Cornell Business Review Fall 2016

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CORNELL BUSINESS REVIEW

Exclusive Interview With Girish Reddy of KKR Prisma The Deficit's Not on the Jumbotron: Snowballing Spending in College Sports Small Blind, Big Find: Upstate New York's Casino Dreams

Fall 2016 | Volume VII | Issue 1

LOOKING THROUGH ROSE-COLORED HEADSETS Cautious Optimism About A Virtual Reality Future

By Lily Wang • Page 7

TABLE OF

CONTENTS

EXCLUSIVE INTERVIEW WITH GIRISH REDDY

Fall 2016 | Volume VII | Issue 1

01 TABLE OF CONTENTS 02 LETTER FROM THE EDITOR 03 THE BUBBLE 05 A.I. GETS A DESK JOB 07 LOOKING THROUGH ROSE-COLORED HEADSETS 09 A NEW FRONTIER 11 EMPTYING THE ENDOWMENT 13 THE HIDDEN GIANT 15 THE MEDICINE CABINET'S OUT OF REACH 17 PLAYING, AND PAYING, TO WIN 19 WE CHAT 20 SMALL BLIND, BIG FIND 21 THE DEFICIT'S NOT ON THE JUMBOTRON 23 EXCLUSIVE INTERVIEW WITH NICK BAYER 25 BREXIT 26 EXCLUSIVE INTERVIEW WITH GIRISH REDDY 29 FEAR & LOATHING & ADVERTISING 31 EXCLUSIVE INTERVIEW WITH MILES AHEAD 34 BACK ON THE GRID Cover Photo By Zack Kanter

CORNELL BUSINESS REVIEW Fall 2016 | Volume VII | Issue 1 Ethan Coy Andrew Billiter BUSINESS MANAGER Jenna Roland MAGAZINE DESIGNER Grace McBride EDITOR-IN-CHIEF

MANAGING EDITOR

Bjorn Bjornsson, Hunter Bosson, Casey Breznick, Emma Nelson, Sanjana Sethi, Samantha Torre & Avirook Upmanyu ASSOCIATE EDITORS

Nolan Abramowitz, Lucas Goldman, Isaac Greenwood, Cameron Griffith, Leora Katzman, EDITORIAL TEAM

Hyun Ho Lee, Hamish MacDiarmid, Jeremie Mutolo, Piotr Nowakowski, Katherine Pioro, Grace Shi, Josh Thompson, Lillian Wang & Catherine Wei BUSINESS TEAM Natalie

Allen, Archana Choudhary, Kristen Daddario, Nicole Feibelman, Chloe Gulati, Lena Jiao, Betty Lazis, Minesh Patel, Michal Pisarek, Rosie O’Regan, Rhea Somaiya, Savanna Steinberg DESIGN TEAM Jacob

Rauch, Rosalyn Xu

Letter from the Editor Welcome to our Fall 2016 issue! Our organization has grown substantially this semester, and I am pleased to present what we believe is perhaps Cornell Business Review’s best issue to date.

Cornell Business Review was founded by Matthew Linderman ‘12 with the goal of encouraging Cornell students to “Join the Conversation.” During my tenure as Editor-in-Chief, I have sought to further his vision by engaging readers globally in addition to those here on campus.

This semester we recruited a technology team to rebuild our website and allow us to build a global presence. According to data we have collected through our new website and Facebook page, Cornell Business Review has been read in over 30 countries by thousands of viewers. While we view the magazine as a staple of our organization, our goal is for Cornell Business Review to become a notable voice on business and finance topics, and we see our online platform as a mechanism to accomplish that.

One of the most rewarding parts of my role as Editorin-Chief is helping our business team conduct alumni interviews. This semester I had the privilege of visiting the New York offices of KKR, a global alternative asset management giant. There I interviewed Girish Reddy MEng ‘78 MBA ‘80, Co-Founder of KKR Prisma, a customized hedge fund solutions provider. Mr. Reddy shared his views on Cornell Tech, the President-Elect’s infrastructure plan, the Indian economy, and much more.

Other interviewees in this issue include Nick Bayer ‘00, Founder and President at Saxby’s Coffee, and Rob Karp ‘19, Founder of MilesAhead, a high-end travel advisory company.

Serving as Editor-in-Chief has helped define my Cornell experience, and I am grateful for this opportunity.

My colleagues on the executive board, Andrew Billiter (Managing Editor, ‘17), Jenna Roland (Business Manager, ‘18), and Rosalyn Xu (Design Editor, ‘18) have been incredibly supportive, and the success of this magazine is largely a result of their hard work.

We hope you enjoy our magazine. If you’re reading the print version, make sure to check out the new version of our website, www.cornellbusinessreview.com, for more content!

Ethan Coy Class of 2017 Editor-in-Chief

The Bubble

BY CAMERON GRIFFITH

Source: Kai Caemmerer/Business Insider

Economic bubbles have historically come as a complete surprise without any telltale signs of an impending crash. Today, the signs of the largest housing bubble in history stand hundreds of stories tall in China, with no one seeming to care.

In the past decade, dozens of “ghost cities” have sprung up across China.

These cities cost billions of dollars to build and are capable of housing millions of people. The most famous of these ghost cities, Ordos, boasts rows and rows of newly completed skyscrapers, lush parks, art museums, and concert halls, most of which stand completely unoccupied.

The rapid growth of the Chinese middle class is largely responsible for this enormous bubble. For many Chinese, real estate is the only asset class in which they believe they can make sound investments, as domestic stock markets are considered too volatile for risk averse investors.

Furthermore, bond yields are kept artificially low to encourage development, and the Chinese government limits the amount that citizens are allowed to invest in international assets. As a result, the rising Chinese middle class has been forced to find an alternative investment for its newfound wealth.

In the past year the Shanghai stock exchange plummeted from its alltime high, losing nearly 40% of its value in the span of four months, while, during the 3 | CORNELL BUSINESS REVIEW

same period, housing prices in Shanghai rose 31.2% according to the National Bureau of Statistics. The combination of all these factors has led Chinese middle class investors to the conclusion that real estate is the safest investment opportunity available to them.

Investment in real estate has led to a significant increase in the demand for new housing projects as many middle class families buy one or two extra apartments to meet their investment needs. This brings us to the other half of the problem: strict government quotas for provincial GDP growth. Every year the national government stipulates a certain level of GDP growth which provincial leaders must meet or else face harsh penalties. The easiest way for leaders to meet these standards is to invest heavily in the construction of entire cities filled with massive apartment complexes.

And because of ballooning demand, these apartments are often bought instantly, even though the new owners have no intention of living in them.

The entire system creates an upward spiral of growth, with new apartment buildings being built faster than Chinese urbanization can fill them. The severity of the problem is outlined by the China Center for Urban Development, which found that the land used for urban construction rose by 83.41 percent from 2000 to 2010, while

the Chinese urban population saw an increase of just 45.12 percent in that same period. The result of this disparity is vast, uninhabited, concrete jungles that leave provincial governments with inflated GDPs, and the central government none the wiser.

Were it not for the Chinese government’s comprehensive use of a variety of financial tools and public policies to ensure consistent economic growth, it is likely that this runaway construction would have already resulted in one of the largest financial bubbles in history.

In order to maintain steady growth in the housing market China’s central government employs several contractionary and expansionary policy measures which have so far been largely effective. When housing prices rise too rapidly, the government tightens credit requirements, raises down payments, and imposes restrictions on the location and quantity of apartments that citizens can buy.

When the government detects a cooldown in the housing sector it does just the opposite by loosening credit restrictions and lowering the required down payment.

These drastic policy measures have made it much more difficult for those wishing to purchase a home or invest in real estate for the long term.

Richard Li, the head of investing at Zhong Tai Construction Group in

Guangdong, said that “Moving in the same direction as government policies leads to investments which yield much less risk.”

Li added that it is more beneficial, from an investment standpoint, to anticipate governmental policy changes than it is to try and understand typical market indicators.

The world is waiting to see what the end result of these policy measures will be, but if we examine the devastating effects that the US housing crash had on both the domestic and international economy a clearer picture of the potential of this economic time-bomb emerges.

Both bubbles share the same root cause, in that home buyers expect alreadyrising real estate prices to continue to rise. In the United States, housing prices had risen continuously since the mid 1990s, while housing prices in Shanghai and other major Chinese cities have seen upwards of 30% increases in recent years. These staggering figures indicate how, in both cases, green-eyed investors can become blind to the realities of the market based on the fallacy that what has happened will continue to happen.

Shortly after the US financial crisis in 2008, it became clear that the economic implications of the housing market crash would resonate for years to come. The CaseShiller housing index shows that house prices plummeted from their record highs to a ten-year low, leaving millions of people underwater and forcing them to foreclose on their homes. Millions lost their savings in the coinciding market crash, and have been forced to postpone their retirement.

In China, this phenomenon will only be intensified. As few jobs in China offer any form of retirement planning, and the Chinese financial sector lacks few investing alternatives, many people rely solely on real estate investment to meet their long term financial needs. A report undertaken by the China division of Citibank estimates that 65% of personal wealth in China is tied up in real estate, compared to 35% in the United States.

This means that when the housing market collapses, millions of Chinese families will lose their retirement savings, college funds, and possibly even their homes.

This grim outlook has not scared off

Chinese investors, many of whom have faith that the government will be able to mitigate the threat of a housing market collapse, as they have proven adept at ensuring consistent economic performance.

According to Li, “the purpose of government regulation and control has been achieved” and that “China’s real estate sector will not end up in the same bubble as Japan, nor will it suffer the same crisis that the United States did.”

The optimism of the rising Chinese middle class, coupled with the meticulous control of the Chinese government, have created the perfect conditions for the largest real estate boom in history. Although this deft control of the housing market has been successful at staving off disaster thus far, the government is only adding fuel to the fire by allowing the housing bubble to grow far larger than it would under free market conditions and ensuring that the fallout from the eventual crash will most likely be even more devastating.

CORNELL BUSINESS REVIEW | 4

A.I. Gets A Desk Job

BY KATHERINE PIORO

The Terminator. I, Robot. Ex Machina. What do all of these films have in common?

Step into any cinema, and you’re bound to find at least one science fiction movie about robots and artificial intelligence (AI). More often than not, these artificially intelligent robots pose a detrimental threat towards humans.

Beneath the threat of robots is the deeperseated fear that technology imbued with human intelligence will eventually overtake mankind. This fear is present all across literature as well, motivating the plots of well-known works such as Aldous Huxley’s Brave New World, H.G. Wells’ The Time Machine, and Karel Čapek’s R.U.R.

But artificial intelligence is not reserved for the big screen and literature.

The past decade has seen a huge increase in the number of software giants pouring money into AI centric research and 5 | CORNELL BUSINESS REVIEW

development programs. In 2014, Google acquired DeepMind, an AI company on a mission to “Solve I n t e l l i g e n c e ”, for more than $500 million.

DeepMind’s claim to fame is its AlphaGo program that beat the world champion of a complex board game called Go. Go is tougher than traditional strategy games; for example, while chess has 35 possible moves for every turn, Go has 250. To address this complexity, DeepMind’s AlphaGo uses a computational approach involving ‘neural networks,’ which is a computer simulation designed to mimic the nonlinear processes of neurons. AlphaGo’s learning algorithm enforces neuronal behaviors by making connections on its own and selfcorrecting.

Google is not the only software giant that is focusing on artificial intelligence. In 2011, International Business Machine’s (IBM) supercomputer Watson beat two of Jeopardy’s greatest champions.

Watson uses DeepQA, another software framework that uses natural language processing and evidence-based search to return a ranked list of possible answers.

Today, IBM is exploring Watson’s potential in the medical field, where its supercomputing abilities are helping doctors diagnose diseases and train medical students. Watson’s potential is enormous – it can read every piece of medical literature on the internet in minutes and process more data in a day than a human can in a lifetime. Mark

Kris, an oncologist at Memorial SloanKettering Cancer Center in New York, predicts that Watson could eventually serve as “the world’s best second opinion.” But Watson’s abilities makes one pose the question: with one doctor that knows everything, is there really a need for human doctors anymore?

Technology has been a disruptor of the status quo since the dawn of the age of man. The discovery of fire allowed humans to cook their food and survive in extremely cold environments. The invention of the wheel during the Bronze Age directly contributed to the expansion of civilization, allowing for both increased mobility in trade and warfare. The invention of the steamengine during the Industrial Revolution of the 18th and 19th centuries eventually led to the introduction of the assembly line by Henry Ford in 1913 and the mechanization of tasks that once required human hands. For the past three million years, technology has almost exclusively automated manual processes. But in the past several decades, the world has seen a shift. By way of artificial intelligence, technology now has the ability to automate cognitive processes, thereby threatening the jobs of white collar workers.

Artificial intelligence is already popping up in nearly every industry, from the legal field to the financial sector and beyond. In the legal field, ROSS, an iteration of IBM’s Watson, serves as a researcher for BakerHostetler, a leading law firm. According to BakerHostetler, ROSS has freed up time for lawyers to focus on tasks that require human creativity.

In the field of journalism artificial intelligence is helping write financial reports and shorten articles.

Since July 2014, The Associated Press has employed artificial intelligence technology from a natural language generation company called Automated

Insights to both generate selected sports reports and to turn out thousands of quarterly earnings reports. The Associated Press maintains that this new development is about ‘using technology to free journalists to do more journalism and less data processing, not about eliminating jobs’.

Artificial intelligence is also taking the financial sector by storm. In November of 2014, Goldman Sachs invested $15 million in a financial start-up called Kensho. Kensho provides analysts with a simple Google-style search bar to answer upwards of 65 million financial analysis questions using advanced data mining and natural language processing. Kensho also responds to phone calls from investors, giving instant, data-driven feedback.

Generally, Goldman executives share the optimistic view that artificial intelligence will supplement human work and give humans more time to focus on problems that require creativity. Kensho’s founder Daniel Nadler disagrees – he predicts that automation software companies like Kensho will occupy between one third and one half of all existing jobs in finance

within a decade.

Many companies employing artificial intelligence technologies are operating under the assumption that AI will do the “drudge work” and leave humans with the creative tasks. But this might not always be the case. A study conducted at Oxford University found that due to the declining price of computers and increasing computing efficiency, 47% of all US jobs are at ‘high risk’ of being automated within the next 20 years.

President Obama’s February 2016 report to Congress echoed these somber sentiments.

The report introduced a study by the White House Council of Economic advisers that examined job susceptibility to automation based on wage. The report found that 62% of American jobs are at risk of takeover by robots, with the majority of jobs at risk paying less than $40 an hour.

However, such a pessimistic view is not universal; a study by McKinsey & Company found that while 60% of all occupations could have 30% of their activities automated, fewer than five percent of all occupations could become entirely automated. In other words,

artificial intelligence will much less likely automate entire occupations than redefine them. Another report by Deloitte that evaluated the census data for England and Wales since 1871 found that the growth of jobs in the creative, care, tech and business service industries have more than offset the loss of jobs in the agricultural and manufacturing sectors. The study postulates that despite AIs cognitive advantages, the general trend of shortterm job displacement and long-term job growth will remain the same.

Clearly, there exists a wide range of conflicting opinions as to how artificial intelligence will impact white collar jobs. In general, there are two extreme beliefs: the first is that while AI might displace some workers, the net result with be massive job growth. The second extreme is that artificial intelligence’s ability to automate cognitive processes will make only a small number of high-paying jobs available in the future. It is true that artificial intelligence’s cognitive abilities separate it from the purely physical technological processes on the past. The exact effects of this separation remain to be seen.

CORNELL BUSINESS REVIEW | 6

Looking Through Rose-Colored Headsets

BY LILY WANG

In 1985, a humble group of programmers from Silicon Valley began exploring the concept of virtual reality from a tiny cottage in Palo Alto. This group would later be recognized as VPL Research, a small company founded by pioneer Jaron Lanier, the man credited for coining the buzzword “VR.” Although VPL initially earned a substantial investment and stirred significant hype for VR in the early 80s, it later filed for bankruptcy when the hardware was unable to live up to heavy expectations for the industry.

Nevertheless, VPL propelled the idea of VR into the public conversation and catalyzed a competitive race to incorporate these immersive technologies into a part of daily life for billions of people all over the world.

It’s now 2016, the so-called “Year of VR,” and Lanier’s efforts are quickly being realized. The landscape has finally shifted in 7 | CORNELL BUSINESS REVIEW

favor of virtual reality, with huge tech giants such as Google, Microsoft, and Samsung developing and launching their own VR technology. Today, VR is recognized as a three-dimensional, computer generated environment that stimulates the human senses, emulating an experience that allows a user to feel present in a certain virtual environment. According to the IDC, the market for VR is estimated to be worth $150 billion within the next four years, opening up the enormous possibility for VR to change reality as we know it.

Oculus, the current VR poster child, initiated a breakthrough in the industry after launching the Rift in March 2014. Before that, Facebook had acquired the startup from entrepreneur Paul Luckey for $2 billion after its demo was powerful enough to convince Mark Zuckerberg of VR’s versatility. Thanks

to advancements in technology, the Rift generates an experience as close to reality as possible. The ingredients to achieve this feat include evolutions in screen resolution, positional tracking and motion sensors, haptic technologies (which make phones and video game controllers vibrate), 3-D graphics, and audio.

So far, the Rift has captured the most attention from the gaming community, with hundreds of online gamers demoing Rift headsets and VR video games for the public to enjoy. For many gaming fanatics, the growth of virtual reality is considered natural evolution of the gaming industry.

Through the Rift, gamers will be able to completely immerse themselves into the distinct universes of role playing games, better known as RPG’s, and engage in combat, battles, or missions in more realistic ways than ever before.

virtual reality video games are a new frontier in fear, generating terrifying experiences that prey upon the immersive intimacy that the headsets create for players.

But virtual reality has the potential to touch so much more than just the gaming industry.

In 2007, Derek Belch, a kicker for the Stanford football team, approached his professor Jeremy Bailenson, the head of Stanford’s Virtual Human Interaction Lab, with an idea.

Belch believed that there was a more effective way to improve his skills than just analyzing http://www.thewrap.com/now-that-virtual-reality-is-a-realityplays on the field what-is-next-for-the-tech-format-guest-blog/ from traditional Horror games have proven especially great sideline and end for VR, as they employ unique features of zone views. He proposed utilizing virtual the headsets to heighten flat screen horror reality to accelerate a player’s preparation gaming into a theatrical horror experience. for future games. Once VR technology hit The Brookhaven Experiment utilizes Rift’s the ground running, Belch and Bailenson 360o view to scare its players when they developed a method to film practices least expect it. The objective of the game in 360-degree video, allowing players to is simple: gun down as many monsters relive their practices simply by putting on as you can before one eats you. However, a headset. Instead of looking at footage because players can turn anywhere they from an inconvenient bird’s-eye view, the want with the VR headset, developers photorealism provided by VR allowed can hide monsters in places where they players to scrutinize their own movements aren’t looking and shock them with a gory and footwork from the perspective of bite to the face. Similarly, Dreadhalls, a the coach. In 2014, Belch tested out stealth horror game about escaping from a VR training on the Stanford football dungeon, uses head tracking technology to team, witnessing substantial success build up tension through surround sound. that culminated in an overwhelming Strange whispers now seem eerily close and win over Maryland in the Foster Farms sudden footsteps echo through a hallway, Bowl. A year later, he founded StriVR, a sending uncontrollable shivers down a company dedicated to promoting VR as an player’s spine. These effects illustrate how instrument for learning and development.

The success of StriVR highlights VR’s potential to redesign the education sector in the future. Instead of immediately placing inexperienced drivers behind the wheel and onto the busy streets, virtual reality simulations can teach them the basics of the road without any danger. NASA engineers can learn how to repair satellites in a realistic environment through VR, and medical students can witness operations through surgery simulations, a teaching method that has actually been used in the UK. Even the military has adopted VR for training purposes, allowing soldiers to experience and react to given combat situations without the risk of serious injury or death. But like everything else, VR has its limits. Although in many situations, VR provides the only secure environment in which to develop basic or even advanced skills, full mastery in any field requires real rather than modeled experiences. VR can only go so far with providing realism in its simulations; eventually, students will have to perform surgery on living patients, soldiers will have to engage with actual enemy troops, and novice drivers will have to move on to real roads.

Even VR gaming presents serious drawbacks. The aforementioned Oculus Rift carries a hefty price tag of $600, not including the cost it takes for the PC to run the device. In the past, attempts of popularizing VR failed due to outrageous retail prices, and even with promising advancements in current technology, pricing still imposes an ominous barrier.

With such a burdening cost, VR may have trouble establishing itself in the market right away, as it would tailor to a very niche category of consumers. At the extreme, VR could also lead to desensitization and interfere with an individual’s ability to perceive and react to real experiences.

For VR to have a significant impact in the market as a new industry, it will have to prove itself capable of overcoming these barriers of entry. Although its potential is promising, VR’s heavy dependence on the willingness of select consumers to spend a lot of money and the development of future technologies prevents the industry from taking off right away.

These few factors will determine whether or not Jamie Lanier’s humble vision will become a reality or remain a fantasy.

CORNELL BUSINESS REVIEW | 8

M

arijuana — a leafy, green plant native to Eastern Asia — has incited a rat race in America. The sight of entrepreneurs flocking to the frontier of opportunity opened by this newly regulated industry is a rendition of America’s craze for gold in 1848. A “green rush” is underway.

Marijuana entrepreneurs, called ‘ganjapreneurs,’ are rightfully attracted to the emerging business landscape as cannabis continues to gain legal status across the country. New findings about marijuana’s therapeutic powers in treating conditions from PTSD to common back pain are encouraging the public to see cannabis in a new light. Between 2004 and 2014, American’s approval of cannabis legalization surged from 34% to 58%.

Since Colorado and Washington became the first states to legalize the herb in 2012, others have followed in their footsteps.

Five more states — Massachusetts, Arizona, Maine, Nevada and California — have recreational legalization ballot propositions this November. Marijuana sales are following a similar upward trend,

rising from $4.6 to $5.4 billion between 2014 and 2015, and are forecasted to reach $6.7 billion by the end of 2016.

However, there are myriad obstacles scaring off prospective ganjapreneurs and burdening those who already made the risky leap into the lucrative industry.

“These businesses have to fight everybody: the federal government, the state, even the city” explains John Tayer, the president of Boulder, Colorado’s Chamber of Commerce. Cannabis business owners confront an uphill battle well before they even launch their ventures.

High barriers to entry ward off a majority of undedicated ganjapreneurs from the start. For example, the Massachusetts recreational marijuana proposition lays out a costly procedure for marijuana business applicants: $1,500 for stage one applicants, $30,000 for stage two applicants and $50,000 in annual registration fees. Worse yet, applicants often face a long, uncertain waiting period — characteristic of the hastily-designed and understaffed government departments

tasked with handling the applications.

Meanwhile, marijuana businesses are at the mercy of a system of convoluted and highly unsettled laws and regulations.

Business owners must simultaneously adhere to state and local policies while facing the threat of penalty from the federal government who still sees cannabis as a schedule I narcotic — a legal status shared by heroin, ecstasy and some of the other most harmful drugs. For shrewd, well-dressed businessmen used to the predictability of highly regulated industries, this legal uncertainty is uncomfortable, perhaps even unbearable. Tayer explains, “Business owners must navigate a volatile system of regulations. Should an incident occur, say with an edible, new regulations are likely to follow. Business owners better adhere to the new rules or face heavy scrutiny from the law.” Not everyone is cut out for such trailblazing, the industry is truly rough.

For successful marijuana dispensaries with valuable inventories, insurance is another grave concern. Dispensaries, stocked with cash, expensive edible

A New Frontier:

America’s Profitable But Problematic Marijuana Industry

BY LUCAS GOLDMAN

9 | CORNELL BUSINESS REVIEW

products, and pounds of cannabis, are prime targets for robberies. In addition, they are vulnerable to federal raids at any moment. Accordingly, insurance is essential. However, from the eyes of insurance companies, these businesses are often deemed too risky to serve as profitable clients.

Tax policies place those dealing with the growing, processing, and selling of cannabis at another disadvantage. Section 208e of the internal revenue code states that businesses that handle controlled substances are prohibited from receiving tax deductions. Therefore, operating costs associated with handling the marijuana such as employee wages and rent are not deducted from the business’s income.

The only deduction these businesses receive is the cost of the good itself.

Banking causes another painful headache for ganjapreneurs.

Understandably, banks are tentative about interacting with cannabis businesses because of federal laws prohibiting them from accepting illegal ‘drug money.’ As a

penalty for violating these rules, banks fear they may lose their FDIC accreditation.

Consequently, marijuana business owners are stuck with an awkward dilemma: huge stacks of cash that they cannot deposit. For those who choose to simply hold onto their earnings, they must invest in expensive security equipment.

Meanwhile, some business owners pursue cash investments such as real estate or a variety of other unconventional solutions.

“I even heard about a man who bought a train car to fill with cash and bury in his backyard,” Tayer recalls.

In the face of such daunting adversity, only a select breed of entrepreneurs persevere. Terrapin Care Station, a revered and still expanding brand of dispensaries and retail marijuana products owned by Chris Woods, serves as a quintessential success story. With several prominent locations in Colorado, Chris attributes his prosperity to three core principles: social responsibility, sharp compliance with regulations, and shrewd quantitative skills. “We work hard to engage and give back to communities,” Chris explains proudly before continuing, “Meanwhile, we practice responsible growing and educate the public to acquiesce the concerns of those opposed to the process.”

However, even some who possess the aforementioned winning attributes cannot succeed in the industry simply because cannabis is still illegal in their states.

Despite the tide of state-level legislation and mandates from over half of the population to legalize marijuana, federal action will take time to unfold due to the scale of the task and various legal complications.

Consequently, the legal gray areas complicating the marijuana industry are likely to remain for the time being, making entry into the realm of businesses directly handling the herb inherently risky. But with the emergence of numerous headaches and technical issues throughout the marijuana supply chain comes a plethora of opportunities for businesses dealing indirectly with the industry. Inventive entrepreneurs

are already at work, growing their creative remedies into successful ventures. This second wave of entrepreneurs wisely taps into the industry’s deep pockets without confronting the legal hurdles plaguing those who directly handle the product.

The evolution of the indirect sector of the marijuana industry is occurring in co-dependence with the industry’s main branch. For example, specialized insurance companies like Cannasure have emerged in response to the large desire for marijuana insurance. These unique insurers are able to charge higher premiums to account for the considerable risk they incur. They also often require businesses to install elaborate surveillance systems to prevent burglary and usually refuse to cover government seizures under their insurance policies.

CanopyBoulder is another unique member of this second wave of entrepreneurs. This company is an incubator specifically geared towards assisting businesses with ancillary services and products in the marijuana industry.

They provide capital and mentorship to marijuana related startups with ideas ranging from grow software to consumer safety and beyond in return for a single digit equity stake in the business.

Ultimately, these companies show the legal marijuana industry works similarly to any other industry.

Success comes from forming a unique solution for a common problem.

“Those venturing into the marijuana industry are sharp, aggressive, and financially intelligent – but more importantly, they are big risk takers,” explains Tayer, identifying one factor that stands out in the marijuana industry — risk. But even this distinction is becoming less pronounced. As the dust begins to settle, large companies are tentatively venturing into the industry.

This summer, Microsoft announced its partnership with Kind, a California start-up that developed software to track marijuana from seed to sale — a sign that the volatile “green-rush” is metamorphosing into a legitimate industry. Tayer reassuringly explains that, “It was a bit like the wild west out here, but it’s starting to settle down.”

CORNELL BUSINESS REVIEW | 10

Emptying The Endowment Losing Bets On Interest Rate Swaps

BY HAMISH MACDIARMID

I

n a much-publicized report, Cornell’s Roosevelt Institute found that Cornell had lost $280 million in its endowment funds because of the fact that interest rates have steadily been decreasing over the past 16 years. In fact, as economists are quick to point out, interest rates are at their lowest rate in recorded human history, which caught many companies and universities off guard, with their investment strategies ensuring that they lost money playing the markets.

Institutions paying a fixed percentage to banks whilst relying on a payout based on the floating percentages used by the banks ensured that as interest rates decreased, universities like Cornell were putting in more than they were getting on returns. As institutions invest in interest rate swaps, a fixed interest rate is paid to their bank while the bank will in turn pay a variable rate on the debt issued by the institution. The variable rates have been lower than the fixed for 16 years, causing schools to lose money.

For the uninitiated, an interest rate swap is an over-the-counter trade where two parties agree to exchange future interest payments for a second payment. The amount is agreed upon by

11 | CORNELL BUSINESS REVIEW

the two parties, and it is often a method used by institutions such as Cornell to combat investment losses, manage their credit risks, and earn further income via speculation on the interest rate markets.

However, it did not turn out to be the most beneficial investment for Cornell.

In fact, their financial report from 2015 stated: “The University experienced an operating loss of $25 million this year; over $20 million of this loss is due to interest expense associated with unattached interest rate swaps, which have no associated debt. The University has a multi-year plan to gradually terminate these unattached swaps.”

Think of this as a borrowing a mortgage at a fixed rate of interest for 10 years or 30 years, which can be a useful tool to mitigate losses caused by variable rates. Interest rates are meant to ensure that risk is managed more effectively whilst generating income for the institution, but in this case 80% of the losses which Cornell experienced were directly due to this investment.

The Endowment of Cornell University decided to borrow money at a fixed interest rate of 4% in 20072008. Shortly afterwards interest rates

dropped to record lows, close to zero percent, particularly for variable rate loans. Unfortunately for Cornell and the other Ivy League Universities who also experienced significant losses, they were all stuck with borrowing money at the higher rate of interest. It seems that the reported loss of $280 million was calculated by adding up the interest that Cornell University would have paid if they had taken out a lower cost variable rate loan rather than a fixed rate loan.

Cornell was somewhat prudent in taking out a long-term fixed rate loan.

Imagine if they had decided on taking a variable rate loan, and if short term interest rates had risen to 10% because of rising inflation - Cornell would have lost a lot more money. So what Cornell did was sensible, and protected their downside risk. Whilst articles which covered the loss in a negative light saw it as a mistake on the University’s part, in reality, they protected their investments at a time when major financial markets were in dire straits.

So why did Cornell decide to borrow so much money – and what did they do with it? With an endowment of $6 billion in equity, Cornell should not be borrowing money at all. They should

"Last year, Cornell University had the lowest return on investment (ROI) on its endowment at 3.4% - at least 2.4 percentage points lower than any other Ivy League school."

just be investing their cash, without any leverage or borrowing. So what, then, did they do with the money? As the representative for the College of Arts and Sciences in the Student Assembly, I know from first-hand experience that Cornell does not disclose much of what they do with their financials. For example, the university does not disclose what is specifically done with the budget for the College of Arts & Sciences.

Furthermore, it appears that the university intends to cut back on financial aid in order to save money, as confirmed by a faculty source close to the Provost, Michael I. Kotlikoff, who chooses to remain anonymous. They said “The University is proposing reducing unrestricted funds, which includes making financial aid ‘more efficient,’ which actually means reducing financial aid to some extent.” Provost Kotlikoff has already enacted a similar policy with International Students, ensuring that those from less affluent backgrounds would face a more stringent process to enter into Cornell University. Cornell could have used the extra money to invest into campus infrastructure; for example, in response to a contentious student

petition, the University could have used the money to provide free hygiene products such as tampons in school bathrooms. The University estimates that such a plan would cost $20 million. While this may appear to be quite a large sum of money, it pales in comparison to Cornell’s losses on a single investment class.

In spite of their losses, if Cornell had openly invested in a project that made a return of more than the 4% cost of borrowing, then that would be a good use of the borrowed funds and would generate a profit, not a loss. For example, suppose the University buys a piece of real estate, borrowing at about 2.5% fixed rate, and investing the funds at 9% per annum rental return. While they could borrow at a lower 1% variable rate, the University would not because they are still making money, and wants the security of knowing that the cost of borrowing will not suddenly increase.

These convoluted financial disclosures beg the question: why is more information not easily available?

For example, Harvard has been more open than Cornell about their loss of $1 billion on similar interest rate swaps.

Harvard confirms that it borrowed funds

for a major new science facility expected to cost several billion. In evaluating this investment, the main issues are did the campus expansion take place; was it a success; and did it produce an overall positive return for Harvard? Another key point is that they had to pay a lot of money to break the swap early— presumably Cornell had to do the same— which is usually a bad idea. Once the swap is in place it is typically better just to let it run to maturity and expire naturally.

All told, is the loss reasonable in the current financial environment? Cornell’s misfortune is not due to the plotting of evil banks or incompetent investment managers. All financial institutions lost a fortune in the financial crash, and today they are suffering due to the same issue of abnormally low interest rates.

Banks’ return on equity are now about 5 or 6%, versus 20 or 30% in 2007, and banks like Deutsche Bank are verging on collapse today. In this respect Cornell did well to survive with their endowment intact, and despite their losses, the University is in a position where it is able to take advantage of the lack of competition once the sluggish growth in the economy has picked up sufficiently.

CORNELL BUSINESS REVIEW | 12

The Hidden Giant The Secret Success of Vista Equity Partners

BY JEREMIE MUTOLO

The performance and success of a private equity firm is difficult to evaluate.

Does a firm that effectively raises large funds from numerous wealthy investors fare better than a firm that can double or triple their investors’ money? If asked what the industry performers were over the past several years, the names of more notorious asset management and PE shops come to mind, with the likes of Blackstone, KKR, and The Carlyle Group presumably landing on the list.

Even less prominent or sector-specific private equity firms such as Berkshire Partners and Silver Lake Management would gain honorable mention. Very few, however, recognize the middlemarket firm based in San Francisco, which at the end of 2014 was crowned the top-performing private equity firm in the world.

Founded and headed by Robert Smith ‘85, a Cornell College of Engineering alumni, Vista Equity Partners has quietly outperformed its competitors over the past several years, yet fails to fully capture the respect of the finance industry. The private equity firm mainly focuses its investments on software, data, and technology 13 | CORNELL BUSINESS REVIEW

companies valued between $25 million and $3 billion, investing a modest $20 to $700 million per transaction. A quick glance at their news section will show that in just the second half of this year alone, Vista Equity has taken part in several acquisitions, totaling roughly $2.15 billion. What’s even more impressive is the performance of their recently closed 2007 buyout fund, Fund III, which, according to Pitchbook.com, has an internal rate of return of 28.24 percent, with Buyouts Magazine reports an even higher IRR.

The success of Vista Equity Partners speaks to the idea of specialization, something that has become a lost art among financial firms. Vista Equity’s focus on software, data and technologybased companies allows them to develop a niche and garner industry experience handling such companies, providing them with the knowledge necessary to ensure maximum returns for their investors. Investors realize the importance of such “niche” investing, so much so that according to the Wall Street Journal, Vista Equity Partners was able to handily surpass its $8 billion dollar goal for its newest tech

buyout fund, Fund VI. If the fund is able to close above $10 billion, it will make it one of the largest tech-focused PE funds in recent memory, a record currently held by Silver Lake. This is not the first time that VEP has seen this level of excess investment; their previous two funds, Fund IV and Fund V both exceeded their respective asking amounts. Despite this, Smith remains confident that an abundance in capital should prove to “have no effect on the firm’s performance or strategy”, according to PEHub. Mr. Smith’s business acumen is also another facet of VEP’s success, with Smith spending six years at Goldman Sachs focused solely on technology M&A. He handled deals with tech giants such as Apple, Yahoo!, and eBay before forming Vista Equity Partners in 2001.

The fundamental reason behind the success of VEP, however, lies in their disciplined investment philosophy.

VEP’s ability to strategically identify, acquire, and merge companies through a series of “small” deals is what allows the firm to consistently draw wealthy investors. The recent merger of Fiverun, Marketlive and Shopatron to form the

cloud-based retail platform Kibo speaks to the innovative vision of Smith and the firm.

Vista Equity Partners’ success comes at a time when a great number of tech companies are choosing to take their companies private, or remain private entirely. The past few years have been notoriously brutal to technology IPOs, with roughly 50 percent of the tech companies that have become publicly available trading below their IPO price.

The decision to go private will vary from company to company, but many enjoy the freedom to focus on remodeling from the inside without fretting over meeting shareholder expectations or maintaining regulation requirements.

Toronto-based financial service firm Canaccord Genuity began tracking 95 business software companies that had an IPO and found that 78 percent of them had been acquired, showing just how uncompromising the public market have been. Additionally, tech companies have accounted for 46 percent of buyouts this year, with the private equity industry spending more than $15 billion targeting these types of companies and somewhere of $300 to $400 billion in

excess cash reserves readily available to be used, with some firms suggesting an even larger amount of “dry powder”.

The poor market environment for tech IPOs presents an opportunity for VPE to feast on companies seeking to make an exit, especially with their proven track record and ease of raising funds.

Combined with venture capital funds experiencing “the highest investment rate in 15 years”, according to the Wall Street Journal, the environment is ripe for firms like Vista Equity Partners to be successful in acquiring and renovating these companies.

But the tech IPO drought that heavily marked the first half of the year is beginning to reverse, as several tech companies have recently gone public, including Twilio and Nuantix.

Investors are slowly clamoring for more “unicorns” to become publicly traded, suggesting a broader trend of tech IPOs starting to emerge once again. This bodes badly for a company that makes its money by taking companies private.

Or does it? Widely popular tech companies such as Dropbox and Snapchat are speculated to be going public in the next few years, while

Spotify and Uber are mulling over the decision with financial advisors.

Demand for these companies to go public is immense, and a favorable market reaction to these highly valued companies will provide a lucrative exit strategy for companies in VEP’s portfolio. If investor fervor is as advertised, Vista Equity Partners finds itself in a great position to reap the rewards.

As companies and the overall economy becomes more reliant on software, private equity firms will begin to aim their sights on the same tech companies Vista Equity Partners has spent years investing in. The bidding war VEP had earlier this year while trying to acquire the event-management software company Cvent speaks to the greater competition the firm will face moving forward. But the discipline and enterprise, traits commonly found in Cornell graduates, of Robert F. Smith will keep Vista Equity Partners performing at the top for years to come.

Photo by Vista Equity Partners

CORNELL BUSINESS REVIEW | 14

The Medicine Cabinet's Out Of Reach Rising Drug Costs In America

BY NOLAN ABRAMOWITZ

Patients in the United States face some of the highest drug costs in the developed world. This has led to an increasing number of Americans being unable to afford medications that could dramatically improve or save their lives.

Take, for example, Brien Anderson, a lymphoma patient, who was prescribed Imbruvica, a new groundbreaking cancer drug. After one year of taking the medication, Mr. Anderson was able to go into remission. However, his private insurance company told him they would no longer pay for the drug due to rising costs. He would have been forced to pay over $10,000 per month because his income was high enough to disqualify him for drug support programs. Unable to afford the medication, his health began to deteriorate and he had to undergo surgery. Likewise, Jacqueline Racener, a Medicare patient with leukemia, was also forced to stop her prescription for Imbruvica because she faced costs of over $7,000 per year. Half of Imbruvica users are on Medicare and face similar costs, causing them to forgo life sustaining treatment. Imbruvica is listed at over $115,000 and was developed by Johnson and Johnson and Pharamacyclics LLC, resulting in $1 billion in sales for 2015.

A recent report from the Journal of the American Medical Association (JAMA) found that drug prices are higher 15 | CORNELL BUSINESS REVIEW

in the United States than elsewhere in the world because US manufacturers can set their own prices; the government allows protected monopolies due to patents; and the FDA takes a long time to approve generic drugs. Furthermore, drugs that treat rare diseases can be protected indefinitely with patents for a single manufacturer under current US patent laws. Most importantly, the study found that drug prices are not justified by increasing research and development costs. This is because most R&D costs are met by grants from the National Institute of Health (NIH) and from various venture capital firms. Drug manufacturers only spend on average 10-20% of revenue on R&D. Pharmaceutical companies, especially those that manufacture rare drugs, are taking advantage of inelastic demand to raise prices to unaffordable levels.

Furthermore, Medicare and Medicaid, the largest insurers in the US, are not allowed to negotiate prices. These same Medicare patients, who represent almost a third of US retail drug spending, also cannot receive direct aid from drug companies. Even individuals with private insurance plans are not immune from rising drug prices. Over the last few years, more Americans have moved away from traditional copay insurance plans where they would pay predictable prices

for prescription medications. To save on basic insurance costs, these individuals have switched to high deductible plans that can cause unpredictable drug prices for an extended period of time. Many cheaper insurance plans offered on state health insurance marketplaces through the Affordable Care Act have deductibles as high as $6,000 that don’t cover many types of drugs. Insured Americans are having a harder time getting approved for the medications they need because their insurance companies are dropping coverage of certain medications, requiring extensive referral processes, or limiting the amount of time medications can be used for.

Increasing drug prices will continue to impact the health and financial stability of millions of Americans. In 2015, the average person in the US spent $858 on prescription drugs. On the other hand, the average across 19 other developed nations was just $400 per person. Moreover, in 2014, the increase in drug prices was 12.6%, which far outpaced inflation numbers that have been hovering around 0% to 2% for the past three years. In addition, price hikes for other medical costs such as surgeries and doctor visits have been relatively low compared to the increases in drug prices. Seventeen percent of overall health care expenses are devoted to paying for prescription

drugs. Moreover, the cost of the most widely used brand name prescription drugs increased 125% from 2008-2014.

Well known examples include: Mylan pharmaceuticals increasing the cost of Epipens from $57 in 2007 to over $500 in 2016, Turing Pharmaceuticals increasing an anti-malaria medication 500% to $750 per pill from $13.50, and Hepatitis C drugs made by Gilead cost $900 to $1000 per pill. Not only are costs increasing for patients, but an increasing number of insurance companies are changing their drug coverage plans.

Increasing drug prices have caused many patients to rely on nonprofits such as the Patients Access Network Foundation to help cover prescription drug costs. However, it is hard to qualify for these programs, so some patients are still stuck facing costs they can not afford.

Moreover, some drug manufacturers offer subsidies as well. However, these programs can hurt health care in the long run by inducing individuals to buy certain drugs based on discounts, hurting competition in the industry. Larger companies are able to offer more enticing discounts and outperform their generic competitors. In the long run, these large companies would increase demand for their product, increase their public relations, and eventually increase prices.

Mylan Pharmaceuticals is a prime

example of drug companies taking advantage of a lack of competition in the auto injector industry for allergies. When Sanofi’s, a competitor, was forced to perform a voluntary recall on its Auvi-Q auto injector, Mylan was able to vastly increase the price of its EpiPen device.

The price of EpiPens has increased to over $500 from just $57, but there have been no increases in manufacturing or R&D costs. Mylan has also been taking advantage of Medicaid by classifying itself as a generic drug to pay less in rebates.

Medicaid requires a 23.1% rebate for brand name drugs, but only a 13% rebate for generics. This way Mylan was able to save hundreds of millions of dollars and continue to increase its profit. The firm spent over $35 million in TV ads in 2014, up from $4.8 million in 2011. Mylan is taking advantage of the sense of security parents feel when they have EpiPens for their children and are willing to pay high prices to keep their children save from life threatening allergies. In the end, parents are just paying for peace of mind. Since the price increase, Mylan’s CEO Heather Bresch’s total compensation has increased from $2.4 million to over $18 million.

The government is taking steps to take the burden off of patients so they can afford the medications they require.

By 2020, new Medicaid and Medicare resolutions will be passed to take away

policies that lead to higher drug prices.

The government needs to ensure more transparency about prices in the industry and allow a competitive drug marketplace to form. Also, insurance companies should make their customers more aware of cheaper generic alternatives. The FDA could help increase competition by decreasing application approval timelines and regulations facing generic drugs.

There is currently a backlog of 4,000 generic drug applications, up from a consistent level of about 400 applications a year until 2002.

The healthcare industry needs to be more strongly regulated by the government because all of its actions have direct human costs. Current policies allow pharmaceutical companies to take advantage of the economic conditions they face, leading to high drug costs that are unique to the US. Policy makers must act to reduce drug costs and make prescriptions more affordable so medical breakthroughs can reach the people that need them the most.

Photo Source: http://wellness.winonastateu.com/wp-content/uploads/2015/03/ MedicineCabinet.jpg

CORNELL BUSINESS REVIEW | 16

Playing, and Paying, To Win

BY JOSH THOMPSON

F

resh from winning the Stanley Cup championship, the Chicago Blackhawks were among the top ten most valuable teams in the NHL in 2010.

Forbes pinned their franchise value at $300 million, and to sports fans and industry experts the Blackhawks were undeniably the premier organization in professional ice hockey. Nevertheless, their worth still lagged behind that of the other “Original Six” NHL enterprises—the Boston Bruins, Montreal Canadiens, and others—by hundreds of millions of dollars.

Five years later, after two more Stanley Cup championships and consistently deep 17 | CORNELL BUSINESS REVIEW

playoff runs, the star-studded Blackhawks are worth a whole $925 million, with their 12% annual growth rate ranking near the top of the league and well ahead of other less-winning members of the Original Six. Success on the ice, unsurprisingly, directly correlates to success in business. Winning makes money, and John Chayka thinks he has a new way of doing it.

Chayka, now 27 years old, became the youngest General Manager in the history of professional sports last year when the Arizona Coyotes promoted him from Assistant GM. Chayka began his career in hockey operations at just 19,

when he realized that analyzing game film for nuanced patterns and complex events revealed a number of statistical insights that could improve in game performance.

Soon thereafter, he created Stathletes with a friend with a math and science background. An ironic blend of science and sport, of hardened analysis and sporadic passion, of statistical order and of chaos, the company attempts to bring analytics to the world of hockey. Unfortunately, science and the sport have had a tenuous relationship. Many hockey higher-ups are still skeptical of the role of analytics in their organizational scheme. Nevertheless,

in the years since Billy Beane’s success in the MLB, as chronicled in book and film Moneyball, a number of teams have begun to implement statistical modeling into their systems, and Chayka’s unprecedented rise can attest to that.

Just as in baseball, the hockey analytics movement started with the consumer. The internet age provided super fans with a wealth of data to muse on, and online forums such as, “The Irreverent Oilers Fans,” quickly began to develop analytical tools for interpreting the on-ice chaos of elite-level ice hockey. Soon thereafter, systems like CORSI and Zone Starts began to take hold in the NHL, and teams have taken their insights and adjusted their strategies accordingly. These adjustments appear to be directly correlated to an organization’s performance; the rise of, “puckalytics,” is often reflected in the success of teams such as the Blackhawks and the Los Angeles Kings, who are heralded as teams at the forefront of the analytics movement. In light of this information, the obvious question is why isn’t everyone doing it?

There are two possible answers— both rely on faith. The first is all business.

Analytics is complicated, and to do it right requires a number of key moves on the part of team managers. Acquiring the right professionals, integrating proper technology, and delving into new research all implies the allocation of significant resources. Teams are careful not to commit to extensive spending so long as their faith in data is tepid, and the evidence is not overly convincing yet. For example, ESPN says that organizations like the Buffalo Sabres as well as the Boston Bruins have poured money into developing analytics systems, yet both organizations have seen relatively little real success in the past few years. Although, teams like the Kings and the Blackhawks play the motley.

The second answer rests on a belief in the essence of sport. Chaotic and harmonious, at times eloquent and at times awkward, passionate and stoic, sports are an age old expression of human imperfection and unpredictability, and the information age seeks to reduce the beauty

of the game to something unnatural—to predictable outcomes, and to perfection.

This romantic perception of analytics isn’t new to hockey. Rather, it has colored the relationship between science and human sports since the integration of computers into chess, since Bill James’ Baseball Abstract, and since the implementation of data science into the world of basketball just a few years ago.

Yet, this skepticism is not merely the chorus of those unwilling to adapt to the changing nature of sports. Ironically, backlash against science in sports may even have some science to back it up.

Exciting offense and scoring points, a lot of points, is perhaps the best indicator of the overall entertainment value of a game. While super-fans and connoisseurs of a sport may have a preference for defensive systems and tight, well executed strategies, the lay consumer’s tastes usually tend towards goals, points, touchdowns, or whatever other values associated with a dynamic, high paced offensive clinic may be. There is some evidence that suggests that analytics may be correlated to a decrease in offensive output in certain sports. For example, since the introduction of analytics into professional ice hockey in 2005, average goals per game in the NHL has been on a steady decline from 3.08 goals per game to just 2.7, despite rule changes that sought to encourage goal-scoring. This criticism isn’t only pertinent in hockey.

Basketball, too, has shown certain trends towards a less-spontaneous, more runof-the-mill game style. As Braedon Clark of Raptor’s HQ says, “the plays that make watching the NBA so fun—an impossible fade away jumper, a driving layup around three defenders—are in many cases the same plays analytics tell us should be avoided.” Clark isn’t alone in his criticism, in fact, many, “experts,” denounce the effects of analytics on the essence of basketball. Former professional Charles Barkley hasn’t held back on analytics, claiming that data analysis is making the game, “boring.” However, if there is a real connection between analytics and less offense, it doesn’t seem to be showing in either league’s revenue stream—the NHL

has gone from pulling in $2.27 billion to just over $3.7 in the last decade, and the NBA has shown as much as 20% growth in certain years.

Analytics has also opened up an entire new world to potential sports consumers.

Hockey, as well as other sports, is no longer confined to the realm of athletics alone. Mathematics and science give sport an intellectual application that can be supplemented throughout the game to give fans a deeper understanding of what’s going on at base level.

Additionally, there is evidence to prove that data analysis may actually make sports more dynamic and entertaining.

Despite a steady decline in goal scoring, recent NHL seasons have shown that offense may actually be on the rise, and the growth of analytics expected to come with their integration into professional hockey is likely to coincide developments in offensive strategies and systems that are favorable to a fast, entertaining brand of hockey. Furthermore, experts in sports analytics like Dr. Phillip Maymin, cofounder and co-editor of the Journal of Sports Analytics, believe that analytics may actually make sports more entertaining.

In a recent interview, Maymin said, “If the results from analytics are more boring games, then rule changes will and should be forthcoming. But it seems as if the analytics approach tends to create better games: high-scoring, fast-paced games with lots of threes, lots of dunks, and lots of passing; in short, lots and lots of highlights.”

Agree with Maymin or not, it’s important to remember that the goal of competitive sports is not to simply make money, but to win, and people like John Chayka are explicitly hired for that purpose. Nevertheless, economic success is not mutually exclusive to organizational success, instead, the two are inextricably linked. Like them or not, analytics are helping organizations like the Chicago Blackhawks win games, and their fanbase, which had the highest average ticket sales and game attendance in the league last year, is perfectly entertained.

CORNELL BUSINESS REVIEW | 18

And The West

BY CATHERINE WEI

Instant messaging, digital stickers, payments, services, and more! What doesn’t this app have to offer? WeChat, developed in 2011, has become a revolutionary app for all. It was developed by Tencent, a Chinese gaming and social media firm, and originated in China, where it was introduced as “Weixin.” Later, to accommodate its diverse user base, the company rebranded as “WeChat.” In March 2016, WeChat surpassed 700 million monthly active users, a symbol of its unprecedented growth beyond Asia.

WeChat capitalizes on convenience. Once users log in, they can accomplish a variety of tasks. WeChat connects work and personal friends incredibly easily. In addition to the traditional method of syncing to phone contacts, users can take a picture of personalized WeChat QR codes rather than handling multiple business cards. Individuals can also shake their phone while using WeChat to connect with randomly individuals across the world who are shaking their phones at the same time. WeChat’s Friend Radar, if enabled, displays other WeChat users in the vicinity that you can connect with. The endless amount of ways to connect with others gives WeChat a worldwide expansive reach.

For financing, WeChat leverages its e-commerce capabilities. WeChat functions as a wallet, with options to increase and decrease cash flow. Homeowners can link their bank account and pay bills. They can also hail a taxi and order food delivery and complete those orders on WeChat. Users can pay each other and make purchases through the 10 million merchants who have registered WeChat e-commerce shops.

This is a notable advantage since many social networking apps have not been able to increase e-commerce profit due to user reluctance and fear of cybercrime. With increased identity and password authentication and fraud protection, WeChat has gained financial trust.

No matter what you need to do, WeChat is there to assist in any way. The incredible convenience the app offers makes it a leader for all digital media and internet activity. The app has 19 | CORNELL BUSINESS REVIEW

seamlessly integrated itself into everyday tasks, making it a household commodity in Asia.

Yet, that presents a problem in itself: why hasn’t WeChat successfully prevailed in West?

WeChat isn’t a common app in the United States; if asked about the app, many have never heard of it. Plus, American citizens who do have WeChat only use it scarcely to communicate with family living abroad in Asia. WeChat hasn’t built a loyal consumer base in America.

There are many reasons that explain this discrepancy between WeChat’s domination in China. First, WeChat arrived late to the social media frenzy. Although China was struggling to find a core social media app to replace their PCbased network, QQ, other developed countries already had their go-to app. In Indonesia, it was Blackberry Messenger. In the United States, it was WhatsApp and GroupMe. Therefore, many Western cultures didn’t feel the need to adopt another social media app. Moreover, if your friends don’t use WeChat, you are less inclined to download the app for yourself.

Second, WeChat focused heavily on consumer analytics solely in China. With a decade of information of the failed QQ social media app, Tencent was able to create an allin-one WeChat app. Suddenly, it became the app that China was waiting for to fulfill all their needs. Conversely, Tencent doesn’t have the same access and insight to consumer analytics outside of China. As a result, the WeChat app doesn’t tailor to international demographics.

One example is stickers. WeChat’s digital emojis do not cater to different cultures. If you search for Western-culture stickers like football or July 4th, no results appear. On the other hand, if you search for mooncakes, multiple stickers appear.

Furthermore, in China, WeChat can be used to pay bills, hail a taxi, and make appointments. This is easily done due to Tencent’s connections with Chinese internet services that are limited outside of China due to government surveillance. Poor localization outside of China has led to WeChat’s disappearance in Western audiences.

However, this isn’t a one-way street—many American companies have struggled to enter Asian markets. In particular, China has one of the largest economies and populations, yet it has strict rules for international firms to enter. Due to heavy government supervision and control, many American companies are forbidden to launch their product in China and have to offer a Chinese-specific version instead.

The reason why the Chinese government is restrictive to Western companies is because the government wants its own domestic firms to thrive. Local conglomerates are favored more than foreign rivals. Facebook and Twitter have been shut out of China, but Chinese Internet companies like Tencent have been welcomed.

Many American students who study abroad in China are forced to download WeChat due to Facebook being restricted, yet their loyalty to WeChat isn’t consistent because once they return back to the States, they revert to their traditional apps.

As a result, competition in China creates an unhealthy economic climate. Of the 496 Western companies that responded to a survey published by the American Chamber of Commerce in China, 57% say the biggest challenges in China are inconsistent regulatory practices and murky laws that favor locals. Many believe that anti-foreign stigma is increasing from the government, and 83% of technology companies say they feel less welcome in the country.

For the Chinese community, WeChat has enhanced the way people interact and carry out their everyday needs and tasks. The app capitalizes on convenience and is known as a jack-of-all-trades. However, WeChat’s success story exemplifies the disparity between how Western apps can enter Asian markets and vice versa. WeChat hasn’t prioritized international demographics to grow outside of China, and Western technology companies struggle to enter China due to governmental control. The bottom line is that WeChat works for China, but for China only.

Small Blind, Big Find Upstate New York's Casino Dreams

BY LEORA KATZMAN

S

ince the demise of the tourism industry in the Upstate New York region decades ago, gambling has been seen as the potential panacea for the upstate economy. After decades of long-term planning, in 2013, Governor Andrew M. Cuomo passed the Upstate New York Gaming Economic Development Act. This act finally legalized casinos in Upstate New York allowing up to seven gambling parlors in the state. Many residents question whether the potential benefits of these casinos are realistic given the growing competition in the gaming industry closer to the New York metropolitan area

In December 2014, a special committee of the state Gaming Commission selected three casino resort projects – Montreign in the Catskills Region, del Lago Resort & Casino in the Finger Lakes region, and Rivers in the Schenectady region. In the summer of 2015, a fourth casino was added in the state’s Southern Tier near Binghamton. The del Lago Resort & Casino in Tyre, Seneca County, located in the heart of New York’s Finger Lakes region, is the closest casino to the Ithaca area. While it is a world-class resort and casino, the larger goal of the site is to inspire growth and tourism throughout the Finger Lakes region. Construction is well underway on the $440 million Seneca County project and the resort casino is scheduled to open in February 2017. The 4-star resort style hotel promises to hire 1,800 full-time employees and offers 2,000 slot machines, 75 table games, 205 hotel rooms, and a wide variety of dining and nightlife options.

While many residents are optimistic about the economic impact of the casino plan, others question whether the potential

benefits are feasible. Many speculate that the revenue expectations are unrealistic because of fierce competition in the industry. The casino industry already faces high saturation, which is confirmed by the casino closures in Atlantic City, and cost cuts at Foxwoods in Connecticut. Additionally, there are plans to open casinos in more desirable locations such as the New York City and New Jersey areas, which may siphon off potential gamblers from the upstate casinos. Another concern is that the gambling thirst is already being satiated by lotteries, scratch-off games, Internet gambling, fantasy football sites and March Madness pools, diminishing the appeal of casinos. There are also fears that these new casinos would cannibalize the already existing upstate Indian casinos, which offer table games and slot machines parlors, known as “racinos”. Speculators also highlight that casino jobs are likely to offer employees relatively low pay instead of wages that would enable economic uplift; federal labor statistics show that most gamblingrelated jobs average less than $30,000 per year Additionally, an indirect consequence is that locals may be lured by the casinos and lose income due to gambling addictions. Lastly, conservationists express concern that these casinos will cause environmental degradation including severe damage to nearby woodland areas.

Although these concerns are legitimate and must be taken into account, the potential economic benefit of these casinos will likely outweigh the costs. The Cuomo administration evaluated casinos in Pennsylvania and Maryland and used them to estimate employment growth in Upstate

New York of nearly 3,000 permanent jobs and 6,700 temporary jobs in construction.

Governor Cuomo and his supporters insist that immense job creation will emerge from the introduction of casinos to the state.

Additionally, the benefits from the increased tax revenues will lead to increased education aid or lower property taxes in all localities in New York State, no matter where the casinos are located; a report by the Budget Division released before the 2013 casino referendum suggested that New York would collect an additional $238 million a year in revenue for these purposes. The report also suggested that local government aid would increase by $192 million. Furthermore, the casinos will boost local economies and existing tourism infrastructure in Upstate New York, which has faced decades of decline.

In the Finger Lakes region, the casino will increase revenues for local businesses such as wineries, breweries, and the cheese trail located in the Seneca County area, specifically. The project has already sparked new developments in the Tyre community suchastheconstructionofaconveniencestore, gas station, auto dealership, and donut shop.

While the casino industry is beset with fierce competition and there are certainly disadvantages associated with gambling parlors, these casinos will likely boost tourism and local economies while allowing the state to capture millions of gambling dollars that are currently being spent elsewhere. As a result, this casino project will provide a spark for economic boost, which will truly benefit the Upstate New York area.

CORNELL BUSINESS REVIEW | 20

The Deficit’s Not on the Jumbotron Snowballing Spending in College Sports

BY HYUN HO LEE

T

he first inklings of what was ahead came in 2007 with the creation of the Big Ten Network. Sports have always been a revered tradition at colleges across America, but huge TV contracts, especially those resulting from conference networks, ushered in a new age of big business sports for the NCAA. Over two waves starting in 2010 and culminating in 2014, the landscape of college athletics transformed through conference realignment driven primarily by the financial potential of conference networks and football conference championship games. The unintended consequence of massive revenue growth from television is that athletic programs, saturated in cash, have created an unsustainable environment of snowballing spending in college sports.

Non-FBS Cornell University, which competes in the scholarship-free Ivy League, provides a look into the past of major college sports. The financial change happening at the top football schools over the last decade has not affected schools like Cornell directly; Cornell continues to receive negligible revenue from television. The university instead supports its athletic program on the 21 | CORNELL BUSINESS REVIEW

three traditional revenue pillars: donations, university subsidies and operating income from ticket sales and student activity fees.

According to Larry Quant, deputy director of athletics for finance and administration at Cornell, each of these revenue sources account for about a third of the Cornell athletic program’s total operating budget. Considering Cornell receives about $6 million in annual gifts in support of operations and collects another $4 to $5 million annually from its $105 million athletic endowment, it can be estimated that Cornell operates on roughly a $30 million budget receiving around $10 million each from university subsidies and athletic operating income in addition to donations.

The financial breakdown for athletic departments at the top football schools now is very different. Primarily behind robust growth in TV contracts and licensing, big time college sports has seen its revenues skyrocket. An increase in revenue has not led to an increase in profitability, however.

Surprisingly, the opposite is true. With the promise of even bigger TV contracts tomorrow, an 83% increase in overall revenue

for the 126 Football Bowl Subdivision (FBS) schools was outpaced by an increase in spending of 115% between 2004 and 2013.

Accordingly, the business model of many top athletic programs currently depends heavily on increasing television revenue to support liberal spending practices.

FBS athletic departments have used the influx of television revenue to participate in an arms race to hire top coaches and upgrade facilities.

The average FBS head football coach today makes almost $2 million a year and some schools like Michigan pay $10 million a year to have a premier coach like Jim Harbaugh lead their program. Schools spend millions of dollars every year getting the newest and shiniest upgrades under pressure to attract top recruits.

Auburn football demonstrates this spending mentality well. The program generates in excess of $100 million in revenues per year yet continues to post deficits due to spending ranging from private jets to multimillion-dollar coaching salaries. The newest purchase, a video board the size of a 5 story building unveiled at their football field in 2015, cost $13.9 million and was approved

despite the athletic department posting a deficit of $17.1 million in 2014. It can be argued that for programs like Auburn, which draws 80,000 plus fans to every home football game and enjoys generous support from its alumni, the innate value of a successful football team is worth the paper losses.

However, significant new investments in athletic departments at the top schools trickle down to encourage less successful programs to spend more as well.

The spending culture has affected the way nearly all athletic programs conduct business, even at schools like Cornell. For example, Cornell competes directly with FBS schools in sports like lacrosse and hockey. When a school like Duke invests millions in its lacrosse program, it makes it much harder for Cornell to attract talent and run a winning lacrosse team without matching spending.

Consequently, the widespread belief is that a program must spend more to be more successful. If a program struggles, the accepted solution is to pad budgets, not squeeze them.

Rutgers football is an interesting case study for this behavior. New Jersey’s largest public school, Rutgers has aspired for the last decade to become a top tier program. Following a move to the Big Ten, the school subsidized a $102 million expansion of the football stadium in 2009, billing it as the key to making Rutgers a profitable athletic program. This promise has not materialized; the annual deficit for the athletic program has continued to grow steadily from $22.7 million in 2004 to $36.3 million in 2014. Schools have shown they are even willing to take funds from their students’ tuition and mandatory fees, about $1400 per student at Rutgers, to subsidize athletic departments.

Subsidies for athletic departments have increased even amid an overall cost-cutting environment at many public institutions.

In 2010, Rutgers froze wages for its entire faculty to shrink its budget by $30 million

but continued to invest heavily in its sports programs. Overall, annual spending at the 126 FBS programs has increased from $2.6 billion to $4.4 billion over the past 10 years.

Despite rigorous cost increases, college athletics have continued to grow. Exorbitant spending increases have been matched over the past 10 years by similarly exorbitant revenue increases from TV contracts.

Immune to clear signs of concern, companies continue to pay ever higher fees for the rights to broadcast college sports. Earlier this year, the Big Ten announced that it had split its television contracts between ESPN, FOX and CBS in a deal that is collectively worth $440 million annually for the next 5 years. This deal is not unique. In 2014, CBS paid $800 million for the rights to broadcast three weeks of March Madness, a contract that was only worth an inflation adjusted $12 million 30 years ago. Television revenue continues to feed the spending machine.

However, the inherent value of these television contracts has a limit and cannot continue to match the growth rate of prices indefinitely. A decrease in television revenues would cause sharp changes to the spending habits of athletic programs, and there is evidence that the bubble in TV contracts has already begun to leak.

Data collected by Nielsen shows that the number of people who watch college sports has remained fairly steady over the past decade.

However, the number of sports television programming hours and the price companies are willing to pay for the programing has increased exponentially. In addition, the way people view college sports has become less profitable as people increasingly cut the cord and go for cheaper alternates. In 2014, cable saw subscriptions decrease for the first time ever and the household penetration of cable TV has declined from over 88% in 2010 to below 80% in 2015.

Sports programing is especially exposed to risk from technological changes due to its disproportionately high cable costs. While the median cable fee for a channel is $0.14/month, sports channels must charge considerably higher fees to operate. ESPN, for example, charges by far the most of any channel at $6.04/month. Baked into most cable packages,

ESPN has been able to convince millions of individuals who do not watch ESPN to pay its high cable fees. However, the disruption of a-la-carte television sources like Roku, Apple TV and Netflix has created cheaper, more flexible options for viewers. ESPN has lost nearly 10 million subscribers since 2013 and its performance continues to drag down the stock of its parent company Disney.

Sports television faces real risks related to paying for television contracts above their intrinsic value. The business of major college sports, propped up by TV revenue, will experience deficits and cost cutting if these risks materialize. Athletic departments will have to either cut sports or adopt more sustainable spending practices.

Here, FBS schools could benefit from studying Cornell. Cornell’s athletic department carries 37 varsity sports and roughly 6% of every incoming class is made up of recruited athletes. However, the athletic department does not receive any revenue from television contracts and accepts only a third of its operating budget in subsidies from the university. In comparison, Football Championship Schools (FCS), which includes Cornell, obtain 71% of their revenues from university subsidies on average.

Cornell does this through sustainable spending practices including coaching endowments and funding capital projects with donations. The athletic department at Cornell is unique in that it created the country’s first endowed coaching position and currently has the most named coaching positions of any school in America. Cornell also does not use university money to upgrade its facilities and the recent $8 million Schoellkopf renovation and $5 million Lynah project were entirely funded by gifts from alumni, parents and fans of the program.

Over the next decade, the expansive growth of television contracts, which has characterized the past decade in college sports, should slow down. Athletic departments will have to adapt their spending habits to reflect the downturn of revenue. The cost of winning has risen in college sports and universities will need to decide if and how they will continue paying.

CORNELL BUSINESS REVIEW | 22

What do you value most about your experience at Cornell?

Bayer: Well, I would say what I value the most at this point are two things. First, the people. I’m still incredibly close with my inner circle of friends at Cornell. They’ve been hugely supportive of both my personal and professional life. The Cornell network is second to none.

I would say the second thing is that Cornell was so challenging and competitive. I played baseball and was in a fraternity, but then there were also academics. I think just every corner of it was very challenging because everybody was really smart, everyone was social, and everyone just had a lot going on.

You either chose to compete and do your best every day or you didn’t. I chose to compete and reach out to really talented people.

As your entrepreneurial spirit grew and you became CEO of your own company, what lessons and experiences at Cornell did you draw on?

When I was your age, I wasn’t smart enough to realize that I should’ve been in the Hotel School. I was taking courses in government and economics which I don’t rely on much today. What I relied on the most was being surrounded by amazingly talented people who forced me to really up my game and use my time efficiently. There's no better training for being an entrepreneur than having similar experience as an undergrad because

being an entrepreneur is an incredibly lonely thing. You’ve got that particular vision that no one else really sees or believes in, so you really have to believe in yourself and have that confidence, efficiency, and drive to actually execute it. I was the first person in my family to go to college. It was a tough experience for me, so I had to learn to start swimming very fast. That level of competition was hugely important for me as an entrepreneur.

What was your main inspiration behind creating Saxbys?

I love people. I like being nice to people as well as being treated nicely by others. I didn’t realize that you could actually build a business on that. So, when I graduated school, there were a couple of really important things I thought about. First was my parents. They didn’t get an education and they didn’t get to chase careers they were truly passionate about. Everything about their work was stressful and uninspiring; they didn’t feel like they were making a difference in the world.

So I knew first and foremost that I wanted to do something I was truly passionate about and made a difference. Secondly, I wanted to wake up every day and truly love what I did. I used my summers in college as an opportunity to try a bunch of different things. I tried finance in New York one summer, then logistics in Charlotte, then real estate in Los Angeles. I liked all of it but I didn’t love any of them. I realized in order

Exclusive Interview With

Nick Bayer

23 | CORNELL BUSINESS REVIEW

to truly love what I did and feel like I was impacting this world, I needed to create my own lifestyle company that would focus on making people's lives better. So that's when I knew I needed to become an entrepreneur.

How did you strive to create a legacy and spirit for Saxbys that contrasted from existing brands such as Starbucks?

For the first 5 years, I was drawn to coffee because I like people and wanted to be in a business that welcomed all types of people.

I did not realize that my business strategy could also focus on a company culture committed to hospitality and social impact.

For the first five years I was constantly focused on what Starbucks and Dunkin Donuts were doing. Saxbys was trying to be a company that competed on product just like everyone was telling us to. Then about 5 years ago I started getting involved with the Cornell Hotel School. I started to go out with professors there and read some impactful books. One was Setting the Table by Danny Meyers, which talked about company culture and how hospitality can be your competitive advantage regardless of what industry you’re in. What two different customers like will almost always be different, but they both want to be treated the same way. We want people to look at us, smile at us, say nice things to us, and be attentive to our needs.

When we wrote our mission statement five years ago, we focused on what our culture

was going to be. We already had 15 locations, but we needed to make a lot of changes. Over the last 5 years, I’ve spent 99.9% of the time focusing on us. Are we living our culture?

Are we making decisions based on who we are as an organization? If so, we’ll continue on our current path, which is competing and differentiating in an intensely competitive marketplace.

did it for about 7 years, and a majority of our growth came through franchising. My Board of Directors, the private equity group, and I believed that in order for us to be on the next level as an organization, we had to start operating cafes ourselves. That doesn't mean we won't come back to franchising in the future, but we are having a lot of success operating our own cafes.

As CEO, how did your role and mindset change as Saxbys grew from a small, unknown coffee shop to an acclaimed brand that won titles such as “One to Watch” and “Best Coffee”?

When you are a true startup entrepreneur, you have to be a jack of all trades and be willing to wear every hat. From being the head janitor, barista, real estate developer, accountant, you really have to be everything because you cannot afford to hire others to do that work for you. Essentially, you need to understand every aspect of your business.

But as the scale of our business has increased, we are now in a position where we employ hundreds of people across thirty-five cafes in a bunch of different states. As Saxbys has grown, so has my role. My role today centers around a few major tasks. One of my biggest responsibilities is to be the driver of the culture within the organization. Since culture is what truly differentiates us from our peers, I spend a lot of my time answering questions like "Do we have the right people?", "Are we treating them well?", "Do they have the tools to treat our guests well?". The other aspect is business development which is basically me trying to visualize where the company needs to be in a month, a year, and potentially a decade. Lastly, since we are private equity backed, I have to work with my investors and my management team to create a successful business model that allows us to have a strong focus on customer loyalty while focusing on profitability.

What was your inspiration behind opening the completely student-run café at Drexel?

A lot of the inspiration came when I started coming to Cornell as Entrepreneur in Residence at the Hotel School and spending time on campus sitting in front of this generation that is incredibly entrepreneurial.

We had a pretty good number of locations that were adjacent to college campuses that were really successful, and we were serving this demographic really well. Additionally, universities were definitely looking for ways to teach entrepreneurial students experientially. This was a huge opportunity that had worked on other college campuses, and we believed we had the infrastructure and support to capitalize.

At that time, Drexel University in Philadelphia was the largest school for entrepreneurship and was looking to incorporate experiential learning into its curriculum. We reached out to the president of the University, realizing that this was something that didn't exist.

It was a lot of risk, but we told him that we would love to work with the university to find a place. We could work with design students to design the cafe and business students to run the cafe for full entrepreneur credit; the president said he loved it. It was definitely risky, but he believed that their successful track record would lead to a great coffee shop. We started working and opened it last year, and it has just been a phenomenal success.

How have you thought about franchising your stores?

We originally started as a franchise organization. However, over the last 2 or 3 years, we have stopped franchising. The reason for that is personal. I always liked the idea of teamwork, having been an athlete.

I love the idea of people working together, sacrificing together for a common goal. That drove us to franchising, but that’s definitely a difficult model to grow. It was too early to franchise, but we did it anyways. We

Do you see yourself opening one at Cornell?

Actually, yes. Obviously, there has been a lot of change, specifically at the Hotel School with the creation of the College of Business.

I have had a lot of conversations with several of the Deans about that opportunity. It is something that we would love to work on. We are rolling out the current program, we are doing another one at Drexel, and new ones at Temple University, University of Maryland, and Penn State. We are starting to scale that program, so Cornell would definitely be both personal to me and something that would be

tremendously successful because I see how great and entrepreneurial our students are.

What sorts of expectations do you have regarding Saxbys in terms of growth opportunities? Where do you see the company in 5 - 10 years?

In the next 5 to 10 years, I see us staying with the young at heart. I see us staying at college campuses and big cities. Big cities never go out of vogue, so I think that is always going to be popular. But I think depending on our growth, the next natural progression involves two initiatives. First grow our geographic footprint. Right now we are just Mid-Atlantic, and we might move to Boston, Chicago, or maybe Florida to start to expand the geographic footprint a little bit more.

The next stage comes when your generation starts to move to suburbs and we’ll look to open more suburban locations. But over the next 5 to 10 years, the big things will be expanding our geographical footprint and potentially following the life cycle of going to suburban real estate.

Is there anything about Saxbys that you would have done differently if you had the chance?

There are always things you wish had gone differently, but you can't live with regrets. First and foremost, I shouldn't have franchised so quickly. I should have opened the first location and run it for a long time. I should have had the discipline to work out the kinks in my model, my culture, and my operation.

What is the most important thing a Cornell student should graduate knowing?

I think the most important thing at this stage in your life is to pick a company whose culture you truly believe in. Don't say “I have to have a marketing coordinator job. I don't care if it's some awful company in Alaska or some amazing company in New York City; I just know it has to be a marketing coordinator.”

Go to a company because of what they stand for. It's about having experiences, and when those experiences are within an organization whose mission is meaningful to you, you are instantly going to be more productive. You are going to love your job, your company, your culture, and your coworkers; you are going to be much more successful.

CORNELL BUSINESS REVIEW | 24

Brexit (n):

The Future Of The United Kingdom and Europe

BY GRACE SHI

Britain’s vote to leave the European Union on June 23rd was a historical decision that will change the country’s position as a pillar of stability, rock the unity of Europe, and bring nationalism back to the forefront of Western political conflicts. On October 9th, Prime Minister Theresa May announced that Article 50 of the Lisbon Treaty—which formed the EU—will be triggered by the end of March 2017, marking Britain’s formal exit from the EU. Due to growing isolationist tendencies, UK will likely pursue hard Brexit, meaning that Britain will terminate its membership in the EU’s single market and no longer carry the obligation to abide by EU laws and regulations.

Before the referendum, polls showed that immigration was the single largest issue that would affect how the Brits voted. The older generation overwhelmingly voted to Leave, with 61% of voters aged 65 and above voting Leave, compared to 75% of voters aged 18-24 voting Remain. A generational gap is evident, where older voters were more hostile to multiculturalism and social change. The belief that limiting immigration will turn back the cultural clock reveals the deep-seated cultural anxiety felt by Leave voters.

Although advantages of limiting immigration may include higher overall employment for citizens, studies have shown that immigration is actually beneficial for the economy because it leads to higher labor productivity. Data shows that EU migrants contribute more through taxes than they take out through state benefits. With no free movement of people, British youth will have limited freedom to pursue education and employment in EU countries. Taking a hard line on immigration will also hurt the UK’s ability to attract talented human capital.

The results from the referendum reflected the growing belief that British money is better spent inside its own borders. With a hard Brexit, the UK will no longer be obligated to contribute to the EU budget.

In 2015, Britain paid £12.9 Billion ($15.7 Billion) to the EU. By leaving the EU, the British government can better control uses for this money, which could go towards anything from increased funding for the National Health Service to improving infrastructure.

Exiting the Union would also mean that Britain can have the freedom to negotiate its own trade deals.

Taking advantage of this opportunity, they are open to pursue relationships with dynamic Asian countries and to strike a deal with Canada. However, the UK will have limited access to the EU’s single market. This means Britain will take an outsider stance—similar to 25 | CORNELL BUSINESS REVIEW

the US—and negotiate on World Trade Organization terms. The UK will then be subject to tariff and nontariff barriers—burdens it did not have to bear when it was a member of the single market.

Uncertainty regarding the direction of hard Brexit negotiations will lead to slower growth in the UK, at least for the next few years. By 2030, the UK’s GDP is predicted to be 5% lower than its GDP if it remains in the EU. This is due to decreased international trade—caused by increased costs of trade, decreased foreign direct investment, and stagnating immigration.

While the pound has been depreciating since the June 23rd referendum—due to the unexpected Leave vote—May’s indication in the beginning of October that the UK would pursue hard Brexit caused the currency to plummet dramatically.

Although a depreciated pound has benefitted the UK’s manufacturing sector by making British goods cheaper for foreign buyers, barriers to trade will damage the UK’s service sector—which accounts for about 80% of the country’s GDP. Businesses will find it harder to deliver services to its major consumers—the EU countries— causing an increase in the UK’s trade deficit. London, which has been the main financial center of Europe, may have to cede its position to financial capitals in the EU, such as Frankfurt and Paris. As a result, Britain’s financial industry could lose up to £38 Billion ($46 Billion) in revenue and 75,000 jobs, resulting in fewer efficient synergies and create a negative pull on the economy in the UK.

To counter the economic effects of Brexit, the Bank of England cut interest rates to a record low of 0.25% and introduced term-funding programs, making it easier for households and businesses to borrow money for investments. Loose monetary policy avoided the possibility of a recession, and actually raised 2016 GDP growth prospects from 1.7% in July to 1.8% in October. The rise in the growth forecast suggests that the UK has weathered the aftermath of the referendum surprisingly well.

While the short-term prospects of the British economy are not as dire as economists expected, Brexit plans moving forward are concerning. Within the UK, Parliament has questioned May’s stance on hard Brexit, particularly her hard line on immigration and opposition to EU rules for single market access.

While she claims new trade deals will be negotiated for “maximum freedom” to trade within the single market, it is evident that the Brexiters want the benefits of hard Brexit without regard for the consequences.

Many of the EU leaders have countered

the UK’s stance on Brexit. French President Hollande has said scathingly that the UK wants to “leave but pay nothing.” One German official has said that negotiations are “not about friendship.” France and Germany, the two most powerful EU nations, want to make an example out of the UK for leaving the Union. The objective is to prevent other members from leaving by making the consequences clear.

Many EU members depend on the Four Freedoms— particularly the free movement of people—and the uniform rules governing the single market.

Although the solution to this conflict of interests remains unclear, it is evident that Brexit will be a major impact on both the UK and the EU. The UK is the fourth-largest importer in the world, and the largest single export market of the EU. On the other hand, 44% of UK exports go to the EU. Both sides depend heavily on each other, and it is in no one’s interest to put too much pressure on trade relations.

This conflict of interests will underlie negotiation talks, and pursuit of brinkmanship politics by both sides will make Europe vulnerable to outside threats and internal breakdowns.

Eastern Europe may become less stable, since Brexit could be a signal that Western Europe is abandoning its eastern counterpart. The UK as one of Europe’s most powerful militaries is critical to the Western alliance. If Britain pursues isolationism and limits immigration, terrorism creeping into the EU from the east may pose a more significant threat to the region. Within the country, some believe that as long as would-be immigrant terrorists are not admitted, the UK can wash their hands of the problem. Other nations may see this as an act of racism or religious discrimination, deepening the divide in Europe.

Brexit threatens to destabilize decade-old unity.

Because of the interconnected and complicated global economic and political relationships that are at play here, one country cannot emerge on top while others are struggling. The nationalist notion that domestic British benefits supersede grave international concerns will likely weaken international relationships and cause irreparable damage globally if this everyman-for-himself ideology persists.

While Brexit can be seen as an attempt

by Britain to rediscover nationalism and sovereignty, it can also be seen as radical isolationism. Although it is clear that growth in the UK will slow due to the initial costs of Brexit, it remains to be seen how much freedom the country is willing to forgo to maintain relations with EU nations and how much the EU values its current relationship with the UK.

KKR Prisma’s

Girish Reddy

BY ETHAN COY

I’d first like to discuss your experience at Cornell. I understand you were one of the first recipients of a scholarship which allowed you to attend Cornell in exchange for working twenty hours a week. What about your Cornell experience motivated you to remain involved with Cornell and take on your new role as a member of the Board of Trustees?

Reddy: Receiving a scholarship to attend Cornell gave me the ability pursue a track that was very uncommon back when I was a student. By completing a joint degree between the business school and the engineering school I was able to discover my professional passion. I was also lucky to be at the right place at the right time. Wall Street was rapidly becoming more quantitative in the 1970s and my engineering background put me in a strong position to use my skillset to carve out a niche and find a company to sponsor me for a work visa in the United States. That proved to be my key to professional and personal development. Andrew Rudd, a PhD in Operations Research

who taught derivatives in the Johnson School, got me into quantitative finance on the investment management side.

The genesis of my entry into finance was a little bit by accident and a little bit as beneficiary of the industry trend at that time. In essence, the scholarship gave me the opportunity to discover my passion for quantitative finance and benefit from a world-class education at Cornell.

From curbing inflation, to creating a national sales tax, to amending the bankruptcy code, India, for all its faults, seems to be managing its economy quite well. Where do you see opportunities for improvement in India and are there areas of the Indian economy where foreign investors should be looking to allocate capital?

Reddy: I have not invested much in India so I am not as familiar with it as someone who actively tracks and invests in the Indian markets. I do think, however, that the general trend is encouraging.

In the past, investors have been hesitant to dip into Indian markets because of

Source: Dorothy Hong - Institutional Investor a lack of transparency in regulatory processes, archaic laws, and disputes over taxation. The current government in India seems to be very inclined to devise a transparent framework in order to encourage international investment.

In terms of growth potential, I think India offers immense opportunities due to its youthful demographic: around 40% of all Indians are under 25. That in itself creates an unprecedented demand for goods and services within the country, thus making Indian companies less reliant on exports to fuel growth.

This is particularly good for midcap companies looking to cater to the domestic market. These companies have benefited hugely from an improvement in living standards which has fueled demand for automobiles, scooters, TVs, washing machines, and much more.

There’s definitely been a lot of progress over the years, but many challenges remain. I think political interference, which is a problem in every country, is more of an issue in India. So is corruption. Fortunately, the government is taking concrete steps to address these CORNELL BUSINESS REVIEW | 26

concerns. The recent demonetization is a big step toward wiping out corruption in India. It’s likely to create public angst and possibly a slowdown in economic growth because of the prevalence of corrupt money, but I think it's a step in the right direction. Since growth in India is still fueled by banks and bank loans, access to capital is not as easily available as it should be for an economy of that size. There are no established bond markets and bankruptcy laws are vague, I think the next stage should be the issuance of corporate bonds. We cannot rely exclusively on bank loans because they have their limitations. It’s also worth pointing out that the savings rate in India is very high. For most investors with fixed income, the only choice today is your bank or your company’s life insurance policies. Indians are looking, however, for avenues in which to invest other than just bank deposits.

President-Elect Trump has indicated the desire to stimulate the economy via his infrastructure plan, which largely will be funded by private investors. What role will large institutional investors such as KKR have in such a plan and will President Trump be able to raise the amount of money he plans to?

27 | CORNELL BUSINESS REVIEW

Reddy: We are still in the very early stages and it is not clear to me the direction the President-Elect wants to take. He clearly has identified infrastructure development as his top priority because it’s a business he knows, and he is hoping to have a public-private partnership.

But the details are unknown. There is a huge appetite among pension plans and sovereign wealth funds for long-dated assets that have some income, and for infrastructure projects which tend to have the longest duration. A simple example is a toll road or gas pipeline.

KKR is involved in the infrastructure and energy space. These projects have a fair amount of demand, and we could get involved in a public-private partnership, but it’s too early to say. It’s certainly a very important priority for the President-Elect, but the question remains whether Congress will approve it given its resistance in the past to public spending on infrastructure projects.

Bank stocks have surged since Trump’s election as the market anticipates regulation to be rolled back under the new administration.

What does this mean for firms such as KKR which have filled the void in lending that banks left after the adoption of Dodd-Frank?

Reddy: I think the need for capital is still very deep and access to capital doesn’t have to come exclusively from banks. Whether some of these regulations will go away or not is unclear, but I think the need for capital remains. Different pockets of capital are important and I believe banks should not be the only source. Pension funds and endowments give us capital to invest, and these institutions have long horizons. Moreover, they don’t typically use leverage, and certainly providing capital for long-term opportunities in an unleveraged manner is one way to make the system much more stable.

Hedge funds have drawn criticism since the financial crisis for their inability to manage risk and earn superior returns. What would you attribute this to, and are central banks one of the main reasons hedge funds can’t generate alpha?

Reddy: The ensemble of central bank policy changes over the past few years has had a very detrimental effect on the investment world. Highly unpredictable and sudden shifts in ideologies and approaches have generated a lot of uncertainty. In

particular, fundamental macroeconomic changes have made it much more difficult for hedge funds, which tend to be more micro and fundamentals focused. That’s been the biggest challenge, particularly over the last 18 months with all the talk in the U.S. about raising interest rates. On the other hand, the Bank of Japan decided to go with negative rates and because nobody was expecting such a move, it had a huge impact on financial institutions, insurance companies, and banks, which are the engines of economic growth. The uncertainty that prevailed following these decisions made it very difficult for hedge funds to add alpha in an environment where technical factors overshadow fundamental factors. Over the last six to nine months, however, as monetary and fiscal policies around the world have evolved, the markets seem to have absorbed these changes much better than they did earlier.

Consequently, hedge funds have started to do well in the current environment.

Another challenge in the current market is the mix of phenomena like indexation, growth in ETFs, and decline in market liquidity. One trend is thus more cyclical in nature -- that the market now has a better idea how to operate. The second is probably more of a structural trend that hedge funds still need to adapt to. It’s the fact bank regulation, low rates, and capital needs have created some very exciting idiosyncratic and uncorrelated opportunities around the world. We have shifted our portfolios from more traditional alpha sources into these new opportunities.

After co-heading equity derivatives at Goldman Sachs, what made you decide to move into the hedge fund world and what advice would you give our readers interested in working for a hedge fund?

Reddy: When I was at Goldman Sachs I interacted a lot with the hedge funds in developing their strategies, particularly when they wanted to use derivatives to influence their views of the market.

Europe was much more open to using derivatives than the U.S. market. So when I left trading, I really wanted to

go back to the investment world where I started. One of the attractive features of the hedge fund industry to me was that this industry was at the cutting

edge of research and was attracting the best talent. I felt I would continue to learn by being involved in an industry that cuts across asset classes and geographies. I came very much from an equity derivative background, so the opportunity to learn about macro and credit or fixed income strategies was very exciting. The hedge fund solutions industry gave me an opening to deal with all these strategies and I genuinely felt that if we structured the product correctly, we could fill a very important need. I think people should focus more on the characteristics that hedge funds provide, and whether they’re really appealing. In terms of what people should do to get into hedge funds, remember that they represent an array of strategies and should not be looked at as a single bucket. You’ve got equity, macro, distressed credit, and relative value, so your ability to learn the nuances of the field should be your driver. But also focus on what your value-added is. Going back to my own experience, having a quantitative background when derivatives were starting to evolve allowed me to immerse myself in that space. It’s not just about passion; you’ve got to have the skill set to truly make it work.

As AI transforms the economy and drives many jobs into extinction, how can Cornell adapt, and what are your aspirations for Cornell Tech?

ultimate expert; Martha’s knowledge and background is very exciting for Cornell. AI’s scope is so vast that we are just scratching the surface. It cuts across robotics, manufacturing, data analysis, medicine, and finance. I think our industry has done a very poor job in leveraging that technology relative to other industries. Indeed, we’ve barely progressed over the past fifty years.

We’ve just followed the same path with the same attitude and same approach, oblivious to the fact that disruption in any industry doesn’t come from inside, it comes from outside.

In terms of Cornell Tech, I think our ability to provide business and technology in a single place is a huge advantage, and that we need to leverage that asset aggressively. So far, I think the programs of Cornell MBA and Cornell Tech have been geared toward entrepreneurs, which is good inasmuch as entrepreneurs need to understand marketing, finance, and business. But I think a lot more can be accomplished by incorporating AI, including cloud computing, into other fields of management like finance, marketing, and strategy. I am very excited that Cornell Tech sits at the center of all these fields. I just set up a chair at Cornell at the Tech Business School for a professor of practice, about which I am quite excited. Mukti Khaire, the professor of practice, is focused on entrepreneurship and trying to bring together and effectively leverage both technology and finance.

Lastly, what does Girish Reddy do for fun?

Reddy: I have a variety of personal buckets. Obviously, my professional life is a big part of what I do. Philanthropy, particularly with an educational focus, has always given me enjoyment and satisfaction. Above all, though, I cherish my family, friends, travel, and golf.

Balancing these is always a challenge – but one I’m only too happy to face.

Reddy: I think we are in the very early stages of AI. Our new president is the CORNELL BUSINESS REVIEW | 28

Fear & Loathing in Advertising

BY PIOTR NOWAKOWSKI

T

he tired, all-too-familiar discussions of the sources of the Apple brand’s strength generally focus on the company’s products and consistent use of exceptional design in all aspects of its presence. Apple has certainly been remarkably resistant to its competitors’ constant attempts to capture its U.S. market share. But perhaps the most impactful, yet the most overlooked, reason for this unyielding strength is the competitors’ flawed comparative advertising campaigns. Even though intuitively the campaigns seemed reasonable, recent studies in consumer psychology make it clear that they were bound to fail. Scientists like John Dunning and Abraham Tesser constructed new models of consumer self-image and self-esteem maintenance mechanisms that reshaped our understanding of the baffling challenges of comparative advertising and perhaps of marketing as a whole.

For years, Samsung pursued a marketing strategy of bold comparative advertising because convincing Apple customers to switch to their products had to include Apple as a reference point. Samsung was right­—comparative advertising can be a highly effective method for addressing 29 | CORNELL BUSINESS REVIEW

buyers’ reluctance to switch. However, while quite straightforward and instinctual on its face, when mishandled it can produce unforeseen outcomes upon exposure to real-life intricacies of consumer psychology and possibly tarnish the advertiser’s image in consumers’ eyes. Comparative advertising is a very special form of marketing because, unlike others, it tries to devalue a "Perhaps the most impactful, yet the most overlooked, reason for Apple’s unyielding strength is the competitors’ flawed comparative advertising campaigns."

competitor’s product in an overt fashion.

This feature makes it tricky to implement from the standpoint of consumer selfimage issues. In order to understand these difficulties, one must compare the intuitive but faulty conventional interpretation of the decision-making process with the new interpretation, built on recent theories in consumer behavior, most importantly selfconcept and belief-harmonization.

The old model of the purchasing decision proposed that, when deciding

whether to buy a product, individuals would weigh their beliefs for and against the purchase, which would then become the basis for one’s decision. However, since the beginning of the 21st century, the way social cognition looked at decision-making started to increasingly favor a different interpretation. David Dunning, a researcher at Cornell University called this new model of consumer decision-making “belief harmonization.” In this process, the person, according to Dunning, reaches a decision by “rearranging and revising [their] beliefs, needs, and preferences into a network of cognitions that produces little, if any, tension or disharmony among its various elements.”

An important implication of thinking about decision-making in this way is that no longer do we just assume that beliefs, needs or wants shape the final decision but rather that the process works vice-versa as well. For example, a person might want a previously seen jacket on an impulse and already have an unconscious bias towards a positive purchase decision due to mere-exposure effect, well before consciously evaluating the factors pertaining to the decision.

This decision bias can result in the person

rearranging their belief framework to match the preferred decision and ultimately justifying the pre-existing preference.

It is important to note that the new model doesn’t contradict the interpretation that beliefs influence decisions. Rather, the decision-making process becomes a feedback loop, where the decision on the one side and the beliefs on the other are in dialog, influencing each other to gradually resolve existing tensions. As a result, the decision can be seen no longer as just an output, but rather a part of a dynamic, selfbalancing mechanism.

Describing the process in terms of belief adjustments brings up a valuable concomitant point that beliefs are not equally prone to changes. And it turns out that the ones that are the most robust are "The decision-making process becomes a feedback loop, where the decision on the one side and the beliefs on the other are in dialog, influencing each other to gradually resolve existing tensions."

usually not even relevant to a decision. These peripheral convictions are “sacrosanct” (per Dunning’s vocabulary), inviolable beliefs about the self. As the least common-sense element of the decision-making process, they can introduce a lot of unexpected noise.

The beliefs form the core of one’s identity and the reason behind their strength, as Abraham Tesser suggests, is the necessity to protect one’s self-esteem and preserve the consistency of the established self-concepts: People need a yardstick for how they see and would like to see themselves and for how they believe they are seen and would like to be seen. Apart from the sacrosanct beliefs held by the general population, such as considering oneself a “moral, lovable, and capable” person, there exist more individual beliefs, such as “I’m an sociable person.” Even though the beliefs are often unrelated to practical considerations of a decision, their inflexibility and subliminal nature makes them particularly impactful. An individual will usually make a purchase decision if the decision is consonant with these underlying beliefs, unless they take the uncomfortable effort of reshaping one’s self-understanding.

The resulting framework, even though quite dynamic and complex, brings clarity to why companies like Samsung made

substantial mistakes in comparative advertising and what exactly can happen as a result of these mistakes. Samsung kept repeating the same errors in its campaigns for years, but the “Samsung Slams Apple” series of commercials from 2012 is the epitome of the company’s crusade against Apple. For example, in some of its advertisements, Samsung presented iPhone users as maniacs lining up in front of Apple stores for days before the release of a new Apple product. iPhone users were shown as unreasonable buyers staunchly holding onto Apple merchandise regardless of the fact that the products continually fail their expectations. At the same time, they were also presented as unsuccessful people stubbornly and pathetically presenting themselves as creative “yuppies,” which was the implied motivation for their loyalty to the brand. Then Samsung presented comparative technical information, which indeed made Samsung phones look quite attractive. The results were devastating, but for Samsung rather than for Apple.

The key reason why Samsung would make this kind of mistakes is because it clearly viewed its audience through the lens of the old decision-making model. The company assumed that iPhone owners will readily assume the perspective presented in the campaign and deem themselves unreasonable. Samsung assumed that people do not have any pre-existing beliefs and, after adopting a disdainful stance towards Apple customers (likely themselves), the audience will proceed to impartially consider the technical information shown in the commercial.

What actually happened in the audience’s minds was probably quite different. Regardless of whether the stereotypical representation of iPhone buyers was correct or not, Samsung didn’t align its actions with the current theories about consumer self-concept. Samsung engaged in a defensive communication style, which on the surface focuses on pragmatics but in fact primarily challenges or defends one’s status or self-esteem. As a result, the commercials effectively detracted people from practical considerations like technical information and whether to switch to Samsung; instead, viewers had to protect their self-esteem.

People faced a cognitive dissonance, which ultimately had to be resolved through belief harmonization. They could either abandon their underlying belief that they are smart

consumers or discredit the source of the message. And because sacrosanct beliefs lie at the core of one’s self-esteem, which the audience was trying to protect at all cost, people were apt to adopt a hostile attitude towards the advertiser and discount its entire message, including the product comparison.

The groundbreaking consumer psychology models prove powerful in clarifying comparative advertising; however, it’s by no means the only marketing strategy that they help explain. This year’s attempts

by Budweiser to brand its beer under the new name “America” is a telling case for reckoning with self-concept and belief harmonization in marketing more broadly.

The new beer brand was created in response to Budweiser’s continued lack of success with the Millennial demographic, which, unluckily for Budweiser, shows a strong preference for wines and craft beers and despises alcohol with mass-production associations. The new name could conceal the beer’s connection with Budweiser, hadn’t it been for the public uproar when the hypocrisy of how Belgian-owned Budweiser refers to American patriotism received wide coverage in the media.

As expected, the campaign achieved the opposite of its goals, particularly among the Millennials. Budweiser’s attempts to appeal to the group’s patriotism only made the consumers determined to overcompensate and subconsciously prove to themselves that they were savvy consumers who do not fall for corporations’ tricks. Moreover, the current context of extreme political divide and related concerns, particularly among young adults, creates a network of discouraging associations around the political name, which further delegitimized the beer as a desirable product.

The continuing shift of consumer psychology paradigms has vast consequences to how marketing campaigns can be evaluated and structured. The innovative, comprehensive theories provide countless insights about comparative advertising and marketing. The theories also reveal the vast extent to which seemingly illogical consumer behavior can shape the marketplace, further reinforcing the significance of being able to properly analyze consumer psychology without resorting to the unrealistic simplifications typical of earlier theories.

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An Interview With The Students Redefining The Travel Agency WHAT WAS YOUR INSPIRATION BEHIND MILESAHEAD?

Rob: I have always loved and been interested in transportation, especially airlines. When I was 6 months old, I took my first flight from Westchester (HPN) to Minneapolis (MSP) to visit family. Then and still now, every time a plane takes off, chills run down my spine. As I got older, I began playing Microsoft Flight Simulator, flying virtual planes and routes around the world in my free time. Out of this came an interest in helping my parents purchase our flights to Minneapolis, learning what frequent flyer miles were, and a general understanding of how it all worked. I began helping family and friends turn their miles into free airfare, and quickly, I began getting daily phone calls with requests for help! One of my relatives suggested that I open a business; I thought they were crazy. Soon after, MilesAhead was born. Four years later, this passion project has become a global travel concierge leveraging our expertise, connections, and technology to optimize reward points, personalize trip experiences, and deliver VIP treatment to our clients.

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WHAT WERE SOME OF THE CHALLENGES OR OBSTACLES YOU FACED WHEN TRYING TO START AND GROW THE COMPANY?

Rob: The biggest challenge we’ve faced has been managing our time. You only have 24 hours in a day; balancing prelims, classes, and social life, and on top of that, being on call for clients is not easy. We work with our partners across the globe on a daily basis, and when you’re working with a hotel in Europe that is 6 to 7 hours ahead of us, we’re not going to hear back until the next morning. It motivates us to be disciplined, organized, and stay on top of everything.

Nelson: Another challenge is setting reasonable expectations and being able to say no. If a client gives us a project and we have our hands full, it’s best to explain that and be transparent. People appreciate and understand honesty. And, sometimes, that even creates more trust between us and the client. We always strive to create strong relationships with our customers - what might begin as a quick weekend in Miami

turns into us planning their family’s trip to Europe. It’s all about how we can make a positive impact in the lives of our clients.

HOW HAS YOUR EXPERIENCE AT CORNELL HELPED YOU WITH MILESAHEAD? HAVE YOU USED ANY OF THE RESOURCES FOR ENTREPRENEURS ON CAMPUS?

Rob: Going to school at Cornell, specifically the School of Hotel Administration, has been wonderful in growing MilesAhead.

When I came to Cornell last fall, it was just me. Today, we have a team of nine, five of whom are Cornellians. We couldn’t be where we are today without our fantastic team, and I’m so proud of them.

Recently, we were admitted into eLab, Cornell’s premier accelerator where student entrepreneurs come to launch or take their businesses to the next level. We are currently working on scaling MilesAhead with the support of eLab and Cornell.

Nelson: We love working in the eHub space in Collegetown. Whether it’s a team meeting, interview, or brainstorming session, we have found that being together in the same place helps our creativity and

productivity. The company has developed strong partnerships with the broader Cornell community, and we love to help students, families, and alumni with their travel needs. It’s exciting to show people the benefits we can provide as a result of our global relationships. Our team has the most fun crafting over-the-top experiences.

Rob: Last year, one of our long-term clients was checking into a beautiful property over spring break, but the rooms for his family were not as advertised, and he wasn’t a happy camper. A senior executive at the hotel is an SHA alumnus, so at 5 PM on a Saturday, I cold-called the executive, explained the situation, and 30 minutes later, the general manager of the property met with our client and moved his rooms to a more suitable location. It amazed me. It was the Hotelie network, the Cornell network, aiding us in making the impossible happen.

HOW DOES BEING ON CAMPUS AND HAVING A PULSE OF COLLEGE STUDENTS’ PREFERENCES IMPACT MILESAHEAD? DOES IT HELP YOU DECIDE WHAT TO FOCUS ON?

Nelson: The past twelve months since I joined MilesAhead have been a fascinating learning experience. We have helped a

lot of Cornell students with their travel needs and have been able to gain a better understanding of behaviors when it comes to home-sharing sites like Airbnb and HomeAway. It has been interesting to see how college students are increasingly looking for affordable luxury and want to take short getaways rather than longer trips.

Dave Roberts, SVP of Customer Insights and Revenue Strategy at Marriott, spoke recently in the Hotel School and stressed how important execution and service quality are to the millennial demographic. We have been seeing very similar sentiments.

AJ: We have a good understanding of what people want to do for breaks and we can relate to parents who want to bring their kids on family vacations. We can recommend clients to places such as Spain and Iceland because we’ve been to those amazing places.

Rob: We also connect with clients on an emotional level, as we work with many parents who have kids interested in applying to Cornell or the Hotel School. That is such a unique thing, and we’ve been able to draw great business (and give some campus tours, too!) because of that. The coolest thing about

being on campus is learning what today’s young travelers look for, whether travelling with friends, family, or on their own.

WHAT DIFFERENTIATES MILESAHEAD FROM OTHER TRAVEL AGENCIES?

Rob: One thing that separates us from larger travel agencies is our innovative approach and value proposition. We operate as a tightly-knit team, can be reached via many communication channels, and specialize in optimizing reward points for airfare. Outside the scope of your average travel agency, we consult with various companies, to most effectively accrue, use, and replenish reward points to save on their bottom line. When we aren’t redeeming points, we’re focusing on fostering strong relationships with our clients and suppliers, whether they’re tour guides, front desk agents, salespeople, or butlers. By investing in traveling to the destinations that we send our clients to, we are able to give them an insider’s look and ensure that their experience matches their expectations. When a client wants to go to Italy, we take those relationships we built to unlock experiences unavailable to the general traveling public. Our team is fueled by a genuine passion for creating memories and an amazing user experience.

Nelson: I wake up each morning to a new

challenge and project. Whether it’s an excursion through remote Antarctica or a journey through South America, we become experts as we build more connections CORNELL BUSINESS REVIEW | 32

and relationships. Our youth is one of our best assets; we can relate to family trips in ways older agents cannot, and provide our clients with a fresh view on travel. It is thrilling when we visit our hotel partners and hear how they appreciate working with passionate and young advisors.

HOW DID YOU LOCK IN THE PARTNERSHIP WITH VALERIE WILSON?

Rob: A few years ago at Virtuoso Travel Week, I met the leadership team at Valerie Wilson Travel and we stayed in contact.

Last winter, when we were changing agencies, our team began talks with them and it ended up working out very well. As one of the top travel agencies in America, VWT’s resources and buying power help us ensure the most competitive rates, develop strong relationships with suppliers, and deliver VIP treatment to our clients. We are very lucky and grateful to be associated with their company.

at the Peninsula with a special welcome amenity to be delivered upon arrival. Just two days before their arrival, the clients called us requesting that we cancel their hotel reservation and that they needed to fly home a day earlier. Within a half-hour, we cancelled their hotel reservation and confirmed new flights with better timing than the initial ones. The clients sent us an email a few days later thanking us and saying they never want to travel without us again.

and was working within a fairly tight budget. The same day, we came back to him with a nicer property than he expected with a discount off the published price and an early check-in for his arrival. We even had a dog bed waiting for his dog and a pack-in-play for his 6-month old son. It was a great challenge for us as we tapped into our network and negotiated with different properties and their management to find the perfect solution.

Nelson: I travel frequently to Charleston, SC as it is my favorite US destination. I had the opportunity to plan a trip for a couple in May who were celebrating their anniversary. Setting up activities, finding hidden gems for the couple to visit, and

WHAT SORTS OF EXPECTATIONS DO YOU HAVE FOR MILES AHEAD’S GROWTH OPPORTUNITIES AND CAPABILITIES? WHERE DO YOU SEE THE COMPANY IN 5-10 YEARS?

WHAT DO YOU THINK IS THE MOST IMPORTANT ASPECT OF YOUR BUSINESS THAT HAS CONTRIBUTED TO YOUR SUCCESS SO FAR?

Rob: As an entrepreneur, I think that learning from your mistakes is paramount to success. Learning how to take criticism, self-reflect and improve for the future makes you a better person. As we’ve grown MilesAhead, the team and I have made many mistakes. No one is perfect. But we have thought, talked, and reflected on our mistakes to make sure they don’t happen again in the future. Most importantly, we have learned how to grow. Our thirst to learn, and also our willingness to ask for help has also been a positive. At the end of the day, you can’t do it alone, and our fantastic team at MilesAhead helps make it possible each and every day. I’m very proud of them.

WHAT IS YOUR FAVORITE AND MOST NOTABLE EXPERIENCE THAT YOU’VE PLANNED?

AJ: I’ve only been with MilesAhead for about two months, but this was a really proud moment for me. We have a couple that travels often between the US and South America. The clients were recently in Chicago for a business trip, and we had made a reservation for a beautiful room 33 | CORNELL BUSINESS REVIEW

hand-selecting the city’s best tour guides was fun, but hearing their emotional reaction to seeing a family picture waiting in their room was even more powerful. It reminded me why I chose the hospitality industry: to create experiences and memories that turn travel into moments that people cherish and remember.

Rob: Last September, we had a high profile client request a two-bedroom apartment during the UN Global Assembly in New York City, when most accommodations are sold out. He gave us two days notice

Rob: We’re exploring multiple growth opportunities, several strategic partnerships and are expanding our core team. We’re working with the eLab to strategically design and plan how we will scale MilesAhead and take it from a service business to a technology-powered service business. We are fortunate to have over 300 clients at the moment, and I’d love to see us double that by the end of 2017. As for the longerterm future, my vision for MilesAhead is to become a leading brand in the hospitality industry with a fantastic company culture and a mission focused on positively impacting the lives of our customers.

Back On The Grid Rethinking American Infrastructure

BY ISAAC GREENWOOD

In the early morning of April 16, 2013, two unknown assailants fired shots from high-powered sniper rifles for over 19 minutes at an electrical substation near San Jose, CA. Officials quickly responded to the scene, and while they were unsuccessful in apprehending the gunmen they were able to successfully reroute electricity from another station and prevent a mass blackout in Silicon Valley. The incident nonetheless incurred $15 million in damages. Two years later, officials in Bakersfield, CA responded to reports of men with flashlights and found slashed wires and equipment at an electrical substation which serves over 16,000 people. Rather than single incidents, these attacks represent a significant trend of vulnerability amongst the American electrical system and infrastructure at-large.

Political candidates from both sides of the aisle have long lamented the woe-stricken traditional or American infrastructure. Planes, trains, and automobiles are all subject to crumbling networks of airports, railways, and highways which have not been maintained since their creation years ago. In its annual Infrastructure Report Card, the American Society for Civil Engineers gave American infrastructure at-large a D+ grade and suggested an additional $3.6 trillion in investment by 2020. However, projects to renovate existing problems have long stalled as states, who fund over 90% of local projects, continue to pay off debt incurred during the Recession. State and local spending on infrastructure fell from 2.5% of GDP in the mid-2000’s to less than 2% today, a 30-year low. Even the main federal source of funding, the federal gas tax, has not seen an increase since 1993, remaining at just 18.4 cents per gallon.

In response to magnified calls for improvement, the Treasury Department unveiled new policies last year which would encourage regulators to incentivize infrastructure investments after revising for risk structure and factors. These policies have come under criticism from Republicans such as Senator Phil Gramm, Chair of the Senate

Banking Committee, for their similarity to the Community Reinvestment Act (CRA) of 1977 which proliferated subprime mortgages and the private funding of the public sector.

The law, which has evolved significantly over its 39-year lifespan, brought credit to many low income areas and municipalities that would have otherwise struggled in acquiring funding. The role of the act in the Financial Crisis remains contested, however, as some like economist and Nobel laureate Paul Krugman cite faulty mortgage-backed securities as the prime instigator. Regardless, politicians in Washington should propose revamped funding guidelines and re-examine the CRA as states continue to deal with outstanding debt.

In addition to accounting for traditional forms of infrastructure, contemporary funding for infrastructure must also include renovations to the exposed electrical grid. The American electrical grid, largely created over the past 125 years, remains fragile and at-risk to third party assaults. An 11-minute blackout in San Diego, CA in late 2011 resulted in a power loss for 2.7 million residents across three states as sewage and airports failed. A 2012 report by the National Research Council of the National Academies of Sciences found electrical substations the most subject to terrorist attack within the grid.

In response to the 2013 attack, the Federal Energy Regulatory Commission conducted a survey which found nine substations had been attacked in similar manners, as well as thousands of disruptions from rodents. These substations are often guarded by no more than wire fence and padlock.

Attacks like the aforementioned will become more common in the increasingly sophisticated technological environment.

Russian hackers successfully created a power outage last December in a coordinated cyberattack which affected more than 80,000 residents in Eastern Ukraine. As demonstrated by the 2010 Stuxnet incident, in which an Israeli virus destroyed various Iranian nuclear centrifuges, cyber warfare presents an ever-

growing threat and American infrastructure should be well-prepared to defend itself against threats from state and non-state actors.

The U.S. currently invests less than 2% of GDP in infrastructure, paled in comparison to Europe’s 5% and China’s whopping 8.6%. While the state model may have worked in the past, current economic situations dictate the federal government must take an increased role in providing for much-needed infrastructure improvements.

Military spending currently accounts for over 50% of discretionary spending and future budgets should be revised to include certain infrastructure projects under the scope of national defense. Redefining infrastructure to include the electrical and “cyber” grid, Stuxnet and other instances reflect the need for continued spending on infrastructure security given their exposure to this newfound form of war. From this perspective, infrastructure, in addition to the widely relied upon electrical grid, could classify as defense spending in order to receive more annual aid.

Another proposal involves the creation of a Department of Infrastructure to oversee the various projects from a federal level. Instead of the current system in which maritime, highway, and other areas are separated across administrations, the newly created and unified department could coordinate spending and include the Army Corps of Engineers in addition to the Environmental Protection Agency. This would improve the efficiency through which potential projects are evaluated in a manner similar to the British Infrastructure and Projects Authority.

The federal government should act swiftly in aiding states on local projects to help alleviate the burden of debt. Rather than fall prey to partisan politics, President-Elect Donald Trump and Congress should make these costly yet necessary reforms rather than continue to let the American grid crumble.

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