Nov 30, 2013

Asset Bubbles ,Kerala Real Estate & Advertising

Robert Shiller, one of the winners of Economics Nobel 2013 defines speculative bubbles as “a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increase.” This attracts “a larger and larger class of investors, who, despite doubts about the real value of the investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement.”

Few years back, from about year 2000 onwards, this trend has been in focus in Kerala. Practically nowhere in the state, you can buy small plots of land at less than a lakh INR per cent. Aided by the easy availability of credit, people have been gobbling up land, villas & flats in every nook and corner.  Lot of people, especially middle class have been clinging on to the moto " Real Estate prices never go down " or " As long as there is black money, real estate cannot go down ".. I find both these arguments really stupid.. If  asset bublbles can form and crash in US, Japan, practically every South East Asian country , & China, there is nothing unique about India or Kerala.

More than that, it is important to understand the market forces to understand the real estate sector. Housing is a primary need. A primary need based demand on real estate cannot easily go down, unless there are structural problems in the society or economy.. However, lot of people bet on real estate as an investment ( after they have a primary unit to stay ). This demand is the root cause of bubble. The problem with this kind of demand is that investors expect it to appreciate. And when the primary demand dries up ( because of the level of prices ), investors tend to lose value..or it ceases to appreciate. This situation is highly unstable when this secondary demand is backed up by easy credit.

So, when does this bubble burst - Here also, I'm a big fan of Shiller . Quoting from his essay "Bubbles  Forever " - One problem with the word bubble is that it creates a mental picture of an expanding soap bubble, which is destined to pop suddenly and irrevocably. But speculative bubbles are not so easily ended; indeed, they may deflate somewhat, as the story changes, and then reflate.

I think the bubble is deflating, the signals are pretty much evident in the advertisements that are coming in the media . If one reads the schemes correctly - Ready to move in flats often means that builder is finding it difficult to sell the units , and he has a huge mortgage to repay - you can  make out these facts himself.  Increased advertisements of villas often mean that they are not selling themselves. Besides this, Kerala has one of the lowest rent to value ratio when it comes to apartments even in Kochi, Trivandrum or Calicut.. Meaning, it is better to rent an apartment than buy it in these places.

So where will the demand shift to ? I think there is a huge pent up demand for afforable housing at entry level.. As well as high end homes with top quality features. The time of fly by night builders and those who construct substandard flats are long gone by. And, no longer should one expect the value of land to appreciate substantially. We are in a high interest rate regime for the foreseeable future. Unless rates come down substantially, the bubble is going to stay in a deflated, not yet burst condition

For more reading

Oct 4, 2013

Is Facebook Doing a location Matching ?

I met an acquaintance of mine a few days back. Usually that person's facebook updates don't come in my news stream. However, couple of inconsequential updates on FB over the last few days from that person ( not 'liked' by anyone, not the most recent one in my stream ) has appeared prominently in my news stream.

 How could facebook give prominence to such an activity in my stream ? My conjencture is that facebook may be doing a location matching . My phone is always connected to net..And, facebook app may have been on as well. I'm supposing that may be true for this particular person as well. So, FB may be doing a location based hypothesis that we have met , and based on that, highlighting the updates more prominently..  Interesting, but kind of creepy.

After seeing this interesting Ted Talk ( ) sometime back, I think we are nearing an age where science fiction  & fantasy in some dimensions atleast gets near reality.

Sep 11, 2013

From Cost to Trust, From Pride to Cost

Advertisements are a great way to sense the economy and industry.. Couple of years back telecom advertisements were all about coverage, sms cost, call cost etc. All the players were competing on call plans, coverage ( remember the vodafone pug ads? ).. Today, it is moving slowly into parameters like trust ( Idea ads )..  The industry matured in such a way that it was pointless to compete more on call or data prices or network coverage. These were taken as granted.  Someone had to breakoff from the usual mode of competition into something else. Airtel tried it first, Idea followed ( what an idea sirjee - i think this was actually a wasteful campaign which did not reinforce or bring about anything new ).. Idea seems to have got its act correctly in the second wave of ads focussed on Trust. And, by far, it has been doing good financially as well

Another sector that is slowly getting into this mode of competing on something intangible is banking. Ads in banking were mostly about interest rates, home loans, atm network and all. I think thats slowly changing. Industry is slowly realizing that there is no point in competing further on these given parameters. Axis has come up with a few ads in those lines from this year beginning.

At the same time, auto sector - going through a severe slowdown - has just switched its gear in opposite direction. Car Ads over the last two three years were all about pride, comfort, brand image and things like that ( remember the Cheverlot Ads ).  Even Tata Nano , the low cost, fuel efficient offering tended to focus more on pride, brand in its campaigns.  Honda Amaze just turned the focus back on cost, mileage in its latest Ad - A clear indication that atleast for the forseeable future, for the passenger car industry its back to basics like cost of owning and running the vehicle

Typically the players who do such well thought switches in their marketing campaigns tend to be the outperformers. And this is one area where typically local players tend to adapt better than multinationals.

It'll be interesting to think about how and when Telecom industry will break out of this 'Trust' mode and  move into something else. Like that, will we ever see Samsung or Apple compete on trust ? Or , is this 'trust' a last resort option when there is nothing else to compete on ?

Sep 7, 2013

Eloping with the Lost Ark

Stephen Elop has been compared with Trojan Horse by the Finnish media for his fire-sale of Nokia to Microsoft..I think that has been a euphimism. The first character that comes to my mind when I think about this last Nokia CEO is Gordon Gekko - the incomparable wall-street icon of evil immortalized by Michael Douglas.. After having done a sale and leaseback of Nokia HQ ( a classic Gekko storyline, if I remember correctly), Elop was left with no other option but to sell it off . To be fair with Elop, i think he lost the plot initially itself when he linked Nokia with windows OS.. That deal was perhaps the most one-sided deal ( favouring Microsoft ) coming from a company that was still in a dominant position in mobile world..

Elop has the unique distinction of taking down Nokia share price by about 65%. When I think about Ballmer, the departing CEO of Microsoft, I can't think of any better example than the following Dilbert cartoon strip ==>

The scale and level of innovations in mobile phone / smart phone devices is kind of plateauing. When innovations are less, acquisitions can yield only economies of scale but not scope. Chasing share-holder value in such an industry by such corporate raiding tactics will inevitably result in an end like
Raiders of the Lost Ark

Jun 8, 2013

Apple, Amazon & The Economics of Price Fixing

There is this interesting case thats going on in US now. It started as US Govt vs Apple. It is now more and more looking like Apple vs Amazon. The key underlying point highlighted by US govt is that Apple forced a change in pricing policy of ebooks which resulted in an increase of prices across the industry.

Circa 2009 December, Amazon ruled the roost in ebook industry with a market share of about 90% - monopolistic by any standards. They had a peculiar pricing policy at that time. Regardless of the book, you would end up paying $9.99 as the price. From Amazon's perspective, it was a clear ploy to capture the market. Obviously, publishers did not like a distributor setting the pricing policy. In other words, it was an unstable monopoly. And such markets are ripe for disruptive innovations.

Enter Steve Jobs with iPad, the wonderful product that has kept me hooked on ever after that. One of the lesser noticed things that Apple did at that time was to enter into a different kind of pricing policy. Jobs' proposition to the publishers was - Price your books at whatever price you want. Just give me a 30% cut on every sale made throiugh iTunes store. But would anyone buy a book through iTunes if it was selling at significantly lower level through the Amazon Kindle store ? Apple had a way to cover up that problem as well. The contract with publishers had this ingenously defined MFN clause . In a nutshell, it meant that the price in Apple iTunes store had to match the lowest price that is offered across any other platform ( read Amazon ) . This had an immediate impact. Amazon's monopoly collapsed. Publishers moved from a distributor driven pricing into an agency or publisher driven pricing. This obviously resulted in higher prices for ebooks. And this is the point on which the entire lawsuit is on. But does US Govt really have a case ?

In economics, there is this concept of Consumer & Producer surplus . Though predominatly explained in the context of quantity based pricing , it is equally applicable in this case as well. A lower price results in more consumer surplus ( or benefit to the consumer. Because in reality, he may be willing to pay higher ) . A higher price results in more producer surplus . Governments typically champion people's cause. And rightfully so in many cases. Because in subsistence related things like drinking water , which people may be willing to pay anything , keeping a low price helps. In a lot of legal & policy making discussions, the cause of consumer surplus is championed and producer surplus is often pictured as a villian. But is that the right way always ?

Producer surplus has a value. It incentivized producers to produce more in terms of quality and quantity. An artificially lower price obfuscates market signals. In the publishing industry context, the artificially low $9.99 prices did not give good signals to the publishers as to whether a book was really doing good in terms of content or price. It was really a barrier to a publisher to know the true taste of a consumer.

Take a look at other industries..

If a medical insurance chain mandates same hospital costs for all hospitals for a unique kind of treatment, as a consumer how would you know which is the best hospital and which one is not ? Identical charges would not foster in quality in treatment. Hospitals giving better quality of treatment would not be able to incentivize doctors or provide better treatment facilities if charges are identical

If a ticketing distributor or Govt mandates same price for tickets from place A to place B for all airlines , how would you know which one is serving you better. Airlines which have a better product offering should be able to charge higher based on the consumer demand. In a regulated pricing regime owing to monopoly of distributor or because of govt regulations, the artificially low pricing leaves passengers under-served

Giving those signals is the real value of producer surplus. It spurs producers to innovate , incentivize and serve consumers better. And I would say, this case against Apple is going collapse like a frail structure of playing cards sooner or later. At worst, for Amazon, this will change as a case against them for abusing the monopoly power in the pre-iPad era to dictate an artificially low pricing.

May 11, 2013

The Farce Called Akshaya Trithiya

To the vast Indian middle class who are always cribbing about the problems of Government , corruption, and much more, if there is a simple service that you can do the nation, just sell your gold..

Why ? Because one of the aspects that you are consistently lamenting is the inflation. And a huge contribution to that is the falling value of rupee which makes the imports costlier, especially fuel, which has a multiplier effect on prices of most consumer goods..One of the most important contributors on rupee fall is our current account deficit ( in simple words, we import more than the export ) .  And one of the main contributors to this is the ever increasing gold imports for domestic consumption.  If you sell your gold, atleast the supply in local market will increase and should bring down the pressure on rupee.

The savvy marketers over the last few years have found a way to tap into the Indian attraction towards the yellow metal by this non-sense called Akshaya Tithiya , which they have extended to a week this year.  And the campaigns have reached such nonsense such as - "Invest in Gold Mutual fund on the auspicious occasion of Akshaya Trithiya"

"It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

- Warren Buffet