bowl, NRF found that the average viewer is expected to spend $82.19 on game related products. With companies developing more efficient marketing strategies, annual Super Bowl consumer spending has increased from $5.6 billion in 2005 to $15.50 billion in 2016. With over 71 national ads during last year’s Super Bowl, when the Patriots played the Seahawks, advertisements included food and beverages, automotive,
8
A Spike in the Stock Market fashion, and more. In a poll by consulting firm Penn Schoen & Berland, they found that 58 percent of respondents said that they discussed the advertisements more the following day than the game. High interest in commercials creates a large continued interest following the game. Bruzzone Research Company found that a week after airing, the top 20 percent of ads shown have eight times the impact of the twenty percent lowest rated ads.
On the small scale, Super Bowl helps with local economic activity and the revenue of regional companies. Between 1999 and 2012, the cities that hosted the big game found local publicly traded companies to have a 9.65 average gain, while the S&P 500 had an average gain of 2.02 percent. Last year, the Super Bowl XLIX hosted in Glendale, Arizona saw a rippled effect from direct local consumer spending that generated $719 million in total economic impact for greater Phoenix. Companies that have the ability to take out money and place ads during the Super Bowl have somewhat of a correlation between money put into advertisement and success. A phenomenon known as the Super Bowl Predictor says that the outcome of the game will determine the year’s stock market direction. It also states that if a team from the old National Football League wins, the market will finish lower than it began. With hundreds of millions of people from different demographics watching the most important NFL event of the year, people are spending more money for the Super Bowl. With spending increasing annually, who knew sitting down to watch a game of football would do the country so much good?
With more efficient marketing strategies, annual Super Bowl consumer spending has increased from $5.6 billion in 2005 to $15.50 billion in 2016.
MARKETS
According to the Super Bowl Predictor, the outcome of the Super Bowl will determine the year’s stock market direction. 9
POLITICAL ECONOMY
The Great Escape HOW U.S. CORPORATIONS ABANDON UNCLE SAM AND GET RICH QUICK by Anuj Krishnamurthy
AMERICAN CORPORATIONS ARE NOT STRAPPED FOR CASH “I LIKE TO PAY TAXES,” Oliver Wendell Holmes, Jr., the esteemed Supreme Court justice, once said. “With them, I buy civilization.” Not surprisingly, Holmes was in the minority; antipathy, not appreciation, has been the dominant American attitude towards taxation throughout the country’s history. A lack of authority, and general reluctance, kept the Continental Congress from using taxes to fill its coffers, jeopardizing the whole revolutionary project. Cultural aversion to taxes in the antebellum South prevented the Confederacy from instituting a sustainable revenue-collecting program, hindering its military and diplomatic efforts. Even now, taxes — whom we should tax, how much, and when — are an inf lammatory issue in American politics. (Just listen to one of Bernie
10
Sanders’ stump speeches; it is virtually guaranteed that he devotes a good chunk to railing against the light tax burden of America’s billionaire class.) But the twenty-first century — the past decade in particular — has seen a dramatic transformation in how American businesses deal with taxes. The anti-tax resistance, once limited to lobbying and political maneuvering, has grown desperate. Today, in an unprecedented exodus of enterprise, American corporations are calculatedly leaving the country to avoid paying taxes.
THE TAXATION GAME The most controversial financial transaction of 2015 was Pfizer’s $160 billion acquisition of an Irish drugmaker,
Allergan. Buying up a sophisticated potential competitor at such a colossal price is bound to attract attention. But the size of the deal seems practically irrelevant if we examine the underlying intention: Pfizer’s executives, in a stroke of avaricious brilliance, really only wanted a “tax inversion” when they purchased Allergan. These euphemistically-named “inversions” are essentially clever mechanisms for cutting tax liabilities, whereby an American corporation buys a firm in a country with lower taxes and relocates its headquarters there. To be fair, the American tax code can come off as overwhelmingly unnavigable, particularly to companies without the vast legal and accounting departments needed to handle it. Firstly, the United States has the highest corporate tax rate
— 39.1 percent — of any member of the Organization for Economic Co-operation and Development; the group’s average is closer to 24 percent. Additionally, the American tax system incorporates worldwide earnings in its assessment of a corporation’s tax liability. That is, a company pays American taxes on the revenue it accrues all over the world. These two central characteristics — heavy taxes and global taxes — incentivize inversions. In the 1980s, the Congressional Research Service reported only one inversion. The past ten years, though, have seen more than fifty — and the majority occurred after 2009, the concluding year of the worst American financial crisis since the Great Depression.
What is Wrong with the Southeast Asian Giant?
Oil for Dummies
Swan Song
INDONESIA’S ECONOMIC ISSUES AND HOW IT CAN OVERCOME THEM Lorraine Sophia Salim 12
AN EXPLANATION OF THE OIL CRISIS FOR ANYONE AND EVERYONE Varun Narayan 13
IT’S NOT OVER UNTIL THE OPERA HOUSE CLOSES Eric Li 14
The US has the highest corporate tax rate % of corporate tax rate by country
USA 39.1% Japan 37.0% France 34.4% Belgium 34.0%
AN ASSAULT ON PRINCIPLE At first glance, it’s easy to find reasons to sympathize with American multinationals. High taxes make it difficult to invest at home: hiring new workers and building new factories gets a lot harder. And worldwide taxes make expansion — entering new markets and catering to foreign consumers — definitively unappealing. The trouble with this line of argument is that American corporations are not strapped for cash, and they never really have been. Right now, it is estimated that U.S. companies have close to $2.6 trillion stored away in foreign vaults. And, because of the American tax code’s “deferral” rule, money made abroad isn’t taxed until it’s brought stateside. In effect, American corporations making record profits — Pfizer’s gross profit has hovered comfortably above $40 billion since 2012 — are just sitting on piles of untouched money. And, at this speed, the cash pile will keep on growing. In 2013, for exam-
In the US, intangible wealth compises 82% of
$
collective wealth
INTANGIBLE
TANGIBLE
WEALTH
WEALTH
Portugal 31.5%
ple, the U.S. Department of Commerce estimated that American corporations raked in $2.1 trillion in earnings. These companies paid a little over $400 billion in taxes, accruing $1.7 trillion — a whole 10% of American GDP — in after-tax revenues. By 2009, the effective tax rate for corporations fell to roughly 20%, the lowest it’s been since 1931. However unpopular, taxes are, of course, the price a civilized society pays the government in exchange for the provision of basic services. They’re necessary for the function of any society — even one that prides itself on free markets and free enterprise. Individuals pay taxes for public schools, roads, and law enforcement. Companies pay taxes for government services, too — but they benefit in substantially different ways. For example, companies receive patents from government offices to protect their innovations from imitation and settle business disputes with rivals and consumers in government courts. However counterintuitive, the same government that imposes taxes on companies is the same government that actively facilitates these companies’ pursuit of profit.
CAN’T TOUCH THIS In its 2006 report “Where is the Wealth of Nations?” the World Bank observed that over 80 percent of the world’s ten richest countries was intangible. This kind of wealth — and not the natural resources and manufactories we can physically see — is, almost indisputably, the most important resource a country can try to cultivate. (In fact, produced capital, like factories and consumer
goods, constitute only about 15% of the wealth of rich nations.) On the surface, this may be surprising. After all, if we can’t touch it, or even look at it, how can intangible wealth even matter? As it turns out, though, small businesses, multinational corporations, and every organization in between, rely heavily on the intangible wealth provided by their government. In terms of human capital, businesses rely on a workforce that’s trained and educated by taxpayer-funded schools. When it comes to the quality of our institutions, corporations rely on the patent protections and property rights offered by taxpayer-funded courts and law enforcement agencies. And, most importantly, profiteering enterprises depend on a society that so intensely glorifies consumerism and materialism to sell their products. It may be surprising, but none of this analysis is fiction: In the United States, intangible wealth comprises 82% of our collective wealth. When corporations leave America for tax-evasion purposes, then, they are effectively stealing. They benefit enormously from the intangible capital nourished by taxpayer-supported government sustenance, but when the time comes to return the favor, they leave. Now, more than ever, the federal government of the United States desperately needs tax revenue. By contributing to budgetary shortfalls and destabilizing the fiscal condition of the American government, these multinational corporations seeking tax inversions are, on a fundamental level, starving our government, hurting ordinary Americans, and threatening to undo three centuries-worth of democratic progress.
11
INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015
What is Wrong with the Southeast Asian Giant? INDONESIA’S ECONOMIC ISSUES AND HOW IT CAN OVERCOME THEM by Lorraine Sophia Salim
W
hat countries stand out when you think of the world’s economic giants? You might think of the big names that you often find on the first page of Wall Street Journal, such as the United States, China, or Germany. All of those would be correct answers; measured by their GDP, the United States, China, and India dominate the list of the world’s top ten largest economies. Not coincidentally, these countries are also the world’s top three most populous countries. It seems logical to think that a large population leads to an increase in productivity, which in turn leads to better economic growth for the country. However, if this is true, then why is Indonesia –the world’s fourth most populous country after United States – often absent from the “GDP giants” list? A quick overview of Indonesia indicates that it is an economically promising country. It seems to fulfill almost all of the criteria for a healthily growing economy: a 250-million person population (66% of them are under the productive age group), abundant natural and maritime resources, a relatively stable democratically-elected government, and a geographical advantage of being in the center of the trading hub between East and Southeast Asia.
12
While considered stable, the Indonesian economy is still underperforming. Despite having abundant resources and economic potential, Indonesia ranks sixteenth on the world’s nominal GDP. While it is true that nominal GDP does not paint a complete picture of a country’s economic health, other economic indicators such as currency, trading, unemployment, and consumption rate point out that the Indonesian economy still has a lot of room for improvement.
THE COST OF HOMELAND SECURITY After being elected in 2014, President Joko Widodo – nicknamed Jokowi – introduced a new goal for the Indonesian economy: self-sufficiency through protecting domestic industries. The self-sufficiency issue has, in fact, plagued Indonesia for decades. Domestic industries are often poorly supported, both by the government and local consumers, resulting in difficulties regarding economic expansion. For instance, despite having more than enough rice fields, in 2015 Indonesia still imported about 1.6 million tons of the staple grain from Vietnam and Thailand. Addressing this problem, President Jokowi was committed to boost domestic industries by limiting imports of the same goods. You might learn from Econ 101 that to protect local industries, the government often imposes import restrictions through regulations such as tariffs, quotas, and subsidies. President Jokowi hoped that with new restrictions, competition within local industries would increase and reliance on imports would decrease. This would drive down the price of goods and support domestic workers, benefiting Indonesian producers and consumers. Although the end goal was noble, the government was too aggressive in its implementation actions. In recent years, there has been a massive f luctuation in new regulations to curb imports. Before a new regulation takes a definite effect,
another new policy or adjustment is enacted on top of it. This huge instability in trade policy plays a big role in severing the Indonesian economy, specifically domestic production and consumption. Take 2015 as an example. In July, the Indonesian government decided to cut the import quota for live cattle from Australia from 200,000 to 50,000 cattle in the third quarter, shocking the Australian cattle industry. On top of this, in the same month, the duty on coffee rose 5 to 20 per cent and the tax on imported alcohol went from a flat Rp125,000 ($9.32) per liter to 150 per cent. In addition, just two months after he forbade rice imports, President Jokowi was forced to open the border again for rice imports because the country began to suffer from inflation. The local production seemed unready to take on the enormous domestic demands. Aggressive trade policy does not immediately solve self-sufficiency issue. In fact, it worsens and hinders the growth of Indonesian economy. Imagine the confusion, unpredictability, and price volatility caused by these wishy-washy policies. For producers, it makes it harder to plan and make investments. For consumers, they have no choice but to buy imported goods at a higher price since some high-quality goods cannot be produced by the local producers. The government’s protective actions are actually destroying what they are trying to protect.
NO MAGIC FORMULA What Indonesia needs to learn is that the road to self-sufficiency is not as straightforward as signing a new regulation. Rather than focusing solely on policy intervention, the government should mimic what its neighbors in China and India did to boost their economy: improve infrastructure, education, and logistics. Building infrastructure for better access to transportation, promoting entrepreneurship in the education sector, and ensuring consistency in the regulatory system are keys for improving local businesses and maximizing economic resources. In addition, policies need time to take effect. Careful, meticulously planned, and stable government policies are what this country desperately needs. The Indonesian government needs to realize that economic regulations do not take effects instantly like a fairy godmother’s magic spell. It will take years — possibly decades — to see significant economic growth in Indonesia. Instead of employing intervention-minded policy, steadily investing in sectors such as education and infrastructure is a more effective way to bring this Southeast Asian giant into future ranks of the world’s top ten economic giants.
POLITICAL ECONOMY
Oil for Dummies AN EXPLANATION OF THE OIL CRISIS FOR ANYONE AND EVERYONE by Varun Narayan
O
il. It dominates the news, the markets, and an entire section of global politics. Most people, however, know little more than that their tank of gas no longer puts such a large hole in their wallet. But in an era when widespread information plays a critical role in the distribution of power, everyday individuals have an incentive — no, a responsibility — to learn why oil prices have dropped, how it has impacted the global economy, and what might happen should prices rise or fall.
DOUBLE, DOUBLE, OIL IN TROUBLE Pricing is generally a matter of supply and demand, and oil pricing is no different. Over the last few years, the supply of oil has surged upward. As the shale revolution has gripped the United States, both small and large oil exploration and drilling firms have tapped our nation’s underground and offshore oil resources, a trend that has driven American oil production skyward. OPEC member states as a whole have upped their own oil output, and both the Canadians and the Russians — in spite of their myriad economic problems — have pumped more and more crude oil every day. While some countries have begun freezing their production levels, such reductions cannot compensate for the massive increases coming from deep water oil drilling.
THE SAUDI STEAMROLLER Some analysts point to potential political conspiracies to uncover the cause of the oil price meltdown. Many of these theories center on Saudi Arabia, a key American ally and one of the world’s largest oil producers. One mainstream theory maintains that Saudi Arabian production has risen in order to lower the price of oil and, in turn, drive smaller oil producing nations and American oil firms out of the market, whereby it could preserve and grow its market share in the long run. Another key theory submits that Saudi Arabia has lowered the price of oil primarily to hurt one pivotal state: Iran, Saudi Arabia’s archenemy. Iran, whose government depends heavily on oil revenue, needs oil at $131 dollars per barrel in order to balance its budget,
Pricing is a simple matter of supply and demand; oil pricing is no different
compared to Saudi Arabia at only $104 dollars per barrel. Simply put, low oil prices hurt Iran more than they hurt Saudi Arabia, and can act as a tool of economic warfare.
OIL TRICKLES-DOWN ECONOMICS The losers from low oil prices are mostly intuitive and easy to spot. Oil companies and oil-dependent governments have suffered the most from the drop in oil prices–BP’s share price has fallen from $50 to below $30. Industries that rely on the oil industry, like exploration or oil-related manufacturing companies, have also taken a hit. Ironically, as oil companies have buckled, so have many sustainable energy enterprises. Low oil prices make conventional, non-renewable energy more appealing to consumers, and companies like Vestas, the only company that focuses nigh exclusively on wind energy, and Tesla, the famous maker of electric cars, have both suffered the consequences. The winners are equally intuitive. Airlines benefit from lower fuel prices, and as consumers have more incentive to buy less fuel-efficient vehicles, truck and heavy automobile manufactures’ revenues also increase. After all, everyday drivers feel less of a pain when they fill up at the pump. The oil companies that dominate parts of the global economy may be far away, but oil’s impact hits right at home.
13
INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015
Swan Song IT’S NOT OVER UNTIL THE OPERA HOUSE CLOSES by Eric Li
14
POLITICAL ECONOMY
O
ver the last five years, opera companies ranging from the famous New York City Opera to the lesser known Dicapo Opera have closed up shop. The Great Recession was the biggest factor behind these bankruptcies and closures, but the failure to attract newer, younger patrons is equally alarming. Opera is a dying art, and its future seems dark and bleak. Adam Smith famously called opera “unproductive labor,” as its value cannot be quantified. While Smith’s theory of value has since been refuted, it remains true that the opera industry exhibit very low growth in productivity. Although increases in productivity lead to growth in most industries—more cars roll out of better-equipped factories, more advanced apps are created by better-trained programmers—the same cannot be said about opera companies due to the “Baumol’s Cost Disease”. According to the economist William Baumol, even if superior technologies make set production and costume designs cheaper, they do not increase the efficiency or quality of musicians, who, along with stagehands, still need to be paid the same, adjusted for inf lation. Thus, salaries rise without an increase in labor productivity. In fact, Metropolitan Opera House was almost forced to delay the opening of its 2013 season due to labor contracts disagreements (the orchestra eventually agreed to a pay cut). The running costs of most opera companies are so high that even if every seat is filled, they still register a loss. Indeed, the box office only account for about 1/3 of the operating budget of most arts organizations. It is no surprise that all opera companies are non-profit organizations whose business model is to maximize both present and future contributions. However, as the median-age of patrons continues to increase, like that of C-SPAN viewers, the problem is clear. Who will fund opera fifty years down the road, when the current crop goes, as Gelb puts it, “extinct?”
“THE OPERA HOUSE EFFECT” One unsurprising source of funding comes from the government. In many European nations, governments offer to fill whatever deficit gaps (which often amount to at least 50 percent in large opera houses) that an opera company sustains. In recent years, however, the English and Italian governments are threatening to suspend public funding unless opera companies can reduce their deficit. However, this policy could foreseeably force companies to stage bargain-quality productions that fail to attract a new audience and solve the actual problem. The U.S government, meanwhile, is even less
Opera is a dying art, and its future seems dark and bleak. generous towards the arts, opting instead to support opera companies indirectly through means such as tax deduction for charitable donors. Among economists, there is constant debate regarding whether arts are public goods that call for government support. A recent study published in Labour Economics examines 29 opera houses built before 1800. The paper not only demonstrates correlation between the erection of opera houses and regional economic growth, but also concludes that these cultural institutions are the cause of growth. According to the researchers, well-educated workers prefer to live geographically close to cultural amenities. The proximity of talents to these cultural institutions thereby significantly increases regional growth. Thus, political leaders should account for the indirect growth effect of cultural amenities when considering whether opera houses should be subsidized. A modern example that seems to support this conclusion lies in East Asia, where there is a parallel between economic growth and rising demand for arts in major urban areas. Many economists, however, have questioned the validity of the “Opera House Effect,” especially when operas are considered as luxury goods. In cities with lower median household income, work opportunities, rather than operas, are the reason why people flock to large cities. Thus, the correlation between growth and opera houses may be explained by the fact that cities that can afford to build opera houses also already have the resources for sustained economic growth. Moreover, operas are acquired tastes. People who f lock to opera houses tend to be those who have experiences with operas. Then, we are faced with the chicken and egg paradox. Does opera actually attract talent, or are the well-off intellectuals the reason behind the successes of opera house? Without sufficient government support, opera houses must adjust their business model in order to survive. Since the opera industry can do little to increase its productivity, it must seek to increase demand. As the current generation of opera-goers exits the scene, it is absolutely vital to attract new audiences (potential new donors) for the survival of the industry.
TWO PATHS FOR THE FUTURE Generally, opera companies in the U.S. are faced with two choices. One solution is provided by Peter Gelb, who seeks to attract new audiences by filling the stage of Metropolitan Opera (“The Met”) with innovative productions and new commissions. The Met’s lineup of shows per season has nearly doubled in the past decade. However, since the box office doesn’t come close to compensating the production costs, the Met has racked up large deficits as a result. Another path taken by many opera companies may be found at the Lyric Opera of Chicago, which maintains a balanced budget year after year by running a shorter season with more conservative repertory and productions. The difference between these two strategies is their focuses on short-run sustainability versus long-run growth. This is similar to the contrast between the austerity measures of Presidents Hoover and the New Deal policies of President Roosevelt during the Great Depression—one sought to steady the ship for as long as possible and hope for the economy to readjust on itself, while the other was forced into radical actions.
REPRISE OR CURTAIN? Proverbially, the opera industry is in a Great Recession. It seems impossible to overturn the trend of decline unless radical measures are taken. While the government is reluctant to provide much-needed support, the industry itself must decide if deficit spending is necessary for the survival of the industry. Opera lovers will be on the edge of their seats waiting to see if opera as a popular art form will be revived in a second coming, or fade away in the long history of music and theater.
15
PERSONAL FINANCE
Raising the Bar for Gym Memberships ARE THEY REALLY PULLING THEIR WEIGHT? by Tiffany Chen
THE MOST GYM-PACKED TIME OF THE YEAR
B
eginning around the end of Janu ary and crawling into late February, gyms tend to see a huge spike in the number of memberships bought. The number of new gym memberships increases by 50 percent, with such purchases making up the majority of new gym memberships annually. For the individual, an average gym membership costs between $40 and $60 per month; factoring in initiation fees, it is likely that the pounds drop more from the wallet than they do from the waist. As the best-laid plans go awry and post-holiday motivation dies down, the group of people who recently made gym membership purchases slowly ceases its workout excursions. Indeed, by the end of February, 80 percent of the New Year’s resolution crowd has already walked away dejectedly from the treadmill. According to the International Health, Racquet & Sports Club Association, by the end of September, the total proportion of new health club members that officially cancel their membership is 50 percent. What was once a fully occupied house is now a barely frequented cave, and staying at the YMCA suddenly doesn’t seem as fun as it did before.
WAITING FOR WEIGHT TIME The time spent in a crowded gym during the first few months of high season is never spent wholly on exercise. Equipment is limited and people tend to follow set workouts; as a result of someone else’s 30 minutes on the treadmill, 30 minutes on the elliptical, and then perhaps an hour of scrolling through Facebook while “stretching” on a yoga mat, there is a risk of not being able to complete one’s own workout in the intended amount of time. As a result, the individual who wishes to use the rowing machine for three minutes ends up spending double the amount of time that he or she would have
16
spent had it not already been in use by someone else. The ultimate outcome is an unproductive time spent at the gym rather than a workout that could have been done outside of the gym. Instead of walking on the treadmill and watching Netf lix, a walk to the supermarket or to Grandma’s house could have taken a shorter amount of time and burned the same amount of calories.
WEIGHING THE PROS AND CONS While gyms may indeed sound exciting to the long-aspiring fitness junkie, purchasing a membership may not be the most effective way of exercising sound financial judgment — and it certainly isn’t the only method by which an individual can exercise his or her abdominal muscles. A study conducted by the American Economic Review noted that, for 8,000 YMCA members over a three year period, those who paid per visit rather than paying monthly fees ended up saving an average of $600. For the busy millennial who cannot commit to daily trips to the
30% 20% 10% 0% -10% -20%
YMCA, a pay-per-visit approach could certainly be cheaper than monthly membership dues. The newest fitness movement powered by juice-thirsty millennials and inspired by the growing trend towards healthy lifestyles now encourages individuals to exercise from where they are, in the confines of their own houses and around their neighborhoods. Running outside not only burns more calories than running on a treadmill but it also provides excellent scenery and a lower likelihood of damaging one’s knees. Free workout videos posted on Youtube have would-be couch potatoes working up a sweat as they do tricep dips off the edge of their seats. Gym memberships, while certainly a hot commodity, come at a hefty price. As people begin shedding clothes and preparing for their spring and summer attire, the pressure to look good leaves individuals sprinting to the gym. As a result, money pumps out of one’s wallet and into the bottomless holes of gym managers’ gym shorts pockets. Moving forward, it may be time to reconsider the purchase of a gym membership as newer, cheaper exercise alternatives continue
PERCENTAGE OF NEW MEMBERSHIPS THROUGHOUT THE YEAR
-30%
With a gym membership, it’s likely that the pounds drop more from the wallet than they do from the waist
The Road to the White House is Littered Green
Abandoning the Titanic
SHOUD YOU DONATE TO YOUR FAVORITE CANDIDATE Nikhil Kumar 18
THE SURPRISING TRUTH ABOUT SUNK COSTS Lorraine Sophia Salim 20
Purchasing a membership may not be the most effective way of exercising sound financial judgment — and it certainly isn’t the only method by which an individual can exercise his or her abdominal muscles.
17
PERSONAL FINANCE The Road to the White House is Littered in Green SHOULD YOU DONATE TO YOUR FAVORITE CANDIDATE? by Nikhil Kumar
P
rimary season is in full swing in the United States, and anyone who has signed up to receive campaign emails knows that one thing is at the top of candidates’ minds: fundraising. Every day, the media inundates citizens with information about how Bernie and Hillary stack up in number and size of contributions, how little Trump has spent compared to many of his competitors, which lobbyists attended a swanky fundraising dinner, and so on. Many Americans, though, lack basic knowledge of how the campaign finance system works in the United States, which makes it difficult to make an informed decision about contributing to a candidate. With the facts in mind, you might think twice about giving to politicians — and a political system — that are already swimming in money.
A cross-country comparison with some of the United States’ peers reveals how odd the American cash-oriented system really is. In the United Kingdom, party spending in the 2010 general election was 26 percent lower than that of the 2005 election, while in Norway, 74 percent of parties’ income comes from public funding while television and radio ads are banned. It is important to note that public financing in the form of a matching funding program is an option in the United States, but most prominent candidates since 2000 have opted out of the system in favor of private funding. The results have been staggering, with more than $6 billion dollars spent in Congressional and Presidential races in 2012. And Americans don’t seem to be happy with the current process: a Bloomberg poll from September 2015 found that 78 percent of respondents believed the Citizens United ruling should be overturned.
A cross-country comparison with some of the United States’ peers reveals how odd the American cash-oriented system really is
FEEDING THE SYSTEM
MEET THE CANDIDATES
Campaign finance reform is a trending issue in this year’s election — so what are the candidates fighting about? Under the current system, individuals can contribute a maximum of $2,700 per election, and corporations and unions cannot give directly to candidates. Beyond this, individuals who gather many contributions for a candidate are called “bundlers” and receive special treatment from the campaign, and lobbyists often help with fundraising. (Hillary Clinton recently came under fire for a fundraiser hosted by a recent lobbyist for the National Rif le Association.) The real trouble, though, came after the 2010 Supreme Court ruling in Citizens United v. Federal Election Commission, which opened the door for Super PACs (Political Action Committees), organizations that can raise unlimited money from individuals and corporations as long as they don’t coordinate with a candidate.
In this context, it is interesting to consider individual candidates’ success in the realm of campaign financing as an indicator for the health of the system currently in place. Among all candidates still in the race, Secretary Clinton, Senator Cruz, and Senator Sanders are in the top 3, having raised $188 million, $104.2 million, and $96.3 million respectively as of February 20, 2016. Ted Cruz takes the second spot with $104.2 million.) Not counting Super PACs, Clinton and Sanders are far ahead of any of their Republican rivals, with $130.4 million and $96.3 million, respectively; Cruz is a distant third with $54.7 million, followed by Rubio ($34.7 million), Trump ($25.5 million), and Kasich ($8.6 million). Among those who have already dropped out, Jeb Bush is the most prominent: before suspending his campaign in February, he raised $157.6 million, nearly 80 percent of which came from Super PACs.
18
These numbers reveal trends about campaign financing in the United States that are not entirely disheartening for those attached to the democratic concept of “one person, one vote.” Of course, the sheer magnitude of contributions is stunning: already, more than $900 million have been raised by or on behalf of the candidates. Yet there is evidence that the Super PACs made possible by Citizens United are less effective than the plutocrats who support them might have hoped. Senator Sanders, the only major candidate without a Super PAC, is one of the top fundraisers of the campaign, while Bush, the beneficiary of what was by far the most monied Super PAC, couldn’t eke out two percent of the popular vote. And Trump, despite coming in fifth place in fundraising among active candidates, is performing astoundingly well with a large sector of the electorate — although as anyone living in the United States today knows, he has benefited from an astounding amount of free publicity thanks to the media.
DON’T BE AFRAID TO COMMIT What does all of this mean for you in deciding whether or not to contribute to your favorite candidate? First (unless you #FeelTheBern), money probably isn’t a major concern for your candidate thanks to their cushy Super PAC. Second, this year’s primaries are defying expectations about the importance of fundraising, so contributing may not be the most effective way to support your man or woman. Ultimately, though, the decision to donate is highly personal and depends on both your passion and your wallet. If you do choose to make a contribution, know that you probably won’t get a refund if your candidate drops out of the race: campaigns almost never return leftover money to donors.
Yet there is evidence that the Super PACs made possible by Citizens United are less effective than the plutocrats who support them might have hoped.
PERSONAL FINANCE
INTERCOLLEGIATE FINANCE JOURNAL • SPRING 2015
$
$
$
$
$ $
$
$ $
TOTAL MONEY DONATED TO ALL CANDIDATES (TOP 6)
FLORIDA $47,364,558
NEW JERSEY $9,868,250
TEXAS $35,329,944
ILLINOIS $9,276,530
NEW YORK
VIRGINIA $8,983,339
$34,986,547
19
INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015
Abandoning the Titanic THE SURPRISING TRUTH ABOUT SUNK COSTS by Lorraine Sophia Salim
THAT SINKING FEELING You are watching your most beloved TV show and, out of the blue, your favorite character dies. With fury, you vow to stop watching the series when suddenly a thought comes to your mind: “I am already on season five and I have invested a lot of my hours, money, and feelings into this! I might as well keep watching to see how it ends.” If you have experienced something similar to this and decided to continue just because you have invested so much, you have fallen into the sunk cost fallacy trap! A sunk cost is an irrecoverable cost that has been invested into a project, regardless of the project’s outcome. Sunk costs can include permanent loss of money, labor, or time. According to the economic theory, disregarding sunk costs in decision-making process is necessary to make a rational decision. However, we are not 100 percent rational. Thus, most of the time we fall into a “sunk cost fallacy,” or, to put it in non-economic terms, the inability to move on after investing for a certain period of time. Similar to the binge-gone-bad, when you stick with your TV show even after your favorite character dies and you no longer find any enjoyment in the episodes that follow, you nevertheless find yourself unable to move on.
YOU’RE NOT AS RATIONAL AS YOU THINK... The reality is that more often than not, humans fall into the sunk cost fallacy: individuals tend to hold on to the things
20
we have already lost. And this is perfectly normal, because humans are both rational and emotional beings. According to David McRaney, author of You Are Not So Smart, as emotional beings, humans have an aversion to loss that leads us to fall into the sunk cost fallacy. In other words, the prospect of losses is a more powerful determinant in decisions than the promise of gains. One reason behind this aversion is the uncertainty factored into making decisions. Faced with an uncertain future, the brain naturally works to minimize any potential loss rather than maximize possible gains. This irrational behavior explains why salespeople deploy the strategy to begin talking about the prospective loss that consumers incur if they do not buy the product rather than the potential benefits of purchasing it. Hearing an advertisement with the first words “Don’t lose…” followed by “buy….instead,” is a marketing ploy by which companies take advantage of loss-aversion tendency.
TO SINK OR NOT TO SINK If it is in human nature to err into the sunk cost fallacy, is the rational sunk cost theory still relevant? Yes, on some occasions. In the domain of economy, finance, and accounting, sunk cost theory works perfectly well because rational decisions are crucial in these fields. This explains the accounting rule to exclude any sunk costs in balance sheet calculations. By considering sunk costs in corporate decision making, different parties would value the losses differently and propose different solutions, each
according to their emotional attachments to the losses. This would create further clashes of interests between different parties. Thus, in a fast-paced corporate environment where there are a plethora of interests to be considered, rational decisions are often the best. On the other hand, falling into the sunk cost fallacy is what makes people human. Throughout history, holding onto sunk costs has led to wars, increases in auction prices, and the continuation of broken political agendas. Nevertheless, the sunk cost fallacy also marks the epitome of human achievements. For example, Thomas Alva Edison tried more than 10,000 failed testing materials before he successfully invented the first commercial electric light bulb. A perfectly rational Edison would have abandoned the project much earlier, thinking that it might be a good time to move on from this seemingly impossible feat. However, he chose to account for his failures — the irretrievable costs — as an asset in the form of learning. The sunk cost fallacy produced the resilience that made Edison’s invention of the light bulb possible. The capacity to fall into the sunk cost fallacy is a trait exclusive to humans. It gives the will to persevere, the desire to beat the impossible, and the ability to ref lect on regrets and sorrows. A study shows that, other than humans, animals can only see gains and losses in the short term: they are unable to commit this fallacy. Therefore, whether we choose our costs to be sunk or not, the existence of the sunk cost dilemma speaks to the very nature of humans — as beings inf luenced by both rationality and emotion.
PERSONAL FINANCE
the prospect of losses is a more powerful determinant in decisions than the promise of gains
The sunk cost fallacy produced the resilience that made Edison’s invention of the light bulb possible.
21
STARTUPS & TECHNOLOGY
Nap Time Is Money DON’T SLEEP ON THE NEXT BIG THING - NAP TIME by Calvin Chu
22
Google’s Came-Changing Foray into Virtual Reality
To Sell or Not to Sell That is the Question
Technology Innovation Amidst Political Unrest
CARDBOARD CAN MAKE ALL YOUR DREAMS COME TRUE! Ruban Hussain 25
THE ONLINE MARKETPLACE FOR CLASS NOTES AND STUDY GUIDES Katharine Jessiman-Ketcham 28
THE EMERGING START-UP SCENE IN KOSOVO Benjamin Winston 30
PRICING YOUR NAPTIME HOW MUCH WOULD YOU PAY FOR A 25-MINUTE NAP?
T
ired of your run-of-the-mill startups? Keep your eyes open because venture capitalists’ attentions are shifting to the sleeping sector. As workdays become longer and more intense and classwork ramps up, people around the world are more sleep-deprived than ever. Over one-third of American adults take daily naps, demonstrating that the demand for a couple of Z’s is quickly rising, and many startups are positioning themselves to capitalize on this.
The demand of a couple of Z’s is quickly rising, and many start-ups are positioning themselves to capitalize on this. THE BUSINESS OF SWEET DREAMS One such startup trailblazing a path in this niche is Doze, which provides business workplaces with resting areas equipped with EnergyPods — comfy “napchairs” manufactured by Metronaps, Bose noise-cancelling headphones, and other amenities for overworked employees to take a nap. Based in San Francisco, Doze is well-positioned to serve the bustling entrepreneurial city and its need for sleep. With the company’s various packages, the consumer price for a 25-minute nap comes out to be around $20.
23
INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015
This relatively high price stems from the need to cover overhead, as each sleep pod rings up at around $11,000. At first glance, that seems like a poor investment to give people the ability to take a short nap. However, 20-30 minutes is often enough to refresh people during a grueling day of work. Furthermore, Harvard researchers found that sleep deprivation costs Americans $63.2 billion in lost productivity each year, easily dwarfing the cost of taking a 25 minute break during the day.
SLEEPING AT WORK Doze is not the only pillow on the bed for the naptime market. Beyond MetroNaps, which sells its EnergyPods directly to various high-profile companies like Google or Proctor & Gamble, many startups are diversifying their portfolio with a foray into the realm of sleep. Office and meeting space rental companies like Breather and Peerspace offer tranquil settings that businesses can rent out for a nice nap. Furthermore, yoga studios are combining relaxation with some shuteye to offer its customers a refreshing experience. For example, Bottom Line Yoga, conveniently located between the Willis Tower, Federal Reserve Bank of Chicago, and the Chicago Board of Trade – claims to open its doors for workers to nap during the afternoon, when natural circadian rhythms dip.
THE PRICE OF SLEEP For many employees and employers, daytime naps are simply not feasible. As a result, other startups are geared towards making the most out of your nighttime slumber. Hello, a sleep-tracking company, has created an orb called “Sense” which keeps tabs on various measures of your surrounding environment, whether it’s temperature, humidity, noise, light— you name it. They don’t come cheap though, as one device goes for $129, and a duo—for your significant other or roommate—tgoes for $178.
THE NIGHTCAP Ultimately, the quality, not quantity of sleep is what matters the most. Noise, light, and extreme humidity or dryness may prevent sleep from working its rejuvenating wonders. With more and more students and employees working harder and longer, the importance of refreshing sleep is growing stronger and stronger. As more companies, students, and workforce members try to place a price tag on beauty sleep, it’s important to stay awake to new developments in the sector.
24
Sleep deprivation costs Americans $63 billion in lost productivity each year, dwarfing the cost of taking a break during the day. PERCENTAGE OF TEENS WHO SAY THEY GET ENOUGH SLEEP 100%
90%
48%
50%
0%
High Stress
Low Stress`
SLEEPING HABITS BY GENERATION Millenial
Generation X
Baby Boomer
Feeling Sluggish or Lazy 37% Has trouble concentrating on things they need to do
27%
11%
Not motivated to take care of responsibilites
14% 0%
10%
50%
60% 58%
38%
34%
23% 22%
20%
32%
Baby Boomer
30%
40%
50%
60%
Studies show that sleep significantly effects the American population economically and psychologically. This data shown in the above charts comes from a report written by the American Psychological Association in 2016.
STARTUPS & TECHNOLOGY
Google’s Game-Changing Foray into Virtual Reality CARDBOARD CAN MAKE ALL YOUR DREAMS COME TRUE! by Ruban Hussain
GET YOUR HEAD OUT OF THE CLOUDS AND INTO VIRTUAL REALITY Virtual reality is the latest tech obsession. With venture capital investments of more than four billion dollars, countless startups like Oculus and Magic Leap have been pioneering the field, and companies from Volvo to Sports Illustrated have also begun taking the imaginary leap of faith-. Virtual reality isn’t going away anytime soon. The term “virtual reality” or VR refers to many things, but at its core, it is exactly what it sounds like—virtual reality involves placing a person in an artificially generated or simulated environment where they can interact in a believable way. The idea of virtual reality as a concept is nothing new. After all, shedding the mundane of life and being
able to do anything without limitations has captivated people since the dawn of human civilization itself. Though virtual reality systems have been in development for decades, the vast majority of these efforts have led to complete failure because the necessary technology in terms of both cost and function simply did not exist. After a series of disappointments, the public lost interest, and virtual reality was shelved away in the dark corner of irrelevance. Suddenly out of the blue, in 2012, a small startup called Oculus announced its Kickstarter campaign for a revolutionary video-game virtual reality headset that promised to solve the traditional VR barriers with the support of top video-game-industry executives. With this, virtual reality was once again injected into the modern public consciousness, and interest has been only snowballing since then.
This was a VR ‘headset’ that anyone could make or obtain under $10 to $20, requiring the simplest of household materials. In the years since, Oculus has remained the poster-child of the modern VR movement, and even after its acquisition by Facebook, the team has been hard at work. With the headset set to be officially released at the end of March, consumers will finally be able to experience their own virtual reality. However, the $600 price tag and high computer specification requirements will be prohibitive to many, meaning that the Rift will likely remain a niche product for video-gaming for the near future.
THE CARDBOARD REVOLUTION At the end of its annual I/O press conference in 2014, Google drastically shifted the course of VR when they handed out an unusual virtual reality headset to every conference attendee. These headsets were designed to allow anyone to experience virtual reality through their smartphone’s screen. The best part? They were made from cardboard. At the same time, Google released a simple app and DIY instructions for those at home to make the ‘device’ themselves. Something incredible was born. This was a ‘headset’ that anyone could make or obtain for under $20, requiring
25
INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015
PRICES OF LEADING VIRTUAL REALITY HEADSETS
ment than anything else in recent history by allowing the average person to witness the potential and enjoy the benefits of virtual reality in a personal way.
“BUT DUDE, VIRTUAL REALITY IS ONLY FOR GAMERS!”
$3,000
Since the creation of the first virtual reality systems, VR has perhaps been most closely associated with video games, a trend that certainly continues with devices like the Oculus Rift and other headsets like the Cardboard.
$800 $600 $400 $200
$20
$0 Samsung Gear
Occulus Rift
Google Cardboard
the simplest of household materials. The trickiest component to assemble is the easily orderable 45mm focal distance lenses. This “Google Cardboard” at first seemed like just a fun gimmick, but the idea spread like wildfire among tech enthusiasts. Google’s ‘development kit’ release jumpstarted the development of scores of incredible VR apps on Android’s Google Play Store (and now on the Apple App Store). By the next conference a year later, Google had recognized the crazy popularity of the Cardboard. It responded by establishing the once-throwaway concept as the basis of a brand new VR platform and announcing a number of partnerships and ideas. Around the same time, some phone manufacturers like Samsung, LG, and HTC jumped on the bandwagon, offering their own takes on the VR headset. Alongside these developments, Google has spread other accessible VR-esque 3D experiences as well. Through Youtube it introduced an option for 360 degree videos to be viewed and rotated through the Chrome browser on any computer or android device.
HTC Vive
Microsoft HoloLens
Google Street View was updated to integrate users’ 360 degree panoramas to allow any person even more access to almost any place on earth. With the help of Motorola, it even created a storytelling platform called Spotlight Stories where filmmakers are invited to craft unique shorts meant to be experienced in 3D space through the 2D screen of a smartphone or computer. Though these might not have been traditionally called “true” VR, they end up facilitating the same experiences of interaction and discovery as any VR system. In the process they sacrifice a little immersiveness for the sake of accessibility to bring a taste of virtual reality to even those who don’t have something like the Cardboard. Through all these initiatives, Google has done something that was unimaginable a few years ago -- it has lowered the barrier of entry to experiencing the promise of virtual reality to a point that every internet user in the world has painless access to it. Though these experiences are by no means yet 100 percent immersive or life altering, this democratization has done more for the VR move-
This democratization has done more for the VR movement than anything else in recent history
26
STARTUPS & TECHNOLOGY
Almost every headset out there has some selection of really absorbing and engaging games that users can immerse themselves in. What the Cardboard has shown, though, is that VR can allow so much more. With virtual reality becoming more accessible to individuals and organizations, so many more have been able to explore their unique ideas and applications: documentaries that build empathy through an immersive experience, apps that share journalists’ stories in powerful ways, and educational and
medical uses for the Cardboard. It is important to recognize also that virtual reality can’t be and shouldn’t be used all the time. While some suit themselves perfectly, other applications simply do not make compelling VR experiences. The beauty of the Cardboard is that the low investment it requires from users means that they tend to be more forgiving with any subpar experiences while continuing to celebrate the ones they love. Today’s VR, just like the VR of years past, is by no means perfect. The
technology has improved leaps and bounds from decades ago and this is what has allowed VR to take root again. The critical difference now is precisely that producers are able to experiment and hone their content while the public can continue to dabble once in awhile without ever being utterly disappointed and turned away. In a way, this has always been what VR needed to firmly establish itself -- room to grow with tempered expectations. And whether it was intentional or not, Google has made this possible.
UPLOADING...
27
INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015
To Sell or Not to Sell — That is the Question THE ONLINE MARKETPLACE FOR CLASS NOTES AND STUDY GUIDES by Katharine Jessiman-Ketcham
AN OFFER YOU CAN’T RESIST If someone told you that you could earn $400 each semester just for uploading your class notes, would you? I know I was incredibly tempted by such an offer when it popped up on my Instagram feed one day over winter break. In fact, like many curious and simultaneously cash-strapped college students, I couldn’t resist immediately going to the homepage of StudySoup.com to see if this was for real. But what I found was a mixedbag of results. While certainly notetakers are crucial for academic accommodations and disabilities, the virtual market for notes rewards those students who are both able and willing to put in a few extra dollars for a better grade.
StudySoup is one of the latest online platforms on which to buy and sell lecture notes and study guides.
COMPETITION FOR CASH Launched in 2012, StudySoup is just the latest online platform on which to buy and sell lecture notes and study guides. Others include sites such as NoteUtopia and Luvo, to name a few. Essentially, they all offer the same thing: a market in which successful note-takers can profit
28
from their skills and the slackers can up their game. Similarly, the mission statement of each firm paints their business, the buying and selling of study materials, as a noble cause. Luvo’s motto is to “help classmates in minutes.” StudySoup’s mission statement is similarly simple, but it goes even further seeming rational and sensible: “there are always a few top students in the class who know exactly what it takes to be successful. We decided those top students can help their peers, and make money, by posting their best study materials to StudySoup.” StudySoup’s co-founder, Sieva Kozinsky, even boasts, “we’ve been able to access and open the playing field...our goal is to really be the go-to-peer-to-peer learning marketplace.” But is this cause of helping “top students make money while helping their classmates” and “leveling the playing field” really a noble one? Or just a legitimization of the commodification of knowledge?
YOUR PAIN, THEIR GAIN The success stories are littered across StudySoup -- Elaine earned $2,306 last semester while Jennifer makes $500 a month and loves helping future med students on the MCAT. Everyone is advertised as a winner in this exchange, so is anyone losing out? Well, buried underneath the success should be the fine print, but no website says specifically what percentage of your profit they take. While I’d have to actually sell my notes to know the precise earnings figures for note-sellers, according to multiple web forums, StudySoup promises you 50% of the profits, Luvo gives you anywhere from 60-70%, and NoteUtopia “takes a small fee.” Let’s do the math — say you sell your study guide for $4. If you’re on StudySoup, you’re walking away with a meager $2 at most. So, does the pain of having to upload all your notes actually pay off?
$400
WHO DO LECTURE NOTES BELONG TO ANYWAY? Maybe, as StudySoup argues, you do deserve some compensation for your ability to synthesize lectures and readings into a master study guide. And your study materials are your property after all, right? Or, are those notes you took in your history professor’s lecture today his intellectual property? NoteUtopia made headlines back in 2010 when it was served a cease-and-desist order for violating California’s state education code that prohibits anyone from selling “academic presentations.” Outside of California, though, regulation remains unclear. If you really are getting better notes out of this process, making more efficient use of your time, and profiting off of your ability either to take notes or to buy notes, who has the right to complain?
STARTUPS & TECHNOLOGY
$300 $500 -$300 MORE THAN PENNIES FOR YOUR THOUGHTS HOW DOES MONETIZING CLASS TIME INFLUENCE EDUCATION?
ONE STEP FOR STUDENTS... ONE GIANT LEAP FORWARD FOR STUDYING? What the creators of the company boast of — the heroic goal of bettering peer-to-peer learning — is simply a market exchange of your knowledge and skills for cash. The real consequence of all of this is the effect it has on our education. What happens to a classroom when you monetize each minute you spend in the classroom into a dollar value represented by the worth of your notes? Do we, as the creators of StudySoup seem to believe, become better note-takers locked in competition for the highest bid or have we, in fact, taken part in the de-incentivization of going to class yourself? In effect, is this marketplace exchange an innovative step toward progress in learning
that will push our generation forward into learning better and to teaching each other, or has it just positioned those with
the ability to drop dime on a study guide to succeed better in class? The future is uncertain — better pay up and wait.
What the creators of the company boast of — the heroic goal of bettering peer-to-peer learning — is simply a market exchange of your knowledge and skills for cash. 29
INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015
Technology Innovation Amidst Political Unrest THE EMERGING STARTUP SCENE IN KOSOVO
by Benjamin Winston
Amidst political protests, ethnic tensions and widespread unrest, the startup scene in Pristina, Kosovo flourishes
A NEW SILICON VALLEY When Americans think of technology startups, an image of college dropouts camped out in Silicon Valley garages comess to mind. Idealized in the HBO series Silicon Valley and home to Apple Inc., Alphabet Inc., and Facebook,the Bay Area truly embodies innovation. However, unbeknown to many, the newest scene for the latest technology startups is in Kosovo. Amidst political protests, ethnic tensions and widespread unrest, the startup scene in Pristina, Kosovo flourishes. Newly declared as an independent state, only accepted as an Autonomous Province by Serbia, but recognized by 108 UN Member States, the Republic of Kosovo is inventing itself and reinventing web companies to meet demand. Over the past several years, international interest has grown as one company after another emerges to assist Kosavars in business. Telegrafi.com is the number one news resource. Solaborate is based on “social” “collaboration” in the country. Shpejt.me allows people to purchase food for delivery via their smart phones. In 2011, the Innovation Center Kosovo (ICK) was established to assist and guide these companies. It offers office space and conference facilities for newly formed or young companies. Nearly 200 events have already been held.
30
Many of the companies at the Innovation Center Kosovo address problems in Kosovo that have been largely ignored in the past. Girafa, which seeks to improve information indexing for Albanian speakers and projects such as Ec Shlire, which helps individuals report sexual harassment, are transforming the technology scene in Kosovo.
THE “OTHER” GOOGLE: GJIRAFA Created by Mergim Cahani in 2014, Gjirafa is a company tailored to the unique and intricate Albanian language. In a two-pronged approach, the company has developed an Albanian search engine and is aggregating news in Albanian. Gjirafa participated in StartupYard, an accelerator program located in Prague, through which the company met Jakub Havrlant, CEO of Rockaway Capital. With large investments by Rockaway Capital, Gjirafa has just raised $2 million in Series A funding, a round of venture capital financing. The money will enable the company to continue improving information services as well as e-commerce and online advertising. According to Cahani, the lack of online data in Albania and the complexity of the language are obstacles Google struggles to overcome. In an interview
with Geektime he states,“[the] Albanian-language web is in its infancy; [it’s] not developed enough. As such, [it] is not rich and one cannot find something online that does not exist.” While providing similar search services as Google, Gjirafa is based upon specialization rather than scalability. In theory, Google is designed to fit any market, function in any location and provide details on an array of issues. Yet, it fails to properly address the needs of Albanian speakers. Cahani refers to his company’s access to local data and understanding of the market as key advantages over Google. He states, “We implement a hybrid approach in search; statistical and language-NLP based. Something that does not exist in academic research for the Albanian language.” Following in the footsteps of Seznam, a Czech based search engine, Gjirafa hopes to attract a niche market. Seznam. cz exists on par with Google in the Czech Republic. In Albania and Kosovo, as well as other southeastern neighboring countries, Gjirafa aims to parallel or exceed Google as the search engine of choice. It offers news, bus schedules, job openings and rental listings. Most importantly, Gjirafa is digitizing existing online information as well as uploading data that does not yet exist online in the Albanian language.
STARTUPS & TECHNOLOGY
Kosovo
PROGRAMMING TO FIGHT INJUSTICE Girls Coding Kosovo, an initiative encouraging girls to learn how to code, recently launched the Ec Shlire app. In response to to acts of sexual harassment, women in Kosovo have created and developed this app. The project has already received international recognition with the Canada Fund for Local Initiatives and the United States Agency for International Development supporting the endeavor. This app enables users to anonymously report instances of sexual harassment. Authorities can
INNOVATION CENTER KOSOVO
In Albania and Kosovo, as well as other southeastern neighboring countries, Gjirafa aims to parallel or exceed ÂGoogle as the search engine of choice.
better understand trends of alleged sexual harassment and implement refined preventative measures. Although the app is not designed to convict perpetrators, data can be better organized for authorities. The Ec Shlire project addresses two crucial issues: sexual harassment and the scarcity of women in the technology sector. In Kosovo, as throughout the world, occurrences of sexual assault often go unreported or unaddressed. According to a report from the Kosovo Women’s Network, a mere 4.1% of individuals in Kosovo have reported or heard of
instances of sexual harassment. This app may allow reporting to be easier. The newly declared Republic of Kosovo has a burgeoning startup scene keeping pace with the increasing needs of her citizens. Technological innovation and implementation continues to improve the daily lives of those living in Kosovo. Despite political protests and controversy in Kosovo, startup activity is vibrant and international interest continues to grow. Gjirafa and the Ec Shlire app, while still in development, may well be on their ways towards improving life in Kosovo.
31
CAREERS
Working Outside The Box HOW CROSSFIT’S CEO DEVELOPED A MULTIBILLION DOLLAR NETWORK by Mike Janigian
32
Working Outside the Box HOW CROSSFIT’S CEO DEVELOPED A MULTI- BILLION DOLLAR NETWORK Mike Janigian 32
Shadow Branding and the Mob
The Buzz Around Bumble
WHY COMPANIES SHOULD EMBRCE THEIR DARK SIDE Vadhana Ravi 34
CHANGING THE DATING GAME, ONE APP AT A TIME Ryan Ma 37
All Hands on Tech THE RISE OF ONLINE HANDMADE MARKETPLACES AND THE SURGE OF CRAFTING Gillian Lee 38
Within the past 7 years, CrossFit has undergone a 13-fold increase in affiliate numbers, from 1,000 in 2009 to 13,000 by the end of 2015.
H
e’s old, he’s certainly not in great shape, and yet he is the face of fitness around the world. His name is Greg Glassman and he is the CEO of CrossFit, a wildly successful strength and conditioning program. Over the past fifteen years, CrossFit has grown exponentially, constantly attracting new members while retaining a strong base of members who religiously live by the program. This brilliant idea was conceived in a garage by sixteen-year-old Greg Glassman with nothing more than a bunch of workout equipment and a revolutionary idea of how to change the concept of fitness forever.
precedents: 1) a $1,000 trainer seminar to teach individuals how to become a CrossFit coach and 2) an annual fee of $3,000 to use the CrossFit name on a new gym. Those were (and continue to be) the only two things one needs to open his/ her own CrossFit gym. These gyms are CrossFit affiliates, meaning each gym decides on their business strategy and independently develop their day-to-day operations. This allows CrossFit headquarters to maintain a low cost business environment by not having to pay for any of the individual gyms’ expenses.
FREEDOM TO FITNESS
His unconventional business model has certainly been applauded mainly due to the incredible amount of growth the company has experienced. Within the past 7 years, CrossFit has undergone a 13-fold increase in affiliate numbers, from 1,000 in 2009 to 13,000 by the end of 2015. That translates to $39 million just from affiliate membership last year. The other main source of income, the trainer certification courses, has simultaneously increased as well.
Glassman launched the CrossFit website in 2000, introducing the world to his workout routines by posting daily “WODs” (Workout of the Day). After initially having success opening a few gyms in the California area, Glassman decided to expand his brand. He harnessed his strong libertarian beliefs and vowed to create a brand with as little regulation as possible. Thus, he established only two
SUSTAIN THE GAINS
He estimates that the entire CrossFit “ecosystem” brings in about $4 billion in revenue each year (growing at about 20 percent a year), while the headquarters brings in over $100 million itself. 33
INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015
It is common for these courses (often capped at 50 people) to be sold out every week in a variety of places around the world. Though growth may have slowed down in the U.S., it has just begun booming in places like China and a variety of European countries.
MAKING A NAME FOR THE GAMES One of Glassman’s major accomplishments has been his effort to make fitness a sport. By teaming up with Reebok and ESPN in 2010, CrossFit has marketed itself brilliantly. Reebok produces the official CrossFit apparel, which CrossFit gets paid a handsome royalty for. Whether its specialty shoes, shirts, or shorts it is almost certain that you will come across a CrossFitter with at least some form of certified apparel. Moreover, CrossFit began hosting an annual event on ESPN called “The CrossFit Games,” in which participants from around the world are invited to participate in a competition to crown the fittest man/woman on Earth. The process of selecting these participants begins with “The Open,” in which any person can sign up for $20, videotape themselves doing the five prescribed workouts, and compete to make it to The Games. Last year, over 272,000 people participated in the Open and the number is expected to grow for years to come. That translates to about $5.5 million dollars from participation in the Open, and all they had to do was come up with five workouts.
Shadow Branding and the Mob WHY COMPANIES SHOULD EMBRACE THEIR DARK SIDE by Vadhana Ravi
FOLLOW THE LEADER Glassman has proven time and time again that he has a goal in mind and a plan to get there. He just does not care what anyone thinks of him and will not let anyone else get in his way or slow him down. Frankly, how can you blame him? His attitude along with his vision has led to unimaginable success in an industry that many people thought was unchangeable. He estimates that the entire CrossFit “ecosystem” brings in about $4 billion in revenue each year (growing at about 20 percent a year), while the headquarters brings in over $100 million itself. The most impressive part of Glassman’s business model is how low the maintenance costs are of his brand. The only major costs that the CrossFit Headquarters incurs is paying lawyers to defend the brand name. But, arguably, Glassman’s biggest key to success is his passion. “I’m not trying to grow a business...I’m doing the right things for the right people for the right reasons,” he says. That is how he claims to have “the fastest growing brand on Earth.”
34
A successful business runs on this two way street of trust and loyalty. The real question is – how can we create this trust?
CAREERS
- whether it be through work, social acquaintances or online interest groups. In this realigned world, it’s all about niche marketing. If you want to sell your idea and have your business succeed, you have to be able to identify and convene your own “tribe”. The Mafia, or the Cosa Nostra, is one of the most notorious ‘tribes’, businesses and brands in history. This organization, that was the inspiration for Scorsese’s famous film trilogy, “The Godfather,” presents a fascinating case study for the tribe model and its implementation. The Mafia knew that the secret to a loyal consumer base was trust. John Dickie, author of Cosa Nostra – a history of the Sicilian Mafia, writes: “Cosa Nostra exists to protect the credibility of its brand. In other words, to make sure that the threats its members issue are never made in vain. A bit like the Volkswagen brand and its reputation for reliability. Only in the case of Cosa Nostra, protecting your brand identity means being able to kill people and get away with it, rather than just being able to start your car on a damp morning.” Businesses and brands are all about people. Specifically, they are about the relationships between people and your brand. A successful business runs on this two way street of trust and loyalty. The real question is - how can we create this trust?
THROWING SHADE
CREATING YOUR OWN COSA NOSTRA The rise of social media has had a surprising effect on the branding world. When the internet first became an inescapable commodity, marketers perceived it as a means to reach a much wider audience than ever before. The rise
of the internet was a catalyst to the idea of mass-marketing. However, the advent of social media has completely changed the online landscape. Instead of bringing people together, it has revived what Seth Godin, thinker extraordinaire, calls “the tribe model”. Social media has allowed people to once again segment their lives into exclusive groups or “circles”
Honour. Infamy. Loyalty. The Mafia has created this unmistakable image of who they are and what they stand for: a brethren that precedes everything else... even the law. What’s the secret to their allure? The answer lies in the world of ‘Shadow Branding’ — in embracing your dark side. What most brands try so hard to keep hidden, their shadows, so to speak, the Mafia played up as its strength. They celebrated both the murky and the noble aspects of their collective identity. This is something market researchers are beginning to recognize as ‘the good kind of negative brand equity’. Long gone are the days of ‘all sweetness and light’ branding that had once captivated consumers around the world. In a global study conducted by BrandZ, ‘classic brands’ like Sears, Kraft and Tropicana are now categorized as “fading stars”. The saccharine fairy tales that these brands were selling are simply not sustainable in today’s world of reality TV. This led these once beloved brands to become nauseating and sappy instead. The Mafia, on the other hand, can never be called sappy. They never romanticised the gory work they did.
35
INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015
They were completely honest about both the positive and negative of their brand. In fact, this was one of the ‘Ten Mafioso Commandments’ that was unearthed during the arrest of Salvatore Lo Piccolo at a secret mob meeting in Palermo, Italy in 2007: When asked for any information, the answer must be the truth. This was a large part of why it took over two decades for the law to catch up with the Cosa Nostra. The Mafia was able to earn (not delude) people into trusting them. And that’s what makes them the original shadow brand.
A STRATEGY OF TENSION Strategia della tensione or ‘strategy of tension’ is how the New York Mafia in the ‘30s controlled their collective identity through the use of public opinion and propaganda. All Mafia business was done through word of mouth. The Mafia was notorious for not keeping written records of anything in case it could be traced back to them. So, the Mafia identity was created based on what your neighbour’s neighbour’s neighbour had heard. The Five Families of New York knew that what kept their empires running was this constant undercurrent of tension and buzz. They had perfected the art of creating the delicate friction that shadow branding is all about. Between stories of glorified loyalty and shocking violence, they kept the public hungry for more. The Mafia brand was definitely ‘riddled with inconsistencies’. Their identity wasn’t this unrelatable syrupy perfection. It was genuine. It was dimensional. And that is what made it buzz-worthy.
36
BRANDING IN SILENCE Native content is quickly becoming the future of branding and advertising. This term, however, has been greatly misused to mean sneakily tricking users to click on content that they do not know is sponsored. This is not the sort of branding that I think would enhance a brand’s equity. Brands can only have sustainable friction if they let the product do the storytelling. This idea is essentially what the Mafia code of Omerta is all about. Omerta is the Mafioso code of honour that places a huge importance on ‘silence’ i.e. non-cooperation with authorities and non-interference with the illegal action of others. This stemmed from the idea that their work will speak for itself and no other recognition was necessary. So while I am not discouraging brands from cooperating with the police, I do think that there is something to be gleaned from the Omerta in terms of not using any partisan vehicle of media or information to push out your product. In other words, let your product or service speak for itself. Native Branding in its essence is merely letting the grapevine do its thing - which it will if you let it. Especially in today’s
social media world, the product adoption cycle is moving faster than it ever has before.** So, the people you really want to target are the early adopters. This section of your buyers are your active consumers. They are, again thanks to the internet, constantly keeping tabs on the product market, and have all the resources they need to make informed, wise decisions (without you shoving it down there throats). If these early adopters latch on to your product, they in turn will drive it forward into the passive consumer market. In short, if you have a quality product and an authentic identity, they will create all the buzz needed for itself. At the end of the day, it takes a certain amount of discomforting honesty and unabashed self-belief to be able to show the world your true colours and then to let them speak for themselves. These qualities are what kept audiences around the world utterly captivated with the Mafia even two centuries after their decline. Their secret was being able to celebrate their dimensionality and to embrace their shadows. And that’s what it takes to create your own powerful shadow brand, your own loyal tribe, your own Cosa Nostra.
Long gone are the days of ‘all sweetness and light’ branding that had once captivated consumers around the world.
Photo by Ryan Lowry
CAREERS
The Buzz Around Bumble CHANGING THE DATING GAME, ONE APP AT A TIME by Ryan Ma
WHITNEY WOLFE FOUNDER OF BUMBLE
F
reshly one year old in December, Bumble is stirring up the hive of social media. Bumble, which some refer to as the Sadie Hawkins version of Tinder, was created by Whitney Wolfe in December, 2014. At just 26, Wolfe has now created two hit apps, following her co-founding role at Tinder. Bumble differs in one key way from its swipe-driven cousin: women are empowered to act first.
Wolfe optimally wanted to change how men and women interact and to challenge and ultimately change or even abolish social dating norms.
THE RISE In 2012, Wolfe assisted in the founding of Tinder, a separate but similar dating app, which first made headlines in 2013. Wolfe worked hard to boost the popularity of the app and is often credited for the app’s popularity on college campuses. However, Wolfe was unjustly stripped of her co-founder title by her colleagues because, according to Tinder’s chief marketer, Justin Mateen, having a female co-founder could be seen as weak or “like a joke.” Wolfe was subsequently fired by Tinder during her break-up with Mateen. These two main events, in addition to several complaints made by Wolfe that were ignored, led Wolfe to sue Tinder for sexual harassment. Tinder and Wolfe settled out of court, but that was not enough for Wolfe. After leaving Tinder, Wolfe wanted to revolutionize the dating sphere by crushing stereotypes surrounding dating. Wolfe wanted to change how men and women interact and to challenge and ultimately change social dating norms. For example, one outdated social construct that Wolfe seeks to work against is that men are often expected
to reach out first. That is why Bumble’s structure encourages women to reach out. This structure challenges said social norms and allows women to comfortably make the first move and helps to shatter the stigma around women being too forward. According to Wolfe during an interview with Vanity Fair, the unwritten
heteronormative rules of dating put “the woman a peg under the man - the man feels the pressure to go first in a conversation, and the woman feels pressure to sit on her hands”. She argues “[i]f we can take some of the pressure off the man and put some of that encouragement in the woman’s lap, I think we are
37
INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015
taking a step in the right direction”. This statement epitomizes Bumble’s goals and its dedication to equality. “We are 100 percent feminist. We could not be more for encouraging equality”, said Wolfe. “It’s not a dating app, it’s a movement”, Wolfe told Time magazine. And the statistics hold true. Bumble has a nearly equal male-to-female ratio, a virtually impossible feat for a dating app. Bumble is completely revolutionizing the dating sphere through its progressive features and goals.
RULES OF ENGAGEMENT Similar to many dating apps and service, the setup and guidelines are pretty simple. Participants begin by completing a brief personal survey and Bumble assembles a profile via Facebook. Beyond that, there are very few restrictions and rules for the app. Users are asked to be original, to upload real pictures of themselves and to refrain from uploading pornographic material or pictures of their children. The number one rule is to show respect towards other participants. Those who do not will receive a warning followed by possible suspension or termination. Once completed, users are ready to swipe away. A swipe left means “not interested” while a swipe right says “I like you”. Bumble, however, allows for a redo when a swipe accidentally goes the wrong way. A simple shake of the phone will allow you to go back to the previous candidate and select the other option. Once matches are made, women must reach out first. Women have up to 24 hours to respond once a match is made. Matches can be extended an extra 24 hours once daily for both men and women if one feels strongly about a match that has not been responded to. For same sex connections, either side may start conversation, but participants are still held to just 24 hours to respond. If a conversation is not started after 24 hours, the connection disappears forever.
And the numbers don’t lie. After just one year, Bumble has had over 1 billion total swipes and 80 million matches sparking over 15 million conversations. In addition, it has an average of 15% week-over-week growth. Currently, the app has not turned a profit despite the successful year. The company plans to reveal a way for the app to make money in the coming year and even has its eye on going public.
But the main purpose of the app is to reverse gender roles and make women feel more comfortable making the first move.
All Hands on Tech THE RISE OF ONLINE HANDMADE MARKETPLACES AND THE SURGE OF CRAFTING by Gillian Lee
TAKE OFF
CHILD’S PLAY
Bumble is not your average startup. It has just 13 employees, 12 of them being female, a true sign of Bumble’s feminist mentality and motivation. Originally, Bumble caught heat from critics for being a feminist dating app, but that shouldn’t be used as an insult. The main purpose of the app is to reverse gender roles and make women feel more comfortable making the first move. After all, they are forced to when using the app. So far, the app has been a great success and widely loved by its users.
When Krafty Kristen was little, nothing made her happier than making beaded bracelets, molding small creatures out of clay, and drawing colorful pictures with a wide array of art supplies. Then came the day when she replaced her crafting supplies with stacks of textbooks and notebooks, never to take them out again. However, with the launch of online trading platforms over the past couple of years, the popularity of crafting has surged among the millennial generation.
38
After just one year live, Bumble has endured great success. Not only has it been widely used and enjoyed by thousands of individuals, but it has also implemented social change in society. Bumble continues to progress social norms while offering a unique way to match potential lovers. As for Wolfe, in just 3 years, she has become a powerful entrepreneur and an agent of social change, all before her 27th birthday.
What used to be a childhood pastime has now become a source of income. Technology has aided in the rising popularity of crafting as sites such as Etsy, Pinterest, and the new Handmade at Amazon. These sites have revolutionized the perception of an ostensibly child-centric activity.
TAKING STOCK Etsy.com is a peer to peer e-commerce website that focuses on selling handmade and vintage items. The vibrant online marketplace sells items that vary from
CAREERS
ARTS AND CRAFTS PEER TO PER MARKETS LEAD TO A RESURGENCE IN CRAFTING handmade pottery and jewelry to customized shirts, guaranteeing that there is something to satisfy everyone’s desires. Etsy went public last April and debuted at $31 a share. Amazon.com has started a similar platform as Etsy called Handmade at Amazon. The growth in popularity of crafting is also aided by Pinterest, a website that allows users to save crafts and recipes that inspire them onto a virtual bulletin board. Pinterest offers endless sources of inspiration, thus encouraging people to be more inclined to try their own DIY projects, and the ease in which they can sell their crafts on Etsy or Handmade at Amazon legitimizes their products. Crafting is no longer just a kindergarten activity, and now it can be a source of income and outlet for expression.
CRAFTING A LIVING In addition to seeing a resurgence in popularity, crafting and online marketplaces have allowed people to support themselves through their art. LeiLei Secor pays her tuition at University of
Virginia by selling her handmade jewelry on Etsy. The 19 year old taught herself to make wire jewelry from YouTube, and from there launched her business, which is called Designed by Lei. Etsy allows users to embrace their entrepreneurial spirit while creating something they love, exactly what LeiLei was able to do. LeiLei isn’t the only success story. In 2013, a company called Simple Shapes, which offers cut vinyl graphics, made an average revenue per month of $36,500. Another shop called Three Bird Nest, which solely sells headbands, made a total of $65,000 a month. There will always be people looking for a specific product, and Etsy and other platforms gives sellers to ability to easily sell their product and buyers to easily find what they want. Crafting certainly deserves a place at the adult table now. Although Etsy’s stock may be falling, there is no denying that Etsy, Pinterest, and other similar sites have reinvented crafting and made it more popular. It remains to be seen how Etsy and Amazon will each end up faring and if other websites will attempt to launch their own handmade selling sites.
TRICKS OF THE TRADE Thinking of becoming a seller in the online marketplace? Successful shop owners share their tips and tricks. People who have encountered success selling their handmade items are more than enthusiastic about sharing their experiences! 26 year old Amber Glenn, who quit her job at Kmart to open her own Etsy shop, says she was able to stand out by taking better pictures of her products. Another Etsy shop owner, Melanie Howe, says sales only really take off when individuals concentrate on making a few quality products that they are truly passionate about, rather than haphazardly making a large number of items. For some people, whether crafting and selling personal products on a handmade marketplace may become the next step in their career. Others may just really love crafting. Regardless of the end goal, there are plenty of options out there. Crafters just need to make sure to stay true to themselves and wait for their items to f ly off the virtual shelves.
39