Cornell Business Review - Fall 2013

CORNELL BUSINESS REVIEW

The Story of the Popshop

by Nicholas Piccone Quantitative Easing: Deus Ex Machina for Boosting U.S. exports

by Shohini Kundu Fracking Amazing: The Transformative Impact of America’s Energy Revolution

by Austin Opatrny

Fall 2013 | Volume IV | Issue 1

EXCLUSIVE INTERVIEW

SPENCER RUBIN

Founder of Meltshop Grilled Cheese

GOVERNMENT

5

Quantitative Easing: Deus Ex Machina for Boosting U.S. Exports

BY SHOHINI KUNDU

8

Just Who is Janet Yellen?

BY JACK HENRY KAPP

INDUSTRY

10

The Industrial Regression: How 3D Printing is Revolutionizing Production

12

Fracking Amazing: The Transformative Impact of America’s Energy Revolution

BY GRACE GORENSTEIN

BY AUSTIN OPATRNY

15

Room for Debate: Behind the Airbnb Controversy

17

Social Media is a Slam Dunk

BY CATHERINE CHEN

BY BENJAMIN HEARNS

FINANCE

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26

The Story Behind the Popshop

29

The Growing Threat of Cyber Attacks on Financial Services

BY NICHOLAS PICCONE

BY SHAMIKA DIGHE

FEATURE

19

Exclusive Interview with

SPENCER RUBIN FOUNDER OF MELTSHOP GRILLED CHEESE

INTERNATIONAL

32

East Africa: The Next Energy Frontier

BY STEVE OLUOCH

35

The Ethicality of Banning Online Pornography: A Look at Iceland

BY SAGAR GALANI

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EDITOR-IN-CHIEF

Ji Yung Suh MANAGING EDITOR BUSINESS MANAGER DESIGN EDITOR

Vinay Ramprasad Lillian Chen

ASSOCIATE EDITORS

Catherine Chen Sagar Galani Grace Gorenstein

WRITING TEAM

Shamika Dighe Benjamin Hearns Jack Henry Kapp Shohini Kundu Nicholas Piccone Steve Oluoch Austin Opatrny

BUSINESS TEAM

DESIGN TEAM

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Amy Chen

Ashini Ganesalingsam Susan Jiang Cyril Pietrafesa Kartik Ramkumar Aaron Weiner Aaron Weinstein Sheng-Nan Zhao Alvin Cao Emily He Celena Peng

LETTER FROM THE EDITOR 6 deliverables over 8 weeks – that is how long it takes to write a CBR-quality article. 1 Managing Editor, 3 Associate Editors, and 12 articles – this is what it takes to create a magazine with insight. 1 Head Designer, a design troop of 4, 1 Business Manager, and his team of 7, – these are who we need to market and execute the Cornell Business Review. This is our 6th publically circulated publication, and we are proud to present not only an improving magazine, but a growing student organization as well. During these past years CBR has honed the editorial process and nailed down the structural foundations of our young organization. We now look both inwards and outwards to foster a culture unique to CBR and find ways to add additional value to the Cornell business community.

As it always does in the business world, new markets are emerging, new names are coming to power, and new technologies are gaining prominence. Our editorial board and writers have worked relentlessly to accurately portray some of these changes during this past semester, and to provide some insight and analysis into these topics. This semester’s publication will explore topics ranging from East Africa as a new energy frontier, Janet Yellen’s nomination as the Chairwoman of

the Federal Reserve Board, to new transformative technologies in the energy sector. To keep close to CBR’s mission as an informant to the business community at Cornell, the magazine also features multiple articles on student entrepreneurship and an interview with Cornell alumnus Spencer Rubin, founder of Melt Shop.

We would like to thank the Cornell colleges for their support, the students and professors for their readership, and Spencer Rubin for his candid interview. Lastly, we express our sincere appreciation for each of our members for making this semester’s publication another success. We also express our humble gratitude to the first founding members of this organization for allowing us to be a part of their legacy.

We hope you continue to find value in the Cornell Business Review for years to come.

Ji Yung Suh Class of 2014 Editor-in-Chief

CORNELL BUSINESS REVIEW | 4

GOVERNMENT

QUANTITATIVE EASING

Deus Ex Machina for Boosting U.S. Exports

BY SHOHINI KUNDU

“If this guy prints more money between now and the election, I dunno what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treasonous in my opinion.”

- RICK PERRY, GOVERNOR OF TEXAS ON AUGUST 15, 2011

P

erry fears that “this guy” is devaluing U.S. dollars; but if “this guy” is treated “ugly down in Texas” and changes course, Texas has much to fear.

QUANTITATIVE EASING: A BRIEF HISTORY

The Federal Reserve Bank (Fed) is the primary agent that controls the monetary base, or the amount of U.S. dollars in circulation with a dual mandate: to increase the money supply for keeping up with normal economic growth without fueling inflation, and to fight unemployment. Normally, the Fed controls the monetary base by buying or selling U.S. Treasury bonds. To increase money supply, the Fed buys short-term U.S. Treasury bonds in the open market; to decrease the money supply, the Fed sells short-term U.S. Treasury bonds. As the Fed increases the money supply, the interest rate on U.S. Treasury bonds decreases. In theory, the lower interest rate of U.S. Treasury bonds should drive investors seeking higher return to other asset classes, such as mortgage­backed securities and corporate bonds—riskier investments that can stimulate the economy. However, in the wake of the 2008 recession, investors became frozen in fear. As the Fed drove the short-term interest rate down to nearly zero, investors kept U.S. Treasury bonds in their portfolios instead of investing in riskier assets. Consequently, the Fed’s standard economic policies became ineffective in stimulating the economy. Businesses could not raise cash due to high interest rates. Unemployment rose. A sim-

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ilar situation prevailed during the Great Depression of the 1930s, when Treasury Secretary, Andrew Mellon, advised President Hoover to “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate... it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”

Hoover did just that and the economy spiraled downwards with no end in sight. This lesson was not lost on “this guy” who embarked on an unusual path of buying “other financial assets,” such as mortgage­ backed securities directly from commercial banks,

AS THE FED BUYS TOXIC ASSETS, IT IS ELIMINATING MARKET RISKS FOR CERTAIN CLASSES OF INVESTORS WHILE LEAVING INVESTORS IN OTHER ASSET CLASSES TO BEAR FULL RISK. to lower interest rates. The purchase of unusual asset classes by the Fed is referred to as “quantitative easing” (QE). By engaging in QE, the Fed infused money into Fannie Mae and Freddie Mac and restored mortgage lending, in turn boosting the construction sector, a key sector of the U.S. economy.

GOVERNMENT

SOUND SENSIBILITIES: DOES QE EQUAL EXPORT SUBSIDY?

Critics complain that by buying assets from select sectors of the economy, the Fed is picking winners and losers, thus interfering with capitalism and, by extension, freedom itself. As the Fed buys toxic assets, it is eliminating market risks for certain classes of investors while leaving investors in other asset classes to bear full risk. Critics also complain that by infusing large amounts of money, the Fed is debasing the U.S. dollar. In fact, the Fed has infused nearly $3.4 trillion dollars in just five years, increasing the money supply by nearly sevenfold. Economists also fear that as the supply of U.S. dollars increases, investors will lose faith in the U.S. currency, causing them to defect to other currencies, inevitably devaluing the dollar. This is Governor Rick Perry’s fear as noted in the opening quote.

However, let us first examine the reality in context of two of the largest emerging economies of the world—China and India. China and India are the largest growth markets for U.S. exports and thus, play a pivotal role in shaping the global market.

INVESTMENT IN ASIA

The Chinese economy is largely driven by investment and export. China invests in its factories to increase its production of goods. China’s domestic consumption is a relatively small part of its production and therefore China relies on exports to keep its factories running. Driven by the belief that all

growth opportunities are in the emerging markets and the fear that Fed’s policies will devalue the U.S. dollar, many investors piled their investments on China. Yet China faces a very different dilemma ­what economists call the “Prisoner’s Dilemma.” If China lets its own currency, renminbi, float up against the U.S. dollar, Chinese goods will become more expensive to U.S. consumers and China’s exports will suffer. If exports suffer and factories close as a result, Chinese banks will be holding a large amount of non­performing assets, triggering a banking crisis in China. The only practical choice for the Chinese People’s Bank is to buy U.S. currency to purchase long­ term U.S. Treasury bonds. This keeps the long­term U.S. Treasury rates low, in turn stabilizing the U.S. government and economy.

The inflow of investment from U.S.

LOWER OIL PRICES CAN DEFLATE ECONOMIES IN THE MIDDLE EAST AND SET OFF ANOTHER ROUND OF SOCIAL UNREST IN OIL EXPORTING COUNTRIES. investors in renminbis raises the valuation of Chinese companies, rewarding both investors and the companies.

Flushed with cash, these companies can then purchase U.S. capital goods to invest in their factories. As the companies

flourish, Chinese shareholders become wealthier as well, making trips to popular U.S. tourist destinations, like Disneyland, while increasing purchases of U.S. goods. As a result, this increase in spending will ultimately boost the U.S. economy.

India’s economy is different from China’s. Unlike China, India runs a huge current account deficit and a large budget deficit. The total value of India’s exports fall far short of its imports. To compensate, India needs foreign capital inflow despite the cost of inflation.

As U.S. investors like Warren Buffet purchase shares of state­-owned enterprises in India, the Indian government reduces its deficit and raises funds for social spending. Increased government spending can increase the wealth effect, leading to higher demand for U.S. products such as airplanes, computers, mobile phones, and agricultural produce, which in turn feeds India’s current account deficit. In other words, the QE policy attracts investment in India and promotes Indian consumption of U.S. goods. This, in turn, will also boost the U.S. economy in the long­run.

The Fed’s QE has been a boon to the U.S. manufacturing industry due to the

CORNELL BUSINESS REVIEW | 6

stimulating effect it is having on the world economy, such as the economies of China and India. By helping the construction industry almost directly and the manufacturing sector indirectly, the Fed is also helping the service sector that forms the backbone of the U.S. economy.

UNWINDING QE: MAY GET UGLY DOWN IN TEXAS

According to Forbes, the Fed is rumored to cut back on QE to $25 billion/month

by July 2014 and terminate the practice by October 2014. If QE is rolled back, it may trigger a banking crisis in China due to falling asset prices, as well as a precipitous drop in Indian currency caused by a large trade deficit. China is the largest consumer of petroleum and India imports more than 70% of its petroleum needs. Any cooling of Chinese economy or increase in the price of imported goods in India may lead to a sharp drop in demand for oil, resulting in lower oil prices. Lower oil prices can deflate economies in the Middle East and set off another round of social unrest in oil­exporting countries. The Texas economy relies on construction and energy more than any other state in the continental U.S. Unwinding QE will take the steam out of the construction industry. If the oil industry declines in tandem, it may get pretty ugly down in Texas.

For now though, we are hooked on QE. Until investors feel confident to jump back into mortgage­-backed securities, the Fed will have to continue with QE. So far, inflation has been tame and QE has had no harmful effects. However, all that can change if inflation rises sharply and the investors are still skittish about mortgage­ backed securities. Until then, the manufacturing industry can keep sailing in the draft of QE –the Deus Ex Machina for boosting U.S. exports.

Shohini Kundu (sk2288@cornell.edu) is a freshman at Cornell University majoring in Economics and Computer Science.

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H

er nomination marks a historical breakthrough; never before has a woman held the position as Chairperson of the Federal Reserve Board. A product of hard work and determination that is reflected in her background and history, Janet Yellen will set a new precedent as Chairwoman of the Federal Reserve Board.

One of the most influential positions in Washington, D.C, the Chairperson of the Federal Reserve Board is the central individual in charge of the banking system of the United States, specifically leading the

GOVERNMENT

JUST WHO IS

JANET YELLEN?

BY JACK HENRY KAPP

board in making decisions about monetary policies.

The “Fed” seeks to regulate inflation and money supply under the dual mandate of maximizing employment and stabilizing prices as defined by the Federal Reserve Act of 1913.

From a young age, Yellen has always been a stellar student, an avid worker, and a genuinely well­regarded individual. A high­school class valedictorian with a passion for public policy and economics, Yellen attended Brown University as one of the few women studying economics in the late 1960s. Yellen would later go on

to receive her doctorate at Yale University, where she would establish her professional path with research on the “Efficiency Wage Model,” propelling her towards her first academic position as an Adjunct Professor of Economics at Harvard University in 1971. Through her research of the model, Yellen argued that markets are not always market­clearing. For example, sometimes employers offer employees incentives that are above market wages to encourage productivity, which in turn can potentially increase unemployment as it distorts market outcomes.

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GOVERNMENT

JANET YELLEN WILL SET A NEW PRECEDENT AS CHAIRWOMAN OF THE FEDERAL RESERVE BOARD IF HER NOMINATION IS CONFIRMED BY CONGRESS.  Moving from the East coast to the West coast in 1980, Yellen found herself teaching macroeconomics at the Haas School of Business (University of California, Berkeley), where she pursued her economic research. After 24 years at Berkeley, Yellen became the Chief Executive Officer of the Federal Reserve Bank of San Francisco.

There, Yellen would help administer the policies created at the Federal Reserve in Washington, D.C. throughout the greater area of the Western United States. Because of her work in San Francisco, in 2010, Yellen was appointed Vice Chairperson of the Federal Reserve Board in Washington D.C., arguably the most influential financial institution in the world.

Yellen’s extensive research in economics and unemployment development has been well­served as her past economic predictions indicate. As early as 2005, Yellen warned of a potential housing market bubble. In fact, the Wall Street Journal recently indicated that of all predictions made by the 14 policymakers of the Federal Reserve Board, Yellen has been the most accurate. This is comforting given that Ms. Yellen is a big supporter of the Fed’s most recent monetary policy. Currently, the Fed is 9 | CORNELL BUSINESS REVIEW

define when the central bank will begin to ease and eventually stop Quantitative Easing. Opponents of Ms. Yellen’s nomination argue that continuing Quantitative Easing, as Ms. Yellen would like to do, would increase the risk of inflation and negatively impact the economy in the long­term. However, Yellen has argued that the bank can work to “help ensure that inflation remains in check and does not undermine the benefits of a growing economy.” In fact, Yellen helped to establish the Fed’s ideal 2% inflation goal that opponents point to as the guiding rule for maintaining inflation low. And, if given an economic climate where interest rates begin to unsustainably rise, Yellen has insisted that she would be hawkish in her reaction.

As Chairman Bernanke prepares to hand over the reins to Ms. Yellen, a monumental task lies ahead of her. The economy continues to stagger along at a 2% yearly growth rate, unemployment remains relatively high, and other international economies continue to seek answers about how the United States will pursue a continued recovery effort. Janet Yellen will make history as the first woman leading the Federal Reserve, but perhaps more importantly, she just may make history by pushing the United States into a true recovery defined by lower unemployment and increased GDP.

administering a policy called Quantitative Easing, a massive $85 billion bond purchase program. By buying $85 billion a month in U.S. treasury securities, the Fed aims to keep interest rates to near zero percent under the premise that low interest rates encourages lending, which incentivizes business and decreases unemployment.

Yet, just what would a Yellen chairmanship shape up to be? Historically, Yellen finds unemployment to be the main impediment to economic growth and that reducing it should be the top priority. For starters, one should not expect any radical reductions in current Chairman Ben Bernanke’s Quantitative Easing policy, as Yellen was a key architect of the plan. Ms. Yellen made that clear in a speech after President Obama’s announcement to nominate her when she mentioned that “more needs to be done to strengthen the recovery” because “too many Americans still can’t find a job and worry how they’ll pay their bills and provide for their family.” Given her perspective, it is very unlikely that Yellen would reduce Quantitative Easing purchases anytime Jack Henry Kapp (jhk248@cornell.edu) is a freshman at Cornell University main the near future.

Yellen now has a unique opportu- joring in Economics and Real Estate. nity ahead. As Chairwoman, Yellen will

INDUSTRY

THE INDUSTRIAL REGRESSION

How 3D Printing is Revolutionizing Production

BY GRACE GORENSTEIN

T

hough Ford’s assembly line reached economies of scale and dramatically cut costs, 3D printing emblematizes a new wave of creating capacity. Standing as a growing 1.7 billion dollar industry projected to grow to 3.7 billion in four years, 3D printing employs a more resource­efficient method of production unimaginable during the industrial revolution. 3D printing uses the additive method of production, also known as stereolithography. In contrast, most machinery uses the subtractive method, which involves cutting down from a larger chunk of material. The additive method eliminates many of the problems of its industrial­revolution­ dated predecessor: wasted raw material and extensive costs of retooling for the production of different items.

The subtractive method had an important role in history; it was well suited for 19th century America, where labor was relatively scarce and resources were plentiful. Technologies like the stocking lathe were

developed, which utilized one entire tree to create the wooden portion of a rifle.

Though 3D printing has been utilized for decades by engineers and designers to create inexpensive prototypes, the technology has developed to a point where any person can create an individualized product. Interestingly, the 3D printer followed closely behind its inkjet predecessor. While the inkjet printer was invented in 1976, only 8 years later Charles Hull invented the first 3D printer. Since then, as a result of the increase in the availability of 3D printing, with hardly any technical experience a person can create almost anything, ranging from a “tooth tea cup”ceramic cup, to a fully­ functional prosthetic hand.

However, times have changed; we do not have (nor would want to) waste resources in the same fashion. Further, we expect customized goods tailored to personal tastes. With 3D printing, the manufacturing

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INDUSTRY

WITH A SCHOOL BORROWED 3D PRINTER, MCCARTHY MADE THE PROSTHETIC THAT ALLOWS HIS SON TO DRAW AND PICK UP FOOD FOR THE FIRST TIME WITH HIS LEFT HAND. game has been turned upside down.

Economies no longer need to be categorized as service­based or manufacturing based. With widespread usage, 3D printing has the potential to make countries that have moved away from manufacturing due to higher costs of labor and resource scarcity, like the United States, players in the goods market. Similarly, it gives designers and creators in less capital­intensive areas an opportunity to produce. 3D printing is fundamentally changing the manufacturing game.

Paul McCarthy’s son Leon was born without fingers on his left hand.

A factory­made prosthetic would have cost tens of thousands, well outside the McCarthy budget. Determined to get a prosthetic for his son, McCarthy found online directions from Ivan Owen, a man who successfully created a 3D printed prosthetic for a five­ year­ old in 2011. With a school borrowed 3D printer, McCarthy made the prosthetic that allows his son to draw and pick up food for the first time with his left hand.

The potential of this technology spans across all production lines.

Just outside of Bristol, researchers are attempting to print the entire wing of an airliner. Using 3D printing conserves resources for aircraft makers; for example, the metal structures of planes

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contains aerospace­ grade titanium, which requires 90% of the material getting cut away from a solid billet. Andy Hawkins, lead engineer of the EADS project working on these 3D created airplane parts, explains that “you only put material where you need to have material.”

With 3D printing, only 10% of the raw material is required.

3D printing also defeats its subtractive counterpart in terms of the materials used. Printed materials for aircrafts can be 60% lighter than a machined equivalent, and just as sturdy. In an industry where lessening 1kg of weight results in $3,000­worth of fuel saved, not to mention reduced carbon­dioxide emissions, usage of 3D seems incredibly worthwhile.

The technology has not been limited to companies, however, 3D printers are now more available for consumer use, and one­person operations are taking advantage.

Exploration of shapeways.com and similar companies emblemize the start of what the widespread use of 3D printing can accomplish. Not only can a person buy 3D created projects, it is possible to submit your custom design, and shapeways will create the plate/ jewelry/obscure cufflink you imagine in your head. The consumer sector has

advanced beyond personalized service to personalized goods.

The ramifications of this technological breakthrough are huge. However, these economies of scale bring about dangers as well—a metal gun has been successfully created using a 3D printer. This was the first of its kind to successfully shoot; previous attempts have been made, but the specifications must be so precise for a gun to function that most have not actually had firing power. With debates raging over gun licensing and state regulations, the ability to create a metal gun at home, without any license required, is a very dangerous thought. Commenting on the breakthrough, one Huffington Post journalist wrote, “If you need me, I’ll be in my bunker.”

In sum, 3D printing has tremendous potential for both big and small operations. It has fundamentally changed the process of manufacturing, as excess bulky raw materials and fixed

A METAL GUN HAS BEEN SUCCESSFULLY CREATED USING A 3D PRINTER. THIS WAS THE FIRST OF ITS KIND TO SUCCESSFULLY SHOOT. plants are less necessary for production.

However, the ease with which individuals can produce comes with dangers as well—regulations will have to adapt to control potentially dangerous creations from the machines.

Grace Gorenstein (geg62@cornell.edu) is a junior at Cornell University majoring in History and Economics.

INDUSTRY

FRACKING AMAZING The Transformative Impact of America’s Energy Revolution

BY AUSTIN OPATRNY

T

he voracious energy appetite of the American consumer is world­renowned. We are the nation that brought the world the Hummer, among other gas­guzzling contraptions. However, over the past several years we have been seen a paradigm shift in the source of our energy. This shift is a direct result of hydraulic fracturing, a new extraction technique (commonly known as “fracking”) that has opened up huge swathes of previously inaccessible oil and natural gas deposits. Hydraulic fracturing, which is done by injecting a highly pressurized mix of water

and chemicals thousands of feet into the ground, will allow the United States to surpass Russia as the world’s largest combined producer of oil and natural gas this year. As a result of this energy boom, the United States reduced its imports of crude oil by 15% over the past five years – China is now the world’s largest importer of crude oil. However, it is the impact of fracking on natural gas production that is truly revolutionizing the American energy profile.

Natural gas refers to the various organic gases trapped below the earth’s surface, of which the most CORNELL BUSINESS REVIEW | 12

INDUSTRY

HOW HORIZONTAL common is methane. Some other gases included butane and propane, commonly known as natural gas liquids (NGLs). The natural gas production process is relatively straightforward.

Gas flows out of the well (the “upstream” part of extraction), and the two streams are separated – the gaseous methane is sent to end­users such as power plants and compressed natural gas (CNG) vehicles, while the NGLs are sent to end­users such as petrochemical/ plastic plants (the “downstream” part of production). The gaseous methane is transported via pressurized pipelines (the “midstream” part), with compression stations spaced out around every 60 or so miles. It is very difficult to transport natural gas through any means other than pipelines, due to its gaseous form. The only existing efficient method is known as liquefied natural gas, or LNG. LNG is created by cooling methane until it reaches a liquid, dense state. It is then loaded onto specially ­ made tankers. The United States currently does not have any LNG export facilities – as a result, nearly all domestically produced natural gas is consumed within the U.S. Due to the explosion in natural gas production, U.S. prices per thousand cubic foot of natural gas are signifi-

THE UNITED STATES REDUCED ITS IMPORTS OF CRUDE OIL BY 15% OVER THE PAST YEARS. cantly lower than international norms.

Over 1 million U.S. wells have been drilled using hydraulic fracturing, lowering U.S. prices to around $4 per unit,

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The concept of horizontal drilling was pioneered in the 1930s

by H. John Eastman, who realized that drilling could be more effective if it was angled and curved, rather than directly

versus $15 in post­-Fukashima Japan.

This has given a tremendous advantage to American consumers and manufacturers, who have seen their relative energy prices fall over the last decade.

Additionally, the producers of NGLs such as plastic and other petrochemical plants have begun to shift production back to the United States – there is $70 billion of plant capacity either planned or underway. Ten years ago, high costs in the United States had most analysts assuming the only future for American petrochemicals was outsourcing. The rapid growth of energy production has also coincided with unprecedentedly low rates in the capital markets. Drilling is highly capital­intensive, especially using the new horizontal drilling techniques. The appetite of capital markets for high­yielding investments has helped sustain this energy bonanza. In 2011 alone, $292 billion was invested in new energy projects and improvements

to existing ones. Most of those projects were financed by debt or stock issuances. The future pace of drilling in a post-Quantitative Easing world is uncertain.

This dramatic growth in investment has taken place within the context of a highly regulated industry. There are several agencies that directly impact energy investments within the United States, including the Department of Energy, the Environmental Protection Agency, the Federal Energy Regulatory Commission, the National Surface Transportation Board and numerous state and local agencies. These agencies have overlapping mandates, but are generally transparent and efficient. A unique regulatory feature of many exploration and pipeline (upstream and midstream) companies is their status as Master Limited Partnerships, or MLPs. These unique corporate structures consider the shareholder a direct partner

INDUSTRY

DRILLING WORKS vertical. It was used for certain exploratory techniques, but was not applied to shale gas until the 1990s. Mitchell Energy used horitzontal drilling in the Texas Barnett shale, one of the major new gas producing plays, in 1991. His success proved that the technique could be used economically.

This established the viability of horizontal drilling, when used in combination with hydraulic fracturing, or “fracking.” The process involves several steps.

First, a drill bit creates a vertical line several thousand feet into the earth until it pierces the shale layer. It is then

banked horizontal through the shale. Then, millions of gallons of a mixture of water, sand and select chemicals are injected at high pressure through the well.

This mixture, known as slick water frac, gushes through the seams of the shale layer, releasing the natural gas which flows up the well. The chemicals are a mixture of biosuppressants and friction reducers.

It is important to remember that the shale deposits are located thousands of feet below groundwater aquifers. They are also capped by sandstone or limestone layers that limit transference of water.

in the endeavor, allowing investors to achieve considerable savings on taxes (there are no corporate income taxes on earnings). In order to achieve MLP status, companies must return a significant portion of their income to shareholders in the form of dividends. Most MLPs return dividends in the 6­ -8% range, making them attractive investments, especially in today’s low yield environment. They are also distinct from the “supermajors” such as Shell or ExxonMobil in that almost all of them operate solely within North America.

There has been considerable controversy in the United States over the specific “fracking” method used to extract both oil and natural gas. Fracking involves injecting a mix of highly pressurized water and chemicals deep into the ground. The pressure of the liquids allow gas and crude trapped deep in fissures within shale rock formation to escape. Although this takes place far

below the water table, there is considerable worry about the method in which chemical wastewaters will be treated.

As most drilling is taking place in rural areas of North Dakota, Pennsylva-

OVER 1 MILLION U.S. WELLS HAVE BEEN DRILLED USING HYDRAULIC FRACTURING.

Commission tested both of the homes and found the methane in the tap water to be “biogenic,” resulting from the manner in which their wells were driven. However, legitimate concerns remain over wastewater treatment plans.

That being said, this energy boom will have several substantial positive environmental outcomes. First, energy production has and will continue to shift away from using coal and instead toward using natural gas, which burns considerably cleaner. It is projected that 53% of new electricity generating capacity between 2007 and 2030 will be powered by natural gas. This will reduce electrical costs for consumers, who will also benefit from lower home heating costs. Higher domestic oil production will offset demand for imported oil, reducing the need for lengthy travel via supertankers. It is also prompting renewed interest in exploring the usage of natural gas as fuel for personal transportation. Already, compressed natural gas (CNG) is used in buses, as well as cars in certain parts of the world. With prices remaining heavily depressed compared to internationally traded crude, the United States is likely to invest more in researching this burgeoning field. Eventually fossil fuels will fade from importance. In the meantime, cheaper natural gas will support the development of renewables while allowing American consumers to keep some extra money in the bank.

nia, Texas and elsewhere, there is no preexisting treatment framework. Additionally, the fears of consumers have been inflated through movies like Gasland, which point out exaggerated risks posed by hydraulic fracturing. Many of the damning examples in these “documentaries” have been debunked. For example, two scenes in which Colora- Austin Opatrny (abo27@cornell.edu) is do landowners light their tap water on a senior at Cornell University majoring fire have been proven to have no rela- in Economics and Asian Studies. tionship with hydraulic fracturing. The Colorado Oil and Gas Conservation

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INDUSTRY

ROOM FOR DEBATE

Behind the Airbnb Controversy

BY CATHERINE CHEN

O

nline hotel room rental service Airbnb is a polarizing service. Though The New York Times recently described the San Francisco­based company as “a service that is adored by some, despised by others,” Airbnb’s popularity since its founding in August 2008 is indisputable.

Airbnb is a service that allows for peer­ to­ peer short­term room rentals; the company collects host and guest service fees for each stay based on a percentage of the total booking price. As of September 2013, the company has had 8.5 million guests who have used the service, which marks a growth of 112 percent since the beginning of 2013. Airbnb has also seen rapid global growth around the world, and has reached more than 500,000 listings globally (Yeung). In an article published in The Next Web, Airbnb released a few statistics that speak to the immensity of the service’s reach. As of September 2013: »» Someone was checking into an Airbnb listing every two seconds this summer »» 175,000 people stayed at an Airbnb during the peak night this summer »» Airbnb’s photographers have captured more images of properties than the entire Library of Congress »» 50 percent of Airbnb’s trips have guests and hosts that speak different languages »» 65,000 people have paid for all their trips using Airbnb host earnings What spurred such widespread popularity? One of the causes can be attributed to the core model Airbnb is built upon.

A SHARING ECONOMY: “ON THE INTERNET, EVERYTHING IS FOR HIRE”

Airbnb is a classic example of a sharing economy. Sim-

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ply put, sharing economies can be classified as what The Economist describes as “peer­to­peer rental.” This form of economy is at the core of marketplaces where individuals who are not licensed professionals can sell goods and services in their communities.

With more than 10 million nights booked worldwide, Airbnb is the world leader in travel rentals. However, the peer­to­peer room renting service is only one of the many instances of successful businesses centered on a sharing economy. Services like Lyft, Sydecar and Uber allow individuals to use their spare cars like taxis. Online and mobile marketplace TaskRabbit allows the outsourcing of household errands and other skilled tasks to others in the neighborhood. All of these online platforms have become burgeoning niches within the past few years, and their collective successes are a solid indicator of the growing importance of the sharing economy.

It is only logical that the rise of the sharing economy has paralleled prominence of the Internet and other technologies. Increasing instances of new technologies have allowed individuals to rent or lease goods ranging from spare rooms to cars with relative ease, all arranged electronically. And as new technologies grow, so do instances of sharing economies. In August of 2013, Business Insider reported that strategists at ConvergEX Group, a marketing strategy firm, project that “the sharing and rental economies will generate $3.5 billion in revenue in 2013, and grow to as big as $110 billion over the next few years.” As ConvergEX writes, “renting and sharing allow us to live the life we want without spending our means. Low cash flow is most certainly driving many customers to rent rather than buy. But it’s also becoming quite trendy; consumers are either unwilling or unable to afford big­ticket purchases” (Business Insider).

INDUSTRY

AS OF SEPTEMBER 2013, THE COMPANY HAS HAD 8.5 MILLION GUESTS WHO HAVE USED THE SERVICE. IMPLICATIONS OF SHARING: LESS ECONOMIC GROWTH?

CHALLENGES WITH REGULATION

A WINDOW OF OPPORTUNITY

The sharing economy’s burgeoning success has been disruptive enough to garner legal reactions. Airbnb’s rapid growth has come under legal fire. Airbnb’s current woes in New York stem from issues with mandatory city hotel taxes. A New York state law enacted in 2010 prohibits New Yorkers from leasing out their homes for durations less than 30 days if the current residents are not living there. Citing the worry of the service’s impact on economic growth and millions in hotel tax dollars that Airbnb has allegedly been costing the state each year, New York state prosecutors have issued a subpoena for transaction information from 225,000 of Airbnb’s New York users.

Airbnb remains staunch in its fight to maintain the information’s privacy, and issued a statement early October that expressed its intent to fight the subpoena. However, on a different tone, though Airbnb has agreed to regulation. In early November, despite prior resistance to government regulation, Airbnb expressed that it was open to collect room rental taxes and stated its

Given the threat and power that regulators pose to Airbnb’s business, it is unlikely that continual head­ butting with the government will prove to be a successful business strategy. By cooperating with the regulation structure, Airbnb opens a door to sustained, albeit possibly slower, long­term growth.

Yet the seemingly existential question still stands. Do businesses like Airbnb that run on the sharing economy siphon economic activity from existing industries, or do they generate economic activity that never existed before? At this current time, it is hard to tell. However, it is clear that Airbnb, and sharing economies as a whole, are only doing so well since they are more efficient than the status quo. Therefore, it seems that Airbnb’s presence and success will do more good than harm to the economy as a whole. Innovators are bound to disrupt incumbents, and the success of these innovators serve as impetus for incumbents to innovate as well. With this simultaneous aim for the better, the economy as a whole will undoubtedly benefit.

According to reports by consulting firm HR&A Advisors, Airbnb has helped generate $632 million in economic activity in New York, supporting 4,580 “jobs.” From HR&A’s calculations, Airbnb’s hosts were making an average of $7,530 a year renting out their homes. Additionally, it was found that the visitors stayed 6.4 nights on average, a duration longer than the typical New York tourist. These visitors who used Airbnb were also found to spend more money, a total of $880 at New York businesses, in the process of their stay (Badger).

The benefits sharing economies bring in do not come without possible drawbacks. Airbnb’s success and the general proliferation of the sharing economy leads to a question of foreTHE SHARING AND Catherine Chen (ckc63@cornell.edu) is seeable impact on the economy as a RENTAL ECONOMIES WILL is a junior at Cornell University majorwhole. The Atlantic puts it well: “When GENERATE $3.5 BILLION ing in Marketing and Strategy. people share and rent things instead of IN REVENUE IN 2013, AND buying them, does that mean we need GROW TO AS BIG AS $110 to produce less stuff, requiring fewer BILLION OVER THE NEXT jobs, ultimately creating less economFEW YEARS. ic growth?” (Badger). Are services like Airbnb even legal? Will Airbnb quash intent to work with New York and San positive prospects of the hotel indusFrancisco city officials to collaborate on try? new legislation.

CORNELL BUSINESS REVIEW | 16

INDUSTRY

Social Media is a Slam Dunk

BY BENJAMIN HEARNS

W

hen the lights go out, most businesses go offline.

Last February, Nabisco’s Oreo was quick on its feet and showed the world how opportunistic a large corporate brand can be. The “you can still dunk in the dark” campaign during the Super Bowl XLVII blackout this past February exemplifies how entrepreneurial use of social media can lead to business success. Oreo recognized that acting fast and opening a dialogue with customers yields tremendous results. For Oreo, this amounted in 15,811 retweets and 2,200 new followers.

Compared to the estimated 90 to 150 retweets most of their posts get, this was a big step for a small cookie.

While a brand like Oreo already had a large following, flexibility and communication—attributes of successful entrepreneurs—are what made this tweet a success.

Entrepreneurs should think about social media in this context.

While the traditionally expensive ad campaigns may seem limited to large, established corporations like Nabisco, the owner of Oreo, an entrepreneur can utilize his or her unique characteristics, namely flexibility and ritualistic use of technology, to get their name across in a non­traditional way. Though Oreo had a large staff behind its successful line, there are valuable lessons to be learned from its opportunistic behavior, a quality any entrepreneur can utilize when growing their business. Additionally, social media encourages dialogue, which is part of an atmosphere in which entrepreneurs thrive. Capitalizing on this novel “conversation” with customers, just as an entrepreneur may have discussed business models with financiers, is a way to apply the entrepreneurial mindset to marketing.

Obvious as it may seem, dialogue and conversation are integral components of an entrepreneur’s lexicon.

One of the best things a small business can do using social media is listen to and engage with its audience.

Pittsburgh’s Franktuary, a popular hot dog shop with

17 | CORNELL BUSINESS REVIEW

three locations, embodies this practice across Facebook, Twitter, Instagram, and its blog. From its weekly hashtag #TuesdayTrivia to continually answering questions and feedback from their customers in a friendly tone, Franktuary connects with its target audience. If you are part of small business or are an aspiring entrepreneur, take note of Franktuary’s simple, yet differentiating social media presence.

Without the utilization of social media, Franktuary’s level of success would not have been possible.

Key to this non­traditional marketing boom is social media. 58% of Americans use at least one social networking site and 98% of 18 to 24­-year­olds use at least one social network. Social media, by nature, is focused on dialogue. Traditional, older marketing channels are terrified of this dialogue, as a single complaint can

SOCIAL MEDIA, BY NATURE, IS FOCUSED ON DIALOGUE. at times have the power to influence the image they have built for their product. Twitter allows a constant stream of real­time comments, complaints, and suggestions, while social networking sites like Facebook and LinkedIn bring together friends, fans, and critics. For a brand, consumer interaction can make or break a reputation.

When managing your brand, as Oreo did, it is important to double­dunk and cover all your bases, because what you say on social media directly affects current and potential customers. The numbers speak for themselves: four­-fifths of social networkers use social media to research new products and those social networkers are more likely to trust their friends on social media than other reviewers. For an entrepreneur, creating an online presence translates into an opportunity to advertise your product. And given constant

SOCIAL MEDIA IS CHANGING THE WAY BUSINESSES MARKET THEMSELVES, AND ENTREPRENEURS WHO UTILIZE THIS INNOVATIVE APPROACH HAVE AN ADVANTAGE.

connectivity, a positive interaction with one customer may yield large returns.

Social media is changing the way businesses market themselves, and entrepreneurs who utilize this innovative approach have an advantage. Before the establishment of social media, start足ups without the resources for print ad had no voice. Now, anyone can send out instant messages and experiment with offers at relatively low costs. However, this creates more noise that a small

business must try to break away from.

Nevertheless, social media is a convenient and accessible tool for entrepreneurial projects, where flexibility and communication are key for a small cookie to make a big splash.

Benjamin Hearns (bhh38@cornell.edu) is a sophomore at Cornell University majoring in Hotel Administration.

CORNELL BUSINESS REVIEW | 18

FEATURE

EXCLUSIVE INTERVIEW WITH

SPENCER RUBIN

FOUNDER OF MELTSHOP 19 | CORNELL BUSINESS REVIEW

Spencer Rubin is the Founder and Managing Partner of Meltshop Grilled Cheese, New York’s first fast casual Grilled Cheese Restaurant.

FEATURE

A

fter graduating from Cornell University’s School of Hotel Administration in 2008, Spencer Rubin worked as a Project Manager for a restaurant developer in Manhattan before opening his dream restaurant, Meltshop, in 2011. With currently two successful locations in Midtown and Chelsea, Spencer is expanding the restaurant across the northeast and turning Meltshop into a household name.

What was your personal inspiration for Meltshop?

Spencer Rubin: We started the concept in 2011 and opened the first location on April 18th. The inspiration behind the concept was to try and create a fast casual concept that brought food to an elevated level. What has always fascinated me is the casual dining environment. I have always thought that the fast casual space had a lot of room for improvement in terms of the quality food that is being offered while presenting the casual experience that I have always loved and enjoyed. Grilled cheese presented itself because some business partners and I thought grilled cheese was something everyone was familiar with. It gave a lot of room for creativity. Whether it be locally sourced, high quality ingredients, interesting cheeses or homemade comfort food, you can make a grilled cheese millions of

21 | CORNELL BUSINESS REVIEW

different ways. We thought that because there is so much opportunity for variation, it was the perfect canvas and backbone for its own concept.

Going back to the concept of fast casual restaurants, did you have any fast casual restaurants as your model in creating the Melt Shop?

SR: During our preliminary research, I pulled up every menu I could find from fast food concepts to full service sit-down restaurants. We looked at places like Chipotle, Sweet Green, Five Guys, we really looked everywhere we could find solid comparisons.

The concept that I found we tried to emulate the most was Shake Shack. I know they are a commonplace fast casual case study, but the company has done incredible things in this space.

Shake Shack’s success is really seen through its attention to detail

in every facet of their operation.

Whether it is their design or focus on bringing in local products, every Shake Shack location focuses on the community around it. I give them credit for the way they have spun (hand spun they would say) the old classic combo of a Shake, Burger, and fry.

Tell us about how it feels to be on Forbes 30 Under 30 Food and Wine list.

SR: The short answer is that it feels good! It’s pretty cool and unexpected and my parents were pretty happy about it. The thing that made me the happiest though, is that it showed me that highly re-

garded and experienced industry vets see something in our concept.

To have other credible people see and acknowledge us is a good feeling. Total validation.

operation is more stable and I try to make personal time for myself when I can, but it totally depends upon the week or the month. I expect to be busy in 2014.

While you were setting up your restaurants in New York, did you have any difficulties in the balance between your personal and professional life?

SR: The first twelve months were an extreme challenge to get the operation up and running. There was a lot of trial and error and with only a couple of years of real world business experience, I had to learn as I went. At first, I didn’t see my friends very often. Now the

So in your experience, what qualities do you think helped you setup your own business, the Melt Shop?

SR: I think it’s an internal drive that some people either have or they don’t. Since I was seven years old, I’ve always wanted to open up my own restaurant and I’ve always set personal goals to try and help get me there. I have a deep rooted commitment to excellence, I set the bar high for myself and I con-

The Meltshop can be found in two locations in New York City— northeast corner of Lexington Avenue & 53rd Street and off of the northeast corner of Sixth avenue & 26th Street.

CORNELL BUSINESS REVIEW | 22

tinuously strive to make my-self better.

Goal setting is definitely a major key and self-awareness is essential, especially when getting into this business young. Know what you know and know what you don’t. Don’t be afraid to ask people for help and when other 23 | CORNELL BUSINESS REVIEW

people ask you for help always be a younger age. If I could do it all willing to lend a helping hand. over again, I would have probably had some more restaurant Can you share some setbacks operations focused jobs. Being in that you have encountered in the a fast-casual environment or a caprocess of creating the Melt Shop? sual dining environment, I could Any regrets? have learned about the different SR: My only regret is that I wish roles. That extra experience would I took on an operations role at have definitely made year one and

FEATURE

major city in the country, if not the world. I don’t see small growth as an option. We want to make this a large, well-known brand within the next 5 years. Right now, we’re working on building up the infrastructure to be able to sustain that sort of growth trajectory. We have a third store under construction, and a few other leases under negotiation now. We don’t plan on stopping any time soon. The plan is to have 5 more stores in the next twelve months and double that next year.

How did your experience at Cornell, specifically in the Hotel school, contribute to your professional success?

SR: I think the Hotel School played a major role in getting me to where I am in my career. The curriculum exposes you to a number of different facets of the industry. . The course work helps you figure out what you truly want to focus on when you graduate and the electives help you build the tool kit necessary to succeed in whatever field you choose. Most importantly, you become well rounded.

Unlike most programs out there, the business aspects of the Hotel two a little easier. But I have no School coupled with the Hospimajor regrets; I’m very happy with tality mindset that the professors the progress and where we are put you in from day one, make it a school unlike any other and they right now. truly set you up to succeed.

What are your future expansion What advice would you give plans?

SR: The goal is to make this a house- students who are interested hold name; we want to be in every in becoming entrepreneurs,

specifically in the food & beverage industry?

SR: It is all based on the experiences you have and the knowledge you gain. Students should do as much as possible while they are still at school. The Hotel School has a lot to offer in terms of extracurricular programs. I wish I did more, like working at the Statler Hotel or Banfi Restaurant.

The Hotel School forces everyone to get 800 hours of hands-on experience outside of normal school work. This amount of hands on experience is an invaluable school requirement as it forces students to get real world experience. Make those experiences count. Make them as rigorous as possible and get as hands on as you can. Most importantly though, have a ridiculous amount of fun, learn what you can, but do not forget to enjoy it.

CORNELL BUSINESS REVIEW | 24

FINANCE

FROM NYC TO ITHACA

The Story of the Popshop

BY NICHOLAS PICCONE

THE CREATION

I

n the heart of Collegetown is the PopShop, a place that many Cornell students pass by everyday, unaware of its existence and purpose. However, what began in April of 2012 as an experimental space for students to work on start-up companies has become a central hub of entrepreneurship at Cornell. The PopShop provides entrepreneurs with a co-working space where they can bounce ideas off each other, learn, and help make their vision for a website, app, or business a reality.

The PopShop did not pop-up overnight—the space

can attribute its creation to Cornell University’s recent successful bid to build its Tech Campus in New York City. Jesse McElwain ’14, a co-founder of the PopShop, explains that the founding of the PopShop and Cornell’s bid for the Tech Campus are both part of the same larger commitment to innovation by the university.

During a semester working in New York City in the fall of 2011, McElwain worked extensively with young Cornell alumni at start-ups. Within this network, McElwain found “a community of young alumni who were very passionate and interested in entrepreneurship at Cornell.” Though Cornell had the resourc-

CORNELL BUSINESS REVIEW | 26

FINANCE

FINANCE

HAMED EXPLAINS, “ENTREPRENEURSHIP ISN’T A MATTER OF CREATIVITY, IT IS SIMPLY HAVING THE DRIVE AND MOTIVATION TO STICK WITH AN IDEA AND MAKE IT HAPPEN.” es to support on-campus entrepreneurial activity, many young alumni believed the current entrepreneurial scene at Cornell was out of touch with the rapidly changing nature of modern start-ups. Specifically, they agreed that the university lacked a physical space for entrepreneurs to come together, think, work, and as McElwain said, “just make things.”

Before the PopShop, Cornell University’s main outlet for student entrepreneurial work had been Entrepreneurship@Cornell, a university-run organization currently headed by Johnson School professor Zach Shulman. Professor Shulman explained that Entrepreneurship@Cornell aims to foster entrepreneurship on campus through a series of guest speakers and summits in which student entrepreneurs are able to interact with other students as well as professionals in the start-up field.

Entrepreneurship@Cornell works in conjunction with Student Agencies, a student-operated corporation, to operate eLab—a non-profit service that helps fund and develop student startups. Students with ideas for potential businesses apply to eLab for funding.

Every semester, around twenty ideas are granted funding. In addition to

27 | CORNELL BUSINESS REVIEW

obtaining financial resources, students gain access to faculty mentorship from Cornell professors with experience in entrepreneurship. That guidance is a key component that Professor Shulman stresses as one of the most important aspects of Entrepreneurship@ Cornell.

Despite these resources, both undergraduate and alumni entrepreneurs expressed a need for a physical space where students could come together, work, and learn. After Cornell’s successful bid for the Tech Campus in the spring of 2012, the creation of a physical space and the expansion of opportunities for undergraduate entrepreneurs became the next logical step in improving Cornell’s commitment

SINCE THE POPSHOP’S OPENING, IT HAS BECOME THE GROWING HUB OF DIVERSE ENTREPRENEURIAL ACTIVITY AT CORNELL to innovation. Ready to respond, Entrepreneurship@Cornell and Student Agencies worked with Cornell entrepreneurs to open the PopShop in April of 2012. Ali Hamed ’14, another co-founder of the PopShop, explains, “The founders of the PopShop were a

diverse group of students with various interests ranging across all of Cornell’s colleges. That is part of the reason why the idea was taken so seriously—the administration saw it as a place for anyone and everyone.”

Since the PopShop’s opening, it has become the growing hub of diverse entrepreneurial activity at Cornell, hosting talks from alumni in the start-up field and instructional events, such as how to use a 3-D printer. Samuel Kaplan ’16 believes that “[the PopShop] is an important place on campus for many young entrepreneurs because it is a place where we can find guidance and help with our projects.” It functions as a setting where experienced entrepreneurs can build their ideas and simultaneously provide guidance for students who want to learn more about the start-up field.

THE POPSHOP’S FUTURE

Entrepreneurship is an expanding sector in today’s economy, especially with the speed at which new technology is constantly developing. Given the most recent recession, start-up businesses have taken on a new significance, as many jobs lost during the economic downturn may not return.

Cornell’s Tech Campus, which aims to open in 2017, will become a hub of innovation with the potential to draw in the brightest minds from all over the world. As McElwain notes, “Cornell has created the ultimate end goal for many entrepreneurs.” Thus, the next logical step will be to match that level of innovation and intensity at an undergraduate level. The demand is evident - for example, a career fair in the spring of

One of Popshop’s many wall decorations.

2012 dedicated to start-up companies was the most widely attended and publicized career fair in Cornell University history, and this success was due a great deal to Cornell’s plans for the Tech Campus.

The PopShop stands as a successful beginning to the bridge between undergraduate entrepreneurial work and the innovation envisioned for the university’s Tech Campus. Though

Cornell has worked hard to increase the opportunities available to undergraduate entrepreneurs, Hamed and McElwain both noted the need for much-improved entrepreneurial classes and even more accessible working spaces. Cornell University has the vision and resources to become a world leader in innovation, and now must simply remain focused and work harder than ever to make that vision a real-

ity - just like an entrepreneur must do when building a business.

Nicholas Piccone (nmp55@cornell.edu) is a sophomore at Cornell University majoring in Economics.

CORNELL BUSINESS REVIEW | 28

FINANCE

The Growing Threat of Cyber Attacks on Financial Services

BY SHAMIKA DIGHE

O

n July 28, 2013, over fifty financial institutions on Wall Street, including BNY Mellon, Wells Fargo, J.P. Morgan Chase & Co., and Bank of America Merrill Lynch, participated in a first­-of-­its-­kind cyber attack simulation. Hosted by the largest industry trade group on Wall Street, the Securities Industry and Financial Markets Association (SIFMA), the Quantum Dawn 2 attacks crippled trading in U.S. equities markets and forced executives to coordinate decisions such as whether or not to suspend trading or use different methods to fill orders. Like its smaller­-scale predecessor, Quantum Dawn 1, Quantum Dawn 2 is the result of a growing trend on Wall Street toward increased preparation against the threat of cyber attacks.

As cyber attacks increase in volume, firms are advancing cyber security technology. The U.S. has suspected both China and Iran of launching cyber attacks on American financial markets. As evidenced by the 2012 DDoS attacks and the likeliness of Iran’s involvement, state­ -sponsored attacks should be the most feared type of cyber attack because they are likely to create the most harm given government resources. Cyber attacks are now a weapon, and the Pentagon has just declared that cyber aggression is a justification for militarized combat. To be adequately equipped for a large­-scale cyber attack, however, Wall Street firms require much more preparation. This includes the need to test existing infrastructure and form strong government alliances, as many aspects of the financial sector make the industry especially vulnerable to cyber attacks.

WHAT’S AT STAKE WHEN A CYBER ATTACK STRIKES

The growing interdependence of technology and financial services has raised the stakes when a cyber

29 | CORNELL BUSINESS REVIEW

attack hits this industry. Information technology (IT) tools have allowed banks to better gauge risk, value securities, and estimate returns, which provides bankers with a clearer understanding of market dynamics. In addition, sectors that have utilized front office IT most, such as online banking, have also been more profitable.

As of 2001, 100% of the largest banks, defined as those with over $10 billion in assets, have websites for customer transactions. According to an Aspen Analytics study, clients who utilized online banking delivered 15­ -20% more profit to banks than those who didn’t adopt online banking. These clients were also 75% less likely to leave the bank. Such accrued benefits have further fueled the trend of technology dependency among banks.

When these systems are threatened by a cyber attack, losses are felt directly by both the financial institutions and their clients. According to a Ponemon Institute study, decreased IT staff productivity and diminished reputation are the two most harmful effects of a cyber attack on financial services, as cyber attacks can completely consume IT resources and drastically decrease customer loyalty. In the long run, financial institutions that suffer from publicized cyber attacks face the threat of lost customers, dwindling future business opportunities, and loss of brand equity.

ATTACKING WALL STREET AND MAIN STREET

 The biggest threat to the financial sector comes in the form of a Distributed Denial of Service (DDoS) attack. According to the Ponemon Institute study, the majority of retail banks have experienced a DDoS attack (64% of respondents in their survey). Furthermore, Ponemon estimates that banks experienced an average of 2.8 attacks in 2012. A DDoS attack is char-

FINANCE

CYBER ATTACKS FROM ANOTHER COUNTRY CAN NOW BE CONSIDERED AS AN ACT OF WAR, AND IF DEEMED APPROPRIATE, ENTAIL A MILITARY RESPONSE. acterized as a deliberate attempt to prevent the use of a service. Attackers first send malicious code to a computer with compromised security. The attack code is then spread from computer to computer via worms that recruit more computers after infecting the first one.

This results in a network of servers, called a botnet, that is commanded to commence the attack and direct a large volume of traffic to the victim’s web service, crashing the website.

In the financial services industry, web­ based services like online home banking are frequent targets of DDoS attacks. As a result, a cyber attack on a specific bank is also an attack on each individual online banking client, for they are most directly affected if their web services are suspended. This highlights the importance of a bank’s ability to protect their online clientele, which includes entities like private house-

holds and small businesses, against this type of attack; once their web server is compromised, these clients are virtually defenseless.

THE WORST CASE SCENARIO: FROM (CYBER) WORLD WAR C TO BOOTS ON THE GROUND

The largest ever DDoS attack on financial institutions took place on September 19, 2012.

Bank of America, J.P. Morgan Chase, Wells Fargo, and PNC Bank were the victims. CrowdStrike, a cyber security firm that investigated the attacks, said the volume of the attack was between ten and twenty times the volume of the average DDoS attack. It required hackers to commandeer several powerful servers over a series of months leading up to the attack. On the day of the attacks, attackers pointed all traffic from these servers to the four financial institutions.

While the Islamist group Izz adDin al-Qassam Cyber Fighters claims responsibility for the attacks, there is reasonable doubt that this group could

have carried out an attack of that caliber.

U.S. officials suspect the Iranian government of sponsoring these attacks.

As defined by a new military strategy announced by the Pentagon earlier this summer, cyber attacks from another country can now be considered as an act of war, and if deemed appropriate, can entail a military response. This particular attack has fueled the growing tensions between the U.S. and Iran and if such attacks continue, this cyber war could intensify to a full-­blown military conflict.

CYBER WARFARE: A PATH BACK TO THE GREAT RECESSION

Although historically DDoS attacks have not caused permanent damage to firms, DDoS attacks are nevertheless some of the deadliest types of cyber attacks on Wall Street because they can induce recession-­ like conditions and wreak havoc across the global economy. In an absolute worst­-case scenario, an extremely large­ -scale, sophisticated attack that affects a critical mass of bank clientele could induce a bank run.

CORNELL BUSINESS REVIEW | 30

While this scenario would need to continue for much longer than the average DDoS attack to create a mass panic, it is not impossible. When Lehman brothers failed in 2008, it rendered much of its short-­term debt worthless. This led to the deterioration of trust between banks and other financial institutions and an increase of short­term interest rates. If cyber attacks could cause a bank of comparable size to Lehman Brothers circa 2008 to fail, the potential economic effects could propagate global recession conditions, just as the failure of Lehman Brothers did in 2008.

DIPLOMACY: THE ONLY REAL SOLUTION

As a result of this growing trend of cyber warfare, preparation and proper response are the only solutions to these attacks. Unfortunately, preventing a DDoS attack is unrealistic given its overall popularity and simple execution. Wall Street’s cyber security teams must keep up with cyber warfare advances and have up­-to-­ date response plans.

Due to the Pentagon’s new cyber warfare protocols, however, it is equally important that the U.S. government, in addition to individual firms on Wall Street, are prepared for the possibility of a militarized war in response to an attack on the financial services industry. According to a 2007 McAfee report, the frequency of government-­sponsored cyber attacks is increasing. As long as the U.S. continues to have strained diplomatic relations, the threat of cyber attacks will remain, as foreign governments often have access to the most skilled military and civilian hackers.

Shamika Dighe (sd547@cornell.edu) is a sophomore at Cornell University majoring in Economics.

S

audi Arabia in 1938, Venezuela in 1939, United Arab Emirates in 1962, Norway in 1969 and Nigeria in the 1970s. In the 20 to 40 years following these dates, these countries all transformed from poverty­ridden areas to become regional economic powerhouses that minted hundreds, if not thousands, of multimillionaires as well as scores of multibillion­dollar corporations. The reason for these countries’ monolithic transformations was oil and natural gas. While most regions of the world have already been explored for oil, there is growing evidence which indicates that East Africa is the next energy frontier; specifically, an oil line that runs along the coast from Somalia to Mozambique.

ROLE OF OIL AND NATURAL GAS

Never have there been commodities as important as oil and natural gas. These commodities account for around 54% of global energy supply and 40% of mar-

31 | CORNELL BUSINESS REVIEW

INTERNATIONAL

EAST AFRICA

THE NEXT ENERGY FRONTIER

BY STEVE OLUOCH

itime cargo. Additionally, 7 out of the top 10 Fortune Global 500 companies in 2013 are in the petroleum and natural gas industry. To give some perspective on the extent of natural gas integration into the U.S. economy, the cumulative distance of natural gas pipes in the U.S. alone is nearly eight times the distance to the moon.

Furthermore, the Energy Information Administration stated that global energy consumption will grow by an estimated 10% in the next 10 years, and 56% in the next 30 years. Considering the pivotal role that oil and gas play, energy companies such as BP, ExxonMobil and Shell invest billions of dollars each year into exploration efforts to discover new reserves of these minerals.

In the last five years, East Africa has been the focus of fruitful oil exploration efforts.

EAST AFRICAN RESERVES

Oil reserves are estimated to be about 10 billion bar-

rels in Kenya and 3.5 billion in Uganda, which add up to about half of U.S. reserves. This would place East Africa as the 15th largest oil producer globally. Proven natural gas reserves are estimated to be about 250 billion cubic feet for Tanzania and it is predicted that further exploration will lead to a fivefold increase by 2015. Mozambique, on the other hand, has about 4.5 trillion cubic feet of natural gas reserves, which places it in the top 10 countries. Though these statistics do not show that this region will be a market leader by any measure, there is a strong indication that there is extensive commercial viability and trillions of dollars to be made from all these resources. For example, given current prices, proven East African oil reserves have an estimated value of about $1.35 trillion. This figure does not begin to account for the positive spillover effects of oil exportation or the additional reserves that are expected to be discovered in the next few years.

CORNELL BUSINESS REVIEW | 32

ECONOMIC IMPLICATIONS

A study conducted by Forbes this year indicated that 6 of the 10 majors with the highest starting salaries are in engineering, with petroleum engineering leading the pack. Poor access to education and low education standards in most of Sub­Saharan Africa have led to a serious skills deficit, which is especially salient in technical fields such as engineering. This means that as oil drilling and exporting efforts escalate in East

33 | CORNELL BUSINESS REVIEW

Africa, the region will need to bring in foreign expertise in order to take advantage of its mineral endowments.

Given the global prestige of Cornell’s engineering program, this presents a very lucrative and slightly less congested job market for graduates. Furthermore, given the continuing economic uncertainty in the U.S. and Europe, current engineering students looking for a job with long­term growth prospects should think twice about passing

on this opportunity in East Africa. The majority of the seven sisters, a colloquial term for a consortium of the largest oil companies in the world, operate in the region, which means that remuneration for high quality talent should be competitive enough to entice Cornell graduates.

In addition, budget surpluses as a result of export revenues will usher in a period of significant infrastructural investment. Roads will need to be tar-

INTERNATIONAL

WHILE MOST MAINLAND REGIONS OF THE WORLD HAVE ALREADY BEEN EXPLORED FOR OIL . . . A NEW VERY PROMISING HOT SPOT IN THE INDUSTRY EXISTS IN EAST AFRICA.

maced, schools and hospitals built, and power production scaled up to meet demand. Each of these government endeavors will require a range of engineering specialties that can be found within Cornell’s engineering and architecture programs. Over the last two decades, Dubai, another oil hotspot, has attracted a swarm of foreign investors and entrepreneurs who have made incalculable fortunes by setting up businesses in the era of an oil boom. If this

Middle Eastern metropolis is anything to go by, oil discovery and exportation leads to the development of numerous other sectors such as real estate, banking, tourism, education, communication and healthcare, professions that Cornell is known to provide high quality training in. The same positive trends can be observed in each of the aforementioned countries. Nigeria, for example, now has one of the fastest­ growing economies, telecommunications market, and market for luxury goods.

A trend that is becoming increasingly popular among countries whose government budgets are heavily reliant on oil and gas exports is to set up Sovereign Wealth Funds (SWF). These funds are essentially amalgamations of excess oil/gas revenues that are above the benchmark (BOP surpluses) and are invested for future use. Norway has the largest SWF globally and there are currently only three in Africa – Botswana ($6.9bn), Angola ($5bn) and Nigeria ($1bn). Enterprising finance

students could see this as just one of the potential benefits of getting a head start in the region. Furthermore, in most of the aforementioned countries, the macroeconomic ripple effects of oil and gas exports has translated into increased need for financial institutions such as commercial and investment banks. J.P. Morgan recently acquired a license to operate in Kenya, a move that other bulge bracket banks will no doubt echo.

Just as with engineers, finance students looking to start their careers in a place with high­growth potential should seriously consider this region.

REGIONAL ECONOMIC OUTLOOK

The macroeconomic landscape in the region is changing rapidly for the better. Thus, savvy entrepreneurs stand to gain tremendously in East Africa.

The region is currently in the process of forming a monetary union similar to that in the European Union, which should reduce cross­border transaction costs. At 135 million people, a third of the US population, East Africa has an

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abundant supply of labor and a market for many primary and secondary goods. According to the International Monetary Fund, the region’s aggregate growth rate is faster than any other part of Sub­Saharan Africa. In its latest figures, the World Bank reported that three of the top countries with the least barriers to doing business are in East Africa. To further support the positive outlook forecasted for the region, President Barack Obama recently visited East Africa and hailed the region’s

growing importance by initiating a scheme that boosts U.S. – East Africa trade.

Niccolo Machiavelli, a prominent historian and political theorist, once stated that entrepreneurs are simply those who understand that there is little difference between obstacle and opportunity and turn both to their advantage. It’s no secret that Africa has had and continues to battle numerous economic and political problems that would make most people think twice

about investing or living there. But for enterprising individuals looking for long­ term gains, these challenges are not insurmountable in the face of the ripe opportunities presented by East Africa’s oil and natural gas reserves.

Steve Oluoch (sgo6@cornell.edu) is a sophomore at Cornell University majoring in Finance and Accounting.

THE ETHICALITY OF BANNING ONLINE PORNOGRAPHY:

A Look at Iceland

BY SAGAR GALANI

O

nline pornography is a controversial issue almost everywhere in the world. Popular opinions on this issue include its degradation of or the rights of participants and viewers to perform or enjoy as they please. This debate has often been perceived to occur between conservative and liberals respectively. However, the government of Iceland, which runs one of the most liberal countries in the world, has been working on policies to ban online pornography. Why is Iceland, one of the most liberal and gender-equal countries in the world deciding to ban pornography?

INDUSTRY OVERVIEW

Like any industry, the pornographic industry is one that is constantly changing. In 2007, the porn industry was a $20 billion industry ($10 billion coming from US consumers alone). However, by 2011, the industry’s revenue reduced by 50-60% because of increased availability of free content online. By 2011, 80-90% of users only accessed free content. However, the industry

35 | CORNELL BUSINESS REVIEW

still remains huge: 1 in 8 searches online are for erotic content. As governments consider banning online pornography, it is important to look at banning such content as shutting down an industry.

IMPORTANCE OF THE BAN

The general perception of countries than ban online content has been conservative and authoritarian.

What surprises most is the notion that Iceland, being

WHY IS ICELAND, ONE OF THE MOST LIBERAL AND GENDER-EQUAL COUNTRIES IN THE WORLD DECIDING TO BAN PORNOGRAPHY? the country that topped the World Economic Forum’s Gender Gap Report in 2013 and having an extremely liberal government is heavily supporting the ban of online pornography. This implies that governments can’t use the excuse of being liberal to not ban such con-

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WHILE IT SEEMS COUNTERINTUITIVE, THE DECISION OF PUTTING FORWARD SUCH A PLAN [BANNING ONLINE PORNOGRAPHY] DERIVES FROM HOW LIBERAL THE COUNTRY IS.

supports the argument that watching pornography does contribute to violent behavior only for men who have a tendency to engage in such behavior. Research shows that this doesn’t imply to all men.

Exposure of Content to Children As mentioned above, the effect of children watching pornography is strong, and can’t be ignored. However, does the protection of these innocent How Liberal is Iceland? children warrant restrictions on viewerIceland is run by the world’s only ship freedom, or are there other means openly lesbian prime minister. 65% of through which we can protect such vulchildren are born outside of wedlock, nerable members of our society? and Iceland has one of the highest percentages of women pursuing higher Implications on Teenage Sexual Experieducation (a 3:2 ratio between women ences and men). Additionally, Iceland has The New York magazine mentions one of the lowest salary gaps between how a release of dopamine-oxytocin in men and women. one’s brain after an orgasm causes one to form an emotional attachment with Iceland’s Stance his or her partner; in our case, the partIn this progressive framework, one of ner being pornography. A teenager is the largest driving factors of the ban much more likely to develop such an is a “powerful feminist movement” emotional attachment to pornography focusing on content which is “violent and detachment from physical intimaand degrading” towards women. Ice- cy. Can governments protect their teenland has cited pornography as a source agers, and people from developing such of aggression in men. Other issues a mindset through completely banning highlighted by policymakers include online pornography? the exposure of such explicit content to children (the average age of such IS IT FEASIBLE? children in Iceland, being 11), and the Iceland has been active in banning porinfluence of such content on the sexual nography for more than a century now, experience of teenagers. but has only currently started to consider ways to implement it.

tent anymore. Due to Iceland’s actions, liberal, as well as conservative governments have just as much to consider regarding the matter.

Is this Right?

The availability of online pornographic material and its censorship is a recurring question in politics and society. On one hand, research shows that governments of multiple countries are seeing cases of rape which are inspired by pornography. Eliminating a stimulant may reduce the aggression of, or frequency of such crimes.

On the other hand, studies by the University of California-Los Angeles in America conducted in 4 European countries, and 2 Asian countries show an inverse or constant correlation between the availability of pornographic material and the number of rapes. This statistic implies that pornographic content may actually have a positive effect on society. While Iceland has taken a strong stance against online pornography for a while, it will be interesting to see how Iceland’s actions HOW ACCURATE ARE THESE CLAIMS? and new research affects perceptions While Iceland has taken a strong Potential Methods of Going about Banstance and supported it with consider- ning Online Porn of such content on a global level. able data, are Iceland’s claims valid?

Even if a government decides it ICELAND wants to ban certain content online, imWhile it seems counterintuitive, the Pornography Contributing to Violence plementing such a plan and actually endecision of putting forward such a plan in Men forcing it seems almost impossible.

Research by Neil Malamuth at derives from how liberal the country is.

Halla Gunnarsdotic, political adUniversity of California-Los Angeles visor to the interior minister has sug-

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EVEN IF A GOVERNMENT DECIDES IT WANTS TO BAN CERTAIN CONTENT ONLINE, IMPLEMENTING SUCH A PLAN AND ACTUALLY ENFORCING IT SEEMS ALMOST IMPOSSIBLE. gested two controversial methods of enforcing such a law: first, to restrict the use of Icelandic credit cards to pay for porn. Second, to create a national filter or blocked website list. The first approach seems irrelevant because of the abundance of free material available. The second has already been attempted in Australia and Denmark,

with little success. Australia’s filter was later rescinded and Denmark continues to work through glitches.

Birgitta Jonsdottir, a member of the Icelandic parliament and a strong advocate for online freedom, confidently states she doesn’t believe such a filter will ever be implemented because of the amount of time taken to implement such a plan. It is her, and many others’ belief in the country that the parliamentary elections being held in April 2013 will cause the movement to die down, especially if the current government loses the elections. Additionally, there’s a fine line between explicit and non-explicit material and defining what websites to ban will be one of the most challenging aspects of the plan.

Despite these potential obstacles, Iceland has continued working on drafting such a policy.

Evaluating the Arguments There exists an abundance of research on how pornography affects our society. However, one still doesn’t have the ability to take a strong stance against or for pornography. While in this article, the focus of the implications of pornography solely focused on economic and emotional impact, there are other factors to consider. Additionally, the implementation of such a policy, while attempted by many, hasn’t been successful yet. The focus now lies on governments to decide how they perceive online pornography, and if their perceptions can actually have concrete implications.

Sagar Galani (sg674@cornell.edu) is a sophomore at Cornell University majoring in Applied Economics and Management.

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