Author Archives: Thomas Wen

College Inefficiencies

Thesis: US universities are inefficient because they require students take useless classes, instead of requiring useful ones.

I really enjoyed attending school at the University of Michigan and I will always cherish my time in Ann Arbor. It’s only right that my last post is about ways to improve the university and US colleges in general. I see a huge problem in the US higher education system: students are taking out tens of thousands of dollars in debt in order to learn skills so they can get better jobs. However, they’re required to pay for and take useless classes because it’s a requirement for a degree, which in today’s job market is the golden ticket. I will draw upon my experience at the University of Michigan to illustrate these inefficiencies.

In the College of Literature, Arts, and Sciences, students are very limited by the courses they can take because of distributions requirements: natural sciences, humanities, race & ethnicity, social sciences, and college wide requirements. Although the curriculum is designed to give a broader education, some of the distribution classes I’ve taken were complete jokes. Part of the reason I was driven to take these joke classes is because the bare minimum factor employers take into account is a good GPA and I had a better probability of getting better grades in these courses. The other part is because I just wasn’t interested in any of the classes that were offered. Therefore, LSA required me to take 21 useless classes (7 additional credits in three different areas), which cost a ballpark $37,800 in total (out-of-state median credit price is about $1800/credit).

No matter if you do or don’t have student loans, these distributions are an unfortunate waste of money and learning. I’d much rather have used that time to take classes I was interested in and actually offered me some benefit. As a student in LSA, you’re only allowed to take 20 credits outside of the college that count towards graduating (anything after is just excess). I took many classes outside of LSA that were really useful to me like Sports Management 101, public speaking in the School of Kinesiology, Accounting 300/301/312 and Finance 425 in the business school, but after I hit the 20 credit limit, it didn’t make sense for me financially. If the University as a whole required students to take a strong, diverse set of classes freshmen year such as Accounting 300, Engineering 101, English 101, etc. then students may have a better idea of what they want to learn before it’s too late and they get trapped.

College is like cable TV; you can’t pick and choose which channels you want, you have to pay for everything even if you don’t want certain channels. Recently, the cable industry is being forced to offer more custom offerings because of outside pressure from Apple, and I see online education playing that role of pressure to colleges. Don’t get me wrong – I learned a lot during my time at the University of Michigan, but could I have learned more of what I wanted? The answer is yes.

 

Entrepreneurs, Rethink Those Term Sheets

Thesis: The current venture funding environment has created inflated valuations for startups, which may seem like a great thing for entrepreneurs, but its not

In a previous post, I’ve written about how it’s a good time to be an entrepreneur. With the rise of Silicon Valley and huge tech companies, entrepreneurship is flourishing and capital is flowing into private equity firms looking to cash in on the next big idea. The growing demand among firms to get a piece of the action has pushed up valuations year after year, and according to Dow Jones VentureSource, the median pre-money valuation, the value of a company before a venture capitalist invests, for all venture rounds to be $40 million, up from $20 million in 2013. After watching the season 2 premier of HBO’s Silicon Valley, the episode made me rethink my opinion on the private markets and I’d like to revise my old post Good Time to be an Entrepreneur.

In the season 2 premiere, the founder of Pied Piper, the hottest tech startup in Silicon Valley, is raising funds for his series A and is fielding offers from several VC firms. Since everyone is trying to participate in the round, each round drives up the valuation of the round. After speaking with a colleague who’s company took on too much money and didn’t meet expectations, Pied Piper ended up taking a lower offer with a better VC firm.

In my previous post, I talked about my view that today’s venture capital fundraising environment is a function of innovative business opportunities and over-valuations. I argued that as long as investors conduct thorough due diligence, invest for the long-term, and avoid building “castles-in-the-sky”, we could avoid another tech bubble in the private markets. However, as long as the amount of capital and competition continues to grow, investor behavior will be hard to change. VC’s invest their funds across numerous companies with the expectation of cashing in big on at least one portfolio company, so they’re willing to take larger risks, rather than miss out on the opportunity.

I now believe the simplest way to avoid a catastrophic bubble is for entrepreneurs to be the rational ones. If startup companies take money at an extremely high valuation, it’s hard to grow at a rate that meets those expectations. If they fall short of expectations, their next round will end up being a down round, where the following rounds investors buy in at a cheaper valuation. If that’s the case, most term sheets contain anti-dilution clauses where the first rounds investors are protected and the founders ownership is diluted. The entrepreneur digs himself a hole if they take on too high of valuations. Therefore, it’s in the best interest for startups to take on realistic valuations from the right VC’s in order to keep growing at a pace where they meet goals and are able to raise more money. It will be hard for entrepreneurs to turn down large amounts of cash if it’s thrown in their face, but it’s in there best interest.

Job Recruitment Inefficiencies

Thesis: The job market is inefficient in matching the most qualified college candidates with competitive jobs because GPAs across different universities and within universities are not comparable and not standardized.

One of the biggest stresses of junior and senior year of college is job recruitment. This process consists of writing endless cover letters, attending career fairs where you have to force conversation, and making phone calls to people you haven’t spoken to in years. Recruiters often say that their companies consider many factors besides your GPA like prior work experience, but for people who don’t have connections at the senior level, which is the majority of us, a candidate’s GPA can be the difference in getting an interview and not. Besides from nepotism accounting for a decent amount of new hires, I believe the job market is inefficient in matching qualified candidates with competitive jobs because GPA’s across different universities and within universities are not comparable and no standardized. I will use the University of Michigan to make my case.

Most US universities use a standard grading scale out of 4.0: an A constitutes a 4.0, an A- constitutes a 3.7, and so on. The University of Michigan uses a 4.0 scale but the specifics vary across colleges. For example, the Ross School of Business uses a 4.0 scale, however, students who receive an A+ are granted a 4.4, instead of your typical 4.0, inflating students GPAs. The grade distribution for classes also differ. In core classes, which contain only business school students, 40% of students receive above an A- and 80% of students receive above a B. In elective courses, which can contain students from all colleges, 60% of students receive above an A- and 90% of students receive above a B. This system greatly differs from the economics department in the College of Literature, Arts, and Sciences. In the economics department, students can’t receive above a 4.0 and the classes are generally curved to a B-, where only 25% of students receive A’s. For two majors that generally apply to the same types of companies, there’s a huge disparity between the GPA scores recruiters see on resumes. Even if the companies who come to recruit on campus are made aware of these differences (I’m not sure if this is the case), it creates an unfair advantage applying for jobs in general, especially to companies whose recruiters are unaware. This creates the scenario where more qualified candidates are overlooked and companies are making recruiting decisions based on non-comparable information.

Another issue making the job market inefficient is student learning disabilities. Students with learning disabilities are given significantly more time on exams and this creates a distortion when it comes to comparing applicants because the disability is not disclosed. I’m not arguing that students with disabilities shouldn’t receive extra time, however, I believe it’s unfair for that information to not be considered when comparing two applicants. One might argue that the extra time allows these students to complete exams in a comparable time to a non-disabled students, and therefore is standardized. But it’s not standardized because there is no extra time in the real world and employers should be aware of these issues. Many exams are meant to be tight on time, and if a non-disabled student was allotted the extra time, it would make a significant difference. I’ve taken several classes with smart friends who are given extra time and received better grades than I have because of it. In effect, this makes these two groups non standardized.

Although it’s against the law to discriminate against job applicants based on learning disabilities, not disclosing it creates an illusion to the employer. I don’t think schools are going to start disclosing disabilities on transcripts or actively promoting their grade inflation tactics, so from an employer’s perspective, its similar to the age-old used-car lemon problem. Asymmetrical information is present in all markets and more transparency is the only solution.

Demand for Skills

Thesis: There will be net positive externalities from technology replacing ‘routine’ jobs because it will force the labor force and future generations to adapt and learn new skills, making way for our countries future.

There are many technology pessimists in the world that believe technology will make the human obsolete and replace them. New research from Duke University shows how much technology is currently destroying ‘routine’ jobs. Jobs can be classified as physical (i.e. factory workers), routine cognitive (i.e. secretaries), non-routine manual (i.e. janitor), and non-routine cognitive (i.e. financial analysis). The following graph shows the deterioration of routine jobs since the new millennium:

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Non-routine jobs and routine jobs have had an inverse relationship since 2001. During the last recession, routine jobs declined at its fastest rate as companies needed to cut costs and did so in the most obvious area. It’s bad that people of low-skill have been losing their jobs to machines and from an economists perspective, wealth is being transferred from the poor worker to the rich corporation in which worker would have a higher marginal benefit. However, I think this is optimal in the long-run because it’s less costly and more efficient and is a signal to the work force. If companies in the distant future become increasingly automated and are able to cut costs significantly, the government could potentially increase taxes (or keep the rate the rates constant, given the trend of overseas profits) and keep corporations at their same level, increasing funds for value-added projects.

The economy and the skills required to keep it moving up is continuing to evolve with technological advances. Technology has proved itself powerful and can perform simple repetitive tasks humans do, but infinitely faster. Although this means workers will lose there jobs, this also means the workforce will have to adapt and learn the necessary skills to survive, particularly how to program and use advanced software. There’s already a shortage of these skills, which is the reason technology employees have to pay absurdly high salaries in order to attract and retain their biggest assets.

This will inevitably force younger generations to meet the demand for these jobs by learning these skills. You might say though the cost of college is getting so high, what if people can’t afford to? Free education today is so readily available over the internet that it’s never been easier to learn skills like accounting, finance, or programming for example. If you have access to a computer, then you have all of the necessary tools to learn. It’s a game of survival of the fittest and in order to survive, our country must adapt.

Revised Post #5: College Athlete Compensation

College athletics, specifically men’s football and basketball programs, are a multi-billion dollar business, yet the players generating this revenue see none of it. From the jersey sales to video games to TV rights, Universities and corporate America are profiting off of these players who are restricted from earning a profit. The debate on whether college athletes should be paid or not has two strong sides and Jay Bilas, ESPN’s top college basketball analyst and former Duke Blue Devil, offers an interesting perspective and believes that “it shouldn’t be disallowed.” Under Mr. Bilas’s ideal system, college athletes would be paid like the free market: they could earn remuneration from the colleges and cash in on endorsement deals like their professionals do. On the other hand, President Obama, who’s on the other side of the debate, believes compensating athletes would ruin the sense of college sports and create bidding wars for players, with the deeper-pocketed universities buying up the best players. I fall somewhere in the middle.

In my opinion, the only players that deserve to be paid are the high-profile players like the Jonny Manziels or the Jabari Parkers that command top dollar, but in a sense, they are being paid through scholarships. For full scholarship University of Michigan athletes, they’re essentially making $40,000 per year, the approximate full years tuition, while also receiving meal plans, housing accommodations, and access to state-of-the-art training facilities. Most importantly, these high-profile athletes have only one goal in mind after college, which is to make it professionally in their respective sports. Therefore, these players have been given the platform and opportunity to compete at the professional level where they’ll make millions of dollars.

Under the Bilas system, colleges and athletes would negotiate contracts that could include a noncompete clause, to encourage players to remain for 4 years (5 years if they redshirt), behavioral clauses, and the ability to unionize. My problem with this is where are schools going to get the money to pay athletes on top of a free education? The answer: everyone else. The increased costs in competing for top recruits will either have to come from sports boosters or students in the form of raised tuition. If funded through the latter, this trend would further accelerate the growing number of student loans, which many believe is the next US asset bubble.

The NCAA’s excuse of preserving the amateur game is no longer excusable when college athletic programs bring in nearly $12 billion in total aggregate revenues. Top recruits only attend college because the NBA and NFL require one and three years out of high school in order to be eligible, respectively. High school basketball recruits can choose to spend the one restrictive year playing overseas, but it requires completely uprooting ones life and isn’t ideal. These athletes either take joke classes or classes designed specifically for competitive athletes because their top priority isn’t education, it’s their respective sport. The reality of college athletics is that it is and has been a business for some time. Universities are employing recruits, paying them the cost of tuition, and profiting off of their success.

College athletes deserve to be paid as long as its not from the universities. The NCAA needs to specify legal channels to how these athletes can earn money. If they’re being paid thousands of dollars from boosters in order to attend a certain school (which is already banned), then that’s hurting the system. However, there’s no harm in a company like Gatorade wanting to use Jonny Manziel for a marketing campaign. Sorry Mr. President, but the essence of the “college game” no longer exists.

Affordable NYC Housing and The Wealth Gap

Thesis: New York City Mayor Bill de Blasio’s affordable housing plan will help aid the wealth gap through neighborhood divisions.

It’s no news that New York is one of the most expensive places to live in the world, however it’s becoming a larger issue as rent has outpaced wage growth. Over the last 20 years, monthly rent has outgrown wages for the city’s renters by 25% after adjusting for inflation. With stagnant wages and greater demand for city housing, the number of rent-burdened households – paying more then 30% of its income on rent – has grown to over 1 million and counting. Mayor Bill de Blasio is trying to combat this by creating 80,000 units and preserving 120,000 affordable units over the decade.

Mayor de Blasio wants to focus on building in East New York. A big issue is that developers won’t be able to charge enough rent to justify the construction costs in many areas, even more so if affordable housing is required. In high-rent neighborhoods, developers could put aside 30% of the units for households making $50,000 a year if they could build a building a third larger than what’s currently allowed by law. And in low-rent neighborhoods, the percentage of units drops to just 4%.

The city government will need to devote serious subsidies to these projects if there’s a chance of developers choosing to put in the time. These projects will only attract rent-burdened households and not enough higher-rent households. No developers want to build in East New York because it doesn’t make sense economically. They’d be housing tenants who have a history of struggling to make rent, a demographic that would repel higher-income residents. Therefore, lower-income people would be moving out of areas that are growing in popularity, like parts of Brooklyn which are on the rise, and to east New York, where the dominant population would be low-income. If this trend comes to fruition, it would strengthen the already widening wealth gap by creating a stronger physical divide between classes.

Even if the Mayor was able to build new affordable units in popular neighborhoods of Brooklyn, rent-burdened residents would eventually feel alienated as more higher-income people move in, which inevitably will happen. Prices will then eventually rise for most goods in these areas and rent-burdened households will be in the same position again, given the bottom of the wage barrel has seen little growth. The demand is so high to live in New York that the forces of supply and demand eventually hurting those who can’t afford it. I think neighborhoods described by wealth have formed and will continue to form, but the Mayor’s plan will accelerate this.

Music Streaming Services

Thesis: Music streaming services have devalued song writers and if corrected for, could decrease the free access customers have been accustomed to.

The music industry is a multi-billion dollar industry that has seen significant changes in the past decade. The shift from physical to digital has had a huge impact especially on music delivery. This shift has also significantly impacted the way artists make money because as streaming has risen in popularity, the royalties have diminished. Streaming services like Pandora and Spotify pay a royalty every time a song is played, however, these payouts are less than stellar. The popular song “Wake Me Up” by Avicii was the most streamed song in Spotify history and the 13th most-played song on Pandora since 2013 with 168 million streams in the US and it only yielded $12,359.

Performers can still make millions of dollars a year from live tours and endorsements, however songwriters get the short end of the stick in the streaming world. Pandora pays two types of royalties: performance royalties to the performers and publishing royalties to the owners of the music. Pandora essentially splits the payouts between many parties including songwriter licensing organizations and performer royalty collection agencies, therefore, the artist and especially the song owner see less money. Spotify pays out about 70% of their gross revenue and splits out payments in a similar way. From an economic perspective, streaming services have stolen away producer surplus from the artists, who can afford it, and copyright owners, who are more vulnerable. The latter has had little success in fighting this because there hasn’t been a major overhaul to US copyright law for 40 years and the system has been clumsily applied to the streaming industry. However, the Justice Department agreed last summer to look into the decrees that govern the two major songwriters’ licensing organizations.

The freemium model, which allows users to listen for free but with advertisements, has contributed to the declining pay of the copyright owner. Pandora and Spotify have gone with this model in order to gain a large enough customer base and hasn’t been able to convert enough to paying customers; they can’t even stay above the red. If copyright law is indeed changed and songwriter’s gain higher royalty rates, the likelihood of these services surviving looks slim. Many music consumers also turn to Youtube, where there are services that can convert videos to MP3 files. With the government putting their mark on the internet with net neutrality, there could be more regulation of copyright infringement on these sites.

It’s unfair that song owners have been pushed around by disruptive technology companies, but these services have been in consumers hands for too long that if taken away, the song owners would seem like the bad guys.

Google vs. Everybody

The EU is going after Google regarding anticompetitive behavior against companies like Expedia and TripAdvisor, who claim Google loads the top of search results with paid advertising and links to its own services. The EU is particularly concerned because Google is dominant throughout Europe with 90% of searches being conducted through Google, compared to around 75% in the US. Google competitors are pushing for this because they claim Google has an unfair advantage that prohibits their products and services, like maps and search engines, from gaining traction. Some politicians have suggested the EU force Google to split its search page from its other functions.

This seems like a desperate move from companies whose products can’t seem to measure up to the quality of Google’s. People choose to use Google search over other search engines because it provides more accurate search results than the competition and people trust them. Google’s goal is to connect users with information and if Google can do it better using its own products, then I don’t see a problem with that. Google is like any other platform, like TV or Radio, where companies compete for business through advertisements. What’s the difference with Google then? If companies want to be seen on search engines, they should advertise through Google as well as improve there SEO.

If the EU were to get its way and dismantle Google, it would be doing a disservice to a majority of the modern world. Google didn’t buy its way into being the dominant leader in search – it did it by being the best at its craft and having a superior product. In the US, monopolistic behavior is determined when a company either buys its way into market dominance or it operates in a manner to destroy competition (like Microsoft and Netscape). In the case of Expedia, they’re in the business of flight search. Google has a product for flights as well, so if people go to Google searching for flights, why would they put their own search results below a competitors? Does it mean that they’re trying to destroy the competition? It definitely does not. Expedia wouldn’t put results from Google in its search queries on Expedia so I don’t see the issue. If I’m Expedia, I’m trying to figure out how to get people to search for flights on my site.

Google does have a lot of power and clout over the internet and the billions of internet users chose them and continue to do so. If I need to find something out, I go to Google. If I want to book flights, I go to Kayak. If I want to order a book, I go to Amazon. It’s all a matter of preference. If  these suits go to court and Google loses, I don’t think the EU has any right to force the unbundling of Google products.

Cable’s Only Savior is Sports

Thesis: Sports is the main reason people still subscribe to cable television.

The current cable television system is a monopoly that forces people to pay for channels they don’t watch or want in the first place. So in essence, you as the consumer are subsidizing these nonsense channels to exist. If cable companies stopped forcing consumers to buy packages, every channel would have fewer subscribers and make less carriage fees, therefore, would need to charge more in order to keep margins at the current level.

Michael Nathanson, a MoffetNathanson analyst, ran projections on the per-subscriber payout for many popular channels and the most interesting assumption is that ESPN would cost significantly the most a la carte at $36.30 with 16.81% of TV homes subscribing to the channel. This is interesting because other stations like TNT, USA, TBS, FX, and Disney all have similar reach but their prices range from $3.72 to $8.95. However, I believe Michael’s assumptions are very inaccurate.

In my opinion, the only reason, if not a major reason, people still subscribe to cable television is to watch live sports. Sports events bring the largest audiences to a network like the Superbowl, March Madness, and World Series. Most major networks compete with each other for the TV rights to these sporting events, paying billions of dollars to air them. ESPN has many of the rights to the biggest sports leagues in the world, including men’s college basketball and football, MLB, and it’s recent 9-year $24 billion dollar TV deal with the NBA. Besides the NFL, which has the most valuable TV rights, ESPN has a monopoly on live sports and sports in general, with popular shows SportsCenter and Pardon the Interruption. Where I think Mr. Nathanson goes terribly wrong is in his estimation on reach.

I’d conservatively assume 50% of males and 10% of females watch sports on a consistent basis, whether it’s NBA, NFL, NCAAM or NCAAF. And if consumers were able to choose what channels they wanted, I think at least half of current cable subscribers would choose and pay for ESPN. It’s the most in demand channel to me and I can say that goes for a lot of people my age. Apple TV is trying to land ESPN for their work-in-progress TV bundle and they’re doing so because sports drives demand.

As we move slowly move to an online model of television and video streaming, ESPN is one channel guaranteed not to disappear. Because there are so many video streaming options away from TV like Netflix and soon to be HBO NOW, it’d be easy to unsubscribe from cable if ESPN were easily accessible otherwise. Sports is the only thing currently saving cable, at least from me.

College Athletes Compensation

College athletics, specifically men’s football and basketball programs, is a multi-billion dollar business, yet the players, who are the real assets that create this value, reap none of the benefits. From the hundred million dollar sponsorship deals to TV streaming rights and ad dollars, Universities and companies are profiting off of “student athletes” who are restricted from earning money even off their own brand. The debate on whether college athletes should be paid has two strong side. Jay Bilas, ESPN’s top college basketball analyst and former Duke Blue Devil, offers an interesting perspective and believes that “it shouldn’t be disallowed.” Under Mr. Bilas’s ideal system, college athletes would be paid like the free market: they could earn remuneration from the colleges and cash in on endorsement deals like professionals do. On the other side of the debate, President Obama weighed in and believes compensation would ruin the sense of college sports and would create bidding wars for players, with the deeper-pocketed universities buying up the best players. I fall somewhere in the middle.

I believe the only players that actually deserve to be paid are the high-profile players like Jonny Manziel or Jabari Parker. But in reality, these players are already being paid through scholarships. For Michigan football and basketball players, depending on their scholarship status, they’re being paid up to $45,000 a semester, not including meal plans, housing, private tutoring services, and access to state-of-the-art training facilities. Most importantly, these high-profile athletes only have one goal in mind for college, which is to make it professionally in their respective sports. Therefore, these players have been given the platform to make millions of dollars in the future.

Under the Bilas system, colleges and athletes would negotiate contracts that could include a noncompete clause, to encourage players to remain for 4 years (5 years if they redshirt), behavioral clauses, and the ability to unionize. My problem with this is where are schools going to get the money to pay athletes on top of a free education? The answer: everybody else. Most college athletic teams don’t turn a profit so the profits from other sports like men’s football and basketball help cover the cost of putting up other teams. So the increased costs in competing for top basketball and football recruits will either have to come from sports boosters or students in the form of raised tuition. If funded through the latter, this trend would further accelerate the growing number of student loans, which many have said is becoming the next bubble.

I don’t have a problem with college athletes being paid as long as its not from the universities. The NCAA needs to specify legal channels to how these athletes earn money. If they’re getting paid thousands of dollars from boosters in order to attend a certain school (which is already banned), then that’s hurting the system. However, there’s no harm in Gatorade wanting to use Jonny Manziel for a marketing campaign. High-profile athletes should be able to profit off their own brand and I think it’s the NCAA’s job to determine appropriate boundaries to do so. The NCAA’s excuse of preserving the amateur game is no longer excusable when college athletic programs bring in nearly $12 billion in annual revenues.