Cornell Business Review - Fall 2014

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CORNELL BUSINESS REVIEW

Exclusive Interview with Vivian Schiller Former Twitter Head of News, NBC Senior Vice President and NPR CEO Student Debt Poised to Crimp U.S. Economy Students owe over $1.2 trillion Tax Inversions in the U.S. We Gotta Get Out of This Place

Fall 2014 | Volume V | Issue 1

David versus Goliath Uber Faces Off Against the Taxi Industry

Contents EDITOR’S LETTER 02

GOVERNMENT CRUDE OIL 03 The ‘New’ Kid on the Block

by Jessica Krause

STUDENT DEBT 05 POISED TO CRIMP US ECONOMY

by Shohini Kundu

INDUSTRY THE PRICELINE GROUP 08 ACQUIRES OPENTABLE FOR $2.6BN

by Reed Boehringer

TECHNOLOGY’S IMPACT 09 ON THE MUSIC INDUSTRY

by Kelli Keith

BUG BITES 11

by Nicholas Rawlinson

COVER: DAVID VS. GOLIATH 13 Uber Faces Off Against the Taxi Industry

by Casey Breznick

FEATURE VIVAN SCHILLER 17 An exclusive interview with former Head of News at Twitter and former President and CEO of NPR.

SPOTLIGHT 22 JEFF SHAFFER & JAY LEE Founders of Fiberspark

24 STEVEN IZEN Founder of lokai

finance 26 WHAT YOU DON’T KNOW

ABOUT THE DEFENSE INDUSTRY

by Ethan Coy

27 TAX INVERSIONS IN THE US We Gotta Get Out of this Place

by Hunter Bosson

INTERNATIONAL 29 ABENOMICS

A Revival Kit for Japan?

by Jeffrey Fung

31 THE INDIAN ECONOMIC

OUTLOOK AND WHAT IT REALLY MEANS

by Sagar Galani

32 THE UMBRELLA MOVEMENT

THROUGH AN ECONOMIC LENS

by Todd Wei

CORNELL BUSINESS REVIEW Fall 2014 | Volume V | Issue 1 Aaron Weiner Catherine Chen BUSINESS MANAGER Susan Jiang DESIGN EDITOR Lillian Chen ASSOCIATE EDITORS Shamika Dighe, Jack Henry Kapp, Grace Gorenstein & Nicholas Piccone EDITOR-IN-CHIEF

MANAGING EDITOR

WRITING TEAM Reed Boehringer, Hunter Bosson, Casey Breznick, Ethan Coy, Jeffrey Fung, Sagar Galani, Matt Hagerty, Benjamin Hearns, Vishnu Kakuturi, Kelli Keith, Jessica Krause, Shohini Kundu, Nicholas Rawlinson & Todd Wei

BUSINESS TEAM Matt Hagerty, David Hauser, Jen Juliano, Nabiha Keshwani, Julia Krupski, Minesh Patel, Cyril Pietrafesa, Kartik Ramkumar, Jenna Roland, Zoey Tang & Aaron Weinstein

Alvin Cao, Emily He, Gwen Shi, Rosalyn Xu & Julie Zhu

DESIGN TEAM

LETTER FROM THE EDITOR We are proud to share the Fall 2014 issue of the Cornell Business Review with you.

This semester, we have had the great pleasure of featuring an alumna on our cover for the first time, Vivian Schiller ‘83. Vivian embodies the mission and pathos of our magazine​through her contributions to the field of journalism.​With her experience at the New York Times, Turner Broadcasting, NPR, and Twitter, she embodies success in a changing cultural climate. Vivian expressed her desire to make an impact in her career, and here at the Cornell Business Review we have a similar goal – we hope to bring members of the community together to join in on a conversation about relevant business ​topics. ​The ​Cornell Business Review has also made improvements as an organization this semester. We have completed our website, ​www.​cornellbusinesreview.com​,​which will enable us to showcase our complete publication along with our newsletter on one cohesive platform. The website represents a step into a new era for our organization and will increase our reach across the global Cornell community. From a financial perspective, we have become less reliant on funding from the university. We are taking steps to become an independent organization by raising additional funds​ from advertisement revenue to support our public​ation​. We have been very fortunate to receive donations from Cornell alumni who believe in our mission and we welcome donations going forward.

We would like to thank the Charles H. Dyson School of Applied Economics & Management, the School of Hotel Administration, the School of Industrial & Labor Relations and ​our ​alumni donors for their financial suppor​t. We would also like to thank ​our advisor, Professor Deborah Streeter, for her continued ​guidance and ​invaluable advice. ​ Finally, we extend a very​special thank you to our interviewees​– ​Vivian Schiller, Steven Izen, Jay Lee and Jeff Shaffer –​​for taking​​time out of their​b ​ usy schedules to share their stories​ and​ experiences.

Lastly, I would like to thank all of the members of the Cornell Business Review for their countless hours of hard work, their dedication, and their entrepreneurial spirit​, all of which drives the success of this publication. I am honored to have had the chance to lead such a dynamic, intelligent, and diverse group of individuals. I look forward to following the Cornell Business Review’s continued success in the years to come.

Aaron Weiner Class of 2015 Editor-in-Chief

2 | CORNELL BUSINESS REVIEW

GOVERNMENT

CRUDE OIL:

The ‘New’ Kid on the Block

BY JESSICA KRAUSE

For the first time in 40 years, the United States exported unrefined crude oil this summer. Two ships were granted refuge from the U.S. law, which illegalizes exporting crude oil. This exemption has sparked the controversial debate on officially overturning this ban. Policy makers enabled this exemption because they were carrying condensate, a lighter version of crude oil, rather than pure crude oil. But now, oil refiners, producers, economists, policy-makers and even the Wall Street Journal are all demanding to know: did this exception mark the beginning of a new era in the U.S. oil industry?

A BRIEF HISTORY

In 1973, the Arab Embargo caused the western world to rethink its energy policy. In reaction to the crisis, the Energy Policy and Conservation Act of 1975 was signed into law by President Ford to block exports of U.S. crude oil and natural gas. The stated goal of this act was to increase domestic energy supply and production.

Since then, the U.S. has experienced a surge in domestic production of oil, which has resulted in a plea from oil producers to enable exporting. Domestic oil production has increased 70 percent over the last six years to about 8 million barrels a day, which marks the peak production since 1988. This growth can mainly be attributed to new drilling technology, such as fracking. Horizontal drilling has unlocked a high supply of condensate, a light crude oil that is typically mixed with heavier oil. It was this extraneous condensate that was recently exported, sparking the oil debate. This new supply is starting to resemble the oversaturation of natural gas in the U.S. market, leaving producers and politicians alike questioning the relevance of the 1975 policy.

THE BATTLE ON THE HILL TODAY

The newly elected and re-elected Congress members need to reach a decision on the relevancy of this law. They can secure the current ban, enable exporting, or delay the decision. A key player in the decision to keep or overturn this ban is the Chair of the Senate Energy & Natural Resource Committee. Pre-elections, this was Mary Landrieu (D-LS). However, neither Landreiu nor her opponent, Bill Cassidy, made the required 50 percent of Louisiana’s vote, meaning a re-vote will take place in December. By not winning the majority, she lost her title as Chair of the Senate Energy & Natural Resources Committee. U.S. Sen. Lisa Murkowski (RAZ) is expected to take over that position as she watched her party take over the Senate. Murkowski recently said in an interview that she would approve the Keystone XL oil pipeline (which would run from Canada to the Gulf of Mexico) as well as push for exports of liquefied natural gas.

Currently, the domestic natural gas supply remains larger than that of crude oil. Nonetheless, the enabling of gas and oil flow would certainly indicate Senator Murkowski is willing and able to overturn this ban.

WHY KEEP THIS BAN?

Oil refiners are the major proponents for keeping the ban, but many economists and politicians alike argue that the everyday consumer of gas and oil in the U.S., will be worse-off by the overturn from a hike in gas prices. Additionally, supports of the ban argue it would reduce refined oil exports, and that the time isn’t right.

First, by selling more crude oil, supply will decrease for oil producers within the U.S, artificially creating a shortage, and thereby raising prices. Since 52% of oil consumed in the U.S. is produced domestically, a supply drop could increase consumer prices. The U.S. is actually experiencing a price low in oil, as current prices are dropping down to CORNELL BUSINESS REVIEW | 3

GOVERNMENT

booM TiMes Barrels of crude per day 10m

Imports

7m

Domestic Production

NOW OR NEVER...OR MAYBE JUST LATER?

4m Q1 1990

Q1 2014 Source: Bloomberg Businessweek

about $80/barrel. Companies like West Texas Intermediate Oil argue that it is not just the past few months we’ve experienced a price low, but actually they’ve been selling approximately $13/barrel less than the international standard for the previous three years. This makes the price more vulnerable for an increase.

While crude oil has been dropping in price, refiners have watched their revenues double over the past few years.

Valvero Energy is the U.S.’s largest refiner and its net income has doubled since 2010. These are the companies that would experience cannibalized revenue, which could stunt the U.S. oil industry as a whole.

Finally, Capitol Hill may be justified in voting to decide on this issue later.

The U.S. still imports 7 million barrels of crude oil each day (almost half) so the case can easily be made to simply decrease imports before increasing exports. Additionally, since the U.S. is so new to experiencing this surge in crude oil, there is no infrastructure in place to physically transport the oil. This could take up to five years, which may be too late to capitalize on the boom. Former Director of Energy Policy in the Treasury, Philip Vergler said, “The real threat to the U.S. oil boom isn’t a lack of exports, it’s the lack of efficient ways to 4 | CORNELL BUSINESS REVIEW

would see a slight increase in revenue from exportation. At the same time, oil refiners would experience a major decrease in revenue. The result would be a marginal increase of about $5 billion to crude oil’s total contribution to U.S. GDP, which is currently about $800 billion.

move crude around the country.” In other words, by the time the infrastructure is ready, the U.S. may have already missed the optimal time, resulting in large fixed cost losses by all parties.

WHY OVERTURN THIS BAN?

Supporters of overturning the law argue that the U.S. overall position in the world economy would be enhanced through: increased job creation, a reduced trade deficit, and oil industry contribution to GDP. Given the infrastructure needed and labor-intensive process of extraction, domestic job creation is a major plus for overturning this ban. However, since it is unknown exactly how many producers would get in on the oil business, job creation figures are almost impossible to accurately predict, leaving for a wide range of interpretation. The American Petroleum Institute estimates 300,000 jobs created by 2020 but an energy research firm, IHS, optimistically projects that 1 million jobs will be added to the U.S. economy. This research firm also forecasts a $22 billion cut in the trade deficit by 2020.

Rather than look at job creation or trade deficit, Goldman Sachs analyzed the position from the standpoint of overall GDP. Oil extractors (or producers),

If an economic case can be made to overturn the ban, the question becomes: when? Goldman Sachs found that refiners are producing at about 91% capacity currently, so they recommended waiting full saturation in the market. Policymakers will be able to tell when this happens as U.S. crude prices will trade at a significant discount when compared to international prices. This seems simple enough, but how much is a significant discount? Oil extractors are arguing that time is now. The estimated break-even price for oil is about $85/barrel, and when this study was done this summer oil was trading around $100/barrel, but now in fall prices have dropped down to break-even range. Goldman announced in the summer that because of this margin, a price drop won’t be devastating to the refiners, but now policymakers, economists, and consumers will need to decide: does this recommendation still stand?

The result in the coming weeks is highly anticipated partly because of the high stakes for everyone from consumers at gas pumps to oil refiners to economists. The Deputy Director of the Energy Institute at the University of Texas, Michael Webber, finished his thoughts off crisply, “This debate is a major slugfest between industrial consumers and producers of oil”. Whichever way the vote goes, changing U.S. energy policy sends a clear message to the rest of the world and will definitely have snowballing effects throughout the globe.

Jessica Krause (jlk275@cornell.edu) is a senior at Cornell University majoring in Applied economics & Management.

GOVERNMENT

Student Debt Poised to Crimp US Economy

BY SHOHINI KUNDU »» In two years, the total student debt increased from $1 trillion to $1.2 trillion mirroring the 20% growth in housing mortgages between 2003 and 2005 that led to the 2008 financial crisis.

In 2013, the newly created Consumer Financial Protection Bureau (CFPB) began issuing a series of warnings about a mounting student debt problem. The bureau reported that in just two years, from 2011 to 2013, the cumulative student debt increased from $1 trillion to $1.2 trillion. To put that in perspective, according to Federal Reserve data, the total housing mortgage debt in the second quarter of 2013 stood at $10.8 trillion.

The rapid increase in student debt mirrored rapid growth in housing mortgages between 2003 and 2005 in which the number of loans increased by 20%.

The aftermath of that run-up was not pretty, as the GDP shrank by 6.2%.

When the housing bubble burst in 2008, it created the worst financial crisis since the Great Depression. With the excep-

tion of a few perennial doomsday sayers, no one saw the crisis coming–not even the much vaunted chairman of the Federal Reserve Board, Alan Greenspan. On June 9, 2005, Greenspan appeared before a congressional testimony and insisted that there was no bubble, simply “froth.”

He was so sure that it was merely “froth” that he repeated this no less than three times.

In the aftermath of the crisis, in hindsight, it is clear that Greenspan had sorely misjudged the bubble. He is not the only one – the greedy financiers, the naïve borrowers, the complicit bankers, the inept rating agencies and the overhyping financial news media all played a certain role in their mistaken belief that in this digital age, in the era of “big data”, number-crunching and quantitative analysis had taken all financial risks off

the table.

Economists have studied the financial crisis in great depth and have found multiple building blocks that led to the crash in 2008. Stable growth during the Clinton-era banished the budget deficit, creating a glut of cash that depressed the interest rates and forced investors to seek higher return alternatives. Financiers bundled low quality mortgages with high quality ones, issuing bonds of dubious quality to unsuspecting investors. Rating agencies were unable to adequately rate such complex securities.

Regulators underestimated the risk associated with such products. With easy money rolling in, banks suspended rigorous checks on borrowers, doling out mortgages to those who had little ability to pay. The banks were also encouraged by politicians, who wanted an increase in homeownership, fueling the growth in housing mortgages. Analyzing the buildup of the last financial crisis brings into question, what is fueling this latest bubble. What exactly are the factors driving the increase student loans?

CPFB reports indicate that most of the student loans are held by the Federal Government – $1 trillion out of the total $1.2 trillion in outstanding student loans. CPFB also reports that there are 39 million borrowers with federal student loans as of mid-2013. According to Department of Education, in 2014, subsidized student loans to undergraduates carry a 4.66% interest rate, while the interest rate on unsubsidized loans is 6.21%. All graduate students are currently borrowing at a rate of 6.21% to 7.21%.

This is a pretty substantial interest rate, considering the current 30-year home mortgage rate is only 3.8%. why the increase?

How can one explain the 20% increase in student debt between 2011 and 2013?

There are three myths surrounding the increase in student debt: increases in enrollment, tuition, and the number of for-profit institutions.

CORNELL BUSINESS REVIEW | 5

GOVERNMENT

The rapid increase in sTudenT debT Mirrored rapid growTh in housing MorTgages beTween 2003 and 2005 in which The nuMber of loans increased by 20%.

Student enrollment? One plausible explanation for increase in student debt is the increase in student enrollment. However looking at enrollment data from insidehighered.com, we find that the total student enrollment, in fact, declined by almost 4% during that same period. This certainly does not explain the total increase in student debt.

Increasing Tuition? On the surface it is true that college tuition has been rapidly rising. However, like student enrollment, this growth does not justify the growth in student debt. For example, in 2010-2011, Cornell’s tuition was listed at $39,666 while in the 2012-2013 it was $43,413, an increase of about $3,747 or about 9.45%. Cornell, however, tends to be on the higher end of tuition hikes. In fact, according to the U.S. Department of Education, the average tuition that students pay after all financial aid is taken into consideration was $24,249 in 2010-2011 and $25,652 in 2012-2013, an increase of only $1,403 or 5.8%. Thus, increase in tuition alone cannot justify a 20% increase in cumulative student debt.

Increase in the number of for-profit in-

stitutions? According to the U.S. News, for-profit institutions have poor graduation rates and account for more than 50% of student debt default. Student debt default at for-profit institutions affects students elsewhere by raising the cost of borrowing, because as Congress envisioned, the student loan program must be self-sustaining. While it is true for-profit institutions contribute most to the current nominal portion of student debt, their enrollment actually declined sharply during that period – by almost 16%.

Changing Demographics: According to the National Science Foundation, enrollment for whites is projected to decrease from 63% in 2008 to 58% in 2019, whereas the same percentages for Blacks and Hispanics are projected to increase from 14% and 12% in 2008 respectively, to 15% in 2019 for both groups. A 10% change in composition of student body indeed explains the increase in student debt. Statistically, minority students are poorer, so according to my hypothesis, they need to borrow more, which drives up student debt.

ANOTHER BUBBLE?

Increased student borrowing should not be seen as a bad thing, if students can find gainful employment at the end of their graduation. However, several warning signs indicate that there may not be enough jobs at the end of graduation due to the impact student debt has on the future national economy. I will dare to make some gross forecasts here, based on some back-of-the-envelope calculations: Reduction in spending per household will shave at least 1.5% from GDP: A recent report estimates that the number of households under age 40 that owe $250 or more each month in student loans has nearly tripled since 2005, to 5.9 million. If you pay $250 a month for student loan, it takes away $250 a month that you could pay towards your home mortgage.

This reduces home purchasing power by $44,000 at today’s interest rates. When multiplied by the number of debt-holders, it gives the magnitude of money that will not be spent on real estate. Indirectly, homes contribute to 15% of the U.S. GDP. A 10% reduction in aggregate home value will shave 1.5% from GDP. Reduction in number of households, an even bigger worry: Record numbers of young adults are living with their parents. According to the Pew Research Center, 3 out of 10 young adults under

a growing probleM

Rundown on the national student debt.

As of November 2014, American consumers owe in total:

$880.3 billion crediT card debT

$1.123 trillion

$32,511 Avg student loan debt

40 mil

Americans have student loans

2018 2014

2011 2008

$36,300

sTudenT loans

6 | CORNELL BUSINESS REVIEW

Cornell University’s own tuition and fees trend:

$41,325

$47,160

$56,240

GOVERNMENT

the age of 35 live with their parents today. Sociologists have found that as loans accumulate, students stay at home to cut their costs. This invariably delays formation of new households. Since much of the economy such as home purchases and spending related to rearing children is dependent on marriage, a postponement in marriage will further shave the GDP. According to 2010 census, children now make up 24% of nation’s population, down by nearly 2% in last 10 years.

This trend is accelerating sharply. Fewer children today means fewer households tomorrow. This could easily shave another 2% of GDP in next 10 years.

Student debt trend: 41% of women who gave birth in 2013 are single compared to 5% in 1960. Statistically, children born into families with two parents are economically better-off than children raised in single parent households. Students from lower income families have greater need to borrow. As we have seen in previous calculations, a 10% change demographics, resulted in a 20% increase in student debt. Thus, the forecast of another 20% increase based on changing demographics will further increase the cumulative student debt with all the implied perils.

Debt spillage into skill base: A recent report shows that as debt for medical students increase, they flock to specialty professions with higher pay leading directly to shortage of family practitioners which in turn increase costs. Similar shortages have been observed among high school teachers. Students with debt are less likely to go into low paying teaching jobs creating a shortage. Shortage of teachers diminish the skill base of the next generation of students. Lower skills means lower income, which erodes the economy further in a knock-on effect.

So far, we have seen that an increase in student debt will result in loss of GDP. Loss of GDP will invariably lead to fewer jobs, which will lead to more student debt defaults. If such a trend continues, this could lead to an increase in the in-

terest rate – fueling a vicious cycle with pernicious effects on the economy.

Only 41% of students graduate in four years.

WHAT CAN WE DO?

Unlike the real-estate bubble, which was fueled by a glut of cash looking for higher return, the student debt is fueled entirely by federally guaranteed loans. Since the problem originates in the government, a viable solution must come from the government. The Department of Education has begun this task, by setting up a website to allow college cost comparison for students. However, Professor Susan Dynarski of University of Michigan has pointed out a major flaw in such comparisons – informed consumers lack realistic choices. Even if in-state tuition in South Dakota is cheaper in New Hampshire, a student in New Hampshire cannot realistically access this tuition.

Many argue that loans should be outcome-based. If for-profit colleges are driving up the loan default rate, then the government should raise the barrier of securing loans in such institutions. This solution can work well. Another proposal is to increase the length of high school by one additional year for the college bound students. This would students but hurt many colleges, leading to large-scale consolidation. Such loans would surely be opposed by college administrators.

The current interest rates for new Federal Stafford Loans in 2014-2015 is

4.66%

for undergraduate students and

6.21%

for graduate and professional students.

Change in amount of seriously delinquent loans since first quarter of 2010 +100% student loans

+75 +50 +25 0

others

-25 -50

mortgages -75 ‘10

‘11

‘12

‘13

WHERE DOES THAT LEAVE US?

In the current political climate, any solution that diminishes the presence of for-profit colleges is unlikely to pass Congress. Thus, a decline in the potential GDP of at least 5% over the next decade with 1.5% directly from loans, 2% from fewer households and 1.5% from loss of skill base is highly likely. While this may not have the feel of a precipice like 2008, it will still be significant, albeit without the drama of the last crisis.

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

Average earnings by educational attainment in 2013: No high school diploma $24,492/yr High school diploma $33,904/yr Associate Degree $40,820/yr Bachelor’s Degree $55,432/yr Master’s Degree $67,600/yr Doctoral Degree $84,448/yr Professional Degree $90,220/yr

Top five highest student debt states for the class of 2013: New Hampshire $32,795 Delaware $32,571 Pennsylvania $32,528 Rhode Island $31,561 Minnesota $30,894

CORNELL BUSINESS REVIEW | 7

INDUSTRY

The Priceline Group Acquires OpenTable for $2.6bn

like-minded, entrepreneurially-led, performance-driven brands who like to win and who share best practices in areas where everyone gains and the cost of coordination is low.”

BY REED BOEHRINGER »» Unrealized potential in the global travel market attracts new competition and raises concerns for online travel agencies.

Priceline Group’s stock price exponenThis past June, The Priceline Group tially over the past several years.

(PCLN) purchased OpenTable for $2.6 Compared to previous acquisitions, billion in an all cash deal – a 46% prethe $2.6bn acquisition of OpenTable is mium given OpenTable’s previous day’s Priceline’s largest and most surprising. closing share price. This acquisition adds Acquiring Agoda and Booking.com extraordinary diversity to The Priceline seems logical, as they were established Group’s holdings, which raises some firms in their respective and attractive questions about the current state and the foreign travel markets.

This begs the potential future of the online travel inquestion, what interest does the world’s dustry. largest online travel agency (OTA) have This acquisition is indicative of in dining reservation software?

Priceline’s expansion efforts, which beAccording to Darren Huston, Pricegan in 2005 with the purchase of Bookline’s CEO, “It’s critical to ing.com. Operating primarunderstand [that] it’s the ily in Europe, Booking.com same customers, travelers has become the world’s largare diners. This is anothest online travel agent (OTA) er leg of the stool for The and has proved to be an Priceline Group.” Though it exceptionally beneficial asremains unclear as to how set for The Priceline Group.

Total global travel market value Priceline intends to integrate Priceline also expanded into OpenTable’s services into the Asian travel market with its existing line of products, in a letter their acquisition of Agoda in 2007, and to the OpenTable team Huston hinted into the meta-search space with their to the advantages of scale, stating, “we 2012 acquisition of KAYAK. These acpride ourselves in being a collection of quisitions have helped to propel The

$1.2 trillion

8 | CORNELL BUSINESS REVIEW

CONSOLIDATING CHAIN

THE

TRAVEL

VALUE

As the industry becomes more competitive, OTAs seem to be expanding in order to consolidate and capture as much of the travel value chain as possible by offering a more expansive range of services.

For example, TripAdvisor, a platform to rate and discuss destinations, now offers its own meta-search service allowing users to compare prices on flights and hotels. Although TripAdvisor doesn’t profit directly from the commission on their users’ reservations, this additional feature keeps users on their website longer, generating more revenue from advertisers.

Furthermore, a recent partnership between Yelp and travel-startup Hipmunk will allow Yelp’s users to book hotel room reservations on its own website. In July of 2013, Yelp also acquired SeatMe, a competitor of OpenTable, enabling users to book restaurant reservations through their native platforms as well. Previously, customers could read and learn about different points of interest on Yelp, but were forced to take their business elsewhere in order to actually book their reservation. Though Yelp is traditionally not an online travel agent, it is clear that they are trying to expand into new markets by offering additional features that new value to their customers’ travel planning experience.

THE GLOBAL TRAVEL MARKET

A recent study by PhoCusWright, a travel-market research firm, sheds light onto why these companies may be so eager to expand and provide more services to customers. According to their research, the total global travel market is currently valued at $1.2 trillion dollars and is projected to grow ~8% to around $1.3 trillion dollars in 2015. This data suggests that the travel market is one of the

INDUSTRY

largest and most globalized industries in the world; however, less than one-third of that value is actually captured online.

There is extraordinary untapped potential in emerging and developing markets, where the offline methods and processes of travel remain very popular.

As more of the world gains access and acclimates to an ecommerce environment, firms seem to be anticipating that these travelers will take their business online. Thus, it makes sense that online travel agents and similar companies, like TripAdvisor and Yelp, are in a footrace to expand their businesses and maximize their global reach.

NEW COMPETITION

Moreover, traditional online travel agents are facing mounting pressure from tech-giants and startups alike. Although firms like Facebook, Google, and Microsoft have not made significant moves in the direction of offering travel-related services, doing so could prove to be extraordinarily effective, as these companies may have the ability to offer unique value to their customers through their social connectivity capabilities and their mass storage of user data. Additionally, well-funded startups such as Airbnb, Couchsurfing.org and OneFineStay may pose a threat to the future of the traditional lodging industry, which would

Technology’s Impact on the Music Industry

BY KELLI KEITH

undoubtedly have an impact on the hotel-reservation businesses of these online travel agents.

Due to the untapped potential in the global travel market coupled with a variety of surmounting external pressures, online travel agencies are trying to expand and create new footholds wherever possible. Though The Priceline Group paid a significant premium for OpenTable and its inventory of around 30,000 restaurants, in an increasingly competitive industry, the reasons to remain complacent are few and far between.

Reed Boehringer (jrb489@cornell.edu) is a junior at Cornell University majoring in Industrial & Labor Relations.

This digital download model, where consumers can pay for individual songs, was first popularized by iTunes. While this model has increased in popularity over the past decade, the streaming model has more recently gained traction through two different revenue models – ad-supported streaming and subscription-based services. The popularity of the streaming mode has thus forced a decline in download revenues as consumers of digital music switch from digital downloads to streaming services.

THE PLAYERS IN STREAMING SERVICES

BRIEF HISTORY OF THE MUSIC INDUSTRY: FROM RECORDS TO STREAMING

Technological innovation has forced the music industry to undergo two major changes to their traditional business model. Historically, the music industry has distributed music through physical copies of albums. Through the transformation of physical music from records, to tapes, to finally CDs, physical music sales have continued to ensure that con-

sumers buy entire albums from artists.

However, over the past two decades, consumers have moved away from buying physical music, which accounted for 51.4% of industry revenues in 2013, and towards buying digital music. The advent of digital music has forced a change in the industry, as consumers can now instantly consume music and are no longer forced to purchase the entire album in order to enjoy singles.

There are mixed reviews of the potential of the music streaming model. Studies indicate that streaming music increases consumer payment for music, as consumers are more attracted to paying for streaming services, rather than searching for illegal downloads. In 2013, the music industry saw a 51.3% increase in streaming revenues.

Many view the rival of the music industry in Sweden as a model for the rest of the world. However, there is concern that streaming will not return nearly as much profit as downloads or physical music sales would. There are two major international players in the streaming space. Spotify, which was founded in Sweden in 2006, has 10 million paying subscribers and over 40 million active CORNELL BUSINESS REVIEW | 9

INDUSTRY

users. Deezer, launched in France in 2007, has 12 million monthly users and 5 million paid subscribers.

Both streaming services provide an ad-supported free streaming model and a paid subscription model. Pandora, an internet radio that launched in 2000, currently has 75 million active users and 3.3 million paying subscribers. It provides a free music streaming service, but doesn’t allow users to select specific songs.

The streaming industry has recently received increased attention as three major companies announced new services. Apple’s purchase of Beats to acquire its fledgling

Many streaming services are partnering with telecommunication service providers to expand their reach into the mobile market.

streaming business that has around 250,000 subscribers, to offset declining iTunes sales. Google is expected to announced a YouTube subscription that will provide users with adfree access to music and provide a streaming service that includes video. Finally, Amazon has announced Prime Music, which is an ad-free streaming service for members of Amazon Prime.

STREAMING SERVICES AND TELECOMMUNICATION SERVICES: AN UNLIKELY PAIR?

There is an increasing interconnectedness with music and other technology. Many streaming services are partnering with telecommunication service providers to expand their reach into the mobile market.

Spotify has a contract with Sprint to offer a free Spotify Prime trial with a Sprint contract, and dis-

counted Spotify Prime contracts after the trial period ends. This bundling deal is part of a strategy by Spotify to increase brand awareness and lure in more paying customers.

Similarly, AT&T announced a deal with Beats Music to provide specialized pricing for AT&T customers.

T-Mobile has taken a different approach. Though they did not partner with a music service, the cell phone company recently announced that streaming music would not count against users’ data limits.

As the music industry continues to grow and evolve, it is clear that technology will have a significant impact on its direction.

Kelli Keith (kak293@cornell.edu) is a senior at Cornell University majoring in Applied Economics & Management.

INDUSTRY

Bug Bites

BY NICHOLAS RAWLINSON

Tonight’s specials: dried caterpillars, greenhouse gases than planes, trains, and ausalted beetles, and locally raised crickets. Altomobiles combined. This supplements the By the year 2050, the though none of those may sound appealing, enormous amount of land and water needed world population will be you may be surprised by the latest trend in to sustain livestock, and the pollution that food – insect consumption. It is increasing occurs as a result of livestock production. globally at impressive rates, and will play an Unlike farm animals that require expensive integral role in feeding a growing world popingredients to be fed regularly, insects can ulation in years to come. Entomophagy, or the consumpbe raised on inexpensive bio-waste, like human and food tion of insects by humans, is a common practice in certain waste. This means insects can increase the global supply of regions of Asia, Africa, and Latin America. According to protein, limit greenhouse emissions, conserve resources, the United Nations’ Food and Agriculture Organization, and recycle waste. an estimated two billion people, a quarter of the world’s In May 2013, the UN released a comprehensive 185population, consume insects regularly each year. But latepage report on the topic, concluding that “edible insects ly, bugs have become bigger. Why now, and what are their [are] a promising alternative for the conventional producprospects within agriculture and food? tion of meat, for direct human consumption and indirect By the year 2050, the world will have an overwhelmuse as feedstock.” Two main challenges for the food indusing population of nine billion people. For underdeveloped try are discussed in the report. First, legal frameworks and and developing countries, demand for animal products has scientific research into the health, safety, and regulatory been rising sharply for decades, and the ability to produce standards needed for international insect production and sufficient levels of protein for billions of additional mouths trade must be established. Second, the industry will have to in the near future poses a daunting challenge. With this challenge and overcome the normative and psychological increased demand, international food deficiencies at an all opposition many Westerners have toward eating insects. time high, and current food production practices devastatDespite the challenges presented by the integration ing the environment, the status quo is unsustainable. This of insects into Western diets, industry experts and entreis where insects fly in. Insects provide protein, iron, calcipreneurs are taking notice. According to Harmon Johar, um, and other vitamins and minerals not found in other Chief Innovation Officer of the food company Aspire, meats. They’re considered to be complete proteins, and “There continue to be more edible insect products on the are full of omega-3 and omega-6 fatty acids, with remarkmarket every year and the industry has at least doubled in ably low amounts size annually since 2010.” An ever-increasing number of Despite the challenges presented of cholesterol and start-ups are pushing forward with a host of insect food by the integration of insects into fat. Additionally, products, with crickets proving to be especially popular for Western diets, industry experts insects do not carry young American innovators. and entrepreneurs are taking the health risks asThis March, Mark Cuban of Shark Tank invested notice. sociated with many $50,000 on-air for a 15% stake in Chapul Energy Bars, other types of aniwhich are produced with flour made from crickets. Cuban mals, as they pose a low risk of carrying diseases that can posted on Twitter: “it’s a solution to a problem. We need be transmitted from animals to humans by means of conbetter sources of protein and over time I think consumsumption, such as Bird Flu or Mad Cow Disease. er habits will change.” On Chapul Bar’s website, founder On an environmental front, insects can make a huge Pat Crowley writes, “psychology can change – in the early difference for a more sustainable future. According to the 1960s, most Americans associated raw fish with the local BBC, the global livestock industry currently emits more bait shop, but then an entrepreneur named Noritoshi Ka-

9 billion

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Left: Ento is a project introducing edible insects to the Western diet, undertaken by a team of four postgraduate students from the Royal College of Art and Imperial College London who wanted to tackle the growing issue of food supply in an increasingly hungry world. The project is about driving cultural change through understanding human perceptions, using strategic design thinking, as well as through creating innovative and compelling experiences.

nai opened a sushi bar in the Little Tokyo neighborhood of Los Angeles in 1966, catering to Japanese businessmen... I see Chapul in a similar vein – a simple, tasty introduction to a novel delicacy… the first step in a broad culinary shift.”

By the end of this past summer, Chapul Bars were sold in over 200 health food and sports stores nationwide.

In 2013, Gabi Lewis and Greg Sewitz graduated from Brown University and founded Exo. Like Chapul, Exo produces protein bars made with cricket flour.

Starting in the fall of their senior year at Brown, Gabi and Greg began experiment with the bar concept. Upon graduation they launched a Kickstarter campaign, the popular crowd-funding technique, to prove that there was indeed a market for insect-based foods. Lewis, speaking exclusively with Cornell Business Review, explained the results of Exo’s early fundraising efforts, “Within 72 hours, we had reached our $20,000 goal. By the end of the month, we had raised almost 12 | CORNELL BUSINESS REVIEW

$55,000 from over 1,000 individuals who believed in our vision.” The success has continued, as Exo earned $1.2 million in venture capital funding in late September of 2014. The company recruited chef Kyle Connaughton, whose CV includes positions as Head Chef at The Fat Duck, awarded 3 Michelin Stars, Restaurant of the Year, Best Restaurant in the World, and Best Restaurant in the UK, as well as Culinary Director at Chipotle. Lewis explained to CBR, “We were able to recruit Kyle because the idea is so progressive, and the impact is so massive. We are producing a product with tremendous social value that people actually want, because it is delicious.” It is clear that Lewis believes in his product and the future of insect-based foods. Based on Exo’s recent success, it would be difficult to argue with him.

Restaurants too, are taking notice.

Bug-filled eateries are popping up all over New York City. At The Black Ant in the East Village, one can get their hands on

the winged-ant guacamole, or sip on some worm salt-rimmed cocktails. If that isn’t adequate, at Toloache in Midtown grasshopper tacos toasted with chilli spices and lime from Mexico feature prominently on the menu. The business appeal of insects for both startups and restaurants is relatively straightforward. Yet, the question remains whether the bug trend has bite. As Fortune writer Michael Casey summarizes, “The big opportunity they see: the consumption of insects as protein is much less taxing on the environment…so they tap into the current sustainability craze. They’re rich in protein and other key nutrients…. And the products can be made at a low cost – until now, with very little competition.” It is certainly worth seeing how these young businesses fare in a challenging industry, for it will speak volumes about how the world continues combatting the environmental and food challenges that grow along with its expanding population.

Nicholas Rawlinson (nmr55@cornell.edu) is a junior at Cornell University majoring in Government.

INDUSTRY

COVER

David vs. Goliath

Uber Faces Off Against the Taxi Industry

BY CASEY BREZNICK

Barbara Sharpsteen makes her way through the crowded streets of Ithaca, New York on a Saturday evening. Her vehicle is old but clean and comfortable, and between the bursts of chatter from the dispatch radio she happily describes her hectic day shuttling students across town as a driver for the local taxicab company Collegetown Cabs. Not before long, I ask if she has heard about Uber, the mobile app that lets you arrange and pay for rides from anyone, not just taxis. Sharpsteen admits she hasn’t heard much of it. But after hearing my explanation, she comments, “[Uber] doesn’t sound good. There are a lot of strange people out there… There’s more security in a cab, you got a name, [but] maybe I’m old school.”

WHAT IS UBER AND HOW DOES IT WORK?

How does a five-year old company with a few dozen home office employees become more valuable than a centuries-old profession with over 230,000 registered members in the U.S. alone? Simple: by inverting its industry dynamics and seizing upon new consumer trends.

Uber, the app developed by Uber Technologies Inc., allows its users to hail rides from drivers-for-hire who are not registered taxi or limousine drivers, and allows anyone with an insured vehicle who passes a background check to become an Uber driver. Users identify their pickup and drop-off points, are made aware of the fare beforehand, and can track the whereabouts of their driver, as well as browse his or her profile and customer reviews. Credit card information is input when users make their profiles, so there is no need to make payments in the driver’s vehicles.

Uber’s original success in San Francisco and the Silicon Valley quickly spread across the country, and now Uber drivers are shuttling people across the globe in 45 countries, including Nigeria, the Philippines, and Saudi Arabia.

After a whirlwind of capital-raising during this past summer, Uber became one of the most valuable private companies in the world, with an $18.2 billion valuation after raising $1.2 billion from CORNELL BUSINESS REVIEW | 13

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The unfolding draMa beTween uber and The Taxi indusTry is a coMMon one in The hisTory of free MarkeTs and capiTalisM. investors in June of 2014. That makes the company more valuable than rental car companies Hertz ($12.4 billion), car manufacturer Fiat ($12.9 billion), and airliner United Continental Holdings ($17.9 billion) – yet Uber does not own a single vehicle. It is the second-most valuable venture-backed firm in history, behind only Facebook, which was valued at $50 billion when still privately held.

Despite this investor confidence, es-

Ridesharing Patenting (by priority dates) 2000 - Sidecar Efficient transportation route

2007 - RideCharge On-demand and scheduled travel services

2009 - Uber Tech Reducing the cost of efficient vehicles

Transport arrangement; user feedback collection; location identification

2010 - RelayRide

2010 - Uber Tech

2009 - Sidecar

Car sharing

Receipt via mobile device; user interface

2010 - Sidecar

2011 - RideCell

Selecting transportation resources

2012 - Flywheel Dynamically categorizing service providers

Fleet management systems and processes

2012 - Uber Tech User’s price change verification; dynamically adjusting prices; dynamic supply positioning for services

14 | CORNELL BUSINESS REVIEW

timates of Uber’s financials run wild. In December of 2013, leaked documents showed Uber earning roughly $1 billion in gross revenues, meaning its net revenues were about $200 million for the year (Uber takes a 20% commission from each ride fare). Over this past summer, co-founder and CEO Travis Kalanick claimed that revenues were doubling every six months, and rumors started to circulate that Uber’s net revenues would top $2 billion this year. If so, that would mean Uber’s yearly revenues would amount to about 20% of the entire U.S. taxi and limousine industry’s revenues.

Uber’s success stems from its understanding of the modern consumer, especially its core user base: urban millennial professionals. As time becomes more precious in an increasingly fastpaced world, an easy-to-use, time-saving device like Uber quickly garners tremendous popular interest. It is therefore more accurate to say Uber sells time (or time-savings) rather than rides, since all it does is allow riders and drivers to connect on its mobile platform.

Another area in which Uber’s innovation is scoring well with consumers is in user-end customization and personalization. According to a 2013 Bain & Company retailer research report, product personalization and customization are rapidly becoming the most powerful consumer retail trends. Uber has integrated these ideas into the ridesharing industry by allowing users to arrange their own rides and screen their drivers by car-type, past-rider ratings, and oth-

er personal characteristics. In turn, Uber users feel empowered to a degree, or at least more relaxed in comparison to casting their fates to the wind flagging down a taxi on the street. As the Bain report suggests, this enhances brand loyalty, enthusiasm, and word-of-mouth marketing.

Co-founder and CEO Travis Kalanick sums up Uber’s dynamic approach to the ridesharing industry saying “Uber is efficiency with elegance on top.” As its website suggests, Uber truly is “evolving the way the world moves.” What could possibly impede what surely seems like the inevitable Uber-led transformation of the ridesharing industry?

UBER FACES UBER OBSTACLES

Traffic in Trafalgar Square was gridlocked. A horde of cab drivers – estimates range from four to ten thousand – had descended upon one of London’s most trafficked areas to protest Uber’s encroachment across the Atlantic. Similar mass protests occurred throughout the summer and fall of 2014 in other large European cities including Barce-

INDUSTRY

Above: approximately 1,000 taxi drivers protest at Olympia Stadium in Berlin

lona and Milan. In the U.S., the crowds have been smaller, attracting hundreds not thousands, but they share the same desire: an end to Uber.

The protesters’ anathema towards Uber stems from the very realistic prospect of its widespread acceptance and usage spelling the end of the taxi driver profession. City governments and taxi driver unions have led the charge, but even some national governments, such as Germany’s, have taken actions to outlaw the app’s use.

The major point of contention lies in the fact that Uber drivers are not obligated to comply with numerous regulations and restrictions that apply to registered taxi drivers in most large cities – the most important of which is securing a taxi medallion. These medallions legitimize a vehicle as an official taxi within a city’s jurisdiction, but can cost more than $1 million in major metropolises like New York City. This sky-high cost effectively locks out individuals from becoming self-employed taxi drivers, and protects a given city’s few large taxi companies with the sufficient economies of scale from

competition – essentially creating cartels out of the taxi companies.

Cities also have a vested interest in maintaining the medallion system because it is an effective and reliable way to increase government revenues. The New York Times reports that in New York City the average medallion price has increased from $550,000 in 2008 to over $1 million in 2013, and that a November 2013 auction of 200 medallions brought in $200 million to city coffers.

While governments have more power to thwart Uber’s rise, taxi drivers and their unions are proving to be the tech company’s largest adversaries. They are a powerful lobbying force that is not afraid of engaging in highly publicized legal battles and shouting matches. In response, Uber has shown no signs of stepping down or compromising. Instead, it often fights fire with fire.

In May of 2014, at the digital technology-focused Code Conference, Kalanick remarked, “We’re in a political campaign, and the candidate is Uber and the opponent is an a – hole named Taxi.

We have to bring out the truth about how

dark and dangerous and evil the taxi side is.”

Strangely enough, union strikes, such as those in London led by the Licensed Taxi Drivers Association, have actually seemed to galvanize interest in Uber. During the summer, CNBC reported that during a week in July of protests across Europe registrations for the app jumped 850%. Perhaps this was largely due to people in Europe in need of transportation signing up for Uber. It seems bad publicity is publicity nonetheless, and Uber thrives off of it.

Uber does, however, face some serious problems that it has yet to clarify.

Increasingly, Uber drivers have attacked the company for its alleged poor treatment of drivers, including claims of unjustified firings, unfair customer review policies, and ultra-low fares. One class-action lawsuit in Boston bluntly claims the company “exploits its drivers.”

Other Uber drivers are attempting to form their own labor unions. In California, there is the California App-Based Drivers’ Association (CADA), based out of Los Angeles, which is teaming up with a local Teamsters union for “organizational and lobbying assistance”. One of CADA’s and other Uber drivers’ concern is the underinsurance of drivers and the call for Uber to pay for additional commercial insurance. According to Uber’s website, its drivers must have a minimum $1 million insurance policy that covers themselves and colliding vehicles, which is considerably higher than the minimum requirements for taxis in nearCORNELL BUSINESS REVIEW | 15

INDUSTRY

ly every large U.S. city. Uber, however, does not provide insurance or subsidize the cost for its drivers.

Technically, Uber drivers are not employees of Uber – they are independent contractors. The extent to which Uber is responsible for its drivers nonetheless remains legally obscure, and until this status is resolved to the liking of both sides, Uber will continue to face legal troubles.

“I think it is in everyone’s interest to maintain a professional, licensed, taxi force. A regulated industry assures the public that fair standards are maintained, guarantees a level of service, and reassures them that mechanisms are in place to address complaints,” says president and founder of Ithaca’s Collegetown Cabs Paul Kriegstein. Kriegstein admits that ultimately the market will decide whether Uber or taxis will prevail, and that whichever side can provide the ideal combination of quality service and low prices will win the market.

Meanwhile for Uber, profits keep rolling in, and while taxi drivers and some Uber drivers continue to raise grievances, more and more consumers are taking a decisive stance: they are uber-crazy for Uber.

CREATIVE DESTRUCTION AND FREE MARKETS

The unfolding drama between Uber and the taxi industry is a common one in the history of free markets and capitalism. Through what is oft-called “creative destruction,” new ideas and com-

Uber’s success stems from its understanding of the modern consumer, especially its core user base: urban millennial professionals.

panies overtake inefficient and outdated ones, or at least attempt to. If the process ends successfully, the result is increased productivity, which usually translates into consumer cost-savings and higher company profits.

This process of creative destruction is driven by the invention or mass-marketing of disruptive innovations like Uber, says Cornell business professor Aija Leiponen, PhD, whose area of expertise is in technology and innovation strategy. According to Leiponen, Uber fits the characteristic mold of a disruptive innovation.

Under classical economic analysis, the demise of the taxi industry under the auspices of Uber’s rise will benefit the economy at large. In theory, Uber introduces free market competition to the ride-sharing industry, which in turn inspires innovation and lowers costs and prices. As productivity rises, human and monetary capital is freed up to be invested elsewhere more optimally. Ultimately, the ripple effects throughout the economy will catch up with the drivers, increasing even their standards of living.

This, of course, is an optimistic view of how things might pan out, and naturally the disadvantaged companies and groups resist their usurpation by the disruptive innovations. These groups of-

ten win sympathy by citing the number of jobs that will be lost or the lower pay workers will receive in the short-term.

Taxi drivers across the world claim that their jobs are at risk because Uber prices unfairly fall below their own, which are often set by decree rather than by markets. Leiponen, however, says she thinks Uber will create a net increase in driving jobs, and that each taxi driver eventually can become a self-employed Uber driver.

In contrast, Kriegstein notes that, “Uber may add a few driving jobs, but they will do so not by creating extra demand, but by cannibalizing some of the revenue from existing cab drivers, and spreading it amongst an expanded workforce.”

Indeed, the sympathies of the taxi drivers are compelling. But, one should consider the “Candlestick Maker’s Petition” before making a final decision about Uber. In this famous economics parable, 19th century French economist and political philosopher Frederic Bastiat imagines a country’s candlestick makers petitioning the national legislature to pass a law banning the sun because natural daylight cuts their business by half.

Today, Uber and the taxi industry are engaged in an epic battle of business, law, and public relations. It is very much a David vs. Goliath battle, but it is becoming increasingly unclear just which side is which.

Casey Breznick (cb628@cornell.edu) is a sophomore at Cornell University majoring in Applied Economics & Management.

THE RIDE-SHARE RACE Personal Technology Columnist Geoffrey Fowler shared the results of a test of ride-sharing apps UberX, Lyft, and Sidecar against local cabs in six major U.S. cities.

Chicago

Boston

Los Angeles

New York*

San Francisco

Washington, D.C.

Least Expensive

Sidecar $4.00

UberX $7.45

Sidecar $11.00

Taxi $9.50

Sidecar $8.00

Taxi & UberX $8.90

Most Expensive

Taxi $7.65

Sidecar $12.00

Taxi $15.05

UberX $39.00

Taxi $14.10

Lyft $15.00

Best Time

Taxi 8:20

Taxi & Lyft 9:00

UberX 16:52

Taxi 10:53

Sidecar 7:59

Taxi 8:56

*Test only involved UberX and taxi

16 | CORNELL BUSINESS REVIEW

FEATURE

EXCLUSIVE INTERVIEW WITH

VIVIAN SCHILLER

MEDIA’S MOST POWERFUL WOMAN? CORNELL BUSINESS REVIEW | 17

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V

ivian Schiller ‘83 is the former Head of News at Twitter, where she lead the company’s strategy for news and partnership with journalism organizations. Schiller grew up in Larchmont, New York and graduated from Cornell University with a Bachelor’s degree in Russian and Soviet Studies. Prior to joining Twitter, Schiller served as Senior Vice President and Chief Digital Officer for NBC News.

Previously, she was the President and CEO of NPR and held positions at The New York Times, Discovery and CNN. What experience do you value the most during your time at Cornell and how did it prepare you for your professional career?

Vivian Schiller: I loved everything about my experience at Cornell. When I came to campus, I had no idea what I wanted to be when I grew up. So I took full advantage of the liberal arts experience at Cornell. I took a range of classes, and ended up stumbling upon my major, Russian. I knew I had to take a language course to graduate and ended up picking Russian because it was the only session I could find that didn’t meet before 10AM. But from the first week, I fell in love with the language, in part thanks to an extraordinary TA who I’m still friends with 35 years later. Through the study of the Russian language, I then became interested in all things Russian and ended up creating a cross-disciplinary major in language, literature, history, and political science.

That was the start of a lifetime of happy accidents. And by the way, at 53 years old I still don’t know what I want to be when I grow up!

Cornell to your current career in journalism?

VS: After Cornell, I decided to pursue a Master’s degree in Russian at Middlebury College. I worked as a tour guide and translator when class wasn’t in session.

My job was to escort groups of American tourists to the Soviet Union and help them with everything from lost keys to translating menu options.

It was an extraordinary educational experience that primed me with skills I continue to use throughout my career like crisis management and public speaking.

I then got a lead for an entry-level position at Turner Broadcasting which was doing a lot of business with the Soviet Union at the time. Most of the job was fetching coffee for people in meetings and making photocopies, but I was also a translator for senior executives on their trips to Moscow.

So at a very young age, I got a crash course on the media industry where I would spend the rest of my career.

As social media constantly grows and changes, what steps is Twitter currently taking or looking at taking in the future to adapt to the ever-changing market and remain a leader within the social media industry?

VS: Twitter is a technology company and platform, so its role is as a complement to media, an amplifier of sorts. This is especially true when it comes to news. Twitter is both live and public which makes it a great platform for journalism. A lot of the work I did was about making sure that quality news content was broadly available and discoverable “the audience on Twitter. now is very

Are you on Twitter?

VS: Of course! It’s my go-to platform With the tech Can you speak about your journey as for news. boom over the a Russian and Soviet Studies major at

18 | CORNELL BUSINESS REVIEW

promiscuous in its consumption patterns.”

past two decades, how have you seen the print media and journalism industry evolve, and do you foresee web apps (e.g. Twitter, Facebook) as the primary source of news dissemination for the future?

VS: The rate of change in the media industry continues to accelerate. Technology has had a particular impact on the news industry. First the Internet, and now mobile platforms and social media have changed the game with Millennials leading the way.

At NBC, for example, our flagship news program is the Nightly News with Brian Williams. It still had a colossal audience, almost 10 million viewers every night. But I guarantee you that none of the students in this room looks at the time and says, “it’s 6:30PM – I have to get in front of the

TV!” So the question is – how do we reach all of you? Your primary media platform isn’t even your computer anymore but these devices (points to iPhone). How can NBC News or The New York Times or any news organization continue to stay one step ahead in order to understand how their audience is sharing and consuming news? This is what the whole industry is grappling with.

Having said that, a lot of the legacy platforms are still going strong.

Broadcast television is still powerful, many newspapers are profitable, and radio reaches nearly 100% of the U.S. population. But if you’ve read your Clay Christiansen, you know it’s vital for any company to be the source of its own disruption – to think about how they can compete with their own prof-

Above: NPR President Vivian Schiller tells an audience at the National Press Club that radio is still important, but the network is committed to delivering news on any platform users want.

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FEATURE

Above: Window at Twitter’s headquarters

itable legacy businesses before someone else does.

Those who don’t will neither succeed nor survive.

I do think we’re in for a longer period of media co-existing media than some thing. I do not think printing presses will be shut down in the next few years. There is no question that it is shrinking, but it’s still pretty vital and lets face it – a very convenient form factor. There’s something to be said about the random act of turning a page.

But the audience now is very promiscuous in its consumption patterns and the kind of loyalty people would have to one brand or one network is gone. We have so many options. We want to get news and information from a variety of sources.

20 | CORNELL BUSINESS REVIEW

How was working at a not-for-profit, NPR, different from working at the many for-profit organizations you have worked for?

VS: Working for a not-for-profit is not as different as you might expect. There is a popular misconception that “not-for-profit” means you don’t have to worry about making money. Nothing can be further than the truth.

Just because your primary objective is to the advance mission of your organization – which in the case of NPR is to inform and enlighten audiences – you still need to pay the bills.

When I was in NPR, the operating budget was about $160 million. If I could not raise at least $160 million plus $1 then we have a problem. So, from that

FEATURE

perspective, it’s business as usual.

With all of your experiences, was there a turning point in particular that enlightened you?

VS: I feel like my career has been a series of turning points. I have been fortunate to work for some amazing companies and have experienced it all – from being promoted beyond my expectation to being fired.

You learn from it all, the good and the bad.

You have had such a successful career. How do you see your career developing over the next decade?

VS: I want to have an impact. That’s my north star.

But that’s a pretty wide net! I’m keeping my options open and looking across a number of opportunities from media to not-for-profit, and even academia. But first, last and always “Can I make an impact?”

As a professional woman working in the industry for many years, what advice do you have for other women striving to be successful in industries dominated by men?

VS: I get that question a lot. I’ve spent my whole life in an industry dominated by men. But I’ve been lucky to have had great mentors. A lot of them were women, but I try to take gender out of the equation and just do the best work I can and contribute as best I can to my company.

I think the bigger challenge from women is selfdoubt. The pervasive “imposter syndrome” is inhibiting at best and self-destructive at worst. I’ve struggled to overcome those myself.

My best advice in terms of women is to acknowledge that self-doubt, find another woman to talk to and just try to push through it. Remember that your success is not an accident.

In 140 characters or less, what advice would you give to students seeking a career in journalism or technology?

VS: Some things can’t be expressed in 140 characters.

I would say the most important quality for a career in journalism is a voracious curiosity. If you’re not curious you’re probably going into the wrong line of work. The hallmark of every journalist I’ve even known is a hunger to know.

Then, there is focus on critical skills – particularly writing. I cannot express to you how important it is to be able to communicate well in writing even if you are a television producer, even in 140 characters. Sto-

ry sense helps as well. How to make the interesting important and the important interesting. And then to be willing to do almost anything to be in that job.

I see many people, particularly your generation, who are coming into the workplace now but have a sense of entitlement. They’ve graduated from an Ivy League school, won all these awards and got all kinds of trophies from pee-wee soccer. They want a job of their perceived stature. Well it doesn’t work that way when you’re entry level. You need to be willing to do anything. You need to volunteer for everything and that’s how you get ahead.

Do you recommend students to pick a career that drives them?

VS: Yes, but let me add an asterisk to that. I’m sure you’ve had hundreds if not thousands of times to follow your passion. Certainly that is necessary but it is not sufficient. Passion is just the beginning of the story that will be your career. The road does not run in a straight line. There will be detours and dead-ends.

Be open to all experiences and keep your eye on your broader goals and value, and you will find your way.

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SPOTLIGHT ENTREPRENEURS

Fiberspark F

iberspark is an Internet service provider that uses fiber optics to offer the fastest and most reliable broadband Internet in Ithaca. The telecommunications industry in the U.s. has been consolidating at an increasing rate as DsL Internet has failed to keep up.

This leaves the cable monopoly as the only option for high speed Internet for the majority of Americans. Cable giants often provide slower Internet speeds than what is paid for and also withhold decent customer service. Additionally, these cable giants often abuse their position as gatekeepers between the customers and online content in order to undermine companies like netflix that compete with the cable giants’ cable tV business. While undergraduates at Cornell University, Jeff shaffer ‘12 and Jay Lee ‘13 formed Fiberspark in order to address this problem. Jeff majored in Information science, and Jay transferred from Bioengineering into the Dyson school of Applied economics and Management where he concentrated in entrepreneurship.

What sparked your initial interest in entrepreneurship? Was it an experience at school or an aspiration you’ve always had?

Jeff: I come from a family of entrepreneurs and engineers, so I’ve always had that in the back of my mind as an option.

Figuring out that there is this set of rules that govern the world that are created by people, and that you can make your own rules and do something different has always been a really attractive idea for me.

Then at the end of my sophomore year I had the opportunity to join a startup that was just about to enter one of the top accelerators in NYC. Going through that experience, which was amazing, was what really made me realize this is for me.

Jay: After sophomore year, my friend called me. He had almost unlimited funding for a pharmaceutical startup so I joined. I was originally in Bioengineering, but got to be on their management team and figured out how a company works not just as an engineer, but also as a manager. There are so many technologies. What interested me in being a manager is that all you have to do is find a niche market, bring it to the market, and advertise it. It’s good for everyone because you don’t want to do research and development forever to make new things when there are already new technologies just sitting there. So at this time I wanted to change to management so I transferred to the Dyson School 22 | CORNELL BUSINESS REVIEW

junior year and I met Jeff in NBA 3000, a Johnson School class where you write a business plan. We were talking about Internet access and it seemed like it was a good time for us to start Fiberspark, and it worked out.

What is the biggest challenge you’ve faced in the initial years of your start-up?

Jay: We had so many, everyday.

Jeff: There is definitely one category of problems. It’s always this “chickenand-egg problem” where two things are prerequisites for each other but we have neither. What’s a good example of that?

Jay: Hypothetically, let’s say you are one of the first landlords we sold Internet service to and we are trying to get you to sign a contract. You won’t sign because we don’t have the credibility that comes with having existing customers. We can’t get credibility because no one will sign.

In the initial years the biggest challenge was convincing major clients to sign six-figure contracts. I told Jeff that we should go to the landlord across the street and he said, “No way, that’s not going to work.” I said, “Why not?” and we walked in.

Jeff: Now, we have the best landlord relationship with the guy who we walked into our first time. It was also our first major contract. He has essentially been an advisor to us.

Along the same lines, fundraising has been an interesting challenge as well.

We started out trying to raise money from banks by getting loans so that we wouldn’t have to give away equity in the company. But to get a loan, you need assets to collateralize the loan, and if you’re a small company then you don’t have assets. The whole reason we need the loan in the first place is to get the assets that the loan requires! That’s when we decided we would raise angel money.

How did you get the idea to found Fiberspark? What motivated you to create “a better kind of internet”?

Jeff: I studied Information Science as an undergrad and I was taking it in a different direction than most people were. I was specifically focusing on technology policy – the things that the Federal Communication Committee (FCC) covers. I was considering going to law school and working for the FCC to fix a lot of what I saw as big problems with the internet service provider and telecommunications industry, such as dominance by big cable companies and them having this gatekeeper power to do bad things to protect their TV businesses and hurt innovation on the internet. When I looked at the FCC, I saw that there were already smart people there making good recommendations, and it was just lack of political will. If I went that route, I would just be banging my head against a wall.

Then I had the experience of working for this great startup as an undergrad and I realized, “Oh, there’s another path I can take here that is addressing the same problem but in a completely different

SPOTLIGHT

Central New York. We don’t have a plan after that.

way.” That’s how Fiberspark was born.

It was an idea of something I wanted to pursue. As Jay mentioned before, we met in class and it was just a great pairing and we decided to start the company right on the spot.

Jay: We also matched in height. I’m from South Korea, which is number one in the world for fastest Internet speeds, and when I came to the U.S. I couldn’t believe the Internet and how slow searches were.

I was really frustrated, and Jeff and I looked into fiber optics.

What challenges did you encounter with the Ithaca renting situation and having time Warner already established in the area? How did you work to get past these challenges to setup Fiberspark service?

Jeff: One of the biggest challenges is that currently, the end user of our service is not the purchaser of our services.

Although, we do have a lot of landlords using our service in their office, so they are often end users too.

However, the tenants’ interests and needs are much different than the landlords’ needs. So it was really difficult at first. We’re just coming at it with, “We know people really want this, why aren’t you buying it?” But landlords are not the people who really have the pain point of, “My internet is slow and not reliable.

Every Friday night when I am trying to watch Netflix I’m getting the spinning pinwheel.”

So there was a lot of trying to align

the interests of the landlords and the tenants, and getting the tenants to be vocal about the problems they were having with their Internet service. The landlords do want to have happy tenants but if they are not hearing the frustration from the tenants, that’s not something that registers on their radar.

And then, not just through education and trying to align their interests, but trying to figure out what the landlords do want regardless of what’s going on with the tenants. That’s stuff like wanting to increase the property value, having fewer hassles, and saving money.

You spoke about your plans to expand throughout Collegetown. Where do you see Fiberspark expanding within the next few years? outside of Ithaca?

Jay: Right now it’s Collegetown for a year and a half. We are looking for locations, but we don’t know exactly where because it could be North, or West Campus, or downtown Ithaca, or the outer side of Ithaca. We have talked to the City of Ithaca and they are interested in economic devel“iT’s always This opment, so they could help with ‘chicken-andfinancing, in which egg probleM’ case we would where Two push to wire the Things are entire City. Once prereQuisiTes for each oTher it can get done, we were thinking of buT we have expanding across neiTher.”

Can you talk about the process in raising rounds of capital for Fiberspark and how you were able to pitch the startup to investors?

Jeff: One of the first things that happened when we started the business was two local Cornell entrepreneurs that had had success in the past gave us a little startup capital. That initial relationship and that initial money was really all about connecting through a mutual interest and connecting on an emotional level – showing them that this is something that matters, something that we cared about, and that there’s potential.

But who knows really what it is because it was such an early stage thing.

We’ve gone from there to do a little bit of friends and family stuff and that was easy because it was like, “Hey I’m your son. Can I have some money?” And now we’re really raising our first round of substantial outside capital. We’re still calling this a seed round even though we had that initial capital at the beginning.

Now it’s still about the emotional side and that connection but it’s really more about numbers – showing that this is a business that makes sense and is going to make money. And yes, other stuff matters – that the ideals we’re striving for are important – but at the end of the day, it’s about what the return on investment and profit margins are.

What is the most rewarding part of founding Fiberspark?

Jay: The best thing is probably getting the contracts signed.

Jeff: For me, it’s doing something that’s really important and that I really care about. It focuses me and motivates me like nothing else. Just knowing that you’re being useful to the world and being way more productive than I could be in any other circumstance, is just really rewarding in and of itself. Closing hundred to thousand dollar deals is also nice.

CORNELL BUSINESS REVIEW | 23

SPOTLIGHT ENTREPRENEURS

Steven Izen S

teven Izen ’13 is the founder and CEO of lokai – a bracelet infused with elements sourced from the highest and lowest points on Earth. Steven grew up in Brookline, Massachusetts and graduated from Cornell University’s Dyson School of Applied Economics and Management.

While a freshman at Cornell, Steven began to develop lokai and has seen incredible growth in the past six months. Steven currently resides in New York City where he is continuing to build the lokai brand.

Did Cornell’s many outlets for entrepreneurial students play a factor in your decision to study here? What was it that made you choose Cornell?

Steven Izen: The fact that Cornell has such an amazing business school definitely affected my decision to come to Cornell. In addition to the academics, I wanted to be able to play a division one sport as well as having a work-life balance through social means. I felt like I could get all three at Cornell: a social scene, running varsity track for four years, and an amazing education.

What does your daily schedule as CEO look like?

SI: lokai launched about a year and a half ago. It was May 2014 when lokai exploded. Up until that point, it was just me working on it by myself. I was doing everything from customer service, to social media, to marketing, to production, to distribution; I was doing everything. Now, we have 10 employees so my day-to-day is more overseeing each person who has a specific role. I manage all of them and really try to work on the big picture things.

How do you incorporate the message of balance in your 24 | CORNELL BUSINESS REVIEW

marketing or in the company in general?

SI: I really want the company to be fun – a place where people want to work. I feel like the attitudes the employees have in the company will directly affect how customers and people who are outside the company view lokai.

We are constantly trying to do fun things in the office. We use some pretty cool chairs. We usually go out and have team nights where we go do an activity.

For instance, next week we are going Escape the Room in New York City. They lock you in a room, and it’s a big puzzle where you have an hour to get out.

Doing activities as a team outside of the workplace really helps with creating and maintaining balance.

Did you find it difficult in the early stages to relinquish control over your brainchild, or was the input of others welcome?

SI: I definitely had to find a balance between the two because it was my idea, and I thought I was right on a lot of things. I thought things needed to be done my way. At the same time, though, I also knew that I was a teenager at the time and that I didn’t have the experience of some of the older and more successful people around me. I really learned to take advice well and knew that they only wanted what was best for the company.

Their advice was from knowledge that they had gathered in past positions that

would help lokai grow faster versus me doing it alone with trial and error.

Did you at any point worry that Lokai may fail, or consider giving up and taking the more conventional career route?

SI: No, there really never was a time. I was always the kid who believed in what I was doing and never thought that I would fail. I think as an entrepreneur if you ever believe that your company is going to fail and don’t fully believe in it, then it’s not going to succeed. You have to be crazy enough to believe in it and put all your time and energy in it to make it work if you want to achieve success. If you start a few other jobs or you do it part time, it just won’t work.

What were the components in developing your product? Can you describe the many steps you had to undertake to make sure these bracelets were ready and of quality.

SI: I came up with the idea for lokai about five years ago after my freshman year at Cornell. I was on the beach with my family and friends thinking about how lucky I was to be there, but my grandfather was diagnosed with Alzheimer’s that week. It was really tough for me because he had always been someone who I looked up to; he taught me how to play pool and golf. That was one of the hardest times of my life.

A few months earlier I was at The Dead Sea, and everywhere you go, you see these big Below: The lokai bracelet, which contains water from Mt. Everest and mud from the Dead Sea signs that say, “Come to The Dead Sea, the lowest point on earth.” So I had that in my mind, and I knew Mount Everest was the highest point.

I kind of put it together and started working. I was able to find local organizations at both locations to source the materials.

If you check out our website (mylokai.com) we recently launched a documentary of our Sherpa expedition where we filmed our crew

SPOTLIGHT

going up the mountain and collecting the water for the white bead.

We see that 10% of the net profits go to charity. What are some charities you have worked with? Do they have any personal significance?

SI: Being a company that’s all about the message of spreading balance, we really feel strongly about giving back to our community and to people in need in order to stay hopeful.

We recently just started our partnership with Pencils of Promise, which is a quickly growing and an amazing non-profit that builds schools in thirdworld countries. It’s a partnership that we feel really strongly about and it’s going to be something special. I’m sure you will see a lot of things coming out during this holiday season about it.

How do you see the lokai brand evolving over the coming years, and do you have an exit plan in mind or are you content “riding the wave” for as long as it goes?

SI: As you know, lokai is a single product. The whole premise of lokai is not the actual bracelet; it’s the message, and that’s what we’re really spreading. We feel that we’re extremely young and in time will develop a product line that aligns with our message that our customers will love.

What is the most important thing you learned through your startup experience that every aspiring entrepreneur should know?

SI: There are a couple things that definitely come to mind. First is that everything takes twice as much money and twice as much time as you’d think. It’s really incredible how you think it’s easy to just build a website, start a company, and make products. But it’s really not. That was definitely the first thing I learned.

That was a big shock and made me understand that you really need to have a plan and be prepared. If you’re going to go in with a full plan, then be ready to execute and really believe in yourself because it is going to take money and time. If you are just doing it as a hobby, cutting corners, not spending money

where it needs to be spent, and not putting in the hours, then it won’t succeed.

The other thing I’ve learned is that only experience can prepare you for the fast issues that arise that need immediate attention. There are always things popping up that you can never prepare for. I think that’s one of the most amazing lessons that I’ve learned starting my own company.

I’ve learned so much on how to run a company and how to adjust to things that happen or I think will be thrown at me.

I now know how to handle different types of positions, jobs, and situations. So if things come up that need to be handled promptly, I know what to do.

Do you feel like summer internships would help learn these lessons, or do you feel it is better to jump right into your company and start it up right “THE WHOLE PREMISE OF away?

LOKAI IS...THE MESSAGE, SI: I actuAND THAT’S WHAT WE’RE ally never SPREADING.” had a summer internship. I had always worked on lokai during my summers between college years. I have actually never had another job in my life. I had my own company in high school which definitely helped start lokai, but I never worked in a corporate setting.

What company was that?

SI: I started a custom wood pen company. I loved woodworking, and I got really into it. My friend and I, by the end of the summer of our junior and senior years, had a pretty successful high school

business.

To answer your question, though, I would say internships definitely help. I would say that if you are an entrepreneur and you want to do an internship, don’t get an internship at a big, corporate company. They will put you in a role where you do the same thing every day, and it will not prepare you for what you need to know when starting your own company.

I would say, go work at a startup. We actually hire interns. We had a couple summer interns, and now we have a fall intern. They are exposed to and experience so many things that you would never experience in a larger corporate office. However, in a startup, you don’t have the people or resources; you use everything and everyone that you can.

Being an intern in a startup would be an amazing experience for anyone looking to be an entrepreneur in the future.

CORNELL BUSINESS REVIEW | 25

FINANCE

What You Didn’t Know About the Defense Industry

volatility. Amidst this volatility, the aerospace and defense industry has seen a significant growth in market capitalization, perhaps a direct result of investors seeking stable companies. Lockheed

BY ETHAN COY Martin, for example, has experienced a 40% rise in stock price in the past year, »» Military contractors have overcome the pain of sequestration better than expected. which has increased its market capitalization to almost $60 billion. »» The military industrial complex Eisenhower feared is alive and well.

Wall Street analysts originally feared that sequestration would limit defense contractors’ access to government funds.

In fact, a projection done by George Mason Professor Stephen Fuller in conjunction with the Aerospace Industry Association estimates that half a million jobs would be lost in the defense industry as a result of sequestration. However, the impacts were quite contrary. For one, defense contracts tend to span many years and the effect of the sequester, therefore, did not substantially impact bottom line profits, explains Marjorie Censer and Jim Tankersley of the Washington Post. In addition, because of the defense industry’s strong lobbying arm, it has continued to thrive. Even as other businesses and his colleague George Ferguson write, In his final address to the with government contracts have had to “Mississippi Senator Thad Cochran’s asAmerican people in 1961, President tighten their belts, defense contractors cendancy to Appropriations Committee Dwight D. Eisenhower warned of the have thrived as threats from ISIS and chairman in a Republican Senate, and power of the growing “military induselsewhere force President Obama to support from shipbuilder Huntington trial complex.” To Eisenhower, having a work with Congress on funding military Ingalls, may help Navy programs and the well-armed nation was imperative, but operations. And, because of America’s second-largest employer on the state’s he warned about the repercussions of reluctance to send more than military coast. ” Lockheed Martin’s Joint Strike the defense industry wielding influence. advisors to Iraq and Syria, America has Fighter program, expected to cost over He encouraged the American people to fought a war largely through the use of $1 trillion over its 50+ year lifespan, albeware of the “danger that public policy UAVs, unmanned aerial veready 70% over budget, could itself become the captive of a scihicles, and powerful fighter has infuriated Senator entific-technological elite.” A look at the jets. Despite fears that seJohn McCain.

Speakdefense industry today would reveal that U.S. aerospace and defense questration would stifle ing on the Senate floor in Eisenhower was right. industry encompasses major corporations valued defense industry growth, June of this year, he said, According to Fidelity, the U.S. aerotogether at over the defense industry has “this is, of course, totalspace and defense industry today enoutpaced the S&P since ly unacceptable.

It is the compasses major corporations valued August 2, 2011. kind of cronyism that together at over $600 billion. And, by Although defense conshould make us all vigilant no accident, many of the companies in tractors seem to be thriving, they have against, as President Eisenhower warned this industry are headquartered around begun to diversify their business segus over 50 years ago, the military-indusWashington, D.C. The defense industry ments. Lockheed Martin, known for its is tremendously effective at lobbying, trial complex.” aeronautics and missile systems, recentHowever, it’s not just political lobwhich procures government contracts. ly announced a design breakthrough in bying that has caused defense budgets According to Open Secrets, the defense energy production that it believes would to balloon. Over the past year, there has industry spent $134 million lobbying deliver functional fusion energy by 2020. been a tremendous increase in geopoCongress in 2013, including almost Critics, however, have pointed to the litical conflicts, which have destabilized $400,000 to Senator Thad Cochran (Rlack of information Lockheed has remarkets and increased global economic Ms). Bloomberg’s Douglas Rothacker

$600bn

26 | CORNELL BUSINESS REVIEW

FINANCE

leased about its discovery, and doubt the In terms of geopolitical conflicts, feasibility of such technology. Northrop ISIS is not the only global threat fuelGrumman, another defense company, ing defense spending. It is well known has recently begun to diversify its busithat China’s military aggression has put nesses by establishing itself in the cyberpressure on Japan to increase its milisecurity market. Customers have entrusttary expenditures, however, the threat ed Northrop Grumman with tremendous China poses to the United States is not amounts of sensitive data (in many cases well publicized. For example, a late draft the customer is the U.S. government), of the annual report of the bipartisan and therefore, they must U.S.-China Economic and find a way to keep this Security Review Cominformation safe. So, if mission described China’s companies like Northrop increased space warfare Grumman develop techprograms. These programs nologies equipped to keep pose a threat to Amerispent by the defense the U.S. government’s incan satellites, which are industry lobbying Congress formation safe, there is an vital to United States nain 2013 opportunity to leverage the tional security. The report technology and offer simiconcludes that, Congress lar services to other companies. should increase funding for naval de-

$134 million

Tax Inversions in the U.S.: We Gotta Get Out of This Place

BY Hunter Bosson » » American firms are pursuing tax inversions in droves to avoid the United States’ uncompetitive corporate tax system.

Following a summer filled with foreign mergers, tax inversions have become the innovative and morally dubious business practice of 2014. As American firms shift their headquarters overseas, widespread claims that a continued corporate exodus will critically hurt both tax revenues and the United States economy have sent regulators, politicians, and the IRS into a frenzy. Blame has largely been assigned to corporations, but the trend has a thick silver lining. In addition to raising awareness of the horrible shortcomings of American corporate taxation, these inversions may prove to help the U.S. economy.

Tax inversions are a benign response to painfully hostile American corporate tax policy. Corporations purchase smaller foreign companies in countries with lower corporate tax rates, and then use

the foreign company’s headquarters as that of the newly merged corporation, bringing the company within the tax jurisdiction of the more corporate-friendly foreign country. Inversions involve neither American job losses nor capital flight; effectively the entire change happens on paper. Kimberley Clausing of the Tax Policy Institute argues that firms embark on this otherwise trivial accounting trick because American corporate tax policy has “a high statutory tax rate, a worldwide system of taxation, and limits on income shifting.” Not only does the United States’ corporate tax rate peak at 39.1%, the highest in the OECD, an organization of wealthy nations whose average corporate tax rate is 25%, but also profits earned by American firms are taxed regardless of where they were earned. Most governments do not tax

ployments in Asia, among other expensive expenditures. If Congress takes these threats seriously, the defense industry would receive yet another significant boost.

President Eisenhower had a point; defense contractors do have significant political influence. But, Congress would not be agreeing to the demands of lobbyists if there were not such credible threats. And as the Senate now goes back into the hands of the Republicans, expect even more support for the defense industry coming from Capitol Hill. As long as the world remains dangerous and its future uncertain, defense contractors will continue to thrive.

Ethan Coy (ekc72@cornell.edu) is a sophomore at Cornell University majoring in Applied Economics & Management.

foreign earnings, only those earned by foreign firms within their borders. However, American companies often face two rounds of taxation – domestic and foreign. There is somewhat of a loophole; earnings cannot be taxed in the U.S. until they return from abroad. Consequently, many companies choose to avoid the United States’ high corporate tax rate by accumulating profits overseas where earnings are out of the IRS’s reach. This has led to a “large accumulation of unrepatriated foreign cash,” now totaling more than $1.95 trillion, which Clausing argues has driven companies to invert. After shifting their tax jurisdiction abroad, firms can pay the new, lower tax rate and invest their earnings anywhere, including the United States, without having to pay the IRS on the earned profits.

Pharmaceutical firms in particular have seen a wave of tax inversions.

Many pharmaceuTax inversions tical companies are a benign generate massive response overseas revenues, to painfully leading to large hostile buildups of foreign American cash that make incorporate tax versions particupolicy. larly enticing. On CORNELL BUSINESS REVIEW | 27

Inversions are neither radical enough to be corporate deserters nor mundane enough to be overlooked; they are simply firms’ solution to a broken system.

September 19th, Horizon Pharma finished its $660 million acquisition of Ireland-based Vidara Therapeutics International, enjoying a much lower corporate tax rate of 12.5%. Medical device maker Medtronic is currently undergoing a $43 billion merger with Covidien, based in Ireland as well, and expects to see significant tax savings. Even Pfizer, who has accumulated $69 billion overseas, attempted a bid for inversion with its failed acquisition of Astrazeneca, based in London.

Other sectors have seen tax inversion growth, but have tended to be less obvious. Many tech firms have accumulated massive overseas holdings; Microsoft, Apple, and IBM have collectively doubled their foreign cash to more than $180 billion. After pharmaceuticals, service industries have seen the greatest corporate flight. For example, Burger King finalized a merger with Ontario-based Tim Horton’s for $11.5 billion on August 26th of this year. Although Ontario has a lower top rate than the United States, at 26.5% it can hardly be considered a tax-friendly jurisdiction. The merger fits with Burger King’s focus on international expansion and offers menu resources and diversification to better compete with McDonald’s McCafe and Starbuck Coffee. Although the merger would have been a reasonable investment even without the prospect of lower taxes, its timing 28 | CORNELL BUSINESS REVIEW

and nature suggest it to be an inversion.

The most vocal concern about tax inversions is the loss in tax revenue.

However, this loss could be offset by new investment. The nonpartisan Joint Commission on Taxation predicted a tax revenue loss of $20 billion over the next ten years. This is considerable, but a relative drop in the bucket for the federal budget, and it excludes new revenues generated from the potential investments. After tax inversions, firms will be more willing to bring earnings to the United States, knowing that their earnings will not be taxed. This incentive would make investing the tremendous quantity of cash held overseas in the United States much more appealing and common, contributing to economic growth. The net impact would be more jobs, greater profits, increased shareholder value, and potentially higher tax revenues from the new growth (as the United States still taxes foreign firms’ profits earned on American soil, capital gains, and income from dividends, all of which could increase). Tax inversions are less effective than meaningful tax reform, but for now they appear to be the lesser of two evils.

In an ideal world, Congress would either repeal or significantly lower the corporate tax rates; however, such action is highly doubtful. Inversions have led to more political rhetoric than policy solutions, peaking with Obama’s statements

that, “Some people are calling these companies ‘corporate deserters.’” Since then, he has used Congress’s gridlock as an excuse for sending Secretary of the Treasury Jack Lew to punitively combat inversions. The Treasury imposed restrictions on overseas asset restructuring and loans between subsidiaries of foreign corporations, making overseas cash harder to bring into the U.S. tax-free even after an inversion. There is some evidence, such as the collapse of the AbbVie-Shire merger, that its measures are making an impact. Although AbbVie CEO Richard Gonzalez admits that the “unprecedented unilateral action taken by the U.S. Department of Treasury” had “destroyed the value in this transaction,” the Treasury has created an insufficient solution to a systemic issue: the U.S. tax system needs reform. It is too complex, too expensive, and disproportionately harms domestic firms. Punishing inversions will not change these underlying facts.

Despite all of the bluster and rhetoric surrounding tax inversions, meaningful tax reform is unlikely. Congress’s inclination towards inaction has only intensified with corporate taxation’s addition to the policy agenda. Even with Republican control of both houses of Congress, the issue remains too divisive for a tax bill to garner the votes and presidential signature to become law. And as long as the tax system remains ineffectual, it is hard to blame businesses for wishing to circumvent it. Inversions are neither radical enough to be corporate deserters nor mundane enough to be overlooked; they are simply firms’ solution to a broken system. Until we fix our tax system, we must wait to use the corporate cash waiting at the border.

Hunter Bosson (hb387@cornell.edu) is a freshman at Cornell University majoring in Economics.

INTERNATIONAL

Abenomics: A Revival Kit for Japan?

BY JEFFREY FUNG

THE INFAMOUS “LOST DECADE”

Before Shinzo Abe was re-elected to the position of Prime Minister of Japan in December 2012, the country had toiled through deflation for two decades. This long-standing deflation was triggered by many factors, including the bursting of the Japanese real estate bubble. Other factors that influenced the long-standing deflation included the collapse of the stock market in the late 1980s and the erosion of purchasing power, which stunted Japan’s economic growth. Eventually, this accumulated into what was known as the “Lost Decade”. Recovery was slow, and previous attempts to revitalize Japan’s economy were not successful.

Just as markets began to show signs of improvement in 1996, the government raised its consumption tax from 3% to 5%, sending the Nikkei stock market down by over 75% and erasing any economic progress that had been made.

Japan’s economic demise paved the way for the reelection of Shinzo Abe to the position of Prime Minister as voters yearned for a much-needed reinvigoration of the Japanese economy.

ABENOMIC - AN UNPRECEDENTED APPROACH

In hopes of bringing about a positive change in the Japanese economy, Abe introduced a three-pronged strategy. This strategy, called the Three Arrows of Abenomics, aims to reflate Japan’s moribund economy through monetary, fiscal, and structural policies.

The first arrow of Abenomics is monetary easing. Monetary easing refers to injecting liquidity into the market through bond purchases and simultaneously keeping interest rates low to bolster asset prices, boost consumption, and lift exports through a weaker Yen. The second arrow involves a massive fiscal stimulus to revive economic growth immediately through government spending; in fact, over $120 billion was committed to public works and infrastructure investment as soon as Abe took the helm.

Last but not least is the third arrow: to spur sustainable growth through structural reforms including tax breaks, deregulation, and higher

participation of women in the workforce.

IMPACT ON DOMESTIC BUSINESS

Through his policies, Abe aims to provide the Japanese economy with much-needed productivity and business efficiency. By supporting long-term growth with structural reforms, Abe hopes to solve one of Japan’s most pressing issues – its ageing population. An ageing population greatly increases government spending on social welfare.

In addition, this necessitates a larger number of workers in order to compensate for the retired population, which exerts even greater pressure on the economy. Abe was determined to tackle this issue through streamlining immigration approvals and encouraging more Japanese women to enter the workforce. Increasing the employment of women serves the dual purpose of replenishing a declining working-age population and adding to the household disposable income. Not only will this strategy reduce pressure on current Japanese working citizens to provide for the retired, but it will also boost the economy through eventual improvements in living conditions and increases in domestic spending.

Japan has the lowest rate of female employment amongst developed nations, with women holding just 1.6% of executive roles at public companies. While many middleaged women want to return to work after giving birth, they are constrained by a lack of adequate day-care facilities. To remove this barrier, Abe aims to substantially increase daycare availability through the creation of 200,000 centers by 2015. To further demonstrate the importance he places on this initiative, Abe has submitted a bill requiring companies to declare their targets for the number of women in executive positions, with a goal of having 30% of all companies’ management positions filled by women by 2020. Since the launch of this campaign, improvements have been observed, and last year, female graduates had a higher rate of receiving job offers than male graduates for the first time. By implementing policies aimed at maximizing opportunities for employment and wage growth, Abe is adamant that there Left: Prime Minister of Japan Shinzo Abe

CORNELL BUSINESS REVIEW | 29

INTERNATIONAL

will be a sustainable improvement in the outlook of Japan’s domestic economy.

Abenomics Prime Minister Shinzo Abe’s approach to breaking out of the deflationary spiral involves three major pushes: the so-called “three arrows.” Their effects are multi-faceted, but each is designed to ultimately spur economic growth.

IMPLICATIONS FOR THE GLOBAL ECONOMY

As a result of Abenomics, Japan has seen steady improvement in the past few years in its labor market and stock market. In August 2014, the unemployment rate dropped to around 3.5% and retail sales increased by 1.2%. The Bank of Japan has been purchasing government bonds at the rate of $60 to $80 billion each month; interest rates are kept close to zero. Such methods were implemented to stimulate spending in the economy by providing the Japanese with easier access to money.

These recent improvements have turned Japan into an increasingly attractive trade partner in the eyes of other nations.

Notably, with the introduction of Abenomics, the Yen depreciated from 80 Yen per 1 USD to 108 Yen per 1 USD. This is virtuous for Japanese manufacturing and export businesses as their products are now more competitive in overseas markets. This feeds into corporate earnings and translates into an increase in business investment domestically. In fact, the Tankan Large Manufacturer’s Index, which measures the business confidence in large manufacturing companies, surged from its previous negative values to a value of 16 by the end of 2013. Exemplifying this expansion is Mazda Motor Corp, which recorded a remarkable Year-over-Year increase of 12.6% in its deliveries to the U.S. and an overall export increase of 19.2% within a year of the start of Abenomics. All of these signs point to the strengthening of Japan as an exporting nation.

The benefits of a devalued currency come at the risk of triggering retaliations from Japan’s export rivals or trading partners. As Japan’s exports become more competitive through a weak currency, this will depress manufacturing in the regions that import from Japan such as the U.S., while taking employment opportunities away in those countries.

Tension with export rivals will heighten, particularly in the case of China, which has been under pressure from the U.S. to 30 | CORNELL BUSINESS REVIEW

allow China’s currency to appreciate.

Abe desires to make it easier to do business in Japan for both domestic companies and international investors who have long complained of overregulation. To promote Japan’s openness for business, Abe has led Japan to participate in negotiations on the TransPacific Partnership, a regional free trade agreement to facilitate a friendlier trade environment with partner countries.

Regulatory reforms are planned and targeted to improve business efficiency in the areas of healthcare, energy, environment, and employment. This includes expanding the scope for mixing public insurance and private payment for medical treatment and allowing for more flexible rules for terminating employment. The latter change has a particularly significant ramification as it means that employees can no longer expect to spend the majority of their career with a single employer. A stronger and more efficient Japanese economy, combined with Japan’s entrance into

free trade agreements, will create many market opportunities for companies of other nations such as the U.S. CONCLUSION

Shinzo Abe’s primary goal, as stated in his speech to Japan’s Lower House of Representatives is “to deliver the sense of economic recovery”, to ensure that recovery continues at a sustainable pace, and to encourage businesses and consumers to continue to spend.

His three-pronged strategy is an unprecedented approach both in terms of the tools employed and their magnitude.

The success of Abenomics has already had a strong impact on Japan’s domestic economy. It is clear that as Abenomics continues to run its course, it not only will improve Japan’s economic sustainability, but will also have far-reaching global economic impacts.

Jeffrey Fung (jtf83@cornell.edu) is a sophomore at Cornell University majoring in Economics.

INTERNATIONAL

The Indian Economic Outlook and What It Really Means

BY SAGAR GALANI »» Indian markets have started to outperform their forecasts; The International Monetary Fund (IMF) has revised India’s 2014 GDP growth projection to 5.6%.

Over the course of this past year, the Indian stock market has seen its largest growth in the last 11 years. Its free-float market weighted index, the BSE Sensex (Bombay Stock Exchange Sensitivity Index), has gone from a value of about 20,000 points in January 2014 to about 26,000 points today. The International Monetary Fund (IMF) has revised India’s 2014 GDP growth projection to 5.6%.

Foreigners have boosted local stock holdings by USD 13.8 billion as of September 2014 – the most among any Asian market tracked by Bloomberg. Why is there a newfound optimistic view on the Indian economy? Is this optimism realistic and justifiable? How will these factors affect the American economy?

NEW-FOUND OPTIMISM

India’s recent parliamentary elections in May of 2014 saw a significant change in terms of its political leadership. The Nehru-Gandhi led Congress Party, which had led the country for most of its time post-Indian independence in 1947, lost by a landslide to the Hindu nationalist party Bharatiya Janata Party (BJP), resulting in Narendra Modi becoming the new Prime Minister of the country.

Modi is lauded for his work as the Chief Minister of the state of Gujarat (2001-2014) for significantly boosting foreign investment and overseeing annual economic expansion of 10% during his time in office. His devotion to the implementation of a free market and focus on welcoming foreign investment is said to be the lead cause of Gujarat’s growth. He played a huge role in reducing bureaucracy and corruption through promoting transparency and providing interest subsidies to companies investing in the state.

More specifically, he was responsible for

digitizing a large section of the procurement process. This allowed investors to submit bids for projects online, reducing corruption issues, a significant deterrent to investing in India previously. While detractors argue that the increase was marginal to the domestic average, there is no doubt that masses perceive him as an individual capable of drastically improving the national economic situation.

He has given a new sense of confidence to the population, as can be demonstrated by recent financial trends.

JUSTIFIABLE OPTIMISM?

Economic indicators have supported this growing optimism as well. Wholesale inflation came to a 5-year low and the trade deficit in July saw the biggest decline in a year, from $190 billion last year to $130 billion. The reduction in inflation addresses one of India’s biggest concerns: income inequality, in which it shows the weakest statistics of all emerging economies. Modi’s new campaign, “Make in India”, attempts to boost exports in the country through supporting its manufacturing sector. To employ its booming population, estimates say that the country needs to have 1 billion people employed every month, which is why creating jobs in India is such an important responsibility for the Indian government.

The new government’s goal is to have a 10% growth in domestic manufacturing per year.

POTENTIAL OBSTACLES

However, for foreign investors to be willing to set up shop in India, its retrospective tax laws and archaic land acquisition rules must be addressed; issues that have not been dealt with in the new government’s budget.

Most simply, retrospective taxes are tax rates based on past cash flows. They are applied to indirect transfers and taxes on goods and services, proving to be a huge burden on large corporations.

Indirect transfers are simply a transfer of shares or interests in a foreign company when the transfer derives its value substantially from underlying Indian assets. The government has addressed these issues by evaluating large disputes on a case-by-case basis, Vodafone most recently won a $490 million tax dispute.

Furthermore, according to a land acquisition rule enacted in 2013, businesses will need to pay for the resettlement and relocation of dislocated people in addition to the market value of the land.

This causes costs to increase by up to two to four times.

IMPACT ON AMERICAN ECONOMY

According to Forbes, “U.S. exports to China and India stand to grow at an average of nine percent each year through 2030.” Why might the United States prefer India over China as a trading partner? Demographically, India is estimated to have the highest population and largest middle class in the world by 2030. It is predicted that 23% of middle class spending globally will come from India, equating to $13 trillion per year in spending. India’s consumer base is large and will thus cause a growing local demand for goods. More specifically, favorable government policies attracting foreign investments will contribute to export growth.

INDIAN-AMERICAN ECONOMIC RELATIONSHIP

Bilateral trade between the U.S. and India has grown more than 8 times over the last 20 years, while U.S. exports to India have increased by 20% annually. An important factor that has limited the growth of this relationship, however, stems from a lack of agricultural trade. For example, the WTO recently ruled that India violated global trade laws by banning poultry imports from America in 2007. Despite these issues, Modi has expressed interest in increasing trade with the United CORNELL BUSINESS REVIEW | 31

INTERNATIONAL

States’ public and private sectors. For the past two years, India has seen its lowest GDP growth rate (below 5%) in about 250 years. These low growth rates have reduced domestic consumer confidence and contributed to corruption scandals and policy issues with regards to tax and foreign investment. If anything, Modi is focused on eliminating these issues.

RELEVANT SECTORS

There has been demonstrated interest between India and the United States in developing ties in the energy and defense sectors. An attractive, albeit complicated possibility, would be joint production and development of technological products and other equipment. Another sector that has been discussed is the education sector, which could be immensely beneficial to India due to its large labor force. According to an official in the Human Resource Development ministry, “[Improving] The university ranking is one area where we would like to improve India’s standing and can learn from U.S. institutions.” According to the U.S.-India Educational Foundation, “Three rounds of institutional collaborations in areas ranging from sustainable development, climate change and renewable energy

to health, engineering and pure science have already taken place.” Such initiatives are intended on being further developed.

During Modi’s visit to America, he spent time building relationships with the CEOs of various corporations, including Google, Citigroup, and PepsiCo. While no policies were implemented between any of the parties, these talks signal a push for a stronger relationship between the two countries and may have implications on Indian immigration and employment laws in the United States.

Modi’s recent visit to America was also focused on developing a stronger relationship with the three million Indian-Americans currently residing in America. Attracting Indian-Americans back to India could result in an influx of skills and expertise to develop the Indian workforce.

According to the Indian Embassy, the largest number of Indians who come to work in the U.S. do so in the technology sector. Modi has announced plans to build ‘100 smart cities’ across India.

Smart cities refer to cities that use information technology to solve demographic issues. For example, when you move into a new apartment or even buy an old one, you have to rework the space (e.g. rip

The Umbrella Movement Through an Economic Lens

BY TODD WEI » » Hong Kong’s economic structure in the face of mass demonstrations. As protestors continue their fight for democracy, economic concerns have begun to take root.

Twenty-five years after China’s largest modern day demonstration in Tiananmen Square, Hong Kong students have reignited a flame of protests against their governing authority. On September 30th, protestors began to fill the streets, calling for democracy after Beijing announced that the Chinese government would largely determine the 32 | CORNELL BUSINESS REVIEW

candidates running for Hong Kong’s next chief executive. Like many past political movements, the region’s law enforcement is actively trying to control these demonstrations. In Hong Kong’s case, police employed tear gas canisters, pepper spray, and brute force to restrain the growing number of protestors.

The unrest began when the leftist

the ceilings off, break walls down) to get wireless and embed electric and plumbing systems. Smart cities solve this issue by anticipating such issues and having the technology built in. Such projects require more technological resources and could be an opportunity for trade between the two nations.

CONCLUSION

It is important to recognize that the Indian economy sees rapid economic growth prospects. In a survey recently conducted, American business leaders replaced Japan with India as the “second most promising Asian market for business expansion” after China. However, much of the growth has come from the potential future prospects of the country. While future prospects look bright and economic indicators are showing legitimate progress, long-term growth will be dependent on the implementation of national infrastructural development and bilateral investment treaties.

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

Standing Committee of the National People’s Congress announced that Chinese authorities plan to screen any candidate running for Hong Kong’s chief executive position in 2017. This electoral reform contradicts the Congress’ agreement of 2007 that the 2017 election would allow universal suffrage. As a result, Occupy Central, a civil disobedience campaign led by Hong Kong University Law Professor Benny Tai Yiu-ting, staged a sit-in at the Central Government Complex to protest the reform and call for the current chief executive, Leung Chun-ying, to step down. Leung, a particularly unpopular leader, is widely seen by protesters as favoring China’s nationalist interests over Hong Kong’s.

The Chinese Communist government, on the other hand, is mainly concerned with preventing the escalation

of Hong Kong protests and stopping the spread of anticommunist sentiment.

They are not ready to see their Special Administrative Region (SAR) have its own freely elected leader, especially one who could pose potential political and economic problems for China. Hong Kong is one of China’s most prosperous cities, and Beijing does not want to lose control and influence over the economically significant region. During the second week of protests, Leung stated in an interview on TVB (Television Broadcast Limited), one of Hong Kong’s main television broadcasters, that there is “almost zero chance” of China reversing its decision to limit universal suffrage in Hong Kong.

Hong Kong’s underlying economic issues may add fuel to the political uproar. Despite an unemployment rate slightly above 3% and a generally increasing GDP, Hong Kong seems economically stable at its surface. However, beyond these numbers, there is an entirely different economic story. In a 2013 report, around one fifth of Hong Kong’s population was actually living below the poverty line. In a city with a surging number of millionaires and luxury buildings, up to one million people still live in poverty.

Property prices are also continually rising, and wages are not rising relative to these costs.

Chief executive Leung Chun-ying has firmly stated his opposition against the movement, saying open elections would skew government policies towards the poor. He argues that Beijing’s screening of potential candidates is a way to decide what is best for all of Hong Kong’s people, from the wealthy to the underprivileged. To Leung, the Umbrella Movement is a numbers game that appeals to the half of Hong Kong’s people that make under $1800 a month. He foresees that if open elections occur, government policies would cater primarily to the poor and possibly turn Hong Kong into a welfare state where the well-being of every citizen becomes the top priority.

Leung argues that this type of politics fails to resolve income inequality and lack of social mobility. Instead, he believes that

business-friendly policies that maintain the strength of Hong Kong’s wealthy corporations and economy will more effectively address economic disparities.

Ne ve r t h e less, secondary effects of the Umbrella Movement extend further than the borders of Hong Kong.

Living under the one country, two systems structure, Hong Kong has become a major financial hub for China. Many foreign companies and financial institutions – Apple, McDonald’s, and J.P. Morgan to name a few – are eager to expand business in the region because of Hong Kong’s secure investment environment and fair, transparent court system. Additionally, the SAR has a developed debt market with favorable borrowing conditions such as high liquidity and few restrictions on borrowing. Due to these structurally advantageous factors, economists believe that political tensions in Hong Kong will not greatly affect investor confidence. However, prolonged demonstrations could make business in the region much less appealing to foreigners. It is also difficult to predict how Hong Kong’s business policies could change, assuming the citizens will freely elect their new chief the Umbrella executive in 2017.

If the protests Movement is a numbers game escalate, massive disruption will prethat appeals to the half of vent the flow of everyday life. Already, Hong Kong’s protesters are ocpeople that cupying the streets, make under $1800 a month. causing huge traffic

jams and even tram cancellations. Hong Kong’s current reputation as a hub of international trade remains strong but could slightly diminish over time with these unrests. Given the economic troubles Hong Kong faces, in an extreme case, this unrest could lead to an economic recession. A number of schools, office buildings, and banks closed at the start of the protests. Furthermore, the approaching retail holiday season is Hong Kong’s busiest shopping period, elevating concern that retail sales will drop. A persistent decline in sales may lead to a contraction of the retail industry, which in turn could scare away new and old investors. International businesses may flee to calmer areas, and these relocation costs may disrupt the flow of income not just for those companies, but also for Hong Kong’s residents. As long as these protests last, it remains to be seen where the Umbrella Movement will ultimately lead Hong Kong.

Todd Wei (tcw59@cornell.edu) is a sophomore at Cornell University majoring in Biometry and Statistics.

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