Economics and morality of price discrimination in college tuition

It seems that every other day, we see a story of recent college graduates being overwhelmed by massive student loans and limited job prospects.  As a result we see plenty of critics decrying both the universities and the graduates from them for some of the following reasons. This is not an exhaustive list. 

1.) Education itself hasn't changed, but the price has skyrocketed.  

2.) Students have unrealistic expectations of what  4 year college programs will do for them and don't prepare themselves for the practicalities of the job market. (I was told I would learn to make cookies)

3.) They don't choose practical degrees or there are too many people majoring in one or two fields (Capitalism: survive or die, love it or leave it #'Merica).

But that can't be the full extent of the problem.  Not all job markets are equitable for degrees and not everyone's qualifications guarantee them an equivalent job.  Some degrees require a masters/PhD, MBA, CFA, and others don't need graduate degrees at all.  So we have to find a way to make accurate comparisons between different degrees and find a more market-friendly solution.

It's still the same apples, just twice as expensive.

This begs the question of how is what we're learning today, different from or better than what our parents learned  20-30 years ago?  In some of the more job market friendly degrees such as engineering, computer science, or medicine, we can perhaps understand the economic justification behind higher tuition.  Why?  Because these areas have benefited the most from technological growth between say, 1980-2013.  Capabilities and modernization of tasks in the job market mean roughly equitable increases in salary, without considering inflation.  Naturally a university would think that they would want to see a greater return of investment on educating these future infrastructure developers, doctors, and potential startup creators.  After all, where would these men/women be if it weren't for universities.

The same can't be said for other degrees such as those within humanities.  Despite the intellectual value and critical appreciation one could earn from studying in these fields, often times there isn't a whole lot of tangible growth or difference between what a humanities major learns today as compared to 20-30 years ago.  Because salaries and career opportunities in those fields was high and cost of education was low back then, people saw a satisfyingly high return on investment.  Not as high as some of the more technical majors, but enough to justify their passion in art history.  Now the cost of education has risen, the economy has slumped, people are more tech oriented, and thus opportunities are low.  Same apples from 20 years ago, except they've gone a bit too ripe, and they're twice as expensive

What would you say, you [can] do here?  

There's a memorable scene in Office Space in which an employee struggles to tell the consultants what exactly he does for the company.  Needless to say he gets laid off later on, but sadly this is how a lot of companies see college graduates nowadays:  Smart kids, but not necessarily valuable.

This is a big problem.  Universities have either attempted to absolve themselves of responsibility by hiding behind the tag of 'learning institution' or they have advocated a higher level thinking approach by instituting core requirements.  While students aim to learn there, that's not usually the sole purpose for them to take on $40,000+ in debt.  It's not enough for them to see how the chocolate chip cookie evolved and changed over time, they want to learn how to make it.  Should it be a university's obligation to incorporate practical elements such as how to use Excel, Salesforce, PhotoShop, Java, Python, etc or how to get the most out of that cool internship? Or is that entirely the responsibility of the students to make themselves valuable assets?  The truth, as with a lot of things, lies somewhere in between.  It's hard to gauge what students would need since universities can scarcely predict what a student wants, but it will eventually hurt those universities' future returns on investment if students recognize that these 4 year programs don't meet employer expectations anymore at some basic level.

(Continued, see next post)

  

Is Borussia Dortmund a 'Moneyball' Success story?

In the past 3 seasons, Borussia Dortmund has won the Bundesliga title twice, and has consistently gotten the better of traditional German and European powerhouse that is Bayern Munich.  So to followers of  the Bundesliga and die Borussen, it may not come as a surprise that they will be playing in the Champions League final. But to the casual football fan, Borussia Dortmund is like a lesser-known family restaurant that  has received rave reviews on Yelp, a marked change from the ultra-posh fusion restaurant that everyone is used to raving about.

What makes Dortmund different is that they are an example of financial recovery and a "model for the future" as many English pundits have now come to accept, when not 3 years ago, they were bashing Arsenal for doing something similar.  They reached the Champions League semifinals with a starting 11 that cost £29 million to assemble.  The team they beat, Real Madrid, spent close to £400 million on their team.  And let me be the first to tell you that Real Madrid is no slouch when it comes to European play.  Bayern Munich, Borussia's main title rivals, spent massive sums over the past few years to close the gap on Dortmund, and while it has resulted in an emphatic league title, they have only beaten this Dortmund team once.

So can we say Dortmund is the first successful 'Moneyball' story in European football?  In an era where filthy rich owners can sign anyone at will, exploiting indebted clubs during the process, our inclination is to hail Borussia Dortmund as the financially sound team who has found a way to outfox the "big money" clubs.

On one hand, I think it is incredible that within 8 years, Borussia Dortmund went from near bankruptcy to creating one of the best teams in Europe on a budget like the figures above state.  But on the other hand, they weren't so drastically removed from success because of bankruptcy. They never dropped out of the top flight, meaning they had a roughly constant revenue stream, they just had to settle their debts via loans and restructuring.  When they fell into debt, the club's supporters stepped in and bought shares of the club, paving the way for a new model of club ownership and sustainability.  While this left Borussia Dortmund with less money to spend, they were able to assemble a team through the unique scouting networks the Bundesliga has often had.  According to prominent football finance blogger Swiss Ramble, Borussia Dortmund didn't impact their cash flow significantly by the transfer market .  He also points out that Borussia Dortmund had a higher percentage of commercial revenue, meaning that they still had a lot of marketability and popularity, despite their lowly financial status at the time.

Compare that to the original "Moneyball" situation at the Oakland A's. Granted it's a different sport, but the original idea meant that the A's formed a team by using lesser known but much more valuable metrics such as on-base percentage, number of walks earned, etc.  Borussia Dortmund has done what a lot of German clubs do when it comes to assembling a team:  They had a good group of young academy players, found some players for very reasonable prices, and formed a team greater than the sum of its parts.

These concepts seem very foreign to the Premier League, and many Bundesliga clubs have taken pride in their lower ticket prices, fan-ownership, and exciting football.  But I still wouldn't deem Borussia Dortmund's success as Moneyball.  Is it a very smart and well-managed financial turn-around from a failed IPO?  Absolutely, but when it comes to team building, they weren't coerced into forming a team based around statistics and specialized play.  

What the new Premier League TV deal means for EPL's future

The English Premier League signed a new deal with Sky Sports which will take into effect for the 2013-14 campaign.  The new deal will be worth approximately £3 billion  ($4.8 billion), which more than doubles the current deal.  There are other elements as to who has broadcasting rights in the United Kingdom (BT can broadcast 38 games, essentially breaking the BSkyB monopoly) but what's also included is that NBC will now become the primary broadcaster of Premier League games in the United States, rather than ESPN.

So what does this all mean for the Premier League's future?

Well that ultimately depends on what we're talking about. From a global viewership standpoint, we can't expect much to change in terms of accessibility, in fact it will probably improve.  The Premier League is the most watched football league in the world and consistently makes the most money by attracting viewers everywhere.  For the UK, they get more channels to watch their favorite teams, more live games, etc and I would imagine a similar effect for other countries who already have steady EPL viewership going.

What it means for United States viewers though is something different and has to be put into context.  ESPN typically gets the rights to only one game per week, and then a midweek game around once a month.  So that amounts to roughly 45 or 46 games per season.  ESPN got a lot better about distributing their viewership for all teams starting from the 2010-11 season so it wasn't all Manchester United, Arsenal, or Chelsea games being  aired; however, that's a very small sample of the 380 games per year even if we get a roughly even distribution of seeing all 20 teams play.  Fox Soccer, as a dedicated channel, offered a lot more games but there aren't that many viewers who subscribe to Fox Soccer since the game hasn't reached the point where people are willing to pay for sports packages exclusively to watch soccer.  The bundles and sports packages aren't optimal either so the Premier League hasn't fully tapped into the US market.  So the ability for NBC to get these games means more access for everybody since the network isn't under as much pressure to air other sporting events on Saturday(ESPN typically has to juggle college sports with the EPL, and occasionally Nascar)  And it lowers the need for online streaming.  NBC has promised to air more games than ever before on NBC, NBCSports, and NBCSports.com.  Accessibility won't be a problem

What will be a problem for us though is that NBC has a bit of pressure on them to maintain the quality of analysis. For established sports, like football, basketball, and baseball, we really don't care about what the commentators have to say all the time since we already have a solid understanding of what's going on in the game.  But soccer is very subjective and the sport hasn't yet reached the same level of popularity or understanding. (importance of possession, pressing, offside rules,etc.)  ESPN made a smart move in getting Ian Darke and Steve McManaman to cover their games.  Ian Darke was already popular with US viewers after covering the national team at the 2010 World Cup, and McManaman was a former elite player in England and Spain who knew enough about the game to reasonably satisfy knowledgeable soccer fans. Essentially, NBC has to find good commentators who can present the game well, otherwise people could lose interest and the overall growth of the sport could diminish.

Champions League Predictions and Power Rankings

The Champions League Round of 16 is 3/4 of the way through but there are still some important games to be decided.

Borussia Dortmund impressed me the most with their turnaround against Shakhtar Donetsk.  Shakhtar looked a bit sluggish and perhaps since it is the Ukrainian league's off-season, they weren't perhaps ready to play one of Europe's most in-form teams.  A victory was expected but Dortmund dominated the game 3-0, barely allowing Shakhtar a sight of goal

The Manchester United and Real Madrid tie was on a knife's edge, but Real Madrid did what was expected of them when United went down to 10 men.  United put in an admirable display and will feel rightfully aggrieved with the red card, but those have been given before. Real weren't convincing but  The form they've been on recently in all competitions including the consecutive wins over Barcelona makes me think that they're finally hitting the heights of last season and that could put them back among the strong favorites to win  La Decima.  Cristiano Ronaldo has scored 9 goals in the competition and leads everyone.

The other ties went roughly according to plan.  Valencia gave PSG a scare and were the better team for most parts of the game but couldn't get the crucial second goal.  Juventus cruised against Celtic and are quietly establishing themselves as a threatening team in Europe again.

On to this week

Barcelona vs. Milan.  Milan shocked everyone with not only a win but a dominant defensive display as they restricted the space for Barca's midfielders to disrupt their passing rhythm.  As a result Barca ended up passing horizontally with little penetration which is very unlike them.  Barca's form has recently dipped but Milan managed to restrict Barca as a whole team to 1 shot on target.  Messi didn't even have an attempt.  A 2-0 win makes the job much more difficult for Barca who require a 3 goal win to go through and that's no guarantee even in front of a hostile Camp Nou.  I think Milan will get the job done but will lose in the process.  A 2-1 Barca win but Milan go through 3-2 on aggregate.

Bayern Munich vs. Arsenal:  Bayern were the much better team against Arsenal and showed how many ways they can hurt you.  They played mainly on the counter attack against Arsenal but scored 3 away goals at the Emirates. Arsenal have an impossible task on their hands and have to go all out to go for a 3 goal win in Munich (next to impossible given Bayern's defensive record this year).  I think Bayern will get a 2-1 win and advance 5-2 on aggregate.

Schalke vs. Galatasaray: The 1-1 draw in Turkey was a very open game for a first leg but Schalke wasted several opportunities to get the second.  Schalke are primarily a counter-attacking side but I expect them to advance and create more chances at home because Galatasaray have to chase the game.  A 2-0 win on the night.  

Malaga vs. Porto: Malaga were very poor in the first leg in Portugal and Porto deserved to score more; however, Porto only managed 1 goal and the tie is fairly open.  Malaga will need to put Porto's midfielders under pressure as they chase for a goal.  However, this Porto side has a little too much quality for Malaga and I think they'll go through 2-1 on aggregate.

Arsenal FC, Financial Restrictions: Is FFP going to validate their long run strategy?

Arsene Wenger has acquired the title Le Prof, for his overall knowledge and understanding of the game of football.  He is also one of the few football managers who has an economics degree.

Arsenal's early successes (1996-2004) under Wenger largely came due to the fact he was a master at finding arbitrage opportunities.  In addition to preparing tactically for matches, Wenger keyed in on a lot of other smaller metrics like player stamina, sprinting speed, scouting networks, player diets.  With these arbitrage opportunities Wenger was able to make huge profits in the transfer market when his players wanted to leave, and when they stayed, they were a force to be reckoned with. 

However, recent years have seen other teams catch up to Arsenal and overtake them without much resistance.  The big examples are Chelsea and Manchester City, who managed to attract wealthy investors who paid off the clubs debts and thrust them into the highest echelons of English football along with established clubs such as Arsenal and Manchester United.  It was a combination of this, as well as updated expectations by competitors who started implementing similar practices.  More competitive training sessions, more foreign players, a greater use of statistical analysis, etc.

Planning for the Future

Arsenal's board, and particularly Arsene Wenger have come under a lot of fire for their unwillingness to spend.  Whether they have the money to spend on top players and keep up with the Manchester clubs and Chelsea is another issue, and there are literally thousands of articles on the subject.

What I want to talk about is whether Arsenal's financial policy of spend what you earn is sound.  Why wouldn't it be?  Spend what you earn?  You don't need to be a football manager or an economist to know that. 

It looks like Arsenal is treating this as a two-period economic game.  In a nutshell, Arsenal's dominant strategy in the first period will be to save money.  That means do what it takes to keep the revenue stream consistent.  If players want more than what is affordable, then they should leave.  The hope is that in the second period the teams who got ahead of them by paying inflated wages and transfer fees courtesy of a sugar daddy  would be restricted financially or severely hampered by the reality of their debts similar to Leeds United in 2003-04.  

Arsenal seems pretty confident that clubs like Chelsea and Manchester City would be reigned in soon because UEFA's Financial Fair Play rules are set to take effect shortly.  The hope is that clubs would have to spend only what they earned from club revenue alone, otherwise they cannot compete in the Champions League.  Wealthy investors wouldn't be allowed to use their money to buy players at will.  In this environment, Arsenal would be able to financially compete with the richest clubs for players and wages.

Problems with Arsenal's strategy

However there might be a few issues with this.  If this was Arsenal's strategy all along, results wouldn't pan out quite as nicely as they would have hoped. The Financial Fair Play rules are rudimentary and have easy to exploit loopholes.  It's no secret that Manchester City are primarily run by the Abu Dhabi United group who bought them out in 2008, and that FFP would constrain the club's spending.  However, to avoid those restrictions the Abu Dhabi group signed a 350 million pound deal with Etihad Airlines for stadium naming rights and shirt sponsors.  Etihad, however is based in the United Arab Emirates like the Abu Dhabi group so there is some legitimacy concerns.  Since Financial Fair Play cannot sufficiently prove that the investors are still pulling the strings behind the sponsorship deal, Manchester City wouldn't be violating any rules and would still have their investors money to operate under legitimate means.  Likewise Chelsea and other clubs with wealthy investors would get around this easy restriction.  So in this two period game, Arsenal's long run outcome would be identical to what it has been for the past 8 seasons: Profit, but no sustained success. 

Another problem is player power.  Wage demands are higher than ever, no question and in my opinion, this is what Financial Fair Play should be focusing on more rather than limiting clubs' spending potential.  Arsenal's upper bound for wages is Chelsea's lower bound for instance.  Since Financial Fair Play will have a marginal wage effect on Chelsea and Manchester City, they will only let go some of their unused players who would still demand top dollar but wouldn't command any value.  

Positives

Of course, there are some silver linings for Arsenal.  Their stadium debt is considered entirely manageable, so that will free up some additional funding and they have consistently qualified for the Champions League so they can attract top quality players.  I don't think their two period game strategy is wrong, I actually quite admire it.  It's just that they shouldn't pin their hopes on Financial Fair Play as vindication for their short run strategy because it is not the beginning of the second period so to speak.  

Note:  When I mention clubs like Manchester City and Chelsea, I only intend to highlight their financial strategy in comparison to Arsenal.  They are simply examples and there are several equivalent clubs in other leagues such as Zenit St. Petersburg in Russia and Paris Saint-Germain in France.   I do not intend to berate them or trivialize their successes.  I am merely speaking from a strategic and economic sense and how their actions could introduce new variables in planning for the long term.