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By UCF College of Business
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The podcast currently has 40 episodes available.
Are the Excel Championships just another bit of content for ESPN? Could it keep the Pac 12 alive? More importantly, is it an eSport and can we gamble on it? Listen in!
Announcer from the movie “Dodgeball: A True Underdog Story”: Live from Las Vegas, It’s the Las Vegas International Dodge Ball Open here on ESPN 8: The Ocho, bringing you the finest in seldom scene sports from around the globe since 1999. If it’s almost a sport, we’ve got it here.
Paul Jarley: But I have to admit I did not see this coming.
This show is all about separating hype from fundamental change. I’m Paul Jarley, Dean of the College of Business here at UCF. I’ve got lots of questions. To get answers, I’m talking to people with interesting insights into the future of business. Have you ever wondered, is this really a thing? Onto our show.
Paul Jarley: While, it most certainly isn’t “Dodgeball,” and we aren’t breaking down Average Joe’s, we are talking about the Excel Championships that just aired on ESPN, and will be heading to Las Vegas in December. Are the Excel Championships even close to an eSport? I really need help understanding why Excel is on ESPN. To form an opinion on this, I’ve assembled the following panel of experts.
Andrew Grigolyunovich is the Founder and CEO of the Financial Modeling World Cup and joins us all the way from Latvia. David Clayton Brown is an Associate Professor of Finance at the Eller College of Business at the University of Arizona. Bill Jelen goes by the moniker Mr. Excel. He has authored several books on Excel and is the competition’s play-by-play guy. Adrian Bouchet is the DeVos Endowed Chair of Sports Management and Chair of the Sports Business Management Program here in the College of Business. Finally, Sean Dennis is an Associate Professor in our Dixon School of Accounting. Listen in.
Paul Jarley: So one of the very first podcasts I did was on eSports and the premise of it was whether eSports was going to be a thing or not. I came down on the side that I thought it was going to be a big thing that I thought it wouldn’t just be a big thing in the professional ranks, that it would be a big thing in the college ranks as well. And one of the reasons I thought that that would be true is it would be a way for universities to promote a group of geeky students with a unique offering, but I have to admit, I did not see this coming. When I saw the ESPN promotion on The Ocho for this event, I thought, wow, this is one I just wouldn’t have imagined. I’m going to start with David and Andrew here. Where did the idea for these kinds of competitions come from? Andrew?
Andrew Grigolyunovich: It all started, I think that was back in 2012, the first competition of a similar kind that was called ModelOff that was created by two guys in Australia and they were doing that on an annual basis and that was devoted to financial modeling. That was called the Financial Modeling World Championship. They had a name brand named ModelOff. I was one of the players, David was one of the players there. We were good players, we made it to the finals a couple of times and in 2016 we were among the top 16 players in London. So the difference between what you saw on ESPN, first of all, that was annual, not regular. Second, it was more player oriented, less show oriented. That was basically targeting finance professionals, giving them very interesting cases to solve, but there was not too much value for spectators. When they sold this to new owners back in 2019 and the competition discontinued by 2020.
So I saw an opportunity to create the Financial Modeling World Cup and that was the tournament for professionals from the very beginning. We were aiming to increase the production value and also increase the spectator value there. We’ve tried a couple of formats. Some of these initially were not too successful, but eventually that has evolved into the format you actually saw on ESPN and that’s how Excel eSports was born. I think the first game we could probably get it to back to 2021 and meanwhile David continued to play in his ideas about the student tournaments because he’s a professor. We are more like professionals and David, maybe you can tell more about that aspect.
David Clayton Brown: My whole entry into this was 2014. I started here at the University of Arizona as a professor and I started teaching financial modeling and I wanted a way for my students to get a little bit more than what we had in class, get some M&A models, some private equity type models as well, and I found ModelOff was a great place to do that. You got these professional models, professional modelers were completing them and it gave the students a chance to see what they were doing. They also provided answers, which was great for student learning. You could try the challenge, you’re going to struggle through it, which is fine, but then you’re going to learn from it afterward. And I had a few students that really engaged with this. They would finish in the rankings at least for this, for the ModelOff competitions.
And then in 2016 I took my hand at it and made it to the finals with Andrew. We got to meet for the first time and then like he said, in 2019, things changed hands with ModelOff started to wrap up and at that point I initiated a conversation with the ModelOff team like, Hey, can we start a college version of this? We start working on it, the pandemic hits, it kind of derails everything, but then I actually was able to get tenure. To me that gives me kind of a license to create value in the world and I see this as a huge source of value. We see industry people saying students need more Excel, they need it sooner, so how do we deliver it to them? At U of A, we’ve started to do more courses earlier in the curriculum, but broadly we just want to get more Excel opportunities to students. This is a hard thing for professors to bring to the classroom, so we’re hoping this is a way to make it easy for professors to give their students a little something extra to do to get their feet wet and then the students that are really interested are going to run with it because of this format Andrew’s developed.
Paul Jarley: So where did most of the contestants come from, Andrew?
Andrew Grigolyunovich: Basically, investment banking, audits, financial consulting. If we talk about finance people, we have actuaries, we have engineers maybe a little bit less than we would hope for. We have a couple of mathematicians. The reason is that our company name is the Financial Modeling World Cup. The word financial might be a little bit encouraging for finance professionals, a little bit less encouraging for other professionals.
Paul Jarley: Where do the problems come from? Do companies submit problems for you all?
Andrew Grigolyunovich: You know what, that’s a very special discipline in writing those types of cases. If a company comes with a problem, it could be the case. We’ll have actually a real life company initiated problem in September, but again, these have to be adapted to a format that’s solvable within thirty minutes or maybe an hour. So we try to see some real life problem. The whole tournament that’s been studied by my company, which is doing financial consulting and financial modeling consulting, quite often what we do, we just look into some interesting real life examples, the real life models we were doing and create some generic case out of that. Initially most of the cases were written by myself, especially in the first season. And then after a while, the players have started to contribute their cases. So right now, it’s also probably two thirds, maybe even more. That’s contributed by the community and the other is being written internally at the Financial Modeling World Cup.
Paul Jarley: One last question and I’ll jump to David. Andrew, do you use it to identify talent for people who you want to hire into your company? Have you ever hired anyone who won the competition?
Andrew Grigolyunovich: Actually, yes. We’ve hired two guys from a team who were doing the student competition last year.
David Clayton Brown: Yeah, for our cases I’d say it’s a mix because we actually want students to get an idea of what real life work is, and a lot of that has been more finance oriented so far just because that’s where my connections are, but we want to expand that even more as we go. For example, we’re actually talking to a professor across the university here that studies bee populations. And so building cases that relate to things people study, I think is a real good way to engage the students and it doesn’t just have to be in the business school. And that’s why we’re starting to look across campus for more of these collaborations, to bring interesting data problems to the students and then teach them some Excel skills along the way and have fun competing.
Paul Jarley: Has it developed into a student club yet? David? Is there a registered student organization on campus?
David Clayton Brown: So I started the financial modeling club a couple of years ago, kind of an offshoot of that that focuses on this competition. I actually for the first time later today, will be teaching an Excel eSports class here at the University of Arizona. Basically, I’m training them on what the recent case competitions have been. I pick a recent Excel eSports case that has been part of the pro competition and let’s break it down, let’s work through, let’s talk about different ways to approach it and how to get as fast as possible. I think two or three other universities at least have these Excel clubs. So I see this growing. Hopefully the MECC creates some momentum behind it.
Paul Jarley: How did ESPN get involved in this? Are they that desperate for programming? What’s going on?
Andrew Grigolyunovich: I think that’s an interesting niche they could be looking into because imagine the potential interest from potential market there. Hundreds of millions of people around the world use Excel, right? This is definitely something that could evolve into something very, very, very big. It’s not just the competition, we use the word competition, but essentially that’s a very nice, interesting, fun way to train. And as soon as people realize that that’s going to be a massive increase in the number of followers and number of participants, there’s a huge market I see there and a huge growth. For ESPN, it turned out that we were actually acquainted with the right person there by Microsoft. The story was that they had some contacts there. They are one of the sponsors for our competition, very much interested in their product being used in these very unusual ways, so to say, that’s how it started. So basically we were producing these Excel eSport games that were shown on our YouTube channel, but that was the right content for them and that’s where they were showing our world championship in 2021, the All-Star game, 2021, ’23 as well, and that’s how it started. So once in a while, that’s a nice content for them. We’re not able to move basketball or American football yet from the prime time. There is a long way to go at this point.
Adrian Bouchet: If you want ESPN to take it to the next level. The question nowadays is can you gamble on it? Can I place a wager on a certain Excel team? And is Las Vegas iterested? That seems to be the future.
Andrew Grigolyunovich: There is some interest, there is some initial, let’s say, work on that. We might see that after some time.
Paul Jarley: One of my original reactions was that ESPN might be the wrong place to host the competition, in the sense that your viewers, and I’m going to engage in overgeneralizing here, but my hunch was that your prime consumers or watchers may not be people who really watch ESPN that much. What do you think? Have they helped you guys promote this, do you think or not?
Andrew Grigolyunovich: They definitely have helped to promote just the fact that Excel is on ESPN already made a lot of news across the world. That’s probably one of the reasons we’re meeting today.
Paul Jarley: Right? Yeah.
Andrew Grigolyunovich: Whether other channels could be more suitable? There might be. Essentially, even internally, we’re discussing, it could be also positioned or very easily transformed into some sort of like a quiz show or very similar to a quiz show. And that’s basically a content for less sport channels, like more general TV channels with general audience. It could be, we will be reviewing these. At this point, there is no exclusive contract or something. So we definitely have options there to look for other ways to promote. But yes, initially ESPN helped a lot, very thankful to them. Hopefully they liked us to be there as part of The Ocho.
Paul Jarley: Do you have any sense of what viewership is like?
Andrew Grigolyunovich: We do have some ratings. What we can share is that our viewership on YouTube for the last year’s All-Star Battle, it’s 800,000 views and of these, I think probably half a million was within a couple of days after ESPN has shown the game. So the interest is there, that’s for sure.
Paul Jarley: Bill, you had the lofty title of Mr. Excel and as I understand it, you’re the play-by-play guy for this. So how did you get this gig?
Bill Jelen: It goes all the way back to the first live event in 2012. I was invited to come and be a judge and I was very happy. I always say I was smart enough to be a judge and not to be one of the competitors because although I teach Excel and I know a lot about Excel, the people who reach the finals are just incredibly good at Excel and to watch them work live, I was there the first three years, 2012, ’13 and ’14 in New York City. It was just surreal to see how fast everyone was and I knew I was in the right spot as a judge instead of trying to compete because the people that are using Excel 50, 60, 70 hours a week are incredibly fast Excel. I’m very happy to be a judge and I was very happy when they invited me back to do some of the play by play for the FMWC before the two ESPN shows, it was on ESPN 3, three sets of two hours that were on ESPN 3. So there was good history there being on those networks.
Paul Jarley: So what’s your day job Bill?
Bill Jelen: I write books about Microsoft Excel, and before that I worked in accounting and finance using Excel 40, 50, 60 hours a week and I’m good at Excel, but I’m not finals good at Excel.
Paul Jarley: So how do you approach the play by play?
Bill Jelen: We get the case a few days before the competition and it’s really important to try and work through that case and there’s maybe seven stages that you’re trying to earn points for, so you have to actually go through and try and solve those. So I know how I solved it and I recognize that there’s other ways that other people might solve it. So then as you’re watching people start to dive in, you’ll be able to see their screen and say, “Oh, look at this. They’re doing something completely different than I did.” And ideally, say there’s 15 questions in section one. If you get the logic for the first one, if you did the logic correct, you’ll get all of those points at once. So 15 times five points, let’s say. So if you see someone get 75 points, oh, they just solved section one, but if they get less than that, then that means that there’s a logic error there and they’re not catching some cases and that problem will then snowball. So it’s just kind of interesting to see who gets the complete section done, which section they’re working on and the leaderboard changing they have. Then we go take a look at that particular.
Paul Jarley: So Bill, what do you think makes a great Excel competitor?
Bill Jelen: Being able to multitask. One of my favorite competitors is someone who looks at the seven problems and tries to figure out a general function that will be useful in sections five, six and seven. So they’re solving case one, but not just solving case one. They’re trying to create an overall model and an approach that will work through those deep cases out of a thousand points. Maybe people want to get to 540 points, but the difference at the end is going to be the people who get up into the 200 point sections.
Paul Jarley: So Bill, I think you’ve probably seen David compete a couple of times. Can you break down his skills? What are his strengths and weaknesses?
Bill Jelen:In all of the that I’ve been in, David does not make it to the final three or four. I know he is very good.
Paul Jarley: I’m trying to help him out.
Bill Jelen: Some people that I remember from 2013, Michael Jarman. Michael Jarman was incredible back in 2013, but Michael’s been promoted and he’s the manager’s, manager’s manager and I don’t think he’s using Excel 80 hours a week anymore. And so you’ll see Michael in a competition and fall out pretty quick. And now Michael has moved on to be a judge and write cases, so it sounds trite, but it is a young person’s game. The people who are actually using Excel just continuously, they would never be at a computer without Excel turned on. Those are the people who are going to.
David Clayton Brown: I think there are three big areas that makes a good Excel competitor. So the first one is just raw horsepower. How smart are you at solving puzzles? So that’s a very general skillset. Two is Excel, how much Excel, do you know? How practiced are you in it? Are you doing it 60 hours a week or are you doing it a few hours here and there? How deep is your knowledge of the functions, the tricks? I mean they just announced Python in Excel, so do you have that tool set ready to go? I think the third area that’s going to become increasingly important kind of in this new world of ChatGPT and prebuilt tools is just how prepared you, how much research have you done into past cases? How many LAMBDAs have you built ahead of time? That way when you see something and you’re like, “Oh, that’s like what I saw three seasons ago in this case,” and I can pull that out in 10 seconds rather than having to model it, which might take you two or three minutes now, you’ve really just saved valuable time. My strength, I think, is number one is I just have good horsepower. I just don’t have enough time to practice Excel and to build those tools. Although that’s partly why I want to coach and why I’m teaching my students is it is what keeps me engaged, otherwise I just can’t devote the time to it. So it’s kind of my mechanism to keep myself in and try to stay relevant on the professional side.
Paul Jarley: And what makes for a good competition? Is it the puzzle? Is it the complexity? What makes for a good competition?
Bill Jelen: You definitely want one where people are getting up into levels five, six and seven, but not solving it too fast if the whole thing gets solved. If someone gets their thousand points in half the time, then it wasn’t hard enough, but if you get down to only two minutes left and they’re only on section two, then it was way too hard. So you’re looking for at least a few of the competitors to get deep into section five, six and seven where they’re trying to get close to that thousand points and kind of neck and neck, those are the ones that I think are the most interesting.
Paul Jarley: Well, I think you’ve had an innovation in the competition in that people drop out if they’re not quick enough.
Bill Jelen:Bill Jelen: Right, yeah, this time, every five minutes, the lowest scores were knocked out. It actually helps trying to talk about eight people and give time to everyone makes it tough. So having those people drop out makes it easier for us to talk about the people who are left.
Paul Jarley: Go ahead David.
David Clayton Brown: Yeah, one thing I’d add is a good competition is also one that’s relatable for the audience. A lot of times these are not necessarily financial model cases, but they’re games that we all know like rock, paper, scissors, or when you asked about how do these cases come from, some of my cases come from playing little board games with my daughters. Kids’ games are a great way to adapt into this. People understand them and so then when you watch it, you have a conceptual framework for how I would solve this, and then you’re just kind of in awe at how the competitors are solving it way faster than you could imagine.
Paul Jarley: Adrian, what’s the definition of an eSport?
Adrian Bouchet: It seems to be like all electronic games try to be an eSport, but I reached out to a former colleague of mine when I worked for Major League Baseball who now works for Red Bull and he oversees Red Bull’s eSports division, which is pretty prominent, and he said that it comes down to three things. Number one, what he called playability. It’s got to be fun to play. Number two, it’s got to be a compelling viewing experience, and number three, it has to have support of either the developer or the publisher, which in this case I guess would be Microsoft. And it certainly seems like, I mean there’s already the ecosystem built, so that’s what he said that takes to become a successful eSport and it has to have a good mix of all three of those components.
Paul Jarley: So there are really famous eSport athletes. I know the South Koreans in particular are dominant in a number of eSports. Have any of the competitors in these competitions gone on to be influencers or do they have fan clubs?
Andrew Grigolyunovich: We definitely do have stars of the competition. We definitely have people who are admired by the field, by the industry, by those people who are engaging with Excel eSports. I wouldn’t say they are influencers, but they definitely use this as their marketing too because for most of them they are consultants. They are doing financial modeling consulting or other types of consulting, and that’s a great added value for them in the eyes of their clients. I believe they can make much more there rather than through let’s say influence revenue, which is especially tough if you just starting.
Adrian Bouchet: So I would ask that question a little bit differently. I would say has Microsoft allowed you to leverage their ecosystem for sponsorship purposes? What companies have sponsored the Excel championship? I mean because if you have ESPN and you have Microsoft, those are two pretty big brands, have they allowed you to sort of leverage their market share to go out and get other companies interested in sponsoring either the competition or the athletes that take part in it?
Andrew Grigolyunovich: We do have other companies sponsoring the events for Excel eSports at this point. There are companies like SoftwareOne, software license retailer. Order.co, a procurement company, like very creative in terms of thinking of different events next to us and basically there are lots of other companies coming with inquiries there. It’s not really prohibited or something like that. Basically, the more sponsorships we’re able to get, the better is the value we can provide and the higher the prize money.
David Clayton Brown: A lot of our sponsors are coming from employers that are interested in our students. The students that are engaging in the collegiate challenge are ones that are typically driven. They want to solve puzzles. It really is about critical thinking and developing those skills alongside Excel, and those are two things all employers seem to want right now. We have a couple sponsors that are basically trying to tap into that network of students, make them aware like, “Hey, we’ve got jobs that leverage these skills, come talk to us.”
Paul Jarley: I’m going to turn to Sean, Sean’s in our accounting department. Sean, are there any accounting firms that are doing kind of quasi competitions to identify talent? I mean, this goes all the way back to Google, right? With some open source things they do and challenges to identify really high end talent?
Sean Dennis: Not that I’m aware of. I did look into this a little bit at the big four and I couldn’t find anything specific to Excel. I could easily see this becoming part of a summer leadership program.
Paul Jarley: Yeah, Andrew, I could see you reaching out to them. There might be some interest there.
Sean Dennis: I think this is more than just a resume builder for firms that this is a way for students to signal, put their money where their mouth is, look, I love this stuff. While not everybody that goes to work for an accounting firm needs to be an eSport level expert at Excel. They do need some and they’re always looking for students to bring in new tricks. And I’ll be honest with you, I considered myself pretty proficient in Excel, but when I’ve watched these competitions on ESPN, I understand that the game that they’re trying to play and it’s kind of cool, Bill does a great job of announcing it and generating interest, but I have no idea what kinds of functions they’re using behind the scenes and firms would love to get their hands on students who know those types of functions.
Paul Jarley: Yeah, that’s my sense of it as well, Sean.
David Clayton Brown: So much has been changing in Excel the last few years that it really is an amazing way to learn. Just trying these challenges and then watching the live stream with Bill where you get to see what the competitors are doing or a number of competitors post YouTube videos and walk through how they did it. I personally have learned so much by doing that, that it’s just hard to find otherwise. So to me, this is one of the best ways to train and to develop those modern skills in Excel.
Bill Jelen: I’ll echo that. The post-competition walkthrough where they’ll turn on the clock and in 30 minutes solve the problem, and it’s not the same as the competition, because in the competition, you just saw the case five minutes ago. To watch someone actually go through and explain step by step by step, and for me, maybe in my 30 minute I got halfway through or something like that, but just to see, oh, that was brilliant. I never considered that or seeing the tools that they’re using. I know a lot about Excel, but I learned from those walkthroughs every time.
David Clayton Brown: And there’s a small slice of people that post speed runs where they’ll take this case that in 30 minutes no one was able to finish, and they show you a way that they just did it in two and a half minutes. It’s kind of mind blowing the care that they put into it and the creative tricks they come up with to make that happen.
Paul Jarley: I’m also surprised some accounting firms, Sean, aren’t using miniature versions of that as part of their selection process.
Sean Dennis: I think it’s probably coming. I know internally when students land at firms, there are incentives for them to learn and develop new tools within, maybe not Excel, but Alteryx, Tableau, Power BI, those types of tools.
Paul Jarley: What do you think students should learn from these competitions?
Sean Dennis: I think firms have been emphasizing Excel for a while. Teachers emphasize it all the time. Students are kind of bombarded with messages about how important Excel is. And for those students who really like Excel, I think shows them that, “Hey, if you like what you’re seeing, like what you’re doing, there’s more out there.” I know I work with a lot of students in office hours. I’ll show them some cute tricks that I’ve learned through the years, but at the end of the day, until this comes along, there’s really not much more you can do with it, not much further to go. And this gives students who want to this extra way to keep going and for lack of a better word, pursue their passion. A lot of accountants really geek out on this stuff and this gives people an outlet for it.
Andrew Grigolyunovich: What do people learn? Imagine you have hundreds of millions of people across the world working in Excel every day. This is something where you can show them what’s the best available, what do the stars do, how do they work? When you’re playing basketball, you’re watching Michael Jordan, LeBron James, other players, you see how they do and you try to replicate that. If you’re playing soccer, you’re watching Messi or Christiano Ronaldo and you go to your playgrounds and play other kids similar like that. Here, it’s more or less the same, but this is the way for people who are working Excel every day to see what the pros do and get some tricks from there. And it’s much easier for them to learn these tricks and apply to their job rather than for a kid to learn dribbling like LeBron or shooting like Stephen Curry. And that’s really the reason that would drive viewership, and this is what’s going to make this huge, in my opinion.
Bill Jelen: Let me talk about relatability. I played baseball, I played basketball, and now as an adult, the number of hours that I get paid to play baseball and basketball is zero. You have 300 million people who are getting paid 48 hours a week to play Excel and then to see Excel on ESPN. I mean all of a sudden there’s a lot of people who are saying, oh, wait, I could do this. I should enter this. I’m using Excel 40 hours a week. I think there’s a huge opportunity there of getting more people to enter the competitions that lead to the ESPN finals just because there’s a good chance that you’re good enough at Excel at your company. Every company has those stars who are the Excel people. I think the competition on ESPN will encourage more of those people to answer in the future.
Paul Jarley: Final question, 10 years from now, are Excel competition still going to be on ESPN? Will they be rivaling other eSports?
Sean Dennis: When I watched the competition, I loved it. One of the thoughts I had is that I didn’t really know what I was watching. I didn’t understand what was going on behind the scenes in Excel, and I think for this to get to the next level, they’ll have to continue to evolve. I think the evolution of going from a tournament down to a survival of the fittest where you kick somebody out every five minutes, I think that’s a good evolution. I think the more that this starts to appeal to the masses, the stronger the chances are that it stays on ESPN.
Adrian Bouchet: You look at the sports that survive on ESPN, they’re the sports that have a sort of an ecosystem, right? I always tell my class, we didn’t just follow Michael Jordan when he got to the Bulls. We knew who he was at college. Nowadays we even know who these players are at high school. So my question would be, can you make Excel relevant at the high school level so people follow it kind of up through the value chain? But I would say yes, as ESPN gets more segmented and certainly there’s only so many SECs and NFLs and MBAs they have to have programming. So I would say, sure.
Paul Jarley: Live content is king these days. Bill, what do you think?
Bill Jelen: I think there’ll be some competition somewhere, whether it’ll be on ESPN or not. I’ve had a long running joke for 20 years that someday Excel would be in the Olympics. This half hour gig on ESPN is just the first step to that. I think eventually, whether it is just on, just on ESPN The Ocho, that’s the day of seldom scene sports. We’re up against Corgi racing and other kind of things that …
Paul Jarley: Wet stair climbing.
Bill Jelen: Yeah, slippery stair climbing, which makes primetime. For me, the first year we were at a 4 a.m. slot in New York and then got moved up to a 7:00 a.m. slot, which is a huge increase because the people who were using Excel 40 hours a week are getting ready for work. I thought that 7 a.m. spot was really good. So I think it’ll evolve. I would love to see Excel not just on The Ocho, but just, “Hey, here’s an Excel competition once a month or whatever.” That would be amazing.
David Clayton Brown: I think we’re going to have collegiate competitions. The Collegiate National Championship, World Championship are going to be where the big airtime comes in. Last year we had Ohio State was the team that won here, and one of their students held up a sign that says, “Michigan fans use Google Sheets.” We’re going to see more good rivalries like that building up. Hopefully we see college competitions, schools scrimmaging each other. Maybe even we have the PAC 12 can survive through Excel eSports perhaps in the future.
Paul Jarley: Andrew, you’ve probably thought the most about the future of this. What do you think?
Andrew Grigolyunovich: My vision is that there are crowds cheering in events where we’ll have Las Vegas finals in personal finals prize money of millions dollars to the winners just like it should be so that it drives the players so that the players will be able to live off the prize money and live off the tournaments. I mean the main stars of the competition. It’s going to be huge and it’s going to be on ESPN and hopefully not on The Ocho.
Paul Jarley: It’s my podcast, so I get to go last. I am all in on the student competition version of this event. Gamification is a thing in education. It’s a great way to motivate learning, feature student skills and give the top contestants the kind of bragging rights that can land them great jobs. It can also bring visibility to the school. I’m so in that we’re going to join David’s competition and win it. Is Excel in eSport? I don’t think so.
So what’s your take? Check us out online and share your thoughts at business.ucf.edu/podcast. You can also find extended interviews with our guests and notes from the show. Special thanks to my new producer, Brent Meske, and the whole team at the Office of Outreach and Engagement here at the UCF College of Business. And thank you for listening. Until next time, charge on.
Listen to all episodes of “Is This Really a Thing?” at business.ucf.edu/podcast.
Reality TV, strikes and cyborgs, OH MY! Hollywood may be heading toward AI-generated content, and we all may already be living in a cyborg state … so was this episode AI-generated? This is part two of a two-part episode. Be sure to go back and listen to Part 1: Will the Hollywood Strike be an Extended Thing?
Actor Bryan Cranston speaking at a SAG-AFTRA strike rally in Times Square in New York City on July 25, 2023: Uh, we’ve got a message for Mr. Iger. I know, sir, that you look through things through a different lens. We don’t expect you to understand who we are, but we ask you to hear us, and beyond that, to listen to us when we tell you we will not be having our jobs taken away and given to robots.
Paul Jarley: The real issue, Bryan, is whether the AI listens and understands us.
This show is all about separating hype from fundamental change. I’m Paul Jarley, Dean of the College of Business here at UCF. I’ve got lots of questions. To get answers, I’m talking to people with interesting insights into the future of business. Have you ever wondered, is this really a thing? Onto our show.
In our last episode, we explored the current writers and actor’s strikes and how the parties might come to some agreement to get everyone back to work and spare us a lot of new reality TV. A key part of that analysis involved the limitations of AI today. It can’t produce a final product without humans. That, of course, is today. AI technology is changing rapidly and its impact on the industry is likely to grow over time. In today’s episode, we look at the long-term implications of AI in Hollywood and ask, could AI depopulate the industry in 10 years? In other words, could it eliminate or substantially reduce the number of people working in Hollywood, especially the writers and actors. To shed light on these topics, I returned to the discussion I had with my group of UCF experts. To just remind everyone, Cassandra Willard is an instructor and program director in our Center for Entrepreneurship and a practicing attorney with extensive experience in entertainment law.
Ray Eddy is a lecturer in our Integrated Business department with an interest in understanding the customer experience. Ray is not just an academic, he has worked as a stunt man, started his own production company and written, directed and starred in several performances. David Luna is a professor in our Marketing department. He is currently working on several projects, studying human machine interactions in the context of chatbots, intelligent assistance, and AI. And last but not least is Robin Cowie. Rob is a graduate of our Motion Picture Technology program at UCF. He’s a little hard to summarize, having worked in a variety of positions in the industry from EA Sports, to Nickelodeon, to the Golf Channel, and the Dr. Phillips Center for Performing Arts. Today, he is the President and CTO at Promising People, a company that produces training and placement services for people who have been incarcerated. But, you probably know Rob best from his work as co-producer on “The Blair Witch Project.” Listen in.
David, if AI is going to depopulate Hollywood, it’s going to have to produce movies that are more profitable than the ones being created today. What do you see as the main issues here?
David Luna: There are different kinds of costs involved in making a movie, right? One of them would be the creative part, and from what has transpired from the conversations with the writer’s union, it seems like it’s a fairly small part of the process. And the other part is the production cost, right? Which seems to be the larger cost in making movies. So if we think of a commercial success as something as making a profit, you want to minimize one of those two costs. So on the production side, you could think about well, having Harrison Ford play Indiana Jones until the 30th century, for example, through AI. That’s one part of it. Being a professor of marketing, I am also quite sensitive to the issues that stem from how consumers will perceive these products. I have done some work on trust and whether people trust AI interactions.
Paul Jarley: There’s a lot to unpack in David’s comments there. First, let’s tackle authenticity. So my understanding is voice is the easiest thing for AI to replicate right now. Is that true?
Robin Cowie: When we talk about AI, there’s, there’s so many things that we’re talking about. So to narrow it, I think over the last six to nine months, the conversation’s really been about large language models. And large language modules specifically from Open AI, but also Google’s Bard or, you know, some of the older ones from DeepMind, or even the new one that Meta just released called Llama 2. These are all large language models and they’re designed literally to be about language. So I would say the easiest thing for a large language model to process is text, not necessarily audio. But essentially the current premise behind large language models is that essentially it’s about math and it’s about probability. And that pattern recognition is behind everything. And so music especially, you know, we are all very familiar with those patterns, and therefore music comes up a lot because voice synthesis or instrument synthesis or anything like that comes up a lot. It’s maybe one of the easiest patterns to recreate, but I think the real innovation is in, in text right now.
Paul Jarley: So where do you think the most powerful application of AI will be in the next few years? In movie making.
Robin Cowie: I worked at Electronic Arts. We used AI for a lot of the background elements, a lot of the gaming elements back then. And this is, you know, in the ancient days, four years ago and over the last four years we’ve seen exponential development with using AI just in the gaming space. But I think when I started being obsessed with it four years ago, I thought, “Wow, this is going to be as revolutionary as the iPhone was.” And now there are some people that are saying, this is as revolutionary as fire. I’m probably, currently, at the place of “This is as revolutionary as the steam engine.” But there is no doubt in my mind that every aspect of every kind of human job, every form of creativity, every form of task-oriented work, every single aspect of human interaction is going to be changed by AI.
Paul Jarley: Rob is my resident futurist. He’s always the first in line with new innovations. What do you think, Ray?
Ray Eddy: The truth is, it’s, it’s this, I could say this is two iterations of this than I can think of in the past. And one is back in the, in the early nineties when CGI became a much bigger thing, “Terminator 2” kind of changed the game in 1991, and that led to “Jurassic Park” in ’93 and then the Lucas making the “Star Wars: Episode I” and it just got more and more and more and actors started thinking, “Well, they’ll never need us anymore because they can recreate.” And in particular, stunt people also felt the same way because, who needs to jump off a building or get lit on fire when you could pretend to do that with CG and it’ll look just as good. The backlash to that has been that there’s a real push towards what we call practical effects, which is actual real effects.
A real fire, a real explosion, a real high fall. Because as of right now, you can still tell a difference. Now, the technology will keep advancing. There will be a day when you can’t tell the difference. Just like with deepfake videos, you can’t tell the person is the actually saying those lines or not. As of right now, there’s still, I guess, inertia in the industry to sort of make that decision. You go with the CG version, which is safer, or the real practical version, which might be more expensive. Then again, CG is pretty expensive too. But, but the other iteration I’ve just referred briefly is back in the early 1900’s when animation first appeared, and then, you know, in the 1920’s, Steamboat Willie came along and then Snow White got an honorary Oscar award, and so all of a sudden actors back then were afraid, “Well, they never need actors again, because cartoon characters would never complain about the wages. They’ll never complain about working long hours. They never would complain about the danger” and there was a fear that animation would replace actors. So this is kind of happening, as I see it, the third time now, AI is be the next thing that will take over. The first two times there was a lot of, you know, concern, but it hasn’t led to massive loss in income, or in job opportunities. It sort of has shifted the game a little bit, but it hasn’t eliminated anything. AI, it’s hard to say. I, I still feel the same as what Rob was just saying. I think that’s, there’s a lot to the fact that it will change the game as time moves forward.
Paul Jarley: My own take on this is the most vulnerable groups are people like extras that you would think AI would be pretty good at filling those kinds of roles pretty quickly.
Ray Eddy: I, I would agree with it, yeah, completely. That when you need a massive thousands of people, whether they’re in a …
Paul Jarley: Ben Hur, think Ben Hur.
Ray Eddy: Ben Hur, sure. Or any sports stadium or, or, or any zombie movie, you want to have a thousand zombies chasing somebody, you know. You create a few dozen and then just repeat them. That happens already, more with CG than with AI. But AI will allow for natural progressions of activities and reactions and things to be moving forward. So it does change the authenticity of it in a way, but also it could lead to sort of loss of control over what’s exactly happening. If you did CG, you just make it happen. If you make it AI, it’s sort of, there’s some randomness that maybe is good, maybe is bad, but the control factor is, is left open. But in any case, as I said, the technology changes so rapidly, it’s hard to say how authentic this will be. But as of right now, I think there’s still a desire to sort of see real people do real things as much as we can. And certainly for the industry, that’s what the industry wants. The, you know, actors and the stunt performers and people who make a living as extras, they don’t want to lose their livelihood either. So there’s, there’s a lot, a lot of people behind this trying to make sure they can keep it under control as much as possible if they can.
Robin Cowie: I agree a lot with what Ray is saying. Christopher Nolan is a filmmaker who’s famous for doing things real, but even Christopher Nolan is going to put all the extra safety harnesses on and all the safety equipment on in camera that you used to not be able to do. So Christopher Nolan can do magnificent things because you have the ability to use computer graphics and computer technology to remove those safety harnesses so you never see them. And so the stunts are actually raised to a huge level, even with extras, what you’re able to see, obviously with “Lord of the Rings,” again, going back, you know, almost 25 years now to the first “Lord of the Rings” movies there, you’re using massive crowd control using CG. But a lot of that CG is powered by actual real actors. And so again, with computer games, from what I’ve done, we synthesize a lot of things driven by a small collection of humans that actually power massive teams of football players. So I would do a casting where I would have 40 different body types that would actually perform the work of 40 different types of humans, and that would then power thousands of characters in the game. So it’s not quite eliminate extras or eliminate writers or eliminate, it’s really about the human machine synthesis.
Paul Jarley: So is the use of AI though, in those situations that you’re describing, Robin, is it cheaper than just having a human do it?
Robin Cowie: It’s even more than cheaper. It’s really doing things that were never possible. Some of it is cost, right? If you were to rotoscope, you know, a hundred thousand people, it’s not possible, right? You could, like, you could go back to the ’60’s and individually rotoscope every image. You could do it, but it would take you years and years and years. But now, you know, you can do so many things so much faster with the compute that is possible with AI. It’s to the point where they use synthetic humans so much that most movies that you watch have some form of face replacement, some form of this. Anyway, that is kind of different, I believe, than the current writer strike that’s more connected to large language models, which is really that we’ve created essentially some form of alien intelligence that is in the mathematics of these large language models and specifically on a thing called a transformer that is challenging human thought and sequential behavior. So that’s a whole different level than where we were before with face replacement.
David Luna: Rob, are you saying that the audience cannot identify the synthetic human at this moment?
Robin Cowie: In many, many ways, the Turing test is always can you tell the difference between humans and computer interaction? And absolutely we’ve gone way, way past. What keeps on happening with technology, or that test, is we keep on advancing it. You know, like, oh, well, can we tell the difference between computer playing go or chess? Or can we tell the difference between a voice synthesis and interacting? We have crossed all of those boundaries. Can we replicate people in a highly realistic manner that there’s no way you can tell between real CG. In fact, I just want to make the announcement: I’m actually computer generated and no, I’m just kidding. This is something Paul set up. No, no, no. But yeah, we are already androids, we already use digital extensions of our life. We already have digital interactions. It’s just that we’re about to go through an exponential integration of these at a level that people have never seen before in history.
David Luna: So I think that kind of addresses one of Ray’s things that he said in that he mentioned that people want to see real people on screen. We think we’re seeing real people.
Robin Cowie: Correct.
Paul Jarley: So could you see in the next five to 10 years entirely AI-produced products that are being marketed through their own channel that would be viewed outside of what we think of traditional Hollywood and movie making?
Robin Cowie: We already are, absolutely, yes.
Paul Jarley: I could see that in just sort of a product portfolio kind of sense, David, you know, you have real actors and what they’re producing and what AI’s producing and let the marketplace decide, right? Ultimately, it’s the box office that’s gonna tell us where to go here and the production costs.
Paul Jarley: Well, I do think maybe in the short term, the professional sports leagues might want to renegotiate their television rights because I think content is going to be really important. If Robin’s right, and this drags on for a couple of years, you already see Netflix buying a lot of international content.
Robin Cowie: I will say that understanding human behavior and doing more and more customized content is really going to be there. Look, I’m a big believer in synthesis. I mean, I think we’re all basically cyborgs and I think we’re going to become more and more cyborgs. And it won’t be an uncomfortable cyborg state, It’ll be so intricate to us that we just won’t even realize how much it is that way. And it’s bad because we’ve seen what the echo chamber of TikTok is like, what the echo chamber of social media is like, and basically we tend to serve up to people more of what they love. And can we do that synthetically with computers? You betcha. So I think as humans, we have to really invest in confronting that, educating people, and instilling a love of humans.
Paul Jarley: It’s unquestionably the case that AI’s share of the market is going to increase, if you want to think about it in very broad terms. But the counter example would be Broadway. I know Ray’s done some work on, you know, shaping experiences and Broadway would seem to be the counter example. Thoughts there, Ray?
Ray Eddy: Sure. No, I agree with that. I think there’s a lot to be said, you know, and on my study of immersion and that kind of activities, live performance is different. I think where technologies could intersect here would be something like holograms. There are already some hologram performers, if you look back at it kind of hit the mainstream when they, had a hologram of Tupac Shakur at Coachella, and it looked so real and kind of launched it into a real possibility for future development in the entertainment realm, whether in music or in live performance. And there are some holograms that are on some shows. I saw one a long time ago, sir Laurence Olivier’s face was projected. The play was called “Time” and he was basically playing God and his head was the whole size of the stage, and it was him.
There were live actors who can superimposed their actions and put someone else’s face over them. They had people recreate Michael Jackson’s dance moves on stage, but it has Michael Jackson’s face and singing a song. So these kinds of technologies can exist and allow the technology to advance in a different way than AI. But to your point, Paul, about who wants to see Tom Cruise in 40 or 100 years, well, people want to see The Beatles now, so it might be a retro thing rather than a same person in perpetuity thing, but they come back later as a, as a flashback. Those, there are some thoughts about the live aspect of it.
Paul Jarley: Part of my thought about that goes back to a prior podcast we did on backyard chickens. Carolyn Massiah was on, and at the very end we were joking about the chickens having their own Facebook page and whether people would watch it or not. And Carolyn talked about marketing simplicity in an ever complex world. I kind of wonder if there’ll be a little of that here, that essentially Broadway is that, taking people back to a prior time where the craft was done differently.
Ray Eddy: Sure. And there’s also the element of the potential chaos of a live performance. Things can go wrong. Someone forgets a line, it’s as simple as that. Or a prop fails, or some technological problem that makes it more tangible and real and vibrant maybe to an audience. So it makes it different. Going to a film, you know, you’re going to see it’s done and perfect and it’s out there. In live theatrical productions, or even in like theme park performances, if something goes wrong, some people say that’s why you go to see a NASCAR race. You don’t go to see the race, you go to see the crash. So that element of risk and unpredictability is always going to be there more in a live performance than AI or CG. Then again, if your AI starts going and you know, doing hallucinating during a live performance, then you’re gonna have a whole different story going on. And that’ll be…
Robin Cowie: It could, it could be super, it could be super fun. I think there’s three things. I think there’s suspension of disbelief and then there’s surprise and there’s delight. And those three guiding principles for entertainment, suspension of disbelief, that can be created by humans, it can be created by machines, it can be created by humans and machines working together. And I think that is true for surprise and delight. I think right now, humans are better at surprise and delight, and truly delight is probably the last realm of humanity. I think that Pixar movie Wall-E is actually one of the best depictions of robots and AIs that we have. You know, I think the reason why Wall-E is so wonderful is that he does create that sense of human delight and human satisfaction. And there’s a scene in that movie where you see the fat humans on a cruise ship and they’re all gorged on delight. And hopefully we don’t go that way. But I do think that, at the end of the day, this is simply an evolution of tool. We humans are tool makers, and this is the most sophisticated tool we’ve ever made. It’s just that the tool now actually talks back and has ideas of its own, and that’s something that we are all wrestling with.
Cassi Willard: And I think just to add to the point, when it comes to the live performance side of things, look at how much content had to move in a digital space due to restrictions based on the pandemic. As live events have come back more robustly, you still have individuals who are showing live performances via live feed, or they’re showing recorded, uploaded elements of performances. People are still selling out football stadiums. People are still selling out arenas because as a human being, one of the other things to think about is the community element. You want to be a fan of those people who are in the credits. Working in the industry as long as I have, I sit and I watch the credits, and I also know going to a theater isn’t the same experience as logging in in my home. So I think that’s one element that AI can’t quite find a workaround to just yet.
Robin Cowie: I have a question for Cassi that I’ve been wanting to talk to an entertainment attorney about this question ever since I heard about it. So MIT currently is putting forward a new concept. We all know that there’s copyright, which essentially I own this and if I’m going to copy it, I have the right to do that. But what large language models and transformers are doing is not really copyright. Essentially they’re taking the mathematical value of letters, which make up words, and then the mathematical combination of those words and then predicting the mathematical probability of what comes next. I mean, that’s essentially what these large language models do. So what they have proposed is the idea of a learning right. So that somebody’s actual pattern that they’re talking, so in my book, in my writing, in my math, in my formula, there’s a pattern of logic that underlies that. And now I can grant you the right to learn from my pattern of behavior. And I think it’s a really interesting idea because it does speak on a math level versus a actual copyright level. And I was really curious as to what you thought of that idea.
Cassi Willard: It opens a whole other legal realm here because ultimately we’re now looking at almost like a business method patent that comes into play. Now when you’re in that AI space, it’s the equivalent of the Amazon platform, back in the day, owning the one-,click purchase or the Amazon platform owning certain rights to methods of photography for products that they’ve held over time. So now we’re looking at those processes and methods, which honestly, hopefully, will go through and further advance AI so you don’t have a character get lost in a script that was mentioned earlier that we can further enhance. So we want to try and make AI step as far away from bad automated customer service as we possibly can. Because that’s the analogy I always make. It’s like having bad automated customer service sometimes when you’re in this space. So we want to ensure that we’re providing the best product possible, but that’s part of the push and pull Rob, very much, that we’re seeing in the AI space because those software platforms that exist right now, the software licensing agreements are going through and speaking specifically as far as what rights exist and what ownership you may have, and especially if you’re looking at things in that kind of co-writer brainstorming space, when you start looking at that software licensing, some of them say the intellectual property doesn’t belong to anybody because it’s a combination of a bunch of different ideas.
Because as these platforms are creating content, they’re further evolving their formulation. So you’re now getting this swirl of what you’re inputting as well as whatever else exists in that universe that’s now building on top of, on top of. So this becomes this really massive digital group project that we now are sitting around going, which one of us owns what percentage of what? It’s just we’re entering in for a software agreement, which you don’t see in more traditional kind of well-established software formats.
Paul Jarley: What’s the lesson for students here? I’m ultimately an educator.
Robin Cowie: In my opinion: use the tools, get involved, be creating things with this. I remember one of the things that made made it possible for me to make “Blair Witch” was that digital editing had just come on the scene and we were able to shoot for eight days real time and get 38 hours of footage that we got down” to 87 minutes. And if people ask me what do I think was the best thing that we did on Blair Witch,” in my opinion, it was the editing because we took incredible human experience and crafted it into something that was really unusual and really unique in 87 minutes. So I couldn’t have made Blair Witch without digital editing tools. I know there’s a lot of things that creatives and humans are going to do that wouldn’t have been possible without the AI tools. For me, students should go make cool stuff. That’s literally what I got taught at UCF when I went to UCF. I had this old, crusty film professor and he just said, “Make shit.” And that’s what we did. It was the best advice I ever got.
Cassi Willard: I would say sandbox when you’re in a safe space, learn those skill sets, because every piece of technology, every tool that you learn to exploit is another thing you can add to a resume. It’s another skill set that you can go through and expound on. And you can learn in a tech space a lot less expensively, a lot lower barrier to entry, a lot lower risk than you can anywhere else.
Paul Jarley: Now’s the time to experiment. Last question: 10 years from now, will AI have depopulated Hollywood or not? Yes or no? And why?
Cassi Willard: I’m going to go ahead and boldly say no. I think it’s going to cause people to evolve. I think you’re going to see this technology implemented like every other form of technology. I think it’ll cause it to evolve. I don’t think it’ll end up killing the industry.
Paul Jarley: David, what do you think?
David Luna: I think it will definitely depopulate the industry. And it’s what’s happened in factories, right, with using robots. You just need fewer workers as you partner out with the technology.
Paul Jarley: Ray?
Ray Eddy: I lean more towards what David said. I think I agree with Cassi, it will not kill the industry. If it had been that, I would say no. Will it depopulate? Yes. The question’s going to be how far? I’ll hedge by saying we just don’t know how far it will depopulate, but it will take some jobs away, yeah.
Paul Jarley: Robin, you get the last word.
Robin Cowie: I think it’s going to be exponentially bigger. One thing that humans love and crave is entertainment. And that entertainment, it’s going to come in lots and lots of forms. And this is really a booster, it’s an accelerator, it’s an ability for us to make more customized entertainment, more personal, larger scale, larger volumes at lower costs. So ultimately I think Hollywood 10 years from now is gonna be 10 times larger than it is now and still making us laugh, cry, and have a good time.|
Paul Jarley: It’s my podcast, so I get to go last. AI is going to replace mediocre scripts, mediocre productions, mediocre actors, and if there’s time, mediocre podcasts. Think Hallmark holiday movies, the “Fast and the Furious” installments, Ashton Kutcher and maybe this podcast. What it won’t replace is awesomeness: the first two seasons of “Twin Peaks,” “The Shawshank Redemption,” Jack Nicholson and “Real Dictators,” listen to it. Face it. Hollywood has been in a creative rutt, relying on franchises for big box office numbers for years. The machines have thrown down the gauntlet, and the humans need to respond. IP laws may provide some guardrails, but the creatives are going to have to win this on the basis of talent and imagination. I’m betting that they will. Storytelling is the most human of endeavors, and perhaps all those profits from those low cost generated AI movies will allow the studios to take more risks and find some fresh faces to bring them to life.
I do think Rob is right. AI will increase the total production out of Hollywood, and AI-generated content will get a share of the market. But records didn’t kill live concerts, movies didn’t kill the theater, television didn’t kill movies, and the streaming services haven’t yet killed network TV. We will just have more options and more content. I’m also guessing that some nights people will still complain that there’s nothing on. Will the increase in content lead to enough new opportunities to compensate for the loss of jobs for mediocre writers and actors? Probably not. But it won’t depopulate Hollywood either. If there is a third thing I know about new technology, it’s that when people play with it, they find unexpected applications and create new employment opportunities. In the meantime, go see Barbenheimer. I dare AI to come up with that.
So what’s your take? Check us out online and share your thoughts at business.ucf.edu/podcast. You can also find extended interviews with our guests and notes from the show. Special thanks to my new producer, Brent Meske, and the whole team at the Office of Outreach and Engagement here at the UCF College of Business, and thank you for listening. Until next time, charge on.
Listen to all episodes of “Is This Really a Thing?” at business.ucf.edu/podcast.
More reality TV? AI-generated “South Park” episodes? Is this where Hollywood is heading thanks to the latest writer and actor strike? We find out from UCF experts how, and why, the strike will be resolved and how AI will play into plans moving forward. This is part one of a two-part episode.
SAG-AFTRA President Fran Drescher in a press conference July 13, 2023: The entire business model has been changed by streaming, digital, AI. This is a moment of history that is a moment of truth. If we don’t stand tall right now, we are all going to be in trouble. We are all going to be in jeopardy of being replaced by machines. You cannot change the business model as much as it has changed and not expect the contract to change too. We are labor and we stand tall and we demand respect.
Paul Jarley: Oh my, this is going to get really complicated. In the meantime, prepare for a new round of reality TV. This show is all about separating hype from fundamental change. I’m Paul Jarley, Dean of the College of Business here at UCF. I’ve got lots of questions, to get answers, I’m talking to people with interesting insights into the future of business. Have you ever wondered, is this really a thing? On to our show. The writers and actors haven’t been out on strike together since 1960. Then, it was partly about how television was impacting the film industry and getting residual income for writers and actors from movies that were then being shown on TV. The business model was changing and labor wanted its share. Screen Actors Guild President Fran Drescher’s comments at the start of this podcast note that technology is changing the business model again with streaming services, digital media and AI among the main drivers. This is a very complicated situation, so complicated, that we couldn’t fit it into our usual 25-to-30 minute podcast. So we decided to split it into two parts. Today we will tackle the basics of the strike and how and when we see it being resolved. The second part, we’ll do a much deeper dive into AI and Hollywood and how that is likely to change the industry going forward, especially for writers and actors. Essentially, we want to answer the question, will anybody be left in Hollywood in 10 years?
David Luna: I think it is helpful to think about different genres and the fact that AI may be better at some genres than other genres. For example, if you’re talking about superhero movies, maybe an AI could write a script that it takes a franchise and and sort of perpetuates it in a fairly cheap way. But, but then when you’re talking about character-driven dramas as a different genre, maybe that, it would be a little more tricky. And what we are seeing in some of these attempts to have say, ChatGPT, write a script, is that oftentimes it does write a script. It may or may not be an interesting script. But one of the flaws that it generally has is that characters sort of contradict themselves. When a consumer observes another person, they infer certain character traits, so you form a mental image of what the other person is like, and then that character acts in a manner that it contradicts their personality then there’s a problem. And that’s what it seems to be happening with some of these scripts. On the creative side, altogether, what I would think, it seems like a partnership between an AI and a creative would work best with the creative supervising the AI’s work. It’s sort of an iterative process directing the AI, which is doing the more menial writing work in the, in the right direction and to make sure that everything is consistent and interesting.
Paul Jarley: Thank you, David. So Rob, you represent production here. So could the studios release and entirely AI-created movie today? Is that technically possible for them to do?
Robin Cowie: No, I think at this very moment in time, given the state of AI, no, it is not possible to do a completely AI-generated movie. There’s a lot of technical reasons that I can list out for why that’s the case. The most recent, and then when we say recent, this is literally last week, is that there’s an organization called Fable, who have released a series called “The Simulation.” These are a series of basically a parody of “South Park” episodes and they are complete “South Park” episodes with voice and, and everything like that. And that’s probably the most extensive we’ve seen so far, but in this exact point in time to release a feature film, no, not possible right now.
Paul Jarley: So I know both the writer strike and the actor strike is about more than just AI, right? There’s been pretty significant changes to those business models, particularly with streaming services that have left I think both the writers and the actors feeling a little bit like they’re on the short end of the stick, particularly when it comes to residuals. Listening to union leaders, I sort of get this impression: We kind of missed on how damaging streaming services would be to our income, we ain’t going to miss it over AI, because if we do we’re all going to be broke. Cassi, what do you think?
Cassandra Willard: One of my absolute favorite quotes from one of our former leaders of the entertainment, art and sports section of Florida Bar, he always used to holler at folks that you have to understand it’s called show business because without the business you have no show. And every single time you have an iteration of a different union strike, when you have the guilds raise their hand up, they’re looking to a large extent to safeguard the business side of the industry. Because without the business you’re going to see the entire house of cards collapse. So we need to sort out, and we’re being more proactive, and you see this in each iteration of going through and looking at this, but had we gone through and looked five years ago, pre-pandemic, we weren’t sitting around thinking about AI technology being a big push. We were more concerned about the digital side of things. And now AI rapidly becoming household information, it seems like over just the past few months. Now this is a bigger focus that our greater community is looking to, but our greater community is also looking to support the entertainment industry. We’re seeing great box office numbers, we’re seeing a lot of pushes, but we have to respect those in the industry to make sure that our market does continue and push forward as well.
Robin Cowie: Yeah, I love, I really like what you’re saying about business because to me I think that’s the heart of this and I think one of the great complexities here is that technology companies really own Hollywood now and that we live in the attention economy and not the actual revenue economy. So as somebody who literally went through a lawsuit to get a better accounting done because there were days of, still are days of, creative accounting, I’m very familiar with, you know, being sensitive to that. But the argument that they’re putting from the streaming side is that basically this doesn’t make money. The only one who’s making money is Netflix. We spent all of this money in our streaming service and none of them are making money. We’ll open our books to you and we’ll show you. It doesn’t make money. Streaming itself doesn’t make money, therefore we can’t pay more residuals. But the reality is, it does make money. If you’re Apple and people are using all your Apple tools and people are using your hardware and you’ve got their attention, it does make money if you are these bigger tech conglomerates. So what’s really happened is that the monetization model has changed. And so you’ve got a labor union on one side saying, hey, we want to measure this by old residuals. The studio complexes, they killed Blockbuster on purpose because they were losing a huge amount of money to Blockbuster. It was very expensive. Now the days of secondary, tertiary, international markets that’s gone away. One of the reasons why Netflix is leading this in the entertainment field is that they use their technology and win global faster than anyone else. So all I’m saying is it is about the business, the SAG and the Writer’s Guild is all about the business. The problem is you’ve got two different business models that they’re arguing over.
Paul Jarley: Well, let’s talk to Cassie about real people who have some legal rights and what those legal rights are. Is there anything that prevents a writer or an actor from entering into an agreement with someone to license their writing style or movie rights in perpetuity? Can they do that now?
Cassandra Willard: So one of the interesting things to always consider when you’re looking at any form of contract in the entertainment industry is your contracts are going to be based on negotiation between the parties and any restrictions that would exist existing in our laws right now, or any other encumbrances from unions or guilds or anything of that nature. Now it’s interesting to see the evolution because I’ve been practicing for over 20 years now, and I first started practicing and studying intellectual property under that dark cloud of those file sharing platforms that we’re supposed to ruin the music industry forever and a day. And it’s part of the reason why a decade ago, a member of Congress out and they wanted some details for me about what my thoughts would be on AI as far as ruining employment as a whole. They were researching an article about how AI was just going to completely implode and the robots would take over kind of theory. And ultimately there’s an element of humanity that you’re hearing this common thread that’s always going to exist. And it’s been fascinating for me over especially the past couple of years as some of my clients have pivoted. If they’re doing creative works, they’re linking into AI. If they’re traveling and they need a co-writer, if they’re brainstorming and they need some other ideas, they’re basically using AI as kind of like a group project. But the other thing that’s a deep, deep pull is the fact that these different platforms, these different AI groups that we have that exist, these entities are in a constant push and pull, just like the discussion we’re having right now, as far as who owns what, how it can be mobilized, how it can be exploited, how we can lay claim. Because these different platforms are trying to discern where the intellectual property exists. And as a faculty member, as an educator, we see this from the academic dishonesty, the plagiarism, we see this push and pull as far as originality is concerned.
Paul Jarley: Help me to understand though, Cassi, the contours of where the collective bargaining agreement ends and individual negotiation could take place. If I’m Tom Hanks, could I enter into an agreement with Paramount Pictures to give them my likeness in perpetuity for x hundred million dollars if that’s what I wanted to do?
Cassandra Willard: You’re going to have restrictions in that space due to our statutes. So our laws are going to put restrictions as far as length of contracts and to other elements that will come into play. We also want to look at just the base level of being competitive in the market to be able to mobilize yourself for future rights. Signing on to some sort of long-term exclusive agreement. You want to make sure you have some fluidity to be able to move on to different projects, into different productions, work in different realms in this space.
Paul Jarley: All right, you’re being very lawyerly with me. So how does it end? How does the strike end?
Robin Cowie: I think in tears and unfortunately in in tears specifically for the writers, I think they will lose against AI because if you look at all the tech companies, the number of AI engineers in a tech company that make up a tech is actually a very small fraction. But the amount of investment that’s going into AI right now is converse. So there’s no way that they’re going to step away from any of these initiatives and AI, you’re going to lose that battle. You’re just going to lose that battle. On the streaming side, I do think that actors and writers will get some give. And I do think that clarity and accountability for streaming services, that’s the best upside in my opinion for the writers and the actors.
Paul Jarley: You agree, Cassi?
Cassandra Willard: I think it’s going to be a robust debate for sure, to say the very least. And I do agree with Rob, kind of looking at those different rights. You still are going to have elements of human equity that are going to come into play, but ultimately we also have to look at the longevity in those survival of the industry as a whole. So that’s one element to also consider as the days tick by, that’s going to start to impact the industry as a whole too. And we’ve seen, you know, reality television was born to a large extent out of strike.
Paul Jarley: Oh no. Is there room for another round of reality TV? Or might AI-generated Southpark episodes be better? Cassi?
Cassandra Willard: That’s the other concern. You’re creating a vacuum of content and talent. So that’s the other element of part of any negotiation are elements of timing and scarcity. So that becomes a space as well. But this is a really unique time in the life of creativity and content because if you defer to AI, you can possibly buy yourself some gap filler if you don’t want to go the reality route, which that’s not something we’ve really seen in previous iterations.
Paul Jarley: Rob?
Robin Cowie: I will say that understanding human behavior and doing more and more customized content is really going to be there. Look, I’m a big believer in synthesis. I mean, I think we’re all basically cyborgs and I think we’re going to become more and more cyborgs. And it won’t be an uncomfortable cyborg state. It’ll be so intricate to us that we just won’t even realize how much it is that way. And it’s bad because, you know, we’ve seen what the echo chamber of TikTok is like, you know, what the echo chamber of social media is like, and basically we give, you know, we tend to serve up to people more of what they love, and can we do that synthetically with computers? You betcha. You know? So I think as humans, we have to really invest in confronting that, educating people, and instilling a love of humans.
Paul Jarley: Ray, I’m going to have you represent all actors here. What do you want your union to do in this situation?
Ray Eddy: Uh, yeah.
Paul Jarley: No pressure.
Ray Eddy: No pressure. Yes, I speak for everyone, exactly. In terms of, you know, acting and stunts as well, you know, they overlap a lot. I think the crucial thing we’re going to look for here is just that it won’t be just farmed out and there’s no need for anyone, any live performers ever again in the future. I think just having some language in there that, you know, we understand that if you need 10,000 extras, we get it, but we need to maintain a human creativity, the human voice, the human passion spirit that goes into artistic creation and eliminating that would be detrimental to the form of art itself.
Paul Jarley: It’s my podcast, so I get to go last. I learned a few things today. First, for the time being, everybody still needs everybody here. Producers still can’t make a totally viable product without creative people. The actors may be in a bit of a better position than the writers, but the industry still needs them both. Second, while streaming services are part of the value chain that makes money for their owners, and those owners, the tech companies, will want to continue to make money, strikes don’t make money. So while there are some very serious long run implications to all this stuff, we live life in the short run and there lies the basis for a deal. I see it going like this, history will repeat itself just like in 1960s and the groups will agree to provide the writers and actors greater residuals for streaming on productions that go to market probably after a certain date. Just like in the 1960 strike where the actors gave up residuals on old stuff to get revenue on new stuff. This way everybody understands those new rules. As Rob notes, there are some accounting issues to deal with here, but ultimately it will come down to revenue sharing in some manner. The world kind of lost its mind when ChatGPT 3 was released. It threatens a whole class of work that nobody saw coming, but it, like any technology has limitations. It will be a while before all this shakes out and we know what works and what doesn’t. So in the short run, we’re going to want some people to experiment with the safety harnesses on. That means, limitations on how AI can be used and perhaps how much content can be AI-generated. It also means getting some better data on how consumers will react to all of this stuff, what they will buy and what they won’t. How long that learning takes and how quickly the technology changes is a bit uncertain. AI seems to be getting exponentially better quicker. Humans who produce and consume AI-generated material may take more time to adapt. My guess is that the agreement will be a short one, just a couple years long, and that everybody will be back dealing with these issues again pretty soon. Also, keep in mind that not all of this is likely to be settled at the bargaining table. Issues of intellectual property and the consequences of industry restructuring may end up being dealt with in Washington and the courts. If one thing is certain, the lawyers most certainly will get paid. That’s the short run story in my view. Our next episode, we’ll take a deeper dive into AI and Hollywood and perhaps give you a few insights into the long run. So what’s your take? Check us out online and share your thoughts at business.ucf.edu/podcast. You can also find extended interviews with our guests and notes from the show. Special thanks to my new producer, Brent Meske, and the whole team at the Office of Outreach and Engagement here at the UCF College of Business. And thank you for listening. Until next time, charge on.
Listen to all episodes of “Is This Really a Thing?” at business.ucf.edu/podcast.
Did the pandemic spark a flurry of innovation or was everyone too busy bingeing Tiger King and Outerbanks and Zooming to endless happy hours to launch new businesses and products? Dean Paul Jarley turns to UCF’s entrepreneurial in-house experts along with an alum whose company helps startups grow and scale to find out the answer.
Caroline Castille: I think we’re going to see a lot of more entrepreneurial people out there who are more hunt-to-kill type of people instead of grazers, just worker bees in the company, which I love. That’s going to make more people, not only in control of their lives, but it’s going to make the economy even stronger.
Paul Jarley: Did I just get called a grazer? When did that become a thing?
Paul Jarley: This show is all about separating hype from fundamental change. I’m Paul Jarley, Dean of the College of Business here at UCF. I’ve got lots of questions. To get answers, I’m talking to people with interesting insights into the future of business. Have you ever wondered, “Is this really a thing?” Onto our show.
Paul Jarley: My sense is, in talking to a lot of faculty and editors, that submissions to journals in terms of research were down during the pandemic. And I think part of it was because people didn’t have access to subjects like they might normally have if they were doing certain kinds of research. Some of it, I think, was just the general angst people had. And then maybe third, people didn’t get together in groups, maybe, as much, and to the extent that sometimes ideas come out of group conversations. And then it got me thinking as to whether or not there’s sort of a similar phenomenon with respect to innovation and entrepreneurship.
Paul Jarley: To answer that fuzzy question, I assembled today’s panel of experts. Caroline Castille is a UCF grad, a finalist in the 2014 version of the Joust, and a serial entrepreneur. Cameron Ford is the founding Director of the Center for Entrepreneurial Leadership at UCF, and an associate professor in our Department of Management. Carol Ann Dykes Logue is Director of Programs and Operations at the UCF Innovations District and Incubation Program. And Dr. Michael Pape is the Dr. Phillips entrepreneur and residence in the Department of Management, and serves as the director of the UpStart Student Venture Accelerator at UCF. Mike, let’s start with you. Did innovation go up or down as a result of the pandemic?
Michael Pape: One way that we measure innovation, which is a new way to do things, at least with a solid metric, is patent submissions. So I was interested in this, been reading about this, and if you look at patent submissions, they kept going up and up and up, the USPTO, the US Patent and Trademark Office.
Paul Jarley:
Michael Pape: They publish all these stats every year. If you look through, they started the plateau in 2016, interestingly enough-
Paul Jarley: Before the pandemic, yeah.
Michael Pape: Yeah, and they’ve stayed pretty flat, but that’s sort of a gross aggregate, obviously. And that’s just the U.S. But I did see that in other countries, they had actually an increase in the number of patent applications, depending, again, what’s your point of reference as you try to interpret this?
Michael Pape: But one interesting thing that came out since… I went to University of Chicago, I get some of the publications and read a paper put out by some of the researchers there, they published a paper in American Economic Association Journal. They looked at the number of patents that were filed were related to work from home. They looked at 3.5 million patents from 2010 to 2021, and they used the keywords “remote” “work from home,” et cetera, et cetera. And then they looked at the number of patents per year, and they found that there was an average, like 0.5% of all patents were related to that as the baseline. And then when 2020, 2021 hit, it almost more than doubled. So it was people… So is that innovation, or is it people who were just sitting on those patents? Of course, that’s difficult to know. So was there an increase in innovation, or was it just people moving forward?
Paul Jarley: Carol Ann, what’s your perspective?
Carol Ann Dykes Logue: BC, Before COVID, to me, there was a collective lack of appreciation for the technology innovations and the capability of technologies that we all have at our fingertips before then. We just took it for granted. It was not always incremental, but it just kind of creeped up in our lives and we got used to it, and we learned what we had to learn, how to use technology. So that was one thing.
Carol Ann Dykes Logue: Second, to me, there was a pretty, and it’s human nature, that there’s pretty generally when you look at a problem, or you experience a problem, you see it from a very self-centered, self-focused perspective and with little appreciation for the shared humanity that has the same problem. Pretty often, we just don’t tend to, in general, think about other populations, other countries. People don’t think that way in general. And the incentive and the view that there was great potential, and therefore a motivation to take the risk, we know we’ve always had entrepreneurs, but there was an interesting dynamic, to me, that happened during COVID in the number of people willing to take some risk after a certain time in the pandemic.
Paul Jarley: Do you think it went up or down, Carol Ann?
Carol Ann Dykes Logue: It went down, and then it shot back up.
Paul Jarley: Why do you think that’s true?
Carol Ann Dykes Logue: Think back to what happened in spring of 2020, and everybody, globally, just… We were all thrown into such massive change, massive uncertainty about life as we thought we knew it, that it became about just surviving. And it was hard for anybody… For most, it was hard to feel secure enough to take that risk. Unless you already had a job where that’s what you had to do, you’re working for a company like [inaudible 00:06:01], and you know got a problem and you got the money to pour into it. So this is more of an individual innovator entrepreneur perspective, but even companies too. Because a lot of our companies in the Incubator, we quickly switched our focus to coaching and advising and supporting them in growth, to supporting them in survival. In many cases, that meant downsizing and all of that, and reducing risk even more, not taking risk.
Carol Ann Dykes Logue: But after a point in time, once they got a feel for, “All right, this is our new world. We don’t know how long this is… Clearly, it’s going to go on for a while. We don’t know how long. We’ve right sized. We’ve got our cash flow under control. We’ve found some new opportunities. How do we move forward then?” And we had entrepreneurs coming to us during all this that, all of a sudden, they saw an opportunity for something that they’ve been thinking about and realized, “There’s a whole lot of people that have this problem,” and ideas that individuals had had, or companies had had, for products and services, to Mike’s comment, that related to virtual meetings and work from home, remote workers, offsite workforce, virtual companies, pretty much. All of a sudden, they realized, “Now’s the time.”
Carol Ann Dykes Logue: And I just think the awareness of global population in general of technology was heightened, plus an awareness that we’re all humans. We all had a shared experience. I’ve not seen anything else like that in my lifetime, where truly, it was a global shared experience, and that just changes the way you see things.
Paul Jarley: Well, necessity was certainly the mother of invention during COVID. I remember talking to Lorette on my advisory board, who sits on a number of corporate boards, and she talked about Papa John’s decision to go to contactless delivery. And she said, “In normal times, we would’ve debated that for two years before we entered that in that space,” and we did it in about 30 minutes.
Carol Ann Dykes Logue: Right. Yeah. And that’s the other thing that came to mind. I was thinking about it earlier, but I forgot, it’s that we proved that innovation doesn’t have to take so long.
Paul Jarley: Well, we saw this in our own world. Imagine, Cameron, how much debate we would’ve had in the pre-COVID environment, about having a significant percentage of our courses on Zoom. We’d still be debating that. There’s a real old joke attributed to someone who is on the board of trustees at Duke, who said if he was driving down the road and he heard that the world was going to end today, that he would immediately drive to Durham, North Carolina because everything happens a year later there. Right?
Carol Ann Dykes Logue: Good.
Cameron Ford: Yeah.
Paul Jarley: But I remember being in a meeting with our provost when the pandemic was just starting, saying, “Well, we might have to consider in six or seven weeks that we might have to go to an alternate contactless form of delivery for higher ed.” And that happened a day and a half later. And we just turned a switch, and we just decided to live with that for a while. Now, at the time, we thought maybe it’d be a week or a month, or maybe a couple of months, and it turned out to be a lot longer than that. But yeah, to your point, Carol Ann, I mean, I think things that we thought we couldn’t do, we learned how to do really fast.
Cameron Ford: I think it’s an important distinction, I think that speaks to both with Carol Ann and Mike been talking about, is a distinction in invention and innovation.
Cameron Ford: Because invention is actually coming up with a creative solution. And like Mike said, they came up with the technology for mRNA vaccines quite a while ago. This innovation is usually measured in terms of diffusion and use of inventions. And that’s usually where entrepreneurs contribute. They don’t typically invent something that’s completely new. They’re the ones that help to provide it to the market and make it more available. So I think the dynamic going into COVID probably had less to do with the pace of invention than it did with windows of opportunities slamming down and other ones sliding up really fast. It’s like suddenly, just something just couldn’t happen. Bam, window goes down. And now, it’s like, people are looking around, trying to figure out what innovations are available that we might be able to use to still get stuff done. So vaccinations, almost a miraculous kind of pace of delivery on those. There were existing fairly large scale delivery services. Those things were able to be scaled up even further to help a lot of restaurants stay in business.
Cameron Ford: But the invention part does kind come back again at the back end of that, because when those windows slam shut, Mike referenced some restaurants and stuff that completely had to pivot, and you have to figure out how to make do with what you have. “We can’t do what we used to do, but we have a lot of resources, and we have some skills. What else could we do with those things to still create value?” The pace of invention probably didn’t change a lot in those before times and during times, but the rate of adoption greatly accelerated in certain areas around medical technology, drone use delivery services, software service, things that facilitated people working from home, working on projects together. A lot of things like that, that blew up.
Paul Jarley: Listen to Caroline talk about windows slamming shut and opening with two of her companies bSteps, which sells dance shoes, and Flightpath, which markets a high tech golf team.
Caroline Castille: It was rough for the dance market, let me tell you. On the marketing side, were people actually dancing? Not really. Not in the ways that we used to market too, which was, you could dance anywhere, and people love to go to dance festivals. They love to go to the club, whatever, and you could wear these shoes anywhere. That’s our value prop. It has all the performance features, et cetera. Not a lot of people were buying. So we said, “Hey, we’re going to pivot, and we’re going to offer classes online.” So we have about 30 influencers plus, and we booked a dance class every week with our influencers. And that was one big pivot that did help to bring sales in until COVID resolved itself, and then we started selling a lot of shoes again.
Caroline Castille: Going up, I mean, for Flightpath, one of the reasons why we were able to sell a golf tee and sell so much of it so fast in its first year was because people were playing golf more. There was a huge increase in golf.
Paul Jarley: This is hard for me to say, because I haven’t gotten used to this idea yet, but my grandson… Okay, I actually have two, I still make them call me Dean Jarley, because I don’t want to be called grandpa.
Caroline Castille: [inaudible 00:13:02].
Paul Jarley: Everybody under the age of 18 has to call me Dean Jarley, so that’s what I [inaudible 00:13:07]
Caroline Castille: Oh my goodness. Oh, wow.
Paul Jarley: But Henry is an avid golfer, because, to your point, all kids’ sports were shut down, except for golf. So there’s been this enormous increase in golf among seven to 10 year olds.
Caroline Castille: Yes.
Paul Jarley: It’s crazy-
Caroline Castille: Yes.
Paul Jarley: … how much. So good product at the right time there.
Caroline Castille: Yeah. Exactly. It’s crazy how much any golfer will invest into something that will make them incrementally better.
Paul Jarley: So let me go through four factors that I think have defined a post pandemic environment, and I’d like each of you to comment on whether or not you think they had a meaningful and/or lasting impact. Has the increase in liquidity led to more deals, more deal flow, more encouragement for entrepreneurship? Less? Doesn’t matter? Carol Ann?
Carol Ann Dykes Logue: Absolutely more. Investment groups that never would’ve talked to us before from Nevada, from New York, from Boston, from Atlanta, from Texas, from California… I think part of it is because, all of a sudden, Florida’s this big, bright spotlight out there. Companies are flocking to Florida, brings that, and brings in investment, attention. And we’re getting inquiries from groups that never would’ve talked to us before. And we have a record number of clients, I would say, that are securing investment, cap equity investment.
Paul Jarley: Caroline’s company, Clickable Impact, is even taking equity positions in firms in place of payment for services.
Caroline Castille: So Clickable Impact is a social media marketing agency. One of our top services is email on performance, where we do email and text message marketing for a percentage of revenue for e-commerce stores. So very niche service. And then the only other thing we do is we just do special partnerships or JVs with different companies. We might invest into them, own a piece, or just be a service provider where we have some kind of skin in the game. Maybe it’s-
Paul Jarley: You will take an equity position as part of a service contract?
Caroline Castille: Yes.
Paul Jarley: So Cameron, another source of financial resources for a lot of small business is home equity. Did unrealized gains in the housing market result in more small business start up? Do you think that had an impact or will have an impact over the next year, or not?
Cameron Ford: Over the next years would be hard to say, because, obviously, they’re raising interest rates dramatically, with the intent of trying to flatten out housing prices and make loans more expensive, so that home equity thing may be kind of more of a blip than anything longer term that people can count on. Obviously, the folks that Mike and I are working with are students tend to not be homeowners and have that as an asset to draw from. So I don’t have a lot of insight into that.
Cameron Ford: I did want to just echo though what Carol Ann was saying about the risk capital investment domain. I mean, it really has gone up by a lot. I’m looking at a bunch of charts on my screen right now, and a huge increase in investment funding recently. And also, Blackstone, one of our patrons that supports our students here at UCF, is opening up a huge office in Miami. And they’re making a big investment in our educational efforts here in Florida as well in parallel with that. And I think that’s going to make a huge difference, having an 800 pound gorilla private equity company like that anchored in South Florida, along with a lot of the really good things we’ve seen with the growth of the venture capital community in Florida as well.
Carol Ann Dykes Logue: Yeah.
Cameron Ford: I think from that standpoint, from a risk capital investment standpoint, I think the future there looks pretty bright. Carol Ann, if you would agree with that or not, but-
Carol Ann Dykes Logue: Yeah. Yeah, totally. Totally. Because once that dynamic changes of the investor world nationally and even internationally, realizing that Florida’s not a swamp land, that there really are investable companies here and deals accelerate, it’s picking up speed. It’s not going to slow down anytime soon.
Paul Jarley: How about The Great Resignation? One of the things that’s puzzled me over the last year or so is, where did all those people go? Carol had mentioned labor shortages that we’re seeing now. Did a bunch of them decide to be entrepreneurs and start their own business? Is there any evidence of that?
Carol Ann Dykes Logue: First thought was fortunately not.
Cameron Ford: Yeah. I was going to say the same thing.
Carol Ann Dykes Logue: Yeah. But that’s a true statement, at least where I sit in the world, my little microcosm. I didn’t see this sudden rush of people that, all of a sudden, decided to be an entrepreneur. We haven’t had anybody show up at our door that hadn’t already been thinking about, or hadn’t already started on something.
Paul Jarley: Caroline has a different take on The Great Resignation.
Caroline Castille: We live in the era of The Great Resignation, for now. And I think that’s just because people are now able to see what it’s like being at home, but also what it’s like seeing other cultures, work cultures. I don’t think it’s just because people want to work at home. I think it’s because people just now can see that they were just in a sucky work culture, a sucky company culture. And now, they can see, “Oh, there are other opportunities with these companies. I’m going to go there.”
Paul Jarley: And then finally, changes in the fortunes of companies that are publicly traded. So right now, a lot of the tech companies who were the solution during the pandemic, because everybody was home, think the Netflix of the world, or the meal delivery services of the world, are kind of taking it on the chin. And a number of companies that specialize in experiences are having a good run. Is that likely to change the nature of entrepreneurship and what entrepreneurs look at over the next few years, or do you also think that’s sort of meaningless in this process?
Carol Ann Dykes Logue: Are you asking change whether or not entrepreneurs consider going public maybe?
Paul Jarley: No, no. I’m asking whether or not it’s going to encourage some forms of innovation rather than others.
Carol Ann Dykes Logue:Innovation, oh. Oh, okay.
Cameron Ford:There’s a long-term trend, I don’t know the exact numbers, but that the 10-year churn in the Fortune 500-
Carol Ann Dykes Logue: 500.
Cameron Ford: … it used to be like around maybe 30% would change over a decade [inaudible 00:19:51]
Paul Jarley: Yeah.
Carol Ann Dykes Logue: Yeah.
Paul Jarley: Yeah, yeah.
Cameron Ford: … where now, it’s like 70%.
Paul Jarley: Wow. Really?
Carol Ann Dykes Logue: Yeah. Right.
Cameron Ford: And a lot of that’s because of mergers and acquisitions and other stuff like that. It’s not all that stuff just vaporizes. But the name plates at the top of the companies changes a lot within a decade, so you’re seeing a much more rapid churn in membership in the upper echelons of the corporate world. Which to go back to the point Mike was making earlier, I mean, I think the overarching value of our entrepreneurship education efforts is really to help our students become professionally agile and to be able to move around from various kinds of startups, or small companies, or big companies and then hopefully playing a positive role there, and then maybe moving out of that, and maybe having a side hustle. There are so many different ways, I think, our students are going to have to navigate their career paths that are so different from folks my age, certainly.
Carol Ann Dykes Logue: Yeah.
Cameron Ford: They had a much more linear notion of what that might look like. I think our students are going to be doing a lot more weaving and bobbing, these windows going up and down, like I saying before.
Carol Ann Dykes Logue: Yeah.
Cameron Ford: Trying to be able to sustain a financially and personally successful career. So I think a lot of things that… If you think of entrepreneurship as a method, you can apply to a lot of different kinds of problems. I think that’s one of the things we’re trying to contribute to the world is to empower our students that way.
Paul Jarley: So if I were to summarize the one thing I’ve heard from this conversation that I think might have the most lasting impact was Cameron’s comment about diffusion, and that diffusion clearly excel-
Listen to all episodes of “Is This Really a Thing?” at business.ucf.edu/podcast.
Inflation hasn’t been much of an issue since Jimmy Carter was in office. But—like Mom Jeans and mullets—it’s totally back. This time, though, it feels different. We’re paying more than ever at the pump and in the grocery stores, so what’s to blame? Is it government spending? Supply chain shortages? The war in Ukraine? We’ve got questions, so we turned to UCF economist Sean Snaith for answers.
Want to learn more? Check out Snaith’s latest U.S. Economic Report from UCF’s Institute for Economic Forecasting.
Paul Jarley: Inflation hasn’t really been an issue since the Carter years. That Saturday Night Live skit was Dan Aykroyd impersonating Jimmy Carter. Inflation is definitely not the friend of people who are on fixed incomes. Today’s inflation, though, feels a little different. Some people think it’s not a surprise. We printed a bunch of money during the pandemic, and we’re suffering the consequences to that. Spending was high, particularly government spending.
Some people blame it on supply chain shortages. Some people blame it on the war in Ukraine. Some people believe it’s a government conspiracy. To sort through all of those things, when Sean gets here, we will have a conversation with him that will help us shed some light on where inflation really is today and where we think it’s going in the future.
Well, here he is. I’m assuming you’re in big demand these days.
Sean Snaith: Yeah. I’ve spoken on at least two occasions about inflation over the past year and a half.
Paul Jarley: So you raising your prices, given all this demand?
Sean Snaith: No, competition’s too fierce.
Paul Jarley: Really? Yeah.
Sean Snaith: Yeah. Economists are a dime a dozen.
Paul Jarley: Well, that’s probably true, but you’re the prettiest one I have, buddy.
Sean Snaith: Aw. You’re like my magic mirror. What fairy tale was that? Who’s the fairest economist in the land?
Paul Jarley: Oh, that’s not even close. I mean, it’s a low bar if you’ve met most economists, right?
Sean Snaith: I build a career on low expectations.
Paul Jarley: There’s no GQ for economics. I’ve never seen it.
Sean Snaith: No. We did do a GDP GQ…
Paul Jarley: There you go. Very nice.
Sean Snaith: But yeah, the model was not an attractive man.
Paul Jarley: I would imagine not. So how unattractive is it right now?
Sean Snaith: Well, we’re making the call when our release goes out that we are in or very close to a recession right now. And speaking to different groups and to the media over the past year, all of this can be traced back to the policy response to COVID-19 in 2020.
Paul Jarley: We’ll come to that in a couple minutes.
A few weeks ago I was driving home and when I drive home from the gym, I tend to put on sports talk radio. It’s my time to kind of catch up with. And the guy was railing against the inflation number in the sense that he didn’t believe it, that he thought the reported one was too low. And he was quoting the doubling in gas prices over a period. And yeah. So talk a little bit about how that inflation number is actually put together and what it really means.
Sean Snaith: Many of the variables in macroeconomics have measurement issues. Financial markets, interest rates…
Paul Jarley: Pretty simple stuff right?
Sean Snaith: To the second on the spot. When you start talking about GDP, employment, unemployment inflation, now you’re dealing with something that’s not as directly observable. And especially for something like the price level, we know what the price of individual commodities are. We know much wheat and soybean costs. We know much corn costs, how much a gallon of gas or gallon of milk costs, but the price level’s not observable. So we, the economics profession, the government, comes up with proxies to try to gauge that.
And the most common cited and observed proxy for inflation is the consumer price index. Hopefully people aren’t listening to while they’re driving, because we might have people nodding off and driving on the shoulder. But basically, when I’m teaching introductory students about it, I’d say, just think about you go to the grocery store and you put in a bunch of different items from the shelf and you go to the checkout and they ring it up and they tell you how much it is. Then the next month you do the same thing.
So basically that’s what the CPI is. It’s a basket of goods and services consumed by the so-called typical urban consumer. That basket gets repriced each month. And from that these inflation numbers are calculated. Now within that basket, certain items may be rising much faster than the average of the basket as a whole. And so if you’re looking at used car prices, which were up 40% year over year, if you’re looking at energy prices, which were up much higher than, and driving, really the overall CP numbers in many ways, or some food prices, it’s much higher than the eight and a half percent that gets reported as the headline number. So I think that’s where a lot of the skepticism comes in, that somehow the government’s trying to hide or obfuscate the real inflation rate out there.
Paul Jarley: Because the truth is, the inflation rate is different for different people based upon their purchasing patterns forward. Right? I mean, there isn’t really one inflation rate.
Sean Snaith: Well, one of the biggest sources of economic fallacies and misinterpretations is the notion that we forget. And I mean, we, in the biggest sense that when the rules of the game change, we’ll go back to sports talk radio here, the players play the game differently. So in the NFL, when they start penalizing for high hits to try to reduce the number of concussions, well now we start to see more lower body injuries. And so for the consumer, the rules of the game are your income, the prices that you face each day when you go shopping. And when those things change, your behavior changes. You don’t push that same cart up to the checkout that they use for calculating the CPI.
If the price of chicken wings goes up too high, I eat fewer chicken wings and maybe I substitute pork or beef. And so you that’s what’s happening now. People’s behavior will be altered by that. And so it is, depending on how you respond, how inflation impacts you in a real sense will in part depend on how you react.
Paul Jarley: But what is the inflation rate today?
Sean Snaith: I think the last reading was 8.7%, which was for May.
Paul Jarley: Do you have any reason to believe that’s over or understated?
Sean Snaith: No. I think it reflects what’s happening to energy prices. I think it reflects what’s happened to food prices. I think it reflects what’s happened to the price of shelter. These are the three big items that consumers… 65% of house of household spending for households that make $80,000 or less, 65% is on those three items. And so rent’s been rising. Food’s been rising, and the cost of transportation’s been rising. That doesn’t leave a lot of wiggle room for most people. And I think this is one of the key reasons we’re seeing consumer confidence at levels we haven’t seen since the early 1980s.
Paul Jarley: We opened the podcast with Dan Aykroyd’s famous inflation as your friend skit, impersonating Jimmy Carter. When was last time inflation was double digits? Was it the Carter year?
Sean Snaith: It may have leaked into the early Reagan years as well.
Because that’s when the early eighties, the Fed had to very dramatically raise interest rates. They raised short term interest rates to close to 20% in order to break the stranglehold that inflation had formed on the economy.
Paul Jarley: Okay. So let’s break down that inflation rate. So how much of this do you think is due to the war in Ukraine?
Sean Snaith: I think in Spanish it would be un poco. This was, to put the cart ahead of the horse earlier in the park podcast, but most of the economic problems that we’re currently facing, the labor market shortages, the supply chain problems, the high price of oil and gasoline, the overall high rate of inflation rates was already baked into the cake by, I keep wanting to go back to COVID-19 policies, but Putin’s invasion of Ukraine was the icing on this layer of cake of economic misery. Sure, it caused a spike in oil. Nobody knew. I mean, how’s this going to play itself out, right? We haven’t seen this kind of war in Europe for a long time. And so markets reacted, oil spiked up close to $150 a barrel. And then as the reality on the ground continues to unfold, it’s not the World War III as some were predicting and unfortunately some seemed to want.
And so, we’re kind of back down to where we would’ve been had Russia not invaded Ukraine. We were on this trajectory for a year and a half. Now we’re back around $110 a barrel. Politically, we love to point the figure, nothing like a good scapegoat. Somebody’s wearing a black hat. In this case, it’s Putin, who, I mean, it really has caused more problems for a country with a GDP just a few hundred billion more than the state of Florida. Well, 6,000 nuclear war heads. I’m not going to brush that aside.
But no, that was not helpful. There was disruption, there were problems, and then we added to it. These embargoes were meant to punish Russia somehow, caused further pain for the rest of the world in terms of commodity prices in terms of fertilizer. I mean, this is the hidden cost of high oil and natural gas prices is what it’s done to the cost of fertilizer, which has skyrocketed over a year and a half. And that means that the price of food isn’t going to be coming down very quickly, because there’s another crop of food inflation that, so to speak, is already in the ground.
Paul Jarley: What’s the source of all these labor shortages we’re having. Did everybody retire?
Sean Snaith: No. Again, the labor market is very complex and people’s behavior in terms of entering or leaving the labor market can depend on a variety of things. But some of it is aging. A piece of it is aging. The baby boomers continue to age and more of them are moving into retirement. So that’s…
Paul Jarley: Well, and at the beginning, right, of this, the pandemic and the aftermath, their portfolios were pretty good because the market was still really high. Right? Unlike other slow downs we’ve had.
Sean Snaith: Right. So if you’re the west coast of Florida, Naples and Sarasota and places that tend to attract more affluent retirees, they thrive when financial markets are booming like that. But it goes beyond that and we’re at a university here and I speak to students and ask them, “Were you working before the pandemic?” “Yeah.” “Are you working now?” This was 2021, the situation’s changing. “No.” I said, “Why not?” I know the answer. “I don’t have to.” “What do you mean you don’t have to?” “Well, I got two $1,400 checks when I got laid off from Buffalo Wild Wings, I got unemployment plus an extra $600 a month. I’ve got three roommates. I’ve got enough money to pay the rent. My Xbox subscription is up to date. I’ve got the money for my prescription for my glaucoma. Why am I rushing back to scrub pots in the kitchen of Buffalo Wild Wings? And the answer is, I’m not.”
So that’s part of it, because if you look at the shortages, you didn’t hear Advent Health or Orlando Health saying, since the pandemic, none of the orthopedic surgeons came back to work. No, it was servers, bartenders, people working in retail, gasoline stations. That is the piece of the labor market where the shortages were just really across the board. Now there were labor market shortages, again roll back the clock pre-pandemic, February 2020. But they were specific, not enough nurses, not enough accountants, not enough tradespeople, but it wasn’t, “Hey, I can’t get somebody to make a latte at Dunkin’ Donuts.” That wasn’t the issue. But that became the issue.
Paul Jarley: What about the airlines? What’s going on there? Just because it’s been in the news so much.
Sean Snaith: Labor shortages as well. Pilots, unlike politicians, there’s a mandatory retirement age of 65. And so again, you’ve got the baby boomers, they hit this age, they have to retire. And so there’s, with the explosion of demand that came out of the pandemic that was fueled by $6 trillion of government spending that was underwritten by 0% interest rate, the Fed pump liquidity into the banking system. But all those purchases, and we did this to fight the 2008, 2009 financial crisis. The Fed’s balance sheet went from 800 billion to over 4 trillion. But because of what we did in terms of the pandemic, the Fed had to go back and redo what they did in 2008, cut interest rates to zero. And then the balance sheet grew further to almost 9 trillion.
Now, not all of those purchases end up in circulation in the economy, because banks for a variety of reasons, from dog franks to stress tests to worries about being overextended are not loaning out all that money. They’re sitting on it. They’re holding it as reserve. So that really never makes it into the economy. However, those $1,400 checks, they did get spent. And the other spending that the government did outside of those checks went into the economy and those dollars started to circulate.
Paul Jarley: That gets us to velocity. So is velocity back to pre-pandemic levels/ velocity is the rate of turnover in currency, in the economy.
Sean Snaith: I would say that it’s increased. The Fed’s not reporting some of these monetary measures that they did historically. Monetary policy is very different post-financial crisis than it was pre.
Paul Jarley: Talk about that.
Sean Snaith: Well pre-financial crisis, being a central banker was a fairly straightforward occupation. If you wanted to stimulate economic activity, you would push reserves into the banking system. The banks at that time did not hold excess reserves because you don’t make money.
Paul Jarley: They loaned out the money.
Sean Snaith: They loaned out the money and that money…
Paul Jarley: Circulated through.
Sean Snaith: Right. And so interest rates came down, economic activity went up. If the economy was overheating, you pulled those reserves out. So it’s not as straightforward now. It’s more complex. They have a different set of tools. I haven’t taught money in banking in some time, but I imagine I couldn’t use my old notes to teach that class these days. So it’s a little more complex and it’s a whole different… The structure of the economy and the connections in how monetary policy makes its way to economic activity were all reset and changed and altered in ways that I think the Fed’s still learning.
Paul Jarley: That segues nicely. So the Fed has done a traditional response that moved to raise interest rates. How effective do you think that’s going to be in today’s economy? Because that’s usually a durable goods kind of, right?
Sean Snaith: Right. It affects things that are sensitive to interest rates…
Paul Jarley: Houses, cars…
Sean Snaith: Houses, cars, business investments. Building, buying equipment, building. It doesn’t affect purchases of food, typically. But the Fed is late to the party or late to ending the party, right? There’s the old saying, I can’t remember which former chair of the Federal Reserve said it, but that the Federal Reserve’s job is to take away the punch bowl once the party gets going. You don’t want people to overindulge. But not only did they not take away the punch bowl in time…
Paul Jarley: They filled it a couple times.
Sean Snaith: They went to, yeah. They went to ABC and bought a case of Everclear or alcohol and dumped it in. And well, guess what? People have landscapes on their heads and inflation’s 8.7%.
But the good news for the fed and my view on this has changed in the past three months, I thought the Fed was going to have to act very dramatically. They were trying to do baby steps the way they were doing pre-pandemic.
Paul Jarley: Well, it is an election year as well.
Sean Snaith: Well, supposedly they’re not swayed by politics and goodness knows that President Trump did his best to try to change monetary policy. So that’s a good thing in this country, that it’s not. But they’re going to get a really big assist by this recession. They’re not going to have to raise interest rates as dramatically as they would have if the economy was still pumping the way it was a year ago. I think this recession will be fairly long, certainly by comparison to 2020, which was only two months. I think it’ll be a year, year plus. I don’t think it’s going to be terribly deep, but I think over the course of that time, you’re going to start to see a slow fading or erosion of inflation rates. And so they’re not going to have to repeat 1980 when they just crush the economy because that was the only way to kill inflation.
I think inflation will sort of fade over time without the Fed having to be as aggressive as they would in a different economic environment.
Paul Jarley: Where do you see this recession hitting the hardest?
Sean Snaith: Really, I don’t think it’s going to be… I don’t want to understate or diminish people that might suffer in a recession, but it’s not going to be this dramatic plunge that we saw, certainly not 2020, certainly not in 2008, 2009. I think the unemployment rate will creep up a little bit, but there’s a huge cushion in the labor market. There’s a lot of fat in the labor market that we can cut away before we get into muscle and bone. And that’s the 11.4 million job openings that remain unfilled.
So I’m an Acme anvil company and I’ve got a thousand positions open. Well, I can cut those and nobody is hurt.
Paul Jarley: That’s nobody’s paycheck.
Sean Snaith: Nobody’s paychecks, nobody’s lost a job. So that could be trimmed. And I think that consumers and… When you’re tightening your belt as a household, there’s some things you can cut and there’s some things that you can’t, so that those more discretionary or luxury kind of items I think are going to see the impact. And so, those associated industries. I’ve never predicted a recession. I always felt that that was sort of folly to do so. But I’m pretty sure we’re in one or very close to one right now. When it officially gets announced a year from now, we’ll see if I’m right or wrong, but this is the medicine that I think is going to help cure what ails us economically, from the labor market to the supply chain to inflation to high oil and gasoline prices. It’s not going to be quick, a shot of a adrenaline and your heart’s back. It’s going to, as I said, I think a year, but slowly, this economic fever dream we’ve been living in is going to is going to break.
Paul Jarley: Could anything go wrong here that would make this recession deeper in your mind?
Sean Snaith: If the Fed overreacts. They were slow to start tightening. Are they going to now err further to the side of tightening? I think that remains yet to be seen. I think if we had passed more spending bills. There was some discussion at one point of a $3 trillion in addition to everything else…
Paul Jarley: Infrastructure bill.
Sean Snaith: Infrastructure. Build Back Better. They call it infrastructure, but then they spend it on everything else. But that money would’ve just went in and would’ve further fueled inflation. So in introductory economics course is, introducing the concept of inflation to new students. Often use the terminology that inflation is too many dollars chasing too few goods.
And so this, putting more dollars in is not going to help. I think in California, they’re giving everybody a thousand dollars, excuse me, to help with inflation. I’m like, “Okay.” Let’s put out the fire by throwing gasoline on it. The fire truck rolls up and they’ve got an oil tanker behind them. You might want to leave because the fire’s not going out. And these other notions, going back to Dan Aykroyd and some of the comical nature policy, then these notions of price gouging and trying to put price restrictions on to, or… These failed economic tropes of the seventies, the fact that they’re somehow trying to be resurrected to me is just stunning.
But I don’t think we’ll see those. But you start doing stuff like that. You’re just going to compound problems. I mean, we’ve made our bed here and we got to lay in it here for a year. And I think as we get to the other side of this recession, we’re not going to rocket out of it. It’ll be a gradual rise, but that period is going to allow a lot of these problems to resolve.
Paul Jarley: So bottom line, two years from now, are we still talking about inflation? Still going to be a thing?
Sean Snaith: No. Now will it be back down to 2%? No, it won’t be, but it won’t be 8.8%.
Paul Jarley: You think it’s three, four, somewhere…
Sean Snaith: Three to four. Yeah. Yeah.
Paul Jarley: It’s my podcast. So I get to go last. We have certainly been through the most unusual two and a half years of my lifetime. Fear of a new virus caused us to voluntarily shut down the economy. We kept people from starving by government executing an intergenerational loan. This helped cushion the blow, but it also kept some folks from immediately jumping back into the economy when fear of the virus started to subside. And we looked to start everything back up.
If Sean is right, and I have no reason to doubt him, the weirdest time in my life is going to finally end by the most typical of economic responses as spending slows and a modest interest rate hike brings balance back to the economy. 2024 may very well be the year when we are able to close the book on the economic consequences of the 2020 pandemic.
Listen to all episodes of “Is This Really a Thing?” at business.ucf.edu/podcast.
Paul Jarley: This would not have happened a year ago.
Valerie Moses with Addition Financial (00:02): Good morning. It is so great to see you all here today. We are so proud of our partnership with Dillon Gabriel and with UCF Athletics and with the College of Business, we’re a proud partner. You can see us at the student gate at any football game, so please come visit us. We are incredibly honored to sponsor this morning’s event and to get to hear from Dillon and from [Steven 00:00:24] as well, all about the NIL partnerships. This is such a huge brand new front here, I would say, in the world of sports business and something that we all really need to be paying attention to. So it is very exciting to see these partnerships really come alive, and we are so grateful for our partnerships here today.
Paul Jarley (00:44): Will this newfound right to publicity change college athletics forever?
Paul Jarley (00:48): This year was all about separating hype from fundamental change. I’m Paul Jarley, Dean of the College of Business here at UCF. I’ve got lots of questions. To get answers, I’m talking to people with interesting insights into the future of business. Have you ever wondered, is this really a thing? On to our show.
Paul Jarley (01:08): Name, image and likeness is a legal concept that allows any person, including student athletes, the right to publicity, the ability to capitalize on anything that identifies them, including the ability to engage in third-party sponsorships and endorsements. Some people think this will change college athletics as we know it, others aren’t so sure. They think the marketplace will adjust, and that the benefits will accrue to a very few. To help sort through this, I’ve assembled three guests. Terry Mohajir is UCF’s athletic director, Brittney Duzan is the associate AD for compliance, and Scott Bukstein is an associate instructor in our DeVos Sports Business Management Program. Listen in.
Paul Jarley (01:51): As I understand NIL, this is being dealt with on a state-by-state basis. So what does Florida allow student athletes to do now that they couldn’t do before? Brittney, I’m going to throw that to you.
Brittney Anderson-Duzan (02:06): Sure. So, like most states, the state of Florida is one of the few that actually has a legislated piece for name, image and likeness. So essentially what they now have is the right to utilize their name, image and likeness for commercial purposes, so whether that be for money or not for money, that they weren’t allowed to do previously by NDA legislation. So basically, they have the right to publicity now.
Paul Jarley (02:32): They can print their faces on t-shirts. Can they get appearance fees? I’m trying to understand exactly what we’re-
Brittney Anderson-Duzan (02:39): Yeah. They can get appearance fees. It [inaudible 00:02:43] us now with what students on campus can do. So think outside of just those big endorsement deals, our student athletes can now do philanthropy work and actually use their platform as a student athlete for that.
Paul Jarley (02:53):For their own foundation, you mean.
Brittney Anderson-Duzan (02:55): Yep, they can create a foundation. Previously, they couldn’t go out on their own and utilize their name, image and likeness for a business. So if my student athletes want to go to the entrepreneurship office here on campus and want to start a business and use their name, Brittney Duzan’s makeup brand, they weren’t allowed to do that previously. They can do private lessons and actually use their name, image and likeness for that. Like you said, speaking engagements, autograph sessions, and then the stuff you’re seeing in the media, like these endorsement deals, and-
Paul Jarley (03:24): They could provide private lessons to like high school athletes.
Paul Jarley: Terry.
Terry Mohajir (03:28): The only thing that we can’t do is we can’t create the deal for them. So we cannot be involved in the deal, they have to create it themselves. People can ask us, “Hey, I want to talk to so-and-so.” We can put them in contact, but that’s it.
Paul Jarley (03:43): Okay. You can do that.
Brittney Anderson-Duzan (03:44):Yep.
Paul Jarley (03:44): Okay.
Brittney Anderson-Duzan (03:46): Yep. And what was odd was before, like with the private lessons, they’ve been allowed to do that forever with the NCAA, but the NCAA used to say, if I was the star tennis player, I couldn’t say me, Brittney Duzan, the number one for our tennis program, is giving private lessons. I would literally have to say, “Would you like to do lessons with me?” And couldn’t give my credentials because that would be using your name, image and likeness, which makes no sense because when you’re giving lessons, you’re going to want to give your credentials.
Terry Mohajir (04:11): You just couldn’t have a formal camp with your … you could [crosstalk 00:04:15] private. You couldn’t advertise it.
Paul Jarley (04:17): Okay. But now you could do a formal camp, Terry, is that true?
Terry Mohajir (04:19): Mm-hmm (affirmative).
Paul Jarley (04:20): You could, okay.
Terry Mohajir (04:21): You could have the Dillon Gabriel quarterback camp. In the past, he could do private lessons, but not-
Paul Jarley (04:27): Yeah, yeah. Hey Scott, are there any good sources of data on NIL activities at the national level? Do we know what they’re doing?
Scott Bukstein (04:34): The data within the space influencer is one of the primary NIL marketplaces. From July 1st through October 31st, the first four months in which NIL activities have been allowed, social media content has represented 59% of all transactions within the NIL space on that one platform. If we look at another primary marketplace, Paul, Opendorse, posting social digital content represents right around 28% of total NIL compensation on the Opendorse deals marketplace. So right now, social media where college athletes are essentially functioning as brand ambassadors, they’re making posts, endorsing a company, right now that’s the primary activity area and also the primary revenue area. Now there’s a bunch of other NIL activation and monetization areas. For example, some student athletes are making personal appearances at places like restaurants, car dealerships, community events. Some student athletes are signing autographs. This could be on physical, or now on digital, trading cards, digital collectibles, NFTs.
Scott Bukstein (05:41): Some college athletes, they’re playing video games with fans through platforms such as YOKE Gaming. Student athletes will get paid to spend 20 to 30 minutes playing in a specific video game with fans. College athletes can generate revenue by providing shout-outs to fans on platforms like Cameo, or they can engage in sending text messages to fans on platforms like Subtext. Some college athletes have been selling apparel, other branded items, through platforms like [inaudible 00:06:09] and The Players Trunk. So here’s a neat possibility that we’re seeing emerge for group licensing collaborations within the space with university athletic programs, so that college athletes, they’re able to sell merchandise and memorabilia that have trademark protective university athletics program logos and colors.
Paul Jarley (06:26): So Scott, do you have any sense of what the total value of this market is? Like, even for just the influencer stuff, do you have a number?
Scott Bukstein (06:33): It’s difficult to capture. The main reason is, and we’ve seen this within the past couple weeks, not all of these deals are being disclosed. It’s reporting that’s been made voluntarily by some athletic programs and then by these marketplaces. So for example, Opendorse, which is one of the primary marketplaces, for the first four months of [inaudible 00:06:53] activities from July through October, if we look at total compensation for division one, 82.9% of all NIL related compensation through the Opendorse deals marketplace involve college athletes on men’s college sports teams, and the average compensation per deal was $686.
Paul Jarley (07:15): Those numbers aren’t eye popping to me. Particularly on a per-athlete basis, right, I mean, they’re pretty small potatoes.
Scott Bukstein (07:22): Yes.
Paul Jarley (07:23): I would assume that the best opportunities here are probably for superstars in either football or basketball in the revenue sports. Fair enough?
Scott Bukstein (07:34): Okay. For sure.
Paul Jarley (07:36): All right. So you went to kind of what’s my next question, I assume the star quarterback is in a pretty good position to maybe take advantage of this, but do you have any sense what percentage of your student athletes are probably involved in something related to this? I mean, are you even allowed to know?
Terry Mohajir (07:51): Well, yeah, she knows.
Brittney Anderson-Duzan (07:53): Yeah. I was going to let Terry take it because he does have a good grasp on it, but yes. So the state law does require student athletes to disclose their NIL activities. They don’t give a timeline for disclosure, but our student athletes do a pretty good job about disclosing what they’re doing. You’d be surprised, it’s a wide breadth of student athletes from the starting quarterback to bench warmers. We have some students who have a really big following on like TikTok, or really good on Instagram, and that’s where you’re seeing a lot of things happening right now. So I wouldn’t say it’s a huge percentage of our student athletes that are utilizing it, but it’s not just the star quarterback.
Terry Mohajir (08:31): Yeah, I would tell you Paul, that our female athletes probably have the most upside, especially the ones that have a very robust social media following. And they play better, I think, as far as for advertisers. And so I think if you start looking around the country, you might see bigger numbers with maybe a star quarterback, or a star basketball player, but you’ll probably see more of your student athletes that are females.
Paul Jarley (09:08): Terry, do you think this is going to impact recruiting at all and how colleges recruit?
Terry Mohajir (09:13): Absolutely.
Paul Jarley (09:15): Give me a sense of what you think’s going to happen there. I mean, we’ve talked before, right? Yeah. I thought you’d be going out and hiring social media experts and some brand experts to help the students develop this, and quite frankly, what you don’t want is UCF’s student athlete filling the blank on the headline for something that happened NIL-related that you had no control over. I mean, that’s what would freak me out.
Terry Mohajir (09:44): Yeah. I think the biggest concern I have is predatorial people that are promising the world and the sky, and they’re not able to deliver. The other thing is, what I’m finding out is you have people that want to help and want to use certain student athletes’ name, image and likeness, and then they have handlers that get involved that try to get way over market price. That’s a little bit of a challenge too. So I think this is going to correct itself eventually. From my understanding, going back to your question about recruiting, I think it’s really a strong recruiting tool as far as when someone says, “Hey, I’m going to go to this school because there’s a lot more NIL opportunities.” I think when you are in a metropolitan area, like we are in a top 20 DMA, as opposed to a traditional college town, that maybe the only thing in that college town is the school that doesn’t have a lot of industry, it’s a little bit more challenging.
Terry Mohajir (10:50): And I also think, just to be very candid, which I’m a very candid person, is there’s also a lot more opportunities to not use the rule why it’s intended for. It’s more to pay players.
Paul Jarley (11:05): Right, right. So boosters are going to oversell…
Terry Mohajir (11:09): [crosstalk 00:11:09] … there’s really no market value. If you are in a small SEC town and I’m using that, she loves that when I use … and your-
Paul Jarley (11:18): Let’s pick on Tuscaloosa, can we do that?
Terry Mohajir (11:22): Let’s call it Rich Point State, whatever, Rich Point State. And you’re a small little town, and you have boosters that are paying for name, image and likeness that live in two states over.
Paul Jarley (11:37): Yeah.
Terry Mohajir (11:38): You know that they’re industries in two states over. And also can work against you. If you have a star quarterback, well, I’ll just use an example, star quarterback at, if you have a [inaudible 00:11:50] company that spends money on name, image and likeness, and you pay a star quarterback at one school, and you’re not doing another school, it may hurt you on your advertising. So I use the car dealers, if you are promoting a quarterback at one school and you have a very competitive collegiate region, and you say, “Look, he’s sponsoring that quarterback,” why would I buy from him? That’s not my school. So I think you have to be very careful from an advertiser as well, because people are generally very parochial in how they spend their money, and they want to support people that they support their interest, if that makes sense.
Brittney Anderson-Duzan (12:30): And I feel like with recruiting too, just being part of the recruiting process sometimes-
Paul Jarley (12:35): Yeah, Brittney.
Brittney Anderson-Duzan (12:35): … is, you’re seeing a shift of the questions they’re asking or like, how are you going to market me as a school? So you’re looking at the school’s marketability, you’re looking at the town’s marketability. And then it’s also, I think, going to tie a little bit into, all right, well, we already have these student athletes or these kids that want to play their freshman year. I think they’re going to say, well, it’s going to be a more candid conversation because the starters are the ones potentially getting better deals. So you’re kind of seeing those conversations start in some of these sports with, all right, well how are you going to market me, which that conversation wasn’t happening a year ago.
Terry Mohajir (13:10):[crosstalk 00:13:10] … you could also see some of the student athletes that might have more of a realistic chance to play at the next level that really don’t want to mess with it either.
Brittney Anderson-Duzan (13:21): Yep.
Terry Mohajir (13:21): They just say, “I don’t want to mess with, I want to focus on my trade. I want to play in NFL, NBA, whatever it is, and I don’t really need any distractions.” And you can also see certain student athletes being distracted from it as well. So I think it’ll correct itself, just like all the stuff, and I really love the rule. Having been a former student athlete coach, I love the rule, the opportunity, because it’s intended to help the women’s soccer player write a children’s book, or help a young man have a passing camp or a shooting camp or something like that, and just like regular students. But it’s not intended for college X to get booster Y to pay a player $50,000 for no market value. And I hope this is being recorded because you can take that to the bank.
Paul Jarley (14:10): Yeah, no-
Terry Mohajir (14:11): [crosstalk] … because that’s not the intention of why we are doing this.
Paul Jarley (14:15): Sure, of course, Terry.
Terry Mohajir (14:16): [crosstalk 00:14:16] … people out.
Paul Jarley (14:18): So what flashed through my mind, I have to admit, when Brittney was talking, is the frightening scenario of NIL being available when Johnny Manziel was playing at Texas A&M, but we won’t actually put that in the podcast.
Terry Mohajir (14:31): No, that’s okay. That comes up often.
Paul Jarley (14:35): I mean, he’s sort of the poster child, right, in a way.
Terry Mohajir (14:37): No, because he was signing autographs for money, which actually, I don’t have a problem with that. If someone wants to pay him money for that, that’s fine. Now-
Paul Jarley (14:46): Remember Terry, A&M had it on their website.
Terry Mohajir (14:49): I know.
Paul Jarley (14:50): … and they’re selling it on their own website, but I’m also worried about agents here.
Terry Mohajir (14:54): Yeah.
Paul Jarley (14:54): I’m worried about agents approaching student athletes and saying, “Well, we’ll handle this, your image and likeness stuff for you now,” and this is a way for them to get in the back door. So are there guardrails on that?
Terry Mohajir (15:08): Well, that’s what my concern is. I was talking about the handlers.
Paul Jarley (15:11): Yeah.
Terry Mohajir (15:11): … and now there’s legit agents that have some legitimate opportunities to help a young person get to the next level in their professional sport. But then you have handlers that may not have the experience. You have uncles, aunts, cousins, brothers, that want to get involved that really don’t have the expertise. So we do have a couple forums that allows them to go on and get the professional help that they need. There’s a couple companies out there. One that actually was started by UCF grads is one company is called Icon Source. And it’s basically, after you register through the compliance portal, you can go on there and they can negotiate all your contracts, they handle all your name, image, likeness. It’s a resting place for your name, image and likeness that advertisers can go on there, it’s very clean. We also have services on campus that our student athletes can take advantage of, the legal services on campus that they can use, and I think they have. Brittney, I think you’ve …
Brittney Anderson-Duzan (16:24): Yeah, we funnel a lot of student athletes over, which has been helpful, because we can’t help them obviously work through contracts, but to Terry’s point, the most we can do right now is educate them on what to use and what to do. Because you are seeing some shifts where you’ve got agents who’ve worked in that professional realm who are saying, “Well, we’ll come do NIL with you,” and so just educating them on, well that’s not what their normal course of dealings is. They’re not used to dealing with those kind of contracts, so are you sure you want to work with that agent? So making sure before they sign anything that they’re going over to legal services and doing that. And what Terry’s talking about is third-party market places …
Paul Jarley (16:59): Yeah.
Brittney Anderson-Duzan (17:00): … and there’s a ton out there, and Terry did a great job of vetting some of them. But giving our student athletes the opportunity to say, look, you don’t need an agent to go out and find deals. Here’s a platform you can go on, where you can meet people that want you to do an endorsement deal with them, or want you to do a social media post with them, and you can work with them and the contract’s done there and vetted, instead of you going out and hiring someone that you don’t know. And then all agents have to register through our office, so they have to be licensed with the state of Florida. If they’re a professional, if they work with like the NFL, they have to be NFLPA certified. If they are an attorney, they actually have to be in good standing with the bar. So we do that kind of vetting and give our student athletes a bit of information before they go out and do things, just to kind of help as much as we can.
Paul Jarley (17:47): Scott has a bit of a different take on NIL and agents.
Scott Bukstein (17:52): From an agent perspective, I actually think that name, image, likeness is going to be helpful for student athletes. Currently, we have an amalgamation of state laws that have been completely ineffective at regulating agents, the NCAA has tried to regulate agents. So now from a student athlete perspective, you have some time to learn more about various agencies instead of picking the agency that agrees to charge the lowest percentage for commission on your rookie deal, instead of picking the agency that your basketball or your softball coach recommends. And all of a sudden NIL provides college athletes with an opportunity to learn more about these agencies, be more informed. But, most certainly, you’re going to have situations where an agent might offer to represent a college athlete for NIL marketing purposes. That agent would advance a large sum of money against which the player’s future marketing earnings would be credited, because historically, and this is unfortunate, but in reality, some agents have provided marketing guarantees as part of a broader effort to sign players for contract negotiation purposes.
Paul Jarley (18:52): So is NIL going to be the end of this, or do you think more legislation is coming to allow more kinds of activities? Look into your crystal ball. What do you think?
Terry Mohajir (19:04): Go ahead Brittney, I’ll give you my honest opinion.
Brittney Anderson-Duzan (19:09): I mean, honestly, I think any opinion I’d give right now would be stupid because 10 years ago I would never have said that name, image and likeness would be-
Paul Jarley (19:17): I mean, that’s fair. Yeah.
Brittney Anderson-Duzan (19:19): So, do I think things will change? Yes, I think it’ll just continue to evolve as we move along, but I’m going to hold what I think’s going to happen. I’ll let Terry answer.
Terry Mohajir (19:32): So here’s my thought, and I’ve been doing this for long time now, been in AD for almost a decade, and I’ve seen it evolve and everybody was freaked out when we went to cost of attendance, we were allowed to pay up to the cost of attendance. I was very much in favor of it and it didn’t change the world all that much. It’s just became a budget issue for schools that wanted to pay it. However, in this day and age, what we have allowed to happen as a practitioner and people in my industry, we have allowed the media to hijack the narrative of who our student athletes are. I’m very passionate about. We tend to let people think that they’re employees, and so that’s the big topic right now on Capitol Hill, is that our student athletes employees, they’re not employees.
Terry Mohajir (20:30): When you talk to our student athletes today and ask them if they want to be employees, they do not want to be employees. They do not want to pay taxes. They do not want to be fired. They don’t want all kinds of stuff. They don’t want to have to get workman’s comp. They don’t want to have to get taxed on their housing, their apparel, and all that stuff. So now if they become employees, they get taxed on all that, their food, their shoes that we give them, the medical care, the pharmacy opportunities they have.
Terry Mohajir (20:56):
Paul Jarley (21:54): Yeah. That’s true on most campuses, Terry, right?
Terry Mohajir (21:57): Most campuses, I’ve worked at a school where basketball paid a lot of bills, universities. And so it was an elite basketball program. But I think that’s the key, I am concerned of this talk about employees versus non-employees, because when you get Capitol Hill involved and you get people that are trying to have political favor because they think it’s a very trendy thing to do, they’re not talking to the practitioners, including the students.
Paul Jarley (22:33): So it’s 10 years from now, will NIL have changed college sports in a fundamental way, or is it just going to be a benefit for a few star athletes? Scott, what’s your take?
Scott Bukstein (22:44): A pure financial perspective, I do think in our rights, they’re going to continue to assist many college athletes with professional career prospects and for sports such as football and basketball. In the long run, I think college athletes that benefit might end up being the ones who need the money the least. So what do I think we’re going to see within NIL? So we have this 10 year big picture vision. Within the next year to two, we’re definitely going to see more structure. I think we’ll see more formal classes within colleges of business, similar to a new credit hour, I think it’s a two credit hour class at BYU that is a Shark Tank-type component. We’ll see more workshops led by compliance staff. I also think we’ll see more strategy. So it’s just like esports and sports betting, where companies at first just rush into this space, I think companies now they’re just jumping into the NIL space without any [inaudible 00:23:32] strategy, or end goals, defined objectives. I also think we’ll see some type of consolidation within this space and emergence of several key leaders.
Paul Jarley (23:42): Terry, what do you think?
Terry Mohajir (23:44): I think it’ll be a benefit for a lot of athletes, because it gives athletes an opportunity to really do what it’s intended. You’re going to hear horror stories. We’re already starting to hear about the starting quarterback at these elite programs that came in as starters, now they’re not starting, so they’re getting their advertising dollars taken away from.
Terry Mohajir (24:09): … because they’re not playing anymore. So I think you’re going to start seeing advertisers be a little more cautious about putting their investments into 18-year-old.
Paul Jarley (24:17): That’s interesting.
Terry Mohajir (24:18): So I think that’s going to be happen, but I do think it’s what it’s intended to be. I talked to Chip LaMarca, he’s the one that sponsored the bill in the state, and I had a really good candid conversation with him. It is intended, for young people, to generate some extra money, to start a clothing company like Dillon Gabriel did, to write a children’s book, to be an equity actor. Our student athletes are in great shape to go be actors, or be able to take photos for advertising, like for a fitness magazine, or all that kind of, I think that’s going to be what’s going to evolve, and I think that’s great. I think it’s fantastic to-
Paul Jarley (24:59): What do you think Brittney?
Brittney Anderson-Duzan (25:01): I agree completely. I think the media is focusing on the recruiting aspect and the big stars and these giant deals, but the things that they’re not focusing on, which I think we’ll start to, are, I have some student athletes that I’m not going to out right now because they’re going to have things coming out, but they’re doing philanthropy work and are doing these things that, two and three years ago they could do to an extent, but now they can have total ownership of it. And they’re going to be able to take that, they’re not going to be going to the NFL or the Major Leagues. And they’re going to be able to show that on their resume when they go apply for a job.
Brittney Anderson-Duzan (25:34): This is something that I did while I was in college, and I think that’s going to continue. I think it’s going to grow, because the more that we get into NIL, and the more we understand where our student athletes land, because we have no data to look at, right? Like I don’t know how many student athletes want to start their own clothing company, how many student athletes want to be a social media influencer. So I think the next few years, as you see us kind of to get some historical data, we can start helping our student athletes, and I just think you’re going to see those areas grow as much as you’re going to see the endorsement side grow.
Paul Jarley (26:01): Well, and I mean, athletes are in a unique situation here to use their likenesses, but let’s not forget, I have a lot of students on campus in the College of Business who start foundations and businesses while they’re in college, and frankly we encourage that as much as possible, right? So I think [crosstalk 00:26:23] … it’s easy to forget they’re student athletes, right?
Terry Mohajir (26:26): Yeah. And I’ve always hesitated. I say student athletes, but I’m very cautious about saying student athletes. I just say our students most time. The population that Brittney and I serve, they’re students, they happen to be very talented in one area. They just are. I mean, I’m recruiting students, not to be athletes, I’m recruiting to your college. And other colleges. That’s what we do, we’re recruiting them to other colleges so they can get an education and degree and get a career, period. That’s it. We have lost our way in that narrative, we have lost our way as practitioners.
Paul Jarley (27:05): It’s my podcast, so I get to go last. A lot of my students want to be social media celebrities and to monetize their brand in some way. It’s incredibly hard to do. Sports give student athletes a little bit of a leg-up in trying to establish celebrity status, but it’s still really hard. Being a good student athlete doesn’t guarantee that people are going to find you interesting and worthy of their attention off the field. NIL is in its infancy. New things always draw attention, but the early return suggest it’s not going to be a big moneymaker for many student athletes. As this becomes more apparent, NIL’s ability to fundamentally change the college athletics landscape will fade. That said, there are some potential risks for students, athletes or not, in marketing their name, image and likeness. The potential for shenanigans by agents is especially troubling. And a course on this, offered by our marketing department, could be, well, a very good thing.
Paul Jarley (28:12): So what’s your take? Check us out online and share your thoughts at business.ucf.edu/podcast. You can also find extended interviews with our guests and notes from the show.
Paul Jarley (28:24): Special thanks to my new producer, Lesley Crews, and the whole team at the Office of Outreach & Engagement here at the UCF College of Business, and thank you for listening. Until next time, charge on.
Listen to all episodes of “Is This Really a Thing?” at business.ucf.edu/podcast.
Assorted Speakers:“Where’s the beef?” “Why is my six-count nugget now a five count nugget? Where’s my other nugget?” “You mean shrinkage?” “Significant shrinkage.” “So you feel you were short changed?” “Yes.”
Zemack-Rugar: So apparently if you reduced one dimension, but you make it longer, then people perceive the same size because we can’t assess volume.
Jarley (Host): : As Erin Turner would say, this is how they get ya.
Jarley: : This show is all about separating hype from fundamental change. I’m Paul Jarley, Dean of the College of Business here at UCF. I’ve got lots of questions. To get answers, I’m talking to people with interesting insights into the future of business. Have you ever wondered, is this really a thing? Onto our show…
Jarley: A couple of weeks ago, I read an article claiming that for a variety of reasons, some companies were cutting back on the size of their offerings rather than increasing their price. I was intrigued. So I sent an email out to the faculty and within an hour, I had 10 people who had volunteered to become part of a podcast on this subject. It made me think that shrinkflation was at the very least, well, an academic thing. Conflicting schedules reduced the size of our panel from 10 to five, but I have one economist and four associate professors of marketing with me today to talk about what’s going on. Muge Kullu, Yael Zemack-Rugar, Axel Stock and Anand Krishnamoorthy all hail from our Marketing Department. Listen in.
Ayson: Yes, we are. So if you look at TPI inflation, it’s called headline inflation. It has increased in the past three months. We went from below 2 percent to 2.6, 4.1. Now it’s just four points, 4.6. And then now it’s just at 4.9, uh, which is considered high based on the past three decades. And it’s high compared to the Fed implicit inflation target as well, which is 2 percent. So it is increasing.
Jarley: It’s a really odd situation here. We’ve had an economy that’s been largely shut down for a year. That’s coming back. Give me some sense of how much of this is sort of a supply chain issue and how much of it is due to other factors.
Kullu: Companies had trouble from the supply end, also from the demand end, you know, like people just ran to the store and cleaned off the shelves for toilet paper. So like demand went crazy and suppliers shut down first; China shut down. So, and that was a wave of shutdowns in different parts of the world in different parts. At times through the year and then logistics shut down, now there was a lot of trouble passing through the customs and the border shut down. There was a lot of challenges from both ends of the supply chain from both the supply side and the demand side, right?
Jarley: Uluc agrees.
Ayson: So that’s how it started on disruptions of supply chains. We call this in economics, we have this Phillips Curve. That’s how we describe inflation. Now as these two components, main components – cost push and demand pull. So on the supply chain, disruptions affect the cost per side of things. And now we have all this stimulus money and then infrastructure spending and also the normalization. So we’re kind of finding our feet that it means demand is picking up. So it was kind of pulling inflation. So we have both factors happening at the same time. There’s a third component, which is inflation expectations. That seems to be still anchored at low level.
Jarley: The market thinks this is temporary.
Ayson: That is correct.
Jarley: If I’m facing rising costs or shortages in my input, I really have three choices. I can raise my price, but I have two other alternatives. One would be to substitute in a less expensive input and that could be a quality reduction or, in some cases, I can shrink the size of what I’m selling you, which is what we’re going to call street place. But tell me a little bit about why companies would choose one or the other. And then talk to me a little bit about quantum pricing, Uluc.
Ayson: So it really depends on if you have competitors or not. So if you have close substitutes, so a lot of competitors, then you can’t afford to increase prices. So you have to make cuts other places, or you have to, as you say, decrease either the quality or the quantity. These companies that are doing this are mostly in the food and beverage industry, or they have a lot of competitors where there’s a lot of awareness or people pay attention to prices more so than they do to quantity.
Jarley: Cause it’s clumpy, right?
Ayson: And if I’m buying a box of cereal, that’s uh, 15 ounces and I, the company reduces the 14.5. It’s the same box. I’m not going to notice that, right? So I’m just going to pay attention to the price so they can do this, but we do live in this social media age. So if the word gets out, people as consumer awareness, I don’t know how, how much you can do this. How long you can keep this up?
Quantum pricing. First of all, is these companies that sell multiple products. I mean, I sell multiple products and I, um, place my products in these price ranges. So I, I have bunch of things that I sell at 5 99. I have other things that I sell at 3 99. So instead of moving it from 3 99, 9, 9 to 5 99, I just adjust the quantity. I saw it reduced the quality, as you’re saying,
Jarley: Uluc gave us a lot to unpack here. So I’m going to ask my marketing colleagues to help me break this down. Well, we’ll let you know it’s food as the most obvious place for shrinkflation, but can you give me a few other examples? Muge…
Kullu: First class and business class and economy class seats in an aircraft. Still, we are talking about the size and the critical resource we are talking about is the aircraft space. You know, there have been airlines who offered all business and they’re full of the aircraft, like 50 seats instead of 250, right? So you can put 250 economy versus 50 business class. It is five times. It occupies five times the space. So which one is a better strategy is the company’s decision, given the profits per unit resource consumed. So that’s a very critical aspect of the product that companies should really focus on. Like for any profit may be high for a business class, but then you look at the amount of space it takes up from your aircraft, maybe economy like selling five economy, class seats, maybe more profitable. You know, the company should be careful about those kinds of decisions when they’re making these product blind product mix menus.
Jarley: And in an earlier conversation you and I had, and for our student listeners, right, increasing class sizes can be a form of form of shrink question, right?
Kullu: Exactly, exactly. To teacher student ratios, amount of time, you spend with an, um, representative in a bank, you know, in a service then why I’m at the time you can, you know, the resource, whatever the key resources, what are the expensive resource you’re talking about, then how much money is needed for each product becomes your decision makers?
Jarley: Anand, I thought I saw a recent article where Walmart’s thinking of eliminating all of its front-end personnel and just go to self checkout. Is that a form of shrinklation?
Krishnamoorthy: What is the biggest expense on the floor? It is people. Walmart, as it is, has a very few people on the floor. If much of it can be automated, then a lot of these cost savings can then result presumably in the lower prices that Walmart likes to tout. Anyway, because Walmart is about low prices. That is not as big a deal for some of these other players where pricing is not their key differentiator, but at Walmart it’s always about pricing. What can they do to bring prices down in a world where costs are difficult to strength, shrink, uh, labor, for example, that is the first way you can, uh, if a product shrinkage is not going to work, then you would look at shrinking on other expenses like labor. What a manufacturer is doing with shrinkflation is pretty much what Walmart or other retailers are doing with wages, because when it comes to a retailer, um, nearly all the product you put on the shelf is made by someone else. So then when it comes to your own product, so to speak, it is your employee labor force. And that is what you would like to shrink.
Jarley: So in general, are people more sensitive to price than they are changes in service or changes in packaging?
Krishnamoorthy: Yes. They are, and there are a lot of reasons why. The most obvious is that consumers tend to pay attention to top-line prices. They remember the price of the item. They do not remember the size or weight of the item. I can ask you a simple question. What was the size of a canned vegetable, a vegetable in cans, uh, 15, 20 years ago? What was the weight? Do you remember, anybody? It was 16 ounces. Why it’s a pound, right? The challenge is, is it even, you know what it is today, go to Publix and look. It’s 14 and a half ounces. Every can of vegetables is 14 and a half ounces. Why haven’t we heard about it? We are experts in the room. If we don’t know that the package has shrunk from 16 ounces to 14 and a half over the last 15 years, how in the world are consumers who are mostly clueless about these things are going to figure this out? Consumers remember, or at least pay attention, to prices.
Krishnamoorthy: They don’t pay as much attention to product sizing. Ice cream, for example. There was a study on ice cream consumption in Chicago that they found that consumers are four times as sensitive to changes in price as a package size drops. Clearly consumers notice that a lot more. I’m sure a Yael in the room can probably talk about the behavioral aspect, but the primary argument is that there’s a lot of consumer processing required to keep track of sizes, et cetera. That is…. pricing is slightly easier to remember. Pricing is something consumers always look at. So it’s slightly easier to process; hence, that is the thing that consumers pay attention to. And that is what they are most sensitive to
Jarley: Yael, you wanted to weigh in on this. Are we seeing the dark side of marketing here?
Zemack-Rugar: Dark side. So I agree with Anand and the prices are high sensitivity item. And I also completely agree that we do not look at labels to understand how many ounces they are. What is a serving, how many calories. These are not things we bother ourselves with. However, we do perceive sizes and we do notice changes in sizes. It’s so perceptually. So if you’re going to engage in shrinkflation, for example, maybe lower the quantity in the bag, but don’t change the size of the bag. So there’s fewer ounces of chips in there, but it looks like the same bag, just more air, then people won’t notice because they don’t read what’s on the package. However, if you shrink the package, they will notice and consistent with all the perceptual errors that we can generally live on.
Jarley: So, Axel, are there competitive pressures here as well? So I’m thinking for example, firms that have more competitors might have to play different sorts of games than ones with fewer competitors.
Stock: As I said earlier, you know, consumers might not react to the shrinkage because they don’t notice the shrinkage, but when they start consuming, then certainly one will notice, you know, I need another package to satisfy my consumption. So the way I see the market is, you know, there are different consumers, there’s different, demands. Or let’s say we have some low demand consumers and then we have some high demand consumers. So if the firm is basically shrinking the package, then our high demand consumers may have to purchase an additional package to satisfy their demand. Whereas the low demand consumers, they may be OK, but then the price per package will increase. But actually the matching of their demand with the amount of product that is provided may actually be advantages. So for those consumers, it may actually be that shrinkflation may provide an advantage.
Jarley: Okay. I need to make sure we’re speaking the same language here. When you talk about a low demand consumer, you mean someone who wants to consume a smaller amount of the product. So the example I’m going to use here, the 100-calorie pack, it comes to mind as an example of this, and I’m willing to bet the people who are purchasing the 100-calorie package are paying more for it on a per unit basis. They just got it in the bigger box. Am I right about this? And is that a low demand, Yael?
Zemack-Rugar: Clearly agree with Axel that some people prefer small quantities. And in fact, that creates an advantage for smaller packaging for certain products and your 100-calorie pack is an excellent example because it’s usually applied to indulgence products. So there are no 100-calorie packs for carrots, but there are usually for Oreos. And why, because we know we can’t control our own consumption of these indulgent goods, cookies, ice cream. So, the manufacturer helps us control it by giving us a small package. And then we pay a premium for that control, the premium that you pay to buy 10 individual size 100-calorie packs of Oreos over one package of Oreos. I mean, weigh them out at home, put them in little plastic bags. But we know once we open that package, it’s very hard for us to stop. And those little packages serve as a stopping point. And I think that’s one of the ways from a behavioral perspective that marketers can think about how to position smaller packages as a good thing, as a service to the consumer, as an improvement and innovation in their product. If they fall into these categories, then they can actually leverage shrinkage to both reduce the package size and increase the price. And so an added benefit.
Jarley: Yet Costco doesn’t stock giant bags of 100-calorie packages.
Zemack-Rugar: No, they do. They chose…they have boxes of like 25 bags of small bags of chips. It’s not size, maybe less a calorie consideration than a convenience consideration, but still, which is another dimension that gives an advantage to a smaller package. But still it would be cheaper to buy an enormous bag of Veggie Chips, then 20 individualized bags, but people buy individualized bags and then pay a premium for them.
Jarley: Anand, go ahead.
Krishnamoorthy: There are differences in terms of how retailers actually display unit prices. Costco is one of those stores that actually prominently displays the price per unit. Most stores do not. In fact, I think in 30 or 35 states, there is not even a law mandating that unit prices be displayed. And in the 10 states that have laws, it is all over the place. I can give an example with tea bags, for example, the same retailer. Let’s say you have one Brand A and Brand B. Under Brand A, you could say the price is 27 cents per bag. And Brand B, you would say the price is a $1.22 per ounce. So even within the same retailer, within the same product category, you could have many different ways in which unit prices are displayed. And if at all, the places you shop Costco is probably the one that hits the unit pricing on the head in terms of prominently displaying it. Of all the times. I’ve shopped at Costco, not once have we heard any consumer in the paper towel aisle debate choices of brands or products based on the unit price. That is a store that puts the unit price in font size 40. Then if consumers don’t pay attention to that at Costco, why would they pay attention to that at Publix where the unit pricing is in font size 2.
Jarley: There are other areas where permanent pricing is the norm. Let me give you an example: A gallon of gas is a gallon of gas and you see very little variance there. But I want to comment on this because we had an exchange around this price per square foot in housing is a pretty common metric.
Kullu: Price per square foot is actually a concave function. You know, the bigger the house, price per square foot goes down. But then you buy a bigger house. The price goes up, but the marginal increase is lower. As you go bigger and as a real estate construction company, it is really very challenging to make decisions because you have to do it well before you know anything about how much customers are willing to pay. You know, that is kind of a very scary, very risky industry. So one thing that we’re looking at is how big these houses should be and should they have any flexibility? And what we find is flexibility is key to product line flexibility. That’s what we call it. You know, just the firms should be able to make changes as they go and plan. Yes, they buy the land, but they keep their options open. If they want very large luxurious homes or just moderate model houses, no? Or if they want maybe big land and they will divide it into several subdivisions. Are all of them gonna be very luxurious? Are all of them going to be townhomes? Those are very different decisions. And the firm is flexible and keeps their flexibility in terms of decision-making and not finalize anything ahead of time, three years ahead of time, that’s much easier to survive when the resources are costly. Once again, when the land costs are significant, you know, if land is cheap, that’s really, you can get away with it much easily.
Jarley: I think we’ve established that you shrinkflation is real at least in the short term. Uluc, so let’s turn to the macroeconomic consequences of that. If you’re the Fed or the Treasury Department or the average consumer.
Ayson: On the macro front, one of the concerns is that that it might disrupt labor markets, because we found a company that cannot increase prices. Then I can maybe decrease my labor and the only way I can do that is to cut my workers at these low levels of inflation. I can’t lower wages. I can’t give you a cut. It’s very hard for me to do that. Instead of that, I lay you off or I make you work less hours, or, you know, I decreased our benefits, allowances and things like that. So that’s one concern. The second concern is about policy formulation. So to the extent that we can’t pick these things up, the increasing quantity, then inflation is not very informative. Or the Fed is the ultimate controller of inflation, right? So, and if they cannot see just this focus on headline inflation only, then they can’t see this shrinkflation. So they can’t, react to it. So that’s one of the complications of it.
Jarley: Do things ever reinflate? Anand, go ahead.
Krishnamoorthy: Yeah, so usually there is no incentive for a firm to unilaterally drop prices when inflation dies, because one you’re competing with other firms that as Axel pointed out earlier, there is no incentive. What is the biggest expense for firm? As we talked about, wages. If you cannot drop wages, why would you then drop prices and get the start in terms of margins? So it’s well known that prices are always stickier on the downside. That is, to put it in stock market terms in the opposite of stock market terms, price increases take the elevator; price decreases take the stairs. Why would you unilaterally drop prices? Because your costs have gone down, nobody else is doing it. And consumers are getting used to paying higher prices. Why then would you want to drop prices if you’re not seeing a whole lot of drop in demand because the top-line prices remain the same and your unit price has increased and your margins are better. Why would you want to change that?
Jarley: Muge, you wanted to add.
Kullu: I was going to talk about the airline industry and what happened during the 2009 crisis, the size of the seats and how, you know, I was talking about those fully business class seats in the aircraft. It was biggest hype before the crisis, you know, like 2006, 2007, all these, you know, silver jets, EOS, all these airlines fully focused on the business class. And, you know, they were talking about inflation in seat sizes and the resource consumptions. And with the crisis, when the crisis hit, they all went out of business. They could not survive. They could not sell. And all those airlines with full service, we call it the, all the cabins, they were able to rearrange their seat seats and remain in the business through those years, all those difficult years. And right now, we started seeing all those bins before the COVID, before the airline industry went into this most recent crisis.
Jarley: Yael…
Zemack-Rugar: So it’s about, it’s about customer value when you’re all in a competing space and you have to generate some value proposition that’s added to the consumer, right? You can do it in a variety of ways. You can innovate, have new products, the benefits features, or you can make your package bigger. And sometimes that is a path of least resistance. We would not see the supersizing wars that received, but let’s remember that as you inflate, you have to inflate by that much more, even just to return to the perception that you’re the same as before, right?
Jarley: Axel?
Stock: So I want to continue that discussion along those lines a little bit, just as Yael mentioned, when costs are dropping, then firms tend to want to offer more quantity as at least as an option. And here, basically we see like the opposite effect of what I pointed out earlier, which is now with bigger sizes being available, consumers who initially have a, let’s say, a low demand for the product, all of a sudden they’re tempted to consume more than they initially wanted. And in the era of fast food, it can lead to very negative effects for the consumers like overall consumption and the negative health effects like obesity and so on and so forth.
Jarley: Final question: It’s a year from now, is there still pressure to shrink your packages or do you think shrinkflation will be something that will be a historical artifact. Axel?
Stock: Because it is still going to be potential from strategy in general, it’s about firms about offering menus of choices for consumers. And so as you can increase your menu, you can basically tailor to a more different consumers, more precisely and potentially make more profit. So I think there’s still going to be supply chain problems, maybe in other industries, other than those that we have discussed today. And if firms can respond, if it’s a category where, you know, package sizes can easily be shrunk, then that will happen at least for some time.
Jarley: Yael, what do you think?
Zemack-Rugar: From a marketing perspective, if conditions are such that companies need to become wiser about their product lines and packaging and offerings, I would hope that we can see some more sophisticated marketing strategy. Product lines, right? Small, medium, large, which by the way, is another way to manage perception of size. Then we can see better segmentation, right? So when you talk about service level, that’s the size, too. So when companies have these smarter strategies of thinking about how they allocate their resources, their size, their, as Muge aptly called it, their limited and precious a resource that they have, that’s when we get more interesting things than just is the package of bigger or smaller.
Jarley: Anand…
Krishnamoorthy: Well, frankly, if inflation was with us 30, 40, 50 years ago. You look at canned vegetables, chocolate bars have shrunk in size. The curvature of bars of soap has increased over time, high curvature, lower material, lower costs. Shrinkflation has been with us for a long time. Airlines started doing economy, limited leg room, more economy seats way before COVID hit. So the point is it’s been with us way earlier than COVID was ever a phenomenon, and it is going to be with us far longer. Perhaps they may come up with a fancier term than shrinkflation, but the phenomenon is probably here to stay.
Jarley: Muge…
Kullu: It all comes down to how you manage your supply chain.
Jarley: Uluc…
Ayson: The supply line problems will dissolve and supply will meet up with demand. In that case, we’ll have healthy levels of inflation. Companies will not have to resort to shrinkflation.
Jarley: It’s my podcast. So I get to go last. Some of my colleagues didn’t give me a straight answer on the future of shrink inflation academics frequently struggle with simple yes or no answers consumers. On the other hand, all of us prefer a menu of choices, but as Axel notes, choice can be expensive. If firms think their customers are more sensitive to price, they’re going to find ways to cut corners and preserve margins. The real question in my mind is whether the consumer will be more or less price sensitive a year from now, and they are today. I’m betting less. People’s features are coming into focus. Consumers will become more acclimated to modest price increases, especially as supply chains work themselves out. And with a more robust job market, people are going to be willing to pay a little more to get what they want. As Anand notes, shrinkflation will never go extinct, but I don’t think shrinkflators will become the defining feature of this century’s Roaring Twenties.
What’s your take. Check us out online and share your thoughts at business.ucf.edu/podcast. You can also find extended interviews with our guests and notes from the show. Special thanks to my interim producer, Erika Hodges, who can’t get rid of this gig fast enough, and the whole team at the Office of Outreach & Engagement here at the UCF College of Business. And thank you for listening. Until next time, charge on!
Paul Jarley: Eshwar, I’m going to start with you. What the heck is an NFT?
Eshwar Venugopal: I think the world is trying to figure it out.
Paul Jarley: This here was all about separating hype from fundamental change. I’m Paul Jarley, dean of the college of business here at UCF. I’ve got lots of questions. To get answers, I’m talking to people with interesting insights into the future of business. Have you ever wondered, is this really a thing? Onto our show. (singing). On March 11th, CryptoPunk 3,100, a piece of digital art, sold for $7.6 million with an NFT. That broke the record set the day before by CryptoPunk 7804, which had sold for $7.5 million. Then on March 21st, Beeple’s the First 5,000 days sold for $69.3 million. Needless to say, people took notice. I took notice. Well, honestly, Josh told me to take notice. I was hesitant. This all seemed pretty esoteric. Techno geeks with stupid money doing techno geeky things, I thought.But then Forbes did an article. I noticed Christie’s auction house was involved. And so I started to send some emails and make some phone calls. My resident blockchain guy had an interest in this. The dean of arts and humanities, Jeff Moore, put me in contact with an artist interested in NFTs. The kicker was Jeff Stokes. Jeff is a member of my dean’s advisory board, with BNY Mellon, who put me in contact with their digital asset guy. If Alexander Hamilton’s bank was interested in NFTs, I figured I should be too. So to shed some light on this new phenomenon, we have with us today, Eshwar Venugopal, who is an assistant professor here in the finance department at UCF, Carla Poindexter, who is the professor of art at UCF, and Lory Kehoe, who is the director of digital assets and blockchain at BYN Mellon. Listen in.
Paul Jarley: Eshwar, I’m going to start with you. What the heck is an NFT?
Eshwar Venugopal: An NFT is basically a certificate of ownership of a digital group. Basically giving artists an ability to offer limited additions of their artwork. I’m going to use artists as an example over here, since we have Carla over here. But I have a problem with that, but I’ll come to it later on. But the idea is that you have a certificate of ownership and it is a limited edition product and it is more of a digital collection rather than a physical good. That’s how it has been envisioned. But things have been changing rapidly. These days, if you take some of the latest NFTs that are being minted, there is a physical aspect of it. One guy actually sold his house on NFT. So, things are a little bit blurry now, but if you take a look at it from a property perspective, it is just an ownership as a consumption good. That’s it.
Paul Jarley: Yeah. Let me be old school for a minute so I can understand this a little better. I can purchase an original Monet. I would go to someone who would be an expert in Monets who would say, “Yes, Monet really painted this.” And I would spend a kazillion dollars and I would put that Monet on my wall. But other people could reproduce that Monet. So when I buy the original Monet, I also didn’t really buy the intellectual property or the licensing of that Monet. All I bought was the original Monet. Carla, do you agree? That’s how this world used to work?
Carla Poindexter: Definitely. But you can also purchase the copyright.
Paul Jarley: But that would be separate though, right? That would be a separate buy.
Carla Poindexter: Definitely. Right. The Monet is probably, it depends on the piece, but sometimes it’s an open source image.
Paul Jarley: Okay, yeah.
Carla Poindexter: And sometimes it is not.
Paul Jarley: Okay.
Carla Poindexter: So, that is the difference.
Paul Jarley: I want to stay in the world I think I know, and then we’ll move to most of the world that I think we’re going to be in. The other analogy for me is, I’m a big baseball card collector.
Eshwar Venugopal: Oh, yeah.
Paul Jarley: And I’ve seen that a few… Akil Badoo, who’s this rookie for the Detroit Tigers, is actually issued a lot and in NFT. So I have a little bit of knowledge in the collectible area, only enough to be dangerous here. But the first thing I want to understand is what I actually own. I own a certificate of authenticity.
Eshwar Venugopal: Right. Let me actually give you an example with the baseball cards. So the other thing about NFT started with something called CryptoKitties. I’m not sure you know CryptoKitties.
Paul Jarley: Okay.
Eshwar Venugopal: So it’s basically similar to baseball cards.
Paul Jarley: Yeah.
Eshwar Venugopal: But a digital version with cats’ pictures on them. That’s how the entire thing started off. And essentially what you’re owning over there is the rights of ownership, or you can even think about it from a copyright perspective, through that particular kitty. The same way you have an authenticated baseball card, here you have a digital authenticated certificate of ownership. And it basically says that nobody else can claim ownership of this particular image, right? And the image is basically a set of lines and quotes, that’s it. You can claim in the public markets saying that, “I am the one who owns this baseball card or a CryptoKitty card,” and it can be easily verified and it can be verified digitally. If you have the baseball card, you have to call in, say, I don’t know what they’re called, but you probably have to call an authenticator.
Paul Jarley: Yeah.
Eshwar Venugopal: And somebody has to come in and verify the certificate of ownership and all of that. This just makes that process a bit easier and quick.
Paul Jarley: Let’s talk about what’s actually in the blockchain. If Carla had produced a work of art, for our listeners, Carla is a painter by trade, and she did a digital painting and she put it out for bid for an NFT. If somebody were to purchase that NFT, her artwork isn’t actually in the blockchain, correct?
Eshwar Venugopal: That’s correct.
Paul Jarley: Okay. Is it a link to the site? Is it a web address? What’s in the blockchain?
Eshwar Venugopal: So let me give you an example. I tried making an NFT last week. I took a picture of a monkey in Houston, I just uploaded it to Rarible and linked it to my Ethereum wallet and I tried minting. So when I minted, what happens is that Rarible has a unique code for my artwork or in this case, a picture of a monkey. And this particular picture gets uploaded into Rarible’s database, and there’s a link to it, and there’s a unique identifier. I can upload the full quality image or I can upload a lower quality image. It doesn’t matter, right? There’s a unique ID in Rarible for that particular thing. And that is the ID that gets embedded into the blockchain. It is not the actual image that is being uploaded into the blockchain rather a reference. And this reference is your identification for that particular image. So essentially no image is being uploaded into the blockchain, it becomes all the elements of the blockchain …
Eshwar Venugopal: Right.
Paul Jarley: Right? And decide to throw that in. So what is the verification process like?
Eshwar Venugopal: That is where things get a bit mucky and I’m not clear on how Rarible does this. Rarible basically says that, or at least… All platforms definitely will verify whether this person has the raw art or if it’s a 3D art, they ask for the source file. If the source is there – it is this particular person, that’s something to verify the ownership. However, that’s not a foolproof way of doing things. I’m assuming that these platforms go ahead on the web and do an image comparison with whatever is existing out there and see if those links back to you. That’s one way of verifying. I’m not exactly sure how each platform was doing it.
Paul Jarley: Okay. Then secondly, I have to assume that that company and its website and address is going to continue in operation.
Eshwar Venugopal: Yes. That’s the hope actually. But if Dot Com and even the recent ICO woman busted any evidence, it may not be true in the long run. It may be true for the next five years, but who knows what’s going to happen in the next 10 years?
Paul Jarley: I’m on the fees issue….
Carla Poindexter: Yeah. The fee is supposed to be very high.
Eshwar Venugopal: Yeah. So the fees really depend on how much pressure is there on the blockchain at this point of time. Given that the last couple of weeks has been crazy and everybody’s buying a lot of Bitcoins and Ethereum, the pressure was high and therefore the fees are normally higher. On average, the fees have been in the range of $30, just to say that this image belongs to this person, so getting an entry into blockchain. And that particular part is $30, but if you want to actually list your items for sale, then you have to move to something that is an auction website. I used OpenSea and over there, the fee was again, roughly around $40 or something.
So just right off the bat, before I even sell it, it’s $80. And on top of it, there’s a 2.5% commission for Rarible and they take it over. The good thing about this is that, I get a royalty every time this image is being sold and resold, right? The first time I get 100%. But every time it has been resolved, right? If I’m a popular artist, probably Carla has more experience on this, if a piece is getting resolved, I probably get, I set it as 10%, but many people… You have the option to set it as a 20 or even 100%. That likely keeps growing. That this is not the case in today’s scenario. Yes, Spotify and other mediums allow artists to get royalty, but it does not set up in this way that you get lifelong royalties. And I think it’s not to lose…. 10% is a huge number, in today’s standards.
Carla Poindexter: That’s the beauty of it I think. Because when an artist sells an artwork, they receive whatever. But when that gets resold and resold the artist receives nothing.
Eshway Venugopal: Yeah. Especially the physical ones, their structure. Yeah.
Carla Poindexter: Right. And I think that’s why this has been invented. And I think that’s what is so exciting about it.
Paul Jarley: That’s very helpful, Carla. So the incentive from the artist is to be able to capture more of the future revenue stream in the resale market of the item.
Carla Poindexter: Definitely.
Paul Jarley: Is that right, Eshwar?
Eshwar Venugopal: Yeah. That’s correct.
Paul Jarley: Carla is that right?
Carla Poindexter: Definitely. That’s the beauty of the whole thing.
Paul Jarley: Okay.
Carla Poindexter: Because, imagine as a young person selling a piece of art for $1,000, and then later in your life, when you have established a reputation-
Paul Jarley: Right.
Carla Poindexter: … same piece gets sold for $20,000. The original artist never sees anything.
Paul Jarley: So Lory, why did the bank become interested in an NFT?
Lory Kehoe: We got involved and our interest, and why we’re interested in NFTs, is simple in many ways, it’s because our clients have started asking us about NFTs. And some of our clients in the wealth management side started purchasing NFTs, and they’ve got in touch with the bank to understand how we can custody them. And also, we’re getting early stage questions in relation to… Over time as these entities increase in value or some of them already valuable, and to Carla’s points just there, could they be used as items of collateral over time? So I think what we’re seeing is, NFTs has a potential. Are they a potential store of value as well as being something that, I guess, consumers may make, collect and engage with? For me on the NFT front, and this, I think, plays neatly into what Carla was talking about there, the way I think about NFTs is down to three things. So A-M-C. A, is accessibility. NFTs provide access to something which was… Especially pieces of art or very expensive pieces of art or luxury cars, as the case may be. And provides access to things like that that were unavailable for most of society, right?
I wish I could afford a Rembrandt, but I can’t, but I may be able to afford a Non-Fungible Token or a token representing a small part. So that accessibility piece is that term that gets used a lot. The second area is, M, and that stands for marketplace. It creates a marketplace where people can buy and sell these tokens or whatever you want to call these or NFTs. And then the final piece is community is C. And I think the community piece is actually the really interesting part of this. So growing up here in Ireland, I used to have football or soccer cards, in US, you have baseball cards and things like that.
Paul Jarley: [crosstalk 00:13:43] Baseball cards right there. You joined us late. Yeah.
Lory Kehoe: Exactly, right? And that was cool and I could trade those with my friends, but I was limited in terms of the folks I could exchange those with. And now, due to internet, obviously I could do that anywhere. But I think what Non-Fungible Tokens have brought about is, and which is really interesting, is that, it is the convergence and merging of the fan experiences in terms of physical and digital. And I think the Kings of Leon have done that incredibly well and I think they’re going to be… Actually, we’re only at the start of that happening so, the Kings Leon issued a bunch of NFTs-
Paul Jarley: Now we are into music. Yeah. Okay.
Lory Kehoe: Exactly. So they issued, as part of their latest album, a bunch of NFTs. And if you bought a bunch of them, built into the NFT, because it’s programmable, right? It’s a programmable piece of technology that you own. And this is really where the magic is, they built in this Willy Wonka and The Chocolate Factory Golden Ticket.
Paul Jarley: Golden ticket.
Lory Kehoe: Exactly. But what it did is that, the golden ticket gave you access, or will get you access, when we’re back doing all this great stuff, to a front row seat or to meet the band backstage. So what we’re seeing is this blending of fan engagement at a physical level, but also at a digital level. And I think we’re going to see a whole host of more of those initiatives, which are going to be unlocked through things like NFTs.
Paul Jarley: If I were to make the naysayers argument, it would be this, and this is where I started when I first discovered NFTs, there is stupid liquidity in the market right now. There’s a bunch of money running around, it’s got to attach itself to something and now it’s attaching itself to a digital asset because there ain’t enough things for it to attach to. And then, when the world gets back to normal, this will all go away.
Lory Kehoe: Geez. What can I say there? I think there’s a number of points. I think the world going back to normal, I don’t know what that world is going to look like, right? I think the genie’s out of the bottle post COVID. So, I think COVID has accelerated digital agendas for companies and for individuals all around the world. And I think people are interested in communities now more so than ever. We want to be part of something where we felt that we weren’t in the past. I’ll give you an example, if I go to New York and I go visit a museum or something like that, it’s interesting, I’ll go back home and I might tell my mom, “I was there and I saw this painting.” But actually, I now have a mechanism where I’m able to bring her into what that story looks like.
I’m able to purchase an NFT or a token. I’m able to pass it onto her. She’s now part of that story. She understands what that piece of art is, the history associated to it. And there is that community associated with it. She may want to purchase more tokens as the case may be, she may want to pass it on to somebody else. So for me, I think there’s value in that level of ownership. I don’t think it’s pure speculation. I think there is, it comes back to that community play. And I think we’re, we’re at the beginning.
Paul Jarley: Do you think the consumption side is more important than the investment side? Because part of what you’re talking about is consumer… What you’re talking about there is really varied in consumption. You’re purchasing the experience to consume that experience, which is different than, I think this asset is going to appreciate in value and I’m going to be able to sell it at a multiple some years in the future.
Lory Kehoe: And I think it’s both.
Paul Jarley: Yeah.
Lory Kehoe: I’m a regular Joe, if I see a potential for an asset to appreciate in value, and I can afford that asset. Well, I might go down that path and make that investment as the case may be, as part of a balanced portfolio, naturally. But, if there’s an opportunity to purchase something instead of buying, a MoMA pen, for example, right? I’m able to do something a bit more interesting. I’m able to pass that on. I’m also able to bring that person, the recipient of my gift, into the world of NFT. So they’re not only getting that NFT and the story about the painting, but I’m also bringing them into how this whole world works, which I think is also another angle.
So it’s an interesting one. I was talking to somebody yesterday about this and they were saying… They asked me, would I be interested in potentially purchasing a token or an NFT, which represents part of a forest where I’m actively contributing to the de-carbonization of an area. My gut response was, tell me more, tell me more, I’m interested. So I think the consumption side and the investment side, I don’t think they’re mutually exclusive actually. I actually think they could converge and that’s probably where you’ve got an even better story.
Carla Poindexter: I love what you’re saying, Lory, because that’s the whole thing about art. There’s the community and the activity of investing in an artist. And then there’s the other side, that more people tend to think about when they’re not interested in art, and that is the investment side. And I think the community side has to come first and then it becomes authentic. You were talking about reputable companies getting into this and looking into it. I love it when someone says, “Think about an NFT supporting an artist.” Someone purchases that token, purchases that artwork, and that allows the artist’s reputation to grow. And it’s not so much about the thinking that, Oh, someday I’ll get to pass this along and make money. Of course, that’s part of it, but entering into it, the point of the consumer, I think, is a good way to talk. Love it.
Paul Jarley: What do you think, Eshwar? I want you to react to my comment about stupid liquidity.
Eshwar Venugopal: Okay. Yes. There’s a lot of stupid liquidity over here. So, just let me take a step back and see where the NFT thing came from. So I mentioned CryptoKitties a while ago, right? The company that started this CryptoKitty build, the first thing that they wanted to do was do NFTs for real estate and they decided not to do it because of the regulatory pushback that they got. To both Carla and Lory’s point, community actually comes first in these things. This started off as a toy, as Chris Dixon would say it, and it has garnered a large enough community now that regulators have started taking notice of it. And as you mentioned, there was a lot of liquidity over there. And I wouldn’t buy the argument that things are going to go back to normal, or at least what it was before after the COVID pandemic just because people won’t have enough time playing with this thing. Because there’s already enough interest that this is now a self-following process. More and more people are getting into it. And it’s not going to be just with the art market. That’s what I said earlier.
Paul Jarley: Yeah.
Eshwar Venugopal: I have a problem with NFT being more hyped with the art market, rather IBM and IBV they have been in talks about putting patents, the entire patent system onto the NFT platform or as NFTs. And therefore trying to evaluate how much each patent is worth by buying and selling, there’s an active secondary market for that. And also even Academia, if you think about it. Academia can use the form of an NFT. If you think about it, we pay fees to the journals, to get our work published, and the journals ask universities to pay subscription fees and the authors themselves, in many cases, won’t have the copyrights to these things. Rather, if you put it on a NFT, you actually give credit to these authors, you can monetize it if the patent becomes a successful or an industry source uses your model.
Paul Jarley: What keeps you up the most at night about NFTs? Lory.
Lory Kehoe: Look, I thought some of the points that were made earlier there were great around… I think it’s difficult to purchase, right? I think the friction associated with them, that will get solved, right? That’s just technology in an early stage and a new wave of technology. That gets solved and gets solved quite fast. And I think it already is beginning to, right? And that’s number one. Number two, I think on the energy intensive nature associated with them. I think that is a consideration. But I also see that getting solved as we move away from the complex consensus mechanisms in terms of proof of work, to proof of stake, to other new ones that’ll emerge. So, although I don’t have a solution right now, I do think that that will get solved.
So that’s number two. And number three, I do think also as well, sometimes it could be, Eshwar was talking about this, it can be very expensive to actually purchase the token. Not the token price, but the actual process in terms of paying the gas fee or the associated fees to purchase it. So I think that’s another area that will get solved. As those three things move forward and get solved, that provides more people with an easier route in. And then also what happens, is that, you’ll have a bigger stock of NFTs to purchase. Not just art, not just luxury cars, but a range of things. And what keeps me up at night is probably, me sitting on the edge of my bed, being excited as to what’s to come, rather than fretting as to what will come each bar.
Paul Jarley: Eshwar, what about you?
Eshwar Venugopal: Well, Lory actually has covered one of the many things that keeps me up. Well, the first is, the overall impact that has. But the more important thing is the interaction of this digital economy with the existing one, how it is going to play out. Because it’s a matter of sustainability and stability over a period of time for… Because, yes, you have a new digital asset in place, but how is it going to impact the value of dollar over a period of time. It’s going to affect the larger economy, right?
Paul Jarley: Yeah, it is.
Eshwar Venugopal: Adoption is exponentially, especially, as I think Lory mentioned earlier, the COVID pandemic has just accelerated the way people adopt to digital assets.
Paul Jarley: Yeah.
Eshwar Venugopal: So the government has to step in and if they step in, and let’s say all of a sudden, they put a moratorium on Bitcoin or even the NFTs and they think that something is not right over here. What would happen to the existing money inside the system?
Paul Jarley: Right.
Eshwar Venugopal: To your point about stupid liquidity, a lot of people have put their money into the NFT system and Ethereum and all the other things over here. So what is going to happen over there? The interactions and the fall out, or the shake up before things settle down is, what both excites me as a researcher, but also keeps me up as an average citizen because I have a lot of money in NFTs as well. What will I do …
Paul Jarley: Can they be hacked? Can NFT systems-
Eshwar Venugopal: Yes. Yes.
Paul Jarley: 10 years from are NFT’s going to be around and what are they mainly going to be used for? What do you think Eshwar?
Eshwar Venugopal: I really wish they transform into something a little bit more reasonable. I wish they are not focused on just artwork and there’s a better way to mint these NFTs. My problem with NFTs is that it’s expensive, number one, and it is highly carbon intensive.
Paul Jarley: Yeah.
Eshwar Venugopal: So we cannot sustain a world where we are burning carbon so much just for the sake of digital art, even though I have high praise for art. So I hope that things change and we find a better technological way to implement these things and have artwork. But there are much, much bigger applications or use cases there for NFT. One of them is the patent system, the other one could be academic publishing, knowledge sharing. I’m hoping that the system would change from what it was. It’s a tie now I want to want it to become an actual thing.
Paul Jarley: Carla, what do you think. Do you think artists are going to be dabbling in this 10 years from now?
Carla Poindexter: I think so. I think it’s complicated now. I think the safety factor, the understanding of that clearing house that we talked about earlier on before Lory got in. Where does one go to even create that contract and create that token? How does that entity, the Christie’s or the intermediary, how does that all work? And I think once it becomes easier for people to understand, it’s a little bit like cryptocurrency right now, what are we going to really purchase a fraction of Bitcoin? Or, what was it, Doge?
Paul Jarley: Dogecoin.
Carla Poindexter: The Elon Musk you know.
Paul Jarley: Oh, right.
Carla Poindexter: Oh my gosh, it broke in half overnight. So I don’t know, I think we need to understand more about blockchain technology that the every… The artists are not, like you said earlier, most of us tend to… We need a step by step process here and we have to feel that these things are safe because the art market has never been a safe place for artists.
Paul Jarley: Lory.
Lory Kehoe: In 10 years, it will be the NFTs for many different things. Certainly not just art, I think music is one area. I also think in 10 years on, what you’ll see is that, these pieces, these NFTs will be used as financial instruments. I think what tends to happen at a retail level is that as more people adopt pieces of technology… And we saw this in Bitcoin, it happened at a retail level, and then eventually it reached a certain scale and then institutions really started getting interested in it, and then the regulators have to get interested in it because of the impact to the overall financial system.
With NFTs, if it reaches a certain scale, it will then be, okay, is there an opportunity here, at an institutional level, to help, for BNY Mellon, for our clients, we’ll provide services around NFTs. What other purposes can those NFTs serve? If we’re custodying them, it goes back to that collateral point. So I don’t think that’s going to be today or tomorrow, but I think that’s something that will happen over time. I think we’re at the start of the journey, if anything, we’re maybe coming towards the beginning or the end of the beginning, but we’re no means at the beginning of the end when it comes to NFTs.
Paul Jarley: It’s my podcast, so I get to go last. New technology is seductive. It gets you thinking about endless possibilities. Techno geeks creating and spending millions on digital art is a bit like fashion designers creating originals for the Paris runway. The designers and models get a lot of publicity, but your spouse ain’t wearing that on date night. It’s not practical. When moving from theoretical possibility to practical solution, I like to ask two questions: first, which problem does this solve? And if it does solve the problem, is this solution economically efficient? The Fisher Pen company allegedly spent a million dollars developing a pen that could write in space, but astronauts used pencils. Carla and Eshwar helped me to understand what problem NFT solve for the creator. It allows them to capture some of the appreciation in value of their creation in the resale market. But as Carla noted, creators need to understand and trust that the private guarantor of this contract will still be around and able to enforce this agreement at the time of resale. And since fees are high and tokenization is environmentally irresponsible, it seems a good option only for a small number of relatively well-known creators, not the masses.
Lory is a classic early adopter. He gave us three motives for potential buyers. Most fundamentally, NFTs have created a market by solving the ownership problem, you don’t want to purchase the digital equivalent of the Brooklyn Bridge from some scammer. Access and community are tougher sells for me. People want to be part of communities and will pay for access and exclusive events. But NFT seem a gimmicky solution to a problem with simpler known solutions like VIP tickets. This leaves access via fractionalization. Fractionalized tokens may make it easier than putting together a syndicate to purchase an expensive asset. But I’m not sure at what price point a fractional NFT is worth the cost of mining it. And there are a host of legal issues here that will need to be resolved.
In the end, I favor an explanation for the rise of NFTs, offered by Anil Dash, one of its creators, in a recent article in The Atlantic. NFTs for high priced art represent one of the few places people holding a lot of cryptocurrency can cash in their investment. They can’t buy expensive yachts, they can’t buy Teslas, depending on the day, but they can buy high priced techno art from artists. This will allow famous artists to get richer and retain some of the rights at resale, but the masses of artists and investors, well, they’re likely to be left behind. Eshwar called NFT a toy, I would add, a toy for the rich, at least for the foreseeable future.
Paul Jarley: So, what’s your take. Check us out online and share your thoughts at business.ucf.edu/podcast. You can also find extended interviews with our guests and notes from the show.
Paul Jarley: Special thanks to my interim producer, EriKa Hodges, who can’t get rid of this gig fast enough, Kenny Butcher, who helped us make this podcast possible, and the whole team at the office of outreach and engagement here at the UCF College of Business. And thank you for listening until next time, charge on.
Listen to all episodes of “Is This Really a Thing?” at business.ucf.edu/podcast.
GameStop and AMC made national headlines for unexpected reasons as retail investors from social media website Reddit began feverishly scooping up shares in each company. While the resulting drama caused wild swings in stock prices and scrutiny against some online trading platforms, the long term impacts remain to be seen. Did “Redditors” usher in a new era of retail stock trading? Or are these so-called meme stocks just another example of financial history repeating itself?
Paul Jarley: Remember the E-Trade Baby?
E-Trade Baby: A lot of people are like, “Isn’t it difficult to invest in the markets?” And I’m like, “Not if you’re using E-trade. Making a big investment is as easy as a single click.” Boom. I just bought some stocks.
Paul Jarley: I think he was the first meme investor. He didn’t last long.
E-Trade Baby: Wait, why is this line going down? Oh God, it just dropped 400 points. This is not happening. Dear Lord, I made a horrible, horrible mistake. ****
Paul Jarley: Or maybe he just moved onto the social media site, Reddit [crosstalk 00:00:31] and lost hundreds of thousands of dollars trading stock in GameStop. Turns out he’s just one of many.
E-Trade Baby: Take it back. Sell, sell, sell, sell, sell. Too late. It’s all gone.
Paul Jarley: This show is all about separating hype from fundamental change. I’m Paul Jarley, Dean of the College of Business here at UCF. I’ve got lots of questions. To get answers, I’m talking to people with interesting insights into the future of business. Have you ever wondered, “Is this really a thing?” Onto our show.
Paul Jarley: So GameStop has obviously been in the news a lot over the last week, and to help me understand what’s going on here, I’ve convened a panel of experts. Kevin Mullally is an assistant professor in our finance department. Garrett Cummings is the president of our student investment club and a finance major. And I pulled in our own Josh Miranda, who knows a little bit about viral marketing and maybe viral finance to have a conversation about GameStop and its short-term and long-term implications. But I want to start out with a story. When I first came to UCF, one of the first groups I met with were some executives at EA sports.
Paul Jarley: And they said to me, “We know right now we’re a company that puts the $60 box in a GameStop for people to purchase, but we know that’s about to go away. We know that a few years from now, we will have developed into something like iTunes, where people electronically download whatever the game is into their console. And we think after that, we will become a company that offers various components of games that people can download and create their own game. And we want to understand that consumer more and what aspects of the games they like and dislike, so that we can meet that market demand when it comes.” Now, I raise that story because that was 10 years ago, and EA sports knew GameStop was dead then. So when I first heard the stories about GameStop, I have to admit my first reaction was, “Wow, they’re still around? Why would anybody invest in GameStop?” Is there a legitimate reason to believe that GameStop has a future? Kevin, do you want to kick us off? I’ll pick on you first.
Kevin Mullally: Yeah, absolutely. So I did a bit of researching that question myself, actually, kind of thinking the same thing, because as you guys probably know, at certain points during this whole incident, GameStop was actually more valuable as a company, as a going entity than was Best Buy. And again, my reaction is the same as yours.
Paul Jarley: Or Delta Airlines, I think I read somewhere.
Kevin Mullally: Correct, correct. So all kinds of crazy mis-valuations, very clearly. And so I looked back into the history of it, and kind of the thing that has come out is that there are actually quite a few people that were long in GameStop, even sort of middle of 2019.
Paul Jarley: Explain long, Kevin, for our listeners.
Kevin Mullally: Oh, I’m sorry. So they had established a position where they had held a good number of shares in that company. So they were investors in that firm mid 2019, early 2020, well in advance of any of this taking place. In the argument, one of the most famous guys that had established a pretty sizeable position in GameStop was Michael Burry, who listeners may be familiar with from the movie The Big Short. He was kind of one of the guys that very famously predicted that the housing market was going to collapse. And his argument for investing in GameStop was basically that it had been mismanaged, that they had a whole bunch of cash on their books, that they had been making a bunch of bad acquisitions, and just generally had poor management and a lot of managerial turnover at that time as well.
Kevin Mullally: And his argument was that, “Look, hey, if we can get these guys to buy back their shares, we can take cash off the books and deploy that more efficiently in the market. It’s going to make the firm more valuable and the shares more valuable.” And so that was the argument for it, is that they had a lot of cash on the books. We can basically just kind of skim this thing down and take that cash and make it more valuable elsewhere. And so that was the argument for him and then several other hedge fund investors who came in later on as well to try to establish, to take some control over that firm. So the argument was potential, basically.
Paul Jarley: Okay. So that cash had built up over a number of years?
Kevin Mullally: That’s my understanding.
Paul Jarley: Okay, because I doubt they even own the real estate they’re in, right? I mean, I think there’s probably little asset there.
Kevin Mullally: Yeah, that’s probably true. What I definitely know is that the number that I saw as far as their cash holdings was like $500 million.
Paul Jarley: Wow.
Kevin Mullally: So a very sizeable amount of cash that they were just basically sitting on, or misusing in many cases.
Paul Jarley: Well, because here’s one of the first questions I would have for our two younger colleagues who are here on this podcast. Josh, when’s the last time you set foot in a GameStop? I know you’re a gamer.
Josh Miranda: I mean … so the difference in setting foot in a GameStop, maybe a little bit more recently, but actually buying something from a GameStop? It has been quite some time. It’s just most game consoles nowadays, the new ones don’t even have disc drives, so you can just download the games directly from the vendors, from the publishers. So why leave your house to check out what’s out there when you can just download it?
Paul Jarley: Garrett. How about you? Have you ever set foot in a GameStop?
Garrett Cummings: Yeah, it’s been a very long time, I must say. And being a brick and mortar company, you got to sell the best. With everything moving online, GameStop is definitely not the first place I think of when I want to download a new video game.
Paul Jarley: Right, they’re in a space where you can download things directly located in shopping malls. Could there be a company in a worse position than GameStop? It’s kind of hard to imagine, really. So it’s not surprising, I think, that some hedge funds started shorting it. Kevin, would you mind explaining shorting for our listeners?
Kevin Mullally: Absolutely. Yeah. So this is a pretty common thing that hedge funds do. So when you short a stock, what you are doing is you are borrowing those shares from somebody else in the market. You are taking them and you are selling them, in a sense, and then hoping that the stock will fall so that you can later go back and buy them to replace what you’ve borrowed, and thus you win, you make money if those shares fall. The risk, of course, is that they could also go up, and if they go up, your risk is unlimited. They could go up to infinity, theoretically, and you would lose a whole bunch of money or all of your money.
Paul Jarley: Now, just so I understand the scope of the potential loss here for the market, you can’t short more shares than are in circulation though, can you? Is it the number in circulation or is it the number authorized?
Kevin Mullally: So one of the impetuses for these, for the sort of Redditors to buying GameStop and begin squeezing these guys is the fact that the short interest was actually above the shares outstanding. In aggregate … not a single trader of course, but in aggregate, I want to say the number was 138%. So they had shorted 138% of all shares outstanding. And so the issue there becomes that clearly everybody can’t buy back the shares they’ve shorted at one time. So if you start to see the stock price increase, some people are going to be hung out to dry because they will not be able to buy those shares back to cover their position. And so it obviously can get a bit more technical when you start differentiating between shares outstanding and then the shares that are actually available to be traded. The term would be float.
Paul Jarley: Yeah.
Kevin Mullally: But long story short, yes, there was an issue here that the amount of shorting that was going on exceeded the amount of shares that were able to be traded or available to be traded.
Paul Jarley: And this got some hedge firms, as I understand it, in trouble. The question I had there is it surprises me that a hedge fund would have a significant percentage of its portfolio in a short position with a particular company. Is that unusual?
Kevin Mullally: It’s actually not that unusual. And the reason is if you think about sort of investing, one of the things that we would teach our students right off the bat is that diversification is done to eliminate firm specific risk.
Paul Jarley: Right.
Kevin Mullally: You hold a diversified portfolio to get rid of that.
Paul Jarley: Yep.
Kevin Mullally: Now, if you’re holding a diversified portfolio and you’re not really taking any firm specific risks, it’s also difficult to generate abnormal returns. You’re in essence holding the market. And so if you’re a hedge fund and you’ve got five or 10 really great ideas, one way that you can generate abnormal returns is by basically going all in on those five or 10 ideas, especially in the case of short campaigns. And so it’s actually not as abnormal as you would expect. That’s just one of the things these guys do. They’re very, in many cases, high risk vehicles for investment, and that’s what they do. They just take on these very concentrated bets because they believe in them or they believe they can influence the outcomes or other things like that.
Paul Jarley: Garrett, do you have any GameStop stock?
Garrett Cummings: No, it’s kind of interesting though. The stock itself met our criteria perfectly around the $30 mark. And an idea that we’re teaching, I remember this is something called volatility contraction, meaning that we’re not buying when a stock is bouncing around from $20 to $40 in big swings. Looking for when a stock really settles down in a period of five days to a few weeks within the context of an uptrend. And so we teach our members to buy when the stock makes a new high after it’s consolidated for a period of time in a very tight manner. And what this allows us to do, it allows us to take a decent sized position in a stock, like Kevin was mentioning, but because the volatility of the stock has dried up, it allows us to keep our risk for a stop-loss very close behind it. And so a few of my friends followed this trade, actually. And so they had 30 or 40% of their accounts in this trade when it broke out with a portfolio risk of only about 0.8% roughly behind it. And so did it meet their criteria? Yes, but sadly, because of the fundamental idea, I didn’t believe in GameStop at all. I succumb to more of the fundamental side, and I did not take the trade myself.
Paul Jarley: Did you have some friends who got rich?
Garrett Cummings: I’d had a few friends that made about 40 to 60 grand, so not a million dollars stories, but definitely enough to pay off any debts outstanding, especially at our age. And yeah, they did very well on it.
Paul Jarley: So why didn’t GameStop use this as an event to raise even more cash? Kevin, maybe you answered that early, but do you have a sense of why they didn’t do that?
Kevin Mullally: Yeah, so that’s actually one of the long term implications of this whole incident that I think is the most interesting. So there are a couple of reasons, practically. One, it’s obviously hard to do a seasoned equity issue that quickly. And then the second is more just from an investor’s perspective. So sort of my non-technical description of this whole thing would be that it felt like musical chairs to me. Who’s going to be the last person standing, that’s holding the stock?
Paul Jarley: And you don’t want it to be you, right?
Kevin Mullally: No. No, absolutely not. And so typically what’s going to happen here is with these equity issues, they’re going to be underwritten by an investment bank, and the first sales are going to go out to institutions and stuff like that. And what institution in its right mind is buying GameStop at 300 bucks a share? What is your expected return in that world if you’ve made 300 bucks for this? And so I suspect that there’s some of that going on as well, is that they just know that this is not really viable. They could do an equity issue, but they’re not getting $300 a share for that.
Paul Jarley: Yeah. So who are these Reddit people? Give me some insights here. Are these guys in people’s basements? Josh, you want to weigh in here –
Josh Miranda: Yeah, so –
Paul Jarley: As a reader of Reddit.
Josh Miranda: Yeah, so I mean a lot of my work is kind of in digital media and marketing and communications. So I kind of end up spending a good chunk of my personal and professional life kind of following these trends, these social media communities, if you will. And this subreddit is what it’s called, and this one is called wall street bets. This has been around for several years, as a matter of fact. There’s something like, I think, tens of thousands, or even hundreds of thousands of people who frequent this subreddit to some degree. And the idea being is that they kind of treat Wall Street a little bit more like a casino, and they make a show of some of their buys and some of their losses.
Josh Miranda: I mean, they have their own language for the way they describe some of the trades they make and for the losses that they have. And a lot of it kind of surrounds the way a meme can go viral, for example, and this whole GameStop thing has kind of happened the same way, where you have people who are blindly investing in GameStop just because of the herd mentality. And then they’re posting about their, “Hey, I lost $20,000, I lost $30,000,” and they get a whole bunch of upvotes on their post and the community cheers them on. It’s really … it’s kind of fascinating.
Paul Jarley: Is this where the term meme stock comes from? Is that where this –
Josh Miranda: This is exactly where … yes.
Paul Jarley: You’re paying a lot for that fame.
Josh Miranda: Yes, yes. I believe this community is the one that kind of coined the term meme stock. And it’s right there along with the likes of AMC, with Blackberry, companies who similarly you may not think would be doing too well.
Paul Jarley: Kevin, is this a legitimate area of research in finance?
Kevin Mullally: Absolutely. So this is actually kind of well-timed. We had a seminar speaker here a few weeks ago who presented a paper on Robinhood, and basically talked about retail trading and how Robinhood has facilitated in that and what the effects are. And in essence, this has become a really … this is a really extreme example of his paper, but basically what he saying is that retail traders, people on Robinhood, this kind of demographic of trader essentially buy stocks sort of ignorantly. They just buy whatever is going up or going down and then they just lose their lunch. The stocks that they buy go down quite significantly, five or 10% over the next 20 days. And so, yeah, this notion of how retail trading could affect the market and the propensity of people to be trading over Robinhood and things like that is definitely important, especially given the fact that retail trading has become bigger now, with Robinhood and the sort of commission-free trading and that type of thing. It’s definitely getting to be a more economically significant portion of the market.
Josh Miranda: Yeah. If I can jump in there, it’s kind of been fascinating to watch it from the lens of this Reddit community, because they quickly turned against Robinhood once they started limiting trading of some of these so-called meme stocks, GameStop, AMC, and they almost took on this sort of David and Goliath sort of mentality. We got to stick it to the man. We’re going to stop using Robin hood. We’re going to leave them negative reviews on the app store. And it’s just been interesting to see the way that herd mentality has really driven so many of these key decisions and financial decisions for a lot of these people.
Paul Jarley: Do we have any estimates of how many people we’re talking about here?
Josh Miranda: You mean on the community or how many –
Paul Jarley: Yeah. Well in the description we’re talking about it. I’m going to be a little blunt here, the number of stupid investors that appear to be out there.
Josh Miranda: Sure. Well, so on the front page of this subreddit, it lists 8.6 million degenerates, is what they call themselves, and that’s people who are registered as part of that community. So it’s a lot of people who are at least following this.
Paul Jarley: Now Garrett, do you have any sense of that just from –
Garrett Cummings: Yeah. I’m very proud of the American people for getting back into the marketplace. The number of investors has been on decline since ’08 for a little bit, and it really … I’ve done a lot of studying of the market history. And it really does feel like we’re back in the roaring ’20s a little bit, back when the American people did take a big passion in the stock market. And me being a young, passionate person myself about it, I really hope it’s opened people’s eyes to saying, “Wow, even if I would have just invested $100 in this company, and I did it at the proper time with low risk, I could’ve had a very nice rainy day fund off of that.” And so to me, it’s inspirational. We’re taking down the barrier of the big guy versus the small guy.
Garrett Cummings: The information out there moves so fast, and the fact that this little Reddit page of Wall Street users was able to find out, “Wow, this stock is 140% short interest, let’s run this sucker through the roof.” The fact that they were able to do their due diligence, even though there are a lot of crazy people out there who just go with the herd mentality, the fact that they came out with that information when no other fund or hedge fund easily could have done the same thing or found it, I think that speaks volumes, that the playing field between institutional and retail investors is narrowing at a very rapid rate.
Paul Jarley: Yeah. Is it an American phenomenon though? Or is it a worldwide phenomenon? Does anybody have a sense of that?
Josh Miranda: I know I’ve seen specific commenters, just kind of browsing through the threads, so I mean there are people from other countries. I don’t know if they’re the ones actually making the spend here, but I mean there are people who frequent this website who aren’t from the states.
Paul Jarley: Where are we now with GameStop and that story? I thought it was down to about $90 a share. Is that the last I saw? Is it down below that?
Kevin Mullally: It really depends when you check. It changes every 30 seconds. It’s pretty hypnotic to watch. It’s 61 right now.
Paul Jarley: 61?
Kevin Mullally: Yeah.
Paul Jarley: So are we near the end of the story, do you think?
Garrett Cummings: Personally, I think this is something we’ve seen time and time again, if you’ve paid attention to market history. In the early 1900s, you had the Northern Pacific Railroad had a similar phenomenon. It was $150 a share, short interest was through the roof and a group of traders decided to take advantage of it. And the stock, in one day, went all the way up to a thousand dollars a share before coming all the way back down to $350 a share. You’ve had these boom and busts all throughout history. You had the tulip craze, the South Sea bubble, the .com bubble. So it’s all sorts of things. And usually when a trip … and most recently in the cannabis sector about three years ago, you had [inaudible 00:19:14] rate go from $30 all the way up to $300 a share. So usually when you get these type of moves and they’re round trip, if you did not lock in any profit, I think it’s a very excellent time to go ahead and head for the exit door. The easy money was made on the way up and now it’s just very similar to catching a falling knife.
Paul Jarley: So Garrett, I have to admit, it’s kind of refreshing to have a young guy tell an old guy like me to try to remember history here, because it repeats itself regularly.
Garrett Cummings: Yeah. I get a lot of jokes with my friends, because I’ve read Peter Lynch’s old books, [inaudible 00:19:47], The Old Market Wizard’s books and so on. And a guy named Jesse Livermore said it best: “Human nature is not going to change. So as long as the markets are dictated by human nature, only the names are going to change. You’re eventually going to see a similar bubble situation elsewhere and if you call it a bubble, it can be scary. But if you call it an opportunity, you can catch on the way up if you find a low risk entry and do very well for yourself.”
Paul Jarley: So Kevin, how do you think the GameStop story’s going to end? Is somebody going to buy them? Are they going to go out of business? What’s going to go on there?
Kevin Mullally: I’m not sure. I mean, I think they clearly have to evolve. I mean that seems obvious, that the brick and mortar or video game sales is not really a sustainable operation. In terms of the trading, I’m not sure. I actually think that this could be a more regular event, and I think data’s coming out … when I was kind of reading about this this morning, a lot of data’s coming out that maybe this wasn’t really the retail versus Wall Street kind of thing that it was pitched to be, that one of the main guys in Reddit was a guy who worked for Mass Mutual and is an actual broker. And there’s questions now about how legal his actions were.
Paul Jarley: I was just going to ask that. Was that legal?
Kevin Mullally: Yeah, so there’s quite a bit going on here. And a story came out yesterday that said that this Sendvest Investment, which is a hedge fund, they made $700 million off of this. So it’s not even obvious to me that this is a retail versus Wall Street thing. And the funny thing is, is that this is social media, and maybe the medium by which this is taking places a bit different, but this has been kind of a tactic hedge funds have used for a really long time with trying to get stocks to move in the direction that they want. When a hedge fund does a short campaign, they often do media events about it and they do press releases and they accuse the firm of doing things that are not so great and that kind of thing.
Kevin Mullally: So this idea of trying to get some collective action on a stock isn’t really new either. And I’ll be curious to see if later we find out that there was a bit more on the hedge fund side and the institution side, sort of poking the bear on this one a bit. So I don’t think that this will be the last time we see something like this. And I’ll be very curious if we get more information that reveals that this was not just Redditors who are mad at the stock market or mad at Wall Street sort of fueling this run.
Paul Jarley: How about meme stocks generally? Josh mentioned here, which if I understood Josh, was people sort of bragging about their losses.
Josh Miranda: Yes. And I mean, correct me if I’m wrong, I’m not as much the finance guy as much as I am kind of the media guy, but I had personally never heard of mass amounts of people bragging about all the money that they were losing. This community specifically refers to it as loss porn, is what they call it. And it’s people who just kind of celebrate people who’ve lost all this money from making stupid decisions and kind of laugh about it collectively.
Paul Jarley: Although we don’t know if they really lost money though. We just know they created a meme.
Josh Miranda: They show their portfolio.
Paul Jarley: Oh really?
Josh Miranda: So from everything that they’ve provided, it’s like, “Here’s my portfolio. I lost a lot of money.”
Garrett Cummings: Now if I could touch on the psychology behind that, there’s a guy named Ed Sakota, and he’s quoted as saying, “Everyone gets what they want from the market,” and how the market is subconsciously engraved in how they perform in their trading. And so some people are just purely in it for the adrenaline and the thrill and the gambling. And I think that’s where you see a lot of those people on Wall Street Bets. It’s just subconsciously in their mind that they’re going to lose in the marketplace and just don’t do anything to change it.
Paul Jarley: Are we going to see government regulation here, Kevin?
Kevin Mullally: You know, I think the thing where you could see it as certainly this notion of Robinhood shutting down trading, or only allowing people to close out their positions. I mean, I do think that there’s something to that. It’s an interesting question of what the … of course it always comes down to what your belief about the government’s role is ultimately. There doesn’t appear to be a clear right or wrong answer to me here. Of course on the one side you’ve got these people who are saying, “Hey, we know what we’re doing. We know what we’re getting into and we’re adults and we should be able to do this,” and on the other side the government’s saying, “Well, maybe, maybe not, because some of you are going to lose your lunch on this one as well.”
Kevin Mullally: So I’m not sure. I think what’s going to come out of it is probably more transparency about why that decision was made. And I think clearer rules about when these companies and these brokerages and things like that can actually halt trading, because Robinhood is taking the brunt of this, but other brokerages just at things like increased margin requirements and just made the trading more costly. And I think just more transparency on those rules, the specific terms by which or on which trading would halt, I think will be that the most likely outcome in my mind.
Paul Jarley: What do you think, Garrett?
Garrett Cummings: Personally, if anything comes back to say that retail investors should not be able to [inaudible 00:24:53] maneuver, and in the name of secretly protecting the “hedge funds” that they get messed over, I would find that pretty messed up pretty much, because the market’s supposed to be free. You take your bet and if you lose, you take it like a man and you move on to the next trade. That’s how it’s been since the stock market began. You saw it in 1929 when people got burnt, but guess what? We didn’t change regulation just because people had their feelings hurt. Now, I would definitely love to see more details about Robinhood and how this affects the brokerage side. Did they act within their guidelines in the name of “protecting the investor”? And even if that’s the case, I don’t think they should have the right to infringe on a free market.
Garrett Cummings: If someone wants to buy or sell something and there’s shares available for it or not available, they should really honestly get what’s coming to them, because that’s how they learn. And in 2015, I blew my stock account pretty heavily. I took it from about $20,000 down to $2000. And you know what, that’s part of the game. If you don’t know how to play the game, the game is going to teach you the rules. And the people who did get burned by this, they’re going to learn the rules very fast. And the people who are prosperous from this, I hope they have the rules and don’t go into something else and give away all their gains.
Kevin Mullally: There’s another side to that story though, that would be the argument in favor of some sort of regulation, which is just how we want an efficient capital market, because we have to remember that the trading and the sort of return generation is a consequence of the market, not the goal.
Paul Jarley: That would be nice, and I agree with that, Kevin.
Kevin Mullally: You know what I mean? So if you take a step back and you think about what the purpose is of the market to begin with, the entire purpose is to match savers and spenders.
Paul Jarley: Yeah.
Kevin Mullally: Right. And so if you get into this situation where you have a market that is clearly not efficient, like on no planet can you possibly justify GameStop at $300 or $400 a share.
Paul Jarley: No.
Kevin Mullally: Then you get into the concern that Dean Jarley brought up at the beginning of this podcast, which is why didn’t some firms issue stock during this time? And the answer is GameStop clearly is not going to get 300 bucks a share, but AMC did. They did issue stock during this time. And the concern then becomes if that capital is going to a company that’s overvalued like AMC or GameStop, it’s not going to somebody else who has a legitimately viable project that they could pursue. And so the reason why efficient capital markets are important is because we want spenders to be able to finance projects that will grow our economy. And so that’s the other justification for having at least a conversation about regulation, is not just winners and losers in the market, but it’s the economy as a whole and how the market facilitates economic growth.
Paul Jarley: Because losing trust in that market would be a really bad thing.
Kevin Mullally: Absolutely.
Garrett Cummings: I would arguably say though, that judgment and value is subjective. When you have a stock that’s close to 140% short interest, and you know that, wow, if we can get a short squeeze or this thing could run and these short positions can not cover in time, you can either see it as wow, the stock’s at $30 a share, or we can see it as the fact that people on Wall Street Bets and other institutions saw that wow, this thing’s 140% shorted, we can run this through the roof and make a killing, just like the old commodity rates back in the early 1900s.
Paul Jarley: But I believe that brought regulation, did it not? To commodity markets?
Garrett Cummings: No [crosstalk 00:28:11] lock limit down inside the commodities markets to this day. You don’t have organized … they limit the amount you can buy that to try and prevent that.
Paul Jarley: Yeah, yeah.
Garrett Cummings: But it still can happen where you get lot limit up and lot limit down, and if you’re on the wrong side of that trade, it can be a nasty little spill.
Paul Jarley: So is this going to be a story a year from now? I’m going to ask each of you. Are we still going to be talking about meme stocks and things like maybe GameStop maneuvers going forward? Or is this transitory?
Kevin Mullally: I mean, if these Redditors are bragging about losing $20,000 or $30,000, it doesn’t seem like that’s a sustainable future.
Paul Jarley: Not in my checkbook.
Kevin Mullally: They’re going to run out of money at some point.
Paul Jarley: That’s what I thought too, Kevin. How about you, Garrett?
Garrett Cummings: I don’t think it’s going to be GameStop and AMC, but like I previously said, only the names are going to change. So human emotion and nature loves putting bubbles that we’ve seen throughout history. And so you’re going to just have something else out that goes from a dollar to $50, kind of like NEO went from $4 up to almost $50. You’re always going to find explosive stocks in the market, and that’s exactly what we’re trying to teach our members is okay, how can we identify these opportunities with a small amount of risk and get into them, take our money, and get out before the bubble bursts, essentially?
Paul Jarley: Garrett, you got any interest in going into a PhD program in behavioral finance?
Garrett Cummings: Not really. I’ve just done a lot of studying, and it kind of gets back to what I was saying about Ed Sakota. You get what you want out of the market. So the difference bettwen a losing investor and a winning investor is the losing investors who got their tail handed to them are not going to find what they need to do to win. Myself, I can’t pull it up here on the podcast, but I’ve taken my trading to the level of building a full data Excel sheet that updates live time. And that way I’m having every tool at my ability I need to feel out the market, be able to place the proper bets when I need to. And ultimately it’s a spreadsheet on how to manage my risk while maximizing return.
Paul Jarley: Josh, what do you think? Is this the latest social media craze and it’s all going to go away, or where are we here?
Josh Miranda: You know, I think that might be a little part of it, but it’s like anything. When you have a lot of people who are putting a lot on the line to really do much of anything, that kind of becomes a news story. And when you have millions of people who are on this subreddit, who are even just … even if they’re just monitoring what’s going on, that in and of itself becomes the story. I know now some of these Redditors are focused on driving up some cryptocurrency. Doge coin is one of them. And so it seems like … again, I’m not the finance guy, but it seems like they’re just going to move on to the next thing, and then onto the next thing. And might they be able to make waves somewhere with some stock or some crypto? Perhaps, but it’s clear that these people are just … they’re still going and this community doesn’t seem to be going anywhere. So if they make another headline somewhere along the way, I wouldn’t be surprised.
Paul Jarley: I would just like to take the opportunity to point out that more than two years ago, we decided that Bitcoin is not a thing, at least as a currency. And it continues to exhibit volatility, which makes that impractical.
Josh Miranda: That’s fair. That’s fair. A thing or not a thing though, somebody out there is making money on it, I guess.
Paul Jarley: It’s my podcast, so I get to go last. Let’s start with the thing I’m most sure about. GameStop is not a thing. There was a reason so many investors were shorting it and I don’t see the company making a major turnaround, at least not the GameStop we know. It may serve a niche market in a nostalgia space or as a secondary seller of older equipment and games to parents buying their kids their first video games. But for the most part, the world has passed GameStop by. I’m not investing in it. As Garrett mentioned, bubbles happen from time to time, and some people will lose their shirts. In a twisted display of macho investing, some of these traders will want to post about it online and claim they’re tough enough to take it. But unless they have unlimited lines of credit, serial meme investors aren’t really going to be a thing for very long.
Paul Jarley: Even the E-Trade babies run ended relatively quickly. I suspect meme stocks won’t be a thing for very long either. Chalk it up to a few people getting their 15 minutes of fame. Not a thing, just [inaudible 00:32:41]. Here’s what I think is the real story. Social media gave retail investors a way to coordinate their behavior and maybe influence the market outcome in a way that was impossible in the past. Perhaps a stick it to the man or let’s burn it all down motive played a role with the Reddit group of investors, who see the system is rigged, and were willing to risk losses just to make a point. But ultimately, these retail traders were just participating in the very thing they’re protesting against. Historically, coordinated action by the masses to change market outcomes has been viewed pretty dimly by governments.
Paul Jarley: When manufacturing workers organized in the early 20th century to fight back against what they saw as an unjust wage system, the government took pretty strong action. Add the likelihood that some institutional investors may have participated in the Reddit GameStop action, and are certainly thinking about how to weaponize efforts like this for their own benefit in the future. And I suspect government interest in curbing this kind of behavior in the name of protecting efficient markets is sure to arise if we see a few more repeats of the Reddit GameStop story. What do you think? Check us out online and share your thoughts at business.ucf.edu/podcast. You can also find extended interviews with our guests and notes from the show. Special thanks to my producer, Josh Miranda, and the whole team at the office of outreach and engagement here at the UCF College of Business. And thank you for listening. Until next time, charge on.
Listen to all episodes of “Is This Really a Thing?” at business.ucf.edu/podcast.
After one of the deepest recessions in history, the U.S. economy still has roughly 10 million fewer jobs than before the COVID-19 pandemic began. While some say the economy is improving faster than expected and has seen significant growth in recent months, it could be some time before the U.S. returns to pre-pandemic highs. What will drive the economy back into recovery? And can it happen before 2022? Sean Snaith, Director of UCF’s Institute for Economic Forecasting, explains his timeline and predictions for complete economic recovery.
Paul Jarley: So between now and election, what do you think, the economy going to have a recession? Yes? No? Why?
Glenn Hubbard: On balance, I don’t think we’re at the cusp of a recession.
John Solow: I absolutely agree with Glenn’s take on what things are doing now.
Paul Jarley: No, I think the short answer is no, there’s not going to be a recession before the 2020 election or in 2020 at all, I think.
Sami Alpanda: I agree with almost everything that has been said so far.
Paul Jarley: Turns out they were all wrong. This year was all about separating hype from fundamental change. I’m Paul Jarley, Dean of the College of Business here at UCF. I’ve got lots of questions. To get answers, I’m talking to people with interesting insights into the future of business. Have you ever wondered, is this really a thing? Onto our show.
Paul Jarley: 2020 threw everyone a curve ball. That recession, well, it turned out to be a thing. Is 2021 the return of prosperity? Will the economy go on a run like it did in the 1920s? I sat down with our resident expert, Dr. Sean Snaith, he’s the director of our Institute for Economic Forecasting. Listen in. Well, thanks for joining me today, Sean.
Sean Snaith: Pleasure.
Paul Jarley: We’ve got a lot to cover. I’m going to ask you to be the ghost of economy past, present, and future, if you don’t mind. And let’s start out with the past. Back in 2019, I hosted a panel of people, including Glenn Hubbard at that time and asked them whether a recession in 2020 was possible and all of them to a person and you as well said, no chance, right?
Paul Jarley: The economy was really humming. When I asked them what they were concerned about, frankly, they had trouble coming up with anything and then March of 2020 happened. So how bad did it get in 2020?
Sean Snaith: Well, at least I’m in good company in being wrong, I suppose. And I don’t know if I’m the ghost or I’m haunted by my past forecast, but I don’t think, two things, that I don’t think anyone saw coming. One is a pandemic, global pandemic out of China. That’s one thing. This is …
Paul Jarley: That’s the exogenous shock.
Sean Snaith: That’s the exogenous part. And so this stuff happens. Now, could that in and of itself have triggered a recession? Maybe.
Paul Jarley: Maybe.
Sean Snaith: Maybe. But it was the endogenous part or the policy response to it that really put us into the historic downturn. And that was the decision in March and April to lock down, quote unquote non-essential sectors of our economy. And that was instantaneous recession. I mean, just add water, just add bad public policy and there you go, that’s a command economy. The government says you don’t make anything. You can still make things. And I mean, it was deep and it was instantaneous and there was no uncertainty about the fact that we were in recession.
Paul Jarley: Has it been the most uneven economy? I don’t know that much about the history of this, but I mean, clearly there have been big winners and losers in this. So there are some parts of the economy that did gangbusters, right? Our friends in Lakeland, Publix did really well during this period.
Sean Snaith: Well, yeah and I played a large role in that. That was for years been my sort of social activity was making up the excuse to go to Publix to get out of the house. But there were huge winners during this and again, chosen by the government by and large. If you had a nail salon, you were a loser. If you were selling groceries, you were a huge winner. If you were selling goods and services online, you were a huge winner.
Paul Jarley: If you required a crowd to be successful, you were a loser. That was sort of the rule, quite frankly. And instead if you were selling something that people could enjoy by themselves in general, you were a winner, I suppose a part of this, but I can’t think of another recession I could summarize that succinctly. Go ahead. Quite frankly, can you, I mean-
Sean Snaith: I mean, this is unique. I mean, and again, typically, you may have an exogenous shock that can knock the economy off its tracks and precipitate a recession, but generally there’s some internal weakness already in place.
Paul Jarley: Oil in the ’70s, probably the best example, right?
Sean Snaith: That was a huge shock a couple of times. And oil was far more important to the economy back then than it is today in terms of how much oil we use to produce GDP. But this was just unprecedented and like I said, I just couldn’t believe what was being done under the guise of public health.
Paul Jarley: So how would you describe the economy now< today?
Sean Snaith: I think, we’re in the midst of a pretty solid recovery. And again, this is because of the nature of this recession and its uniqueness, typically, there’s a psychology involved with recession and accenting recession and confidence has to build. And, it’s a more gradual process, typically. Everyone knew why the economy was in recession. It wasn’t because the economy was in poor shape. It was because the government shut it down.
Sean Snaith: And that’s why the panel of economists in 2019 said everything was fine. And that was true through much of February, the economy was in fantastic shape, maybe the best I’d ever seen, in terms of the labor market, for sure. And so, in order to get out of recession, it was pretty easy to do.
Sean Snaith: And the big thing was to let the economy open up again, tell them all, that millennia you can have shoppers there. And all of a sudden we’re selling retail goods again, that weren’t being sold for several months. And people that were furloughed were being, at least part of them were being called back. So, we saw in the third quarter of 2020, a really large, almost 34% increase in GDP growth at an annual rate that was after the second quarter’s contraction, historic of 31%.
Sean Snaith: We just got a report this morning in the fourth quarter, the first take on GDP growth. And it came in at 4%. So we’re continuing in a recovery. It hasn’t been officially declared. I think the MBER who weighed in very early on when the recession began, will likely declare I think May, but May or June of 2020 is to when we hit the bottom and began this recovery process. And I think most of the data while it’s not final, supports that.
Paul Jarley: Let’s talk about government response for a little bit. So we’re talking about our third fiscal stimulus package, if I got my numbers right, I think. The Biden administration is talking about their third in year judgment. How effective were the first two and how necessary is the third one?
Sean Snaith: I think the first one, again, we threw in a matter of weeks, close to 40 million people out of work, I mean, just, the labor market doesn’t function like that under normal circumstances. It lags behind the economy and unemployment rises gradually. It doesn’t spike. And so that money was needed. Unfortunately, I mean, it happened pretty rapidly by DC terms, $2.2 trillion, passed and signed in a matter of weeks, that’s a record as well, but we traded off sort of precision for speed. And so people were getting checks quite frankly, that didn’t need those checks.
Paul Jarley: My father who passed away got one.
Sean Snaith: And there’s plenty of examples of that, but that’s a different kind of mistake, but I mean, giving it to somebody who’s been working through the entire pandemic and hasn’t seen any loss.
Paul Jarley: It was a blunt tool, right? An immediate blunt tool.
Sean Snaith: And so that helped, but it wasn’t enough of course, because the economy’s still, really didn’t recover until we opened things up.
Paul Jarley: Well, I have to put this in perspective, maybe for people who don’t follow this as much as you and I do, right? In 2019, the economy was $22 trillion give or take, right? So a $2 million or $2 trillion package is little under 10%.
Sean Snaith: I mean, it’s fairly big, much larger than our collective response to the great recession after 2008, 2009. And the total response, which was, I think about 1.6 or 1.8 trillion, it took about 16 months to be kind of rolled out and implemented piecemeal, right?
Paul Jarley: And spent.
Sean Snaith: And spent. So this was very quick, very large and necessary because of what had happened with the shutdowns. Now, had we not shut down everything and let people make their own decisions, and, maybe do public health measures, masks, social distancing, washing your hands, sanitizing, common air, but let the economy continue to function, I think we would have seen maybe a recession, certainly nothing on the magnitude of what we went through.
Paul Jarley: The second stimulus is really just rolling out now, how effective do you think it will be?
Sean Snaith: Well, the second one, a little bit smaller. It will help. Again, I think the big thing is, is the economy’s reopening. Consumers are spending again, a lot of pent up demand from this recession. We’ve got the vaccines through the approval process and manufactured and being administered. So as we proceed through 2021, that fear factor is going to go down.
Sean Snaith: The ability to be in larger crowds should be increasingly possible as we go through 2021. So, that’s really going to be more important than any stimulus. And so this 1.9 trillion that’s being discussed now probably is overkill where we are in the recovery, but if they’re going to do something, let’s take the time and target it to those who need it.
Paul Jarley: I mean, so I can see extended unemployment insurance benefits for people who are still out of work, right? Rather than just mailing checks to people.
Sean Snaith: Willy nilly. This shut down and this recession has really disproportionately hurt lower income households. I mean, like no other.
Paul Jarley: Service industry people, right?
Sean Snaith: Service industry people. I mean, obviously here with tourism being such a large sector, tens of thousands of people lost their jobs in tourism and related businesses. Those are the people that have not gone back to work. These are the people that are still unemployed. These are the people that need help, not people that have been lucky enough to work throughout the entire pandemic.
Paul Jarley: So did Florida do worse than the US economy as a whole?
Sean Snaith: Yeah. Well, the contraction in state GDP, I think-
Paul Jarley: On percentage terms.
Sean Snaith: … in percentage terms, I think we’re projecting about 6% versus 3.5% nationally. So and again-
Paul Jarley: This is bad, basically.
Sean Snaith: And it makes sense because the devastation to tourism. I mean, Orlando International Airport, passenger traffic was down 97% year over year in March and April. I mean, that’s effectively shutting it down. And then we had the major theme parks closed and people weren’t going to the beaches and spring break was viewed as evil for different reasons this year than it usually is. It was going to be this huge, super spreading event, right? Super spreaders. So Florida took it really on the chin and tourism is still climbing its way out of that very deep hole, but the rest of the economy, certainly didn’t fare as badly.
Paul Jarley: Do you think this next stimulus package will pass? Do you think Congress will do something?
Sean Snaith: I’m curious if there’s been pushback because one thing I’ve observed, at least recently in politics is that when it comes to the Democratic Party, there are no deserters. They sort of march and vote in lockstep and maybe somebody will pay a little lip service here and there, but you don’t have people voting against the party very much.
Sean Snaith: And so they’ve got, majority’s albeit slimmer than they did in 2008. So it’s interesting to see some pushback and, it may be the nature of the executive office not being as forceful perhaps that there’s a little more pushback. But I think something will come through. 1.9 trillion, almost the same size as the package we did back when the economy was contracting 31% at a time when the economy is six months into recovery, it seems a little late in the game to be spending that kind of money.
Sean Snaith: And then, we were talking about before we began recording, yelling at kids that are on my lawn. I’ve been doing the economic equivalent of that for about 10 years about the national debt.
Paul Jarley: Well, I’m right there with you, brother. We’re probably the only two people who talk about this regularly.
Sean Snaith: And it’s true 27.6 trillion right now. If this goes through, let’s just say a trillion dollars that plus still a reduced tax revenue, I mean, we’re going to be pushing $30 trillion, but certainly by the end of 2022, at this pace, balanced budgets, surpluses, budgets at all, I mean, who needs them? We’ve got continuing resolutions to fund everything, no debate over priorities. No, it’s just spend away. But I’ll say the same thing about the debt. You can’t run up debt like this forever.
Sean Snaith: We can’t have a climbing debt to GDP ratio without a day of reckoning at some point. I mean, we’ve been lucky. I don’t know if it’s lucky. I mean, we’ve been enabled.
Paul Jarley: Well, interest rates have been so low for so long.
Sean Snaith: Well, that’s it. And so there’s been no short-term pain from all this borrowing, but interest rates aren’t going to be low forever. Now, they might be for five more years, they might be for 10 more years. But if we keep adding to that debt and interest rates start to rise, then the burden of that debt’s going to rise right along with it. And we don’t have wiggle room in the federal budget. I mean, most of the federal budget is non-discretionary spending, mandated entitlements and can’t be touched. The discretionary stuff, oh, less defense, more educated. This is nickel dime stuff when you’re looking at a debt approaching $30 trillion.
Paul Jarley: So let’s go on to the future. Then when does the economy recover to pre pandemic levels? What’s your best guess on that? Both nationally and in Florida.
Sean Snaith: Well, I think in the aggregate, if you’re looking at total payrolls, your total jobs in the economy, I think by the end of 2021, we should be back to where we were in terms of payroll levels. The unemployment rate, probably not down to the same levels by then, but I think into 2022, again, assuming that this recovery progresses and there’s not another policy shock or a viral shock, but with tourism lagging, right, I mean that-
Paul Jarley: I think Florida will come out a little later.
Sean Snaith: I think we’re into 2022 before tourism sort of gets back. But the data thus far is encouraging on that front. Passenger traffic over the holiday season in Orlando was the largest in the nation, down still 42% year over year. But, again, as we discussed earlier, it was down 97% in March and April. So, that bounce back is really pre vaccine, right? Nobody had the vaccine for the most part, or very few people did by the time the holiday season rolled around, this was just people saying, I see what it is.
Sean Snaith: We know what risks are, I’m traveling, and as the vaccine is administered more widely, then I think that tourism accelerates as that takes place. So I think, by the time we get to summer, it may not be exactly where we were in the summer of 2019, but I think we’ll be 75 to 80%.
Paul Jarley: So if you’re the Biden administration, what do you do?
Sean Snaith: Well, take it easy on executive orders. No, I think they’re going to need to do some, they’ll do some stimulus. I would say again, let’s make it targeted to those that really need it to the individuals and the businesses that were damaged the most by these lockdowns in this COVID-19 recession. And then, take the foot off the gas and let’s see how 2021 plays itself out because I do think the pent up demand is still out there.
Sean Snaith: It hasn’t been fully vented and as 2021 rolls on, and people start to go do things in crowds and travel and all these things that have been curtailed, you’re going to see a lot of growth in consumer spending. I mean, if you look at the upper rungs of the household income ladder, that spending is way down still, compared to where we were pre pandemic. And that’s because those households are the ones most likely to go spend two weeks in Aruba or go out.
Paul Jarley: Most discretionary experience-based spending, right?
Sean Snaith: Exactly.
Paul Jarley: We talked about it.
Sean Snaith: And so that has not been uncorked yet, so that’s still coming. I think housing is a pretty solid driver of the economy, not just here in Florida, but nationally, and I think will continue to be. It was unusual, although it’s not late cycle anymore, but pre COVID 19, there was a booming or building boom in housing taking place. And that was at the tail end of that expansion.
Sean Snaith: Usually construction booms at the beginning of an expansion. So we had this late expansion wind from construction and that breeze is still blowing. And I think, continues through 2021 and probably a couple of years beyond.
Paul Jarley: Do you think there’ll be a tax increase?
Sean Snaith: Well, the tax cut and jobs act, I think some elements of that are going to go. It’s always easy to just say, well, we’re going to tax corporations more and just, pretend that there’s some extra-terrestrials-
Paul Jarley: That pay that tax.
Sean Snaith: Yeah. That pay that tax, that it isn’t really us paying it, but it’s confusing enough to most people that they think that they’re not paying it. So, I think you’ll see that, always fashionable to tax the rich. So, those high-
Paul Jarley: Find is over $400000. Is that the current proposal, I think.
Sean Snaith: Well, it depends on where you live and if you have kids. So I think taxes are going up and so that will have a dampening impact on the economy going forward. I think the economy, because of the COVID thing’s got some momentum here as we recover from that.
Paul Jarley: So it may not be a bad time in the short term, [crosstalk 00:21:49], right?
Sean Snaith: Yeah. But what I would expect to see, and I don’t know if it will be in this administration, but at some point there are going to be new taxes implemented. And I think, again, back to this 20, 28, 27 and a half trillion dollar debt and growing, it’s got to be paid for somehow. There’s growth taxes, I think, your 401k might suddenly be subject to a charge or a withdrawal processing privilege fee, financial transaction taxes, we’ll get those GameStop Redditors, we’ll make them pay a tax every time they try to buy. And I think in the medium run, that’s likely to be the case.
Paul Jarley: Is it politically or economically viable though to create a new set of taxes that would actually put the federal budget in balance? You go back to pre ’20 spending, 2020 spending.
Sean Snaith: Well, again-
Paul Jarley: Because there’s two ways out of this, right? We either cut spending and get back into a balanced budget or a surplus situation. Or not unlike UCF, we can try to grow our way out of this.
Sean Snaith: Well, there are limits to enrollment and the best of growth that we could expect would be insufficient to deal with the debt that we have. And we’re not-
Paul Jarley: 5%. I mean, 5% would be historical.
Sean Snaith: It would be historic. It would need to sustain that. And even then would still have to make some decisions, but what’s not been addressed are entitlement programs. Those taxes have been tweaked a little bit, the income limits have been pushed up. I think that’ll be part of that puzzle.
Paul Jarley: Retirement ages might go up as well. I could see that happening.
Sean Snaith: And again, as I get closer to eligibility, my opinion changes a little bit. Dammit, I want my social security, but it was originally not meant to be a 35 year defined benefit pension from the government. This was to keep the elderly, many of whom fought in the great wars and supported those efforts and, lived through the depression and, work to make our country great. And to make sure they didn’t end their lives in poverty.
Sean Snaith: And so the eligibility age at the time it was, the program was created, was older than the life expectancy. And so that hasn’t changed much in terms of eligibility age, but life expectancy has gone up significantly. And so that’s why people are at the social security trough for much longer than historically was the case.
Sean Snaith: Anytime you try and touch social security, you’re pushing grandma off the cliff in a wheelchair, the AARB, Jack boots come out after. I think there’s a realization, finally dawning here that we’re in trouble with this program as it is, the status quo is non-sustainable.
Paul Jarley: So last question, is the roaring ’20s going to be a thing?
Sean Snaith: It was for two months. The first two months was the best of times.
Paul Jarley: Can we have another decade long run?
Sean Snaith: I’m not sure. I think that there’s significant damage from this recession. I said, well, the aggregate, we might get back to the numbers in a year, year and a half, there’s still going to be losses that don’t get-
Paul Jarley: Persist.
Sean Snaith: And particularly small businesses.
Paul Jarley: No doubt.
Sean Snaith: Many did not make it through the lockdown itself, many limped on for awhile, but will not survive 2021. And so those folks, those resources have to be sort of redeployed. I’m a bit concerned about policy. I mean, it seems like we’re slipping back towards, sort of policies that do have a downward impact on economic growth.
Sean Snaith: A lot of the Obama, Biden type ideas are sort of being rolled out again. And I think a lot of that is what kept the economy from really bouncing back more strongly after the great recession. And so, again, I don’t know, I have to wait and see what actually happens and what gets passed, but what’s being discussed seems awful familiar.
Paul Jarley: Thanks, Sean.
Sean Snaith: Thank you for having me.
Paul Jarley: It’s my podcast. So I get to go last. The Spanish flu gave a way to the roaring ’20s. Will history repeat itself? Pent up demand is most certainly a thing. People have been cooped up in their houses for a long time. And when this pandemic ends, they’re going to want to party and travel. Some of this will result in a shift in consumer spending away from goods and towards entertainment and experiences, but on balance, I think a pretty big bump is coming.
Paul Jarley: But for all this to happen, the pandemic has to end. We can talk stimulus packages all we want, and some money is certainly needed, but the best stimulus package in my mind is the one that puts as many needles of the vaccine into people’s arms as quickly as humanly possible. It is ultimately consumers, not the government that will drive this rebound and to do that, people are going to have to feel safe going out again.
Paul Jarley: Will this lead to a decade long expansion? I doubt it. We’ve got a big bill to pay. Tax increases are probably in our future, and this will slow economic growth some, but the roaring ’20s were mainly fueled by technological innovation as the electrification of America and the rise of mass production opened up new markets and fueled job and income growth.
Paul Jarley: Maybe we’ll see a number of innovations hit the market in the post pandemic world, but I doubt they will replicate what happened in the 1920s. That said, predicting the future is a risky business. And right now, just returning to business as usual seems like reason enough to celebrate. What do you think?
Paul Jarley: Check us out online and share your thoughts at business.ucf.edu/podcast. You can also find extended interviews with our guests and notes from the show. Special thanks to my producer, Josh Miranda, and the whole team at the Office of Outreach and Engagement here at the UCF College of Business. And thank you for listening, until next time charge on.
Listen to all episodes of “Is This Really a Thing?” at business.ucf.edu/podcast.
The podcast currently has 40 episodes available.