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A SELF-IMPOSED STATE OF SURVEILLACE

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Intercollegiate Finance Journal

TABLE OF CONTENTS

Markets 4 Market Timing Watching the Watch Industry Matthew Janigan

6 Hostile Shareholder Takeovers and You Icahn and Ackman Fire Back Mahir Jethanandani

7 It’s the Most Wonderful Time of the Year Christmas’s Impact on the Economy Matthew Janigan

10 Hand Over Fist High Stakes in an Age-Old Sport Kevin Han

10 Streaming’s New Frontier How the WWE Network Could Start the Second Wave of Videostreaming Alan Xie

Political Economy 12 Negotiating for Our Lives What’s at Stake at the COP21 Nikhil Kumar

14 A Modern Day Malady Finding the Cure for Increasing Drug Prices Gillian Lee

15 A Franc Move Charting the Ascendance of Unconventional, Post-Crisis Monetary Policy Carter Johnson

16 The Capital Creeds How Truly Capitalist, Socialist, and Successful are the Countries We Love to Idealize? Varun Khurana

Personal Finance 18 Getting CARDed How a 2009 Bill Affects You Carin Papendorp

The IFJ Online www.theifj.com The Blog An Elegant But Dangerous Approach to Government Financing Jonah Goldberg-Trills Practical Idea, Huge Pay Off, and Booming New Marketplace Cassidy Wald A Hidden Gold Mine: Public Transportation from Uber’s Cyrus Maden ([FLWLQJ DQG 3URƓWDEOH :D\V WR ,QYHVW Your Money Stephen Kearns The Beginning of the End for Biotech? Scott Theer Follow Us Facebook: IDFHERRN FRP WKHLIM Twitter: #WKHBLIM

20 You’ve Got Returns Turning to the Web for a New Way to Invest Rachel Binder

29 A Self-Imposed State of Surveillance Do Location Tracking Apps Actually Keep You Safe? Katharine Jessiman-Ketcham

30 Look Ma, No Hands! The Inevitability of Autonomous Driving Srinivasa Dheeraj Namburu

32 Big Shoes to Fill Sneaker Startups Thomas Abebe

33 Shedding Light on SolarCity The Next Giant in Energy or Bound for Failure? Varun Khurana

34 Think Twice Next Time You See an Ambulance 7KH 5LVH RI 7UDIƓF $QDO\WLFV From a Niche Market Benjamin Winston

35 Hotel California AirBnB and San Francisco’s Battle Over Taxes Liz Studlick

Careers

22 Face Value Why the Better Looking are Better Off

36 Bring it On NFL Cheerleaders Fight for Salary Justice

24 Keep your Hands and 401(k) to Yourself The Privatization of Social Security

38 %XLOƓQJ D %UDQG ZLWK 6RXO Inside SoulCycle’s Success

Tiffany Chen

Dean Murphy

Startups & Technology 26 Bubblelicious? Don’t Hold Your Breath for Tech’s Big Pop Soham Bhatia

28 The Bigger, the Better What is Big Data and Why Does it Matter? Angela Marie Tang

Sarah Park

Kathryn Scott

40 Behind Every Great Product How Product Managers are Trying to Combine the Best of Two Worlds Robert Ju

41 Don’t You CA Problem Here? How the Drought in California Affects the Rest of the Nation Adrija Darsha

42 Bridging the Gap Weighing the Options of a Post-Graduation Gap Year Brian Tung

43 How to Get an Internship at a Startup Using your Network to Land your Dream Job Haris Memon

MARKETS

Market Timing

WATCHING THE WATCH INDUSTRY by Michael Janigian

HOSTILE SHAREHOLDERS TAKEOVER AND YOU: Icahn and Ackman Fire Back, Mahir Jethanandani 6

IT’S THE MOST WONDERFUL TIME OF THE YEAR Christmas’s Impact on the Economy, Matthew Janigian 7

HAND OVER FIST High Stakes in an Age-Old Sport, Kevin Han 10

STREAMING’S NEW FRONTIER How the WWE Network Could Start the Second Wave of Videostreaming, Alan Xie 10

he times are constantly changing, but is the way we tell time changing as well? In the modern age, there are so many ways to find the time that watches are seemingly becoming increasingly irrelevant. However, there are more watches being bought and sold now than ever before. The industry is in the middle of a massive transformation with new competitors trying to redefine the market and well-established brands continuing to impress consumers with an ageless product. GET WITH THE TIMES The high-tech wearables sector of the watch market is undoubtedly expanding the quickest. Business Insider published a report estimating that sales of smartwatches will grow 25 percent annually and make up 52 percent of the wearables market by 2020. This growth is in part due to Apple’s recent release of the Apple Watch, which marked the first smartwatch to contend with the luxury companies. They are forecasted to sell 15 million units this year alone, with an average growth of 24 percent over the next five years. The Apple Watch appeals to those looking for up-to-the-minute technology, but also seeks to attract consumers looking for more traditional luxury by offering an 18-karat gold case, starting at $10,000. Only time will tell whether or not this unique product will last in a very conservative market.

LUXURY WATCHES These range of watches are changing the market in order to endure a technological surge.

SURVIVAL OF THE FITTEST Fitness bands and sport watches are caught in the middle of traditional watches and technological reinvention. Fitness bands have the niche audience similar to luxury watches but also the transformative aspect similar to technological watches. For that reason, it is difficult to predict exactly what will become of these products. On the one hand, there is evidence that the market is still healthy, reflected by the 168 percent increase in revenues from last year and the 12 million devices that Fitbit has sold through October of this year. On the other hand, they very well may see a downward trend in the long term as smartwatches adapt and take on new roles. The Apple Watch already has many of the same features as a Fitbit, like tracking calories burned, steps taken, distance traveled, and also offers some features that the Fitbit doesn’t, like measuring heart rate and a built in GPS. Each of these devices will need to differentiate themselves sufficiently in order to both survive the future marketplace; otherwise, they will be on a collision course that will certainly spell disaster for one of them. A TIMELESS BEAUTY At the same time, “classic” luxury watches such as Rolex, Cartier, and Patek Philippe prove to be doing just fine in the wake of the new technological push. These brands pride themselves on selling a product that is able to merge the worlds of traditional status symbols and ever changing fashion trends. Lately, these companies have experienced growth of their own, specifically, in emerging markets such as India. Last year about 60,000 Swiss luxury watches were sold in India. Though this

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015

may not seem like a large number, sales have been consistently growing at a 20 percent rate per year and producers see huge profit potential. Luxury watches will be something to keep a close eye on, as it represents the largest and fastest growing segment of the luxury goods market in India. GOOD AS NEW Ironically, technology is also rejuvenating the luxury watch market by encouraging more pre-owned watches to hit the marketplace online. Before the Internet, many people were unsure of how much their watch was worth and were subsequently more skeptical to sell. Now there is sufficient information to figure out the prices of watches, as well as websites like eBay and Craigslist to list them. Moreover, the value of a new watch generally drops quickly just after being purchased, but pre-owned watches experience much less depreciation. Consequently, a pre-owned watch is cheaper and its value remains stable for a longer time. More Rolexes are estimated to be sold on eBay more than through licensed dealerships and there are even businesses popping up that focus only on buying and selling pre-owned luxury watches. One such business, Crown & Caliber, explained that they make most of their profits off knowing what watches to sell, at what price, when, and how to find consumers. The line between consumers and producers has become blurry; customers sell their old watches and buy different ones, while businesses purchase their customers’ watches and sell them to other customers. It is a very time-sensitive business (no pun intended) where watches are constantly changing hands—or wrists, if you prefer— to turn a profit and keep up with the latest fashion style. GROWTH FOR BOTH? So what does the future hold for the market as a whole? While there appears to be some overlap between the technological and the luxury sides of the market, they don’t seem to be hurting one another. Although both have the same fundamental purpose of telling time, they each have a distinct appeal. Smartwatches aim to aid other technological devices and augment productivity. Traditional luxury watches are much more of a well-grounded fashion statement and status symbol. It is estimated that the entire wearables market is to increase at a 35 percent growth rate over the next couple of years. The entire market is growing, rather than one having to replace the other. One may start seeing more and more watches on people’s wrists as more and more people decide that the time is worth the money.

Hostile Shareholder Takeovers and You ICAHN AND ACKMAN FIRE BACK by Mahir Jethanandani

nder fire for Icahn Enterprises’ hostile takeover and control of Dell Computers in 2013, Icahn laid down the law: “What I do is good for America. Shareholder democracy does not exist. But in spite of this, my activism is alive and well and benefits everyone.” THE NUMBERS BEHIND THE CLAIM How accurate are these bold statements, penned from the front offices of some of the world’s leading hedge funds and wealth management firms? The results speak for themselves: activist investors (as a group) have returned 12.6 percent per year since 2004—pre-management fees— versus 7.7 percent of the benchmark S&P 500. Using Novus’ Activist

Investor Portfolio as the focus index of activist investor performance, activist investors are surely showing the Midas touch behind their investment decisions. BREAKING DOWN ICAHN’S ROLE Activist investors “invade” a public company by purchasing large amounts of shares, capturing a sufficiently-sized market share to obtain voting seats on a company’s board of directors. Activist investors, often backed by large investment-management institutions, are sent with a mission to shake up company management, operations, and finances. Executive actions that activist investors have forced include the selling of a public company, making the company private, merging with other companies, and spinning off aspects of the business. The performance backs Icahn’s claims, but do shareholder activism and takeovers really benefit shareholders—and Americans, per Icahn’s claim? REMEMBER THE PAST? In the aftermath of the dot-com bubble, the single conglomerate control of five to ten percent of one company would frighten investors and remind Americans of what too much uncertainty and too much

Institutional Investors Suffer When Companies are Broken-up and Spun-Off

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Placing segments of businesses in the hands of corporate cleansers do not bode well for those relying on the status quo to remain unchanged. control could do. The beauty of two destructive financial crises lies in the necessity to disrupt corporate structures and develop credible front-office management. Today’s activists buy credibility with their dollars and sense out the progressive and responsible practices that prevent government bailouts and equity price overvaluation. Activist investors seek to shake up mismanaged and inefficiently-run companies, for the sake of returning rightful returns on investments for the funds they represent and the company’s everyday shareholders. Icahn and Co. are focusing on governance and operational management, dissecting the nuances and machinery behind their stake-acquired companies. ICAHN WASN’T THE FIRST Instead of overthrowing board members and purging executives, successful activist takeovers are meshing with management and founders. In March 2014, Microsoft gifted Mason Morfit, president of activist-centered ValueAct Capital, the vacant seat left by Steve Ballmer’s departure. Yet, ValueAct Capital’s $2 billion stake in the company is not enough to push and shove Microsoft’s $300 billion size. Cooperation between the activist and management sides is creating some of the rallies behind mergers and acquisitions, revivals of sleepy tech titans, and pharmaceutical takeovers—so what is there not to love? THE REPERCUSSIONS AND BEAUTY BEHIND THE TAKEOVERS Unfortunately, acquisitions and stock spin-offs come with unforeseen consequences to employees and American people. Of course, activist investing cannot be solely responsible for such financially-traumatizing matters, but repercussions are present with certain activist’s executive decisions. Placing segments of businesses in the hands of corporate “cleansers”—instructed to clean house and improve the company’s

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condition and standing—do not bode well for those relying on the status quo to remain unchanged. Institutional investors relying on strong governance and unique competitive advantages suffer when companies are broken-up and spun-off, like eBay-PayPal, Volkswagen-Ferrari, Target, and PepsiCo. Employees endure the fire under their cubicle seats to prove their worth, eerily reminiscent of the corporate classic film Office Space. Good for the American people? Not always, Mr. Icahn, not always.

PRE-MANAGEMENT RETURNS $FWLYLVW ,QYHVWRUV S&P 500

In the advancement of industrial and technological growth, the threat of activist interventions can bring out the best in operations, marketing, and finance governance. In July 2013, Trian Fund Management’s Nelson Peltz hung his $2 billion stake in PepsiCo over PepsiCo CEO Indra Nooyi’s head, and demanded requests of his own. In inheriting her CEO position, Nooyi was well-prepared for intervention since her entrance in office back in 2006—expanding to healthier options with the rise in type 2 diabetes and potential acquisition in Mondelez International. The pressure from the public could bring out the best in growth models for the biggest of firms, like Apple and Microsoft. When hostile activists come knocking, management needs to be prepared. Investors must hope for the most competent and the best of corporate raiders. Maybe Icahn is not too far off—follow the performance and ride the coattails of benchmark-beating corporate raiders to outsmart the S&P 500. Ackman and Pershing Square, however? Remember Herbalife and Target. Not every activist can perform like the Oracle of Omaha.

It’s the Most Wonderful Time of the Year

CHRISTMAS’S IMPACT ON THE ECONOMY by Matthew Janigian

t seems to start earlier and earlier each year. Not too long after pumpkin spice latte season starts, holiday decorations start to creep into malls. Halloween acts as the last line of defense before stores shift into high gear for Thanksgiving. But it’s not really for Thanksgiving per se; rather, it’s for the unofficial beginning of the holiday shopping season that starts with Black Friday. From that momentous midnight to Christmas Day, stores are scrambling to end the year on a strong note. DECK THE MALLS Consumerism has long been linked to church holidays and festivals. Since the beginnings of organized Christianity, merchants set up stands in marketplaces outside of church grounds on days of celebration. When Christmas became an official Christian holiday in the late fourth century, with connections made to the gift-giving of Saint Nicholas, merchants had yet another day of the year to take advantage of. Fast forward to the 19th century and the deeply consumerized holiday would already be recognizable to the modern day traditions. Diary entries from Clara Pardee, a Protestant living in New York City in the late 19th century, wrote of the ten days preceding Christmas during which she spent time shopping downtown. Nine of the ten days were spent “out to market & downtown”; only on Christmas Eve did Pardee not go shopping. Shopping at this time of the year was, of course, different than other times. Malls were decked out with all sorts of Christmas displays. The Wanamaker stores were decorated so elaborately with Christmas decorations like the Nativity scene that Christians found them awe-inspiring. Indeed,

Cartoon by Linda Navon Chetrit

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015

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Whether in the form of gifts or donations, the economic marketplace LV ŴRRGHG ZLWK PHVVDJHV HQFRXUDJLQJ giving. some Christians wrote to the most ornate stores thanking them for displaying scenes that made them feel closer to their religion. Shopping could have more meaning to consumers than just the purchasing of gifts; it could transcend materialism and become a sort of spiritual experience. WINTER WONDERLAND In the modern economy, the consumer culture underpinning Christmas has grown to the point where it permeates the entire economy. After Thanksgiving, retail companies experience a make-orbreak moment that lasts a month. They have the entirety of the holiday season to boost their sales prior to reporting their yearly reports in January. That the yearly reports of retail companies come after the beginning of the new year reflects just how important the latter part of the year is. This shouldn’t come as a surprise, considering the average American consumer spends over $750 each year on Christmas gifts. Furthermore, a higher gross domestic product (GDP) is positively correlated with increased consumer spending during Christmastime. In gross terms, the United States leads all countries with nearly $250 billion in total spending on goods during the holiday season. While consumer spending on retail items can be expected, companies can’t assume every winter will be a wonderland of consumerism tendencies. Companies have to be constantly competing to gain a share of the market. The desire to undercut competitors is a prime reason many retailers have moved Black Friday a day earlier, beginning on Thanksgiving. Some get started even earlier, declaring November “Black November” as if to indicate the whole month is awash in grand sales. And aside from competing with each other, companies have to worry about broader economic uncertainty that could cause consumers to be more frugal. ‘TIS THE SEASON Consumers spend their money on more

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than gifts, though. The final quarter of the year is responsible for more than a third of all charitable donations throughout the year. December alone is responsible for 18 percent of all donations. It’s not only the season of gifting, but also the season of giving. As with spending on shopping, however, charitable donations are also susceptible to broader economic tension. After the 2008 recession, charitable giving didn’t recover until 2013, according to the Blackbaud Index, which tracks charitable giving in the United States. As the economy recovers, households are more willing to give to charities. And unlike money spent on shopping, money given as donations is tax deductible. Even if a household has less income, there’s still some incentive to give. Underlying shopping and charity is the overall sentiment of giving. Whether in the form of gifts or donations, the economic marketplace is flooded with messages encouraging giving. For retail companies, this sentiment drives sales. For charities, it drives revenues. And for consumers, it drives at least some desire to be generous. BAH HUMBUG Not every season, however, is filled with generous gift giving. Even seven years after the Great Recession and strong economic growth this year, it isn’t clear that this season will see an uptick in consumer spending. This should seem surprising. Home values have risen; the first three quarters of the year have been demonstrative of broad economic growth; unemployment rates are down; oil prices are lower; and consumer confidence is solid. However, behind these positives are also signs of a slowing recovery. Job gains haven’t been as rapid, and stock market volatility has increased over the year. According to a report from Morgan Stanley, the problem isn’t necessarily that consumers don’t have the money

to spend, but that they aren’t as willing to spend it. Of course, holiday season spending may be more difficult to predict than spending during other times of the year. Each year, people tend to have a genuine desire to be generous within their means. In general, people do their best to not emulate Scrooge. Even in the thick of the Recession, people gave to others and to charities. Economic predictions of consumer spending are largely based on household income. Generosity is all too easy to undervalue. JINGLE BELLS SELLS Christmas undoubtedly has a significant impact on the economy. The most telling part is, perhaps, the secularization of the holiday. What started as a modestly important Christian holiday has grown into a widely impactful market holiday. To be sure, the earliest church leaders had no intention of recognizing a holiday that brings out pure material pursuit. As the holiday has grown in popularity, so too has Christmas-based consumerism. Even if the religious sentiment behind the holiday has been diluted, the call for generosity and compassion has not been lost. At the very least, Christians can take solace in knowing that these broader messages have reached a wider audience. In a nation where 83 percent adults identify as Christians, it’s no surprise that a holiday that has always had consumerist undertones has become so popular. Let’s face it: Christmas sells. And this is true especially in America. When the Puritans first established colonies, there were no holidays at all. Eventually, this rather strict policy loosened up. As Christmas grew in America, it spread overseas, eventually coming to represent an entire month out of the year. PRESENT PRESENTS To wrap it up, the holiday season is surely a gift to companies and charities alike. But the magnitude of the expected benefit this year is still uncertain. While the economy seems healthy, uncertainty and fear can greatly alter the willingness to spend. It’s unclear what type of presents the economy is going to unwrap this year. But one thing is for sure: it certainly won’t be coal.

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015

HARD HITTERS Despite being guaranteed millions in advance, Pacquiao throws a wild punch, demonstrating his desire to win.

Hand Over Fist HIGH STAKES IN AN AGE-OLD SPORT by Kevin Han

oxing as an art dates back to 4000 B.C. on the Nile Plateau, where it began as a brutal sport with little protection or rules. These matches tended to last until one man was seriously injured. It was not until 1867 that John Gram made an updated Code of Rules which became what we know today as Boxing. Many people mistakenly believe that boxing as a professional sport is on the decline with fewer people watching every year. But if one looks at the economics behind the sport, it is still a lucrative business for both boxers and managers alike. 500 MILLION DOLLARS BABY Consider one of the most recent and memorable bouts of this year: the match between Floyd Mayweather and Manny Pacquiao. At the highest level of boxing, revenue is earned through pay-per-view television, which is generally monopolized by both Showtime and HBO PPV. Gate prices for this fight were $4,500 each, which brought in a total of $74 million. Pay-per-view cost $100 per household, while sports bars were charged $5,000 to air the fight. While there are various administrative and upkeep costs, there are also the matters of the reward incentives for the boxers themselves. Pacquiao agreed beforehand to a 60-40 split of the earnings in Mayweather’s favor, and he still managed to net himself $125 million, meaning that the entire purse of the two fighters was worth over $300 million.

Both of these fighters further increased their earnings through sponsorships and advertisement. According to the Economist: “Five corporate sponsors paid a record $13.2 million to affix their logos to the contest, with Tecate beer alone accounting for $5.6 million. Six more companies shelled out $2.25 million just to decorate Mr Pacquiao’s trunks. In all, this twelve round match brought in an incredible $500 million. However throughout the year, there are hundreds of professional matches throughout the world. Both professional and underground boxing create a large and thriving sector which is often overlooked. Still, there are many who claim that boxing is fake and that there is no point in being a part of the boxing world—and for good reason, too. PULLING PUNCHES As mentioned above, both Pacquiao and Mayweather agreed upon a winner and loser purse beforehand. This is commonplace practice in professional boxing. For this reason, many believe that because fighters are guaranteed money before the fight begins, they tend to fight in a lackluster manner. For example, according to Rafael Tenorio of DePaul University, on October 25, 1990, James Douglas was guaranteed $20 million. Because of this, he was visibly out of shape when stepping into the ring, and was knocked out in three rounds. The audience felt very cheated because of this.

In professional boxing, the promoter initially shoulders all of the financial risk in creating the pay-per-view event. The responsibility to market the event again falls upon the promoter. Because they shoulder the majority of the risks in showcasing these fights, self-interest incentivizes them to do well at their jobs, if only for profit. These promoters will then contact the pay-per-view distributors to cover expenses. Based on the projected audience, the promoter will then agree upon a purse to be given to the two fighters, and by extension, their managers. Afterwards, both the fighters, the venue owners, and the promoters will be at liberty to seek sponsors and advertisements for extra revenue. With this in mind, the promoters often lose their incentive to promote the fight to the public, due to the expenses being covered by the major distribution networks, such as HBO and Showtime. KNOCKOUT PUNCH At the highest levels, the difference between winning and losing means millions. In the case of Pacquiao and Mayweather, the difference in earnings was close to $200 million between the winner’s and the loser’s purse. Therefore, in some cases there is at least some incentive to do well in a fight. Putting pure economics aside, there is also something in the human spirit that drives us to show our strength to the world. Competition, especially among athletes, is strong motivation. Even if we can get away with the easy path, our desire for glory and achievement will triumph in the end.

Streaming’s New Frontier HOW THE WWE NETWORK COULD START THE SECOND WAVE OF VIDEO STREAMING by Alan Xie

n 2003, Netflix, which was a subscription DVD rental source at the time, attempted to sell themselves as a streaming service to Blockbuster. Although their pitch was rejected, Netflix moved forward with their new business model, and subsequently revolutionized how people view their favorite shows. Over the past decade, several

MARKETS

competitors have emerged, such as HBO, Amazon Prime, and Hulu Plus, all offering cheap methods of watching hit shows. Still, despite their affordability, in comparison to television providers, they have a limited amount of content. Specifically, one of the major advantages of cable is the ability to view live sports and other sports programming. In fact, this feature is arguably the biggest reason why television providers have remained profitable. Still, their successes are tenuous and their futures are especially delicate. Surprisingly, the demise of these traditional service providers may have started in the unlikeliest of ways: the WWE network, with potential to create a second wave of video streaming that just might bury cable for good. A NEW CHALLENGER IN THE RING As a brand valued at $2.3 billion, with 15 million viewers, programming in 150 countries and 30 different languages during 2014, World Wrestling Entertainment Inc., (WWE) is undoubtedly successful. Through the pay-per-view (PPV) infrastructure, pioneered by its CEO Vince McMahon, WWE has enjoyed a vast amount of revenue, totaling $82.5 million in 2013. Through this system, the WWE charges $44.95 for most payper-view events, with the exception of a price tag of $59.95 for Wrestlemania, their premiere wrestling event. However, based on their annual 10-K report, they split their PPV revenue with the multichannel video programming distributors that broadcast their content. Specifically, WWE takes less than half of the money earned from their PPV events. Recently, WWE has turned towards direct streaming, signing a deal with MLB Advanced Media to produce the WWE network, while still offering PPV options. The WWE network is offered at $9.99 per month with a one month commitment and offers streaming options for STREAM ME Through its streaming service, the WWE is reaching a broader audience than ever before.

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televisions, computers, and other devices. For this price, customers also have access to 130,000 hours of content. After the fixed costs have been accounted for, they take home nearly 70 percent in profit. As of May 2015, the service reached 1.3 million subscribers, and requires around 1.43 million to break even (calculated from lost PPV revenue and fixed costs). As this number continues to grow, the implications for the sports industry become increasingly significant. WRESTLING FOR CONTROL OF THE INDUSTRY From college to professional to the Olympics, athletics have consistently provided revenue for television. Although several major sports offer their own streaming services, each has its own flaws. MLB only offers streaming through select providers, NBA League Pass runs at a price of $200 and requires a cable or satellite

300

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provider, and the NFL sells both Sunday Ticket and Game Pass as separate, highpriced packages, even though much of their content overlap. Sports depend on cable for revenue, while cable depends on sports for an advantage over streaming. However, the WWE network has the capability to change this relationship entirely. If the consumer base exceeds the 1.43 million mark, the WWE network definitively out-earns the previous model. In this scenario, both UFC and MMA could consider adopting a similar service. Since both brands rely on the McMahon-inspired PPV service, it is very possible that they will follow WWE into streaming as well. The situation is more complicated for the major American sports leagues, but with sustained success of the WWE network and similar services, it is conceivable that they also follow suit. In this hypothetical (but absolutely possible) realm, cable would lose arguably its greatest attraction, and be entirely replaced by streaming. FAKE COMBAT, REAL INNOVATION Over the past century, cable has become a staple of American society, and has remained a driving force of American culture. However, even the largest industries are not exempt from the fragile nature of business. Television providers took a major blow from streaming and have relied on sports and sports entertainment to support themselves over the past decade. But with the success of the emerging WWE network, the sports industry as a whole may be inspired to turn towards similar streaming alternatives. Although such a shift is far from the reality, it is important to consider because it may just result in the final collapse of cable.

POLITICAL ECONOMY

Negotiating for Our Lives WHAT’S AT STAKE AT THE COP21 by Nikhil Kumar

MEETING THE CHALLENGE At this year’s COP21 in Paris, world leaders will work to save the planet.

s the once-distant threat of climate change becomes an urgent reality in the form of record-breaking hurricanes (Patricia), rapidly melting ice sheets (Greenland), and devastating droughts (California), the topic is gaining importance in politics, business, science, and the media. Recently, President Obama rejected construction of the Keystone XL pipeline, public opinion polls show growing concern about the climate, and more and more countries like Costa Rica are relying on clean energy sources. From Nov. 30 to Dec. 11, the world’s leaders and climate activists will come together in Paris for the COP21, the United Nations Conference on Climate Change, where they will attempt to reach an agreement to keep global warming below 2°C. But will they actually succeed?

A LONG ROAD… This year’s COP (Conference of the Parties) is the product of more than two decades of climate change diplomacy. Among the many multilateral meetings held and agreements signed during that time period, three actions loom above the rest. In 1992, the Earth Summit in Rio de Janeiro resulted in the adoption of the United Nations Framework Convention on Climate Change, which recognized anthropogenic climate change and put the bulk of the fight in the hands of developed countries. Five years later, the Kyoto Protocol (which has not been ratified by the U.S.) set limits on greenhouse gas emissions between 2008 and 2012. In 2009, the COP15 in Copenhagen was a failed attempt to reach an agreement for

the period beyond 2012, although it did result in the 2°C objective at the center of this year’s conference. Due to the history behind the COP21 and the enormity of what’s at stake, the event promises to be formidable. 40,000 delegates from 195 countries will participate, making it the largest conference ever organized by the French government. U.S. President Barack Obama, Chinese President Xi Jinping, and Indian Prime Minister Narendra Modi will join French President François Hollande and many other world leaders in the negotiations. For security reasons, France will put in place “exceptional” border controls even though it is part of the functionally borderless European Schengen Area. The energy and diplomatic resources poured

A MODERN DAY MALADY Finding the Cure for Increasing Drug Prices, Gillian Lee 14

into the organization of the COP21 suggest that this is a real, genuine gathering of countries with a common goal. …PAVED WITH QUESTIONABLE INTENTIONS Yet there is reason to doubt that these efforts will ultimately bear climate-saving fruit, due in large part to the three largest emitters of greenhouse gases: China, the U.S., and India. In Nov. 2014, President Obama visited Beijing, where he and President Xi announced a bilateral plan to reduce greenhouse gas emissions in which Chinese emissions would peak in 2030 and the U.S. would cut emissions by 26 percent from 2005 levels by 2025. Although critics argued that the agreement did not go far enough, it represented a remarkable step in the realm of climate change negotiations. Furthermore, President Obama and Prime Minister Modi held discussions on the issue in September 2015, and the latter has committed to, in his own words, “a development strategy that will enable [India] to transition to a more sustainable energy mix.” Thus, it is clear that the major players are willing to combat climate change. More murky, though, is how they will work in a multilateral setting and whether they will sign a binding agreement, which must be universal. After all, the U.S. has never ratified the Kyoto Protocol and has a spotty record in general when multilateral action is called upon. For its part, China has been burning 17 percent more coal each year than previously reported. And India, significantly poorer than China and the U.S. in per capita terms, arguably has a lower burden of responsibility to reduce its emissions than more industrialized countries. It remains to be seen whether, rather than strengthening the COP21’s chances of success, the bilateral talks between the U.S., China, and India will serve as an excuse for the major players to back out of a comprehensive deal. TO HEAVEN OR HELL? (OR MARS?) As residents of planet Earth, we all stand to gain a great deal from the achievement of the COP21’s goal: a “universal, ambitious, flexible, sustainable and dynamic” climate change deal. The investment that has been put into the conference and the high-profile nature of its participants are cause for optimism, but its success will require the cooperation—and sacrifice—of all parties involved, including the great powers. The conference, then, will be a test of the United Nations and the international system on which it is based, as well as our ability to prioritize the well-being of future generations in spite of any short-term economic

A FRANC MOVE Charting the Ascendency of Unconventional, Post-Crisis Monetary Policy, Carter Johnson 15

disadvantages. If all else fails, we can always count on the colonization of Mars — hopefully not our planet’s saving grace, Mars One will begin manned missions to the Red Planet in 2026.

A Modern Day Malady FINDING THE CURE FOR RISING DRUG PRICES by Gillian Lee Cartoon by Linda Navon Chetrit

n Aug. 2015, the Kaiser Family Foundation conducted a poll of 1,200 U.S. adults, which found that 72 percent feel that drug costs are unreasonable. Perhaps unreasonable is an understatement – the Organization for Economic Co-operation and Development found that in 2013, American per capita pharmaceutical spending was $1,034. Last year, per capita drug spending increased by more than $100. The issue of mounting drug costs is therefore rightfully on the minds of many people. Even the 2016 presidential hopefuls have addressed the issue by putting forth different plans to address rising costs. However, the effectiveness of such proposals conflicts with various barriers of entry that already exist in the big pharmaceutical industry. DIAGNOSIS While Republicans and Democrats generally are not on the same page for any given issue, many politicians within the two political factions have come to the same conclusion: a number of drug companies are purely profiteering from increasing drug prices. The drastic increase in drug prices over the past several years can be attributed to various causes. One reason is the introduction of new drugs to treat cancer, multiple sclerosis, and high cholesterol. These new drugs are often priced highly to compensate for research and development costs. Beyond the setting of high prices for new drugs, pharmaceutical companies are also capitalizing on a new business strategy. Companies buy old drugs, especially orphan drugs, which are used to treat rare diseases, and brand them into specialty drugs in order to justify a steep price increase. The sudden overnight price increase of Daraprim, an orphan drug used for treating malaria and toxoplasmosis, which is an infection caused by a

THE CAPITAL CREEDS How Truly Capitalist, Socialist, and Successful are the Countries We Love to Idealize?, Varun Narayan 16

parasite, exemplifies the implementation of such a strategy. Turing Pharmaceuticals acquired Daraprim, which has been in use since 1953, this past August. Immediately following the acquisition, the price of the drug went from $13.50 per tablet to $750. Martin Shkreli, who runs Turing Pharmaceuticals, stated that the increase in revenue from the new price will allow his company to develop a better alternative to Daraprim. Understandably, many people have had a problem with this price increase. COMMON SYMPTOMS The average consumer is certainly feeling the weight of the increase in drug prices. In a recent survey, the Kaiser Family Foundation found that 24 percent of people surveyed said that they or a family member did not get a prescription filled because of the cost. Filling prescriptions has shifted from being a necessity to a choice due to high costs, an absurd reality that certainly signals the severity of the implications of rising drug prices. The increase in prices is also impacting government programs, such as Medicare. CNBC estimates that people enrolled in the top 10 Medicare Part D prescription drug plan will face an average premium increase of 8 percent by next year. Enrolling in a Part D plan can help cover the cost of medications, and these top 10 plans count for about 80 percent of enrollment in prescription drug plans. Senior citizens therefore will have to face the consequence of paying more for prescriptions, or else search to find a cheaper plan. TREATMENT The issue of increasing drug prices has resounded through the political sphere. As far as Democratic candidates go, both Bernie Sanders and Hillary Clinton have put forth plans to rectify the situation. Both have proposed to allow Americans to import drugs from Canada, where brandname drugs are frequently much cheaper than they are in the U.S. Clinton’s plan would allow drug companies to spend a set percentage of their revenue on research and development, and further regulate prices through insurance companies. Sanders’ plan also requires companies to be as transparent as possible about the costs to produce the drug. Republican candidates Marco Rubio and Chris Christie have similarly cited the need for increased transparency in the costs of healthcare. This in theory will prevent companies from arbitrarily increasing the cost of a specialty drug, since they often allude to the cost of research and development to justify their prices. The public,

Cartoon by Linda Navon Chetrit

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015

insurers, and the government should be given the appropriate information to explain high costs. Legal ramifications could then follow if the price is significantly higher than the benefit of the drug, or in the case that companies refuse to disclose information, insurers could act on the silence by providing information to drive down costs. RISK FACTORS Although these various plans, if implemented, may help to alleviate the dramatic price increases, their effectiveness is also subject to the whims of government regulation and the nature of the economy. If a drug company wants to compete in the market by producing a generic version of a brand name drug, the process is incredibly lengthy. It takes the FDA an average of 50 months to approve a generic drug. This long wait time creates an opportunity for the company to drive up the price of the drug, particularly if it is the only available drug of its kind. No matter how transparent a company is regarding its costs, drug companies can continually challenge the market with higher prices in the absence of a competitor. For Clinton’s proposals of

a price control, perhaps the core of the issue lies in the barriers to entry for companies offering a cheaper generic alternative. The effectiveness of the proposals remains to be seen. In the meantime though, the stock market is already exhibiting signs of investor unease. Since Clinton announced her plan to control drug costs, the Nasdaq Biotechnology Index has fallen more than 11 percent. Investors are undoubtedly worried that Clinton will stifle the highly profitable industry by limiting resources dedicated to research and development, as well as negatively affect the valuation of stocks in the biotech sector. Looking beyond the lens of politics and market activity, the health of the actual patient must also be considered. Many of the drugs that are being affected are aimed at treating life-threatening diseases in which immediate access to the drug is often vital to saving a patient’s life. Therefore, it would be extremely detrimental if certain treatments were too expensive to keep in stock. Whatever the solution to the increase in drug prices may be, it is of the utmost importance to always have the patient’s well being as the first priority.

A Franc Move

CHARTING THE ASCENDANCE OF UNCONVENTIONAL, POST-CRISIS MONETARY POLICY by Carter Johnson

even years since the Global Financial Crisis, it has become abundantly clear that global financial markets post-2008 have increasingly been defined not by the crisis itself, but rather by the world’s reaction to it. The most fundamental differences in a world pre- and post-crisis are not to be found in an investment bank’s balance sheet or a homeowner’s mortgage. Rather, they are to be found in the actions of a lone government institution: the central bank. Institutions of this kind—in brighter days, the sole arbiters of interest rates and money supply—now serve functions as murky and complex as the subprime bonds of days gone by.

POLITICAL ECONOMY

THE FRANC TAKES A HIT In December, global financial markets watched as Europe, still experiencing low and stuttering growth, prepared to announce that its own central bank would also introduce Quantitative Easing (QE). The most sudden reaction, however, came not from investors but from another central bank. On Dec. 24, the Swiss National Bank (SNB) announced the repeal of the euro-Swiss franc cap that had existed since 2011, when investors had flooded to the franc in the midst of the Greek sovereign debt crisis. The peg had become too expensive to maintain in the face of rest of the ECB’s QE and a weakened European currency. A sudden appreciation occurred, and within one hour the currency rose nearly 30 percent against the Euro (later to fall down to “just” 16 percent) and nearly 20 percent against the dollar. The chart below says it all. The move was enough to put many traders and brokerages out of business. Large U.S. forex brokerage FXCM needed a $300 million bailout to survive. UBS and Citi each tallied $150 million in losses from their franc positions. The actions of the SNB—and the Swiss franc move—are indicative of the monetary mire in which central bank policies are now stuck, much of it formed with the implementation of Quantitative Easing programs by the U.S. and the United Kingdom in the aftermath of the crisis. QE was first introduced, with little success, by the Bank of Japan in the early 2000s as the country fought through what has since been termed a “Lost Decade”

of falling prices, declining wages, and low growth. The practice, however, marked a radical departure from the norm for the Federal Reserve and Bank of England. Between 2008 and 2010, these two central banks collectively purchased nearly $2 trillion worth of mortgage backed bonds and Treasury securities (in the U.S.) and gilts (in the U.K). QE continued in the U.S. until late 2014, at which point the Fed had collectively bought over $3.7 trillion dollars, increasing its asset holdings by more than eight times in the process. Now, Japan, bolstered by Shinzo Abe, has returned to QE as well. These banks present quantitative easing as the only means of stimulating flagging economies with rates already set at or near the zero bound. In introducing these programs, however, central banks have acknowledged that the old rules aren’t working. Their answer has been to essentially rewrite them. GAME OF LOANS Given all that has happened, perhaps it isn’t surprising to see Bill Gross, ex-PIMCO chief, criticize the very system upon which he has based a successful career. In his Feb., 2015 letter to investors, Gross—now running bond strategy at money management firm Janus Capital—compared global monetary markets to the board game Monopoly. “Players [in this case, investors or anyone remotely connected to the financial markets],” he wrote, “would be justified in saying that competitive devaluations and the purchase of bonds at near zero interest

THE SHARP MOVE IN THE EURO/SWISS FRANC CHART SINCE FEBRUARY OF 2013 1.3500 1.2500

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rates is indeed a significant distortion of the markets and—more importantly—capitalism’s rules which have been the foundation of growth for centuries, long before Parker Brothers central bankers came into existence in the early part of the 20th century.” And so recent central bank moves to “rewrite” the rules of the game call to mind several burning questions: Why do these rules need to be rewritten? What aspects of modern, global financial markets and economies are so fundamentally flawed as to be unfixable under decades-long systems and practices? And, perhaps most ominously, what happens when these aggressive practices (negative interest rates, Quantitative Easing, and currency devaluations) don’t work? After all, trillions of dollars have been created and thrown into the global markets in the hopes of stimulating growth. The only problem? Such stimulation has resulted in a significant divergence between the real and financial economies, and has in no way ensured that money created will ever come to bear in useful or growth-producing investments. Growth in Europe and Japan remains dismal, and to quote Gross, “even with the U.S. growing at an acceptable rate for now, its recovery over the past five years has been anemic compared to historic norms.” These questions, and the complexity of their answers, will define the development of financial markets in the coming decades. WINTER IS COMING Nearly a year after the Swiss National Bank dropped the euro-franc peg, all eyes are on the Federal Reserve. After delaying in September the first interest rate hike in nearly ten years, December’s FOMC meeting is the last possible event of the year in which the Fed can act to raise rates. And, as Fed Chairman Janet Yellen has noted, it promises to be a “live” meeting, especially after the release of particularly strong job data reports released on Nov. 6. The Fed decision, the timing of which has largely shifted from “date dependent” to “data dependent,” in the words of Wall Street analysts and former Philadelphia Fed president Charles Plosser, will affect bond, currency and equity markets around the world. If such a hike marks a return to pre-crisis monetary policy, it also marks a divergence from the easing to which so many central banks have resorted since 2008. Such a divergence in monetary policy, just like the unwinding of post-crisis quantitative easing policies, will set the stage for what promises to be an eventful year for the markets in 2016.

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015

The Capital Creeds

HOW TRULY CAPITALIST, SOCIALIST, AND SUCCESSFUL ARE THE COUNTRIES WE LOVE TO IDEALIZE? by Varun Narayan

POLITICAL ECONOMY

n the last Democratic candidates’ debate, Bernie Sanders consistently characterized Denmark as a model to which the U.S. can aspire. Indeed, presidential candidates and demagogues often present shining examples of what our country can be. “Like Denmark! Like New Zealand! Like Norway!” Most all of these nations fall into one of two camps: free-market utopias, where competition and free trade has induced prosperity; and socialist havens, where the government’s heavy, helping hand has built lives for its people. But how successful are these nations? Many of our world’s supposed sovereign paradises simply do not match up to the standards we have set for them, and the standards they have set for themselves. Even more importantly, we must realize that our conceptions of perfect capitalist and socialist societies are not very capitalist or socialist. Stereotypes and misinformation obscure the truth about these countries, whose governments, economic systems, and living standards we all too often bow down to.

PERSONAL FINANCE

Getting CARDed HOW A 2009 BILL AFFECTS YOU Photo by Cadence Lee

by Carin Papendorp

NO SWIPING The number of college seniors with credit cards has fallen almost 30% since 2008.

GETTING CARDED How a 2009 Bill Affects You, Carin Papendorp 14

YOU’VE GOT RETURNS Turning to the Web for a New Way to Invest, Rachel Binder 15

FACE VALUE Why the Better Looking are Better Off, Tiffany Chen 16

AN ALTERNATIVE SYSTEM The Privatization of Social Security, Dean Murphy 17

very year, millions of American teenagers go through the college admissions process, polishing their applications and eagerly waiting to see whether they will be accepted or rejected. However, fewer teenagers are worried about another kind of application: a credit card application. A 2008 study on college credit card use by Sallie Mae found that 67 percent of freshmen and 88 percent of seniors possessed a credit card. When the same study was repeated in 2012, only 21 percent of freshmen and 60 percent of seniors had credit cards. What caused this huge drop in only four years? In a 2013 article titled “College students more wary of credit card debt,” the Washington Times attributed this striking reduction in credit card use among college students to a post-2008 shift in attitudes: apparently, after seeing the disastrous effects of the financial crisis, students now hesitate to live above their means. In reality, there’s a direct explanation: the Credit Card Accountability Responsibility and Disclosure Act of 2009 (or CARD for short). Title III, “Protection of young customers,” limits banks’ ability to market and offer credit cards to college students. Though often hailed as a victory for consumers, CARD hinders students’ ability to build credit and lay the groundwork for a sound financial future. IS THIS YOUR CARD? Under CARD, consumers under 21 can only be approved for a credit card if they have the signature of a cosigner and submit financial information proving “an independent means of repaying any obligation arising from the proposed extension of credit.” For students with variable incomes, these new restrictions may prevent even responsible spenders from obtaining credit. In 2007, 3.9 million credit cards were issued to college students. In 2012, that number fell by over half to 1.7 million. Similarly, overall approval rates fell from 47.8 percent in 2007 to 39.1 percent in 2012. Of course, these declines coincide with the Great Recession, leading some to speculate that the economic contraction led banks to decrease lending. Even still, due to the CARD Act, these changes probably disproportionately

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015

affected students and young people. PATERNALISM STRIKES AGAIN Age may be “just a number,” but your credit score is not. The interest rates for federal student loans are set by Congress, but interest rates for private student loans are based on credit history, meaning that students with low credit scores pay more in interest straight to the banks. Similarly, the interest rates for car loans and mortgages are determined by credit score. Even employers can look at the credit reports of job applicants, using the information about payment history and amount owed to judge the reliability of prospective employees. Clearly, without an accessible way to build credit, students will be paying in more ways than one. Although car loans, student loans, and even secured loans specifically for the purpose of building credit can also be ways for young borrowers to establish a credit history, credit cards (when used properly) are the most efficient route to a higher credit score. What’s more, loans cost students money in the form of interest, whereas credit cards are free to own and use as long as students don’t carry a balance. AGE: JUST A NUMBER? Some would argue that because the prefrontal cortex—an area of the brain responsible for impulse control, planning, and decision making—doesn’t develop fully until about age 25, lawmakers are right to use caution about giving credit cards to teenagers. The same logic underlies the fact that you have to be 21 years old to buy alcohol, and, in many states, enter a casino or rent a car. However, parts of CARD that address marketing and promotional offers apply to college students irrespective of age, meaning that 18 year olds not attending an institution of higher education would be exempt, whereas a 30 year old enrolled in college would not be. These restrictions highlight the arbitrary nature of the CARD legislation. “No card issuer or creditor may offer to a student at an institution of higher education any tangible item to induce such student to apply for… [a] consumer credit plan.” DO STUDENTS ACTUALLY HAVE MORE DEBT? Many articles conflate student loan debt with credit card debt that happens to belong to students. As a result, it becomes difficult to determine whether rising education costs or uncontrolled credit card spending is the root cause of student debt. The average graduate in the class of 2015 will owe about $30,000 in student loans. Meanwhile, a survey

by Fidelity found that the average 2013 graduate owed $3,000 in credit card debt. Similarly, the Sallie Mae study found that average credit card debt was $3,173 (although median debt was only $1,645). These figures seem pretty daunting, except that the average American has between $5,000 and almost $8,000 of credit card debt. Of course, older adults have had more time to build up credit card debt than college students, and it’s possible that some of these debt-ridden adults began accumulating credit card debt in college. Still, it’s unclear that specifically targeting college students for credit card restrictions makes sense as a policy. By limiting student access to credit cards, the CARD Act makes it so that only students who can piggyback on their parents’ good credit can benefit from high credit scores—a concerning trend in a nation that supposedly prizes individualism. Although CARD was implemented to crack down on bad behavior by banks, it’s unclear whether the real losers are credit card companies or college students.

You’ve Got Returns

TURNING TO THE WEB FOR A NEW WAY TO INVEST by Rachel Binder

echnology continues to disrupt the financial sphere, and with the success of crowdfunding, it has become possible for anyone — no matter his or her financial standing — to join others and fund a project that they all want to support. But for those providing the funds, that’s basically where the fun ends. If the business idea or project succeeds, the only financial beneficiaries are the project creator and the crowdfunding platform (such as Kickstarter or GoFundMe). What if someone like you or me wanted to actually invest in a business idea that could potentially be very successful? Until recently, only venture capitalists, bankers, and high-net-worth individuals could buy stock in a private company. A new proposal from the SEC is about to change all that.

ALL FOR ONE, ONE FOR ALL A new proposal from the SEC called Regulation Crowdfunding has approved the sale of securities through crowdfunding. Termed “equity crowdfunding,”this new conception of investing is a differentiated approach to the crowdfunding that most of us are familiar with. Equity crowdfunding allows any individual to invest in a company. This means that no matter your income level or net worth, you can join other investors to fund startups and small businesses with the opportunity to earn a return on your investment. If the business thrives, the value in your share of the business will rise, and if the business fails, your share loses value. Rather than just providing funds to a startup or business idea - as you would using reward-based crowdfunding platforms like Kickstarter and GoFundMe — you could own a portion of that business and actually earn a return on your investment. Crucial to the potential success of equity crowdfunding is the online platform. Online platforms will provide access to a plethora of investing opportunities that individuals would not otherwise know existed. Because these platforms have a stake in the companies offering the investment opportunities, platforms are incentivized to provide accurate information and to direct investors to the most optimal investments. This establishes a more efficient marketplace, as the platform provides the necessary background knowledge that will allow ordinary individuals to make better decisions and support companies with higher potential. FUND FOR EVERYONE This new regulation won’t just better the ordinary investor - equity crowdfunding will also help startups and small businesses get access to more funds at an even faster rate. Entrepreneurs previously needed certain connections to the right venture capitalists, bankers, and angel investors. Now, with equity crowdfunding, entrepreneurs will be able to turn to the crowd for funds. It’s been estimated that utilizing this new form of investing, entrepreneurs could potentially bring in over one million dollars each year solely through ordinary individuals. Typically, venture capitalists and angel investors look to invest in companies that are located in larger coastal cities such as San Francisco and New York. The online presence of equity crowdfunding platforms will provide exposure to startups and small businesses that may have otherwise remained under the radar of investors. This could potentially expand the scope of the startup landscape and allow companies with unrecognized potential to take advantage of increased access to funds.

PERSONAL FINANCE

VIRTUAL REALITY Before it was acquired by Facebook, Oculus VR, creator of the virtual reality head-mounted display called the Rift, raised $2.5 million on Kickstarter. SAFETY FIRST Itâ&#x20AC;&#x2122;s important to acknowledge that even with this liberalization of equity funding, safeguards will still be in place. The SEC has implemented a tiered system that limits the extent to which a non-accredited investor can invest in one of these small companies. For example, those with an annual income or net worth below $100,000 can only invest up to $2,000 or up to five percent of the lesser of their annual income or net worth. These safeguards are important, and even with them in place, the ability for someone to invest even a small amount of money is

still an opportunity to earn significant returns. These safeguards apply not only to investors but also to the startups and small businesses receiving the funds. Thus, entrepreneurs and small business owners will be held to a certain standard to ensure that transactions are financially sound. With higher levels of income, these smaller companies will be required to submit financial documents and to receive auditing reviews. FUNDING THE FUTURE Online platforms such as Kickstarter

and GoFundMe have accumulated funds from individuals willing to fund creative projects and charitable causes. These platforms have provided billions of dollars to these new ideas, allowing entrepreneurs and creators to access the necessary funds to bring their ideas to life. Unlike platforms like Kickstarter and GoFundME, however, equity crowdfunding could completely change the way startups and small businesses fund themselves and could allow ordinary individuals to earn handsome rewards on the success of these businesses.

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015

Face Value

WHY THE BETTER LOOKING ARE BETTER OFF by Tiffany Chen

THE ONE PERCENT ΖQGLYLGXDOV ZLWK HQYLDEOH ȴJXUHV and blemish-freefaces also tend to enjoy an enviably larger number of zeros on their paychecks.

merican culture’s narrow perspective of beauty has transformed one’s appearance from a means of self-expression into a hot commodity. As a result, the better looking tend to be, for the most part, better off: attractive athletes will get modeling contracts in addition to getting drafted, attractive politicians receive more votes and confidence from the public, and even Cinderella and Kate Middleton rose from the depths of destitution with their

sparkling gowns and shining hair to live happily ever after on grossly expensive real estate. For the common folk, the message remains the same: looking one’s best on a day-to-day basis ultimately results in greater future financial rewards. MAKE UP FOR MONEY Professional success is partially skindeep. The term “beauty premium,” coined in a 2005 study conducted by re-

searchers at Harvard University, refers to the income gap separating “attractive” and “unattractive” people and is statistically comparable to the same income divide between genders and ethnicities, which hovers around 75 percent. In other words: the one percent of Americans with enviable figures and blemish-free faces will also see an enviably larger number of zeros on their paychecks. Part of the reason such an income disparity exists is due to the “halo

PERSONAL FINANCE

which translate into increased wages in the workplace. More specifically, women ranked more attractive than their peers make approximately eight percent more in wages, while men ranked more attractive earn four percent more. Such differences become especially important in professions where appearances mean a lot: modeling, dancing, TV broadcasting, and stripping (holding services offered and all else equal, attractive strippers earn 12 percent more than those deemed less so) come to mind. The converse also holds true: the bottom 15 percent of women on the attractive scale earn four percent less than the “average” looking woman, and the bottom 15 percent of men earn 13 percent less than the average man. At times, however, this phenomenon might be due more in part to self-selection rather than pure appearance. Among MBA graduate students, the ones who were deemed as physically attractive proceeded in disproportionately large numbers to litigation while the students sitting on the bottom rungs of the appearance ladder opted to study tax law. For those students hoping to pursue major league litigation and business, then, investing in appearances — whether through a higher-end wardrobe or liposuction surgery — can be viewed as an investment in their career.

effect”—namely, there is an implicit association between individuals’ physical appearances and their overall character. As such, submitting a more flattering portrait of oneself to a potential employer could mean a 10.5 percent higher salary offer than what the “average” employee would receive. Moreover, attractive people tend to know that they’re attractive; they thus exude greater displays of confidence and demonstrate greater social capacity,

FAKE IT UNTIL YOU MAKE(UP) IT On a smaller level of physical alteration, the effects are the same; wearing makeup (but not slathering it on in gobs) increases a woman’s likability, perceived competence, and trustworthiness. The obvious becomes even more obvious: cosmetics will boost a woman’s attractiveness, and attractiveness is correlated with other positive personality traits. As a result (and by no means is it necessarily fair), buying and using makeup for women becomes not only an investment in one’s physical appearance but also it is an investment in the goodwill and optimistic perceptions of those around them. Beauty permeates the face of politics too; many politicians diagnosed as clinically overweight—most notably, perhaps, New Jersey governor Chris Christie—have undergone drastic weight loss programs in the months preceding state elections. For Christie’s case, gastric band surgery—the physical tying off of the stomach—cut 85 extra pounds and assured his donors that he was physically fit to be president. The cost for lap band surgery ranges between approximately $9,000 and $29,000 in the United States, with the average surgery priced slightly above $14,000. Perhaps, then, the individuals who seek out plastic surgery, reductions, and enhancements in order to match America’s beauty standard

aren’t far off the beauty mark—in the long run, an investment in one’s physical appearance yields financial benefits in the professional arena. LOOK BETTER TO FEEL BETTER From an individualistic standpoint, investing in one’s appearance produces greater gains in health and self-esteem and ultimately leads to increased savings. Health economists estimate that obesity is the face behind 27 percent of the increase in overall per-capita health care spending since 1987, with obesity’s annual direct cost sitting at an extra $2,741 per individual. The average price for a personal trainer is only $50 per hour and the famed Weight Watchers dieting program is around $300. Comparing costs directly, a Zumba workout and spin class not only shed pounds but they also save medical bills in the long run; certainly many people express disdain for weight loss fad programs and diets—in the end though, the price to become healthier now is significantly less than the medical bill you will have to pay later. As a result, a healthier lifestyle and concern about physique can lead to reduced spending in the long run. In addition to the health benefits, spending money on physical appearances buys increased self-esteem. A study conducted by researchers from Ruhr Universitát and the University of Basel reported that, compared to individuals who backed out of plastic surgery, the patients who underwent it felt “healthier, less anxious, had developed more self-esteem and found the operated body feature in particular, but also their body as a whole, more attractive.” While friends and family observe the physical effects of surgery and weight loss, the individual witnesses the same superficial changes in addition to positive changes in mentality concerning body-image and self-confidence, the latter of which commonly translates into more financial opportunities and upward mobility in the workplace. Certainly in an ideal society, appearances wouldn’t mean everything and they wouldn’t systematically favor a handful of individuals over the rest. The ugly truth is that American culture’s strictly defined notion of beauty has resulted in the ability of individuals to invest in their appearances and tease the systems—professional and personal—to their monetary advantage. While considered taboo and “weak” in many cases, there is certainly a value hidden beneath the many layers of makeup and between the unwrinkled folds of plastic surgery. It is an attractive financial investment—one that shouldn’t only be taken at face value.

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015

Keep Your Hands and 401(k) to Yourself THE PRIVATIZATION OF SOCIAL SECURITY by Dean Murphy

hose responsibility is it to take care of grandma: you or the President? Regardless of whether it should, the United States government has assumed a predominant responsibility for the welfare of the country’s elderly, disabled, and unemployed. The Social Security Act of 1935 served as the first nation-wide effort to curb the financial burdens associated with old age and physical encumbrance. While the system’s structural defects have not become particularly apparent until around the turn of the 21st century, its revelations ultimately suggest the need for an alternative method of ensuring insurance and income for generations henceforth. SOCIALLY ACCEPTED NORMS The framework of the system is strikingly simple: those currently in the workforce are subject to a federal payroll tax, the weight of which is shared by both the employee and respective employer. Workers of today and tomorrow fund the income security needs of current retirees. Monetary contributions are funneled into two separate

trust funds managed by the U.S. Treasury Department: Old-Age and Survivors Insurance (OASI) and Disability

Insurance (DI). OASI funds are distributed to qualified retired workers and their spouses, while DI funds are dispersed analogously to disabled persons. These massive stockpiles of cash do not simply sit idle. In order to grow the capital into future beneficiary payments, the U.S. Treasury is in charge of allocating the money to specific investment assets. The investible universe is constrained to government debt securities. These bonds ensure that a general rate of interest is earned on the money invested on a riskless basis. As of September 2015, a total of $2.8 trillion dollars were invested in government debt with a weighted average rate of return of 3.245 percent and 7.779 years remaining until maturity. THE TIPPING POINT While Social Security has become an integral part of retirement for hundreds of millions of Americans since its inception, it has not come without a multitude of shortcomings. In order to remain financially solvent, OASI and DI depend on consistently strong population

PERSONAL FINANCE

“

While Social Security has become an integral part of retirement for hundreds of millions of Americans since its inception, it has not come without a multitude of shortcomings. and workforce growth rates in order to replenish fund reserves. These conditions were met throughout the early 20th century, up until around the turn of the century. Baby Boomers adequately financed the social security system during their working years, but the rapid workforce growth rate following the war did not persist. An ensuing solvency crisis has characterized the past several decades. While cash inflows currently exceed outflows into the trust funds, this will not be the prevailing trend within the following decade. Somewhere around 2025 we will hit a point of inflection and by 2033 or 2034, the funds will be rapidly depleted. The United States will surely honor the promises of retirement income even if the funds are exhausted. Regardless, the current accounting trend is unsustainable in the longterm. Prolonging the retirement age or reducing monthly benefits does not solve the underlying structural problem. Long-term solvency is not the only underlying problem. Monthly payouts from the OASI fund are primarily insufficient to cover the general costs of retirement living. According to the Social Security Administration, the average monthly benefit for an eligible retired worker in the United States is $1,335. On an annualized basis, this equates to approximately $16,000, which is only $4,000 above the poverty line for a single person household.

”

cut costs related to the administration of Social Security and provide higher rates of return on investments. In fiscal year 2014, the SSA spent nearly $12 billion in order to keep the system running. A vast majority of the administration’s funding is directed toward administrative expenses, which involves everything from running health-related tests to determining benefit eligibility for millions of Americans. A gradual transition to a privatized system would save taxpayers billions of dollars in the long run. Wealth advisors and large investment corporations, both of whom take a different approach to growing money over various stages of a worker’s life, are more effective in managing 401,000 accounts and maximizing

overall returns for investors. These players’ strategies typically allocate savings to high dividend and growth equities early in the investor’s life, followed by a gradual shift to fixed income investment vehicles as workers approach retirement. Private individuals and organizations can also adopt a life insurance-based investment approach. Permanent life insurance, in addition to paying out a pre-determined sum in the event of a death, also consists of a cash value component that grows over time and can liquidated and used as income during retirement. The returns of these types of investments are typically not correlated to the market, and so do not face as much risk as traditional equities. The ultimate objective of reform is to prevent the insolvency of government-run social security in the United States and maximize investment returns for working Americans. A dual-model that fuses free-market qualities with the current system could improve overall efficiency and satisfaction with the system. Privatization would also have its shortfalls, especially for chronically low savers. Keeping some government aspects, particularly redistributive aspects, would help ensure some minimum level of income for those in the bottom income bracket. Despite the good intentions of public social security, there is much room for improvement. The current system could benefit with the integration of free-market principles.

KEEP YOUR HANDS AND 401(K) TO YOURSELF An alternative system, one that incorporates elements of an individual 401(k) model into the current payroll-based tax-funding model, would

A SELF-IMPOSED STATE OF SURVEILLANCE Do Location Tracking Apps Actually Keep You Safe?, Katharine JessimanKetcham 29

Photo by Cadence Lee

STARTUPS & TECHNOLOGY

THE BIGGER, THE BETTER What is Big Data and Why does it Matter?, Angela Marie Teng 28

Bubblelicious?

DON’T HOLD YOUR BREATH FOR TECH’S BIG POP by Soham Bhatia Photo by Cadence Lee

LOOK MA, NO HANDS! The Inevitability of Autonomous Driving, Srinivasa Dheeraj Namburu 30

BIG SHOES TO FILL Sneaker Startups, Thomas Abebe 32

SHEDDING LIGHT ON SOLAR CITY The Next Giant in Energy or Bound for Failure? Varun Khurana 33

THINK TWICE NEXT TIME YOU SEE AN AMBULANCE 7KH 5LVH RI 7UDIĆ&#x201C;F $QDO\WLFV From a Niche Market, Benjamin Winston 34

HOTEL CALIFORNIA AirBnB and San Franciscoâ&#x20AC;&#x2122;s Battle over Taxes, Liz Studlick 35

f something goes up, must it always come down? According to Isaac Newton, it should. Then again, Newton also said, â&#x20AC;&#x153;I can calculate the motion of heavenly bodies, but not the madness of people.â&#x20AC;? He would be horrified, like many others in tech industry, to hear of current valuations for unprofitable startups, like $10 billion for WeWork, the physical workspace rental company, or Jet.com, the wannabe Amazon, valued at $1.5 billion. In heady times like these, the term â&#x20AC;&#x153;bubbleâ&#x20AC;? is often thrown around, with investors simultaneously handing over money and anticipating disaster. But in times of uncertainty, taking a closer look is often warranted. WELCOME TO THE INTERNET The turn of the twenty-first century was a time for madmen. Companies like Worldcom and Pets.com capitalized on Internet hype with attractive names and nonexistent earnings, before crashing back down. It is easy to think the same is occurring today, as the S&P technology index is approaching its 2000 high, but current valuations are based on earnings growth, not irrational exuberance. Furthermore, the Internet has come into its own. Instead of being used by a small slice of the population, itâ&#x20AC;&#x2122;s become ubiquitous in developed countries. Greater connectivity allows for increased sales for e-commerce companies like Amazon, consumer oriented companies like Apple, and enterprise software providers like Oracle. The Internet plays an intimate role in our daily lives, from telling us where to go, what to do, and who to meet. Its pervasiveness and convenience has made us completely reliantâ&#x20AC;&#x201D;to the point where if we canâ&#x20AC;&#x2122;t momentarily order food online, Armageddon is nigh. The Internet is here to stay.

POP! With valuations for tech FRPSDQLHV WKLV LQČľDWHG LV WKH market overdue for a violent correction?

FOMO OR NO DOUGH? With 61 unicornsâ&#x20AC;&#x201D;or private companies valued at $1 billion or moreâ&#x20AC;&#x201D; Silicon Valley is swimming in cash. The dearth of tech IPOs has forced investors to sink their money into private markets, with 80 percent of all funding now being done at the private level, leading to massive late stage rounds that draw incredulous headlines. Due to this shift away from public markets, these late stage fundings are less like the risky investments of the dot-com boom and closer to repackaged IPOs. The most important ramification of this paradigm shift is the transition in returns. Public investors could have received a 50x return on investment with companies like Microsoft if they invested in their IPO. By the time current companies reach that stage, venture capitalists and other

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015

private investors have already enjoyed the fruits of their money, cashing out in private rounds. Companies that cater to retail investors, like Vanguard and Blackrock, have moved into unicorn hunting by participating in 75 percent of the top 20 tech deals in the past year; additionally, individual investors have dipped their toes into equity crowdfunding with platforms like AngelList. LESSONS LEARNED Capital is being allocated much differently than it was in 2000. Funding is going to the companies with disruptive business models, loyal customers, and innovative management teams. Later stage, more mature startups, like Uber and Airbnb, are receiving 80 percent of current funding. versus only 45 percent in 2000. Deal volume for these older companies is also far outpacing younger ones by a magnitude of two to one. Investments are based on proven revenue and growth rather than wild predictions. Most importantly, the cost to start a company is incredibly low. Services like Google Drive, Slack, Amazon Web Services, and Salesforce platforms have brought down startup costs from hundreds of thousands to tens and even less. This is unprecedented, and it will only become lower. Ultimately, we are residing in one of the most promising times in human history. It is impossible to predict the direction of public and private markets, but one must understand that ups and downs are natural and healthy; crashes and panics are largely psychological and can be managed with increased investor intelligence. Enjoy the ride.

The Bigger, The Better

WHAT IS BIG DATA AND WHY DOES IT MATTER? by Angela Marie Teng

ech’s hottest buzzword seems to be popping up everywhere, from corporate employees on Wall Street, to tech-experts in Silicon Valley, to the typical student at university, taking with it an air of confusion and misperceptions. Big data is a complicated concept, with different companies and corporations using a variety of definitions. Generally, however, it is a “collection

The 3 V’s of Big Data

V(olume)

Big data allows processing of larger amounts of information which was unheard of before

V(elocity)

Big data LV DEOH WR GHDO ZLWK IDVW SDFHG ȵRZV of information

V(ariety)

Big data comes in a variety of channels such as social media, audio, email, video, etc. of data from traditional and digital sources…that represents a source for ongoing discovery and analysis,” according to Forbes contributor Lisa Arthur. The concept of big data, although elusive, is often used to describe unstructured, usually text-heavy, and multi-structured data, which can come in a variety of formats. Big data allows the analysis of these data formats, including Facebook posts, tweets, and YouTube comments, giving data scientists, bankers, and businesspeople new insight. THE THREE V’S AND MORE The increased accuracy of analyses through the use of big data has allowed many companies and financial institutions to be more confident in their decision making. Related to this increased efficiency are the so-called “Three V’s of Big Data Definition”: volume, velocity, and variety. VOLUME Big data analysis allows users to deal with large volumes of data, whether that be social media streaming, transaction-based data, or machine-to-machine data. In the past, analyzing such a large amount of data would require enormous costs. Today, data storage costs come at a much lower, and sometimes even free, price. VELOCITY As internet speed increases and data streaming comes at unprecedented rates, companies and financial institutions need to have the tools to be able to react quickly enough to the influx of data. Big data serves as an excellent instrument that has created multiple breakthroughs by its ability to deal with fast-paced flows of information.

VARIETY Moreover, with the numerous channels data surges in today, including online social media, numeric data, unstructured text documents, email video, audio, and financial transactions, corporations are tasked with managing and consolidating all that information, whether it’s for market research or product creation. Again, the tried and tested method of using big data techniques has served beneficial for this cause. THE DATA REVOLUTION These characteristics of big data give it the capability to transform various aspects of society, including business, government, education, and the economy. With the increased ability to deal with larger data sets, companies and researchers will be better equipped to measure, track, and describe economic activity and relevant statistics. It is common belief today that over the next few decades, data will change the landscape – increasing efficiency and providing more informed policy-making. While the impacts of big data are numerous, one of its most important benefits is increased accessibility to information. Having the ability to store and analyze a large cloud of data, and at any time being able to pull out specific information could have various implications on many sectors. In a healthcare setting, this would allow for increased collaboration between doctors and researchers, creating more accurate patient assessments and innovative treatments. In the education sector, big data could increase educator effectiveness via consolidated and more accurate assessments and deliver education tailored to individual students and needs through achievement evaluations and the incorporation of technology. In many companies and financial institu-

STARTUPS & TECHNOLOGY

tions, big data is currently being used to conduct more thorough and large-scale market research to better suit products to customers’ needs. WITH BIG POWER COMES BIG RESPONSIBILITY But big data has its risks and limitations. Many big data tools can be sidestepped. For example, education programs used for grading student essays can often be circumvented by writing longer sentences with more highfaluting words to achieve a higher grade, even though the teacher countercheck would garner much lower scores on such tactics. In other words, big data, and technology in general, cannot substitute all human services. Rather, it complements individual functions by increasing productivity at a much lower cost. Moreover, big data analysis results may not be as robust as expected. Data models are prone to error, and thus are in need of constant tweaking and re-tweaking as technology and the avenues for data transmission advance. As Geoffrey Moore said, “Without big data analytics, companies are blind and deaf, wandering out onto the web like deer on a freeway.” There is no doubt that big data will play an important role in the future, particularly with the increase in our use of data and the number of channels through which we access and transmit them. With data being woven into more and more facets of our lives, big data will be an essential tool to continue to make sense of all this information. The use of big data could be the new competitive advantage.

A Self-Imposed State of Surveillance

pulsively update your roommate via text on your whereabouts. Increasingly, the solution to anxiety-inducing experiences, such as walking home alone, is self-enforced tracking, the sharing of your every movement. But besides dissipating fear, do surveillance apps actually keep you safe? A VIRTUAL ESCORT HOME Created by five students at University of Michigan and launched on August 19th, 2015, Companion lets friends virtually walk you home by monitoring your progress via GPS. While initially conceived of as a resource for students navigating their way around campus at night, the app boasts half a million users who have broadened its uses. After entering your destination, users can choose which of their contacts they want to add as a trip Companion. If a user starts running, does not arrive at the destination in time, has their headphones removed from their phone, or the phone falls to the ground, the app will go into alert mode. From there, the Companion user can call 911 and the user’s location will be shared automatically. The creators of Companion acknowledge that the universal appeal of their app lies in “the emotional chord” it strikes with people: “We all want someone to have our back.” That mission however, begs the question, is the safety felt by users a psychological placebo or can this app really save you from danger? At the moment, co-founder Lexie Ernst tells Fortune, “We have no concrete examples of someone being saved by our app.” THE MARKET FOR FEAR Companion is just the newest in a slew of tracking apps geared towards college students. “Circle of 6” sends a message

with a map and GPS location to a group of six contacts if you are in danger. “bSafe” installs a red button on your screen that, if pressed, sounds a siren and starts recording video. “Panic Guard,” which can be activated just through tapping or shaking your phone, alerts police and contacts of your location. “KiteString” notifies emergency contacts if a user does not arrive at his or her destination. To be sure, all of these apps provide a valuable service, but, through and through, the chief promise attracting new users seems to be the peace of mind they offer. As far as research goes, very few of these apps have yet to report an incident in which their widgets have actually intervened and saved a user in the face of danger. Moreover, user testimonials are murky, praising the feeling of protection one gains from the apps but lacking any concrete examples of instances in which a user was shielded from attack. Their popularity appears simply to be indicative of a culture convinced that surveillance equates to safety. From iPhone apps that track you as you walk home to nanny cams that can monitor every room of your home to spouse-tracking widgets to ease suspicions of infidelity, we’re tracking ourselves with the near-vigilance of trained operatives and erecting a network of personal monitoring far beyond anything imagined. Hysteria has always surrounded the unknown and uncontrollable, and technology has always capitalized on that fear by attempting to close the gap between what we know and do not know. The fallacy of these recent personal tracking apps that promise to make you feel safer is that there has yet to be any evidence that they do anything besides that.

SAFETY FIRST Companion comes equipped with panic buttons and safeguards, but is it making students safer?

DO LOCATION-TRACKING APPS ACTUALLY KEEP YOU SAFE?

by Katharine Jessiman-Ketcham

e’ve all experienced it at some point or another — you were at a party off campus for the night or stationed at the Rock cramming into the wee hours and suddenly it’s 2 a.m. and you’re walking back to the dorm all alone. You pass that unlit corner, a gust of wind whips around you, and your nerves kick in. Maybe you pick up your phone and pretend to talk to someone on the other end or perhaps you com-

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015

Look Ma, No Hands!

THE INEVITABILITY OF AUTONOMOUS DRIVING by Srinivasa Dheeraj Namburu

STARTUPS & TECHNOLOGY

how ludicrous this system of transportation is, one has to acknowledge that it is integral to growth in our society. Transportation is a mainstay of the economy, accounting for 10 percent of the US’s GDP, but this isn’t the whole story. Imagine a world where modern transportation didn’t exist. Almost every other economic structure would collapse around us. How would you get your sweater in two days from Amazon Prime or fresh vegetables year-round at the grocery store? While the US recognizes the importance that the transportation industry is to its economy, it also recognizes that the average age of its bridges is 42 years and the state of our roads costs Americans $101 billion in wasted time and fuel annually.

TOO COOL TO HAND(LE) The future of driving will be hands-free.

t’s been 108 years since Ford’s Model T was put into production. Throughout this century, engineers have been able to add modest features like Bluetooth connectivity, satellite radio, and seat warmers to our cars, but little has been done to alter the fundamental nature of the driving aspect. Most of us still get into a metal box that is constantly pressurizing and exploding gasoline under our seats while a driver tries to navigate busy intersections with other unskilled drivers on roads with potholes a-plenty. As we begin to realize

CRUISE CONTROL While infrastructure development is a lengthy, costly, and politically divisive issue, increased automation is a relatively easy way to drive the US towards a more sustainable economy. Increased investment in modes of transportation and infrastructure can lead to a thriving economy. By innovating in the automated control of cars, ships, and trains while simultaneously investing in our roads, seaways, and railways, the United States can create a sustainable avenue of growth by freeing resources, once needed to transport goods, to other services. One only needs to look at the creation of the US-Interstate Highway system to see the benefit gained from an investment in our transportation industry. With government inaction, the only avenue left to pursue is the private sector, where big tech companies like Tesla and Google, combined with startups turned big businesses like Uber and Lyft, come into play. Automated cars are not science fiction, with Tesla stating that the completion of their technology will take only six more years to complete. Products like Tesla’s Model S represent an efficient, sustainable, and safe alternative to an internal combustion engine, and as of October 14th, the Model S can steer itself on the highway. The next evolution comes when cars can perform all the necessary operations that a normal car can perform such as parking, driving on all types of roads under any weather condition, and communicating with other drivers, a truly automated car. Now, where does this puzzle piece fit into the jigsaw puzzle that is America’s dilapidated road system? DRIVING CHANGE The enabling of autonomous driving would transform the current landscape

of this industry. Autonomous vehicles will enable efficient transportation of goods and effectuate decreases in road congestion stemming via ride-sharing and efficient driving practices. While, many would opt to purchase their own car, the rise of ride-sharing will propel the automobile rental market, to the point where in the long-term that people will eventually stop buying cars and simply use ride-sharing services as they would be cheaper and less onerous. Autonomous vehicles could prevent the 10 million car crashes that occur every year in the United States while generating $642 billion in welfare, assuming “$317 billion from fatal crashes, $226 billion for non-fatal crashes, and $99 billion in time savings,” according to Adam Ozimek’s analysis in his Forbes piece The Massive Economic Benefits of Self-Driving Cars. This number doesn’t even account for industrial transportation or decreased costs of maintenance, insurance, and fuel. ROAD-BLOCKS While the benefits listed sound incredible, our expectations must be tempered; there are roadblocks and challenges to consider if these technologies are brought to market. The first roadblock: regulatory impediments caused by government officials can delay legal framework needed for the use of autonomous vehicles in daily life, increasing the burden on companies who have already incurred great losses in research and development, and thereby decreasing the incentive to create these products and bring them to market. Similarly, the transportation industry employs some 20 million people in the US and the loss of these jobs, though staggered, would result in a reshuffling of the job market as these people search for work in other sectors. While overall economic efficiency would grow in the long term, the gains in the short run will not be as great. Resistance from workers could be enough to delay this technology from reaching the market. However daunting the challenges may seem, automation is the path to the future. With American firms leading the international market, it would be prudent of not only the American government, but also its people, to support these emerging technologies. Google already has a self-driving car on the streets; Tesla has demonstrated initial technologies on its existing car models. Even long established automotive companies are getting in the game: Toyota has earmarked one billion dollars for autonomous driving research. This technology is just around the corner.

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015

Big Shoes to Fill SNEAKER STARTUPS by Thomas Abebe

neakers were once simply shoes designed for sports and other forms of physical exercise. However, with the advent of innovative marketing tactics and increasingly advanced footwear technology, sneakers have become a global obsession. Sneakers became an icon in pop-culture and fashion through hip-hop music and basketball. The 1980s rap group Run-D.M.C and Michael Jordan helped bring Adidas and Nike into the mainstream. The recent launch of Yeezys, a line of sneakers designed and endorsed by rapper kanye West, proves sneakers’ cultural dominance. The Yeezy Boost 350, a sneaker that was released by Adidas on June 27, 2015, retailed for $200. Moments later, they were all sold out. According to Campless, a sneaker data company, the average price for those Yeezys is now $834. Such an appreciation in the secondary market illustrates how much the demand for sneakers dramatically outpaces the supply. Yeezys are not alone in this regard. Other sneakers such as Jordans, LeBrons, and KDs are all money-making machines. For instance, in 2012, Nike’s line of LeBron James’s sneakers raked in $300 million in the U.S. alone. The secondary market for sneakers in 2014 was valued at over $1 billion. Overall, Forbes reports that in 2013, the sneaker business in the U.S. was $22 billion—a 30 percent growth in less than a decade. To say that the sneaker industry is high-

ly lucrative is an understatement. PASSION FOR FASHION Money is not the only thing abundant in the sneaker industry. What’s even more abundant, and arguably more important for future startups, is the amount of passion people have for sneakers. People camp outside of stores days before the release of sneakers—often on a weekly basis. Stores have been broken into, people have been robbed, and there have even been cases of murder involving sneakers. This passion for sneakers that people have, if tamed correctly by startups, can be used to attract and retain millions of long-term users. For a startup to be successful in a market, there are a couple of conditions that have to be met. The first is the existence of a large addressable market, which sneakers clearly has. Another important factor for success is the prevalence of passionate and devout customers. The sneaker industry has “sneakerheads,” which Wikipedia defines as “a person who collects, trades, or admires sneakers as a hobby.” Despite these conditions, the multi-billion dollar sneaker industry is a multi-billion dollar market that has only seen the emergence of few startups, which quickly attracted the attention of prominent venture capital firms. SOLE MATES Campless is a company backed by Detroit Venture Partners that collects and analyzes sneaker price data. With the growing number of people interested in sneakers, Campless recognized the need to collect and analyze sneaker data to get a better understanding of the market. Another sneaker startup in this space is Chronicled, which has raised $1.4 million in seed financing to create a technology for reliable and secure authentication of sneakers. ChroniGRAB A PAIR Startups are surging into the sneaker market.

cled is solving one of the most crucial problems that exist in the sneaker market:the prevalence of counterfeits. Air Goat, an Andreessen Horowitz backed startup, provides a platform for buying and selling sneakers. Air Goat realized that the majority of the buying and selling of sneakers either takes place on eBay or other fragmented platforms. Their vision is to provide the best buying and selling platform so that the secondary market is less fragmented. Another startup improving sneaker transactions is Sneaker Connect. Whereas Air Goat is for buying and selling sneakers, Sneaker Connect is for trading sneakers—which happens to be a common form of transaction in the collectible sneaker market. Sneaker Connect is the first app on the market to provide a platform where sneakerheads can find and trade sneakers safely. (Disclosure: I co-founded Sneaker Connect with a friend in the spring of 2015.) It’s not too late. There is still a huge opportunity in the sneaker market for new tech companies to come in and disrupt the industry. Market conditions are ripe for sneaker-related startups. All you need is a good idea and a sweet pair of kicks.

Shedding Light On SolarCity THE NEXT GIANT IN ENERGY OR BOUND FOR FAILURE? by Varun Khurana

ollowing the death of Steve Jobs in 2010, the most recognizable face of American innovation has become, ironically, South African entrepreneur Elon Musk. Musk has been vaunted as a revolutionary, primarily due to his role as CEO of Tesla and SpaceX, two companies which aim to solve large scale transportation problems through efficient solutions. However, rarely discussed in the conversation about him is SolarCity, a company chaired by him and run by his cousins. Over the last decade, the company has become the largest residential solar provider in the world in an industry that could revolutionize the way we consume energy in the future. “Solar will be the single largest source of electricity generation,” Musk told Big Think. “People do not understand the magnitude of [SolarCity]. It’s really very, very significant.”

STARTUPS & TECHNOLOGY

A BEAM OF LIGHT IN A DYING INDUSTRY SolarCity was founded in 2006 by brothers Lyndon and Peter Rive at the suggestion of their cousin Musk. When the company was founded, the technology for solar power existed, but the high capital costs required for panels and lack of concern for climate change from the American public made the industry highly unattractive. In 2006, solar power accounted for only 0.01 percent of total energy consumed by Americans. The market was so small and fragmented that by 2007, one year after launch, SolarCity had already become California’s largest solar provider. “We’re building the industry,” Lyndon Rive remarked to Time in 2008, which reflected both the sad state of alternative energy and the potential for SolarCity to grow. In 2006, a remarkable event changed the alternative energy industry forever: a low-budget documentary featuring former Vice President Al Gore giving a series of talks on the potential dangers of climate change spread like wildfire, giving many Americans concern about their dependence on non-renewable energy such as gas and coal. This increased interest in alternative energy from the public, combined with friendly tax credits from the government, caused an influx of participants in the industry. However, in 2011, the solar industry was dealt a massive blow: Solyndra, a panel manufacturer backed by 300 million dollars from the American government, went bankrupt. “People make a big deal about Solyndra and everything, but there’s a lot of [private venture capital] that got torched right alongside the (Department of Energy) capital,” Michael Morosi, an analyst at Jetstream Capital LLC, told Bloomberg News. Terrified private investors fled the industry, which for the capital-intensive solar industry, resulted in the bankruptcy of several companies and fear for new entrants. SUB-PRIME LENDING COMPANY OR FINANCIAL GENIUS? The primary controversy over SolarCity has been whether the company’s financing model is sustainable over time. Instead of signing short-term fixed rate contracts to protect themselves from fluctuating market conditions, consumers sign a 20-year contract with no upfront costs at a constant per watt rate over the life of the contract. This enables consumers to immediately start saving and for the solar company to gain a steady stream of revenue over an extended period of time. The solar power system is still owned by the company, which provides maintenance and repairs on the equipment. During times when the

SPOTLIGHT’S ON YOU SolarCity’s business model relies on installing solar panels on customers’ homes—and signing them up for a 20-year contract. sun is not out, residents automatically purchase power through their local utility grid at their agreed upon rate. By law, any excess power created by the solar system is automatically sold back to the utility company at their regular rate, which helps to partially cover the costs of the extra utility power being purchased. This concept is referred to as “Net Metering.” Since the company gets revenues at a slow but constant rate with no upfront payment, they need short-term money to help fund future expansion. SolarCity has started to issue bonds at a 4.4 percent interest rate that are backed by the 20-year contracts. This resembles the model created between commercial banks and Wall Street investment bankers, where the commercial banks package some of their mortgages and put them in bonds that are then held and sold by the bankers. These bonds are referred to as “asset-backed securities.” When owners begin to default on risky mortgages (referred to as subprime mortgages), these bonds become illiquid and almost worthless, which was one of the primary reasons for so many investment banks failing during the financial crisis of 2008. Famed short-seller Jim Chanos, who was one of the first investors to put a huge bet against Enron, used this model as justification for shorting SolarCity. “SolarCity is really a subprime financing company in effect... [SolarCity] put[s] [the panel] on your house and they collect the lease payments. So in effect, if you put on the panels you have a second

mortgage on your home because you hope it’s an asset, but in many cases it turns into a liability,” said Chanos. LEGITIMATE RISK OR MISUNDERSTANDING? According to Rive, this represents the biggest misperception about the company. “Our average FICO [credit] score for our customers is 740,” remarked Rive. “How can we can be a subprime financing company if none of our mortgages are subprime?” SolarCity’s stock price has fallen nearly 74 percent over the last year, primarily due to a strong correlation with the rest of the solar market and concerns about this business model, highlighted by motivated short-sellers like Chanos. However, evidence shows that SolarCity is just a victim of ignorance. A poll of 16 sell-side investors from major banks shows that none have a sell rating on the stock, indicating that industry experts believe that the company is simply misunderstood. If the equity price of the company remains stable, there is good reason to believe that the company can change the world. SolarCity controls over 40 percent of the total solar residential market and currently offers prices almost $0.02 less per watt than traditional energy companies. THE FUTURE SolarCity’s future looks brighter than ever today. They have announced a more efficient panel which will help consumers save even more money on their energy

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015

bills. They’re also working to use Tesla’s battery pack model so that energy from the sun can be stored even when the panels are not directly exposed to sunlight. For the rational consumer, there is almost no reason not to switch to these solar panels, especially as they get increasingly cheaper than traditional energy. Even though it is his least talked about company right now, SolarCity might eventually be the company that brings Musk closest to his long-time goal of revolutionizing the world. With solar panels powering every home, we can look forward to a day where gas and coal are almost never needed, and you can bet that SolarCity will have played a huge role in making it happen.

MOVE ALREADY 7UDɝF RQ FURZGHG VWUHHWV OLNH WKLV FRXOG EH HDVHG E\ WUDɝF analytics.

Think Twice Next Time You See an Ambulance

THE RISE OF TRAFFIC ANALYTICS FROM A NICHE MARKET by Benjamin Winston

ong lines at traffic lights and commotion as cars make way for speeding ambulances are daily occurrences. These inconveniences are unsettling, sometimes even dangerous. Drivers waste many hours each year waiting in traffic. Even more disturbing is the fact that speeding ambulances attempting to maneuver through traffic crash on average 11 times a day. However, a recent partnership between Miovision Technologies, Ecopia Technologies, and Brisk Synergies may alter the way we analyze traffic data and minimize the impact of traffic in our daily lives. BUMPY ROADS Data analysis forms the foundation of many industries, from drug testing to creating major league baseball lineups. Even when we decide which movie to watch, we compare online ratings and reviews. However, comprehensive data analysis is lacking in the field of transportation infrastructure. Kurtis McBride, CEO of Miovision, explained in an interview with Reuters, “Urban planners and transportation leaders need living, breathing visualizations of their cities to be able to plan for the future and adjust for short-term problems.”

While the construction of roadways or bridges requires maps, models, and numerous simulations, these statistics are rarely updated following the completion of the project. Currently, cities rely on the roadside collection of traffic data and manual calculations. Officials struggle to gain a comprehensive and up-to-date understanding of transportation systems with this costly, burdensome method. Through the partnership between Miovision, Ecopia, and Brisk, new software will be added to existing systems and data collection will become automatic. Data will enable cities to not only maintain and monitor their roadways, but also facilitate the reparation rather than reconstruction of thoroughfares. BUILDING NEW BRIDGES Working together, Miovision, Ecopia, and Brisk can now expand the usefulness of their existing technologies. Combining Miovision’s video collection units with Brisk’s analysis programs and Ecopia’s satellite imagery of city streets, devices plugged into traffic cabinets can now quickly convey information regarding traffic flow. The new partnership stems from years of research at Waterloo University. Recently, Miovision raised $30 million in its Series B round of funding. With the tens of millions of dollars these companies have raised, they plan to

focus on understanding, monitoring, and visualizing change. Through monitoring, engineers learn about current traffic conditions and can make crucial decisions to resolve traffic congestion. Urban planners can research and design the most efficient and effective paths and infrastructures for vehicles and bicycles. Implementing visual imaging, engineers will facilitate the flow of people between public spaces such as highways and intersections. With the newly developed technology, traffic lights can more easily be changed to help emergency services arrive at a location faster and officials will be able to note which intersections are dangerous. Citing reports from the U.S. Federal Highway Administration, McBride foresees Miovision’s Scout cameras, which count cars passing underneath lights, reducing traffic by 10 percent in the United States. Following in the shadows of Silicon Valley, the incorporation of technology with transportation infrastructure reveals an untapped market. Gartner, an American information technology research firm, foresees the global transportation IT market surpassing $150 billion within the next three years. Although traffic analytics may seem like a niche market, Miovision, Ecopia, and Brisk are striving to move it into a mainstream part of the technologically connected world of today.

STARTUPS & TECHNOLOGY

tech companies physically based in San Francisco but legally based in Delaware. Increasingly, however, companies have chosen to incorporate abroad to dodge federal tax. In 2014, Apple made headlines when it was discovered the tech giant avoided paying $9 billion in taxes in 2012 by strategically locating assets on paper in Ireland, which charges a 25 percent tax rate compared to an up to 40 percent tax rate in the US. Though some of their activities may be sketchy, legal tax avoidance is a way of life for most companies, and lobbying for lower taxes or reincorporating in different places is common. After all, if you could pay less, why wouldn’t you?

Hotel California

AIRBNB AND SAN FRANCISCO’S BATTLE OVER TAXES by Liz Studlick

his October, when San Francisco-based company Airbnb put up ads around its hometown, it didn’t highlight its two million home-hotel listings across over 190 countries. Nor did it showcase its estimated sixty million guests or unique properties ranging from castles to houseboats. Instead, the company picked its most recent tax bill. Dear San Francisco, Last year, our guests and hosts brought over $12 million in hotel taxes to the city. Love, Airbnb The other ads took a similarly cheeky approach, recommending that the city use the money to pay off expired parking meters, extend library hours, or buy burritos. For California residents watching rents skyrocket thanks to services like Airbnb, these seemed like tone-deaf appeals in the run-up to a November ballot on limiting the length of stays on the service. Though the company quickly took them down and issued an apology, the question remains: why did the company feel like it deserved credit for paying its fair share? A TALE OF FEW CITIES Silicon Valley is a story of innovation, of rugged, brilliant men coming up with history-changing ideas in garages. It’s also a hidden story of land development and tax revenue. Some of the first startups, including Hewlett Packard, were leased out of Stanford Industrial Park, which offered low-interest leases to high-tech tenants. As the tech industry grew from nascent military-industrial startups like General Electric and semiconductor manufacturers to the huge companies of the dot-com boom, new companies clustered in the peninsula below San Francisco. This wasn’t random: financial incentives like cheaper land and a lower property tax rate led companies from Google to Apple to base their operations south of the city. By basing operations in smaller cities like Menlo Park and Cupertino, tech companies avoided paying revenues to larger cities like San Jose, which

SOMEONE’S SALTY Airbnb’s recent ad campaigns sparked public controversy. found itself almost left entirely out of the thriving tech industry despite serving as a home for many employees. The city has been forced to cut resources for police, fire departments, and roads despite nearby areas flourishing. San Jose is the tenth largest city in the country at night; however, it’s only thirteenth during the day, due to the massive efflux of workers to neighboring towns. SUBVERSION BY INVERSION Local cities also miss out on taxes in a different way: corporate inversions. Where a company is technically incorporated, regardless of where its physical headquarters are, dictates its corporate tax rate and to whom it gets paid. While local workers may be paying an income tax to state and federal governments, the company itself only owes taxes to where it’s located. In many cases this is Delaware, which keeps a low corporate tax rate and provides big protections for companies. Airbnb is among the many

TAX CITY Beyond the taxes Airbnb avoids paying to the city of San Francisco, however, is one exception: hotel taxes. These are usually levied against, obviously, hotels, and the company initially argued that since it is a platform for rentals, it shouldn’t be taxed as a hotel. This past February, it was revealed that Airbnb owed “tens of millions” in back taxes for its rental activities in the city. Though they eventually paid up, the back taxes threatened to become a major issue, with longtime residents watching what they perceived as an entitled tech company wriggling its way out of paying its fair share. Though these companies may provide important economic growth for the area, that doesn’t mean they can shrug off taxes. Airbnb, much like Uber, has argued that their product represents a new kind of service that can’t be explained by the old models—which means, conveniently for them, that the same regulations don’t apply. Through the ad, Airbnb hoped to highlight its compliance and its corporate citizenship, arguing that they too loved the city and hoped to help it grow. The timing—immediately before an important ballot on limiting long-term rentals through the service to 75 days—suggested that the company felt the area owed it something for its influx of cash. Do things our way, the ads seemed to say, and we’ll keep the tax money flowing in. Though this battle may be front-page news for San Francisco, the subtle ways that tech companies have historically subverted taxes often go unnoticed. Airbnb won the vote immediately after the controversial ads, staking a further claim on the city. However, for a brief moment, residents seemed to be sending a message: Dear Airbnb, You’re not special for paying your taxes. Love, San Francisco

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Bring it On

NFL CHEERLEADERS FIGHT FOR SALARY JUSTICE by Sarah Park

BUILDING A BRAND WITH SOUL Inside SoulCycle’s Success, Kathryn Scott 38

PRODUCT MANAGEMENT How Product Managers are Trying to Combine the Best of Two Worlds, Robert Ju 38

DON’T YOU CA PROBLEM HERE How the Drought in California Affects the Rest of the Nation, Adrija Darsha 40

THE GAP Weighing the Options of Post-Graduation Gap Year, Brian Tung 41

HOW TO GET AN INTERNSHIP AT A STARTUP Using Your Network to Land Your Dream Job, Haris Memon 42

t is no secret that the NFL is one of the most profitable organizations in America today. With over $12 billion in revenue in 2014—a nearly 16 percent increase from 2013—the NFL’s revenue eclipses that of many major companies such as Netflix, Buffalo Wild Wings, and Adobe. However, despite the high profitability of the NFL, it has recently come to light that one group of its employees has blatantly been excluded from a share of the gains: the cheerleaders.

THE BEST DEFENSE IS A GOOD PROSECUTION NFL cheerleaders are moving the battle from to gridiron to the courtroom.

THE BASE OF THE PYRAMID NFL players, coaches, and members of management are compensated more than generously, and their respective salaries have increased at exorbitant rates in recent years. Last year, NFL commissioner Roger Goodell received over $44 million, representing a more than four-fold increase in pay since 2004 when Paul Tagliabue held the position. Although there is a $143 million salary cap, many NFL players are among the highest paid individuals today. The five highest paid NFL players each earned over $27 million from June 2014 to June 2015 alone, with Pittsburgh Steelers quarterback Ben Roethlisberger earning the most at a staggering $49 million. With Goodell’s goal to increase revenues to $25 billion by 2027, it looks like the future only holds an upward trend in pay to players. In stark contrast, NFL cheerleaders are often not even paid the minimum wage. Appearing at charity events and mandatory off-field appearances, practicing several times during the week, and attending every game—rain or shine— are just a few of the tasks that NFL cheerleaders must perform. Although it may look glamorous, being a NFL cheerleader has recently been exposed for being one of the most grossly underpaid professions, not just in the NFL, but in the entire country. An Oakland Raiders cheerleader was paid a meager $125 per game in addition to being forced to pay out of her own pocket for a myriad of expenses such as travel, mandatory promotional events, or photo shoots. Similarly, a cheerleader from the Tampa Bay Buccaneers was only paid $100 per game. When calculated on a per-hour basis (including time spent in practice and other hours beyond the standard gameday commitments), these cheerleaders are often being paid no more than $3 an hour. Given the enormous time and physical commitment that cheerleaders sacrifice to the NFL, in addition to the

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015

“

When calculated on a per-hour basis, these cheerleaders are often being paid no more than $3 an hour.

profits that they help generate, there is no excuse for the deplorable wages that they have been paid. In fact, Eric Smallwood, senior vice president at Front Row Marketing, estimates that TV appearances of cheerleaders on game days alone are responsible for about $8.25 million in profits to the NFL. Furthermore, cheerleaders help promote ticket sales and the NFL brand overall. There is also the fact that cheerleaders are highly skilled workers and that cheerleading is one of the most injury prone sports for high school or college athletes. Cheerleaders should be properly compensated for both the skills that they provide and the medical risk that they take on every time they perform. A NEW REASON TO CHEER Although this practice of underpayment has been going on for years, cheerleaders put up with the appallingly low pay because they felt “lucky” to have landed such a sought-after job. Due to the limited number of spots, it is extremely competitive to be hired as a NFL cheerleader, and many felt that if they complained, they would simply be fired and replaced by the hundreds of other girls willing to take their place. However, cheerleaders are finally fed up and taking a stand. A plethora of lawsuits have been brought to court by these cheerleaders, and for the most part, they have been successful. The allegations, which include failure to pay on time or at all, failure to reimburse for mandatory expenses, and unlawful reductions or penalties from earnings, illustrate the unjust way in which these cheerleaders have been treated. The Tampa Bay Buccaneers and the Oakland Raiders both recently settled lawsuits brought by former cheerleaders for $825,000 and $1.25 million in back wages, respectively, with both teams now agreeing to pay their cheerleaders the minimum wage. Cheerleaders from the New York Jets, the Buffalo Bills, and the Cincinnati Bengals have also filed lawsuits. With females now

”

comprising 45 percent of the NFL’s fan base, it is no longer possible for the NFL to continue this practice of wage theft without significant outcry. Furthermore, this past July, cheerleaders scored a major legal victory when California passed a law that designates cheerleaders as employees rather than independent contractors. This means that along with meal breaks and paid sick leaves, cheerleaders must now be paid at least the minimum wage. New York legislators have also joined the fight, introducing a bill that would require the NFL to pay cheerleaders the minimum wage. The success of the NFL cheerleaders’ thus far proves that the legal system agrees that they are being exploited. However, legal settlements are not enough. The NFL must fundamentally alter its grossly imbalanced compensation scheme in order to show that it is above the exploitation of its workers.

Building a Brand with Soul INSIDE SOULCYCLE’S SUCCESS by Kathryn Scott

oulCycle, the profitable boutique fitness chain that announced that it is in the process of planning its IPO this past July, seems to defy many tenets of classical economic theory. Founded in 2006 by Julie Rice and Elizabeth Cutler, SoulCycle has grown from a single studio on the Upper West Side of Manhattan to 47 studios in seven states and the District of Columbia as of August 2015. In its prospectus (a registration statement filed with the Securities and

Exchange Commission when a company announces its intent to go public), SoulCycle reported $25 million in profit on $112 million in revenue in 2014, and its profit margins show no signs of slowing down. Indeed, the remarkable success of companies such as SoulCycle contests our understanding of both consumer behavior and investor optimism, suggesting that strategic branding decisions that imbue ordinary services with powerful psychological undertones can inflate the value of these services and facilitate sustainable long-term profitability. BUSINESS OF FITNESS When Julie Rice and Elizabeth Cutler, both young mothers at the time, founded SoulCycle in 2006, they made strategic decisions that distinguished SoulCycle from other fitness services. The price of each class would be high ($34 in New York City, plus $3 for shoes), and accordingly SoulCycle would be much more than a workout – it would be a spiritual, therapeutic experience. Rice and Cutler’s initial marketing decisions were critical to SoulCycle’s almost instant success; the Wall Street Journal reported in 2013, “Within six months of opening, the first studio turned profitable.” From the outset, Rice and Cutler understood the importance of marketing to both attracting customers and generating the fervor that SoulCycle devotees cite as their reason for consistently choosing SoulCycle over other fitness companies. With a now well-established, cult-like following, SoulCycle is the fruit of businesswomen who understood their company’s unique market and carefully crafted a spiritual rhetoric surrounding their product. CYCLING FINDS ITS SOUL The fitness industry, which is part of the personal consumer products industry, is notoriously complex. Forbes noted in 2015 that the industry is “conducive to fashion and faddism.” Why? Because people’s preferences and subsequent buying habits are constantly in flux, consumers are impressionable, and ascertaining the longevity of people’s loyalties to particular companies can be exceedingly challenging. Furthermore, the actual product that the fitness industry sells, in this case cycling on a stationary bike in a group setting, is relatively straightforward and certainly not new. In August 2015, The New York Times reported, “Economics 101 says SoulCycle’s high profit margins should be eaten away by competition.” But SoulCycle distinguishes itself by self-identifying as a brand that, according

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FINDING YOUR SOUL 6RXO&\FOHČ&#x2021;V IRXQGHUV GHČ´HG WKH pricing and branding norms of WKH Č´WQHVV LQGXVWU\

to its own mission, sells â&#x20AC;&#x153;an inspirational meditative fitness experience designed to benefit the body, mind and soul.â&#x20AC;? SoulCycleâ&#x20AC;&#x2122;s physical setting complements its mission: classes are dimly lit, inspirational slogans adorn the walls, and scented candles evoke a cozy, calm atmosphere. Furthermore, SoulCycle doesnâ&#x20AC;&#x2122;t attempt to appeal to the masses, but instead targets a specific audience (wealthy residents of expensive cities such as New York and Los Angeles) that is less price-sensitive, guaran-

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teeing profitability even in economic downturns. At $34 a class, SoulCycle is unquestionably pricier than most other fitness optionsâ&#x20AC;&#x201D;many gyms offer monthly memberships that are less expensive than the cost of a single SoulCycle class. In a 2013 interview with the Wall Street Journal, Rice noted, â&#x20AC;&#x153;A cocktail in New York can cost $16 or $17, so we always tell people that itâ&#x20AC;&#x2122;s the same asâ&#x20AC;Śthe price of two cocktails.â&#x20AC;? Considered in the context of New York Cityâ&#x20AC;&#x2122;s ex-

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pensiveness, SoulCycleâ&#x20AC;&#x2122;s prices donâ&#x20AC;&#x2122;t seem so unreasonable. Another unique aspect of SoulCycleâ&#x20AC;&#x2122;s pricing mechanism is that, unlike other fitness companies, SoulCycle does not offer a membership option. SoulCycle customers are â&#x20AC;&#x153;price-taking consumers,â&#x20AC;? meaning that their actions have no effect on the market price of the good they buy. The lack of a membership option reflects SoulCycleâ&#x20AC;&#x2122;s intentional targeting of a specific audience, one that can afford to spend $34 per workout or chooses to substitute SoulCycle for other less expensive fitness options, forgoing other purchases in the process. AN ILLOGICAL CONCLUSION Economic theory holds that consumers aim to maximize utility, or satisfaction, in choosing how to allocate resources. The fact that many of SoulCycleâ&#x20AC;&#x2122;s most loyal patrons forgo other purchases in order to afford SoulCycle suggests that consumers derive significant utility from the purchase of a SoulCycle class, compelling them to consume more SoulCycle classes despite their objectively high price.

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015

Price, however, is a powerful indicator of satisfaction, as price can both suggest that a product is inherently more valuable and bias consumers to feel more satisfied with their purchase. In his book “Predictably Irrational”, behavioral economist Dan Ariely discusses the phenomenon of “arbitrary coherence,” or the tendency for arbitrary initial prices to dictate future willingness to pay. His research found that humans frequently take market prices as given, and assume that a higher price reflects an inherently more valuable product. Furthermore, paying a high price once will make the consumer more likely to pay a high price for the same good in the future; after the first purchase, consumers rarely contest the given price of a commodity. In the case of SoulCycle, price also serves an ideological function by reinforcing the idea that the company sells more than just a workout. SoulCycle’s prices impart to the consumer that its product is laden with emotional, mental, and personal value; these intangible benefits set SoulCycle apart from competitors in the fitness industry.

Behind Every Great Product HOW PRODUCT MANAGERS ARE TRYING TO COMBINE THE BEST OF TWO WORLDS by Robert Ju

ew York and San Francisco are distinct cities, made (in)famous for wildly different reasons. Weather, fashion, housing, schedules, and even brunch plans vary between these two places, but perhaps what New York and San Francisco are known best for are being the capitals of certain fields – finance and tech, respectively. An interesting thing to note about these two fields is how disparate they seem. For one thing, their hubs are on opposite ends of the country. Another important point of conflict is how they’re perceived by the general public – stereotypes of the Wall Street businessman or businesswoman conjure up images of a polished suit, social poise, and not enough time to do anything but work. On the other hand, software engineers are often caricaturized by their t-shirt and jeans work attire, social awkwardness, and nap pods at work.

A TALE OF TWO CITIES Much like the cities that encapsulate these fields, technology and finance seem to be for mutually exclusive crowds. And that might have been the case before, when Silicon Valley was in its infancy and technological monoliths like Google and Apple were being created in garages. But now, companies in Silicon Valley are looking for a unique blend of people who understand computer science and are passionate about technology, but also want to direct the company at a more managerial level than software engineering. Tech companies call them product managers. WHAT DOES A PRODUCT MANAGER DO? The category of product manager is very broad. A product manager at one company may be considered a manager or even a software engineer at another, depending on how technically or

entrepreneurially focused the company is. As Kenneth Norton, one of Yahoo’s most prolific product managers, once stated, “product management may be the one job the organization would get along fine without.” They simply are a motley mix of company positions that make it easier for the individual core job categories to get their work done. They have the vision of a marketer, the empathy of a good manager, and the technical chops of a software engineer. While never strictly necessary, a good product manager can synergize across departments and increase the quality of product in a way the individual departments cannot. MASTER OF ALL TRADES At this point, people may be wondering that if product managers need to pass muster as a software engineer anyway, then why not just become a software engineer? The question isn’t that

simple. One of the main reasons why it’s important for product managers to understand the technical details is that the manager can relate to his software engineers as they build the product together – the product manager directing mainly the vision, and the software engineers doing mainly the implementation. The degree of technical knowledge also depends on the product manager’s specific role – a product manager working more with user interfaces (known as front-end development) would need to know less about algorithms and more about front-end development than a product manager working on optimizing a search engine would, for example. GOT IT. SO HOW DO I SIGN UP? First, you have to make sure you’re the right type of person for the job. Ask yourself: are you passionate about technology? Any companies in particular? What would you want them to do differently? What concerns do you have about the product? If you answered yes to the first two questions and find the latter two questions to be interesting talking points, then chances are that product management might be a good fit. Take a wide variety of classes in computer science, both on the more algorithmic side and on the front-end side, management classes, and economics classes. If you like it all and want the best of both worlds, chances are you’re going to like being a product manager.

Don’t You CA Problem Here?

HOW THE DROUGHT IN CALIFORNIA AFFECTS THE REST OF THE NATION by Adrija Darsha

f you are from California or know anyone who is, chances are that you’ve heard about the massive, historic drought plaguing the state. But what does the drought entail for the sunshine-loving state and for the rest of the nation? Turns out you may be faced with more than just hearing your prideful Californian friends whine about their brown lawns and short showers (which you all should be taking regardless). ALL TAPPED OUT 2014 was one of the driest years in decades and followed two consecu-

Cartoon by Linda Navon Chetrit

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tive dry years throughout California. Together, 2012 to 2014 is now the driest three-year period in the state’s recorded history. The dry spell has left millions of acre-feet of empty space in reservoirs across California that cannot be filled by typical winter storms. Groundwater basins are also stressed, with many areas heavily relying on water from underground aquifers. On April 1st, 2015, California governor Jerry Brown issued an emergency executive order mandating a 25 percent reduction in water usage across the state. On May 5th, the State Water Resources Control Board adopted the state’s first-ever mandated statewide cutbacks in water usage, requiring water suppliers throughout California to achieve water savings ranging from 4 to 36 percent cumulatively through February 2016. The drought is most severe in the southern part of the state—and poor rural farmers in the area are getting the worst of it. In Tulare County, in the southern San Joaquin Valley, for example, is a place with virtually no water. State politicians and county officials have hastened to give water tanks to about 1,200 homes. Unfortunately this covers only slightly more than half the households that do not have water. These effects play into larger impacts for the rest of California and the nation. GET THAT GUAC According to a new study from the University of California, Davis, the drought in California will cost the state’s economy $2.7 billion and almost 21,000 jobs in 2015. The most severe of these cuts will come out of the agriculture industry, which will

lose $1.84 billion and around 10,000 jobs this year. In addition, 542,000 acres of farmland in the central valley will be forced to fallow. While these effects may be a small fraction of California’s $1.9 trillion-a-year economy, it makes a significant impact on the lives of many people. California produces almost half of the vegetables, fruits, and nuts grown in the United States. This means that you may be paying more for your produce and that guac in your Chipotle burrito bowl. However, since many of California’s important vegetable crops continue to be watered by groundwater, these effects are much smaller than they could be— using groundwater to tend crops may not be a viable solution in the long-term. Fresh fruit prices are projected to rise anywhere from 2.5 to 3.5 percent and vegetables between 2 to 3 percent. TURNING (NO) WATER INTO WINE Fortunately, not all is bleak in this situation as one California commodity has flourished in the scarcity of water—wine. In 2014, the wine grape harvest was “third in a string of great vintages this decade,” according to CNN. This is thanks to the fact that wine grapes use relatively little water, and drought years tend to produce a higher quality of grapes. While the drought has no significant impact on the day-to-day lives of most Californians, it is a looming and ubiquitous figure that causes a little bit more worry with every dry month that goes by. It seems that the only logical thing to do in this situation is substitute your daily intake of water for wine.

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2015

MIND THE GAP Students who take gap years return with higher GPAs as well DV VHYHUDO LQWDQJLEOH EHQHȴWV

Bridging the Gap

WEIGHING THE OPTIONS OF A POST-GRADUATION GAP YEAR by Brian Tung

hat exactly is the optional gap year that follows the culmination of senior year? We can look at the gap year as a break from academics and an option to pursue personal passions outside of the classroom. These personal passions can range anywhere from painting and rock climbing to community service and traveling. In reality, this gap “year” can last anywhere from three weeks to a year or more. According to The Independent, there are approximately 2.5 million students taking a gap year at any given moment. A gap year can be advantageous for students who are looking to exit the classroom in pursuit of personal interests that span beyond the classroom and textbooks. These students can also solidify their interests by exposing themselves more to their passions. Though taking a gap year has its advantages, there are multiple factors to consider before committing to one. IS THERE A GAP IN ACADEMIC PERFORMANCE? The first factor that a student should consider is the amount of time away from school or work that he or she will need. Students who take too much time away from school can lose their academic focus. Susan Greenberg, a New York Times columnist whose daughter contemplated taking a gap year, viewed her daughter’s situation in the following way: “as someone who couldn’t wait to matriculate [to graduate school], I didn’t see the point of delaying that great intellectual awakening.” The author brings up the point that a gap year delays continued education and that she felt slightly disappointed in her daughter for wanting to take the gap year. This can be pivotal for students who want

to continue purusing graduate school and rigorous academics. The time away from school can give students a taste of the real world and possibly restrain their desires to return to the stress and rigor of their academics. But will taking a gap year actually take a toll on academic performance or one’s habits as a student? According to the New York Times, students who return to college after taking a gap year have grade point averages that are higher by 0.1 to 0.4 points compared to their gap-free peers. Another study by The Independent shows that gap year students did on average 2.3 percent better on first year exams than those who went directly into graduate-level university. As a result, we can see that the time taken away from the classroom seems to serve students well. They are able to re-energize their minds, making them even more poised for success in the classroom. Furthermore, a break from studying can make students more excited and motivated when they return. PLANNING THE GAP Another factor that should be considered is whether the student has a clear plan of what he or she wants to do during the gap year. If a student is indecisive, the gap year can become a stressful, rather than a relaxed time. Susan Greenberg discussed potential gap year options with her daughter and created a list that included getting a job or internship, signing up for volunteer relief organizations, and traveling. With a clear, organized idea of what awaits in the next year, the gap year will become more efficient and allow individuals to maximize the use of their time. Therefore, a clear plan is crucial for students who are looking into the gap year as a

possible option post-graduation. GAP TO THE FUTURE In addition to time away from the classroom, a gap year can be an opportunity for students to take charge of what they want to do with their lives and free themselves from academic stress. A student who is accustomed to academic essays and homework assignments can gain a new perspective on what they want to do with their lives after they experience real world phenomena like jobs, commuting to work, and other routines taken for granted by the working world. Whether the gap year is used for an internship in finance, artistic drawings, or any other interest, the student can finally look over the horizon and into their future endeavors for the first time. It is in this gap year that the student can answer, if they haven’t already, “what do I want to do with my life?” According to CIEE.org, 60 percent of students confirmed their choices of major after taking gap years. Regardless of what students ultimately decide to do for their gap year, they can still learn a lot about the world and themselves through personal experiences; they can grow mentally in their characters and become more mature in their individual pursuits of their passions. However, a gap year does not always have a significant effect, making the experience’s impact vary from student to student. Though not everyone will be able to decide what they want to do with their lives, a gap year can be a strong facilitator in their potential options. These options are limitless and the gap year can be a great outlet for students to test different options and hone in on the few that make them passionate and excited.

CAREERS

How to Get an Internship at a Startup USING YOUR NETWORK TO LAND YOUR DREAM JOB

by Haris Memon

Push vs. Pull â&#x20AC;˘ â&#x20AC;˘ â&#x20AC;˘

The concept of â&#x20AC;&#x153;push vs. pullâ&#x20AC;? basically translates to â&#x20AC;&#x153;give before you take.â&#x20AC;? Find ways to provide value before asking for something. â&#x20AC;&#x153;Pushâ&#x20AC;? value to someone before â&#x20AC;&#x153;pullingâ&#x20AC;? value from them. For example, if you want to work for a tech company in a marketing role, perhaps come up with a few innovative ways for them to market their product. This can range anywhere from social media content ideas to writing some blog posts. If you canâ&#x20AC;&#x2122;t think of an innovative way to provide value, simply ask for advice. People will often want to help out an ambitious student who shows curiosity and is eager to learn.

Warm Intro â&#x20AC;˘ â&#x20AC;˘ â&#x20AC;˘ â&#x20AC;˘

&ROG FDOOLQJ LV RQH RI WKH OHDVW HÎ?HFWLYH QHWZRUNLQJ WHFKQLTXHV Î&#x2013;WČ&#x2021;V FDOOHG Č&#x160;FROG FDOOLQJČ&#x2039; EHFDXVH LW LV SUHFLVHO\ WKDW FROG DQG GHWDFKHG 6R LW LV RIWHQ PRUH HÎ?HFWLYH WR use a â&#x20AC;&#x153;warmerâ&#x20AC;? method when reaching out. If you know someone that knows a team member at a startup you want to work for, ask them to introduce you through email. Once youâ&#x20AC;&#x2122;re introduced, itâ&#x20AC;&#x2122;s up to you to impress them as best as you can. +RZ GR \RX LPSUHVV DQ HPSOR\HH DW D VWDUWXS" $VN LQWHUHVWLQJ TXHVWLRQV RU HPSOR\ SXVK YHUVXV SXOO WDFWLFV :DUP LQWURV FDQ EH JUHDW WRROV WR JHW TXLFN PLQXWH LQIRUmative phone calls with an employee. Take advantage of your schoolâ&#x20AC;&#x2122;s alumni network, family, friends, professors, colleagues, and anyone else for warm intros.

The Salesman Tactic â&#x20AC;˘ â&#x20AC;˘ â&#x20AC;˘

Salesmen send out thousands of emails in order to maximize their leads. You should do the same (not thousands, of course, unless you have the time). The more people you reach out to, the more your network expands. Some may result in phone calls, some may result in interviews, some may result in mentors, and some may result in bringing you even more warm intros. 7R FDVW VXFK D ZLGH QHW WDNH DGYDQWDJH RI PDQ\ GLÎ?HUHQW VRXUFHV )RU VWDUWXSV LW is helpful to use angel.co, a website similar to Tinder that is designed to let startups and job-seekers â&#x20AC;&#x153;matchâ&#x20AC;? with each other and form a relationship. Use LinkedIn to Č´QG GHFLVLRQ PDNHUV DW FRPSDQLHV \RXČ&#x2021;UH LQWHUHVWHG LQ DQG OHYHUDJH \RXU VFKRROČ&#x2021;V alumni network. 43

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