First Look

November 10, 2009

"Teach Workers about the Perils of Debt," in the November issue of Harvard Business Review, argues persuasively for financial education. And not a moment too soon: In a recent U.S. survey covering knowledge of basic finance, for example, 30 percent answered a question about the concept of compound interest by overestimating the amount of time it takes for debt to double. As Dartmouth professor Annamaria Lusardi and HBS professor Peter Tufano write, "Overall, U.S. households have twice as much debt, by virtually any metric, as they did a generation ago." Companies can help by adding a financial literacy component to employee assistance programs. They can also make it fun. A video game called Celebrity Calamity, created by the nonprofit Doorways to Dreams Fund, of which Tufano is the founder and president, puts users in the role of a celebrity's financial manager and helps them learn about managing credit and debit cards. This week also sees an article by professor Anita Elberse on strategic and marketing issues around music sales ("Bye Bye Bundles: The Unbundling of Music in Digital Channels") and cases on financier J.P. Morgan, shoe and clothing retailer, and speed-dating service HurryDate, among many other publications and cases.
— Martha Lagace

Working Papers

Platform Envelopment (revised)


Due to network effects and switching costs, platform providers often become entrenched. To enter established markets, aspiring providers of new platforms generally must offer revolutionary functionality. We explore a second path to entry that does not rely on Schumpeterian innovation: platform envelopment. By leveraging shared user relationships and common components, one platform provider can move into another's market, combining its own functionality with the target's in a multi-platform bundle. Dominant firms otherwise sheltered from entry by standalone rivals can be vulnerable to an adjacent platform provider's envelopment attack. We develop a taxonomy of envelopment attacks and analyze conditions under which they are likely to succeed.

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Stretching the Inelastic Rubber: Taxation, Welfare and Lobbies in Amazonia, 1870-1910


This paper examines the effect of government intervention via taxation on domestic welfare. A case study of Brazilian market power on rubber markets during the boom years of 1870-1910 shows that the government generated 1.3% of GDP through an export tax on rubber but that it could have generated 4.7% in total, had the government set the tariff at the optimal level. National, regional, and local constraints prevented the government from maximizing regional welfare. In a context of lobbies, government budget maximization may have differed from regional welfare maximization.

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Managing the CEO's Succession: The Challenge Facing Your Board

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Information Content of Insider Trades before and after the Sarbanes-Oxley Act


This paper examines the information content of Form 4 filings under the more timely disclosure regime introduced by Section 403 of the Sarbanes-Oxley Act of 2002 (SOX). Abnormal returns and trading volumes around filings of insider stock purchases are significantly greater after SOX than before. Abnormal trading volumes around filings of insider sales are also greater post-SOX on average, but stock returns are not more negative. However, once controlling for pre-planned transactions, reporting lag, litigation risk, and news following insider trades, I also find a negative association between returns around filings of insider sales and SOX. Overall, the evidence suggests that the prompt public disclosures about insider transactions mandated by the new rule are relevant to the pricing of securities. The results are also consistent with SOX and regulatory actions reducing the incentives to sell ahead of privately known negative news.

Bye Bye Bundles: The Unbundling of Music in Digital Channels


Fueled by digital distribution, unbundling is prevalent in many information industries. What is the effect of this unbundling on sales? And what bundle characteristics drive this effect? I empirically examine these questions in the context of the music industry, using data on weekly digital-track, digital-album, and physical-album sales for all titles released by a sample of over 200 artists. I analyze sales dynamics from January 2005 to April 2007—a period in which the share of unbundled units jumped from roughly one-third to two-thirds of total unit sales. My modeling framework, a system of an "album-sales" and a "song-sales" equation estimated using the seemingly unrelated regression method, explicitly accounts for the interaction between sales for the bundle and its components. I find that revenues decrease significantly as digital downloading becomes more prevalent because consumers switch from buying bundles (albums) to cherry-picking their favorite components (songs) on those bundles. The number of items included in a bundle (a measure of its "objective" value) does not emerge as a significant moderator of this effect. Instead, I find that bundles with items that are more equal in their appeal and bundles offered by producers with a strong reputation suffer less from the negative impact of the shift to mixed bundling in online channels.

What Would Peter Say? The Continuing Relevance of the Drucker Perspective


Teach Workers About the Perils of Debt


Is It Fair to Blame Fair Value Accounting for the Financial Crisis?

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Cases & Course Materials

Digital Chocolate

Linda A. Hill and Alison Berkley Wagonfeld
Harvard Business School Case 410-049

Trip Hawkins founded Digital Chocolate in Silicon Valley in 2003 to develop outstanding games for mobile devices. By 2008, the company had expanded its operations into four countries, and Digital Chocolate was one of the top developers of soloplayer games for standard mobile phones and iPhones. In 2009, Hawkins was eager for Digital Chocolate to start developing new types of mobile games that could be played by multiple players over a period of time. Hawkins wondered how to guide his company into this new area of social gaming without losing any of the tremendous creative momentum the team had built over the previous years.

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Sharon Katz, Edward J. Riedl, and Jessica Deckinger
Harvard Business School Case 110-035

This case illustrates a comprehensive valuation of a firm specializing in the "speed dating" niche of the dating/entertainment industry. The founders of HurryDate, a small, privately held firm, are considering options to fund future growth, including a full or partial sale of the firm. Students must assess the firm's strategy including the key risks and success factors associated with this industry; evaluate basic financial reports; assess the firm's past performance; estimate the firm's future performance; and make recommendations regarding the valuation of the firm. This exercise also highlights the challenges of valuing a small firm, where information and viable comparables are often limited or non-existent.

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Integrated Project Delivery at Autodesk, Inc. (A)

Amy C. Edmondson and Faaiza Rashid
Harvard Business School Case 610-016

Describes Autodesk's engagement in Integrated Project Delivery—a new model of risk management, inter-firm teamwork, and multi-objective (aesthetic, cost, and sustainability) optimization in building projects. In 2008, Autodesk, Inc., the world's largest design software company, decided to engage in Integrated Project Delivery (IPD) for the design and construction of its new Architecture, Engineering, and Construction Solutions (AECS) Group headquarters near Boston. Under IPD, the project's architect, builder, and client (Autodesk) entered a contractual agreement to share all project risks and profits. During the project, however, Autodesk was unsatisfied with the design progress and asked the project team to introduce a three-story atrium in the headquarters' design. Logistically, it was not a good time to make changes as the team had already made significant design progress. The team was also working under a tight budget and delivery deadline. However, the aesthetics would appear to be greatly improved by changing the design. The project's architect and builder had to decide whether accommodating the atrium into the current schedule and work sequencing was an acceptable risk.

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J.P. Morgan

Richard S. Tedlow and David Ruben
Harvard Business School Case 810-052

An account of J.P. Morgan's remarkable career in government, railroad, and industrial finance.

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One South: Investing in Emerging Markets (A)

Nicolas P. Retsinas and Justin Ginsburgh
Harvard Business School Case 210-024

A United States private equity fund, The Saboput Group, must decide whether to invest in a new technology park development in Chennai, India. The case provides the reader with a detailed investment memorandum from the local Indian operating partner, and the reader must review the memo and financial model to make an investment recommendation to Saboput's investment committee.

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Krishna G. Palepu and Liz Kind
Harvard Business School Case 110-024

William Wang, CEO of VIZIO, Inc., was proud of his company's success in providing affordable flat screen TVs. Since its founding in 2002, VIZIO had grown to over $2 billion in revenue and was one of the top three flat panel TV brands, along with Samsung and Sony. Faced with intensifying price pressure from the industry leaders and an unprecedented economic recession, Wang wondered how VIZIO could best sustain its growth and finance its business.

Purchase this case: 2009: Clothing, Customer Service and Company Culture

Frances X. Frei, Robin J. Ely, and Laura Winig
Harvard Business School Case 610-015

On July 17, 2009,, a privately held online retailer of shoes, clothing, and other soft line retail categories, learned that, a $19 billion multinational online retailer, had won its board of directors' approval to offer to merge the two companies. Amazon had been courting Zappos since 2005, hoping a merger would enable Amazon to expand and strengthen its market share in soft line retail categories. While Amazon's interest intrigued Zappos' senior executives, they had not felt the time was right, until now. Amazon's offer—10 million shares of stock (valued at $807 million), $40 million in cash and restricted stock units for Zappos' employees, and a promise that Zappos could operate as an independent subsidiary—was on the table. Zappos' financial advisor, Morgan Stanley, estimated the future equity value of an IPO to be between $650 million and $905 million; this estimate skewed the Amazon offer—at least in financial terms—toward the high end of Zappos' estimated market value. Hsieh and Lin, Zappos' CEO and COO respectively, knew that much of Zappos' growth, and hence its value, had been due to the company's strong culture and obsessive emphasis on customer service. In 2009, they were focusing on the three C's—clothing, customer service, and company culture—the keys to the company's continued growth. Hsieh and Lin had only a few days to consider whether to recommend the merger to Zappos' board at their July 21st meeting.

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