Cornell Business Review Spring 2021 by Cornell Business Review

Cornell Business Review Spring 2021

L L A W

U A S AS

SPAC at Sea Shunned by the media, opportunities are sizeable

LETTER

FROM THE

EDITOR

How does one gauge whether a publication has improved in the past semester? The quality of the magazine’s content, both visually and conceptually, are to be considered. Yet such metrics are difficult to quantify, and word counts, although helpful, are ultimately illusory. At its core, a publication serves the public by disseminating ideas and encouraging dialogue. Therefore, this semester the Review’s focus was on expanding its readership. A partnership with Volume, Cornell’s AppDev project which consolidates student-run publications, brought our CBR NOW newsletter to mobile devices. A new Website Development team began work on a custom site, one which promises to deliver our writing in a more engaging and accessible way. Overall, this semester was an important stepping stone in the Review’s evolution as a publication, moving into the digital space and developing partnerships with other student-run organizations, all the while ensuring that our content is as fresh and exciting as ever. Regarding our content, the Editorial team released some of our most in-depth and international work to date. These pieces are not synthesis but analysis; Davis’ SPAC at Sea, our cover article for the 22nd edition of CBR, investigates the financial media’s crusade against Special Purpose Acquisition Companies. Goliath v. Goliath and Systemic Risk in China give insights into global economic developments. Our writers also focus in: Miami: The Next Silicon Valley and The Perpetual Startup investigate microeconomic trends in the United States.

Outside of our written content, the Business team conducted a landmark interview with Michael Polk, CEO of Implus and Advisory Director at Berkshire Partners. Mr. Polk gives valuable advice on developing as a leader, first steps after graduation, and the impact of business school. The Design team has outdone itself once again, with exceptional full-length and CBR Now graphics. On a more personal note, the Cornell Business Review has served as an incredible learning experience, both as a leader and student. Throughout my time as a writer, Managing Editor, and now Editor-in-Chief, CBR has catalyzed countless hours of research and debate on topics ranging from finance to art. Although virtual meetings have come to an end for CBR, I am thankful to have gained experience leading and organizing online events. Although the world is slowly returning to normalcy, I have no doubt that part of our professional lives will stay on-screen. A special thank you to CBR’s Executive Board - to Kyle Castellanos, our Managing Editor, who organized this semester’s editorial process. To Helen Wang, our Design Chair, for keeping us on-track and for her team’s web mockups. To Megan Frisica, who grew CBR’s professional network, and to Rishik Zaparde, who spearheaded the web development process. To our entire team, who didn’t let a pandemic stop the publication. And of course, to our readership for their continued support. I hope you enjoy our work.

Alexandre C. Taylor

Cornell Business Review

Editor-in-Chief Managing Editor Business Manager Design Director Web Dev Chair

Alexandre Taylor Kyle Castellanos Megan Friscia Helen Wang Rishik Zaparde

Associate Editor Rhea Bhammer Madison Kang Editor Maria Alexander Ash Arumugam Wally Chang Srauss Cooper Saurin Desai Davis Donley Anya Gert Natalie Hughes Raghav Madhukar Philip Matteini Isabella Picillo Yoon Jae Seo Nicholas Weising Emily Xiao Business Aanya Bhandari Evan Byers Grace Kim Mahima Kumbhat Ellen Li Jaclyn Liu Fermin Mendive Yejune Park Angela Shi Andrew Wallace Graphics Jessie Jiang Michelle Ren Zhang Layout Samantha Mulvey Talia Singer Webite Designer Alexandra Kim Website Dev Jae Kim Robert Zhao

FINANCE 4

SPAC at Sea Shunned by the media, opportunities are sizeable

Systemic Risk in China The Harmless Debt Crisis

Contents

Davis Donley

Raghav Madhukar

ECONOMY & LAW Miami The Next Silicon Valley

The Smokeshow Everyone wants a piece of the cannabis action

The East African Federation An Optimistic Future

Philip Matteini

Nick Weising

Dilan Minutello

BUSINESS 14

Vegas in Transition The Sands Corporation is Betting on Asia

The Perpetual Startup Nonprofits Fail Because They Can’t Measure Success

Goliath vs. Goliath Amazon and Reliance’s Battle Over Indian E-Commerce

Fast Fashion Breeds Deceit

Who Trains the AI AI is Built on India’s Back

Wally Chang

Emily Xiao

Saurin Desai

Isabella Picillo

Yoon Jae Seo

ART Digitization In Frame Bright Spots in a Bleak Industry

Between Profit and Royalties Spotify has Backed Itself into a Corner

Maria Alexander

INTERVIEW 28

Anya Gert

Michael Polk

SPAC at Sea

Shunned by the media, opportunities are sizeable Written By Davis Donley

PACs, or special purpose acquisition companies, have become one of the hottest trends in the financial markets as they offer a unique alternative to traditional IPOs. A SPAC is a blank check company formed solely to raise capital through an initial public offering (IPO) and acquire an existing company. After their IPO, a SPAC places the money raised in an interest-bearing trust account. Investors with expertise in a particular industry or business sector generally form SPACs and prioritize pursuing deals within their circle of competence. SPACs generally have two years to complete an acquisition or must return funds to investors. Essentially, SPACs are publicly traded companies with no commercial operations and provide retail investors with early access to privately held companies, which have historically only been available to institutional investors. SPACs have existed since 1993, often as a last resort for small companies to raise capital—only in the last year have they become mainstream. Before 2020, SPACs were looked upon unfavorably, often being compared to penny stocks and pump-and-dump schemes. However, SPACs have gained prominence as bigname investors from Wall Street and Silicon Valley, such as Bill Ackman and Peter Thiel, began using them as a means to take companies public.

SPACs follow a three-stage life-cycle, which is crucial to understanding their risks. The first stage of a SPAC comes post-IPO, when the company’s only asset is $10 in cash per share. The SPAC generally trades at net asset value ($10 per share), which is a company’s total assets minus its liabilities. Thus, before a merger target is announced, the price of SPACs remains close to this $10 floor. Investors can take advantage of merger

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arbitrage opportunities in SPACs by purchasing shares for less than $10, as this is essentially getting cash at a discount. The second stage for a SPAC occurs when the merger is announced, and the price of shares can swing based on investor perceptions of the deal. It is common for SPACs to increase in price when a unique merger target is officially announced. While SPACs have two years to complete their merger, in 2020, merger targets were announced on average only 4 to 6 months after the SPAC’s IPO. The third stage for a SPAC occurs after the merger is completed (when the stock no longer trades as a blank check company) and the shares fluctuate based on the new company’s outlook. Post-merger, the private firm takes the SPAC’s place on the stock exchange. The SPAC ticker symbol and stock name adjust to reflect the newly traded public company. In 2020, 248 SPACs went public and raised a combined $83 billion, dwarfing the $12 billion total proceeds from SPACs in 2019. The incredible growth in the number of SPAC IPOs has only increased in 2021 as 298 IPOs through April raised a combined total of around $100bn.

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With celebrities such as A-Rod, Shaquille O'Neal, and Colin Kaepernick forming their own SPACs, investors question whether a bubble is forming.

At first glance, it is easy to dismiss all SPACs as a speculative frenzy.

Euphoria in SPACs peaked in February 2021 as investors chased young companies amidst low interest rates. As bond yields increased, SPAC prices have fallen dramatically as higher bond yields provide investors with an alternative to place their cash and means investors are less willing to pay as much for speculative, high-growth stocks. As many companies merging with SPACs have low present cash flows, the majority of which will be from future years, a rise in bond yields and the subsequent application of a higher discount rate reduces the present value of SPAC merger targets. Numerous news outlets proclaimed “the end of SPACs” as the high-growth companies they targeted will have much lower valuations in a higher interest rate environment. Before March 2021, speculative fervor was at its peak as numerous SPACs traded for large premiums over their net asset value ($10) with no merger target announced. While it is unlikely that SPACs without targets will return to their lofty prices, it is premature to dismiss SPACs as an investment vehicle. When purchased for $10 a share, SPACs offer an interesting asymmetric risk vs reward structure. After a merger proposal, shareholders have two options—redeem their shares for $10 plus accrued interest or hold their shares of the post-merger company for the long-term. SPACs incorporate numerous guardrails into their structure, which news outlets repeatedly overlook in their analysis. Because investors’ money is placed into escrow immediately—and earns a small amount of interest while waiting for a merger—the downside risk for SPACs is largely eliminated. Essentially, $10 per share acts as a SPAC’s floor because the

blank check company always holds $10 worth of cash in an interest-bearing trust account. Moreover, before a merger is completed, SPAC investors can redeem their shares for $10 plus any interest accrued. In a worst-case scenario for an investor who buys a SPAC at $10, a deal never materializes and the investor fails to earn the market’s 5% to 10% return, but instead only receives interest from the trust account. Ultimately, the greatest risk for early SPAC investors is opportunity cost. However, the potential upside from a good merger candidate makes the risk seem well worth it, given that downside pre-merger is fairly protected. However, investors must take note that their shares cannot be redeemed at $10 post-merger is completed; risks post-merger are SPAC specific.

While SPACs possess inherent guardrails mitigating downside risk before the merger, SPACs have shown poor shareholder returns post-merger due to share dilution. Researchers at Stanford University discovered that “although

Due to the risks in SPACs and the fervor from retail investors, it is easy to dismiss all SPACs as speculative investments. To be sure, many of these companies merging with SPACs will fail over the long term, as SPACs pull from venture capital, and

venture capital is inherently speculative. The electric vehicle SPACs in particular appear to have lofty valuations with little to no current revenue or competitive advantages. Despite the risks inherent in SPACs such as dilution, there remain a few ways in which they offer themselves as sound investments.

Amidst the February and March crash in SPAC prices, merger arbitrage opportunities have emerged. Pre-merger SPACs trading below their $10 net asset value are safe, risk-free investments as they can be redeemed at $10 plus accrued interest upon merger completion. Investors can think of it as purchasing a $10 bill for less than $10. Furthermore, if these SPACs trading sub-net asset value announce exciting merger targets at attractive valuations, they may increase in price. Purchasing shares of SPACs sub $10 offers 0% downside before their merger is completed as the investor can either sell them for a profit if the price increases or have theirshares redeemed. Overall, many companies targeted by SPACs are speculative growth stocks trading at high multiples. However, there are unique cases in which SPACs acquire high-growth companies at reasonable prices, which provide longterm shareholders excellent returns. For example, Draftkings, a popular sports betting company, went public via SPAC in April 2020 and returned 526% from its SPAC IPO price of $10. Furthermore, QuantumsScape, a Bill Gates-backed company that makes solid-state batteries, returned 395% from its SPAC IPO. 24 SPACs have been completed in 2021, and despite merger dilution and the founder “promote,” they have returned 35.2% on average from their SPAC IPO. The financial media tends to label all SPACs as poor investments, with a select few which prove good long-term holds. This provides opportunities for the proactive investor who is willing to do their due diligence. As renowned investor Peter Lynch famously said,

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The person that turns over the most rocks wins the game.

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SPACs issue shares for roughly $10 and value their shares at $10 when they merge, by the time of the merger, the median SPAC holds cash of just $6.67 per share.” The dilution embedded in SPACs stems from three sources—warrants, founder shares, and an underwriting fee. A warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed price until the expiry date. In the case of SPACs, issued warrants allow investors to buy the underlying stock of the post-merger company for $11.50 per share, with a five-year expiration date. Ultimately, when investors exercise their warrants the number of shares outstanding increases, thus making each share worth less. The second cause of dilution is that SPACs pay an underwriting fee based on Another advantage SPACs provide over IPO proceeds. IPOs is that they allow retail investors The third cause of dilution and poor to purchase shares at the same time as post-merger returns in SPACs is institutions and accredited investors. that sponsors—the investors behind In recent months, the IPO and DPO the SPAC who seek out a target— (Direct Public Offering) markets compensate themselves with a “promote” have seen Roblox and Snowflake go consisting of shares equal to 25% of public, providing excellent returns the SPAC’s IPO proceeds, or 20% of for institutional investors, but not so post-IPO equity. The greatest risk in much for retail investors. Online games SPACs over the long-term is this big company Roblox had its reference price sponsor “promote” which dilutes the set by the New York Stock Exchange company’s shares. The SPAC sponsor is at $45 for its direct listing. However, incentivized to find any target before the trading started at $70 for retail investors. SPAC deadline as their shares from this Since Roblox’s DPO, retail investors who “promote” have zero cost basis and sell purchased on the first day of trading have for pure profit. not received any profits, but institutional The massive profits SPAC sponsors investors experienced a quick 52% pop receive from this “promote,” regardless on their shares. Similarly, Snowflake of the quality of the company they offered excellent returns for institutional merge with, led to an explosion in the investors who could purchase it for $120 number of SPACs hitting the market. a share in its November IPO as the Today, there remain hundreds of SPACs stock now trades at $236. However, the chasing deals of significant size in the stock began trading for retail investors same industries. This will inevitably only at $235, so they have only received mean that standards will slip and that a minuscule gain. SPACs help even weaker companies will be brought to the playing field between retail and market. Moreover, hundreds of SPACs institutional investors as both can pick competing for a limited supply of private up shares at the net asset value of $10. companies means that these private SPACs function as a good alternative to companies can ask for higher valuations. IPOs in that they allow retail investors The sheer number of SPACs is leading to early access to private companies with some SPACs overpaying for their merger high potential growth prospects. targets.

Systemic Risk in China The Harmless Debt Crisis Written By Raghav Madhukar

Graphic By Michelle Ren Zhang

ystemic risk (SRISK) is the quantum of externality that a firm-level failure can impose on the broader financial sector. Perhaps the most impactful instance of SRISK in recent history was the 2008 collapse of Lehman Brothers, which led to severe repercussions across financial institutions and securities markets. In today’s global context, Chinese companies collectively carry approximately 30% of the world’s systemic risk, compared to US companies, which account for a mere 7%. This gargantuan concentration of SRISK in China warrants a serious investigation into its various causes and implications.

Systemic Crises and Risk

Systemic crises emerge with low aggregate capitalization in the financial sector. When individual financial firms’ ability to provide financial services to clients is threatened due to low capital availability, other financial firms often step in to fill the gap. However, when capital availability in the aggregate financial sector is insufficient, there is really no scope for other firms to fill the gap - it is in such scenarios that systemic crises materialize. There are broadly two categories of events that trigger such aggregate capital shortage in the financial sector: (1) The economy reels from a shock, or (2) A highly interconnected firm (i.e. a firm with high SRISK) fails. While there is a vast sea of literature on the sources, nature, and implications of economic shocks, the first serious attempt to quantify SRISK was made only as recently as in 2010, by a team of finance researchers at NYU Stern’s Volatility Lab following the publication of a seminal paper titled ‘Measuring Systemic Risk.’ It was determined that an accurate measure of SRISK could be computed as the product of (a) the expected costs to society from a systemic crisis measured per dollar of capital shortage in the aggregate financial sector, and (b) the anticipated contribution of a firm to the aggregate capital shortage. Part (a) represents the potential financial cost that society will have to incur (in dollar terms) in the instance of a crisis. Part (b) represents a firm’s contribution to the expected losses during a crisis (as a percentage). Therefore, SRISK turns out to signify a monetary value.

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SRISK in China As of today, global systemic risk stands at $4.4 trillion, with China single-handedly accounting for $1.3 trillion. Four Chinese banks - Industrial and Commercial Bank of China (ICBC), Bank of China, China Construction Bank, and Agricultural Bank of China - have a cumulative SRISK of more than $660 billion, which constitutes more than 50% of the country’s total SRISK.

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What is even more astounding is that the Bank of China and the Construction Bank of China together hold more SRISK than

These staggering figures from China can be attributed almost entirely to two factors: the size of Chinese banks and the leverage they carry.

Size of Banks

Chinese banks have achieved enormous growth over the past two decades. Nineteen of the 100 largest banks in the world by Net Asset Value (NAV) are based in China four of which top the list. This transformation has been enabled by a combination of various key factors including state intervention, disproportionate corporate debt, and nascent equity and bond markets. Since the turn of the millennium, the Chinese state has relentlessly pursued a strategy of aggressive lending to both retail and corporate consumers alike, even if at times this may have meant compromising on credit quality. However, since the Chinese government regulates monetary policy while also owning and operating banks, concerns regarding undercapitalization, under-profitability, or rising bad debt rarely arise. This is because the central bank can and will always step in, and even print currency if necessary, for the banks’ protection. Thus, China has successfully cultivated and preserved an environment of fearless lending for over

two decades, which is reflected in the vast balance sheets of its banks today. Another factor contributing to the rapid growth of Chinese banks is their disproportionate asset composition. In China, capital lent to corporations represents nearly two-thirds of total debt in the country, while the remaining third captures retail and government debt. In stark contrast to this lending pattern, the US sees a roughly equal split of debt across corporations, retail consumers, and government entities. Such disproportionately skewed lending to corporations results in a generally higher average loan size for banks, which explains some of the swift development in bank assets. In addition, this approach perfectly aligns with the Chinese government’s agenda to ensure that domestic companies predominantly secure financing from within the ‘Chinese system.’ Finally, companies in China continue to rely greatly on banks as a source of financing - far more than in developed countries like the US or UK - because equity and bond markets in the country are relatively new. For reference, the market capitalization of the US stock market is $49.1 trillion, and the size of its bond market is $39.1 trillion. On the other hand, China’s equity market is worth approximately $9 trillion and its bond market is valued at $11.9 trillion. Therefore the ability of Chinese companies to tap into the public equity and bond markets as a source of financing is limited relative to the US.

Harmless SRISK? While intuition may lead us to believe that present levels of concentration of SRISK in China ought to be a cause for grave concern, the reality happens to be quite the opposite. This is evidenced by the low beta values of Chinese stocks implying a low risk-reward relation. With the backing and safety net of the government, virtually no amount of leverage or bad debt can bankrupt any of the banks. Nobel Laureate economist, Robert Engle, affirms that while China may have rapidly rising debt levels, much of this debt is “riskless” as it is “explicitly or implicitly guaranteed” by the government. Therefore, while the scale of systemic risk may be large, the likelihood of it panning out is highly unlikely in the current context. However, while China’s excessive credit growth may appear riskless given the low probability of a systemic failure, it is prudent to prepare for the worst (a post-crisis bailout) well in advance. There are two commonly upheld views on achieving this: (1) Creating a bad bank, and (2) Upgrading financial markets infrastructure.

The first approach, which is to institute a bad bank, essentially entails the formation of a placeholder institution that purchases nonperforming loans (delinquent loans) off the balance sheets of financial institutions. Such a cleansing exercise allows major financial institutions to continue to stay healthy, capitalized, and well functioning, and prevent a full-blown crisis from occurring at the minimal preventative cost of purchasing bad loans. The second approach, which is to improve markets infrastructure, can be achieved in two ways. First, a country can develop more robust and structured exchanges to trade financial derivatives. Second, it can create central counterparties (CCPs) in an economy. CCPs are intermediaries in financial transactions that buy from the seller and sell to the buyer, and thereby ensure greater liquidity in the market, while also reducing default risk on the part of buyers because they are required to hold a margin account with the CCP.

Leverage in Chinese Banks

While both the approaches outlined above might mitigate potential symptoms of owning high SRISK, they don’t solve for its root cause: artificial growth enabled by stateintervention. In the long term, perhaps the only viable approach to containing the ballooning SRISK in the country is to scale back on government intervention, push for privatization, resort to autonomous monetary policy, and allow new domestic private firms and foreign banks to set up shop and scale operations. These measures will help decrease the firm-level SRISK of existing banks and therefore reduce the possibility of a systemic crisis in the years to come.

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Leverage contributes as much to inflated SRISK values in China as bank size, if not more. The median Price / Book ratios of the four largest Chinese banks is 0.505, while that of the four largest American banks is nearly double that at 1.195. From our knowledge of the established empirical association between low P/B ratios and high leverage ratios, we can infer beyond reasonable doubt that Chinese banks are more levered compared to their American counterparts. This in turn results in higher firm SRISK values for financial institutions in China, explaining the country’s high overall cumulative measure.

Reconsiderations

Miami: The Next Silicon Valley Written By Philip Matteini

The Rise of Silicon Valley

n the mid-1950s, the semiconductor industry was run primarily in East Coast cities such as Boston and New York. Seeing an opportunity, a recent Harvard MBA named Arthur Rock convinced former employees of the failed Shockley Semiconductor Laboratory to form their own company in Palo Alto. With the financial backing of New York entrepreneur Sherman Fairchild, the group formed Fairchild Semiconductor in October of 1957. Thanks to Rock’s fundraising and Sherman Fairchild’s connections in the electronics industry, the group quickly attained lucrative contracts in the public and private sectors. By the mid-1960s, the group generated more than $90 million in sales annually and became the secondlargest company in the computer chip industry. When the company was eventually bought out, four of its original employees provided Rock with funding to launch Silicon Valley’s first venture capital firm, Davis & Rock. Another four provided the financing that helped a former Fairchild Semiconductor employee launch Advanced Micro Devices (AMD), a multinational semiconductor company with a current market cap of nearly $100 billion.

ensuing virality provided a sudden sense of legitimacy to a movement years in the making.

Miami’s population has grown by nearly 20% in the last decade. Many of these newcomers arrive from cities such as San Francisco and New York, where rising living costs are driving residents out. In the Bay Area, residential rents are down roughly 20% in the past year. moveBuddha, a booking platform for moving companies, revealed that 90% of its San Francisco-related searches were for people moving out. While heightened office vacancy rates in the area are understandable given the COVID-19 pandemic, the disparity in residential real estate prices between Miami and the Bay remains astounding: $45.45 per square foot in Miami compared to $64.12 in San Francisco.

States experiencing an increased outflow of tech workers also have higher taxes and stricter regulations on businesses. For instance, California’s landmark 2018 law requires companies with principal executive offices located in the state to have one female director on their board of directors. According to the law, by the end of 2021, companies with six or more directors must have at least three female directors. Industry watchers also point toward the efforts of legislators to impose a wealth tax for highThe commitment of Fairchild Semiconductor’s original net-worth individuals. Florida, on the contrary, has both a eight employees to reinvest both their knowledge and low corporate income tax rate and no personal income tax. capital transformed the local community. In less than Miami’s friendlier business environment has made it a two decades, an industry based almost entirely on the viable alternative to more expensive, traditional industry East Coast had relocated nearly 3,000 miles across the settings. This is reflected in the growing volume of tech country to a farming community in Northern California. professionals among the many newcomers. Despite the The efforts, financial and otherwise, of Arthur Rock ongoing pandemic, Miami gained 3% more tech workers and Sherman Fairchild to Kleiner’s California team in 2020 than it did the previous year. In San Francisco represented a break from conventional, industry-wide and New York, the inflow/outflow ratio of tech workers attachment to the northeast. As the United States enters an declined by 20% and 35% respectively for the same era defined by heightened political division and emerging year. Additionally, Mayor Suarez’s pro-tech advocacy disruptive technologies, innovators find themselves at a has prompted some of the world’s most successful new crossroads. businessmen, including Elon Musk and Peter Thiel, to seek meetings with him. A recent announcement from the Mayor’s office noted the plans of seventeen large financial In December 2020, Founders Fund principal Delian and technology companies—including Spotify, Goldman Asparouhov suggested that “we move Silicon Valley Sachs, and Blackstone—to either move their headquarters to Miami”. Miami Mayor Francis Suarez promptly to or open permanent offices in the city. responded: “How can I help?”. Suarez’s response and its

“How can I help?”

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Miami’s Structural Challenges Though Miami’s tech scene has been on the rise for several years, it still lacks some of the fundamental traits of a tech capital. Fast growing tech ecosystems tend to have a few things in common: strong economies with business-friendly regulations, top-tier universities that produce talented engineers, and locally headquartered tech companies. Despite demonstrating tremendous growth in the last decade, Miami still falls short in the areas of education and local business. Bill Gurley, general partner at Silicon Valleybased venture capital firm Benchmark, recently suggested that prominent tech ecosystems require at least “three independent public companies north of a $10 billion market cap founded in the region.” South Florida has only one: Chewy.com, a pet food delivery company acquired by PetSmart for $3.35 billion in 2017.

These shortcomings are complicated by Miami’s outsized exposure to environmental concerns gripping the nation. Experts predict that sea levels in the city could rise by three to six feet in

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Climate change threatens to expose Miami’s most significant burden to success: inequality.

change. This is particularly true in the case of Hispanic and non-Hispanic Black Miamiains who are significantly overrepresented in inland flood zones.

According to Census data from the 2019 American Community Survey, Miami is the city with the third-largest income inequality gap in the United States with a population of more than 300,000. Liberty City and Little Haiti, two of Miami’s poorest districts, are comfortably situated at fifteen feet above sea level. This makes them a prime target for gentrification, with the goal of providing an alternative to high-income, coastal flood zones more susceptible to rising sea levels. Recent efforts in this direction have resulted in rising costs of living for low-income residents and pose threats of increased poverty and strains on city resources. Policy approaches to mitigating these concerns will require more than a few tweets from Mayor Suarez. The bottom line is that despite possessing many pull factors for tech professionals, Miami must also address its substantial structural baggage. When William Shockley first formed his lab, he experienced difficulty convincing semiconductor engineers to come work in a region without longdistance telephone service. Miami’s public officials face an even greater challenge convincing tech workers to put down their roots in a city without a cohesive vision to address its broad-

ranging systemic concerns.

Looking ahead

The birth of Silicon Valley through the Fairchild team’s reinvestments was no accident. It occurred due to a combination of the employees’ expertise and a geographical gap of industry between the two coasts. A relative absence of tech companies outside of the northeast made Northern California an attractive alternative ripe for growth. A common misconception is that the first semiconductor companies were started in Stanford University’s Tech Park. The reality is that there is no meaningful connection between Stanford and the growth of Silicon Valley.

Yet, Stanford’s reputation as a consistent supplier of tech leaders and workers did aid in Silicon Valley’s rise. Research by Stanford’s Engineering department led to the creation of one of the first university semiconductor labs in the world. Despite not producing any early advances in the field, it provided key training to students, greatly improving the local supply of engineering talent.

Similarly, the growth of Miami’s tech sector is contingent upon the collaboration of all its institutional forces toward a common goal of greater regional wellbeing. Its current reputation is one of being a “lesser-evil” compared to expensive, anti-business alternatives. The city instead must focus on improving its own merits. Its business leaders must continue to innovate, but with an eye toward how their products impact the local economy. Its public officials must incentivize and work together with private entities offering solutions to environmental and infrastructural challenges. Its universities must seek avenues of integration with a vast and rapidly expanding network of tech businesses and startups. Silicon Valley’s success story is attributable to comprehensive growth in the region, impacting areas not only confined to the tech industry. Miami’s reputation will be determined by its ability to organize and execute a unique strategy that combines economic growth with equitable societal improvement.

ECONOMY & LAW

As far as education, Miami lacks the presence of elite universities seen in other cities such as Austin and Boston. The University of Miami (UM), widely regarded as the region’s most prestigious academic institution, cannot compete with the country’s best universities. To its credit, UM has mostly distanced itself from its party school reputation of the 1980s and ‘90s, made possible by the leadership of renowned educators Edward T. Foote II and Donna Shalala. Still, the school’s undergraduate program sits on the periphery of US News’ list of the top fifty universities nationwide; its graduate programs in business and engineering are ranked #60 and #118 respectively. Notably, just over two-thirds of full-time MBA graduates are employed following completion of the program. In comparison, the country’s top programs (the University of Chicago’s Booth School of Business and Northwestern’s Kellogg School of Management) tend to produce employment rates higher than 80%.

the next fifty years, making Miami one of the most environmentally vulnerable metropolitan areas in the country. The city’s poorest residents are those most susceptible to climate-induced displacement. A study conducted by the American Society of Civil Engineers revealed that racial minorities face higher exposure to the effects of climate

The Smokeshow

Everyone wants a piece of the cannabis action

Image credit: Reefside.co

Written By Nick Weising

annabis, whether recreational or medicinal, is now legal in 36 states. On March 31st, the state of New York legalized recreational marijuana, adding the Empire State to the large list of states with legal cannabis. Likewise, the Biden Administration and Democratic Congress may further loosen federal enforcement. This is a dramatic turn from the state of legalization just a few years ago, largely because of changing public perception. Once seen as a hard narcotic, marijuana is now largely viewed more mildly, with state governments seeking to tap into marijuana-related tax revenues.

According to Marijuana Business Daily, the legal market in the US will reach between $11.2 and $13.7 billion in retail sales this year and could grow to reach $30 billion by 2025.

The business world is not unaware. Large corporations in sin industries have been taking large stakes in cannabis companies in the United States and Canada. Altria, the parent company of Philip Morris USA, paid $1.8 billion for a 45% stake in Cronos Group, a publicly-traded marijuana conglomerate based in Canada. Alrtria also patented a variety of marijuana products and devices, suggesting that the The US marijuana market has grown significantly future of cannabis consumption will be via vaping in recent years. and ingestion. Although recent investments by the firm have faltered, Altria continues to inject capital, indicating strong faith in the long-term prospects of the marijuana industry. Research from Brightfield

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Group indicates that the international cannabis market is projected to hit $31.4 billion by 2021 with the U.S. currently driving more than 90% of worldwide sales.

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Big Tobacco companies are not the only ones dipping their toes into the market. Alcohol giant Constellation Brands, the makers of Corona beer, bought a 38% stake in the largest Canadian cannabis company, Canopy Growth, for $4 billion in August 2018. This deal was preceded by a smaller $200 million investment in October 2017 by Constellation. Heineken has also invested in Canadian marijuana businesses, and Novartis, the pharmaceutical giant, entered into a strategic

arrangement with Tilray, one of the largest medicinal Consequently, investors who once backed tech firms are cannabis companies in the world. now investing in the cannabis industry. In 2014, PayPal coIn many ways, investment by tobacco companies into founder Peter Thiel became the first institutional investor the marijuana industry is reminiscent of Big Tobacco’s to finance the market. Poseidon Asset Management, a entry into the vape market. Philip Morris USA took a hedge fund founded in 2013, invests exclusively in the minority stake in Juul Labs, which today is the largest vape cannabis industry. The firm specializes in agriculture manufacturer. Many adult smokers have switched over to technology, compliance tech, genetics and lab testing, and vaping as a healthier alternative to cigarettes. However, data analytics sectors. backlash from underage users, tighter regulations for The industry has also grown more complex as both poor-quality products, and an increase in the smoking consumers and producers become more experienced age hit the vape market hard. Bloomberg reported that and incumbents develop economies of scale. There is vape sales in the US fell as much as 13% in 2020, having a real difference in the genetics and quality of cannabis previously forecasted a 10% year-on-year increase. Seeking depending upon its cultivator. The use of pesticides, unto mitigate risks from the vape industry, Big Tobacco is regulated because the plant is still pending federal approval, again diversifying its portfolio, this time with marijuana. is a common area of concern. Yet demand is sky-high Yet unlike the tobacco industry in the 20th century, the for specialty products. Numerous complaints were filed marijuana industry is filled with newcomers. One such with the Los Angeles City Council concerning Cookies business is Leafly, which produces news and retail content customers disrupting the peace before or after visiting the for cannabis-related products, including marijuana vendor. itself. Another disrupter is Cookies, a marijuana grower based out of California known for its variety of different However, most big players outside of sin industries are strains. Grenco Science, the pioneer in advanced cannabis waiting to move due to negative public perception. In vaporizers, launched the Cookies G Pen Gio, and Cookies September, Target.com began selling CBD-infused family-certified concentrates have been developed products, a non-psychoactive cannabis derivative. Within exclusively for the device, including “London Pound days, the company changed its mind and removed the Cake,” “Sherbert,” and “Gelato.” The crossover between products. Coca-Cola explicitly commented that the vaporization and marijuana is a way to further legitimize company has no plans on entering the cannabis market. consumption. Indeed, the number of marijuana-adjacent This hesitancy opens the door for the “cottage” side of businesses and companies that service growers is forecasted the industry to emerge, especially in retail. It allows to continue to expand. Tokken, for instance, provides for companies like Cookies and Leafly to exist. They banking services that ensure marijuana-based businesses acknowledge as such: “Ultimately cannabis will look a can thrive without institutional capital. Acting as a legally lot like beer;” “You have the large firms that dominate compliant intermediary, the Colorado-based company the market, but there’s still a thriving marketplace for ensures marijuana growers and sellers have access to craft beer.” said F. Aron Smith, executive director of the much-needed financial infrastructure. National Cannabis Industry Association.

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Compared to tech startups, companies in the marijuana business can leverage an important advantage: whereas tech companies often face the need to create demand, or to at least educate their consumer base regarding their product, marijuana startups enjoy high levels of existing demand.

Ultimately, cannabis is an industry on the rise while tobacco and alcohol are on the downswing. Regardless, there will undoubtedly be hiccups on the road to mainstream popularization. Yet so long as the marijuana industry does not realize institutionalization and other traditional retail companies continue distancing themselves, there will continue to be massive opportunities for small-scale entrepreneurs to grow within the industry.

The East African Federation An Optimistic Future Written By Dilan Minutello

anzania houses within its borders the city of Arusha, the capital of the newly proposed East African Federation (EAF). The EAF would be Africa’s second political union in modern history and the greatest border change on the planet since the fall of the Soviet Union. Such a drastic upheaval of the political status quo in Africa holds the potential to shift the power dynamics of the region and the world for decades to come.

The East African Federation is the proposed unification of six countries—Kenya, Tanzania, Uganda, Rwanda, Burundi, and South Sudan—into one national government, and is seen as the successor to the East African Community (EAC). The EAC is a current monetary and economic union between the six countries that was refounded in 2000. The community has grown in the past decade to have a significant impact on the politics and economics of the region, with the overarching goal of establishing the East African Federation. Its customs union and common market allow for the free flow of labor, capital, and goods between member countries. The EAC negotiates with trade partners and external bodies on behalf of its member states and maintains a common external tariff on imports from outside countries. Action to fully transform and formalize the EAC into the EAF is currently underway. In 2018, a committee was formed to begin drafting a constitution, which was intended to be implemented in 2023. Most notably, the ratification of the EAF would increase economic integration and political stability. As citizens, businesses, and capital become more integrated into the new state, internal investment and competition within the market is expected to increase significantly. Yet the benefits of the Federation’s formation must also be considered with context. Rwanda, Kenya, South Sudan, Burundi, Uganda, and Tanzania are already closely connected economies. Thus, the political federation would be a consequential change, but not a fundamental one.

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In any case, the proposed nation would undoubtedly change the status quo of African politics and potentially usher in a new age of economic development for the community.

If the EAF’s constitution were to be ratified, the new state would cover 2.5 million square kilometers, making it the tenth-largest country in the world and the largest country in Africa. The Federation would contain 195 million people, the eighth-most populous region in the world and second most in Africa, with an incredibly young median age of 17.8 years. The EAF’s population growth is also remarkably high, estimated between 5-8%. An economy of that size would astronomically increase the EAF’s political and economic influence on the rest of Africa.

However, all of the perceived benefits of this union depends on the composition of the federal government. The nation’s constitution has yet to be completed, and even when it is, the image of what the country will look like after implementation is unclear. The current treaty for the establishment of the East African Community is subordinate to the constitutions of its member states. The East African Federation will define one president with power that will supersede each member state. After the federation is established and has time to legitimize and develop, it could become an international force, attracting significant foreign investment (besides the current levels of essential aid

and Chinese infrastructure support). Looking farther, the EAF could foster relationships with smaller African states and gain influence in exchange for protection and support. Later, adding new member states would be possible if the EAF proves to be successful for the six states in the region. Significant to the EAF’s success is the level of cultural cohesion in the state. The question as to whether the East African community can cope with their loss of sovereignty and move towards an assimilated identity is yet to be answered. Questions of cultural identity are not new to the EAF’s member states. The original East African Community disbanded in 1977 due to ideological differences between Kenya and Tanzania. After independence from the British, both countries were shaped by despots, with Kenya maintaining a market-friendly structure and Tanzania governing under the principles of Ujamaa, a socialist set of policies for economic and political development. Conflicts between other member states have been constant during the past decades. Consequently, deferral of power may pose problems for the leaders of all six states. The regional identities in East Africa may also not be similar enough to alleviate concerns regarding the lifespan of any federal, pan-national future state such as the EAF.

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The nations in play had their borders drawn by European colonial powers 100-200 years ago.

Yet unlike Europe, where regions have had a thousand years to develop their distinct language and culture, East Africa has only had around 60 years to grow independently. The region, made up of dozens to hundreds of ethic groups, is a mosaic of language and culture. Bloodshed in Rwanda reminds the world that culture is fundamental to state success.

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In many ways—and through multiple incarnations of the East African Community—the EAF is the final attempt at regional reshuffling through unionization. For success to be possible, it is paramount that corruption and senseless policymaking, which have plagued regional politics for decades, be gone from East Africa. The new government must also be transparent and open to multinational ventures with the United Nations and the World Bank. The EAF may also choose to rely on Chinese capital, which has flooded the region in the past decade.

A young United States of America also faced the problem of previously sovereign member states not wanting to yield power to a central authority. The Articles of Confederation, the first legal text that bound the thirteen constituent states to one another, failed after six years in practice due to insignificance. The legislation was drafted during the American Revolutionary War when anti-monarchical and centralized power sentiment was high. The early United States of America suffered from an inept federal government because the Articles were drafted to keep it as weak as possible to maintain the hegemony of the states. The “United States of East Africa” must avoid this problem if success is to be achieved. The only way the United States continued was when the constitution was promulgated in 1789. The founding fathers, figures who held power during the revolution rejoined and rewrote the laws of the state. The EAF may not get a second chance. For success to be possible, the union between member states must be friendly and stable. If not, fear and competition will destroy the federation in its infancy.

Vegas in Transition

The Sands Corporation is Betting on Asia

he formal gambling industry, dating back to the 17th century, long beckoned the spirited to wager their valuables for the small chance to win big. In more recent years, gambling has become a circumscribed industry, confined to massive casinos in cities built for entertainment and leisure, such as the notorious “Sin City” of Las Vegas, Nevada, the former gambling capital of the world. Popular culture depicts Vegas as the mesmerizing city of casinos, glamour, and excess. Yet, for its gleaming, gold-plated renown, casinos in Vegas are nothing more than that: a façade over a more complex economic situation. For one, Vegas has begun to stray from its traditional bread and butter gambling revenues, relying more on non-gaming

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revenue streams to remain profitable. And while Las Vegas was once considered the gambling capital of the world, two new gambling capitals in Asia, Singapore and Macau, offer wider profit margins and larger consumer bases—incentives for casinos to look eastward. In the present day, the gambling industry has grown considerably in Macau, generating $36.7 billion in Gross Gaming Revenue (GGR) in 2019. For comparison, casino gaming revenue in the state of Nevada totaled $8.8 billion that year. Singapore does not fall far behind, with a 2019 GGR of $5.9 billion and the goal to surpass Vegas by incentivizing new casino entry and spurring existing casinos’ growth with construction funding and licensing for larger

Written By Wally Chang Graphic By Jessie Jiang

gaming floor space. Considering Asia’s population size, gambling culture, and rapidly growing economies, the Asian market has not gone unnoticed by casino companies, which have been acutely aware of these trends for the past two decades.

In 2004, Las Vegas Sands Corporation, a leading American casino and resort company, opened Sands Macau, their first Asian casino. Six years later, Sands opened the Marina Bay Sands (MBS) in Singapore, hoping to continue capitalizing on the flourishing Asian market. By the end of 2018, Sands’Asian operations were generating 72% of net revenues, with only 28% coming from North America.

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Then, in a major move in March 2021, Sands Corporation sold off its largest Las Vegas property, the Venetian Resort, and shifted its focus to Asia (except its headquarters, which will remain in Las Vegas).

Sands’ decision comes as a result of the coronavirus pandemic, the death of Sands Corporation’s founder and CEO Sheldon Adelson, aforementioned operational incentives in Asia, and— perhaps most importantly—the woes of operating as a gaming company in Las Vegas. Investors seem optimistic about the profitability of gambling in Asia, considering that Sands Corporation shares hit a 52-week high following the announcement of the Venetian sale.

Unsurprisingly then, the move of Sands Corporation comes with expansion in mind. In April 2019, the Singaporean Ministries of Trade and Industry, Finance, Home Affairs, and Social and Family Development struck deals with the Marina Bay Sands (MBS) and Singaporean gaming company Resorts World Sentosa (RWS) granting the companies exclusive rights to operations in Singapore until 2030. In exchange, these resorts would invest heavily in developing new venues to increase tourism in Singapore, as well as paying higher GGR taxes. Both the MBS and RWS would also benefit from an additional 15,000 square meters of approved gaming area. Two years later, Singaporean development continues to exhibit promising returns on investment compared to Las Vegas. With the approximately $6.25 billion sale of the Venetian, it is likely that some of those funds will be funneled into this ongoing project. Although major casino players have already begun to restructure their assets, ample opportunity continues to exist, with other gaming companies likely to make the move. Yet falling gaming revenues have persisted for decades. On the Las Vegas Strip, the most popular section of Vegas, gaming revenues have already decreased from 57% in 1993 to 35% in 2019. However, an accelerated gaming floor exodus to Asia would not debilitate the city’s economy. Instead, it would arguably transition the city.

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Las Vegas lacks professionals with experience in STEM fields and as a result, its economy is homogenous.

According to the Las Vegas Sun, Vegas struggles to uphold its socioeconomic diversity and prosperity due to an overdependence on tourism and gaming. According to the Bureau of Labor Statistics, Las Vegas employs 1960% more dancers than the average community, 84% fewer mechanical engineers, 76% fewer electrical engineers, 54% fewer people in computer and mathematical occupations, and 22% fewer elementary school teachers. There is an obvious difference between the labor market in Vegas and that of an average city, and this difference has only grown more stark in the face of the precipitous drop in COVID-era tourism. The removal of some casinos and the introduction of technology and a clean energyfocused industry would be beneficial to diversifying the city and increasing residents’ socioeconomic prosperity and stability.

Looking east, Asian cities like Macau and Singapore offer great opportunities for existing casino operators in Las Vegas. At the same time, Vegas operators should focus on downsizing their gaming floors and, instead, expand their entertainment, food and beverage, and non-gaming offerings to best engage the changing palette of their customers. Vegas would also benefit by expanding into STEM fields to increase overall socioeconomic prosperity and diversity. With the inevitable rollout and distribution of COVID-19 vaccines, we can soon expect to see casino patrons again, ready as ever to hit gaming floors, and wagering their dollars for a chance to make it big. But as we look towards the future, these casino-goers might not be strolling in the glitzy lights and classic-Americana of the Vegas Strip; instead, the grand boulevards and looming casinos might be brightly lit by the glow of gold-plated Chinese characters.

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Sands’ move seems obvious when taking a closer look at operating numbers. A 2017 Reuters article found that much of the success in Macau was due to their large operating margins: pure gaming made up 86% of Wynn Resorts’ net revenues. Conversely, in Las Vegas, Wynn’s gaming

revenues composed only 30% of net revenues, with the rest stemming from non-gaming sources. Operating in Las Vegas is also much more expensive, as a higher wage floor requires considerable employment expense.

The Perpetual Startup

Nonprofits Fail Because They Can’t Measure Success Written By Emily Xiao

ou’ve heard it before--bad things happen to good people. But the power of human innovation means that people organize to serve the less fortunate and to create public benefit. This rings true now more than ever— the nonprofit sector has grown by 20% over the past 10 years. The for-profit sector pales in comparison, with only 2-3% growth in the same timespan.

Leadership and Strategy

The communication problem starts at the top, where entrepreneurial talent battles “founder’s syndrome.” Nonprofit leaders are typically motivated by creativity and internal drive, but adversely, are often unwilling to surrender their ideas to changing circumstances. They However, beneath the surface level, nonprofits face deep- struggle to cede control even when transitioning to larger rooted leadership and organizational inefficiencies. 30% of teams, reworking their ideas, or adaptation is optimal. These nonprofits cease to exist within 10 years of operation, and leaders also tend to set lofty and vague organizational goals, which are not communicated effectively to their teams. nonprofits generally do not scale like innovative businesses can—startups like Google and Facebook have grown to Key findings from The Concord Leadership Group’s become international behemoths, whereas few nonprofits survey of nonprofit industry leaders indicate that nonprofits lack organizational structure. Participants surpass the local or national level. identified organizational leadership systems, compelling At issue is the difference in how nonprofits and for profit vision, succession planning, and performance evaluation organizations describe and plan for success. For profit as pain points within their organizations. This sentiment business success largely relies on sound strategic decisions, was not even across the board--senior leaders responded a thorough understanding of an industry’s competitive more positively about their organizations’ abilities to lead landscape, and ample financial backing. For-profit than those lower down the pecking order. This disparity business leaders exercise control over logistics that, in between nonprofit leaders’ confidence and employees’ nonprofits, are often overshadowed by vision. What’s more lack thereof demonstrates that organizations have trouble is that nonprofits often fail to communicate their strategic defining leadership, strategic planning, and compelling successes to funders, creating a cycle where nonprofits fail visions. to gain adequate strategic and financial support to grow. They are relegated to the fate of being ‘perpetual start-ups’. Developing a specific value proposition and employing accurate performance metrics are thus vital to improving How do we revitalize a floundering industry? the fate of the sector. To combat the vagueness of nonprofit operations, the Concord Leadership Group recommends writing down a solid mission plan, measuring it, and formalizing leadership training. In all, leaders need to Nonprofits struggle to achieve create more formalized organizational structures to scale, facing both financial implement cohesive, concrete strategies.

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and leadership inefficiencies that stem from an inability to delineate success.

To mitigate this problem, nonprofit leaders need to quantify the impact and better communicate their performances with funders and employees. By using traditional startups as benchmarks, we can identify the unique challenges nonprofits must address to reach the same heights as their for-profit counterparts.

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Funding and Financial Health

Both nonprofits and start-ups are constantly hungry for new capital. Traditional start-ups need to woo angel investors through their early stages, and expected future growth is enough to incentivize investors. Conversely, donors have a hard time parsing which nonprofits will be the best investment due to poorly communicated outcomes. Funders are particularly averse to fledgling nonprofits, which are seen as sinkholes rather than

real opportunities for change. Similarly, there is a lack of demand for nonprofit M&A. This risk intolerance compounds nonprofits’ cyclical struggles. Beyond these challenges, even established nonprofits see inconsistent inflows. Their funding is often seasonal; organizations expend time and energy applying to grants, diverting attention away from their missions.

Individual organizations alone cannot be blamed for their inefficiencies; funders are also responsible for guiding the growth of the nonprofit sector. According to a Guidestar analysis of the US nonprofit sector’s aggregate financial health, both large and small-scale organizations face a vast problem of insolvency. Financial health is not evenly distributed across the industry, with differences due to size and subsector. To remedy this problem, funders, regulators, and policymakers need to provide more flexible funding and rescue strategically important organizations that are struggling. These external guides need to encourage organizations to restructure or merge when appropriate. Shortfalls in strategic communication and poor financial health largely explain why early nonprofits rarely reach a national scale. The typical nonprofit plateaus when goals are not clearly delineated to employees and funders. Sustainable funding models over the long term require the awareness and assessment of health by employees, leaders, and external funders alike. Although the entrepreneurial talent is there, the move to achieving scale begins with organizations’ ability to define and communicate value.

Breaking the Cycle

Several evaluation methods are applicable. For one, organizations can define their missions as quantifiable objectives. Goodwill, for instance, measures its goal of bringing people out of poverty and into the workforce through a direct headcount of participants in its job training programs. By narrowly focusing their cause, other organizations can similarly track their progress. Nonprofits can also more effectively measure their success by reframing how they analyze related outcomes. Jump$tart, a coalition aiming to improve children’s education, uses statistical studies on their graduates’ outcomes to affirm the organization’s efficacy. The group can then use this link between its program and mission to gauge success through the number of children using its services. Historical outcomes can help indicate what activities are effective in mitigating intended problems and providing benefits.

For nonprofits with missions that are difficult to quantify, measuring organizational success can mean measuring the success of proxies. The Girl Scouts of America strive to create “responsible citizens” and can assess these qualities through members’ professional success or civic participation. Finally, if all else fails, nonprofits can develop concrete micro-level goals to imply greater success. This can be as simple as evaluating the success of a measure in a small sample area to be indicative of overall efforts’ effectiveness.

Conclusion

The difficulty of verifying and rewarding success in nonprofits stems from the vagueness of nonprofit missions. With narrower measures of impact, employees will perform better and funders can reward nonprofits with the most growth potential. While these performance metrics offer a substantial starting point, there is no single blanket method or generic indicator to capture the comparative success of all the organizations in the sector. Each must utilize a different strategy to fit their size, values, and specific functions.

When in doubt, traditional businesses can point to the bottom line as a litmus test for success. Evaluating the progress of nonprofits’ qualitative goals is more complex. While most nonprofits measure their success through dollars raised, member growth, or overhead costs, these factors fail to demonstrate how well organizations reach their goals. Redefining nonprofit success in terms that are both quantifiable and relevant to an organization’s mission will improve intra-company communication and create Free of rivalrous ambitions or ulterior motives, the funder approval for long-term sustainability. nonprofit sector’s superpower is effecting positive change Successful performances need multidimensional on a grand scale. There are great strengths in the industry— assessments. Based on McKinsey & Company’s research for-profit competition is not the end all be all. However, of 20 leading organizations, to continue solving diverse human challenges, nonprofits must fundamentally change how they interact with their stakeholders.

Three primary performance metrics should define a nonprofit’s success: its progress in fulfilling its mission, ability to mobilize resources, and effectiveness of staff.

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Goliath vs. Goliath

Amazon and Reliance’s Battle Over Indian E-Commerce Written By Saurin Desai

Graphic By Jessie Jiang

mazon is no stranger to dominating. Using its near-monopolistic market position, vendor exclusivity contracts, expansive distribution network, and low-cost differentiation strategy, Amazon frequently out-competes rivals—which has led to a staggeringly high 50% market share in the US and nearly $400bn in annual revenues. However, for a company the size of Amazon, there is limited scope for additional domestic expansion, underscoring the need for foreign market entry to sustain returns to shareholders.

It’s hardly shocking that Amazon is intensifying efforts to break into the nascent yet exploding Indian e-commerce market. With a projected 18.5% compounded annual growth rate (CAGR), the industry will grow to $200bn in five years—proving to be fertile ground for long-term growth. Amazon is not alone in recognizing the strategic need to tap into the Indian market: In 2018, Walmart acquired Flipkart, a local player with a 32% market share in India, as it seeks to continue its recent forays into e-Commerce. While Amazon faces competition from fellow foreign competitors, its most jarring threat comes from Reliance Industries, an Indian conglomerate with interests in oil and gas, telecommunications, and retail. So why is a relatively unknown company—outside of

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India—in a position to dominate the highly lucrative e-Commerce market for the foreseeable future? The answer lies in a recent court case between Amazon and Future Group, an Indian retail company with a previously established business partnership with Amazon.

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A provision under a prior contract between the two companies afforded Amazon the right to veto any business arrangement Future Group pursued with Amazon’s competitors.

Amazon alleges it was not consulted prior to Reliance’s recently announced $3.4bn deal with Future Group to acquire its retailing, warehousing, and logistic assets. Amazon fears Reliance will expand its core capabilities and realize synergies that allow it to bolster its e-commerce business—while also supplementing its dominance of the estimated $1tn

consumer retail market—and is seeking to prevent the deal mortar operations but is a relatively new entrant into the through the courts. e-commerce and delivery industry. The case lays bare Amazon’s and Reliance’s positioning in India and exposes the regulatory, economic, and internal factors that enable an uneven competitive landscape deeply favoring Reliance. India’s competitive laws are largely a remnant of its pre-economic liberalization period. Regulatorily speaking, India favors local businesses over overseas competitors through high tariffs and stringent requirements over foreign direct investment. For example, under Indian law, foreign competitors like Amazon and Walmart are barred from entering into exclusive selling agreements with their subsidiaries (i.e., Amazon cannot sell items from vendors they have more than a 25% equity stake in). In fact, Amazon and Walmart are already subject to pending regulatory litigation. These regulations are a huge disadvantage to Amazon, whose cost leadership strategy relies on large-scale manufacturing partnerships. Now, the company will have to explore alternative business models and sources of competitive advantage—like leveraging local business partners—while Reliance, as an Indian competitor, isn’t bound by these regulations.

There are many operational and financial differences between physical and online fulfillment, including what customers expect and their subsequent pain points. While Reliance is fighting on its home turf, Amazon is an expert in e-commerce which may pose a competitive threat. The e-commerce industry facilitates low switching costs for consumers, and Amazon is an expert in catering to niche demand. Therefore, developing specialized capabilities in online retail. leveraging current physical retail stores, and optimizing end-to-end user experience is a priority for Reliance

Additionally, fashion remains a key driver of the e-commerce boom, and Reliance’s existing retail stores already offer a reliable supply chain for apparel. The company also demonstrates a superior value proposition for customers boasting same-day deliveries, no-questions-asked refund policies, no minimum order requirements, and free delivery. The aggregate effect of these capabilities allows Reliance to gain operational efficiencies and appeal to the average Indian consumer—who is extremely price conscious.

a 2% tax on all foreign-bound digital billings, which unduly affects US-based companies such as Amazon and Walmart (via Flipkart). With this political and economic calculus, there remain several questions over Amazon’s survival— much less dominance—in the Indian e-commerce space.

Some may harbor more bullish sentiments on Amazon and point to its deep expertise in the e-commerce space, investments in India totaling $6.5bn, and considerable technical and human capital. While it’s evident Amazon retains core capabilities that map well to e-commerce, the specific dynamics of the Indian e-commerce market and macro trends in India temper its competitive advantage. While Amazon bypassed listing restrictions by launching joint ventures and incorporating them as inventory-holding companies, the loophole has since closed. In a huge blow to Moreover, Reliance possesses valuable and hard-to-imitate Amazon and other foreign e-retailers, the Indian Ministry of resources and capabilities for the e-commerce space. Its Commerce is introducing new regulations that prohibit even already-strong retail footprint is set to double after the indirect stakes in vendors. recent deal with Future Group, bolstering its network of A central part of Amazon’s investments in India has been supermarkets and retails stores. JioMart, its e-commerce digitization campaigns for Indian small businesses, which service, will reap the “network effect” as Reliance develops incentivize use of Amazon’s marketplace. However, there has a strong presence in nearly all medium-to-major Indian been strong resistance from The Confederation of All India cities, thereby expanding its outbound logistics capabilities. Traders (CAIT), a trade body that represents over 60 million As Reliance is acquiring wholesaling, logistics, warehousing, merchants, which has organized protests in several cities and front-end retail assets, there is a strong opportunity for aimed at fighting Amazon’s anti-competitive and predatory vertical integration which are likely to result in quick and pricing tactics. Prime Minister Narendra Modi is also piling reliable order fulfillment. Thus, in addition to achieving pressure onto the e-commerce giant; he has launched a strong business value, this deal should be viewed as a “Vocal for Local” campaign to incentivize purchasing goods statement of intent by Reliance. and services from local competitors and has also instituted

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While the map to success in the e-commerce space is relatively clear for Reliance, it is not without roadblocks. For one, companies with immense resources like Amazon will seek to adapt whatever business model proves most profitable in light of Indian regulations. Indeed, the more important question is of sustainable, long-term competitive advantage. As India modernizes and further develops, consumer purchasing criteria will evolve to weigh the customer experience more heavily. This could be an issue for Reliance, as it has extensive familiarity with brick-and-

Thus, Amazon is disadvantaged due to a favorable regulatory climate for Reliance and the impending deal with Future Group. However, Reliance must be wary of resting on its laurels—especially with the emergence of customer experience as a major pain-point for consumers. Although Reliance is at a significant short-term advantage due to its superior value proposition, revenue and costs synergies from the Future Group deal, and its status as a local competitor. The question remains, however, whether Reliance can capitalize on its short-term advantage to exert sustainable, long-term dominance over the booming Indian E-Commerce market. With stakes in the hundreds of billions, there’s a lot to compete for.

Fast Fashion Breeds Deceit

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Written By Isabella Picillo Graphic By Michelle Ren Zhang

ustainability is one of the most prominent trends in designer fashion, trumping statement-making trousers and voluminous dresses season after season. Although sustainability in fashion has been a conversation for decades, it gained momentum towards the end of the 20th century when fashion became cheaper and more accessible, largely due to globalized manufacturing. In the 1990s, several companies, such as Nike, were exposed for their environmentally harmful practices, which gave rise to “eco-fashion.” Yet the start of sustainable fashion as we know it today began in the early 2010s. Consumer sensitivity, particularly to forced labor, combined with ecological concern as the conditions of fast fashion workers became apparent, such as in the 2013 Dhaka garment factory collapse. Today, we have witnessed many designer brands, self-proclaimed “activist companies,’’ and B Corporations debut environmentally-friendly designs to affirm their commitment to improving sustainability. Both the media and the general public are paying close attention to the fast fashion segment considering their large contribution to environmental degradation. As environmentally conscious consumers demand accountability, fast fashion companies, like Zara and H&M, have responded by announcing their commitment to addressing climate change and becoming more sustainable. However, the significance of these corporate promises remain unclear.

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Designer brands have also touted their commitment to becoming environmentally friendly, most notably during the 2019 September fashion month.

It started in New York when Gabriela Hearts unveiled the first carbon-neutral fashion show, featuring upcycle prints from previous collections. Two days later, Gucci announced that its show would also be carbon-neutral. Today, fashion giants have turned sustainability into a competition, as we continue to see more brands announce their commitments. This is not necessarily negative, as long as companies are taking meaningful steps toward reducing climate change. There is pressure on the fashion industry to reduce its environmental impact. McKinsey estimated that the fashion industry as a whole is responsible for 4% of the world’s greenhouse gas emissions, while the United Nations reports that it accounts for 20% of global wastewater.

The fast-fashion segment, in particular, is notorious for its alarming environmental toll and its history of exploiting workers. Fast-fashion companies are The fashion industry has long tolerated environmental no exception in trying to attract environmentally harm as inherent to the production process, but self- conscious consumers. In fact, they may face even more proclaimed “activist companies’’ and B corporations

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Many experts have expressed concern regarding corporations’ attempts to “greenwash” consumers, to misrepresent the extent of a company’s sustainability.

have led a movement to dispel this tolerance. For instance, outdoor clothing company Patagonia was recognized for its sustainability and social responsibility efforts in every facet of its business. In this season alone, 64% of its fabrics were made with recycled materials, and all of its electricity needs in the U.S. were met with renewable electricity. It is also concurrently working toward its long-term objectives: becoming carbon neutral across its entire business by 2025 and eventually becoming a true zero-waste company.

pressure to deliver on their sustainability initiatives Collection breached Norweigan marketing law, which since Gen Z consumers prioritize sustainability more condemns marketing if it deceives consumers of the than previous generations. nature of a product and induces “an economic decision Meanwhile, the volume of clothing Americans throw that would not otherwise have made.” Unsurprisingly, away has doubled over the past 20 years. Two decades greenwashing is quite common. Often, fast fashion ago, Zara was considered revolutionary for offering companies’ claims about sustainably sourced garments hundreds of new items each season, but now that are vague, failing to specify the actual environmental level of output is hardly exceptional. Companies are benefits. The nonexistent industry standards for what turning out new styles faster than ever before, with “sustainably sourced” means exacerbates the issue. Boohoo turning out new styles within a few days. Consumers are partially responsible for this increased waste. Each year, Americans each generate about 75 pounds of textile waste, a staggering increase of more than 750% since 1960.

Generally, both consumers and experts struggle to discern the legitimacy of companies’ sustainability policies, plans, and projects, as the companies do not release the outcomes of such efforts. Some experts advise consumers to take fast-fashion companies’ announcements with a grain of salt. For instance, Elizabeth L. Cline, the author of two books on the impact of fast fashion, believes that fast fashion and sustainability are inherently incompatible. Some experts have further argued that beyond more ethically sourced materials or materials with a lower environmental impact, the fast fashion business model, based on quick turnover of style, must undergo a fundamental overhaul. Likely, fast fashion will never be an entirely sustainable business, but companies should still be encouraged to adopt more sustainable practices and be appraised when they do so.

In response, many fast fashion companies have introduced sustainable collections. For example, Zara introduced its Join Life collection, which features several styles made from sustainable materials, such as recycled wool, sustainable Tencel, and organic cotton. Similarly, Boohoo sells around 40 items made from partially recycled textiles, while H&M increased its use of organic cotton and sustainably sourced materials. Yet fashion sustainability consultant Aja Barber considers these efforts to make a few items more sustainable little more than greenwashing since the vast majority of items continue to be produced Both designer brands and B Corporations can unsustainably. The United States has anti-greenwashing policies, greenwash consumers too. However, B Corporations but they are rarely enforced. The Federal Trade are less likely to misrepresent the extent of their Commission (FTC) issued Green Guides, first issued sustainability because their certification requires in 1992, which are designed to help marketers avoid proof of social sustainability and that the firms making environmental claims that mislead consumers. meet environmental performance and accountability These guides are not agency rules nor regulations. standards. These companies must recertify every However, the FTC can take enforcement action under three years to retain B Corporation status, serving as the Federal Trade Commission Act. The FTC did not an accountability measure for companies to remain file any complaints regarding environmental claims transparent about their efforts. during George W. Bush’s presidency but filed several during Barack Obama’s presidency. Enforcement of the Green Guides often depends largely on the current administration’s outlook toward sustainability.

European countries tend to be more stringent with regulation and enforcement. In August 2019, the Norwegian Consumer Authority censured H&M for greenwashing with its Conscious Collection, made from waste and advertised as a collection with environmental benefits. The Norwegian Consumer Authority said the company has potentially “misleading” marketing ploys and provided “insufficient” information about the sustainability of the collection. The Consumer Authority’s investigation found that H&M’s sustainability claims in its Conscious

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While greenwashing has been a decades-long problem across industries besides fashion, the frequency of greenwashing has increased over recent years to appease increasingly environmentally conscious and socially responsible consumers. Still, not all companies are deceiving consumers. Yet for those deceitful companies, they should spend less time and money trying to cover up where their clothes come from and instead use those resources to focus on how they can reduce their environmental impact.

Who Trains the AI

Written By Yoon Jae Seo

AI is Built on India’s Back

clutter of languages and overlapping voices echo through the floor of a typical call center in Noida, India. Employees continuously work, answering queries and solving issues until their timer hits for a short lunch break. Agencies like Innova Communications, one of the estimated 350,000 call centers in the country, manage customer service for a multitude of clients. Call centers like the one in Noida and its employees benefit from multinational corporations’ need to optimize cost and quality of customer service. Recently, a new type of service is undergoing rapid expansion in the developing world: data annotation agencies. Data annotation is the manual/ semi-manual job of labeling individual images. For instance, one may see a cat in the picture and label it “cat.” It also applies to more subjective types of annotations, such as annotating the emotions of voices and facial expressions. Data annotation is essential in the development of services and products that utilize AI—in the supervised learning stage, one can feed such annotations into the AI system. The machine learning algorithm spots patterns for when output is correct or incorrect, and, after enough data, can determine the correct output without prior labeling.

Critics of data agencies frequently highlight the imbalance of profits shared by these agencies and their employees and the industry’s lack of social mobility.

Second, the current sampling of data that serves as the backbone of AI is biased toward specific races, ethnicities, and origins. Joy Buolamwini’s research analyzing biases in the facial recognition softwares of IBM and Google reported “...Error rates of no more than 1% for lighter-skinned men. For darker-skinned women, the errors soared to 35%.” Concerningly, AI freelancers have also “failed to correctly classify the faces of Oprah Winfrey, Michelle Obama, and Serena Williams.” Such biases result in removal of content deemed acceptable by users but unacceptable by annotators, such as on streaming platforms.

employees to achieve proficiency in computer use. Other agencies developed curriculums to enhance their employees’ technical abilities. Such curriculums are doubly important considering many annotators have never used a computer prior to their employment, opening endless opportunities for upward mobility.

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Regarding income inequality, annotating companies indeed take a disproportionate amount of income compared to their employees.

The question is whether or not this is noteworthy when it is evident that these agencies provide stability and a lifechanging opportunity for many of their employees. A daily average wage of $8 is a typical source of income for Samasource employees in countries that these agencies operate in. For comparison, individuals employed in Kenya, India, and Uganda earn $4.98, $5.75, and $2.17 in daily wages, respectively. Considering this, agencies like Samasource provide their workers with a stable and aboveaverage wage (Samasource also claims to have more than quadrupled the incomes of their employees).

Lastly, corporations prefer contracting with specific agencies rather than freelancers because doing so significantly reduces the operational costs of collecting data. Attempting to collect various labeled data sets from scattered sources and repeatedly reorganizing them is very expensive. If corporations need to alter their plans, there is no need to individually communicate with every freelancer. These agencies also carry a greater sense of credibility, Overall, data annotation is being professionalism, and reliability than conducted by individuals far outside the core of technological advancement. freelance platforms. However, corporations will continue This is not to say data annotation to rely on these agencies, rather agencies are perfect. Annotation is than freelance platforms, to supply a a tedious and repetitive process, and continuous source of annotated data due often mentally draining. Agencies also to accuracy and pricing considerations. undeniably take a disproportionate Although underpaid on a western scale, level of profits compared to the meager in return for their work, these annotators wages of their employees. However, the will obtain stable pay to support their level of transferable skills developed by families and transferable skills that relay annotators is improving. Samasource, opportunity for upward mobility. a prominent data agency, requires its

BUSINESS

Due to the industry-wide implementation of AI technologies, companies both large and small need a workforce that can consistently provide labeled datasets. As data annotation for most industries does not require a specialized skill or education level, many companies look for the most cost-effective labeling. Unsurprisingly, firms are turning toward the developing world. To meet this demand, a plethora of data annotation agencies have recently been established, contributing to the forecasted compound annual growth rate (CAGR) of 26.9% for the industry over the next seven years.

Despite these claims, multinationals favor data agencies over freelance platforms for three key reasons. First, freelancers enforce homogeneity in data sets, which severely undermines the reliability of the labels. A former annotator interviewed by Vice stated that “If your answers differ a little too much from everybody else, you may get banned.” Enforced bias in data annotation is a significant issue in AI training, which requires accurate labeling for optimization.

Digitization In Frame Bright Spots in a Bleak Industry Written By Maria Alexander

he COVID-19 pandemic presented challenges to many, but also fostered creativity, resilience, and innovation. Many industries, including the art industry, have become more reliant on digitalization to recover markets once dependent on in-person experience and interaction.

It is important to note that smaller businesses face the compounded challenge of lacking both existing online networks and the luxury of a prolonged implementation period—unlike big players in the industry who can rely on other temporary strategies like listing artwork on friendly exchanges.

The Plight of Small Art Galleries

Protecting and Celebrating the Work of Small Artists

Considering that confidence in the contemporary art market has dropped 85% since September, it is clear that shortcomings of digitalization and its transaction speed persist. While digitalization in the art industry can be seen as one positive outcome of the pandemic, smaller art businesses are struggling to reap the benefits of digitalization due to their lack of technology infrastructure and client exposure. While these concerns are pronounced in the art business, digitalization also raises cultural concerns such as the preservation of artistic value and integrity.

Similar to many other industries, the pandemic has exposed larger corporations’ ability to sequester resources and influence to keep their businesses afloat during economic downturns. Art galleries’ business is fueled by discretionary spending and is dependent on travel and in-person contact and networking. While gallery sales have fallen 36% across the art industry in the first half of this year, smaller galleries have experienced a greater fall in sales in comparison to larger ones. Small galleries, with turnovers of between $250,000 and $500,000 a year, experienced the greatest downsizing (38%) and decline in total sales (47%), according to the Art Basel and UBS Global Art Report. On the bright side, only 2% of galleries in the survey were forced to close down completely.

Indeed, online transactions are barely a lifeline for many galleries, and especially not for small businesses. A quarter of the galleries surveyed in the Art Basel and UBS Global Art Report made no online art sales this year. Although digital advancements and infrastructure look like a promising step, digitization is not a viable shortterm strategy due to unaffordable capital expense. Yet in the long-run, advanced digital infrastructure is promising for both consumers and businesses and is likely to lead to greater price transparency, especially with blockchainbased technology, which increases liquidity.

Before the pandemic, many rising artists relayed the creative narrative of their work, gauged audiences’ reactions and opinions, and gained traction through in-person shows. These fairs brought in about 46% of gallery sales last year. Since the pandemic, artists face hurdles with the market’s transition to impersonal online viewing and purchasing. Demand for time-based viewing rooms--digital portals where buyers can view the artwork they’re interested in and explore the piece’s history and the creator’s background-has skyrocketed since the onset of the pandemic. Although this innovation is an exciting step, it is often difficult to judge art based on a virtual first impression. Additionally, these online viewing rooms collect statistics from the viewer, such as how long they viewed the work and how many visits the viewing room received. As a consequence, buyers may only be enticed to explore rooms that have garnered the most visitors, leaving less opportunity for other artists to showcase their work.

One of the main reasons for the disparities in economic survival is the difference between small and large galleries’ digital infrastructures. Larger galleries, museums, and auction institutions are more likely to have advanced online networks in place, easing the transition into full digitalization. However, even for prominent galleries and auction houses, the process of digitizing databases has been One highlight for small artists during this time is the sluggish since databases can include thousands of works. use of user-driven platforms like Instagram where every For smaller firms, the process is even less streamlined. artist’s work is easily accessible to the general public.

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Disregarding algorithm issues associated with app feeds, is performing well in investment portfolios. According to Instagram is known for housing talented artists who lack the Masterworks.io price-weighted All Art Index, the art opportunities elsewhere. market was up by 5.5%, outperforming ten other major classes of assets. Additionally, a report by Citi Bank Global Connection and Gratification: Perspectives and Solutions affirms the commodification of art, stating that there is a growing enthusiasm for portfolio Online is Here to Stay diversification through art acquisition. Technology has changed the way that art is bought and sold in three areas: how it is displayed to buyers, to how it Bright Spots in a Bleak Industry is paid for, and how ownership is exchanged. This online While digitalization invites commodification, optimism process is much more simple than if conducted in person, prevails in many sectors of the art industry. so in theory, it is more efficient for both buying and selling parties. Transaction speed encourages the collection of art for portfolio gains and commodification, but can create a potential disconnect between the art and the buyer. This is not a new phenomenon in the industry, but still a prevalent one. Similarly, since most art is now being sold online, buyers are acclimating to digital galleries.

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Since the beginning of the pandemic, an average of 59% of art collectors reported an increased interest in collecting.

Once consumers adjust and react to the new market structure, will in-person transactions and viewing Since art is considered a luxury market and the pandemic opportunities wholly reclaim art sales? According to has disproportionately impacted lower-income families, many collectors are able to carry on and support the Suzanne Gyorgy, the industry. Head of Art Advisory and Finance at CitiBank, it’s not likely. In a report published by Citi Bank Global Despite new challenges the art market is rapidly evolving Perspectives and Solutions, Ms. Gyorgy wrote that “even as a consequence of the pandemic. Yet the power to change when in-person auctions return in full, we feel that online the market remains in the hands of consumers. As small sales are here to stay and will continue to play a growing galleries recover, they will need foot traffic, not IP traffic, to stay open. A responsible consumer can drive the market role in the art market.” in a direction that ensures small art galleries can survive, Yet despite the tumult in many aspects of the industry, art and ultimately makes all players better off.

ART

Between Profit and Royalties Spotify has Backed Itself into a Corner

Written By Anya Gert Graphic By Michelle Ren Zhang

n today’s ever-changing music ecosystem, music streaming services have become the most efficient method of audio distribution, discovery, and connection. Many, especially the younger generation of listeners, are easily attracted to Spotify; for a reasonable subscription price, Spotify provides a platform for accessible music streaming and organizing. Self-starting artists are granted the ability to publicize their music and develop a small following. However, monetarily supporting your favorite artists on Spotify is not nearly as easy as consuming their content.

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Zoë Keating, a cellist from Vermont, has been posting her streaming income from Spotify for years. While her numbers for 2018 appear successful—with over 2 million streams from 241,000 listeners over the course of 190,000 hours—her ultimate payout amounted to a mere $12,231, approximately half a penny per stream. The current payment system under which Spotify operates is often described as a pro-rata method, which means that artists are paid based on the number of streams they receive. Upon first glance, this approach seems completely reasonable; an artist is paid based on their objective popularity, which is measured via

stream count. However, Spotify sells subscriptions, not music. estimated that on average, these 43,000 artists are being paid Say Person A and Person B both purchase a salary of $90,000. While this figure surely allows top artists a Spotify subscription for the same price, and A listens to 1000 to “live off of their art,” the truth is that this value is highly hours of music in a year while B only listens to 100. Because skewed. A majority of the income pot is allotted to the world’s Spotify pays the artists that A and B listen to based on the most famous artists, and most of the 43,000 would be off with number of streams that their music receives, A’s artists would significantly less than $90,000. receive most of A and B’s total subscription money. The issue Even then, 43,000 creators is a far cry from the “million is, B paid the same amount as A for the subscription, so why creative artists” championed by Mr. Ek. Furthermore, Rolling are B’s dollars going towards artists that they didn’t listen to? Stone additionally estimated that the remaining artists outside Ultimately, artists with the most avid streamers end up this group of 43,000—the so-called “bottom tier” of creators— receiving the majority of Spotify’s subscription payment obtain average earnings of just over $15 a month. However, that pool. This practice gives popular and mainstream artists a is not to say that there is no progress being made on Spotify’s disproportionate advantage over middle and lower-class artists behalf; indeed, this group of 43,000 has almost tripled in size on the platform, since smaller artists tend to have more devoted since 2015.

individual fan bases while popular artists ubiquitously obtain While the user-centric payment approach generally stands streams from diverse audiences. as the most common solution for the issues behind fair pay within the pro-rata model, it is uncertain whether or not it is feasible or will solve the problem in its entirety. A usercentric program has never been tested on a platform as large as This can be further evidenced by Spotify’s, and even if it is successfully administered on such a a study conducted in Finland that large scale, it is theorized to produce extremely high operating costs, as each listener’s proportional content intake would have found that the creators of the top to be considered when dividing the payments. Even more 0.4% of tracks on Spotify collected discouraging is the fact that a user-centric system would be completely incompatible with Spotify’s current business model, 10% of the total revenue. as Paul Vogel—of the head financial officers at Spotify— In disclosing her annual earnings from Spotify, Keating has disclosed that low royalty rates are required to successfully brought to light the issues behind the pro-rata system, explaining operate the platform. The company already pays 70% of its that her fans are often shocked when they find out that the total revenue to rights holders, and increasing the royalty rates money from their subscriptions are not solely distributed to is financially unsustainable for the company. Additionally, her, even if their accounts are used to listen exclusively to although Spotify significantly underpays its lower-tier artists, Keatin’s music. Rather, it is distributed disproportionately, with the situation could very well be worse off without the platform’s popular artists making the largest gains, contributing directly existence. Spotify has made it significantly easier for individuals to get their music out there in the first place. to artist income inequality on the Spotify platform.

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This disparity has resulted in a call for a user-centric system from users and artists alike, which would pool each listener’s subscription payment and split it amongst the artists they listen to. While a user-centric system may have its downfalls, a general move away from a pro-rata system and an adjustment of Spotify’s platform design would allow artists to be rewarded on the basis of their own success, rather than on the basis of others’.

As concerns over payment inequality rise, Spotify will have to continue to weigh the social cost and the financial benefits of under-paying small artists. Yet improvements in the design of Spotify’s app and payment system are an important first step in accommodating middle and lower-tier artists and accomplishing Spotify’s mission of allowing a million artists to live off their music.

ART

In addition to the disparities in income that the Spotify pro-rata royalty system facilitates, this payment method undermines one of Spotify’s core values and mission statements as a company. In 2018, Spotify CEO Daniel Ek presented a mission statement to a panel of potential investors, stating that his goal was to “unlock the potential of human creativity by giving a million creative artists the opportunity to live off their art.” However, Tim Ingham of the Rolling Stone Magazine performed a study which concluded that Spotify is a ways off from achieving this objective. Based on his research of Spotify’s annual results, Ingham found that approximately 43,000 artists are receiving 90% of the royalties. After the distribution, it is

Finally, in order to embrace an effective journey towards fair pay and move away from the pro-rata model, Spotify could address how the design of the platform exacerbates the problem behind stream-based payment systems. Pro-rata systems can be easily manipulated by individuals who seek higher payoffs from Spotify and the platform is inhabited with numerous fake accounts and computers which constantly stream songs to increase revenue. Additionally, certain design features of Spotify could be adjusted to reduce the impact the current design has on small artists. Spotify is well-liked as a result of its personalized qualities, but the manner in which the platform auto-generates playlists and song recommendations inherently prioritize popular artists, thus handing them more streams and contributing to payment disparities.

Michael Polk Michael Polk is currently an Advisory Director at Berkshire Partners, a private equity firm, and the Chief Executive Officer of Implus LLC. He was previously the CEO for Newell Brands, President and COO of Unilever, President of Nabisco at Kraft, and a member of the board of directors of the Retail Industry Leaders Association, Enactus, The Yankee Candle Company. He is also currently on the board of directors for both Logitech and Colgate-Palmolive.

Q A

How did you get where you are now? I graduated from Cornell’s Engineering School with a degree in Operations Research and Industrial Engineering in 1982, which was R mathematical modeling of manufacturing systems. I went to work in a manufacturing environment, in a paper mill that was part of Procter & Gamble’s network of factories. I liked P&G as a company, as a big chip consumer goods company, but the reality was I ended up picking P&G because of its proximity to Ithaca. I wasn’t ready to let go of my college experience, and my girlfriend at the time was entering law school at Cornell. I had options at P&G to move laterally into more commercial roles, but it was going to take two to three years to transition. I decided a quicker path would be to go back to business school. So I applied to graduate school, and received my MBA from Harvard. After graduation, I spent my next 16 years at Kraft in a variety of roles from brand management and marketing to sales. Nine years in, I moved to Australia and ran all of Kraft Foods International across 20 different countries, including Australia, Japan, China, and New Zealand. In 2003, after integrating Nabisco into Kraft, I left to run Unilever’s US food company. I led the integration of Unilever foods, home and personal care, and ice cream businesses (including Ben and Jerries), into one company. Then I was given the opportunity to run all of Unilever’s brands globally, including their marketing and R&D. I commuted to London every week, flying out from New Jersey on Sundays and returning Thursday. After Unilever I was recruited to be the CEO of Newell Rubbermaid, where I ran the company for eight and a half years. In 2019 I retired, but retirement didn’t suit me very well. I’m now working in Private Equity at Berkshire Partners and am the CEO of one of their portfolio companies, Implus. All different and exciting opportunities, and since graduation it’s been a wild, extraordinary ride.

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Did you have any particularly memorable experiences at Cornell?

My most memorable experiences were not the academic ones, but the things I got involved with outside of school, such as Glee Club and a small singing group called the Hangovers. Some of my fondest memories are going to hockey games and sleeping out for season tickets. I went to nearly every hockey game while I was there. It was a formative time for me personally because I grew up in college, rebelled in college, and did all the things you’re supposed to do in college. I would describe it as my breakaway years.

Did obtaining an MBA change your outlook on the business world?

What business school did for me was to broaden my perspective. I arrived wondering whether I was worthy of being a student there, but quickly found out that a lot of my peers didn’t have experience in the real world. I became comfortable holding my own in a fast-paced environment, and my confidence grew a lot. Perhaps the single most important learning experience was being able to think on my feet and communicate clearly under pressure. We were taught using the Socratic method, and you would get cold called to open a business case.

For me, it opened doors. Sometimes people coming out of technology are burdened by the belief that they can't think broadly or commercially, but the Harvard experience allowed me to diffuse that filter. I proceeded to become one of the best marketers at Kraft and well thought-of marketer in the U.S., and it all happened as a result of choosing to go back to business school and widen the aperture of my education.

has your leadership style Q How changed over the course of your career?

My whole leadership style has evolved over time. When I did Myers-Brigg testing, I was always an extreme introvert. Over time, I learned to be comfortable being “out there.” I think the key for success in any business is to figure out how to engender followership and align your agenda for the role you are in with the agenda’s of others, to create a scenario where all the people involved can achieve an outcome that allows them to declare success. Learning how to work through others to get things done was probably the most important variable for me throughout my career. With respect to my CEO roles, a primary responsibility is to paint a picture of the future of the company and then put in place the activities that are going to get you there. That requires you to understand the strengths and the weaknesses of the company, the opportunities the company has, the competitive, environmental, and regulatory threats that could potentially get in the way of the company achieving its goals. You then communicate to the company to help people understand the context of your decisions.

starting their career?

The first and most important thing is to find something you are really passionate about, but of course that means different things to different people. I didn’t have a preconceived notion about doing consumer goods for my entire career, and it's been nearly 40 years. I love what I’m doing and I’m having a lot of fun doing it. The other piece of advice is that it's really important to get stuff done, to make a contribution and to focus on the outcome. It matters how you get the outcomes of course, and you have to do it in the right way with integrity, but your next opportunity in life is going to be contingent on producing in the role you’re in today. Always focus on contributing to the company’s agenda. Finally, make sure you work in a way that respects people and respects the power of relationships, because relationships will enable you to get a lot more done. Always be principled in what you do - find your code and live by it, whether in your personal life or in your work.

INTERVIEW

That style of communication is a learned behavior; some people think it is natural, but I don’t believe that. You deliver through others, but you have accountability for articulating the strategic road map of the company. Inspiring people to deliver is important. Being at the front of the room, allocating resources the right way, and making the sharp choices necessary will get you there.

advice would you give Q What to young professionals just

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