Cornell Business Review - Fall 2011

C ornell Business Review

The European Debt Crisis

Jake Sussman p.8

The Recent Evolution of the Music Industry

Tom Seo p.26

Study Abroad: Going Out is the New In Amy Chen p.22

FALL 2011 | Volume 2 | Issue 1

FEATURING

ANDREW ROSS SORKIN, BEST-SELLING AUTHOR OF TOO BIG TO FAIL

PG. 37

ALSO: Exclusive Interview with William Perez, former CEO of S.C. Johnson PG. 13

FALL 2011 CORNELL BUSINESS REVIEW 1

New Name, Same Significant Mission For over 100 years, the students, faculty, and alumni of the Charles H. Dyson School of Applied Economics and Management have focused on business and economic issues that matter.

Food, energy, natural resources, developing economies, international trade, the sustainable management of all types of businesses. Our broad expertise and worldwide connections make the Dyson School uniquely poised to seize the 21st century’s emerging business opportunities and

LEARN MORE AT DYSON.CORNELL.EDU

No wonder the Dyson School’s undergraduate and graduate programs are ranked in the top 10 and our students are in such big demand.

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Cornell Business Review

Fall 2011

GOVERNMENT

FINANCE

Finance Recruiting in a Slow Economy The Eurozone Debt Crisis

by CJ Gray p.6 by Jake Sussman

IPO’s and the Tech Industry

by Marshall Verdi

p.35

INTERNATIONAL

p.21

CONTENTS

Are Hedge Funds Becoming Banks Warren Buffet & Tax Reform for Mid-Sized Companies?

by Kasey Ashford

by Michael Ashton p.19

p.8

INDUSTRY

Foreign Acquisitions and the Fading of the Domestic Brand

by Catherine Chen

The Greening of Walmart

by Judy Amsalem p.11

Study Abroad: Going Out is the New In

by Amy Chen

Doctoring the Facts: What’s Behind the Increase in U.S. Healthcare Costs? p.28 p.22 by Austin Opatrny

p.17

The Changing Music Industry: Does UBS and the Rogue Trader Scandal

by Ivi Demi p.41 Streaming Have the Answer?

by Tom Seo p.26

FEATURED INTERVIEWS Interview with William Perez

p.13

Student Entrepreneurs

p.31

Interview with Andrew Sorkin

p.37

FALL 2011 CORNELL BUSINESS REVIEW 3

Review CornellT hBeusiness Te a m

Photo by Benjamin Talbert-Goldstein

EDITORS

Matthew Linderman, Editor-in-Chief Christopher Henty, Managing Editor Marc Hershberg, Associate Editor Ji Yung Suh, Associate Editor

DESIGN

Emily Schuit, Chief Designer Eden Brachot Tyler Hein

BUSINESS

Derek Jeong, Business Manager Richard Horgan Vinay Ramprasad Frank Rizzaro

4 CORNELL BUSINESS REVIEW FALL 2011

STAFF WRITERS Judith Amsalem Kasey Ashford Michael Ashton Catherine Chen Amy Chen Ivi Demi CJ Gray Austin Opatrny Tom Seo Jake Sussman Marshall Verdi

Faculty Advisor: Deborah Streeter

Letter From the Editor

Welcome back! We are proud to release our second issue of the Cornell Business Review. This semester we continue our discussion of business issues, trends, and debates among college students and alumni. As we look back over the past few months, our magazine provides insight into recent events and passes along advice from a student entrepreneur, an industry leader, and an industry pioneer.

This semester we have witnessed a barrage of change and uncertainty related to the European debt crisis, recessionary corporate hiring, tax reform demands, Wall Street reform, and the evolution of music and social media. Our editorial staff has compiled a student-tailored snapshot of these events which we hope you find both interesting and informative. This issue also includes insight and advice from William Perez (Former CEO of S.C. Johnson, Nike, and Wrigley), Andrew Sorkin (New York Times Columnist and author of New York Times bestseller Too Big to Fail), and three student entrepreneurs, from clothing designers to sunscreen gurus. The following pages reflect on the semester and pass along advice to connect you with the present and set your sights on the future.

We hope that the Cornell Business Review will help you to establish a business sense as you venture into the corporate world and craft your career. One year ago, this magazine was no more than an idea on a notepad. Yet today, our vision has come to life and I’m happy to see our staff’s hard work result in this polished, insightful magazine. I’d like to thank the colleges for their support, the team for their endurance, the students for their readership, and the University for its broad support of entrepreneurship on campus. I wish the best of luck to our staff and our readers, and I hope you all find value in this publication for years to come.

Matthew Linderman Founder & Editor-in-Chief

FALL 2011 CORNELL BUSINESS REVIEW 5

Finance Recruiting in a Slow Economy:

by CJ Gray

What does it mean for Cornell students?

Signs of a slowing American economy have pervaded media headlines for the better part of 2011, a year in which economists expected recovery and growth to improve.

Roughly three years after the financial crisis reached its peak, weak consumer spending, trouble in the housing market, the sovereign debt crisis, increased regulation, and several other economic issues have lead financial firms to undershoot projected earnings as the general economy experiences sluggish domestic growth and stubborn unemployment above 9%.

The poor economic climate has directly affected markets in which financial firms operate.

Among the challenges banks now face, the October 22, 2011 edition of The Economist noted “the contraction in their net interest margin, the gap between their cost of funds and the rate at which they deploy them,” as well as the “muted” demand for credit.

These recent conditions and uncertainties have many investors and executives focused on maintaining profitability in the midst of a seemingly derailed economic recovery, or even a double dip recession, but many undergraduates have just one thing on their minds: “How will this affect my search for a job?”

For those Cornell University students interested in careers in Finance, seeing Wall Street firms revise their outlooks and announce layoffs may cause concern regarding the upcoming bank recruitment season.

Indeed, the depressed markets and increased regulation in the financial sector do seem to give students legitimate reason to worry about firms’ hiring this year; however, historical data and people familiar with the matter suggest that the Bulge Bracket, Regional, and Boutique banks still recruit in down times, just with slightly different focus.

“During economic downturns,

6 CORNELL BUSINESS REVIEW FALL 2011

we have seen a notable difference between financial firms’ on-campus recruiting for full-time jobs versus junior internships,” said Rebecca Sparrow, Director of Career Services at Cornell. “Even when banks reduce their full-time hiring programs, internship recruiting for Cornell students remains largely consistent,” she added.

Between 2007 and 2009, the percentage of Cornell students entering the financial services industry dropped measurably. Ms. Sparrow recorded “several cancellations for on-campus full-time recruiting events in the fall of 2008 due to the economic crisis.”

Although Cornell does not collect data for junior internship application results, Ms. Sparrow noted that a full-time hire is a costlier and more inflexible investment than the intern, to whom the bank has only a 10-week commitment. Other sources confirm that observation. “Beyond the lower

risks and expenses, summer interns come with many benefits… With interns, bankers get significant leverage – it’s like they’ve instantly gained an army of assistants,” says Brian DeChesare, founder of the website mergersandinquisitions. com.

Will the 2012 recruitment season at Cornell see a drop in accepted applications?

Representatives from a number of Wall Street firms have confirmed that

internship recruiting will be similar in size and nature as last year’s. A number of Bulge Bracket banks have on-campus information sessions for internships in Investment Banking, Sales and Trading, Research, and Asset Management among other industries. In a conversation with the Cornell Business Review, a representative from J.P. Morgan recommended that students that “leverage all the tools Cornell University offers,” and added, “Our

commitment has never wavered and feedback from students shows they appreciate that commitment.”

According to The Wall Street Journal, economic downturns make firms more likely to hire strictly from their intern classes, leaving fewer spots to “outsiders.” Deutsche Bank, for example, hired 80% of its Investment Banking intern class, according to Business Insider. The figure was up from the previous year and leaves fewer spots for those applying in senior year.

The general message of the Career Services Office is that students should start their job searches sooner rather than later. Formulating more defined career interests, meeting people who currently work in that capacity, and getting first-hand experience in that environment will help make the job process go more smoothly and increase the chances of obtaining one of those increasingly competitive spots.

CJ Gray (cjg248@cornell.edu) is a junior at Cornell University majoring in Economics.

FALL 2011 CORNELL BUSINESS REVIEW 7

Eurozone

The

Debt Crisis

by Jake Sussman Although the sovereign debt crisis in Europe achieved national prominence approximately two years ago, its beginnings can be traced back to 2001—the year in which Greece gained admittance into the European Union (EU). In order for any European country to gain membership status in the EU, it must meet the Copenhagen Criteria—a set of rules defining eligibility for membership, broken down into political and economic criteria. The requirements for meeting each are fairly simple: politically, a country must «preserve democratic governance» and, economically, a country must maintain a functional market economy and have the production capabilities to adjust to competitive pressures within the economic union. In 2001— Greece’s first year as an EU member— Greece

reported that its debt load exceeded 100 percent of its gross domestic product. And in response to pressure from the EU, Greece implemented a series of austerity measures, involving a “freeze” in government spending and substantial budget cuts. Despite this alarming fiscal situation, many in the EU remain convinced that these actions signaled that the Greek economy could round into shape, as Greece›s economic data closely neared the requirements of the Copenhagen Criteria.

For the eight years after Greece’s acceptance into the EU, all seemed well in the Euro zone. The Greek government, by abandoning its old currency, the Drachma, and adopting the Euro, could now borrow money at a lower cost. Less wary of a stable currency backed by 11

8 CORNELL BUSINESS REVIEW FALL 2011

other countries, Greek’s lenders thus demanded a lower interest rate for borrowing. But with lower borrowing costs, Greece went “wild”— decreased costs of borrowing often meant higher wages for Greek public sector workers and more attractive pension plans and benefits. Meanwhile, many wealthy Greeks engaged in widespread tax evasion, motivated both by an obvious desire to increase personal wealth and out of a belief that the Greek government, with a long history of corruption and fraud, catered mostly to special interests.

So as Greece borrowed more, they received less to fund that borrowing and the Greek debt load continued to rise. It was only in 2009, when the Panhellenic Social Movement Party came to power, that Greece made the world aware of their country’s growing

fiscal problem. From this point on, the situation in Greece only worsened. In 2010, under EU mandate, the Greek government began a series of austerity measures— initiatives that cut government spending by downsizing

of the global financial crisis of 2008.

The real issue for Ireland, however, was not necessarily that home prices and ownership were overvalued and starting to drop. Rather, the root of the Irish debt problem can be traced

THE DRIVE FOR AUTERITY MEASURES HAS ONLY HURT THE GREEK ECONOMY. social programs— in order to qualify for EU “bailout” money that could help Greece avoid default. The drive for austerity measures, however, has only hurt the Greek economy.

While reining in spending may eventually restore creditor faith in Greece, government cuts in spending often result in inhibited short-term economic growth. The austerity measures have undoubtedly had an effect on Greek unemployment, as the current Greek unemployment rate sits at 15 percent. In addition, as the Greek economy remains grounded, it has seen its debt rating— a measure used to gauge the safety and security of debt— plummet. This development has only worsened the problem of a poor, under-funded Greek economy.

An enormous debt load and signs of economic peril are not unique to Greece— Ireland, Portugal and Spain are also grappling with the onset of a sovereign debt crisis. With Ireland, its crisis stems from an overvaluation in the Irish housing markets, creating what is commonly referred to as a “housing bubble.” Between 1992 and 2006, housing prices in Ireland grew more than 300 percent, a trend fueled by a steep rise in the demand for housing in Ireland— a development driven by a large growth in disposable income, low interest rates, and a tax code that incentivised home ownership. Needless to say, housing prices valued at a 300 percent premium are bound to fall at some point. And for Ireland, that point coincided with the beginning

to the fact that a disproportionate slice of the Irish gross domestic product was involved with home construction. When the “bubble” burst, the correction in the housing market placed a drag on the Irish economy to the point that in 2009 the Irish government announced it would cover its banks’ losses that stemmed from a declining housing sector. This pledge, however, required a great deal of public capital. As Irish debt climbed, reaching 32 percent of GDP by early 2009, the International Monetary Fund and EU provided emergency funds to the tune of $90 billion. Currently, the Irish economy continues on financial “life-support.”

The dire situation currently facing the Spanish economy involves the same condition that grounded the Irish economy—a bursting housing

Greece goes, so too will Spain.

Portugal, unlike Ireland and Spain, has not experienced a bursting housing bubble. In fact, in the immediate aftermath of the 2008 financial crisis, the Portuguese response to a poor global financial climate has been relatively effective.

Even still, since the trouble in Greece has forced many investors to reevaluate economic conditions in all European countries, many analysts are now convinced that Portugal could face long-term financial difficulties because of an outdated legal structure and strict labor market regulations.

A downgraded outlook of Portugal’s potential growth combined with decreased investment in the country has forced Portugal to ask for EU bailout funds. Because of this, the situation in Portugal today is at best precarious.

The circumstances facing Greece and a number of other European countries have propelled the EU into the national spotlight, and has forced the world’s brightest economists and politicians to reevaluate the EU’s joint economic structure on a fundamental level. Many claim that the biggest issue facing the European Union is that it separates monetary and fiscal

THE BIGGEST ISSUE FACING THE EUROPEAN UNION IS THAT IT SEPARATES MONETARY AND FISCAL POLICY. bubble. In addition, with a declining economy caused by a downturn in the housing sector and a worsening global economy, Spain, like Greece, has also engaged in austerity measures.

Although austerity has served its purpose in Spain, reducing its debtload and increasing its attractiveness to creditors, the fiscal crisis in Greece continues to weigh on the Spanish economy, as the potential for Greek default has driven up the cost of borrowing for Spain. It seems that as

policy. The EU states are governed by a concentrated monetary policy, guided by the European Central Bank, but each has its own fiscal policy that can be adjusted.

This potentially problematic structure is only now receiving attention because many believe that it is this policy separation that is preventing the resolution of the debt crises in Europe. Perhaps the only way for Greece, Ireland, Portugal and Spain to recover from the debt

FALL 2011 CORNELL BUSINESS REVIEW 9

! !

! crises caused by fiscal irresponsibility and reckless borrowing is through a country-by-country monetary policy adjustment— a development rendered impossible by the current structure and laws of the EU. With this policy mix in mind, there are two ways in which the European debt crisis might end. The first, and the outcome with the most potential to impact the international economy, is that the European Union loses peripheral members like Greece and Spain. However, the departure of a few EU member countries could cause unimaginable and immeasurable consequences for both Europe and the entire global economy. A default by an EU member country may force many European banks to go under— a situation that could throw the global economy into a recession. The second potential outcome, one that could have far fewer and less severe economic consequences, would be the creation of a more concentrated fiscal union within the EU. This response is

likely one that could develop gradually over the long-term. But in order for eventual reforms to be enacted, financial institutions around the world— from the European Central Bank to the International Monetary Fund to the Chinese government— will have to continue to provide emergency funding to country’s like Greece, Portugal, Ireland and Spain.

If these countries can be kept afloat, then over the next few years the EU, as a whole, can focus on fiscal reform.

Americans are often isolated from the European debt issues, especially with record levels of longterm unemployment and slow GDP growth to focus on at home. To feel a sense of detachment or isolation from the problems in Europe, however, is a mistake. The reason that the debt crisis in Europe commands massive amounts of American media attention, the reason it has dominated the front pages of the Wall Street Journal, the New York Times and the Washington Post, is that it has enormous

10 CORNELL BUSINESS REVIEW FALL 2011

implications for the American economy and financial markets. The logic behind this is fairly simple: we live in an increasingly global economy and nearly 40 percent of all revenues earned by the companies listed in the S&P 500 come from business conducted in Europe. As the European economy continues to struggle, the biggest American companies could too falter— leading to cutbacks in employment and pay to restore corporate profitability. Furthermore, American financial institutions invest heavily in Europe. Of the average fund managed by American financial institutions, nearly half of that is invested in European debt.

So as European debt and investment plummet in value, so does the value of these assets, effectively decreasing American wealth and income and exerting downward pressure on the American economy.

Jake Sussman (jds369@cornell.edu) is a junior at Cornell University majoring in Industrial & Labor Relations.

Foreign Acquisitions and the Fading of the Domestic Brand

by Catherine Chen

Today’s economy is aptly defined as global. Companies are becoming increasingly interconnected and interdependent as the line between foreign and domestic blurs as businesses continue to acquire and invest across countries. Overall, markets have become integrated in the global economy—and the United States is no exception. Acquisitions of foreign firms has allowed the U.S to expand its global presence.

However, massive shifts in the global economy, especially the recent economic downturn, have shaped a different trend of acquisitions. According to Thomson Financial, the ten largest mergers and acquisition deals in the past year have involved foreign companies acquiring American firms.

Fueled by a slowing American economy and a decline in the dollar, both foreign investments and foreign acquisi-

tions in American companies have grown dramatically.

Interesting to note is the fact that most of the foreign firms that acquire American companies choose to restrain from drastically altering the original business strategies or company image. The generally accepted motivation for acquiring a foreign company is to obtain the strategic advantage that the acquired company already has obtained within a particular national market. Therefore, in order to maintain that strategic advantage, the acquiring company often chooses not to alter the basic infrastructure or the strategy of the newly acquired business.

Recently, the rate of foreign acquisitions of U.S firms has increased.

However, foreign firms have managed to acquire many prominent American brands in the past without any shift in

the public perception of the brands’ image as ‘American.’

After an initial wave of press, consumers often soon forget about the acquisition.

These acquired American companies are examples of businesses that have successfully integrated themselves into the landscape of American consumerism. Foreign acquisition is perceived frequently with skepticism as some view foreign acquisitions of American companies with distrust and view such procedures as intrusive to the domestic economy. But whether foreign acquisitions signify a loss of control of the national market by domestic firms, the intertwined integration of the global economy makes shunning such ideas implausible. Globalization has been a trend that will continue to pick up speed, and so will international acquisitions — on both sides.

FALL 2011 CORNELL BUSINESS REVIEW 11

COMPANIES OFTEN MISTAKENLY PERCEIVED AS “AMERICAN”: A superior name associated with ice cream, Ben and Jerry’s was founded nearly 30 years ago in Burlington, Vermont. The company quickly grew and gained attention for its quirky advertisements and unusual flavors of ice cream. It was purchased in 2000 by Unilever, a British-Dutch company.

The company claims that despite its transition to a foreign-owned entity, it still abides by the brand’s founding values.

This famous convenience chain was founded in 1927 in Dallas, Texas and became known for its distinct operating hours (7:00AM to 11:00PM). In the early 1900s, a Japanese company, Ito-Yokado, became the majority shareholder. In 2005, 7-11 officially became a subsidiary of Seven & I Holdings, a then newly-formed Japanese company that has expanded its holdings in convenience stores, department stores, general merchandise stores and financial services.

This line of laptops was originally produced by IBM, but became manufactured and sold by Lenovo, a Chinese multinational computer company who purchased IBM’s PC line in 2005. Lenovo is now the largest personal computer vendor in China, and the third largest in the world. Lenovo has developed product lines specifically catering to the market in China, and has recently launched a line of electronics such as the “LePad” and “LePhone” to compete with Apple products.

Firestone, “America’s Tire Since 1900,”was founded in Akron, Ohio. Firestone’s tires were used in the original Ford Model T, and the company was called by the government to supply rubber materials during World War II. However, the company was purchased by Bridgestone Corporation, a Japanese company, in 1988.

Known as an “American Icon” and “The Great American Lager,” Budweiser was founded in 1876 in St. Louis, Missouri. But in 2008, BelgianBrazilian company InBev became a majority stockholder, and Budweiser is now owned by Aunheuser-Busch InBev located in Leuven, Belgium. The takeover of Anheuser-Busch by InBev created the world’s largest brewery.

Since the acquisition, Budweiser has aimed to have a more expansive global presence.

Gerber is one of the most recognizable baby food brands in America, occupying more than 80 percent of the American baby food market. The company was founded in 1927 in Fremont, Michigan, but became a part of Novartis, a Swiss pharmaceutical company, after a series of mergers between 1994 and 1996.

Catherine Chen (ckc63@cornell.edu) is a freshman at Cornell University majoring in Applied Economics & Management.

12 CORNELL BUSINESS REVIEW FALL 2011

A Few Words with

William Perez

After graduating from Cornell University with a Bachelors of Arts Degree in Government, William Perez spent 34 years at S.C. Johnson & Son, a privatelyheld multi-billion dollar global consumer products company. His term included 3 years as COO and 8 years as President and CEO of the firm. From 2004 to 2006, Mr. Perez served as the President and CEO of Nike Inc., succeeding Nike’s founder Phillip Knight.

From 2006 to 2008, he was the President and CEO of Wm. Wrigley Jr. Company, where he was the first person outside of the Wrigley family to serve as CEO. Currently, Mr. Perez sits on the board of directors of Campbell Soup Company, Johnson & Johnson, and Whirlpool Corporation. He also acts as a senior advisor to Greenhill & Co., a premiere boutique investment bank, and is a trustee of Cornell University.

Cornell Business Review: You’ve had the unique opportunity to run companies following long term family and founder management.

What unique challenges and opportunities did you face under these conditions?

William Perez: I was really blessed at S.C. Johnson because the family was focused on the long-term not operating from quarter to quarter.

With a vision like that, the company was relatively easy to manage. At Nike, I came in following founder Phil Knight, a creative genius. The whole concept of Nike was his MBA thesis at Stanford. Yet in that situation, when you build a company from scratch, it really has to be tough to walk away and let somebody else run it. At Wrigley, Bill Wrigley was

third generation and wanted to bring some balance to his life. So we decided to partner and we worked well together. He really understood the business and while he gave me advice, he was clear about the decisions being mine.

So, there you have three different experiences, three different families, and three different generations. I like privately controlled companies because you can really focus on doing what’s right in the long term, no need to worry about what analysts are going to say or about delivering on the next quarter’s guidance. Certainly when I was working in Latin America for S.C. Johnson and the economies were tough, and our competitors were cutting back and shutting down factories, it was nice to have a family leader like Sam

Johnson say, “Hey don’t worry about the short term, just build the business for the long term. I don’t care about dividends. I want my children or my grandchildren to take dividends.” So, I think private companies have an advantage over public companies.

CBR: How did the knowledge you gained from S.C. Johnson help you transition into your roles at Nike and Wrigley?

WP: A lot of things that I learned at S.C. Johnson were applied to Nike and Wrigley. Most notably, management succession and development which was very important at S.C. Johnson, and I think I added some value to both Nike and Wrigley in these areas.

FALL 2011 CORNELL BUSINESS REVIEW 13

The great learning experience for me was running into a wall at Nike.

When you hit a wall like I did at Nike and fail, you can either go into a state of depression or you learn from it. I think the most important thing that I learned was that you have to pace change to the culture of the company. If you’re trying to

a billion dollars. If we had not done the acquisitions, I honestly believe that S.C. Johnson would have had a difficult time continuing as a successful private company.

Additionally, the leadership team at S.C. Johnson, with one exception, was there when I was there. Successful executives do a pretty good job of

IF YOU’RE TRYING TO CHANGE THINGS BUT YOU’RE CHANGING THEM AT A PACE THAT’S TOO FAST FOR THE COMPANY’S CULTURE, YOU’RE GOING TO FAIL. change things but you’re changing them at a pace that’s too fast for the company’s culture, you’re going to fail. Knowing this when I got to Wrigley, all the change that I implemented there came at a very slow and acceptable pace.

What came from my Nike experience was probably one of the best learning experiences of my career.

Looking back, I don’t care how old you are or where you are in your career, whether you’re starting or you’re running a company, you should try to learn every day. I have jumped at any learning opportunity I have had. I sit on boards now, and I still listen carefully because I find that some of the insights from the board members that have different backgrounds are great learning experiences as well.

CBR: Reflecting on your career so far, what have been your most notable achievements?

WP: I would say that what I was involved with at S.C. Johnson probably gave me the greatest satisfaction.

We made three major acquisitions while I was there, each for more than

However, in the end, there were two markets and it was not a zero-sum game. Looking back, we should have chased triggers aggressively and it was a missed opportunity for S.C. Johnson.

CBR: As a college student, what were the most important steps you took to prepare for a successful career?

WP: This may sound unusual, but one of the things that really helped me at Cornell was learning to cram.

I wasn’t always the best student; I did developing people, and many of our a lot of cramming and the ability to team members were promoted into digest three books in a couple of more senior positions. I would chalk nights to prepare for a prelim really that up as another accomplishment. helped me out in my career because many times you just have to digest CBR: Looking back on your career, a lot of information in a very short what mistakes have you made and period of time, then draw some conwhat did you learn from them? clusions and be able to communicate those conclusions in a coherent WP: Well my mistake at Nike was fashion. So I attribute some of my probably my premiere mistake. The success to the cramming that I did other major mistake that I made at Cornell, unusual as it may sound. was at S.C. Johnson in running its Spanish and Portuguese businesses. CBR: What is the most important A good deal of our business was lesson you learned during your time dependent on the aerosol business at Cornell? and we could see how liquid trigger

THE MOST IMPORTANT LESSON I LEARNED WAS ABOUT THE FRIENDSHIPS THAT YOU’LL MAKE AT CORNELL, WHAT THEY CAN MEAN TO YOU WHILE YOU’RE THERE, AND WHAT THEY CAN MEAN TO YOU AFTER YOU LEAVE. products were growing relative to aerosols. I thought that we should not chase trigger profits because we would trade down in terms of profitability from a higher margin product to a lower margin product.

14 CORNELL BUSINESS REVIEW FALL 2011

WP: The most important thing I learned, I’m not sure I learned it while at Cornell, but rather afterwards. It was the value of the friendships and relationships you establish at Cornell. I was in a fraternity and

I kept in touch with so many of the people after college. It made a big school like Cornell into a small home. When I left Nike, it was pretty obvious that I was hurting and a lot of those folks reached out to me to make me feel better and I appreciated that. So I would say that the most important lesson I learned was about the friendships that you’ll make at Cornell, what they can mean to you while you’re there, and what they can mean to you after you leave.

can’t write up an account of what they read or their analyses. So go as broad as you can, as time permits at Cornell, and then once you’re ready to leave, don’t chase the bucks unless the bucks are in an area that you think will bring you joy in the long run.

though it’s not the sole determinant of success, because ultimately it’s your performance that allows you to be promoted, the ability to interact effectively with different people increases your chances of rising.

CBR: To become a CEO today, do you think it is still that best path CBR: In your experience, what to move straight up from within a qualities differentiate individuals company or to jump laterally to who rise quickly up the corporate climb the corporate ladder? ladder?

WP: I think it’s really depends on the WP: It varies a lot from company to individual circumstance. I was fortuCBR: What’s one common mistake company and I’m not sure that you nate at S.C. Johnson because every college graduates make and how can can pinpoint a certain characteristic few years I had the opportunity to they fix it? that differentiates individuals who try a new assignment, whether it rise quickly up the corporate ladder. was laterally or a promotion. When WP: The simple advice is this: Don’t One thing that I think is important I went to Nike and Wrigley, I realgo after the big bucks, go after what you enjoy doing. I’ve heard so many YOU’LL BE DEALING WITH VERY, VERY people say, “well I want to be on Wall DIFFERENT PEOPLE AND THE MOST Street because I’m going to make a lot of money” or, “I want to be a SUCCESSFUL PEOPLE I’VE SEEN HAD doctor because my dad was a doctor AN ABILITY TO INTERACT WELL WITH or my uncle was a doctor.” Those are MOST EVERYBODY. all the wrong reasons. You want to do something that brings you joy, something that you want to do every is interpersonal skills, the ability ized I had learned a heck of a lot by day. You want to get up eager to go to deal or interact acceptably with moving to new companies and that to work and do whatever the task is everybody. You have very diverse I had missed out on learning opporthat you’re assigned to doing. The groups at companies today, whether tunities by staying at Johnson for so most important thing is to do what it’s gender diversity or sexual ori- long. So I think it really becomes an you enjoy doing period. entation diversity or an ethnic di- individual factor that boils down to Also, while you’re at Cornell, go as versity or an educational diversity. whether you are enjoying the work broad as possible. I think it’s really From a Ph.D. in food science, to an and the people and whether you unfair to make kids who are 17 or engineer, to an accountant, you’ll have peaked out at the company.

18 years old decide that they want be dealing with very, very different I don’t think there is a magical path to go to an undergraduate business people and I think the most success- going straight up in one company school, even though it’s a great one, ful people I’ve seen had an ability to or zigzagging in other companies. without having been exposed to ev- interact well with most everybody. There’s no magic. It depends on erything that they could be exposed To sit down and communicate well your own circumstances. There’s no to at Cornell. So I always encourage with different people, to make dif- right way, no wrong way. As long as people to get a liberal arts education ferent groups of people understand you keep progressing and you enjoy and learn how to read and write. what they are all trying to accom- what you’re doing then stick where It’s amazing how many people can plish and what the team is trying you are. As soon as you’ve plateaued do in-depth financial analyses but to accomplish is critical. So even and you’re still of an age where you’d FALL 2011 CORNELL BUSINESS REVIEW 15

like to take a risk, then go out and try something else.

Nonetheless, don’t forget that every time you leave a company, you’re walking away from the credibility, what I would call the equity you’ve developed there, and you’re going to a new place where you’ve got no credibility and there are high expectations.

just goodie-goodie. I think it makes a big difference and I think if you look around you’re going to see more and more of the business teams becoming more diverse simply because they come up with more creative solutions than you would if you had a homogenous team working on it.

of communication is going across the internet and it’s very difficult to measure its effectiveness, but I think that the biggest change is the speed and types of communication available to individuals and available to the businesses.

CBR: What’s the best piece of CBR: How has the role of business advice that you would pass down changed throughout your career and to a student entering the workforce CBR: Diversity has become a buzz how do you see it changing over the today? word recently. In your opinion, what next 20 years? is true value of diversity?

WP: I would say there are probably WP: Clearly the one thing that two things. The first one is to always WP: There is a great book from a changed the most is communica- give it your best shot. If I failed, it McKinsey consultant that irrefut- tion, the speed of communication, wasn’t going to be because I didn’t ably proved that the more diverse and the types of communication. I do the job, or I didn’t work as hard the team, the more likely they were can remember when I first started, as I could’ve, or I wasn’t there at to come up with a successful solu- the information that had to move fast the start time, or the project wasn’t tion. I don’t believe it’s a buzzword, traveled by telegram, then it traveled done when it was supposed to be nor that it’s going through the by telex, then it traveled by fax, then done. I always gave it my best shot motions, but I do believe it’s the it traveled by email, now it travels by so I would never have to regret that right thing to do from a business Twitter or what have you. Informa- if I had just worked a little harder perspective. You get a completely tion moves in many different ways or I had just done something a little different perspective on the issues and it moves infinitely faster than it better then I could’ve been successand opportunities; and, when those did in the past. Even now when I do ful. So the pitch is to always give it different perspectives have been board work and investment banking your best shot. taken into consideration, it can work at Greenhill, I’m probably The second point is that I had a lot lead to a better solution. It may getting 80-90 emails every day at of help in my career from a mentor, be a buzzword; it may be the right least. It’s instantaneous and people somebody who believed in me for thing to do, but it’s very productive expect a response immediately. A reasons I never fully understood, in the business area. Even if you’re slower response is no longer accept- and someone who gave me opporjust talking educational diversity, able. Good-bye vacations! tunities and protected me when I having a scientist, an engineer, an Faster communication and dif- needed protection. To the extent accountant, and a lawyer, all with ferent communication has changed that you have an opportunity to different backgrounds working on the world of marketing as well. identify and be mentored by somea team can be helpful in addition There’s evidence that the television body early in your career I think to the typical forms of diversity. I advertising, radio, and print are not it’s something you really want to think it’s for real, I don’t think it’s as effective as they used to be. A lot take full advantage of. After having benefited so much from having a I DON’T BELIEVE DIVERSITY IS A mentor, I spent a lot of time, and do, mentoring other people. So BUZZWORD, NOR THAT IT’S GOING still find a mentor and if you are fortuTHROUGH THE MOTIONS, BUT I DO nate enough to rise in an organizaBELIEVE IT’S THE RIGHT THING TO tion take the time to mentor others.

DO FROM A BUSINESS PERSPECTIVE.

16 CORNELL BUSINESS REVIEW FALL 2011

Interviewed by: Matthew Linderman

The GREENING of Walmart

by Judy Amsalem Wal-Mart has recently undertaken massive efforts to “green” their business—from the products they offer to the way their stores are powered and run. Such changes raise a question: Could Wal-Mart be leading the first step towards popularizing global corporate sustainability? WalMart is no stranger to controversy, however. And their current efforts at achieving environmentally friendly business practices have been met with extreme scrutiny and criticism.

The significance of Wal-Mart’s efforts at sustainability stems from the company’s size. Because of this, Wal-Mart is not only an outlier in the field of companies who are “greening” themselves, but their efforts could also set a precedent for other large companies that wish to pursue sustainable practices. How big is Wal-Mart and how much influence do they have? Consider this: Wal-Mart’s $405 billion in revenue in 2009 makes it the 23rdlargest economy in the world, bigger than Sweden. It is the largest private consumer of electricity in the U.S. Wal-Mart employs about 2 million people worldwide, has 8,100 stores internationally, and is supplied by 30,000 factories in China. What’s

more, in 2010, the average person in the world made an average of 1.1 purchases at a Wal-Mart, and each week nearly one-third of the U.S. population visits a Wal-Mart store in the U.S. Wal-Mart has 3 broad sustainability goals: to be supplied 100 percent by renewable energy; to create zero waste; and to sell products that sustain people and the environment. Within these broad goals, more specific targets include: spending $500 million a year to increase fuel efficiency in its truck fleet by 25 percent over three years, reducing greenhouse gases by 20 percent in seven years, reducing energy use at stores by 30 percent and cutting solid waste from U.S. stores and Sam’s Clubs by 25 percent in three years. Wal-Mart has already made some significant progress in accomplishing these goals. For example, they have managed to eliminate more than 80 percent of the waste that would go to landfills from its operations in California, and now offer more organic food than any other retailer in the country.

Because of its massive size and influence, many argue that if Wal-Mart goes green, others may

follow (both by choice and out of necessity). Moreover, Wal-Mart’s size means that even small sustainability changes can have a huge impact. A decision to improve fuel mileage in their trucking fleet by just one mile per gallon, for example, would save more than $52 million per year (not to mention the corresponding cut in emissions.

Wal-Mart’s sustainability goals— like cutting 20 million metric tons of GHGs by 2015 (the equivalent of removing more than 3.8 million cars from the road for a year)—are so ambitious, that they may only be reached by persuading their suppliers to change as well. This means forcing Wal-Mart’s suppliers, with the help of Wal-Mart’s sustainability team, to rethink how their products are manufactured, packaged and transported. In doing so, Wal-Mart can put immense pressure on many companies to go green, especially on those businesses where incentives may have previously been lacking.

This alone could potentially generate waves of positive environmental change throughout corporate America.

More than just impacting their suppliers, Wal-Mart’s successful

FALL 2011 CORNELL BUSINESS REVIEW 17

accomplishment of their goals could also spur other retailers to follow suit with their own sustainability initiatives. Of course, Wal-Mart is not the only retailer going green. Whole Foods has long been committed to decreasing their environmental footprint, and in 2006 was the first major retail chain to offset 100 percent of its energy use using wind energy credits for all American and Canadian stores.

That same year, Safeway signed a contract with the Chicago Climate Exchange committing to decreasing its carbon footprint from all stores, headquarters, and warehouses by 39,000 tons. Wal-Mart is, however, by far the largest retailer to take on such commitments. Simply put, the argument may well become “If WalMart can do it, we can too.”

Wal-Mart may well have various incentives for going green.

Some believe that their efforts at sustainability are motivated by a desire to improve their public image in an area where they have previously received much criticism. However, according to former CEO Lee Scott, the motivation is purely economic.

Scott stated in 2007 that “Tangible profits generated by Wal-Mart’s sustainability strategy in the first year of implementation were roughly equivalent to the profits from several

Wal-Mart SuperCenters.” Scott may have a point. Wal-Mart’s goal of a 5 percent reduction in excess packaging could save $11 billion in the next few years, including savings of $3.4 billion for Wal-Mart itself.

Even still, some critics remain skeptical. For example, some argue that the “greening” of Wal-Mart is an intended “PR” diversion from other contentious issues. One specific criticism, lobbied by labor organizations, is that the company has declined to raise wages that some consider at or below the poverty level. This sentiment was echoed

by Sierra Club director Carl Pope, who said in a statement: “While this announcement shows that Wal-Mart can be leader, it also demonstrates that they should be able to take equal steps to protect workers.

Other critics argue that WalMart, rather than change its own business model, pressures suppliers to change theirs — which can lead suppliers to cut corners and produce products of less quality. Additionally, research shows that large stores with essential consumer goods that have a monopoly on local market, like Wal-Mart often does, encourage consumers to drive further from home and thereby increase carbon emissions. Not to mention that as Wal-Mart accelerates its growth

18 CORNELL BUSINESS REVIEW FALL 2011

overseas, putting more stores around the world, its carbon footprint will inevitably expand.

To see such a large and notoriously disliked retailer, like Wal-Mart, take the first steps towards “greening” their business is, nonetheless, a victory for corporate environmental sustainability. Successful efforts

by Wal-Mart and the company’s positive influence prove that even former “non-believers” may face powerful incentives to change their corporate practices.

Of course, improvements in one area cannot substitute for inaction in another, and it’s important to remember that sustainability is, after all, a triple bottom line: environmental, economic and social.

For those who believe that “what you do” is just as important as “why you do it,” Wal-Mart may not be gaining any gold stars for “earth-loving” or “tree-hugging” anytime soon. But, for those who believe that the ends are more important than the reasons, Wal-Mart is, in its own way and for its own reasons, moving towards significant environmental accomplishments.

Judy Amsalem (jma262@cornell.edu) is a senior at Cornell University majoring in Natural Resources.

Are Hedge Funds Becoming Banks for Mid-Size Companies?

by Michael Ashton

With the American economy currently in a state of flux, even the most experienced investors are unsure of which direction the financial markets will move. And with an uncertain economy comes an uncertain banking climate. Interest rates are at historic lows, prompting many small business owners and companies to seek loans from banks for expansion. Banks, for the most part however, simply are not lending.

Careful and cautious from several years of rising loan defaults, banks have accumulated historically high cash reserves.

While larger companies are still able to raise money from initial or secondary public stock offerings and bond issues, mid-size companies (valued between $25 million and $1 billion) have increasingly turned to hedge funds for capital. But borrowing from a hedge fund can often come at a price—a very steep price. While traditional banks usually lend at rates 2 to 3 percent over prime—which

currently sits at 3.25 percent—hedge funds charge interest rates often three or four times as high. A New York Times article published in June of 2008 echoes this trend: “The number of hedge funds that specialize in what is called ‘asset-based lending’ has quadrupled in the last three years...”

To illustrate a past example, Trinity Communications, a small cable television company, which started with $3 million in capital, borrowed an additional $500,000 from Genesis Merchant Partners, a hedge fund, at 14 percent with a 1 percent fee for paying their debt off early. Now, in the aftermath of a financial meltdown and a slow economy, and as banks further tighten their belts, hundreds of hedge funds have now integrated lending into their business model.

Hedge funds look to turn the highest profit possible in the fastest time. In short, hedge funds, unlike traditional investors and banks, are in a high-risk, highly leveraged business.

For instance, for a traditional investor,

if stock of Company A is currently at $100 a share and the investor believes that it will rise to $110 a share, then he will buy the share itself at $100. If the stock does rise to $110, his profit is $10, or 10 percent on his investment.

If it falls say to $90, and the investor sells it, his loss will be limited to $10 or 10 percent.

A hedge fund manager, on the other hand, for the most part does not buy or own the underlying asset, be it a commodity, shares of stock, or any other financial instrument.

Instead, if he believes that Company A’s stock will rise within the next three months, he will buy a ‘call option’ (for say $5)—the right to buy a share at $110 (or higher) for a profit of 200 percent—or more if the price reaches above $110. He then promptly sells the option to take the profit.

Conversely, if the stock falls to $90 or even to $105, the call option becomes worthless and the loss is 100 percent of the $5 per share option. On the other hand, if the hedge fund manager

FALL 2011 CORNELL BUSINESS REVIEW 19

believes the current $100 share price of a company will fall, then he will buy a ‘put option’ to ‘buy’ shares at a lower price—a practice known as “short selling.” In short, hedge funds engage in high-risk, high-reward investing.

An additional concern that hedge funds pose to a potential borrower is the risk of opposing incentives. For example, the creditors of Radnor Holdings, a disposable cup company that defaulted on a roughly $100 million loan, claimed that its lender,

to the loan announcement, while 255 similar size companies who borrowed from traditional banks during the same period saw little increase in short sales volumes. In other words, hedge fund lenders may be the first to know when a company is in trouble, which may lead to a downward spiral as the company’s investors and customers become aware of the news.

While both the ‘loan to own’ theory and hard research suggest that hedge funds may not always act exclusively in the best interest of their

bank lending is picking up, however, as increasing capital reserves are burning low yield holds in their pockets. The New York Times blog Dealbook reported, on October 17, 2011, that large national banks have increased lending. Wells Fargo, for example has increased large company loans for 17 consecutive months while its loans to smaller companies rose 8 percent in the third quarter of 2011.

It is still not clear which direction hedge fund lending will move—much will depend on the economy. But it is

Hedge Fund Tennenbaum Capital Partners, charged excessively high rates as a takeover strategy referred to as ‘loan to own.’ This concern is corroborated by research that suggests that companies that borrow money from hedge funds see a steep rise in a put option or short sale bets against their company’s stocks even prior to announcements of their loans. According to a Journal of Financial Economics article tracking the trading of 105 U.S. companies who borrowed from Hedge Funds between January 2005 and July 2007, the average company saw almost a 75 percent increase in short sales volumes during the week leading up

borrowers, some of those borrowers have a more optimistic view. For example, the CEO of Rentech, a tech company that has borrowed nearly $100 million dollars from Highbridge Capital and Goldman Sachs at a 12.5 percent interest rate, stated: “On the other hand, if the money is not available (i.e. from traditional banks), the cost is infinite.” Trinity Communications, another borrower from a previous example, has likewise given a great deal of credit to its hedge fund lender, Genesis Merchant Partners, asserting that much of its success can be attributed to acquiring capital when traditional banks were unwilling to lend to them.

There are some indications that

safe to assume that as long as smaller regional banks remain cautious with lending, at least some small and mid size companies may need to borrow from hedge funds if they hope to expand or keep their business alive—no matter what the cost.

If you are a mid-sized company and are looking to raise capital and are unable to obtain a loan from a bank, you need to do your research to make sure that you are working with a credible hedge fund as a lender. The caveat remains: just as hedge funds are high risk, borrowing from them can be too.

20 CORNELL BUSINESS REVIEW FALL 2011

Michael Ashton (maa246@cornell. edu) is a junior at Cornell University majoring in Hotel Administration.

Warren Buffet & Tax Reform

by Kasey Ashford

Warren Buffett, chairman and CEO of Berkshire Hathaway, wrote an op-ed for The New York Times on August 14th, asking for higher taxes on the “superrich.” His proposal would increase taxes on households that make more than one million dollars in taxable income. The proposal also suggests increasing taxes at a higher rate for households making more than ten million dollars. Buffett’s article has sparked public debate over the obligation of the wealthiest of Americans.

Referred to as ‘The Buffett Rule’ within Congress, it has also become a serious legislation proposal. The Buffett Rule is now part of a wider debate on whether to increase taxes or to cut spending in order to alleviate some of America’s staggering debt. Several variations of this proposal, modifying the size and scope of who should be taxed, have since been suggested.

Currently, the U.S holds $14.8 trillion in debt and a record high deficit of $1.4 trillion. Supporters of the Buffett Rule argue that the tax will help significantly reduce the deficit. In order to judge the cost and benefit of this tax, three things are important to consider—how much this top income group pays now, how much they would pay with the tax, and how the tax would impact the deficit and debt.

If the Buffett Tax were to be enacted, it is estimated that the tax would annually generate between $40 billion to $50 billion. This would amount to about half a trillion dollars over ten years. The proposed method of enacting this tax would be establishing a minimum tax for those earning an income of more than one million dollars. The idea behind this is that millionaires would be forced to pay a tax level higher than

the middle-class by deterring millionaires from receiving tax benefits such as price deductions or write-offs. However, this alternative method might prove difficult to implement, and raising the income tax on millionaires might have unintended negative consequences for the economy.

This question of potential negative consequences is a question of what is immediately visible and what is not.

The positive aspect of the tax—increase in collected revenue—is clear, while the potential detrimental impacts of the tax on the economy, especially on private investment, are harder to quantify.

An increase in taxes may be devastating to the still depressed business climate, further discouraging private investment. The millionaires that Buffett targets already pay a substantial amount of taxes. Earners who make one million dollars or more, currently pay 23.3 percent in income tax. This is more than twice the average rate paid by earners in the $50,000 to $100,000 income bracket and more than three times the national average tax rate. Further, the people who earn in the millions and tens of millions are already subject to both corporate tax and income tax. That corporate tax currently rests at 35 percent and the capital gains tax at 45 percent. Increasing the tax rate even more could lower incentives of the upper-class and corporations to reinvest their earnings. Such lower investment potential and economic uncertainty may force companies to shift abroad— further streamlining the U.S corporate tax revenue, counteracting the benefits the Buffett Tax was supposed to bring in the first place.

Supporters of the Buffett Tax, however, disagree with the argument that increasing taxes on the rich would have an

adverse effect on investment incentives.

An increase in income tax would result in a parallel increase in incentives to avoid taxation, fundamentally having no impact on the actual profit margins or level of investment.

A change in taxation policy, however, may not translate directly into its intended results. Historically, actual collected tax revenue has always failed to come close to the initially projected amount after an increase in a tax rate. A better procedure might be to close the existing loopholes in the tax system before creating possibilities for new ones.

Despite all this, a successful increase in tax revenue may produce a reduction in the deficit significant enough to validate its execution. Again, if the Buffett is effective, then it would generate $50 billion annually. Recalling the size of the deficit at $1.4 trillion and the debt at $14.8 trillion, this tax would eliminate 3.6 percent of the deficit and 0.34 percent of the standing debt.

Since debt can stunt economic growth, reducing the deficit is vitally important for any country’s economy. In order to sustain economic growth, some measures must be taken to reduce the size of the deficit; and given the circumstances, the Buffett Tax could be a sensible choice to effectively raise revenue. However, with the 2012 election approaching, the future of the proposed “Buffett Rule” may be constrained by external factors outside of the economic debate.

Kasey Ashford (kda25@cornell.edu) is a senior at Cornell University majoring in History.

FALL 2011 CORNELL BUSINESS REVIEW 21

Study Abroad: Going Out is the New In

by Amy Chen

22 CORNELL BUSINESS REVIEW FALL 2011

Within the past thirty years, China has emerged as one of the leading economic powers in the world, boasting an average of 8 percent GDP growth per year. The remarkable speed at which China has economically and socially developed, since opening its doors in 1978 to international trade, has allowed many Chinese people to gain access to luxuries previously granted to only the wealthiest Chinese. As a result, studying abroad has become an increasingly popular option for the Chinese as more students desire a broader education. With this evolving focus, parents have begun investing in their children’s education by sending them abroad, leading to a huge spike in the number of international students enrolled in American universities.

Beginning in 2000, the total number of international students in the world has increased by 75 percent, according to Unesco’s Institute for Statistics. In the school year ending in 2009 alone, the number was at 3.43 million students, up from 2.96 million the year before. Specifically, the number of international students studying in the United States during the 2009-10 academic school year increased by 3 percent to a record-high of 690,923 students, as stated in the most recent Open Doors Report, which is published annually by the Institute of International Education. This sharp rise was mainly driven by a 30 percent increase in the number of international students from China.

As the leading sending country, China’s nearly 128,000 students account for 18 percent of the international student population in the United States. The same situation seems to apply to Cornell, which in 2010 had 3,667 international students, or 17.51 percent of the Cornell student population. Of these 3,667 international students,

835 were from China. Intrigued by the steep rise in Chinese international students over the past few years, many experts have begun to examine the reasons for this trend, though currently there seems to be no single general consensus.

“I Would Found an Institution Where Any Person Can Find Instruction In Any Study” Various reasons exist for the growth in Chinese international students. Surveys on Chinese parents and students have shown that they believe a Chinese education is too rigid, not very innovative, and stifles creativity.

Instead, a Western education gives them access to a broader range of skills including teamwork, fairness, tolerance, leadership, and decisionmaking skills that are not usually emphasized in Chinese classrooms.

With the increasing demand for well-rounded students in the job market, Chinese students are attracted to the flexibility built into an American education, a principle that Cornell fully embraces in its motto.

In addition, Chinese parents have increasingly become more cognizant of American college and university rankings, as reflected by the fast-growing and lucrative market for tutoring services abroad. These agencies seek to profit from students’ ambitions by providing application consulting, extracurricular activities, interview training, and exam counseling.

Indeed, degrees from institutions in the United States are often regarded more highly than those from Chinese universities. “Programs within the United States seem to be accredited anywhere,” says Sean O’Connell, the director of the international undergraduate program at USC’s Marshall School of Business.

Chinese students are also finding it increasingly difficult to enroll within the top Chinese institutions.

This is perhaps owing to China’s large population and the relatively small number of top schools; China simply cannot meet domestic demand for higher education. A rising middle class has also made higher education more affordable for many more Chinese families, all of which are eager to embrace the opportunity to send their children overseas to study.

What Does This Mean For China and the United States?

It is often argued that China’s strong industries have been fueled by imitation rather than innovation.

Indeed, Chinese innovations in the technologies and sciences have been sluggish compared to those of their Western counterparts. Thus, to maintain this rapid growth, China must continue sending students abroad so that new ideas may be brought back into the country and contribute to the country’s advancement. It is perhaps China’s diligent investment in human capital (i.e. students’ educations) that has, along with capital investment, helped propel China through this period of development.

On the other hand, the United States has reaped the financial benefits from the influx of international students. According to the U.S. Department of Commerce, international students contributed nearly $18 billion last year in tuition payments, housing, and personal expenses to the U.S. economy.

Though it is often costly for colleges to recruit abroad, that population clearly “Has the potential to be a significant source of revenue,” says University of Nebraska chancellor Harvey Perlman, especially because most international students pay the

FALL 2011 CORNELL BUSINESS REVIEW 23

MYTH

FACT

The heavy representation of international students in certain fields, such as computer science, engineering, and physics, means that American students are being crowded out.

American students are discouraged from entering high-tech fields because of the dominance in these fields by international students.

Placinglimitsonthemethodsbywhich foreign workers can come to the US (i.e. putting more restrictions on the H-1B visa process) is the answer to America’s rising unemployment rate.

Increasing H-1B visa awards has decreased innovation by US-born researchers, as measured by patent applications.

full non-resident rate for tuition and fees. In addition, international students also “enrich U.S. campuses and communities with their talent and diverse perspectives,” yet another reason why American universities have increasingly accepted more and more international students in recent years.

The Lack of a Crowding Out Effect In the current economic slump, however, many Americans may feel tempted to find fault

According to research by Mark Regets of the National Science Foundation (NSF), the rise in international students was actually accompanied by an increase in the enrollment of U.S. students.

According to Stuart Anderson, executive director of the National Foundation for American Policy: “The innovations and productivity increases that can come from skilled professionals, foreign-born scientists and engineers are likely to complement the skills of Americans and increase employment opportunities.”

Holders of H-1B visas actually lend a significant contribution to U.S. innovation, in particular by spurring on America’s technological advancement, due to international students’ dominance in technology-related fields.

Recent studies have shown that the increased number of H-1B visas is correlated to an increase in patent activity by U.S. citizens. This is beneficial to the U.S. because patents are a cornerstone of U.S. innovation. In fact, according to calculations made by Jennifer Hunt of McGill University and Marjolaine Gauthier-Loiselle of Princeton University, “for every percentage point rise in the share of immigrant college graduates in the U.S. population, the total percapita number of patents for the entire population should increase by an astonishing 6%.”

with their foreign counterparts in terms of job-searching and university acceptances. However, recent studies have dispelled some common misconceptions about international students. Between the sheer number of foreign students wishing to study abroad, especially those from China, and the everincreasing demand by universities for the world’s best talent, many experts project that the studying abroad trend will steadily progress throughout the next few years.

What international students bring to the United States and back to

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their home countries undoubtedly perpetuates the increasing interconnection between countries today, as new knowledge facilitates new ideas as well as economic and technological development.

With students seeking greater opportunities abroad and countries becoming more and more interdependent, international students will inevitably play an increasingly important role as the modern world continues to adapt to its changing needs.

Ivi Demi (id63@cornell.edu) is a senior at Cornell University majoring in International Agriculture and Development

At ILR, our business is work

The ILR School focuses on the study of people and policies in the workplace.

Our workplace studies focus is broad – from labor-management relations and human resources to labor economics, conflict resolution and organizational behavior.

Our graduates are CEOs and leaders in business, law, government, public service and many other fields.

Advancing the world of work – by preparing workplace leaders, informing policy and improving working lives.

That’s our business at ILR.

FALL 2011 CORNELL BUSINESS REVIEW 25

THE CHANGING MUSIC INDUSTRY: Does “Streaming” Have an Answer? by Tom Seo

The music industry is currently undergoing a period of drastic overhaul. Just as the industry was once restructured with the introduction of new technology—in the form of cassette tapes, CDs, portable media players, and file-sharing devices— numerous executives, journalists, and consumers have touted the emergence of music-streaming services as the latest shift in the competitive landscape of the music business.

In fact, some have gone as far to claim that these new services¬—which include Pandora, Spotify, iCloud, and Rhapsody—will help solve the perennial issue of music piracy, a problem that has been detrimental to both music labels and artists alike. Moreover, others have suggested that these services will offer added competition among music distribution services, with Spotify pin-pointed as the interactive streaming service that may challenge the current pay-per-download revenue model of online music stores such as iTunes.

At the same time, other forecasters remain skeptical and assert that the survival of these new services remain uncertain. Pointing to the poor performance of Pandora’s initial public offering of stock, there are also those who believe that these new services, which rely on royalty payments to music labels for each play online, require an exorbitant amount of start-up capital and are thus unlikely to thrive in an increasingly competitive industry. Given the unproven potential of an online streaming service, examining the historical shifts in the music industry is a necessary step in assessing the future success of emerging models of online music distribution.

Music moguls and executives have long claimed that the music industry is experiencing a crisis. At the heart of the crisis, they argue, is the emergence of digital music piracy, an issue that has

26 CORNELL BUSINESS REVIEW FALL 2011

plagued the industry since the early 2000s. With the introduction of online file sharing services to the public, industry executives claim that record sales and overall revenue have been severely affected by the growing prevalence of such services.

Their claims, in fact, appear to be backed by several key statistical measures. According to the Recording Association of America (RIAA), in the decade since file sharing service Napster emerged in 1999, music sales have dropped 47 percent, from $14.6 billion to $7.7 billion. Moreover, the NPD Group, a North American market research firm, reported in 2009 that only 37 percent of music acquired by American consumers was paid for, with approximately 30 billion songs pirated from file-sharing networks from 2004 to 2009 alone. And with the International Federation of the Phonographic Industry reporting that there has been a 31 percent decline in the value of the global record company revenue since 2004, the music industry has in fact incurred a significant level of loss.

Attributing all loses to music piracy, however, is only one side of the story—other factors are also at play behind the overall decline in the value of record company revenue. While the illegal consumption of digital music is widely considered the most impactful force behind the decline, the digitization of legal music consumption has also had a negative effect on industry revenue.

Currently, approximately 16.5 percent of all U.S Internet users purchase music online and digital consumption revenue is estimated to have grown 6 percent globally in 2010. Thus, CD sales, which has long been the music industry’s most profitable revenue stream, is becoming replaced by digital sales, further lowering the music industry’s profit margins. For instance, in the 1990s,

consumers would willingly pay between $15 to $20 for a physical album, and major music labels would enjoy a profit margin of well over 50 percent on CD sales. A digital album, on the other hand, is typically sold for approximately $10 to $12, and the music industry’s profit margins are further lowered as digital music distributors, such as iTunes, can claim a slice of that revenue.

The most pressing problem for the pay-per-download model, however, may lie in individual consumer behavior. When consumers purchase digital music, they tend to purchase individual tracks, or singles, and rarely purchase entire albums. Such behavior contrasts sharply with the options presented when purchasing a physical album—when buying a CD, consumers are obligated to purchase entire albums, and thus music labels can reap higher revenues. And with physical CD sales expected to drop 40 percent from $4.5 billion to $2.7 billion in 2011 and digital music sales estimated to pull in $2.8 billion in revenue, it is no surprise that the overall value and market capitalization of the music industry is predicted to drop from $6.2 billion to $5.5 billion.

Due to the bleak outlook of the pay-per-download model from the perspective of the music industry, media attention has recently been focused on the business models of emerging music services. For instance, Pandora, a streaming radio service that legally compensates music labels through royalties, released an initial public offering in June, while an interactive streaming service called Spotify launched made their U.S in July. Moreover, with Apple having recently released iCloud, its cloud-based storage service, and Rhapsody acquiring Napster, the market for music distribution is likely to be restructured in the coming months.

These new services allow record labels to make a compromise.

Though completely eradicating music piracy and restoring the dominance of CD sales from the digital market may not be feasible, labels could look to boost revenues through royalty payments.

Pandora, for example, pays licensing fees to music rights management firms such as ASCAP and BMI, and provides royalty payments to a record company each time a song is played. The sheer convenience of this online radio service may be an effective way to deter consumers from pirating music.

Much of the recent media attention, however, has been focused on Sweden-based Spotify, a music streaming service that offers a level of interactivity most other digital music services do not. While services such as Pandora provide online radio services, they are only able to “recommend” songs and do not allow their users to select their own tracks. Spotify, on the other hand, not only allows listeners to play any song in their 15 million song library, but also integrates the service with Facebook, the world’s largest social media site. As a result, Spotify is able to tap into the social network of 750-million users already established by Facebook Spotify hopes to monetize its service through paid monthly

subscriptions. And already, Spotify has seen a 25 percent jump in paying subscribers in the United States and eight other countries, with currently more than 1.6 million paying Spotify subscribers around the world. In addition, the service has created a sense of momentum through its free promotional service. Currently, users of its free service are able to stream an unlimited number of tracks for six months, and can enjoy the same benefits of interactivity in which listeners can skip songs and create personalized playlists. According to the Wall Street Journal, Spotify is quite simply “a free on-demand service,” while radio services such as Pandora can be considered “free services.”

The momentum built up by Spotify through its promotional period and Facebook integration could translate positively to music industry revenue. With a flexible pricing structure that allows users to choose a zero, five, or ten dollar a month subscription level, Spotify could draw more paid and subscribed customers to its service.

Increased user interactivity on Spotify means higher royalty rates for record labels. What is more, Spotify, in a partial validation of its business model, has already become the second single largest source of digital music revenue for labels in Europe.

While Spotify, in theory, may be a welcoming addition to the music distribution market, the young company faces several significant obstacles. In fact, since all music-streaming services must pay royalties on a song-by-song basis, streaming services constantly need injections of capital. If a streaming service is unable to accrue enough subscribers, it becomes unsustainable as the cost of royalty payments and agreement deals with major music labels can easily exceed the revenue obtained through advertisements and monthly subscription fees. Needless to say, streaming services are very dependent on the number of their paid subscribers. There is also pressure for online streaming services to constantly increase the size of their music library, thus requiring additional royalties and fees to music labels.

Nonetheless, there exist several important implications to music listeners with Spotify as a potential new paradigm for online music distribution. Due to the convenience of streaming any song on demand and integrating the tracks into Facebook, the benefits associated with Spotify may deter many listeners from pirating music. In addition, the service may also discourage listeners from consuming music through the pay-per-download model of services such as iTunes. And though it has yet to be seen whether revenues for streaming services will exceed that of purchasing songs on iTunes, if the rate of subscriptions to services such as Spotify continues to grow considerably, then the music industry could take a step closer to mitigating its downward trend in value.

Tom Seo (ss2279@cornell.edu) is a sophomore at Cornell University majoring in Economics and Sociology.

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Doctoring the Facts: What’s behind the increase in U.S. healthcare costs?

by Austin Opatrny

The health care industry in the United States has undergone significant changes over the past several decades, culminating in 2009 with the passage of President Obama’s Patient Protection and Affordable Care Act, known by many as “Obamacare.” While most of that change has been driven by technological innovation that better enables doctors to care for their patients, the dramatic rise in the cost of care has caused business leaders, politicians and average citizens to rethink the current system. According to a Congressional Research Service report, in 2004 15.3 percent of the American economy was devoted to health care, a larger percentage than any other developed nation in the world. Health care costs have tripled over the past 40 years, with costs increasing at an average of 4.9 percent each year since 1965. Adjusted for inflation, the average citizen’s annual cost for health care in 1965 was approximately $1,000, compared to $6,500 in 2005. In order to think about some of the changes currently being proposed for the

industry, we must first understand the underlying factors driving the need for reform. Those factors are difficult to summarize, but are centered on the current structure of the nation’s insurance system, which incentivises consumers to make choices that drive up overall health care costs.

Innovations in medical services and technology have given medical practitioners a far wider range of (largely expensive) treatment options than previously available.

These treatment options, while valuable to the health of patients, tend to be overused —91 MRI scans, for example, were administered for every 1000 citizens, compared to an average of 41 for the developed world. CT scan rates were also the highest of any nation—223 per 1000 citizens, compared to an average developed world rate of 110.

These treatments are paid for via a patient’s health insurance and, for insurance companies, help ensure larger revenue streams to offset the increased cost of new technologies.

However, the collapse in employerprovided insurance (in 2000, 69

28 CORNELL BUSINESS REVIEW FALL 2011

percent of all employers offered their employees health insurance, compared to 53 percent in 2010) has prompted more citizens to purchase their own insurance policies, enroll in government sponsored programs or eschew them entirely.

The government currently provides two programs: Medicare for those over 65 or permanently disabled, and Medicaid for those whose income is at most 133 percent of the poverty line (for a family of four, that would be a maximum household income of $29,725).

In 2004, total expenditures on Medicare and Medicaid amounted to $602 billion. In 2009, that amount rose to $786 billion. In total, spending on Medicare and Medicaid represents 21 percent of the federal government’s budget.

Such a massive rise in government health care costs is unsustainable, especially in a time of increased fiscal austerity.

In addition, part of the reason overall health care costs have increased is because more patients are opting to receive care out of the emergency room rather than

with a primary care physician. For Americans, this change in where they receive insurance has shifted from regular checkups with a primary physician to the emergency department of hospitals, which since 1986, with the passage of the Emergency Medical Treatment act, must accept all patients, regardless of ability to pay. The emergency department has served as the portal of admission in 50.2 percent of hospital admissions in 2006, up from 36 percent in 1996.

Most significantly, those with private/employer insurance visited the emergency departments at a rate of 21 visits per 100 persons, compared with 82 per 100 for Medicaid and 48 per 100 for uninsured or Medicare recipients.

This shows the effect the current system of insurance is having on health care—by forcing more patients to put off primary care and wait till the emergency room,

costs are increasing, especially for the government, which provided the primary payment method for 42.9 percent of visits to hospital emergency rooms, compared to 39.7 percent for private insurance.

Moreover, emergency room care includes costs that one would not have in primary care, causing rates to rise to three to four times higher than for similar care in a primary care setting.

Even amongst emergency care visits, there is a huge difference in how much a hospital is reimbursed for different patients receiving identical care—a person on Medicare may be billed $3,000, with the patient paying $500 out of pocket in premiums and the government negotiating to have their $2,500 share reduced a to $500. Because of this practice, hospitals often charge an inflated “gross-charge” on their bill to a patient. This puts an additional

burden on those without any form of health-insurance.

Visits to primary care physicians is also dependent on income level, regardless of the specific form of insurance. In fact, in areas where those below the poverty level represent less than 20 percent of the population, 81.7 percent of health care is received through a primary care physician, compared with 54.2 percent in areas with a poverty level above 40 percent. This is because the fixed co-pay rates for insurance plans represent a much larger share of annual income for impoverished people or those on Medicare.

What is more, these numbers can help explain the rising costs for general health care. Those without a primary care physician can be thought of as medically “disenfranchised.” As a result, they often look to their local emergency room as a first resort, causing

FALL 2011 CORNELL BUSINESS REVIEW 29

hospitals to receive more and more patients who have only state/ federal sponsored health care or no health care at all. The hospitals receive reduced compensation rates on operations performed for those with Medicare, causing rates charged to those with private insurance to increase. The insurer then passes those costs onto the private consumer in the form of increased monthly premiums.

Current U.S. regulations prohibit both comparative shopping of insurance policies across state borders and the bulk negotiation by state agencies or large hospitals for wholesale rates for medication or other medical supplies. The United States is the only country that does not allow this form of wholesale negotiation.

All of the above factors have led to a situation in which the insured consumer is forced to pay increased amounts to compensate for costs incurred by the uninsured.

This includes increases in cost for young people, who are the least likely to have health insurance.

Most recently, in 2010, 28 percent of people aged 25-34 did not have health insurance, the highest percentage of people in any age group. And because of the high costs of care, many in this age bracket defer purchasing health insurance until they are older and more at risk: 45 percent of young adults reported delaying medical care because of costs in 2010, up from 32 percent in 2001.

Another related health care issue affecting young people, specifically those that wish to practice medicine, and a further driver of increased health care costs, is the increase in medical school tuition. From 1983 to 2003, median tuition and fees at private medical schools increased by 165 percent, while in public universities they increased

by 312 percent.

The increase in tuition at medical colleges has led to an increased debt load for students—the debt load in 2003 is 4.5 times as high as it was in 1984. As a result, an increasing percentage of medical school grads opt for specialized practice, which promises larger starting salaries to defray the cost of tuition. And in addition, grads that decide to go into primary care receive a greater share of reimbursement from Medicare and Medicaid than specialized doctors, resulting in a lower salaries. This has resulted in a shortage of primary care doctors, especially as older doctors begin retire. The percentage of medical school graduates going into primary care has fallen 51 percent from 1997 to 2009. This shortage will become especially intense in coming years as the lack of younger doctors become more apparent—there is a predicted shortage of 40,000 doctors in 2020 (for reference, there are currently approximately 100,000 family physicians). This shortage will be especially felt in rural areas, where the hours tend to be longer and the pay less rewarding.

To summarize, the burden of those with sub-par and nonexistent insurance has caused costs for those

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who do have insurance to increase at a dramatic rate. By creating a system where all patients must be accepted by hospital emergency rooms regardless of ability to pay, the government has essentially made a national health care program without the appropriate funding and insurance changes to support it. Because of that, insurance rates for those with insurance have risen, causing more people to drop their insurance, either in the form of employers ceasing to offer employerprovided plans, or citizens dropping private plans to shift to a Medicare program or no program at all. This creates a self-propagating cycle that especially impacts those at a lower income level. As more people forgo insurance, they make choices that artificially drive up health care costs, such as going to the hospital rather than a primary care physician, or waiting till a condition has become life-threatening to seek treatment.

As long as the current system of insurance remains in place, costs will continue to rise, as they have been for the past decade. This will have an enormous negative impact on our nation.

Austin Opatrny (abo27@cornell.edu) is a sophomore at Cornell University majoring in Economics and Asian Studies.

SPOTLIGHT: Cornell Student Entrepreneurs While many current Cornellians are busy pursuing summer internships and jobs upon graduation, others are opting to start their own businesses right on campus. The Cornell Business Review interviewed three students who are doing just that: Kristen McClellan ’12, Peter Cortle ’11, and Yang Liu ’14. With the help of University programs and resources, such as Entrepreneurship@ Cornell and the “e-lab,� these students have successfully developed their ideas while maintaining full-time academic responsibilities. Of course, entrepreneurship is not for everyone; those looking to start a business often cope with long hours, sleepless nights, and a ton of uncertainty. But, if anything, the stories of these three young entrepreneurs show that any student has the opportunity to “create a job� rather than just “get� one after college.

INTERESTED IN ENTREPRENEURSHIP?

Entrepreneurship@Cornell’s

Entrepreneurship@Cornell

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PETER CORTLE Fashion, particularly “streetwear” design that fosters self-expression and creativity, has always fascinated Peter Cortle ’11, the founder of Life Changing Apparel. His interest in fashion has also led him to one distinguishing belief: “What we wear during our everyday lives could be doing so much more,” Cortle says. When Cortle decided that he wanted to wear clothing that would contribute to a social cause, he scoured the market for clothes that fit his style and sense of social purpose. Sure, there were charities that offered their own apparel, but these items did not fit Cortle’s expectations for design, style and quality. And with that in mind, Cortle resolved to start his own business, Life Changing Apparel, using his own brand of clothing.

Life Changing Apparel is the world’s first “social” streetwear brand allowing its customers to participate in social change without compromising style. With every purchase made, Life Changing Apparel provides clean water to a child in need. In addition to this charitable element, Life Changing Apparel differentiates itself with clothing that meets both the needs of high-quality apparel and unique, streetwear fashion. In his efforts to effectively bridge the gap between streetwear fashion and social responsibility, Cortle states that his brand “fuses together the hip-hop, skateboard, and surf cultures with the act of making a true impact.”

Last year, when he started his business as a student at Cornell, Cortle says that the overall grind of being an entrepreneur while a full-time student was very challenging as he attempted to maintain his own work, life, and student balance. Often things would not work out as he originally planned, but Cortle, to this day, believes that passion for your idea and persistence are key in becoming a successful entrepreneur. As Cortle says: “Things will not work out the way you plan but if you truly believe in your idea, you won’t give up. I sincerely believe this persistence is what makes successful entrepreneurs— while others give up when things turn for the worse, you find a way to keep going.”

As advice for other student entrepreneurs, Cortle believes that they should not be afraid to make mistakes, and that now, at a young age, is the best time to learn from failure and look to improve in the future. Adhering to his own advice, Cortle founded his clothing brand with interest, ingenuity, and determination. As Cortle fittingly states, “Do what you love and are truly passionate about.”

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KRISTEN McCLELLAN Kristen McClellan’12, a senior in the School of Industrial and Labor Relations, came to Cornell in 2008 knowing she wanted to be involved with entrepreneurship on campus. Her idea, “SnappyScreen,” is an airbrush sunscreen application system that efficiently disperses a fine mist of sunscreen that covers the user from head to toe.

When asked about the inspiration for her idea, Kristen says: “The summer before my freshman year at Cornell, my sister and I were vacationing on a beach in the Bahamas. It had taken us what seemed like forever (an hour) to put on sunscreen. We thought, “There must be a faster way to do this?”

With this idea in mind, Kristen entered the Cornell Entrepreneurship Organization’s ‘Elevator Pitch Competition’ in the fall of her freshman year, and placed second to a graduate student. Kristen called the idea “SnappyScreen,” and the following semester she was accepted into Cornell’s “eLab,” a student program that provides office space, access to accountants and lawyers, and a network of successful entrepreneurs and Cornell alumni who serve as mentors.

For Kristen, the eLab provided “An unbelievable mentorship network.” And states that “There has been a mentor available to me through every stage of SnappyScreen’s development.” Kristen has taken time to develop her idea, receiving numerous accolades and press mentions along the way. Kristen and SnappyScreen have been featured in MTV and the New York Stock Exchange’s “Movers and Changers” Business Competition, as well as the ILR Alumni Magazine.

When asked about the challenges of balancing her startup as a full-time student, Kristen replied: “It’s hard sometimes. It’s like taking one extra course each semester. Product design can be tedious. You definitely sleep less.”

For advice to aspiring student entrepreneurs, Kristen believes that the time to pursue an idea is now: “As students, we have so many resources. Students do not always recognize that they can pursue both at the same time. It doesn’t matter if your idea succeeds or fails. Either way, you have gained a learning experience afforded to few. Kristen goes on to say: “…In the next ten years many of us will start families, own homes, and be faced with many other responsibilities. If you act on an idea in college, there’s no one else relying on you, except you. No one else to take care of. Now is the time.”

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YANG LIU & LIANG ZHAO For many people, the idea of going to China is a distant dream and seemingly out of reach. However, Yang Liu, a sophomore student in the School of Hotel Administration at Cornell, is attempting to change that. Yang is developing a business idea, called ‘Culture Messenger’ that hopes to bring, in Yang’s words, “College students to China to travel, learn about the culture, meet the local Chinese college students, form friendships, and have fun.”

For Yang, the inspiration for Culture Messenger came from a conversation with a friend who had great interest in someday going to China and experiencing Chinese culture. That initial conversation set off a “spark” that led Yang to think, “Why not develop such a program?”

Yang realizes, however, that transforming an idea into reality takes not only a ton of effort, but help from others—an entrepreneur cannot do it all alone. When asked how her Cornell experience helped her as an entrepreneur, she described how a class in entrepreneurship in the Hotel School—Developing The Hospitality Business Plan— and working with this course’s professor helped her write and solidify a business plan. She explained how Cornell’s Entrepreneurship lab (the “e-lab”) helped shape her program and allowed her the opportunity to gain a variety of perspectives and ideas from a network of mentors.

To help with the execution of Culture Messenger, Yang also recruited a partner named Liang Zhao, a student in the Hotel school. When asked about some of the challenges of developing a business as a student, Liang stated: “The research was the most challenging thing. We had done some preliminary research but it was based on a small sample with random people.” Yang Liu also agreed with her partner in that getting unbiased research data from potential customers can be difficult.

Through her experience with her startup, Yang says that she has learned important lessons. One, in Yang’s own words, is that “Perseverance is the most important trait to have. I sometime spend a lot of my energy doing this, and it can be difficult with classes and academic responsibilities. You must have determination and perseverance.”

Yang Liu plans to register as an official company and recruit more volunteers, and full-time and part-time staff to help out with the logistics of running the business. She hopes to launch the Culture Messenger Program in the summer of 2012.

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IPOs and the Tech Industry

by Marshall Verdi

The technology industry experienced a new trend in 2011 as many of its well-regarded and heavily used Internet businesses — such as Zynga, Facebook, and Groupon— prepared to offer public stock, prompting buzz and anticipation from Wall Street. For investors, however, this excitement is tempered with apprehension as the push to go public often brings more questions than answers. For example, what will it mean for these companies to release private information regarding their revenue and costs? Also, how will prospective stockholders evaluate information about a new and somewhat mysterious industry?

These are just a few of the many questions that financial analysts must face as they assess the investment prospects of the new Internet tech industry.

When a company goes public, it submits an Initial Public Offering (IPO). The primary purpose of an IPO is to raise capital by releasing

stock to the public. However, this potential influx of cash comes with many new responsibilities.

A public company now has a responsibility to shareholders aside from the survival of its business. It must make “material information” available to all investors— a risky proposition for technology companies, whose success often hinges on innovation and secrecy.

Consider the case of Groupon, the popular online daily-discount website. When the company first announced its plans to go public, Groupon anticipated an initial valuation of $20 billion. Less than a month before its scheduled offering that number dropped to $10.8 billion, reflecting investors’ concern for the company’s business model.

As its IPO approached, Groupon found that investors were wary of the potential of competitor sites—like LivingSocial.com, for example— that offer very similar services to its business. As Charlie

Toole, a portfolio manager at Brave Wealth Managements, in an interview with Reuters said: “What’s to prevent Facebook, Amazon, and Google from going to merchants and offering better terms? How does Groupon keep margins and pricing intact?” Toole’s question points to a fundamental problem with investing in the tech industry—business models are unproven and multiple companies can often replicate each other’s services.

The way we understand businesses in the Internet tech industry is often different than the way we would analyze a business in a traditional industry— say manufacturing or banking.

Unlike companies in more established industries in the United States, Internet companies do not create revenue from the physical sale of goods and the services, and their product is often not easily monetized. Facebook, for example, provides personal

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pages and social networking services to its customers, but its revenue comes from data mining and advertisements. The volume of its user-base does not necessarily correspond to the financial strength of its business, yet analysts use site traffic and the number of users to predict the future success of an Internet business.

Another factor that differentiates the tech industry from others is the sheer number of users and potential customers a website can attract. However, Internet user bases can be volatile and unpredictable— a company that has an enormous user base one year might see it completely disappear in the next.

Case in point: MySpace.

News Corp acquired the social networking site for $580 million in 2005, only to see it lose most of its user base to Facebook in a matter of years. By last June, MySpace had lost so much value that News Corp sold it for $35 million. Such volatility within the tech industry cannot help but make a potential investor in Facebook ask: “What keeps another company from doing to them what they did to MySpace?”

Such risk makes tech companies potentially less appealing to shareholders, but it also makes the promise of upcoming IPOs even more intriguing.

Several tech companies went public early this past summer.

Linkedin (LNKD) and Pandora (P) were the two most significant tech companies to make IPOs, and their experiences were rather alarming.

Early on, extreme fluctuations in their stock prices testified to the uncertainty surrounding the tech industry. Although these fluctuations came at a time of high volatility throughout the market, they may be taken as a sign that investors did not feel completely confident in evaluating these companies’ business models.

In addition, the initial valuations of these companies were exorbitantly high. For a brief period Linkedin traded at 750 times its projected 2012 earnings.

Even still, such valuations suggest that certain portions of the financial markets have faith in the ability of Linkedin to grow and dramatically increase their earnings in the future.

Despite signs of investor faith, Linkedin’s stock price dropped

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20 points in the first few weeks since its IPO. And as a testament to investor uncertainty, in a short six months Linkedin’s stock price reached a low of $70 a share before peaking at $90 and then dropping below $80 to again. Pandora also lost 75 percent of its value before returning to roughly the same price of its initial offering.

However, any discussion of recent Internet tech stocks is not complete without a discussion of the impending IPO of Facebook.

Facebook has a multibilliondollar valuation according to many Wall Street projections and a user base that is quickly expanding and growing daily. In January, investment banking giant Goldman Sachs invested $500 million in Facebook as a part of a deal that valued the company at $50 billion. That deal included a plan for Goldman to raise $1.5 billion from private investors for Facebook on the secondary market. These ambitious plans suggest that Facebook could find similar enthusiasm for its IPO, possibly inducing a much-needed turnaround in the market.

Of course, the opposite could happen, too. Perhaps the troubling question raised by the recent excitement over tech stocks is the possibility of a tech bubble.

The future with this industry is impossible to determine, and it may be that increased investor awareness of a bubble could prevent one from actually developing. There is no question, however, that the valuations of tech companies, as well as their business models, have perplexed investors. Either way, the tech sector remains an intriguing market to watch as it continues to develop.

Marshall Verdi (mjv62@cornell.edu) is a junior at Cornell University majoring in Economics and Government.

W E R D N A

ROSS

N I K SOR

In 2001, Andrew Ross Sorkin launched DealBook, a popular electronic newsletter and blog, to chronicle the latest transactions within the corporate world. He currently serves as the co-anchor of CNBC’s “Squawk Box” program, a financial columnist for The New York Times, and the Editor-at-Large of DealBook. In addition, he received his second Gerald Loeb Award in 2010 for his riveting coverage of the recent financial crisis in his best-selling book, Too Big To Fail.

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Cornell Business Review: How did advantage, tailored content, and Cornell University prepare you for quality journalism. your future endeavors?

CBR: How did you develop such a Andrew Ross Sorkin: The Cornell strong “source network?” experience was really about teaching me how to think. This includes how ARS: I spent a lot of time very early to approach a challenge or a problem, on — and I continue to spend the how to consider the various per- time — trying to develop relationmutations of a situation, and how ships with potential sources inside to interact with other people from the business. Ultimately, it was very different parts of the country and important to me to find people who world. It was about creating friend- were in the position to know inforships, and trying to understand the mation that they probably weren’t dynamic among people. I learned supposed to say out loud, and to more outside of the classroom than develop a trust with these people, I learned inside the classroom. so that I could obtain news before anyone else. I invested an inordinate CBR: What specifically would you amount of time in it. I’ve been doing attribute to DealBook’s success? this job for over twelve years now, so I’ve realized that these are relationARS: To the extent that DealBook ships that are built up over years, and has had success, one factor would be not something that happens over the that we were a first mover in terms course of a week, or a month, or a of aggregating business news in a year. It’s very rare that you’ll meet unique format back in 2001. I like somebody over lunch, and then all to think that readers appreciated its of a sudden, they’ll be spilling their sensibility. We approached it from secrets to you the next week. It takes the perspective of what would the readers want to read every morning and what’s important to them? That was instrumental. Our audience was a very specific audience: it was the deal ecosphere – all of the people involved in the deal world, including bankers, regulators, venture capitalists, hedge fund managers, and the captains of industry. So, we asked a long time, and part of it is buildourselves, ‘what are they looking to ing a reputation beyond the personal get out of a report like this?’ I think trust and bonds: a reputation in the that focusing a lot on what the audi- industry as someone who is writing ence was looking for was a big part things with a unique angle and who of our success. And, over time, we’ve is skeptical, hard-hitting, but ultihad more and more original report- mately fair. ing, including investigative work and breaking news. Ultimately, it CBR: It has been reported that comes back to quality journalism. 2.5 Million individuals read Those three things: the first-mover DealBook each month. Which

publications and websites do you often read?

ARS: It’s funny. I read all the publications that we end up linking to in DealBook. I have an RSS-reader with lists of probably over a hundred different sites that I look at throughout the day. Everything from the traditional things that you would imagine, like The New York Times, The Wall Street Journal, the Financial Times, Bloomberg, The Washington Post, USA Today, to the Daily Deal, Breaking Views, Der Spiegel, various newsletters, and a lot of the U.K. papers.

CBR: As an editor, how would you describe your method or style of management?

ARS: Today, we have an amazing team. DealBook has evolved over the past decade. Originally, it was me in my pajamas by myself. But, over time, we built an amazing team with lots of extraordinary

PERSISTENCE OVER TALENT WINS EVERY DAY.

38 CORNELL BUSINESS REVIEW FALL 2011

editors and reporters. I joke that I’m the “Cheerleader-in-Chief,” but I actually think of myself that way. I feel like my job is to try to make everyone else as good as they can be, to cheer them on, and to cheer on the DealBook brand.

Fortunately, the sensibility that I established years ago has been embedded into the DNA of the report every day. So, for the most

part, everybody understands what we’re trying to do, the framework of what we’ve already created, and what fits.

I ALWAYS LIKE TO THINK THAT DEALBOOK WAS MY EFFORT AT BEING ENTREPRENEURIAL.

CBR: How do you balance all of your professional and personal reCBR: What would you consider to sponsibilities? be the highlight of your journalism ARS: I wish that I could tell you career? that I’m perfect at it. But, of course, it is a daily challenge. I think that ARS: Oh, boy. I don’t know. It probawhile I multi-task in some respects, bly happened in college; I interviewed the trick for me is that I really try to Mick Jagger. I thought that was probfocus on just one thing at a time. ably one of the coolest things that For me, that’s the key. So, when I’m you could ever do. I don’t know if I’ve writing my column, for example, I had the highlight yet, but I hope that really do think of nothing else. I try I haven’t had the highlight, because to not get distracted. When I’m pre- if I’ve had the highlight, then what paring for “Squawk Box,” I really try would I have to look forward to? Thus just to prepare for “Squawk Box.” far, I would say that writing the book When I’m in a meeting, I try to be Too Big to Fail was one of the great exin the moment – I try not to look periences in my life. I thought that it at my BlackBerry twenty times, and was a great personal challenge for me really try to focus on what is the task to see if I could physically and menat hand. I try to compartmentalize, tally do it. It was like playing three-diso that I’m not trying to do twenty mensional chess. It was fascinating to things at the same time, because I get inside the minds of these people, think that whenever you try to do to try to bring the story together, and to put the big puzzle together. that it is very challenging.

CBR: Which financial figure do you still wish to meet, and why?

ARS: That’s a good question. You know, I never got to meet Steve Jobs, and I think that he would’ve been fascinating to talk to. If you go back in history, then I’d probably like to speak with John D. Rockefeller or John Pierpont Morgan.

And, given what is going on in the world today, maybe also economist John Maynard Keynes.

CBR: What is the predominant difference between presenting a recent event on television and presenting a recent event in a newspaper article?

ARS: On television, the speed and rapidity of it is the biggest challenge.

Often on television, something will literally happen at 7:01AM, and you

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are reacting to it at 7:01AM and three seconds. So, it’s really about being able to try to put the news into perspective quickly, to think on your feet, and to draw upon your reservoir of knowledge on the specific topic. It’s also about articulating the news in a nuanced way within a short period of time. In an article, you may have one or two thousand words, and a reader can go back and re-read a section if it’s very complicated. But on television, you’re trying to impart the information and you may only have a minute or two to explain what otherwise is a complex issue. There are things you can do on television that doesn’t work in print, and there are things that you can do in print that don’t work as well on television.

like trial by fire. I fell in love with business, and I thought that it was a fascinating world.

CBR: What advice would you offer to students interested in pursuing careers in either the journalism or investment banking profession?

ARS: Well, they are different businesses. But, I think that it’s the same advice, oddly enough, for both. Ultimately, it’s about asking the right questions and creating a network of relationships with people. And, it’s also about perseverance. I think that I developed a lot of the rela-

CBR: What is the one thing that you would like to do within the next five years?

CBR: Where or when did you develop your interest in business?

ARS: I was always interested in business; I wanted to be an entrepreneur. I like to think that DealBook was my effort at being entrepreneurial. I was always interested in the world of media and advertising. When I was fifteen years old, I started a sports magazine, and I was always interested in the business side of it: publishing, finding advertisers, and creating budgets. And, my interest in Wall Street and finance grew as I spent time in London. After I finished college, I was covering British business when it happened to be the height of the “Mergers and Acquisitions” boom, and it was sort of

over talent wins every day. If I get an email from somebody once, I may not respond immediately, but when I get emails from somebody three or four times, it may seem annoying, but I feel compelled to call them back. I generally think that most people want to be helpful. Nobody wants to say “no” to you. It’s a painful thing. Often times, they probably shouldn’t say “yes,” but people want to say “yes.”

I think that you’ve got to identify what you’re passionate about, and then identify the people that may be able to help you get there, and seek them out. That’s really the best advice that I can offer.

ARS: I don’t necessarily look that far out. I want to basically keep on doing what I’m doing. I want to make “Squawk Box” as great as it can be. I want to write great columns. Maybe I’ll write another book at some point – with the economy so shaky, I suspect that I could always write a sequel to Too Big to Fail.

CBR: What’s next?

ARS: I am worried that we’re going to be bumping along the bottom, and I think it’s going to be difficult. I hate saying this, but I’m anxious, I’m a little nervous, and I tionships that I have now because fear that it’s not going to feel like I kept calling people, I kept email- the economy is getting better for a ing them, and I kept pushing the long time. point. I would say that persistence Interviewed by: Marc Hershberg

40 CORNELL BUSINESS REVIEW FALL 2011

The UBS Rogue Trader Scandal

by Ivi Demi This past year, the investment banking world was witness to one of the largest rogue trader scandals to ever hit the already reeling and vulnerable industry. The Swiss banking giant UBS released reports in early September 2011 of a rogue trader who, in initial reports, was responsible for over 2 billion dollars in losses for the firm. Subsequent inquiries into the losses have estimated the final total to be just shy of 2.3 billion dollars. The massive losses have been linked to unauthorized trading on the part of 31-year-old Kweku Adoboli, a trader who sat on the Delta One desk of the firm’s investment bank.

The Delta One desk is responsible for the trading of Exchange Traded Funds, or ETFs. These ETFs track underlying assets within a market, such as a stock exchange, a specific sector, or commodities such as gold. ETFs are traditionally much

cheaper than mutual funds and provide access to market products for personal investors who may not have had the opportunity to purchase these products otherwise. During the follow-up investigation by international authorities, Adoboli was arrested and charged for fraud in the exchange of these ETFs, as well as false accounting information dating as far back as 2008. A combination of these false practices, misguided and nonresearched information, and negligence on the part of Adoboli are what ultimately led to the loss of billions.

Though in many scandals of this nature, the crime can be traced to the actions of one party, upper management may also be held accountable for the damages and losses incurred to the firm.

The bank’s Chief Executive Officer, Oswald Gruebel, initially dismissed any

calls for his resignation, placing the blame on the hands of the rouge trader’s actions and stating that there was no way for upper management in the firm to know of Adoboli’s intentions at the time. But UBS and the Delta One desk are no strangers to controversy—the firm was once bailed out by the Swiss government in 2008, and it was responsible for past rogue trader scandals of equal and greater volatility. Gruebel’s resignation came soon after his attempted defense, along with the resignations of Francois Gouws and Yassine Bouhara, the co-heads of UBS’s Global Equities franchise.

For many in the UBS front offices, the loss is seen as manageable thus far, despite the foreseen posting of a complete loss for the third quarter of the 2011 fiscal year. But the damage to UBS’s reputation may take a much longer

FALL 2011 CORNELL BUSINESS REVIEW 41

time to rebound. Its management and investment banking divisions will receive serious scrutiny in the coming months from regulatory agencies and investors.

The scrutiny is also adding to further calls of trimming down the investment banking unit of the firm. On a global scale, media commentators have renewed their push towards a further separation of commercial banking from investment banking, a topic that has sprung up contemporaneously with major fraud and rogue trading scandals in the past.

Investors in big banks are prone to move assets readily based on even the slightest of rumors of a corporate scandal. As a result, a split between these two arms in a bank can become more important in protecting the interests of both the clients and employees. To many average investors, who have little experience in how their money is being utilized, particularly in assets such as ETFs, it becomes difficult to understand or realize when your earnings are being traded fraudulently or if the advice you are receiving is trustworthy.

As the investigation continues, concern is also being brought up in

regards to the nature of the alleged trading. Because UBS received bailout money from the Swiss government in 2008, any trading being done that could jeopardize the status of the traditionally internationally safe Swiss franc is considered far more heinous among Swiss bank regulators. Rumors reported by investigators to the media in recent weeks have shown that Adoboli could have been speculating against the Swiss franc. If this is shown to be true during the ongoing trial and investigation, the consequences for both Adoboli in court (jail time) and for UBS in the investment banking world could mean more regulation and scrutiny from government.

In looking at the UBS rogue trader controversy as a whole, there is one key trend in investment banking that is evident: there is a growing culture of risk growing within the industry. No matter the restrictions and control that firms begin to place on their traders, an appetite for risk in trading has been a growing part of the investment banking culture for years. Although each

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passing case of fraudulence tends to bring with it a wave of finger-pointing and renewed calls for reform, it appears that every few years, a rogue trader will go beyond the limits of their position to make risky and illegal investment decisions under the noses of their management. Much like in previous cases, UBS will most likely crack down with a string of paper trail regulations that further hinder individual traders’ abilities to make large-scale investment decisions or simply provide an easier avenue to track these asset movements early on in order to prevent them from occurring. What this UBS case has shown, however, is that the calls for reform must be answered not simply by the punishment of the guilty party and a change in leadership, but by a continued effort to change the culture surrounding investment banking, particularly when it is tied in so intricately with commercial banking. Only then can we expect cases such as these to disappear.

Ivi Demi (id63@cornell.edu) is a senior at Cornell University majoring in International Agriculture and Development

C ornell Business Review Thank You To Our Kind Sponsors: Charles H. Dyson School of Applied Economics and Management The School of Hotel Administration The School of Industrial & Labor Relations Entrepreneurship@Cornell Student Assembly Finance Commission

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MASTER OF MANAGEMENT IN HOSPITALITY

make bold moves and learn from them.”

- Kirk Kinsell MPS ‘80

Kirk Kinsell

President, The Americas, InterContinental Hotels Group (IHG) MPS ‘80 Making bold moves that perform for the hospitality industry is what Kirk Kinsell does. Like being first out of the gate in 2004 with Hotel Indigo, the industry’s first branded boutique hotel experience. Where does true passion for hospitality come from? For Kirk Kinsell, it springs from his rich experience at the Cornell School of Hotel Administration’s MMH program. “The school instills a commitment to our industry,” says Kinsell. Today Kirk is responsible for the performance of IHG’s largest operating region, spanning more than 3,400 hotels and resorts under seven brands.

Congratulations on being chosen 2011 Cornell MMH Outstanding Alumnus of the Year!

To learn more about the world’s leading hospitality-focused graduate management degree, go to mmh.cornell.edu/elevateyourpassion

Proud sponsors of the 2011 Cornell MMH Outstanding Alumnus of the Year event:

44 CORNELL BUSINESS REVIEW FALL 2011

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