Money to Blow . . . on Coursepacks?

When I was an investment banking analyst, the expectation was that I blew my discretionary income on nightlife. As a student, the expectation is that I am cheap.  Still, even students can have indulgences.  Mine are overpriced lattes and of course, new textbooks.

Whatever may be said about the monotony of reading thousands of pages of court cases that is law school, one benefit of spending hundreds of dollars on casebooks every semester is that it is less psychologically unsettling than spending hundreds on coursepacks as I did in undergrad.  Coursepacks (in undergraduate business school anyway) comprised business articles from sources such as the Wall Street Journal, some academic papers, and Harvard Business School (HBS) case studies.  Spending anywhere from $100 to $200 on these materials per course seemed silly—partly because so many of those articles could be found for free online and partly because of the flimsiness of their binding and presentation relative to real textbooks.  (After all, Jay Gatsby didn’t stock his library with shoddily binded computer paper.)

Honestly, I can’t complain about having to pay for the HBS case studies because a decent amount of sweat goes into collecting the real-world data and organizing it for a small audience.  The limited distribution of the cases relative to a Dan Brown novel forces a price markup with which I can live.  However, the fact remains that you are also paying for many free, publicly available materials.  The other problem is a more general one with education:  in most courses, you only ever reference a couple of the HBS cases but still pay for the other five.

Some renegade professors surreptitiously post supplemental articles on course management websites such as Blackboard.  The more circumspect ones post links to those articles.  But these are rare cases because professors generally have nothing to lose in selecting material and forcing students to buy expensive coursepacks (except a few negative course evaluations); whereas, if they distribute copyrighted material, they risk violating school policies and the law.

While copyright law, through fair use and exceptions for educational uses, gives some room for copying, courts have likely made the practice of circumventing coursepacks by professors an even greater rarity.[1]

There is much talk about education in the United States needing serious repair:

–          In light of the financial crisis of 2008, there has been commentary on the ‘Wall Street brain drain’—the trend of excessive numbers of young and bright Americans heading to work in finance.

–          In response, initiatives in support of science, technology, engineering, and math education (STEM) have been announced.

–          Occupy Wall Street has reinvigorated an argument that has never really gone away, which is that student loans, and implicitly college expenses, are just too high.

I think it is undeniable that education needs reform.  Although the bullet points above are mostly relevant to higher education, maladies infect the entire system.

The last bullet resonates with me most.  The first two issues would directly benefit from the lowering of higher education costs.  Greater financial flexibility means greater flexibility in contemplating different careers and taking courses in subjects of interest.  I think it’s safe to say that a vast majority of folks headed to finance go there for money and opportunity rather than enthusiasm for the vocation.  Allowing people to educate themselves in things that they find exciting is more likely to lead to innovation, opportunity, and an economy that is not dominated by the financial sector.

Our liberal arts education system is predicated upon this diversity of interests.  I will be the first to admit that sometimes too much curricular flexibility causes a neglect of the less ‘sexy’ subjects, such as STEM.  However, I posit that if quality education were cheaper even STEM would benefit from a boost in popularity.

Peter Thiel, former Pay-Pal co-founder, has commented that education is in a cost bubble.  I don’t doubt him.  Paying $200 for 200 pages of paper, of which only 20 pages ever benefited my mind, is appalling.  Perhaps, inflated coursepack pricing isn’t the fault of educators as much as it is the cost of copyright law.  However, it is just another symptom of a bloated and inefficient educational system. (Another example is schools paying premium salaries to professors for their research rather than teaching ability.  Schools again may be the victims rather than the culprits because they are merely trying to improve their reputations, which though superficial, may be just as important as quality education.)

I am not advocating skipping college. (As a grad student, I would be a hypocrite if I did).  Although not attending college may make sense for an elite few, I do think the vast majority of Americans could benefit from the networks and job opportunities colleges and some types of vocational training can create.  I advocate instead for a massive retrenchment.


I have no clue.  Maybe that’s my cue to go occupy Wall Street.

[1] See, e.g., Princeton University Press v. Michigan Document Services 99 F.3d 1381 (6th Cir. 1996)


Facebook is to Zynga as a Clownfish is to a Sea Anemone?

The days leading up to the highly anticipated Facebook IPO have been met with market excitement.  Comparisons of Facebook to Google and speculation about whether the company is over- or under-valued have been rife for some time.  Facebook has convincingly overcome concerns about negative cash flows and lack of a monetization plan that plagued it in the media a few years ago.  However, concerns about Facebook’s business model seemed to have revivified as investors struggle to identify the company’s bread and butter and more importantly, to understand its relationship with social gaming behemoth, Zynga.

I remember hearing estimates in 2009 that Zynga made up 40% of Facebook’s revenue.  That is why I was taken aback by the market’s surprised reaction when it traded up shares of Zynga upon finding out the company composes 12% of Facebook’s total revenue.

A breakdown of Facebook’s revenues from Zynga shows that Zuckerberg’s company derives its revenue from the gaming company through the sale of virtual goods and other add-on features in games (Payments) and through ads that Zynga buys to cross promote its own games to captive Facebookers (Ads).  Moreover, an increasing proportion of this revenue comes from Payments revenue.


In some ways, the Payments model is not very different from the way Apple charges iPhone application developers a cut of the revenues made from the Apple App Store.  Facebook’s cut of Zynga’s Payments revenues is reported to be 30%.  Facebook’s relationship with Zynga deviates from Apple’s relationship with its app developers in at least one key respect—Facebook also reaps ongoing benefits from Zynga’s success in the form of advertising revenue.  The larger Zynga’s customer base grows, the more it is willing to invest in advertising and the more people that fall into the target audience Zynga wants to reach.  Increased advertising by Zynga benefits Facebook.  Additionally, while iPhone app users pay once for an app (say $0.99), Zynga users may keep buying add-ons within the same game (say $0.99 per virtual good).  Finally, while I have not searched Apple’s financials to confirm, I seriously doubt any one app developer makes up 12% of Apple’s app store revenues, let alone 12% of the diversified company’s total revenue.

Thus, Facebook’s near-term future is highly levered to Zynga’s success.  This leverage presents problems in the eyes of some for several reasons.  First, sustaining revenues from gaming alone is not Google-esque.  Google effortlessly fused the worlds of media and technology in a revolutionary way.  It was able to use its technology to appeal to advertisers very broadly.  A dependence on gaming leaves Facebook less diversified, less appealing to advertisers universally, and potentially vulnerable.  This factor doesn’t bother me much because other apps will fit into the Facebook ecosystem as the social networks becomes increasingly ingrained into the way we think about the Internet and computing.  Plus, there is a trend in various sectors to solve problems through gaming anyway.

The bigger problem is a more general business issue.  Dependence on one company can become unhealthy if the equilibrium is rattled.  Right now Facebook and Zynga have symbiotic interests.  Both businesses align well with each other.  However, if Facebook were to decide to invade Zynga’s turf and start competing with the game developer, or if Zynga can successfully create its own network of users outside of the Facebook platform, the relationship won’t be quite as hunky dory.

Some have countered that Facebook has an exclusive arrangement with Zynga whereby Zynga agrees to use Facebook currency and develop certain games only for use on Facebook.   I don’t really see this arrangement mitigating the concern.  Prohibiting development on other social networks is a useless demand since Facebook has won the day as far as general interest social networks go, and gaming is not a fit with other popular social networks such as Twitter, LinkedIn, and foursquare.

More significantly, Zynga has always had a disconnect between its mobile apps and its games on Facebook.  I once tried playing Mafia Wars to get a better idea of what the craze was behind Zynga’s games ahead of an interview with the company.  My profiles on Facebook and the iPhone app could not be synced.  Whether this incompatibility is still an issue with Zynga’s games, I do not know.  However, the recent success of Words With Friends at the very least shows that Zynga is capable of finding success outside of Facebook even with an exclusivity agreement in place.

The fact that the ads portion of Facebook’s revenue from Zynga is decreasing is reassuring, but it still raises issues about Facebook’s ad monetization strategy.  Google found a direct way to relate ads to subjects that directly interests users.  When searching for a person’s profile on Facebook, it is less obvious which ads should pop up than if someone conducts searches about an upcoming vacation on Google.  (This explains why so many people complain about dating advertisements on Facebook.)  The display ads on Facebook are commoditized, and the company’s current advertising strategy is just as shaky as a non-premium online ad network.

These concerns about Facebook’s advertising revenue is not to say the company won’t eventually get it right.  The rich data Facebook collects is highly valuable.  The challenge of utilizing it in a way that doesn’t sound off alarms about privacy remains.  Personally, I thought Beacon was a promising first step, but it was introduced in such a disastrous way that Facebook has been unable to broach the topic again in a privacy-friendly way.

Still, Facebook has to figure out the ad scheme fast.  Other social networks, though not at all threatening in terms of scale, are carving out niches that are more advertiser-friendly.  Pinterest, for example, can make money on ads in a very direct way not too different from Google, and foursquare can capitalize on location-based audiences and local deals.

Utlimately, Facebook is well . . . Facebook.  I don’t think many can imagine life without it, and it is hard to bet against a company with that type of stickiness.  As long as the Facebook-Zynga symbiotic equilibrium does not shift, the fact that 12% of Facebook’s revenues come from Zynga isn’t too troubling.

I’d also note that while I may have painted a rosy picture about Zynga over the medium term, it too has long term concerns, namely the danger of becoming less data-driven/disciplined and more like a media company.  Additionally, while the exclusive arrangement with Facebook might be a pro for the social network, it displays Zynga’s subjugation to Facebook’s terms and power.

In the meantime, I leave it to you to decide which company is the Clownfish and which the Sea Anemone.  For help and more information, see the epic video below.

JD: Not Just the Protagonist of a Show I Used to Like

I’m at law school.  It’s finally sunk in, and it’s worth mentioning.  Many of the topics on this blog correspond with my past lives as a business student and technology investment banking analyst.  As a legal student, my current interests won’t simply vanish, but I do except to perceive the world in an increasingly altered fashion.

Already I have noticed just how retrospective law is compared to the forward looking natures of technology and financial analysis.  I can imagine former colleagues condescendingly spurning the legal field’s lack of velocity and disengagement with the “real world.”  Yet, I also already recognize the potential benefits of applying the rigors of thorough legal analysis to non-legal matters.  Having read dozens of cases already, parsing analytical discourse into the issue at hand, logical reasoning, and actionable theses is becoming second nature.  The skill of “pattern recognition” that venture capitalists and portfolio managers so proudly tout can be comprehensively honed in the pursuit of a juris doctor.

The distinctive feature about the study of law, of course, is the Socratic method.  It is alive and well a couple of millennia after the bearded sage last donned a toga.  The method is captivating, but it is also mentally taxing.  Some professors seem to employ it to make a point for the benefit of teaching, but others ask students questions seemingly to satisfy their own whims.

While it does help gradually reveal kernels of wisdom, the Socratic method in the legal field today might be less illuminating than in the past.  Reading century old cases, it is apparent that the law has evolved from primarily reflecting the collective moral compass to becoming more about functionality and establishing objective rules.  That means when reading older judicial opinions which rely less on the precedents of preceding cases and more on logical statements of morality, the conclusion is usually too obvious.  Then, when listening to classmates answer questions about these same cases, the kernel revealed is sometimes anticlimactic.

There is a tendency to want to jump ahead to the implied rule.  Perhaps, our primal sensitivity has eroded (or never existed), and in a jaded modern world, we immediately want to drill down to the detached, secular answer.  It is on this front that I will need to adjust most.  I will be forced to value the path to wisdom and not only the results, or risk being miserable for three years.  It is a mindset I happily espoused as an undergraduate, and hopefully, I can ease myself back into that disposition.

I was always fascinated by law school.  As funny as it sounds, attending law school has always been more of a dream than learning or practicing law.  Now that I am here, it is great to hear spirited discussions about legal controversies and public policy.  It is just funny to realize how only a couple of years as a working stiff can change one’s view on things.

LOST: A Business Allegory

As one of my favorite shows ever comes to an end tomorrow, I felt a need to make a tribute in my own small fashion.  The most impressive feature of LOST (yes, always in all caps) was its ability to maintain a connected, though at times meandering, story arc on a major network over the course of six seasons.  It is rare for a show I like to go out at a point when I am still as interested as I was when I first started watching it.  Sadly (on a couple of levels), there will be a void in my life after Sunday night.

LOST earned repute among its fans for constantly weaving its themes and motifs throughout episodes and seasons.  In that vein I wanted to make a tribute to the show that incorporated the recurring ideas and themes of this blog.  Much of my experience and interests lie in business, finance and startups.  If imaginatively interpreted, LOST can provide us an allegory for these subjects.  The following expatiates the roles various characters and objects played in the show’s economic ecosystem:

  • Candidates / Companies (Startups): Our beloved main characters were on the island for a purpose unbeknownst to them and us. We eventually find out that they are there as candidates to replace the current protector of the island.  We root for them.  We empathize with their pain.  We smile with their successes because when they win, we the general audience win.  Startups in some form improve an aspect of civilization, albeit for a profit, and it is often for the greater good.  The characters of LOST, for its legions of followers and for the island’s well-being, provide a similar service.
  • Jacob / Venture Capital: Introduced early in the series but only making an appearance in the last episode of season five, Jacob is perhaps the most influential character on the show.  He is well intentioned and wants to give all the characters on the show a chance to succeed through their own decisions and actions.  He has a vested interested in all of them and guides them on their missions.  However, they ultimately  need to fend for themselves.  Jacob is Venture Capital.  After investing in their portfolios companies venture capitalists certainly have an influence on the big operational and funding decisions, but it is up to the companies to execute on their own.  Even though the two parties’ interests are not always perfectly aligned, like a parent to a child (or like Jacob to the candidates), venture capitalists wish the best for the companies.
  • The Island / Consumers: The island is us.  It is the consumers of our economy.  It is a moving target, which is why it eludes so many including people like Widmore who never seem to be able to find it.  The island is hard to reach.  It must invite you. Consumers are often difficult to reach, and customer acquisition and distribution plague many startups.  Finally, the island travels through time.  Similarly, timing is so crucial with consumers.  Introduce a concept too early, and it won’t work.  Too late, and you might as well not bother  (Jangl to Skype).  The candidates are there to serve the island just as companies operate to serve their customers.
  • Black Smoke (Man in Black) / Market Forces: Yes, the black smoke in LOST has always been a destructive force, at least on the surface.  Yes, the man in black in the form of John Locke vowed to destroy the island just this past episode.  But has he really been all that bad for our LOST economy?  He is responsible for weeding out the candidates.  Only four candidates remain going into the final episode.  As consumers, we want the best product possible from the best company, and the island, too, deserves the best protector possible.  The black smoke in its own chaotic way is doing just that.  Market forces can be brutal. While they often destroy seemingly good companies, they also ensure survival of the fittest.  Perhaps, Adam Smith really envisioned a cloud of black smoke when he wrote about his “invisible hand.”
  • Desmond / Big Brothaaa: Sorry, I couldn’t resist the play on Desmond’s catchphrase.  Desmond’s role in LOST‘s conclusion is one of the most intriguing questions leading into the finale.  For our purposes Desmond is the government.  In the show he has displayed a capacity for withstanding strange electromagnetic forces.  He is also tying up loose ends and helping the main characters stay on track to fulfill their purposes.  He has also been described as a failsafe against the black smoke, or market forces.  The government has the ability to do all this:  prop up companies and provide bailouts as a failsafe against financial meltdown.  On the flip side, just as Desmond is impervious to the island’s electromagnetic characteristics, the government can also be unresponsive to consumer outcry.
  • Ben Linus / Hedge Fund: Stretching even further, we can see Ben as a hedge fund.  He never quite seemed to be just another candidate.  He interacted with Jacob to glean any potentially useful information all the while manipulating island newcomers.  He somehow stayed above the fray, but when he did get burned it was huge—he lost his daughter Alex, tantamount to a complete fund collapse.  Going into the final episode, Ben might even be playing the man in black, or smoke monster.  Only a hedge fund manager could be cocky enough to believe he could manipulate market forces.
  • Charles Widmore / Private Equity, LBO: Well, Widmore is a corporate raider.  He literally raided the island in season four and seemingly for a profit.  In this last season his ego seems to have convinced him that only he can counter the smoke monster and save the remaining candidates.  I imagine Henry Kravis believed only he could straighten out “broken” companies battered by the free market back in his heyday.
  • Jack Shepherd / Google: It’s always been about Jack.  The show ends on the 23rd of May.  Jack’s assigned number as a candidate is, of course, 23.  This past episode he seemed to confirm his pivotal role as it all comes to an end by stepping forward to fulfill his destiny.  He might be the chosen one, but he is also responsible for his own fate.  The island needs him, and he needs the island.  He is Jacob’s ultimate candidate—the cream of the crop.  He is Google (or Apple or Amazon or any other wildly successful venture-backed company that you think deserves the crown).

There are probably many holes in this assessment.  It might turn out that this entire metaphor is somehow dismantled in the series finale, but hopefully like LOST itself, it leaves plenty of room for questions and debate.

Not Too Late for a Summer Job, Type-A Undergrads

I know. This is way too quick to write my next post, but too bad. This is time sensitive.

As the general job market worsens (I don’t believe the latest drop to 646K in jobless claims is at all an accurate indicator), so do prospects for summer internships and jobs for college students. I have enjoyed the hardship that is recruiting season at a school full of Type-A go-getters. Fortunately, for me times were good, and finance jobs were available basically to anyone that had read “When Genius Failed” or “Liar’s Poker” and rocked a 3.0 GPA. Alas, overachieving college sophomores and juniors, times are different, and interviewing for internships is hypercompetitive. I have had undergraduate students, mostly on the business major path, ask me for advice on what to do when the ideal summer gig isn’t available. I usually suggest being creative in the downturn (as does everyone else). I advise them to do something even remotely related to what the ideal job would have been (as does everyone else). I tell them to hang in there, and stay positive (yeah . . . you get the idea).

Everyone has been talking about innovation being born in times like this, and I agree. Opportunity cost is so much lower considering the higher level of risk involved in previously “safe jobs” and the lower short-term earnings potential in finance. So one thing I do suggest for college students is to look at operational roles in non-traditional and early stage companies. The problem here is that many of these companies do not have formal programs, and let’s face it, if you are a business or engineering major, you are probably somewhat risk-averse and cling to the comfort of a formal program. Startups also often want more experienced folks. Given the job outlook, the current talent pool can only hurt the inexperienced even more (admittedly, this last point applies to me too).

Obviously, this rambling is leading to something more positive. Today I discovered an awesome opportunity to work for startups in a formal program. It is offered by True Ventures (investors in Automattic/WordPress, Meebo, GoodReads, etc.) and is called True Entrepreneur Corps. It is an 8-week program for 2010 and 2011 grads and includes a small end-of-program stipend. More importantly, it sounds like a great experience targeted at this unaddressed yet still unemployed crowd. The best part is that the deadline is still a couple weeks away on April 15, 2009. So if you qualify, give it a chance. Perhaps, you’ll come out of it with an entrepreneurial bug and will be off changing the world in no time at all.

The Problem(s) with Wall Street

Wall Street is no longer a street in Downtown Manhattan. It hasn’t been for some time now. Wall Street has actually weaved its web across most of New York City. It is no longer just the banks. Its appendages include hedge funds, private equity firms, wealth managers, and any other type of financial/investing house that may have sprouted in the past couple of decades. However, when it comes down to our current mess and whom tax payers are bailing out, the blame indeed does revert to the traditional salestraders, investment bankers and bank execs. They are the ones that took on misunderstood, levered off-balance sheet risks to satisfy their hedge fund clients. They are the ones that provided a secondary market for bad mortgages, incentivizing brokers to give out a loan to any potential homeowner that would seek it. Now, there are many to blame including perhaps, the SEC, which may not have oversight when it comes to hedge funds and private equity shops, but which is absolutely in charge of maintaining the appropriate regulation over banks to provide shareholders transparency. Yet, even with so many to blame, there is no question in my mind about how broken the Wall Street system really is.

I seem to have vilified investment banks and refered to them as “they.” Unfortunately, I myself am a member of the industry. I have only been involved for about a year and a half now, meaning I really have nothing to do with most of the ills that spurred this historic collapse, but I am a cog in this ‘broken’ machine and am obligated to at least offer some insight into the repairs needed. So here is an initial list:

  • Short-term Gratification:  As with any public corporation, banks are rewarded for short-term results quarter-by-quarter rather than on long-term performance. Banks, however, facilitate capital so that an overreaction to good or bad short-term market conditions has a much more severe bullwhip effect for our whole economy than a typical company whose overreaction is slightly more isolated to its industry and supply chain. More broadly, banks are encouraged to maximize profit in boom cycles even more so than other companies because employee attrition is so high, and many employees are looking to grind for money over short bursts of time rather than build a career. Employee attrition is so high in the industry because people recognize the need to be opportunistic regarding their resumes and financial wealth. In other words, they want to maximize their bonuses during the boom times. Unless clawbacks become a reality, this is where the currently popular term, ‘moral hazard,’ comes into effect. When playing with other people’s money and having only upside, why not aim for the quick happy ending?
  • Incentive Structure:  Bonuses on Wall Street are not like typical bonuses. Besides being much bigger than in the typical corporate job, they are also much more than just a year-end cherry on the top. Bonuses are considered part of one’s expected compensation. There is no way, especially at the junior level, that people working at an investment bank would work 80+ hours a week for just their base salaries. The amount of verbal [and physical if you count lack of sleep] abuse involved would not justify it. Bonuses are based on revenue, and on Wall Street revenue is largely based on volume and size of transactions. This explains why employees may push irrational trades and transactions for the incremental revenue. One solution is giving more stock to employees, and while banks do implement this, it worked better in the old private partnership models. Now that banks are public, however, there are still plenty of non-employee shareholders onto whose shoulders employees can push risk.
  • Client-Facing Business: While Goldman Sachs, JPMorgan and other banks have used proprietary trading essentially to the effect of having in-house hedge funds, Wall Street is still a client business. Whether it is bending over backwards to produce an M&A analysis at 4:00 AM on Saturday for the VP of Corporate Development so that he can use the phrase, “The acquisition of ‘xxxx’ company is accretive,” on slide 27 of his presentation to the President of Corporate Development, or executing an MBS trade worth millions while having no idea about the true risk profile of the security, the client is always right. Banks want to make money and cater to the client’s every single need. The current crisis largely stems from the latter case in which traders had no idea what they were trading but could not say no to the client. Maybe a refresher course from middle school health class would help: “No means no.”

The following points might not have prevented a financial crisis, but are still flawed facets of the financial services industry:

  • S&T vs. IB:  Sales and trading and investment banking advisory are two distinct aspects of the Wall Street business model. Traditionally, sales and trading desks have been responsible for  acting as an intermediary to ensure buyers and sellers can get trades done, and they would get paid for this service. As mentioned, more recently some traders have also traded as investors/speculators taking risk onto banks’ balance sheets, essentially making bets that assets would increase in value and make the bank money that way. Investment banking advisory groups, on the other hand, give clients advice on M&A, IPOs, restructuring, etc. In boom times both segments do well, but traders often see more upside. Trading is what caused banks to take on undue risk in this last collapse. In these down times, though, both traders and bankers are punished via layoffs and lower pay. There is probably more nuance involved than this, but somehow it doesn’t all quite make sense.
  • Analysts vs. MDs: Analysts are the lowest rung on Wall Street. In investment banking advisory they are chimpanzees, jumping and clapping on command. That guy doing that M&A analysis at 4:00 AM before, well, that was an investment banking analyst (i.e., me). The Managing Directors (MDs) bring in the deals and have the relationships that generate business. So maybe they do merit the millions a year, like any good agent would in other fields. The analyst makes his $60K base and hopes to make a bonus of anywhere between $20K and $100K (perhaps, closer to $0 these days). The analyst is only in his early to mid 20s. Plenty of money at that age right? Maybe, but you do have to factor in the average of 80-90 hours a week, the cost of living in Manhattan, and the workplace abuse. There are people between analysts and MDs with MBAs that check work and manage deals to ensure execution, and they are paid somewhere between $100K and a couple million. The problem with the model is that analysts do everything—from the initial financial analysis and company presentations to binding and couriering books—but are not incentivized with the appropriate financial upside or long-run career path. I don’t know what the solution is because truth be told, most analysts are just using the position to save some money and go do something else. Perhaps, the people in between should shoulder more responsibility since they hope to be on career paths to become MDs. The fact that one has his or her MBA does not justify sitting on one’s hands and having his or her analyst do all the work so that it can be passed onto the MD, who originally sourced the business.

Some of this was just venting, but hopefully, there were some sage (or moderately useful) words, as well. Here’s to Wall Street fixing its woes so that maybe the rest of the ‘normal’ folks can fix theirs.