It’s a “We” World After All: Inside WeWork’s $20 Billion Valuation

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In September 2017, WeWork became the sixth most valuable startup in the world. The co-working company takes on long-term leases for raw office space and builds out the interior into trendy, millennial friendly spaces that are then subleased to Fortune 500 companies and startups alike, one conference room or desk at a time.

 

To provide a sense of WeWork’s fast-spreading dominance, the startup has dazzled tech investors by portraying itself as a Silicon Valley-style company that serves as a “physical social network” for millennials. It has raised over $8 billion to date, accruing over $4.4 billion through the Japanese tech giant SoftBank’s Vision Fund in 2017 alone. Additionally, it was valued at $20 billion this year, which is the largest valuation in New York City and the third biggest startup valuation in the United States after Uber, Airbnb and SpaceX.

The impressive valuation of a startup – which coincidentally encourages the startup lifestyle – is worth more than Twitter ($12.96 billion), Box ($2.44 billion), and Blue Apron ($1.54 billion) combined, Business Insider reported. Yet, industry experts, professors, and the general public has been left scratching their heads whether the co-working giant can justify its grandiose appraisal. With a $20 billion valuation that is eight times that of a traditional leasing company with a similar business model warrants a major question: is WeWork overvalued?

 

First, let’s take a look at how WeWork came to be the highly talked about startup it is today.

 

CEO Adam Neumann was born in Isreal and moved to the United States in 2001 after serving as a naval officer in the Israeli military. “Before I started WeWork, I owned a baby clothing company based in Dumbo, Brooklyn,” he said in an interview with Business Insider. The company, called Krawlers, sold clothes fit with padded knees for crawling babies. “We were working in the same building as my co-founder Miguel McKelvey, a lead architect at a small firm. At the time, I was misguided and putting my energy into all the wrong places” he said.

McKelvey and Neumann noticed that the building they both worked in was partially vacant. With the combination of their individual architectural and entrepreneurial expertise, they came up with the idea to open a co-working space for other entrepreneurs. Although it took tremendous convincing of their landlord, McKelvey and Neumann opened the first floor of a co-working startup called Green Desk in 2008 – the early incarnation of the company that would contrive WeWork. The “green” in the name was inspired by the company’s focus on sustainable co-working spaces featuring recycled furniture and electricity that came from wind power.

 

Despite Green Desks near-instant success, Neumann and McKelvey eventually sold the business to their landlord, Joshua Guttman. The WeWork co-founders recognized the importance of being green, but felt the focus of their business should revolve around community. The two founders knew they were onto something and possessed a strong concept. After pocketing “a few million” from the Green Desk sale, the two men founded and launched WeWork.

 

WeWork, in its current iteration, opened its doors to New York City entrepreneurs in April 2011 and has since expanded to cities across the country and worldwide.

 

At WeWork offices, options include a single desk in an open floorplan, dedicated private offices with doors, and full floors for more established companies. Amazon.com Inc. and International Business Machines Corp. have both taken advantage of the entire-floor leasing option. Common spaces feature comfortable couches, fun and interactive amenities like foosball tables and beer kegs to encourage meetings and socializing, and various office events take place frequently.

 

Moving on, we must raise another question: what industry is WeWork in exactly?

 

Neumann has blatantly denounced defining WeWork as a real-estate company or tech company. The “We Generation,” as he calls it, strives to encourage sharing and collaboration rather than isolated office places. Neumann instructed the WeWork Public Relations representatives to push back against any characterization in the media of WeWork as a myopically defined real-estate company and instead encouraged the description of WeWork as a “lifestyle” or “community-focused” company.

 

In an interview with the Wall Street Journal, Artie Minson, WeWork’s president and chief financial officer said, “we frankly are our own category. We use real estate and services to empower our community.” Minson supported the company’s sky-high valuation, stating it made sense because investors are looking to WeWork’s plans for growth and confident in the acquisition of millions of members in the future.

 

The WeWork client is “coming to (the company) for energy, for culture” Neuman stated at an event this summer, aiming to breakaway from a pigeonholed industry classification. The Wall Street Journal reported that Neumann and other WeWork executives described the company “at various times… as a community company, a lifestyle company and a platform for entrepreneurs.”

 

Neumann went on to add, “we ourselves are still discovering what is the best type of company that we want to be. We’re taking the best practices out of the for-profit world and best practices out of the nonprofit world.”

 

Skeptics continue to question whether WeWork should receive the tech company treatment, especially in valuation, when real estate is so integral to its main product and subsidiaries. In addition to co-working space, WeWork dabbles in communal housing, early education, and, strangely, a wave pool business.

WeLive, WeWork’s attempt to infiltrate the residential real estate industry, features shared expansive kitchens, large laundry rooms with ping pong tables and other interactive amenities, and free WeWork cocktails on rooftop terraces and in mail-room themed bars. That’s right, what serves as the WeLive mailroom during the day is converted into a happening bar at night designed to bring the inhabitants together to socialize and expand their network.

Bloomberg Technology noted that “WeWork wants to parlay its success with co-working into a “we” lifestyle brand that incorporates not just work but living and wellness for community-minded people.

 

Similar to other tech-giant influencers like Facebook’s Mark Zuckerberg, the WeWork co-founders have taken a keen interest in early education. In Fall 2018, the company is set to open a private elementary school for “conscious entrepreneurship” inside an New York City WeWork space. The experimental school was tested via a pilot program of seven students, including one of the five children of WeWork Co-founder Adam and Rebekah Neumann.

 

The project is being spearheaded mostly by Rebekah Neumann, who attended the prestigious New York City prep school Horace Mann and received a bachelor’s degree in Buddhism and business from Cornell University. She told Bloomberg the school will “(rethink) the whole idea of what an education means” but is “non-compromising” on academic standards.

 

“In my book,” she stated, “there’s no reason why children in elementary schools can’t be launching their own businesses.” Can anyone say, “Baby Boss?”

 

The most peculiar industry expansion for WeWork, however, was the purchase of a “large stake” in Wavegarden, a wave-pool start up. It remains unclear how Wavegarden’s technology, which can produce up to eight-foot-high waves for surfing at various water facilities, fits with WeWork’s common-space persona. A company spokesperson told the Wall Stret Journal that WeWork has “made meaningful investments to significantly enhance (the company’s) product offering.”

 

Throughout the various expansions and acquisitions of the WeWork brand, one narrative has remained the same: “the “we” brand promotes a seamless integration of meaningful work and a purpose-driven existence.

 

The “We” model has proved popular. As of October this year, WeWork established itself in 172 locations in 18 countries, granting its 150,000 a variety of locations to work from. The workspace provider employs over 3,000 people. The startup is rounding out the year with an impressive purchase of the social network company Meetup which strives to connect individuals during their off-work hours based on common interests. WeWork hopes the acquisition will help establish a sense of community in its shared workspaces, Inc. reported. The most valuable component of the purchase, however, is Meetup’s 35 million user base.

Some Silicon Valley investors and others in the real-estate industry say the company’s well-crafted image belies the unremarkable nature of its business. For instance, let’s consider WeWork’s competitors. With an indeterminate identity, it is hard to say just who WeWork’s competitors are or if the company even has any contenders due to its multitude of market engagements. IWG PLC, an office-leasing company with a similar business model to WeWork, manages five times the square footage and has approximately one-eighth the market value. Boston Properties Inc., the United State’s largest publically traded office leaser, owns five times the square footage that WeWork leases and manages while boasting a market capitalization of $19 billion.

 

Barry Sternlicht, who runs Starwood Capital Group LLC with more than $50 billion of real-estate assets under management, said, “if you had positioned (WeWork) as a real-estate company, it wouldn’t be worth (its valuation).” Neumann “dressed it up and made it into a community, and that turned it into a tech play” he said.

One argument against WeWork surrounds it’s “expanding” clientele base. A large portion of WeWorks client base is comprised of startups. If there were to be a downturn in the market, it would become increasingly difficult for startups to raise funding. If startups don’t have the funding necessary to sustain themselves, WeWork might run into trouble staying profitable with a decrease in leasing demand as its clients wouldn’t be able to pay the rent for the office space.

 

WeWork was swift to negate any doomsday arguments, stating that only a small fraction of its client base are other tech startups. “Venture capital-backed companies only makeup mid-single digit of the total population of our WeWork member companies,” a spokesperson told Business Insider. “The membership is very diversified across multiple industries and our fastest growing segment is larger, more mature companies who have joined for the value proposition of more affordable space, community, networking, and flexibility – as well as services (healthcare, payment processing, etc.)”.

 

Despite the company’s efforts to assuage any skepticism, many academics and industry experts remain unsold. Consider the passionate words of Scott Galloway, a marketing professor at the NYU Stern School of Business and the founder of business intelligence firm L2, said in a Business Insider presentation, “WeWork is arguably the most overvalued company in the world. WeWork is now getting a valuation equivalent of $550,000 per customer… In some instances, WeWork – if you do the math – the floor that the WeWork (office) leases in a building is worth more than the building hosting the WeWork.”

 

Galloway went on to compare the co-working space to other tech companies like Snap, Inc. and Twitter, “Snap is incredibly overvalued, WeWork is incredibly overvalued, and a company that’s off (its market estimation) 70%, Twitter, is still massively overvalued. (Twitter) is a stock that will be trading for between five and ten bucks within six to 12 months. Two and a half years ago, when it was at 55 (dollars per share), I said it would be below ten, and I was wrong, it’ll be below five.

 

It is unclear whether WeWork will have a similar rocky post-valuation experience to Twitter and Snap, Inc. with so much tech industry confidence balancing out the vocal skepticism.

 

From WeWork’s commencing days, Neumann would preemptively boast about how he was building a $100 billion business to his friends. With a $20 billion valuation under WeWork’s belt, the co-founder’s brag might not be terribly outlandish after all. Does the company actually deserve its high appraisal? Will WeWork be a startup that simply dazzled the tech industry in its 15-seconds of fame? Only time will tell, but for now, WeWork is confidently looking towards the future and not letting criticism get in its way.

Uber’s Road to Profitability

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About 10 years ago, it was obvious that one should never sit in a stranger’s car. In March 2009, Uber Technologies Inc. sought out to change that norm and disrupt the taxi industry. 8 years later, they have reached complete dominance over the industry through their transportation app, Uber. Founded by Travis Kalanick and Garret Camp, the app was originally an effort to create an affordable black car service, which soon transformed into a massive ridesharing platform. Today, they operate in over 80 countries and over 670 cities worldwide (Uber). However, they are still growing. They now offer a low-cost ride program, rides in black cars, food delivery service, and more. According to Kalanick, the Uber app has more than 40 million active riders worldwide (Vanity Fair). Yes, that is 40 million people actively using 1 platform.

Although those numbers do sound sexy, the company is actually not making any money. During their past four quarters of operations, Uber experienced losses exceeding $3.3 billion. With this outrageous number, Uber has become the most loss-making private company in tech history. Simultaneously, the company has also become the highest valued private technology company. According to Bloomberg, Uber is valued at $69 billion (Bloomberg).

At this point, you might be thinking, “How does a company that continues to make no profit get such a high valuation?” Before understanding how a company gets valued, it is important to grasp the intentions of an unprofitable company. It is comprehensible for a startup business to not make any money within their first year or two in business. However, Uber has been around for more than 7 years, has raised over $11 billion, and still is unprofitable (Crunchbase). It may sound counterintuitive to stay in business after making no profits for such a long period of time, right? In fact, companies can become very successful and attract many investors even without making profits for lengthy periods of time.

There are three core principles that companies follow in order to survive without any profits. The first method is to continuously reinvest in the company. According to Uber’s release to Bloomberg, the company’s net revenue was $6.5 billion, excluding revenues from China (Bloomberg). Therefore, earnings are significantly large, but Uber is choosing to reinvest that money back into their company. The purpose is to continue their growth and boost future revenues. This intentional reinvestment strategy has been proven to work with Amazon, which irregularly reported a profit throughout more than twenty years in business to focus on growth. Amazon obviously has the ability to allow profits, but argues that they must constantly reinvest into the company in order to compete in different fields.

Another way a business could continue to operate without any profits is the expectation of potential expansion. Twitter was a great example of this, as they acquired Vine, Periscope, and other platforms in an effort to expand its social media presence. However, they are dealing with significantly large expenses due to the compensation of stock options. Other companies that used this method include Yelp and Spotify. Although Yelp reached profitability in 2014 through expansion, Spotify is still in the process. Similar to Uber, Spotify has consistently experienced increasing revenues, but still has continuously shown upwards of a billion dollars in losses. Their strategy is to increase their number of users on their free service to potentially convert them into subscribers.

Lastly, an unprofitable company can remain in business because of its speedy growth in its early stages. Tech companies that can show a rapid increase in user growth will secure the backing of venture capitals. Through the investors’ perspectives, they see massive potential due to their user base and disregard the early revenue drought. Uber is definitely the leading tech company in this category. As mentioned earlier, Uber’s valuation is extremely high, surpassing many established car-rental companies and airline companies, and it is exactly because of this reason.

All three of these categories play a crucial role in generating a valuation of an unprofitable company. In the case of Uber, their valuation is driven by the tremendous confidence investors have in the company due to its user base. However, the large size of the backing will make it challenging for Uber to deliver long-term. It is very important for Uber to continue to convince investors that profits will begin to unfold. It is very easy for investors to lose confidence in the company’s abilities to generate future profits. So why do investors continue to invest in Uber? Obviously, they trust the company’s growth models that will keep their stock high. They also have faith in the company’s ability to reach their large goals.

Usually, when evaluating a firm, one would pay close attention to the price-to-earnings ratio. This ratio suggests how much an investor would have to put into the company in order to get $1 in return. However, this ratio is irrelevant for many tech companies, such as Uber, as they do not have any profits to show in its early stages. Also, tech companies do not have many assets other than the software, which is extremely hard to value as is, so the price-to-book ratio is also out of the equation. Instead, investors of Uber, and other unprofitable tech companies, would look at their price-to-sales ratio to determine the company’s valuation. This ratio compares the stock price of the company to its revenues. This is an indicator of the value placed on each dollar of a company’s sales or revenues. Uber’s valuation of $69 billion and its net revenue of $6.5 billion in 2016 gives the company a price-to-sales ratio of 10.6. This ratio is much higher than the S&P 500 Information Technology Index price-to-sales ratio, which is the highest compared to all other S&P 500 sectors.

The technology industry is known for its overgenerous valuations. Even based on the technology industry standards, Uber’s valuation is still very high. However, if Uber was treated as a transportation company instead, they would be nowhere near their current valuation. The price-to-sales ratio of the S&P 500 Transportation Index is 1.5. Therefore, Uber’s value would have to fall by 86% to associate with the average transportation company. However, it is obvious that Uber enjoys being in the technology category.

Regardless of the industry, a company’s valuation also reflects their business plan. For Uber, investors are paying very close attention to the company’s path to make money and if they seem attainable and realistic. Although it is not possible to accurately predict when and how the company will become profitable, Uber must be very convincing to deserve such a high valuation. They have somewhat modeled themselves after Amazon, which had successfully completed the process after years of net losses. According to Mike Walsh, and early Uber investor, “There are many companies, Amazon as an example, that invest heavily in the early years and hit profitability only after a company IPO.” (CNN). However, the most Amazon lost in 1 year was less than $2 billion, even at the peak of the dot-com boom.

Uber generates revenue primarily by charging clients for the rides, taking around 20% of the total fare. The company has reached such enormous growth because of how convenient and affordable it is for consumers. This resulted in Uber stealing market share from taxis and other traditional transportation methods. Even drivers began to switch, realizing that driving for Uber would allow them to make more money than driving a taxi. This is largely because of the fact that Uber allows drivers to better optimize their time and services. However, these drivers are responsible for the depreciation of their own cars, which is not factored into the ride.

The affordable prices for users and high incomes for drivers are all part of a long-term strategy. Uber is essentially subsidizing each trip. The plan is to dominate market share and drive taxis and other competing rideshare companies away. The prices are expected to increase as the initial process of acquiring customers begins to slow down. Currently, drivers for Uber are essentially donating the use of their own cars in exchange for the company’s growth. This does not get factored into Uber’s actual cost of operation.

Is Uber’s business model sustainable? Will they eventually become a profitable company? How long will that take? These are obviously very important questions to consider. Clearly, Uber is significantly unprofitable as of right now. However, you can make the argument that the company’s losses are diminishing over time. As seen through the chart, Uber has the ability and control to accelerate or slow their spending to become more or less profitable. This is important evidence to deliberate when making the case that in the long run, Uber does have potential to become profitable. Many optimists argue that the company is so large that people are just not used to the losses on such a large scale. Their revenues are also massive, and are quickly growing. However, they might be taking a longer time getting their global business under control, whereas a smaller business, such as Snapchat, would not take as long. This could be due to their attempt to break the norm, as well as the need for actual drivers and app awareness.

However, recent headlines have given Uber a tough time throughout their road to success. Earlier this year, Uber got caught up in allegations of prevalent sexual harassment throughout the workplace. Not to mention, the company even experienced a #deleteuber campaign throughout social media, and accusations of technology theft. As controversies added up, investors began to question Travis Kalanick, the current CEO and Co-Founder, and his ability to run the company. Kalanick had become a massive liability to the company due to his unclear business practices, poor management skills, and concerning lawsuits. Therefore, Kalanick resigned as CEO of the company back in June of this year.

After a couple months of searching for the perfect candidate, Dara Khosrowshahi was hired as the new CEO in August to get the company back up on its feet again. Khosrowshahi’s resume includes being the former CEO of Expedia, becoming one of the highest paid CEO’s in America, and being a board member of BET.com and the New York Times Company. He believes that although Uber is unprofitable as of right now, the “math is working” in certain countries, and that they are currently focused on subsidizing other investments. In an interview by Andre Ross Sorkin, a New York Times columnist and CNBC anchor, Khosrowshahi mentioned that Uber will not be profitable in the U.S. for the next six months, depending on the performance of their rival company, Lyft (CNBC). He has inherited a company that has been hit with a public scandal, the faction among its board members, an investigation into workplace harassment, and many other lawsuits. Therefore, he has not been given an easy task.

So, how do these public-relations woes impact the Uber’s road to profitability? Ultimately, they take away from the company’s primary focus – growth. Instead of concentrating on expansion, reinvestment, and strategies for profitability, they are forced to deal with fixing their public image.

However, it has been announced that Uber does have big plans for the future. They are currently in the middle of negotiations with SoftBank Group for a multi-billion-dollar investment deal. The Japanese-based company has global ties that could potentially help Uber in its constant international expansion. Also, Uber has recently agreed to a deal to purchase thousands of self-driving cars from Volvo. Last year, Uber and Volvo joined together to develop autonomous vehicles that will potentially become the future of Uber. Additionally, Uber’s project, Elevate, is set to bring “flying cars” into the market by as soon as 2020. They have partnered with NASA to sign a Space Act Agreement that will allow these low-flying, possibly self-flying, aircrafts to become a reality.

Uber has already begun taking steps to prepare for an IPO. Khosrowshahi announced in an interview that the company plans to go public in 2019. This will be a big day for investors, and a brand-new chapter for the company. Uber has the chance to live up to its extremely high valuation. It is clear that they have big plans for the future that can potentially allow the company to generate massive amounts of profits, but only time will tell.

 

https://uberestimator.com/cities

https://www.vanityfair.com/news/2016/10/travis-kalanick-uber-ipo

https://www.crunchbase.com/organization/uber

https://www.bloomberg.com/gadfly/articles/2017-03-16/uber-needs-to-get-real-about-that-69-billion-price-tag

https://www.bloomberg.com/news/articles/2017-04-14/embattled-uber-reports-strong-sales-growth-as-losses-continue

https://www.cnbc.com/2017/11/09/uber-ceo-dara-khosrowshahi-speaks-at-nytimes-dealbook-conference-2017.html

https://techcrunch.com/2017/11/09/uber-ceo-says-2019-is-the-target-for-ipo/

Can California handle recreational Cannabis?

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Following a trend of progressive change throughout the country, California recently passed the legalization of recreational marijuana. Going into effect starting in 2018, any person over the age of 21 can legally buy marijuana. The $7 billion industry is expected to generate over $1 billion in state tax revenue.

However, per the federal government, marijuana remains a schedule 1 narcotic (the same level as heroin). Since the federal government is responsible for regulating banks and interstate commerce, there is a significant barrier to banking services for people in the cannabis industry. It is considered a crime to handle the financial proceeds from marijuana sales—banks can lose accreditation or even face money laundering charges.

There are obvious implications that stem from the lack of safe financial structures for the cannabis industry in states where the sale is legal. The irony of this industry is that it is essentially the only business that is begging to be regulated, as regulation will create safety for everyone involved in the transaction.

  • Dangerous
    • With hundreds of thousands of dollars in cash being mulled around in duffel bags and cars presents a high risk for crime and theft. Armored vehicles and security guards are a necessity.
  • Inefficient
  • The laborious counting of stacks of cash for paying taxes is slow and inefficient—it requires the tax collectors to use more time and people bring backpacks full of cash to bank and takes time
  • With a cash-only system, it is difficult to pay employees and write checks

John Chiang & the Cannabis Banking Working Group

To brainstorm solutions to this problem, California State Treasurer John Chiang created a task force coalition, the Cannabis Banking Working Group (CBWG), with representatives from law enforcement, banks, regulators, and local governments. The goal is “to ensure a safe a smooth transition for the public, businesses and financial institutions” in the “unchartered waters” of legal recreational marijuana. The coalition has met several times in the past year and recently published a report on possible solutions to marijuana and banking in California.

Solution 1: State Courier Service

Under this plan, “the money would come to the state and the would be the party that would interact with the banks”. Armored vehicles would pick up cash from marijuana businesses and then transport those tax dollars to a secure counting facility. The cash would then be taken to either a federal reserve facility or a financial institution willing to “accept the cash as deposits to state accounts.”

Solution 2: Adhere to lenient existing laws

 Support and expand the few small banks that followed strict compliance guidelines that allowed for business with the marijuana industry under Obama’s U.S. Deputy Attorney General.

Solution 3: Public Bank

The creation of a publicly owned bank or state-supported financial institution. Public banks are independent of the federal reserve, and are insured by the state. This idea, that has been gaining popularity since public dissatisfaction with Wall Street and big banks, may also reap other benefits. Such a bank could expand banking to underserved groups beyond the cannabis industry. However, the obstacles are formidable:

  • Difficulty of getting deposit insurance
  • Unknown start-up costs
  • Investment likely to measure in the billions of dollars
  • Probability of losses for several years or more that taxpayers would have to cover
  • In addition, a public cannabis institution might have trouble obtaining federal regulatory approval and access to Federal Reserve money transfer systems.

Solution 4:  Lofty Federal Goals

  1. Provide legal safe harbor to financial institutions, by prohibiting federal prosecutors or regulators from penalizing them for serving cannabis customers that comply with state law.
  2. Legalize cannabis by taking it off the list of Schedule I controlled substances.
  3. Prohibit federal officials from prosecuting cannabis consumers or businesses in states that have approved medical or adult recreational use.

 

 

Behavioral Economics

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Humans do not actually behave according to economists’ thought processes. Classic economics assume that humans are perfectly rational beings, who are all-informed and have infinite calculating abilities. In such a world, where people have concrete preferences and act in isolated events, advertising would not need to exist. This is because people would be certain in their preferences and unable to be swayed by ads.

In 2016, $190 billion was spent on advertising in the United States, so clearly, the real world has a need for advertising. That’s where behavioral economics come into play. Behavioral science–at the intersection of economics and psychology–assumes that people are not rational or capable of making decisions in their best interest (Freakonomics). In reality, most people make decisions using their emotions as the deciding factor either equally as much or more often than they use reason.

In this world of incomplete information, independent actors (people) must infer from others or situations with more complete information. Their safest bet is often to copy what the people around them are doing. The academic term for this is social norming, which in lay man’s terms means peer pressure.

A big reason for this herd mentality is something called loss aversion. Loss aversion is a concept explaining that people experience greater emotion (pain) with loss, than the emotion (pleasure) they experience with gains of proportional size. So in simplified terms, people hate giving stuff up, even if said stuff has little to no value to them. They want to mitigate their losses, and one way of doing this is by making decisions that other people have already made which weren’t catastrophically bad.

Behavioral economics takes into account these factors playing into decisions that real, irrational individuals make. It’s a study of the “codification of behavioral anomalies” which economists establish using empirical evidence (Forbes). Consumers frame their personal economic outcomes as gains and losses, which affects their economic decisions and choices. Behavioral economics examines this framing.

Advertising is an industry that has been using behavioral economics to its advantage long before the area of study was formally established. The industry manipulates the emotions of consumers in a way, changing their preferences, which contrary to standard economics beliefs, are not concrete. Like social norming, people pick well-known brands because they figure they’re less likely to be catastrophically bad than the alternative.

One tactic some advertisers use is the creation of scarcity. Limited edition, limited time only, etc., labeled products construct an artificial scarcity, driving humans to take action. They buy the product right then and there instead of waiting. Companies and advertisers exploit this scarcity bias in consumers as an effort to sell more products.

Advertisers and ad agencies rely on data to help manipulate their audiences. This collection of data calls for a new area of academia–this time in the field of ethics. Where is the line drawn? If voluntary data collection is okay, what about involuntary? How do these ethical issues converge with those of digital data collection as seen by Google, Facebook, etc?

http://adage.com/article/adagestat/advertising-dan-ariely-behavioral-economics-marketing/146001/

https://www.investopedia.com/terms/b/behavioraleconomics.asp?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186

https://www.spectator.co.uk/2017/08/how-sutherlands-law-of-bad-maths-could-solve-nightmare-train-commutes/

 

The Impact of Redlining

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In early 1930s, Home Owners’ Loan Corporation (HOLC) was created as part of Roosevelt’s New Deal to reduce the down payment required to buy a house in hopes of promoting homeownership. The Congress then created the Federal Housing Administration, which sets standards for construction and underwriting and insures loans made by banks and other private lenders for home building, as well as insuring private mortgages. HOLC developed a system of maps that rated neighborhoods according to their perceived stability. On the maps, the areas rated “A” were marked in green areas. According to Ta-Nehisi Coates’ article in The Atlantic by, these areas were considered “in demand” neighborhoods that, as one appraiser put it, lacked “a single foreigner or Negro”. These neighborhoods were considered excellent prospects for insurance. Contrastively, neighborhoods where black people and other immigrants lived were rated “D” and were usually colored in red. This is where the term “redlining” comes from. Usually, these “D” neighborhoods were considered ineligible for FHA backing. FHA selectively granted loans to white neighborhoods and forbid the sale of properties in these green areas to anyone other than whites. The mortgage industry as a whole adopted these practices, and turned the maps into self-fulfilling prophesies. The inability to access capital in these “hazardous” redlined neighborhoods, lead to disrepair and the decline of these communities’ housing value, which in turn reinforced the redline designation. The deterioration of these neighborhoods also most likely also fed white flight and rising racial segregation. The federal government eventually retreated from the practice, and it was outlawed by the Fair Housing Act in 1968. Nevertheless, redlining left long-lasting, truly horrific consequences for black people, black families, and black neighborhoods.

The Mapping Inequality project allows online access to the national collection of “security maps” and area descriptions produced by HOLC between 1935 and 1940. By looking at where the differently rated zones falls on the map, it becomes clear how present differences in the level of racial segregation, home-ownership rates, home values and credit scores reflects the old redlining boundaries. Today, these same communities still face predatory lending, or “retail redlining”, which inversely the proportion of Black residents to grocery stores, non-fast food restaurants, and other retail resources important for promoting and maintain health. According to a Pew Research project led by NYU Sociology professor Patrick Sharkey, to this day, Black people with upper-middle-class incomes do not generally live in upper-middle-class neighborhoods. Sharkey’s research shows that black families making $100,000 typically live in the kinds of neighborhoods inhabited by white families making $30,000. “Blacks and whites inhabit such different neighborhoods,” Sharkey writes, “that it is not possible to compare the economic outcomes of black and white children.

Sources:

New York Times

Washington Post

Why is Disney the Biggest Studio in Hollywood?

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Why is Disney the Biggest Studio in Hollywood?

Yutai Han

11/21/17

 

This post will examine the source of Disney’s success. After the Q4 earnings report came out, commentators said that Disney could still be a stronghold for years to come. That is because Disney’s unique advantage lies in its ability to create iconic animated stories that bring warmth and joy to children and their family throughout the world and the ability to turn the stories into a profitable package, a utopian wonderland of magical calling to children with rich imagination.

 

Disney’s Q4 earnings report show that their profit from studio entertainment dropped 21%, and other revenues such as media networks dropped as well.

The reasons are twofold. First, audiences are abandoning their cable TV subscription. Disney’s affiliate company, ESPN, is going through a turbulent transformation to launch ESPN Plus, part of a $1.2 billion investment of streaming services to compete with Netflix. Second, this year is a relatively small year for Disney’s film business. Last year, Zootopia and Finding Nemo 2 hit the worldwide theater with a craze, but this year Cars 3 wasn’t too successful. On the other hand, big productions such as Thor 3 and Star Wars: The Last Jedi are released in the end of the year and they are not counted in Q4’s earnings report.

 

For a lot of these films, the profit brought by selling merchandise can sometimes trump the box office itself. For example, Frozen has sold 3 million princess dresses, profiting $450 million. Since last year, Shanghai Disneyland has sold over 1 million fluffy animals and among them, the bestseller is the magic wand and the Minnie Mouse hairband.

 

The only increase of revenue came from theme parks by 6%, quarter to quarter. According to the earnings report, this year marks the 25th anniversary for the Disneyland at Paris and revenue from the Disney hotels saw some increase.

 

Therefore, in turbulent times, Disney’s theme parks are still their main stronghold. Although the domestic revenue was impacted by the hurricane season, but overseas revenue saved it. I haven’t been to the Shanghai Disneyland myself but through several positive accounts that I’ve read online, I’m convinced that it’s comparable to any top theme park experiences. It’s somewhere that you can immerse yourself fully into the beautiful fairytales created by Disney and Pixar, and the exciting worlds of Superhero movies created by Marvel Studios. No wonder that the newly-opened Shanghai Disneyland is the top destination for families with kids. The Disneyland at Shanghai opened its door to Chinese about a year and a half ago, and in a recent report (in Chinese) conducted by the Shanghai Information Center, Disneyland has welcomed over 11 million people, bringing a growth of 0.44% GDP to Shanghai as a city, and creating some 62 thousand jobs. In the same time, the opening of Disneyland helped the city boost its overall tourism industry by a growth of 6.9%, as $25 billion. The report concluded in praising Disneyland as a leader of the tourism industry that brings significant economic improvements.

 

I read that Disney’s attention to detail was surprising to Chinese contractors, but at the same time, Chinese contractors wanted to cooperate with Disney because they’re hoping to learn from Disney’s high standards. For example, before the construction of the Disneyland, Disney formed an academy of sculptors and evaluated them on their work. Disney hired them only after they’ve qualified for the examination. This is part of the effort of Disney to recreate the world from their movies that the visitors can immediately immerse themselves into.

 

Go Big or Go Home: Many Too Big to Fail Banks Just Got Bigger

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Are U.S. banks too big to fail, or are they simply too big to break up?

The economic crisis in 2008 revealed how financially unstable big banks can hold the entire global economy hostage. The concept of these banks being “Too Big To Fail,” meaning a business has become so large that a government will provide assistance to prevent its failure to avoid a disastrous residual ripple effect throughout the economy, was integral during this time. The U.S. government disbursed over $700 billion to save companies like AIG that were on the verge of financial failure.

 

The tremendous monetary support that was necessary during 2008 increased government regulation of Wall Street significantly and set out to decrease the mammoth of preexisting too big to fail institutions. However, while increased regulation has been realized over the past decade since the crisis, too big to fail banks have not been cut down to size. Rather, the system has gotten even bigger. According to SNL Financial, JPMorgan Chase, the top performing bank in total assets, has seen its base increase to more than $2.5 trillion. Since the end of 2008, JPMorgan’s deposit base alone has grown by over 29 percent. With such promising numbers, JPMorgan is considered to sit atop a list of banks that could threaten global stability.

 

JPMorgan, Wells Fargo, Citigroup and Bank of America, the so-called “Big Four” institutions, all show this same upward trend since 2008, with over $8.2 trillion in total assets, which is 154 percent more than re rest of the top 50 banks combined.

 

To avoid another round of unfavorable bailouts, financial watchdogs have been calling too big to fail banks to make themselves less risky by dividing up and adding significant capital to safeguard against losses. However, amid demands to break into smaller entities, top Goldman Sachs analyst Richard Ramsden claimed that the government’s call to divide JPMorgan into two or four parts would greatly diminish value for shareholders.

 

According to an S&P Global Market Intelligence report, “if and when another crisis hits, the biggest players will be far larger than they were in the last crash.” Still, approximately 75 percent of the 30 largest too big to fail banks are significantly bigger than a decade ago.

 

Conversely, government experts find the increase in banks’ total assets promising. In her announcement resigning from the U.S. central bank, Janet Yellen wrote, “I am gratified that the financial system is much stronger than a decade ago, better able to withstand future bouts of instability.”

 

This past June, the Treasury Department published several recommended changes to regulation intended to prevent “taxpayer-funded bailouts.” The paper called for “eliminating regulation that fosters the creation… of too big to fail institutions” but offered to suggestions on how to alter those already present.

 

Only time will tell whether the maintained presence of too big to fail institutions will hurt or benefit the U.S. and global economy.

Microtransactions in Video Games

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In 2016 consumers spent around $30 billion on video games. Historically, video game consumers spent that money on a single game that unlocked all of its features. However, more recently, video game developers are distributing free-to-play games on the App Store, the internet, Steam, etc. in exchange for introducing microtransactions.

Microtransactions are transactions within a game that allow players to unlock virtual items that help them progress in a game or make their character look better with weapon skins.

With the advent of the App Store, small game developers saw this as an opportunity to sell their games for free but work in transactions so that players could add to the game. Clash of Clans, despite being a free game on the App Store, made $2.3 billion dollars last year. Microtransactions go beyond the App Store, too. League of Legends, a free game made by Riot Games, made $1.6 billion in 2015 off of Microtransactions.

Microtransactions are leeching into full-price video games as well. The new game, Star Wars Battlefront II, was released with a lot of controversy. The $60 dollar game (the deluxe edition costs $80) was going to be released with a microtransaction system. To get loot crates, which can unlock heroes like Darth Vader and Luke Skywalker, and help a player progress through a game, people would have to pay up. Electronic Arts removed that system before the game came out, after public outcry by gamers and a post which earned EA the highest number of downvotes ever on Reddit.

For big box games like Battlefront, the idea is to create a continual revenue stream for a game even if its initial price depreciates. Within a year some games can lose more than half of their value as new games come out and replace the old ones, similar to cars, though at a much faster rate.

Microtransactions employ behavioral economics. There are a whole slew of tactics, but there are two main ideas that trick people. First, they have weird conversion rates from dollars to an in-game currency, so it is hard for players to know how much money they have spent. Second, developers treat microtransactions like gambling. Players can put in money to get that in-game currency in the hopes that when they unlock a loot box they will get a great prize.

Microtransactions are likely going to be around for a while, and as artificial intelligence takes off, they will probably become more specified to a person’s play style, the friends they have online and a whole host of other variables. Gamers have at least staved off microtransactions in Battlefront, for now.

When We Talk About Gun Control, Here is the Business We Are Talking About

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In addition to the belief in the Second Amendment Right, economics in the firearm business could also a reason for the difficulty of implementing gun control in the United States.

Firearms industry is a billion-dollar business. According to the IBISWorld, by June 2017, the revenue for guns and ammunition manufacturing industry is $13.3 billion with $1.0 billion profit. According to the latest Annual Firearms Manufacturing and Export Report in 2016, there were 11,069,333 pieces of firearms, including pistols, revolvers,rifles,shotguns, produced in that year with only 3% of them being exported. The rest of them stayed in America. According to Firearms and Ammunition Industry Economic Impact Report 2017 , there are 301,123 jobs related to firearms industry. The industry also had over 51 billion dollars impact and generated over 6.5 billion taxes.

In order to keep this business running, Center for Responsive Politics said in 2016, gun lobbyist spent over $10 million to protect gun rights. Moreover, gun owners also fear that their guns would be taken away or they would be banned from buying guns. he National Shooting Sports Foundation (NSSF)  said since Obama took office, the gun industry has grown 158%. The CNN has called Obama “the best gun salesman in America.”

Last year, since people were afraid that Hillary Clinton would win the election and take away guns, FBI said the background checks for buyers reached record high during the 2016 Black Friday. Now with Trump in office, according to the National Shooting Sports Foundation, the background checks in July 2017 drop 25% to 907,348, the lowest since 2013 because run owners are more confident about their gun rights. Due to the low demand for guns,  gun companies like Sturm Ruger & Company also experienced drop of their stocks, according to a Fortune article.

Moreover, since people fear a more strict regulation would be put on guns after mass shooting, gun companies tend to see a rise of sales after these tragedies. After Sandy Hook shooting, San Bernardino shooting, and Las Vegas shooting, gun shares all expressed a boost.

 

“Little Girl” and My Morning Coffee

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Every Tuesday and Thursday morning I would, without fail, purchase a large cup of iced coffee from the Annenberg cafe before heading to class. Personally, caffeine is not a necessity, but more for comfort as I often need that little push to get through the mornings. However, to many people elsewhere in the world, coffee is something they cannot get out of bed without. And this year, these caffeine addicts have all the reasons to get slightly worried as a “Little Girl” returns for another visit.

(Image of author’s favorite morning drink)

I am of course referring to the La Niña (Spanish for “Little Girl”) weather phenomenon. It is the opposite of the El Niño weather, which turns global climate a bit hotter. La Niña is when unusually cool water surfaces in the Pacific and causes global temperature to change as a result. It would mean that this year, the world would feel a little cooler, which may be a good thing for those who do not like hot weathers. However, it is a devastating news for farmers and manufacturers whose products rely upon a hot weather.

In a Guardian article, Sarah Butler introduces this dilemma global coffee enthusiasts are potentially facing. Coffee beans are a tropical produce, and they do not tend to react that well in face of a cooler climate. La Niña can, for example, bring in “severe droughts in key growing areas including the US midwest devastated crops while excessive rains in Columbia led to the spreading of a deadly coffee fungus”, which was what had happened in its last cycle 5 years ago. When the production of coffee beans is directly and negatively impacted, it is inevitable that the coffee price would surge upwards as a result, since by simple supply-and-demand economics we know that a reduction in supply would cause the market price to go upwards.

Of course, while the simple fact is that our coffee would become more expensive, global climate change can have more devastating effects. Floods and droughts can destroy cities and their economies, all the while taking lives of hundreds of thousands. This year, the United States had suffered from three major tropical storms and hurricanes, and the affected areas are only beginning to recover. With La Niña coming in and making weather patterns more unfavorable, the recovery efforts can be hindered.

Then, the economic damage would not just be a few extra cents on my iced cappucino.