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Mississippi during The Great Depression

The Great Depression has been frequently described as ‘one of the greatest disasters in American history’ due to its disastrous impact on income, tax revenue, profits and unemployment.[1] Perhaps unsurprisingly, the adverse impacts on banks in Mississippi were relentless which becomes particularly apparent when considered in conjunction with the impact on national banks. The severity of this impact can be ascribed to the rural, impoverished characteristics of the state alongside the convoluted nature of policy implementation. Mississippi was divided into two Federal Reserve districts with conflicting policies surrounding liquidity provision which has been identified as a contributing factor to bank failures. In 1929 over 80% of people in Mississippi lived in a rural area vs 45% of the general population which illustrates how problematic it can be to generalize the impact of The Great Depression across states.[2]

Understanding the implications of The Great Depression in Mississippi has been an area of interest to scholars due to the uniquely localized business relationships and enduring co-dependency. The bank was undoubtedly a fundamental focal point of the townspeople’s lives with a weekly venture to town being the only alternative to storing cash under a mattress. Credit relationships had a tendency to be local which mitigated the likelihood of moral hazard and adverse selection since long-term relationships decreased the incentive of pursuing short-term gains. However, not all repercussions of localized business relationships were positive as credit rating agencies such as D&B have revealed through their Reference Books (1926-1935) that the highest credit ratings were reserved solely for firms with large net worth’s.[3]

The survival of one small bank; The First National Bank of Oxford, has been regarded as nothing short of a miracle particularly due to its founding only 20 years prior to The Great Depression. Against all odds, FNBO managed to ‘double the balance of its individual depositors’ accounts in the midst of the darkest months of the Great Depression’.[4] Irrefutably, a key factor in the survival of FNBO was the power and influence of small newspapers which contrasts significantly from the easy access to financial information available today. In line with the majority of small towns in Mississippi; there was only one newspaper. The Oxford Eagle was published weekly and displayed quarterly financial statements.[5]  The Eagle played an integral role in calming the citizens of Oxford, preventing bank runs and dictating where civilians were willing to put their trust.

Rescuing FNBO…

FNBO was forced to close in November 1930 directly resulting from their investments in Guaranty Bank & Trust whose failure outraged the Oxford community. The behaviour of Guaranty’s president, J. A. Smallwood, shocked civilians following the emergence of his $75,000 embezzlement charges illustrating the problematic repercussions of co-dependency between Mississippi banks.[6] In response to the undue closing of FNBO and their favourable media portrayal, the community collaborated to rescue the benevolent bank and preserve its legacy. The development of the ‘Love Plan’ entailed depositors exchanging 25% of their deposits for stock in the bank which would transfer ownership to depositors and provide sufficient cash for meeting immediate needs. Subsequently, in 1931, the Oxford Eagle outlined the plan for the remaining 75% of deposits to be gradually unfrozen: 10% within 30 days from the adoption of the plan, 15% within a year, 25% at the end of year two, and the final 25% at the end of year three. Once the majority of depositors had accepted the plan and met the  baseline requirement of holding a minimum of ten dollars in the Bank of Oxford the bank was reopened within five months.

Where is FNBO today?

While the spread of information today may rely on social media and digitization as opposed to newspapers, society still looks to the media in an attempt to attain clarity and transparency surrounding which corporations to trust.

FNBO’s short history indicates that as with the 2007 crisis, survivors of the Great Depression were not dictated by continuity or a rich history. Surviving banks had the capabilities to respond and adapt swiftly to the crisis with community support being the overwhelming advantage for FNBO. Furthermore, the practices of misleading credit ratings and selective credit relationships have been important characteristics of 21st-century financial crises.   

The First National Bank of Oxford’s tale of durability offers an important insight into the nature of the Great Depression in Mississippi and its impact on local communities. The story of FNBO remains a watershed in the history of the Great Depression since no other banks in Oxford were able to endure the hostile financial climate. FNB remains open today and proudly maintains its culture of offering a localized service and participates in a variety of community ventures.

[1] Eric Bostwick, “The Little Bank That Could: An Examination of the Historical and Financial Records of One Bank That Survived The Great Depression”, Accounting Historians Journal (Florida, 2019) p.17.

[2] Nicolas Ziebarth, “Identifying the Effects of Bank Failures from a Natural Experiment in Mississippi during the Great Depression”, American Economic Journal: Macroeconomics (2013) p.86.

[3] Mary Hansen, “Credit Relationships and Business Bankruptcy During the Great Depression”, American Economic Journal: Macroeconomics (2017) p.235.

[4] Eric Bostwick, “The Little Bank That Could: An Examination of the Historical and Financial Records of One Bank That Survived The Great Depression”, Accounting Historians Journal (Florida, 2019) p.17.

[5] Eric Bostwick, “The Little Bank That Could: An Examination of the Historical and Financial Records of One Bank That Survived The Great Depression”, Accounting Historians Journal (Florida, 2019) p.27.

[6] Eric Bostwick, “The Little Bank That Could: An Examination of the Historical and Financial Records of One Bank That Survived The Great Depression”, Accounting Historians Journal (Florida, 2019) p.17.

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Introduction

Hello, welcome to my blog on Financial Institutions 1850-2020. I started this blog to consolidate my understanding of the industry. After studying history at the University of Exeter in the UK, I currently attend business school in Paris where I will shortly be graduating from my masters in International Business. While this blog is a hobby, exploring key financial topics enhances my commercial awareness and proves to be very useful in my post-graduation job hunt.

If you have any feedback or suggestions for future articles please get in touch – I would be very grateful.

Axon Enterprise

This post will briefly explore Axon Enterprises: the global leader in public safety technologies. I became interested in Axon Enterprises in the last year due to their evolving business model (subscription based) and the significant lack of competitors within the industry.

Axon rose to prominence following the development of the Taser electroshock weapons. The core aims of Axon are defined as reducing social conflict through the establishment of a fair & effective justice system. Axon has claimed that they believe they are ‘creating a sustainable and profitable business model while solving society’s most challenging problems’.[1] The financial strategy entails selling the technologies through subscription plans that ‘generate recurring revenue and cash flow and demonstrate leverage as we scale’.[2] Axon is currently split into two main segments: the Taser aspect of the business comprises of the development, manufacturing and sale of conducted energy devices (CEDs). Taser devices were first introduced in 1993 and have since been adopted by the majority of US police departments. The appeal of Taser devices has been mainly attributed to the fact that bullets become less necessary.

The second component of the company is the software and sensors aspect entailing on-officer body and in car cameras (Axon Body and Flex) in combination with ground-breaking cloud-based digital evidence management software. Body cameras have successfully addressed the problem of time consuming report writing by largely eliminating their necessity. The cloud software has had an extreme impact on the industry due to its role in allowing law enforcement to ‘capture, securely store, manage, share and analyze video and other digital evidence’.[3] Furthermore, out of the 69 major metropolitan area police departments in the US, 46 use the Axon network.

Evidently, Axon has seen ongoing success due to their ability to address problems in society otherwise ignored by the public safety industry. The competition environment has also played a key role as Axon have emerged as police departments are extremely attracted to the concept of paying a single fee for tasers, body cameras, and footage analysis to the point that finding several separate providers would be a financial and logistical pain. Competition in the industry is defined by ‘product performance, product features, battery life, product quality and warranty, total cost of ownership, data security, data and information work flows, company reputation and financial strength, and relationships with customers’, all of which Axon is currently thriving in.[4]

One of the main contributors to Axon’s success in recent years has been their effective means of promotion. New products are initially implemented for free to police forces in order to drive growth: ‘when Axon pivoted toward body cameras, it decided to give them away for free, along with one year of access to Evidence.com. Now, such subscriptions come with free upgrades and a free year of Axon Records’.[5] This method of promotion has been very effective for Axon, however, this can lead to profits taking longer to hit the income statement. Nonetheless, this has not prevented Axon from being extremely popular with investors due to the monthly subscription model resulting in a readily available cash flow.

Ultimately, the subscription based business model implemented by Axon is providing them with consistent competitive advantage as it locks clients down into their ecosystem.  

[1] 2019- 10K Annual Filing SEC

[2] 2019- 10K Annual Filing SEC

[3] 2019- 10K Annual Filing SEC

[4] ‘The Top Defence Companies to Watch in 2020’, Baystreet (January, 2020). http://www.baystreet.ca/stockstowatch/7205/The-Top-Defense-Companiesto-Watch-in-2020    

[5] Brian Stoffel, ‘Why You Shouldn’t Pay Too Much Attention to Axon’s 2020 Forecast’, (March, 2020). https://www.fool.com/investing/2020/03/03/whyyou-shouldnt-pay-attention-axons-2020-forecast.aspx

Disney & 21st Century Fox

After nearly two years of anticipation due to a range of problems including regulations and a bidding war with Comcast, Walt Disney Company completed its $71 billion acquisition of 21st Century Fox assets. This post will discuss the merger between Disney & 21st Century Fox, why it was such a huge event and the ongoing discussion surrounding outcomes.

The deal was a gamechanger due to its inclusion of ‘the 104-year-old 20th Century Fox studio, the FX and National Geographic cable networks, and an additional 30 percent of subscription streaming service Hulu (Disney already held a 30 percent stake before the acquisition)’.[1] The importance of the deal has been widely reinforced by various commentators including AdWeek’s Jason Lynch describing it as one of the most “massive transformations” ever seen in the industry and Vox Media claiming “It’s hard to overstate what the closed deal means…in this era of ever-accelerating media consolidation, the implications of this deal are pretty staggering”.[2]

Arguably, one of the most notable criticisms of the merger originated from concerns about a monopoly as the deal contracted the number of significant Hollywood firms from six to five. The consolidation of this power in the industry has generated fears that Disney may be able to drive up prices for its services, have too much power in the box office and be able to dictate what is seen in the media to an unreasonable extent. Disney’s reputation for focussing on big-budget films was widely criticized during the build up to the merger in combination with controversies including the attack on the LA times for ‘the publication’s investigation into the company’s business dealings in its Anaheim, Calif. theme parks, blacklisting LA Times critics out from all screenings of Disney films… and John Lasseter thrived for years in a system that aided his sexual harassment of female employees’.[3]

Beyond the concerns addressed by critics, the merger itself was anything but a smooth transition due to core cultural discrepancies. The differences in corporate cultures are characterized by Fox being generous and Disney being very conservative with their corporate titles. Salary structure was also not in coherence as ‘on average, Fox’s TV executives are paid at least 20% more than their Disney counterparts’.[4] The topic of salary remains a particularly important aspect of the merger in current circumstances due to the recent announcement: ‘shockwaves went through the film and TV community this morning when Disney, one of the biggest media companies in the world, became the first entertainment conglom of that size to implement massive pay cuts related to the ongoing coronavirus pandemic’.[5] The cut was driven by the virus resulting in Hollywood production being shut down, releases on hold and amusement parks closed. CEO Bob Chapek maintained that the cuts will remain in place until there is a substantial recovery in business. This turn of events is noteworthy due to expectations of performance when the deal was initially closed. Onlookers expected the deal to give Disney the capacity to ‘aggressively compete with Netflix, its ever-growing rival’.[6] However, recent unforeseeable circumstances have made that possibility increasingly unlikely.

[1] ‘Mergers & Acquisitions Special Edition: The Disney / Fox Acquisition’, (2019). https://mediaradar.com/blog/disney-fox-acquisition/

[2] ‘Mergers & Acquisitions Special Edition: The Disney / Fox Acquisition’, (2019). https://mediaradar.com/blog/disney-fox-acquisition/

[3] ‘If Disney Buys Fox: The Pros and Cons of the Potential Acquisition’, (2017). https://www.slashfilm.com/disney-buys-fox-pros-and-cons/

[4] Nelliei Andreeva, ‘Disney-Fox TV Exec Structure: Big Titles Galore, Studio Merger Put Off Amid Challenges Blending Corporate Cultures’, (2018). https://deadline.com/2018/10/disney-fox-dealtv-executives-analysis-culture-clash-1202473873

[5] Nellie Andreeva, ‘Disney’s Executive Pay Cut Threatens To Deepen the Divide Between The Two Sides Of The Merged Company’, (2020). https://deadline.com/2020/03/disneys-executive-pay-cutthreatens-deepen-the-divide-between-two-sides-of-merged-coimpany-disney-fox-1202896256/

[6] ‘Mergers & Acquisitions Special Edition: The Disney / Fox Acquisition’, (2019). https://mediaradar.com/blog/disney-fox-acquisition/  

Key Features of the Dot-Com Bubble

This post will briefly touch on three key defining features of the Dot-come bubble that have cropped up repeatedly in my reading and why they have continued to be discussed today. Due to swiftly increasing enthusiasm, the bubble entailed companies being ‘floated with no revenues, and not much of a business plan, and achieving huge valuations. Money was thrown at entrepreneurs like it was going out of fashion’.[1] Although the bubble was of a relatively short duration, the impact was significant as ‘the NASDAQ index today is still only 40% or so of its peak value’.[2] IPOs played a huge role in the Dot-com bubble as they produced returns that dwarfed earlier periods with the Journal of Finance insisting that ‘‘Internet IPOs averaged a stunning 89 percent (median: 57 percent) during 1999 and 2000’.[3]

The case of Amazon has been extensively discussed due to its survival despite finding itself in a dangerous position and the widely held belief that management was poor. The survival has been attributed to a combination of luck, timing and extremely tactical fund raising. The funding move consisted of ‘Ruth Porat, co-head of Morgan Stanley’s global-technology group, advised him to tap into the European market, and so in February, Amazon sold $672 million in convertible bonds to overseas investors’.[4] Analysts insisted that waiting even a few weeks longer to raise the funds would have resulted in Amazon failing alongside other Dot-com disasters including Webvan, Kozmo and Pets.com. Arguably, the survival of Amazon could not be attributed to a diverse product offering as many of the defining features of Amazon that drove their success emerged after the bubble. Amazon Marketplace was launched in November 2000 and Prime in 2005. The survival of Amazon has continued to appear in articles so frequently and continued to attract attention due to the potential to compare it with relevant companies today including Uber and Snap who also attract concern due to mounting losses.

One of the key markers of the Dot-com bubble was the merger between AOL and Time Warner on 10th January 2000 which has been labelled as the peak of the bubble. The motivations behind the merger have been summarized as combining ‘Time Warner’s impressive book, magazine, television and movie production capabilities with AOL’s 30 million Internet subscribers to form the ultimate media empire’.[5] The final terms of the mergers cleared by the FTC entailed AOL shareholders owning 55% of the new company and Time Warner shareholders owning 45%. The failure of the merger has been blamed on a variety of factors including culture and leadership. Fortune published an article claiming that ‘the aggressive and, many said, arrogant AOL people “horrified” the more staid and corporate Time Warner side’.[6] Leadership also came under scrutiny as Levin was blamed by shareholders for ‘allowing Time Warner and its stable old-media assets to be effectively taken over and dragged down by the ailing new-media division’.[7] Following Richard Parsons being selected as replacement, the situation worsened as increasing tensions ensued.

[1] Matthew Lynn, ‘Opinion: Looking back 15 years, three things the dot-com bubble got right’, (2015). https://www.marketwatch.com/story/looking-back-15-years-three-things-the-dot-com-bubble-got-right-2015-01-07

[2] J. Bradford DeLong, A SHORT NOTE ON THE SIZE OF THE DOT-COM BUBBLE, NATIONAL BUREAU OF ECONOMIC RESEARCH (January, 2006). http://www.nber.org/papers/w12011

[3] Alexander Ljungqvist, ‘IPO Pricing in the Dot-Com Bubble’, The Journal of Finance, Vol. 58, No. 2 (Apr., 2003).

[4] Timothy Lee, ‘The little-known deal that saved Amazon from the dot-com crash’, (2017). https://www.vox.com/new-money/2017/4/5/15190650/amazon-jeff-bezos-richest

[5] AOL-Time Warner formed, (2000). https://www.history.com/this-day-in-history/aol-time-warner-formed

[6] Rita Mccgrath, ‘15 years later, lessons from the failed AOL-Time Warner merger’, Fortune (2015). https://fortune.com/2015/01/10/15-years-later-lessons-from-the-failed-aol-time-warner-merger/

[7] AOL-Time Warner formed, (2000). https://www.history.com/this-day-in-history/aol-time-warner-formed

Investing in Africa

This post will briefly touch on the ongoing saga surrounding investment in Africa and particularly recent concerns about the sustainability of rising debt levels. I first became interested specifically in South Africa after reading about the leadership of Cyril Ramaphosa and his attempts to attract FDI.

Zambian economist Dr Dambisa Moyo summarises why Africa’s economy causes so much grief with his claim “the world needs to engage and help solve Africa’s problems, which, sooner rather than later, will become global problems”.[1] Upon receiving investment, key issues outlined in Agenda 2063 will finally be addressed including the push to end wars on the continent, significant developments in infrastructure leading to heightened freedom of movement. While connecting African capitals through a high-speed rail network would, arguably, provide the boost required for Africa’s global trading position, resources are being increasingly used for paying foreign loans. Therefore, the grand plan remains fearfully distant. Another point of concern is poverty levels which the Bill & Melinda Gates Foundation proposes are rising in Africa despite falling globally.[2]

The factors contributing to these dangerous poverty levels are varied and complex. However, recent explanations have focussed on Africa’s notorious debt problems. A substantial proportion of Africa’s debt is incurred through ‘foreign currency dominated Eurobonds issued on international financial markets’ due to the underdeveloped and illiquid nature of African bond markets.[3]  This year, the IMF has accused African countries of being on a Eurobond issuing spree and failing to efficiently evaluate exchange rate risks and realistic costs of repaying debts. This accusation was faced with a variety of responses and outrage. One particularly defensive perspective insists that African countries are paying far too much interest as opposed to over-borrowing. The article suggests that African countries are short-changing themselves by consistently accepting high yield curves closely linked to their poor credit ratings. The reasons for these mistakes are cited as ‘the excessive need to attract investors’ which is forcing African governments to borrow short-term in order to finance long-term projects.[4] As a solution, the critic proposes that African governments should ‘bargain for competitive interest rates and accept only favourable bids’. However, undoubtedly this suggestion is wishful thinking given Africa’s current lack of bargaining power.

The role of ratings in Africa’s mounting issues has been noted by several reporters with further Moody’s rating downgrades expected this year. As opposed to accepting illogical interest rates, Business Tech has attributed the problems in South Africa specifically to factors including the persistent failure to adjust personal income-tax brackets for inflation. A substantial amount of culpability has been landed on South African Finance Minister Tito Mboweni who has failed to convince investors that he has a sensible plan to relieve government debt.[5] His possibilities for improvement have been cited as adjusting ‘capital-gains tax, levies on fuel and luxury goods, excise duties and charges on sugar-sweetened beverages’ and urgently implementing structural reform to resolve GDP.[6]  An additional factor mentioned recurrently in assessments of South Africa’s position is the bailouts of state-owned companies such as Eskom and South African Airways which have relentlessly contributed to government debt and generated further damaged to the low-growth economy.

Despite South Africa’s array of financial shortcomings, this did not prevent the government pointing the finger at Zimbabwe in the last month by telling ZANU PF leader Emmerson Mnangagwa the country is ‘lawless and unsafe for investments’.[7] The accusations stemmed from the suspected manipulation tactics of political leaders and repeated failure to respect investment & trade agreements. South African politician Baleka Mbete has been particularly vocal about this issue and has condemned Zimbabwe’s laws aiming to protect local industries from competition and enforcement of ‘punitive import tariffs and closing out some sectors to foreign competition’.[8] Mbete’s criticisms have been motivated by the potentially detrimental impact these issues will have on the direction of FDI summarised by the claim “we believe that in a highly competitive environment for FDI, these are but a few of the basic conditions that must be upheld at all times. In our view, failure to do so means that investment capital will always look past Zimbabwe to other safer havens”.[9]

In conclusion, the nature of debt and potential for FDI in Africa are topics that are persistently debated and feature regularly in global discussions. Understanding Africa’s economy is challenging due to its multifaceted, complex nature and lack of transparent information available. However, I am eager to learn more about this topic and will be particularly interested in the informal sector. The informal economy operates beyond the bounds of regulation, taxation and social protection making the value of production extremely difficult to decipher. The impact of the sector on the lives of women is particularly noteworthy as it has been described as a poverty trap, ‘concentrating women in low-skill, low-income activities with little prospect of advancement’, a proposition I hope to explore in future posts.[10]  

[1] ‘How Africa hopes to gain from the ‘new scramble’, BBC News (February, 2020). https://www.bbc.com/news/world-africa-51092504

[2]‘How Africa hopes to gain from the ‘new scramble’, BBC News (February, 2020). https://www.bbc.com/news/world-africa-51092504

[3] ‘African countries aren’t borrowing too much, they’re paying too much for debt’, (February, 2020). https://www.ghanaweb.com/GhanaHomePage/africa/African-countries-aren-t-borrowing-too-much-they-re-paying-too-much-for-debt-876379

[4] ‘African countries aren’t borrowing too much, they’re paying too much for debt’, (February, 2020). https://www.ghanaweb.com/GhanaHomePage/africa/African-countries-aren-t-borrowing-too-much-they-re-paying-too-much-for-debt-876379

[5] ‘Mboweni’s budget unlikely to stop South Africa’s march to junk’, (February, 2020). https://businesstech.co.za/news/budget-speech/376277/mbowenis-budget-unlikely-to-stop-south-africas-march-to-junk/

[6] ‘Mboweni’s budget unlikely to stop South Africa’s march to junk’, (February, 2020). https://businesstech.co.za/news/budget-speech/376277/mbowenis-budget-unlikely-to-stop-south-africas-march-to-junk/

[7] ‘South Africa Tells Mnangagwa To His Face: Zimbabwe Is Both Lawless And UnSafe For Investments…’, (February, 2020). https://www.zimeye.net/2020/02/25/south-africa-tells-mnangagwa-to-his-face-zimbabwe-is-both-lawless-and-unsafe-for-investments/

[8] ‘South Africa Tells Mnangagwa To His Face: Zimbabwe Is Both Lawless And UnSafe For Investments…’, (February, 2020). https://www.zimeye.net/2020/02/25/south-africa-tells-mnangagwa-to-his-face-zimbabwe-is-both-lawless-and-unsafe-for-investments/

[9] ‘South Africa Tells Mnangagwa To His Face: Zimbabwe Is Both Lawless And UnSafe For Investments…’, (February, 2020). https://www.zimeye.net/2020/02/25/south-africa-tells-mnangagwa-to-his-face-zimbabwe-is-both-lawless-and-unsafe-for-investments/

[10] ‘How globalisation has informalized African Women’s’ Lives’, (February, 2020). https://www.opendemocracy.net/en/oureconomy/how-globalisation-has-informalized-african-womens-lives/

Mark Carney’s Final Contributions as Governor

Mark Carney’s term as the Governor of the Bank of England is due to expire this March. This post will briefly explore his final thoughts and contributions as governor which have been especially relevant throughout the process of Brexit. Carney is an economist and banker who began his career at Goldman Sachs before joining the Canadian Department of Finance. He assumed his current position after serving as the Governor of the Bank of Canada from 2008 to 2013.

Carney’s contributions on Brexit throughout the past four years have featured persistent warnings of the potentially detrimental impact on the UK economy. These cautions triggered a significant backlash from Brexit activists who accused him of making statements that encouraged continued membership. The prospect of a No-Deal Brexit was particularly concerning to Carney who insisted that large components of the UK economy were severely unprepared. This lack of preparation stemmed from the lack of firm contingency plans in place. Carney’s reservations about Brexit were varied but his main concerns involved the implications of a disorderly Brexit which he feared may extend to a sharp decline in demand for UK assets, ‘depreciating sterling and tightening financial conditions for UK households and businesses through adjustments in equity prices and corporate/bank funding costs’.[1]

Due to these cautions, reports this week of Carney’s optimistic outlook for the UK economy came as a huge surprise. Carney explained his projections to Reuters claiming “in an environment where everything is getting a fresh look, it’s fertile ground for taking a step back and making bigger changes than otherwise might have been made”.[2] Many sources have attributed Carney’s sudden shift to optimism to the reduction of uncertainty as he recently claimed “we are already seeing a rebound in confidence, business confidence and to some extent a firming of consumer confidence’.[3] Economists increasingly associate this confidence boost with higher levels of investment and growth.

Evidently, Carney has a list of economic problems the UK must address in order to become strong and now hopes Brexit will serve as an opportunity for significant improvement. Carney has described the UK’s main economic problem as weak productivity which has the potential to severely inhibit growth in the long-run. The UK productivity crisis has been a recurrent theme for many economists as the output per hour worked, a key driver of economic growth, has been ‘effectively flat-line since 2008’.[4] Structural factors such as weak productivity strain the UK by keeping interest rates low which Carney does not expect to change in the near future.

In addition to productivity concerns, Carney cites the UK’s inadequate infrastructure as significantly limiting to the economy and suggests that higher public investment in infrastructure and higher corporate spending would provide a necessary boost. Arguably, the issue of infrastructure closely links to Boris Johnson’s main priority of addressing regions in the UK which exhibit growth rates vastly inferior to London. He has relentlessly expressed his desire for these parts of the country to ‘level-up’.[5] This week Johnson approved the highly controversial High Speed 2 rail link which may play a key role in the ‘levelling up’ process.

In conclusion, Carney’s continued economic insights have played a key role throughout the process of Brexit and have generated significant discussion. Carney’s successor Andrew Bailey has exhibited noticeably differing views on the impact of Brexit. Bailey’s optimism fuelled his description of Brexit as a “chance to restore the City’s independence” by ditching the ‘Brussels red tape which damages the financial sector … and adapting other regulations to better suit the UK”.[6] Ultimately, Bailey’s prediction of favourable regulation generating a spur in innovation is vastly different from Carney’s contribution. Meanwhile, Carney will continue to assume a central role in the UK economy. He is due to be Boris’ climate change advisor ahead of the upcoming UN climate change summit, an issue he has expressed consistent interested in. Carney first urged companies to be more open about their climate change footprint in 2015 which was ‘years before other central bankers began talking about the subject.’[7]

[1] Angharad Carrick, ‘Now Mark Carney sees a silver lining to Brexit’, City AM (February, 2020). https://www.cityam.com/mark-carney-sees-silver-lining-in-brexit-hit-to-economy/

[2] Angharad Carrick, ‘Now Mark Carney sees a silver lining to Brexit’, City AM (February, 2020). https://www.cityam.com/mark-carney-sees-silver-lining-in-brexit-hit-to-economy/

[3] ‘Highlights: Bank of England’s Carney speaks about Brexit, technology and climate change’, Reuters (February, 2020). https://www.reuters.com/article/us-britain-boe-carney-highlights/highlights-bank-of-englands-carney-speaks-about-brexit-technology-and-climate-change-idUSKBN2080TI

[4] Harry Robertson, ‘Bank of England’s Mark Carney says infrastructure investment needed to boost growth’, City AM (February, 2020). https://www.cityam.com/bank-of-englands-mark-carney-says-infrastructure-investment-needed-to-boost-growth/

[5] Angharad Carrick, ‘Now Mark Carney sees a silver lining to Brexit’, City AM (February, 2020). https://www.cityam.com/mark-carney-sees-silver-lining-in-brexit-hit-to-economy/

[6] ‘New BoE boss Andrew Bailey hails Brexit as a chance to restore the City’s independence’, Daily Mail City & Finance Reporter (February, 2020). https://www.thisismoney.co.uk/money/markets/article-7996861/New-BoE-boss-Andrew-Bailey-hails-Brexit.html

[7] ‘Factbox: Carney’s time at the Bank of England, from Brexit to climate change’, (February, 2020). https://www.reuters.com/article/us-britain-boe-carney-factbox/factbox-carneys-time-at-the-bank-of-england-from-brexit-to-climate-change-idUSKBN2080VQ

5G, T-Mobile & Sprint

On February 11th, the $26.5 billion merger between T-Mobile and Sprint was approved after a lengthy process entailing numerous reservations and antitrust criticisms from the US government. The merger has faced multiple setbacks widely due to public concerns which became particularly severe in 2019 when ten attorneys filed a suit to block the merger as consumers would allegedly face enormous price increases. Supporters of the merger have taken the stance that developments in 5G will generate benefits for society trumping the necessity for discussion of the dangers of horizontal mergers. This post will briefly explore both sides of the argument.

Criticisms

The opposition was inevitable when two companies with substantial market share combine they inherit the freedom to set prices on their own terms, thus, undermining the basic principles of the free market. The main objection to the merger emerged due to dissatisfaction with rising inequality and concerns about the impact the deal could have on the lives of consumers. Throughout history the effects of rising inequality can lead to ‘eroding trust in democratic societies, paving the way for authoritarian and nativist regimes to take root’.[1] The US has fallen under a spotlight as ‘the top 1% of households have doubled their share of the nation’s wealth since 1980’.[2] Activists fear that the increasingly divided society characterized by a lack of trust could lead to political violence, corruption and a severely damaging impact on economic growth. The potential for adverse effects has provoked demands for US authorities to combat the wealth gap by ‘vigorously cracking down on anti-competitive behaviour in the market’.[3] Ani-trust laws were relied on heavily during the 1930s under Franklin Roosevelt which effectively regulated corporations favourably for consumers by prohibiting price-fixing, cartels, bid-rigging and disadvantageous mergers. The telecoms industry is susceptible to particular scrutiny as the sector is already noticeably concentrated, the T-Mobile & Sprint merger will worsen the situation. New York Attorney General Letitia James strongly objects to the ‘megamerger’ and has claimed “reducing the mobile market from four to three will be bad for consumers, bad for workers, and bad for innovation, which is why the states stepped up and led this lawsuit”.[4]

Positive Reception

On the other hand, some responses to the T-Mobile-Sprint merger have been optimistic with Ajit Pai, the chairman of the Federal Communications Commission calling the decision a “big win for consumers.”.[5] Pai is firmly convinced that the deal will ‘help close the digital divide and secure United States leadership in 5G’.[6] While the future of the telecom market is unpredictable, the possibility of 5G services replacing broadband has been used as the principal justification for the merger as the combination of T-Mobile and Sprint could consolidate the 5G network and compete with AT%T and Verizon. The argument strongly pushes the perspective that if 5G improves the lives of consumers and enables faster, more reliable connections, the deal should go ahead. Furthermore, if 5G does take over broadband in the near future, this merger will undeniably be one of many as broadband specific players will lose relevance. Zachs Equity Research summarises the prospects associated with 5G as it may achieve ‘speeds up to five times faster than current LTE in just a few years and reaching as much as 15 times faster by 2024’.[7]

 Wider Implications

The predicated repercussions of 5G development stretch far beyond impacts on broadband functions. Market Watch asserts that 5G will ‘play a major role in the U.S. internet (IoT), data intelligence, TV and driverless vehicles’.[8] Applications of 5G have also been extended to shopping experiences as AT&T has looked into ‘dressing rooms of the future’. Mirrors will be interactive recognizing products being tried on through an RFID tag. Data collected during the mirror experience would then be used to generate personalized adds. AT&T has claimed that a fortified 5G network is essential for facilitating these types of interactions. The innovation would also improve consumer experiences after they have left the store as ‘you can seamlessly collect data such email address, sizes, style preferences, and use it to send targeted offers… imagine opting not to buy a product after trying it on due to a steep price, only to receive an email a few days later letting you know it’s on sale’.[9] The incorporation of video services has also been considered which would provide customers with video assistants as an alternative to salespersons. Arguably, if T-Mobile and Sprint intend to gain a competitive position to compete in the race for enhanced consumer experiences, the merger may be essential.

Conclusion

In conclusion, the merger between T-Mobile and Sprint has been long-anticipated and highly controversial due to the substantial market share they possess in the sector. The merger has been largely connected to the race to 5G and its transformative properties on the lives of consumers which may be particularly impacted in rural America. While certain negative consequences such as the redundancy of stores is an inevitable component of most mergers, several positive impacts have been identified. Ultimately, the suggestion that ‘data plan prices weren’t about to fall before the merger; they were set to climb’ would imply the merger may have been timely.[10]

[1] Christopher Ingraham, ‘Rising Inequality is Destabilizing Democracies Around the World, Warns UN Report’, The Independent (February, 2020). https://www.independent.co.uk/news/world/wealth-income-inequality-global-world-democracyun-report-a9331086.html

[2] Christopher Ingraham, ‘Rising Inequality is Destabilizing Democracies Around the World, Warns UN Report’, The Independent (February, 2020). https://www.independent.co.uk/news/world/wealth-income-inequality-global-world-democracyun-report-a9331086.html

[3] Amitrajeet A. Batabyal, ‘How the T-Mobile-Sprint merger will increase inequality’, San Antonio Express News (February, 2020). https://www.expressnews.com/news/article/How-the-T-MobileSprint-merger-will-increase-15048153.php    

[4] Catherine Thorbecke, ‘Judge approves controversial merger of T-Mobile and Sprint’, ABC News (February, 2020). https://abcnews.go.com/Business/judge-approves-controversial-merger-mobilesprint/story?id=68907780    

[5] Catherine Thorbecke, ‘Judge approves controversial merger of T-Mobile and Sprint’, ABC News (February, 2020). https://abcnews.go.com/Business/judge-approves-controversial-merger-mobilesprint/story?id=68907780   

[6] Catherine Thorbecke, ‘Judge approves controversial merger of T-Mobile and Sprint’, ABC News (February, 2020). https://abcnews.go.com/Business/judge-approves-controversial-merger-mobilesprint/story?id=68907780   

[7] ‘T-Mobile And Sprint Merger Puts Spotlight On 5G For Retail’, Pymnts (February, 2020). https://www.pymnts.com/news/retail/2020/t-mobile-and-sprint-merger-puts-spotlight-on-5gfor-retail/

[8] ‘5G Inside The Merger Of T Mobile And Sprint That Will Accelerate The Performance Of Telecommunications Companies, Such As iQSTEL Inc. IQST’, Market Watch (February, 2020). https://www.marketwatch.com/press-release/5g-inside-the-merger-of-t-mobile-and-sprint-thatwill-accelerate-the-performance-of-tele-communications-companies-such-as-iqstel-inc-otc-iqst2020-02-13   

[9] ‘T-Mobile And Sprint Merger Puts Spotlight On 5G For Retail’, Pymnts (February, 2020). https://www.pymnts.com/news/retail/2020/t-mobile-and-sprint-merger-puts-spotlight-on-5gfor-retail/   

[10] Jeremy Horwitz, ‘Open Letter to the US States: Don’t Appeal the T-Mobile and Sprint Merger’, Venture Beat (February, 2020). https://venturebeat.com/2020/02/12/open-letter-to-u-s-statesdont-appeal-the-t-mobile-and-sprint-merger/

Google’s Acquisition of Fitbit


Fitbit’s initial success has been widely acknowledged due to a variety of factors. After a successful IPO filing and NYSE listing in 2015, the brand’s diverse customer base contributed to product availability in over 100 countries worldwide through channels including ‘39,000 retail stores, retailer websites, Fitbit.com, Fitbit Premium and Fitbit Health Solutions’.[1] Fitbit’s major value proposition derives from studies confirming the products increase physical activity levels of wearers largely due to increased awareness. In 2016, Fitbit ranked 37th out of the 50 most innovative companies of the year. The social aspect of Fitbit’s business model incentivizes users to be more active illustrated by the fact that users take an average of 700 more steps per day when they have friends on the app.[2]

In recent years Fitbit has seen decelerating sales growth and a 50% decline in stocks in 2016. Consequently, Fitbit entered a plan of merger with Google in November 2019. Google will acquire Fitbit for ‘$7.35 per share in cash, valuing us Fitbit a fully diluted equity value of approximately $2.1 billion’.[3] The merger is expected to make progress once regulatory disputes have been addressed. Responses to the acquisition have differed significantly due to Google’s reputation for handling data and main competitor: the Apple Watch.

The Apple Watch

The motivations driving the acquisition have been closely linked to Google’s ongoing quest to thwart Apple’s position as the market leader. Last year the Apple Watch accounted for 46% of smartwatch shipments and did not face the same issues around data privacy and reputation.[4] Therefore, the Fitbit acquisition presents a promising opportunity for Google to strengthen its wearables presence. Arguably, Apple’s established position remains unchallenged due to their remarkable ability to sustain an efficient ecosystem. All services offered by Apple work in synergy prompting consumers to favour iOS over Android. Google’s capacity to compete may depend on their exploitation of Fitbit’s interlinked components including the social platform which facilitates competition between consumers and connect. While Fitbit devices link effectively to the app using Bluetooth, the potential for interconnection is not as sophisticated nor so convenient as the multifaceted ecosystem Apple has assembled.

Regulation

In addition to an inferior ecosystem, Google’s reputation for an insufficient attitude towards data privacy and relentless scrutiny from regulators has proved to be detrimental to acquisition procedures. These regulatory probes have been notably prevalent in the EU where pressure on US tech companies over privacy shortcomings has increased. Google still faces the consequences of 2018 complaints accusing the company of collecting unwarranted data including sexual orientation and political leanings.[5] Inquiries such as these strain the pending acquisition of Fitbit as regulators become increasingly likely to ‘question what the company intends to do with the intimate health and location information the devices track’.[6] Some consumers opposed so strongly to Google’s attitudes to privacy they switched to Apple as soon as rumours of the acquisition emerged.

Healthcare

Despite the inevitable dangers, the acquisition may present a valuable opportunity for Google to restore their damaged reputation due to the benevolent values held by Fitbit and the advantages associated with pursuing progressions in health. Fitbit has pledged its mission to make fitness a fun and empowering journey and possess an extremely inclusive customer base ranging from athletes to parents of all age ranges. Equally, Google’s CEO has expressed his firm beliefs in the company’s potential in the healthcare sector evidenced by Google’s recent efforts to develop artificial intelligence with the ability to ‘automatically analyze MRI scans and other patient data to identify diseases and make predictions aimed at improving outcomes and reducing cost’.[7] From this perspective, Google’s acquisition of Fitbit may serve as an attribute to the company’s perception as serving the health of society.

In conclusion, after nearly 12 years, the end of Fitbit’s independence remains a widely discussed acquisition and point of interest especially in light of Google’s recent regulatory disputes. Furthermore, Fitbit’s disappointing quarterly results indicate the possibility of stock decreasing even further as the acquisition process ensues. Google’s Senior VP of Devices, Rick Osterloh claimed: “we believe technology is at its best when it can fade into the background, assisting you throughout your day whenever you need it”.[8] Arguably, for this to be the case a well-connected ecosystem remains essential and explains Google’s inability to match Apple’s advantage on wearables thus far.

[1] SEC- Fitbit’s 10-Q form November 2019. https://www.sec.gov/ix?doc=/Archives/edgar/data/1447599/000144759919000035/fitbitq3-201910q.htm.

[2] Dan Graziano, ‘Fitbit’s New Software Update Makes Your Tracker More Personal’, (2017). https://www.cnet.com/news/fitbit-software-update-makes-your-tracker-more-personal-ces-2017/

[3] SEC- Fitbit’s 10-Q form November 2019. https://www.sec.gov/ix?doc=/Archives/edgar/data/1447599/000144759919000035/fitbitq3-201910q.htm.

[4] Adam Levy, ‘Google’s Fitbit Acquisition Is All About Apple’, International Business Times (December, 2019). https://www.ibtimes.com/googles-fitbit-acquisition-all-about-apple-2862977

[5] Stephanie Bodoni, ‘Google Faces Privacy Probe in EU Over Location Tracking’, (February, 2020). https://www.pressherald.com/2020/02/04/google-faces-privacy-probe-in-eu-over-location-tracking/.

[6] Stephanie Bodoni, ‘Google Faces Privacy Probe in EU Over Location Tracking’, (February, 2020). https://www.pressherald.com/2020/02/04/google-faces-privacy-probe-in-eu-over-location-tracking/.

[7] Greg Roumeliotis, ‘Google CEO Eyes Major Opportunity in Healthcare’, Reuters (January, 2020). https://www.msn.com/en-ca/money/topstories/google-ceo-eyes-major-opportunityin-healthcare-says-will-protect-privacy/ar-BBZddhi.  

[8] Adam Levy, ‘Google’s Fitbit Acquisition Is All About Apple’, International Business Times (December, 2019). https://www.ibtimes.com/googles-fitbit-acquisition-all-about-apple-2862977.

Was the Amazon – Whole Foods Merger a Success?

On the 15th June 2017, Amazon’s purchase of organic & natural food giant Whole Foods Market was valued at $13.7 billion, $42 per share. Amazon had long-intended to enter the traditional retailing industry and the move was recognized as a game-changer due to its adverse effects on shares of rival grocers alongside a 29% skyrocket in Whole Foods stock. This post will explore the extent to which the merger can be considered a success and whether predictions made in 2017 have become a reality.

Challenges

At the time of the purchase, Whole Foods faced a variety of challenges and had been losing substantial revenue to competitor Kroger. In February 2017, Whole Foods had expressed their plans to close nine stores and lower financial projections for the year due to slowing sales growth and competition. Only months later in April, Whole Foods admitted their sixth consecutive quarter of declining sales which was largely blamed on their high prices and the availability of similar products at a lower cost. Due to the disappointing results, Whole Foods faced ‘dissatisfaction from investors’, a revision of board members and the transferral of significant debt to Amazon.[1] Particularly harsh criticism emerged from activist investor Jana Partners and money manager Neuberger Berman who suggested the necessity for Whole Foods to sell itself. Investors criticized Whole Foods’ poor performance, ‘very expensive real estate and high prices’.[2] These observations were particularly meaningful in light of Amazon’s opposing stance, their focus on affordability and practicality would surely necessitate adapting to a new model.

Predicted Outcomes

Despite the problems associated several positive outcomes of the deal were predicted. The deal was expected to give Whole Foods ‘financial breathing room… improve its supply chain logistics’ and introduce renovation from the technology side.[3] One of the most appealing forecasts for consumers was the potential for a decrease in prices which featured as a notable complaint prior to the takeover. Business Insider suspected ‘customers will enjoy lower prices on products like Whole Trade bananas, organic avocados, organic large brown eggs, organic responsibly farmed salmon and tilapia’.[4] The possibility of investing in additional areas, more efficient merchandising and logistics was expected to enable these price decreases. Forbes projected the introduction of facial recognition, the removal of cashiers due to a shift towards Amazon Go technology and the ambitious expectation of new methods of payment in the form of Amazon’s own currency.[5] However, Amazon spokesman Drew Herdener said: “plans do not include reducing jobs as the result of the deal and that the company does not plan to automate Whole Foods cashiers jobs with Amazon Go technology”.[6]

Outcome

Recent reports of Whole Foods’ progress indicate that the deal’s outcome was not as promising as expected evidenced through a variety of setbacks. Concerns were raised in 2018 when customers expressed outrage at empty shelves which caused an uproar on social media. Business Insider has recently reported more shortages as shoppers ‘in Washington and California have reported a consistent lack of lettuce…other hard-to-find items have included staples like bread and even sugar at some locations’.[7] Even more problematic is the fact that consumers have swiftly blamed Amazon for the organizational and inventory issues with one consumer claiming a manager had informed them that Amazon had pushed for less stock at the back of the store. Allegedly, Amazon’s order-to-shelf system bypasses stock rooms as shelves are stocked ‘directly from delivery trucks, cutting costs and reducing storage and waste’.[8] Bezos received a poor reception following his decision to cut healthcare benefits for part-time employees triggering many customers to switch to Trader Joe’s.[9] In addition to shortages, another contributor to Whole Foods’ recent problems entails their remodelling of the shopping experience. The Philadelphia customers were disappointed with the removal of their Allegro Coffee stop which was replaced with refrigerators and shelving units. Arguably, this move was driven by a need to combat competition alongside a sense of urgency as Amazon Prime promises to have groceries delivered within two hours.[10] While previously distribution warehouses have been outside urban areas, competition is generating the need for well-established supply chains close to customers. These problems raise important questions for Whole Foods. It is increasingly difficult to identify whether Whole Foods are deviating from their core values and user experience, or whether this shift is an inevitable stage in the evolution of retail. The Philadelphia Inquirer supports the latter viewpoint by claiming ‘supermarkets will stop selling anything besides perishable items… to make room for storing those items, supermarkets will start jettisoning more than just cafes’.[11]

Final Thoughts

In conclusion, Whole Foods does not appear to have experienced significant relief from their previous obstacles and consumer satisfaction has certainly not increased dramatically. A point of further confusion to consumers has been Amazon’s recent decision to open a supermarket concept in Irvine which will be their first grocery store. The launch of a supermarket with a completely distinct branding has induced debate regarding Amazon’s intentions with Whole Foods. To summarize, The Mercury News illustrates the impact of the Amazon-Whole Foods deal with the claim ‘if Whole Foods was home-run, they’d be gobbling up other chains, not starting a new one’.[12]

[1] ‘Amazon to buy Whole Foods for $13.7bn’, BBC News (June, 2017). https://www.bbc.com/news/business-40306099

[2] Sarah Whitten, ‘Whole Foods stock rockets 28% on $13.7 billion Amazon takeover deal’, CNBC (June, 2017). https://www.cnbc.com/2017/06/16/amazon-is-buying-whole-foods-in-adeal-valued-at-13-point-7-billion.html

[3] ‘Amazon to buy Whole Foods for $13.7bn’, BBC News (June, 2017). https://www.bbc.com/news/business-40306099

[4] Ashley Lutz, ‘Amazon is officially buying Whole Foods — here’s everything that will change for customers’, Business Insider France (August, 2017). https://www.businessinsider.fr/us/amazon-buys-whole-foods-changes2017-8

[5] Bruno Aziza, ‘Amazon Buys Whole Foods. Now What?’, Forbes (June, 2017). https://www.forbes.com/sites/ciocentral/2017/06/23/amazon-buyswhole-foods-now-what-the-story-behind-the-story/#49594051e898

[6] Jeffrey Dastin, ‘Amazon to buy Whole Foods for $13.7 billion, wielding online might in brick-and-mortar world’, Reuters (June, 2017). https://www.reuters.com/article/us-whole-foods-m-a-amazonidUSKBN1971QJ    

[7] Aly Walansky, ‘Customers are noticing empty shelves at Whole Foods and they aren’t very happy’, Today (January 2020). https://www.today.com/food/customers-are-noticing-empty-shelveswhole-foods-they-aren-t-t172612

[8] Chelsea Cirruzzo, ‘Shoppers Say Two D.C. Whole Foods Are Poorly Stocked. Some Blame Jeff Bezos’, Washington City Paper (January, 2020). https://www.washingtoncitypaper.com/food/article/21111660/shopperssay-two-dc-whole-foods-are-poorly-stocked-some-blame-jeff-bezos

[9] Chelsea Cirruzzo, ‘Shoppers Say Two D.C. Whole Foods Are Poorly Stocked. Some Blame Jeff Bezos’, Washington City Paper (January, 2020). https://www.washingtoncitypaper.com/food/article/21111660/shopperssay-two-dc-whole-foods-are-poorly-stocked-some-blame-jeff-bezos

[10] Inga Saffron, ‘Whole Foods cafes are falling victim to Amazon’s delivery strategy’, The Philadelphia Inquirer (February, 2020). https://www.inquirer.com/columnists/whole-foods-cafe-amazon-deliveryfairmount-philadelphia-inga-saffron-20200211.html    

[11] Inga Saffron, ‘Whole Foods cafes are falling victim to Amazon’s delivery strategy’, The Philadelphia Inquirer (February, 2020). https://www.inquirer.com/columnists/whole-foods-cafe-amazon-deliveryfairmount-philadelphia-inga-saffron-20200211.html   

[12] Jonathan Lansner, ‘Why is Amazon opening non-Whole Foods supermarkets in California?’, The Mercury News (January, 2020). https://www.mercurynews.com/2020/01/30/why-is-amazon-opening-asupermarket-in-irvine/

iRobot’s Leading Position

This post will explore leading global consumer robot company iRobot and how they have managed to maintain a leading industry position for the last 25 years. Award-winning products such as the Roomba Vacuuming and Braava family of mopping robots have contributed to achieving their principal vision of making cleaning more efficient, equipping people with time to accomplish more in their daily lives.

Products

Arguably, iRobot products offer exceptional levels of convenience which have ensured their consistent popularity amongst consumers. The latest models can be controlled hands-free and automatically empty themselves such as the Roomba i7+ which is armed with automatic dirt disposal.[1] Another one of iRobot’s most desirable features is the iAdapt 2.0 technology and vSLAM navigation which enables the robot to keep track of its location resulting in seamless coordination around the home covering all floors. Furthermore, imprint smart mapping uses sensors and cameras to familiarize robots with room layouts. Products are also able to connect to Wi-Fi with the possibility of setting up cleaning schedules through the companion app or using voice control.

Partnerships

Another key driver in iRobot’s strength is the nature of their collaborations with other tech companies boosting the perceived credibility of their technology. iRobot works closely with Amazon resulting in regular sales and all devices have support for Google Assistant and Amazon Alexa. In a press release this January, iRobot announced a new partnership with integration and discovery platform IFTTT which will encourage innovations of the app and move the company closer to their ambitions for a smart home through IFTTT’s pledge to enable ‘more extensive interaction with other devices in the home’.[2] The potential for a future acquisition has become a topic of interest due to the aggressive push from tech giants to develop their smart product ecosystems. The expansion of ecosystems will boost data volumes enabling tech giants to access multiple channels (see article on Fitbit). Markets Insider suspects that tech giants will be attracted to iRobot’s wide database of specifics about consumer’s homes.[3] Since the major tech players are yet to gain exposure to the consumer robotics industry, a substantial bid from a company such as Apple would be unsurprising to many.

Financial Position

iRobot’s positive financial position has contributed to their ability to thwart competition thus far. Last year, iRobot’s revenues increased by 11% due to the launch of new products. New additions ‘The Roomba s9 Series, the Braava jet m6 Series and international sales of the Roomba i7 Series generated 17 per cent of 2019 total revenue’.[4] iRobot has also been granted a patent for an autonomous cat litter cleaner. Recent performance has been equally indicative of a promising future as the most recent financial statements revealed outperformance in the US where international revenue grew 6% to $179.6 million.[5] This information has been especially powerful in light of new market entrant SharkNinja who claims to be a ‘relentless innovator in the housewares industry’ and has a range of impressive vacuums and kitchen appliances.[6] The sustained performance of iRobot despite recent tariffs, fierce competition and their recent call having the ‘highest implied volatility of all equity options today’, indicates that iRobot appears to be set to sustain its leading position in the industry.[7] Interest from major tech players may also contribute to their strong position.

[1] Erica Katherina, ‘Amazon drops great deals on these iRobot Roomba robot vacuums’, Digital Trends (February, 2020). https://www.digitaltrends.com/dtdeals/irobot-roomba-deals-i7plus-960-675amazon/.

[2] Steve Symington, ‘iRobot is Realizing Its Vision for Truly Smart Homes’, The Motley Fool (January, 2020). https://www.fool.com/investing/2020/01/07/irobot-is-realizing-its-vision-fortruly-smart-hom.aspx?source=iedfolrf0000001

[3] Luke Lango, ‘7 Buyout Targets to Watch in 2020’, Markets Insider (January, 2020). https://markets.businessinsider.com/news/stocks/7-buyout-targets-towatch-for-2020-1028793898

[4] Lucia Maffei, ‘iRobot’s longtime CFO to step down just months after COO departure’, Boston Business Journal (February, 2020). https://www.bizjournals.com/boston/news/2020/02/05/irobots-longtime-cfoto-step-down-just-months.html.

[5] Steve Symington, ‘Why iRobot Stocks Soared Today’, The Motley Fool (February, 2020). https://www.fool.com/investing/2020/02/06/why-irobot-stock-soaredtoday.aspx

[6] https://www.sharkninja.com/ourcompany/#vision-growth

[7] Zachs Equity Research, Yahoo Finance, (February, 2020). https://finance.yahoo.com/news/implied-volatility-surging-irobot-irbt151803178.html

Embracing Robo Advisors

While my previous post on innovation within the financial industry considered the vastly differing global attitudes to FinTech broadly, this post will look specifically at Robo Advisors. Customers depend on Robo Advisors for a variety of services varying from chatbots such as Bank of America’s Erica for assistance with basic questions to large digital wealth management companies such as MoneyFarm. Robo Advisors create a portfolio for their clients based on Modern Portfolio Theory and the investment aim, risk tolerance, financial capability and expected return of the client. Once this information has been provided, Robo Advisors closely monitor the portfolio to ensure it maintains optimal asset class weightings.

Advantages

The advantages associated with Robo Advisors are numerous. Robo Advisors commonly allocate assets in equities and domestic blue chips which fluctuate regularly, and government bonds which are far less volatile enabling a consistently balanced portfolio. Johnson identifies tax-loss harvesting using algorithms as another balancing strategy used by Robo Advisors who sell loss securities ‘by offsetting a capital gain liability in a similar security’.[1] In this sense, Robo Advisors possess considerable advantage as traditional brokerage firms attempting rebalancing would generate significant transaction fees due to the time-consuming nature of the methods. Arguably, Robo Advisors provide more transparent cost-structures compared to human advisors who are ‘more prone to misguided, incentive-based compensation schemes’.[2] This links to another perceived benefit of Robo Advisers: the absence of emotion which can be highly influential and potentially inefficient in human advisor relationships. Clients may be suspicious of investments banks’ ulterior motives due to their long-standing reputation for placing the relentless push for capital above the interests of clients. One of the most attractive aspects of Robo Advisors is their accessibility to retail investors who are not discriminated against based on resources. They serve as an ideal solution to inexperienced investors who lack expertise, time or those with lower portfolio values as who may primarily hold exchange-traded funds.  

Disadvantages

While Robo Advisors offer a wider range of investing prospects particularly for investors lacking time for research, they are still limited to specific investment options. Many Robo Advisors do not access more than 12-25 funds and may be unable to invest in closed-end funds, individual stocks, bonds and currencies.[3] This underlines another disadvantage as Robo Advisors rarely beat the market due to their tendency to match market performance and follow an index fund investing strategy. The extent to which Robo Advisors can be described as a personalized service is dubious and has been used as a source of criticism. While investing options are determined by the individual profile of clients, in the event of uncertainty, Robo Advisors are unable to physically meet with clients, provide reassurance and diminish fears by explaining the current situation and market shifts. Consequently, there is a case for a lack of personalization which results in a reluctance to trust Robo Advisors.

Influential Factors

The likelihood of individuals trusting Robo Advisors usually depends on cultural and demographic factors which applies to the acceptance of FinTech in general. Global acceptance rates vary with Robo Advisors being popular in the United States, UK, Canada and Europe but exhibiting low levels of awareness and acceptance in India. This trend could be attributed to the stringent regulatory environment as all advisors must comply with the Securities and Exchange Board of India’s guidelines. While India has a couple of prominent Robo Advisors such as Scripbox, Goalwise and 5Paisa, tech start-ups are rising at a slow rate and the lack of knowledge contributes to a preference for traditional brokerage firms.[4] The Hofstede insights provide compelling evidence for the link between cultural dimensions and the popularity of Robo Advisors. The USA and UK are far more comfortable with uncertainty in comparison with countries such as Portugal potentially due to their high masculinity scores. These insights indicate that countries with high masculinity scores are driven by achievement and success making Robo Advisors an opportunity to compete for financial value. Elements of gender across countries evidently impacts approaches to Robo Advisors, this trend can also be applied on an individual scale. Brenner finds female investors more likely to choose human financial advisors and suggests male investors ‘due to overconfidence in their own financial skills – are less likely to seek financial advice from professionals’.[5] The shifting of responsibility from financial institutions to individual investors has been a widespread point of concern as investment decisions could be detrimental in the absence of sound financial knowledge. Naturally, those lacking sound knowledge are usually the young and inexperienced, yet Robo Advisors are most popular among ‘tech-savvy millennials’ who have insufficient funds for traditional investment advisors but still pursue diversification.

Final Thoughts

In conclusion, responses to Robo Advisors are diverse with many encouraged by the absence of conflicting interests while others are reluctant to place their trust in machines. The environment is unpredictable with Robo Advisor Moola set to close at the end of the month citing slow growth rates and high acquisition costs as the cause.[6] However, the shift towards machine-driven investing strategies has been an enormous success in other cases such as Systematica, the firm relying on quantitative, algorithmic trading. CEO Leda Braga summarises her strategy’s potential with the offer of stability as “When a trader is forced to sell at a loss, he takes that home with him… a black box doesn’t care”.[7]

[1] Jeby Johnson, ‘Robo Advisors: An Innovative Financial Technology for Investment Management’, Our Heritage Journal (2020) p.12.

[2] Lukas Brenner, ‘Robo-Advisors: A Substitute for Human Financial Advice?’, Journal of Behavioural and Experimental Finance (2020) p.1.

[3] Jeby Johnson, ‘Robo Advisors: An Innovative Financial Technology for Investment Management’, Our Heritage Journal (2020) p.14.

[4] Jeby Johnson, ‘Robo Advisors: An Innovative Financial Technology for Investment Management’, Our Heritage Journal (2020) p.15.

[5] Lukas Brenner, ‘Robo-Advisors: A Substitute for Human Financial Advice?’, Journal of Behavioural and Experimental Finance (2020) p.5.

[6] ‘Robo-advisor runs out of Moola and shuts its doors’, https://www.professionaladviser.com/news/4009086/robo-adviser-runs-moola-shuts-doors.

[7] ‘Trading Legends: Leda Braga’, Trader Life – https://traderlife.co.uk/series/trading-legends/trading-legends-leda-braga/.

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