Nov 26, 2014

Apple - Platform Thinking,Network Effects & Valuation

One of the electives that I took while in IIMK was this less fancied course - Complementary Products & Competitive Advantage  . The fundamental message in that course was in applying 'Platform Thinking' concept into a lot of situations . A platform could be thought of as an area where two or more types of consumers / producers join for their mutual benefit.  And the value of the platform grows as more and more consumers / producers join it.  Typical example of this is Card Payment networks - Visa & Mastercard.  So, if you are a card network provider,  merchants are forced to give that as a payment mechanism because consumers want that. And, more consumers joining the platform results in more merchants adopting it.  Like a domino / network effect. If executed well, it soon reaches a tipping point from where more consumers & merchants just adopt it.

This concept could be extended to a lot of situations - Currency is a platform  ( explains dollar's dominance  ) .. Amazon's kindle publishing is a platform..  Facebook is a platform ( you have users & advertisers ) , Airports could be thought of platforms connecting Airlines, Passengers & Retailers.    In a way, it is a kind of thinking that visualizes a business as a convergence point of different types of consumer - producer combinations

If there is a factor that has strongly differentiated Apple from Samsung in the smart-phone / tablet / field, it is internalizing this platform concept into their product strategy. In other words, platform thinking is Apple's competitive advantage. Product design, user experience, marketing strategies  - All can be copied.  But the game is no longer about producing a feature rich / perfect phone . It is all about enriching iPhone / iPad as a platform

This platform is much more than the App-Developing eco-system.  But it all started with it.  Apple took great care in nurturing the App-Developer eco-system.  Its entry barriers & tight quality checks resulted in attracting a well-paying user-base & a talented pool of app-developers adopt it as a platform.  It might be numerically less than the Android App store in terms of Apps or developers or consumers. But quality & experience-wise , I'd say Apple has nurtured it well.

They had a few more platform experiments -  iBooks  , Newsstand , Passbook .. All these are nothing  but interesting variants of platform concept that brought a distinct user-base & producers / sellers towards iPhone / iPad . With the latest entry  - Apple Pay -  I think Apple has virtually killed the competition . True, Samsung has Google Wallet  -  But its not about being first in the market. It is about properly launching it & marketing it to reach that Platform Tipping point from where the platform would itself grow.

The value of iPhone today is not about electronics / features / UI alone.. It is about access to these platforms that it provides you.  And it is this valuation that Corporate Finance often misses
In a networked world, if a company of Apple's size manages to make a 20%+ Jump in Stock in a month or two -  largely on account of the Apple Pay announcement - I've to say that it is being truly successful in internalization & execution of this Platform Strategy

See the Graph Below on Apple's Stock 

I've to say, Carl Icahn is spot-on in asking for share-buy backs. Because present valuations does not account what new platform ingredients can Apple innovate - and the network economy benefits that it can add to the company.

Nov 14, 2014

Brent Crude - An index detached from the fundamentals ?

To Hedge or Not to Hedge - That's the billion dollar question puzzling everyone from industry heads to govt policy makers in the wake of crude oil collapse . Before even attempting to answer that, it may be prudent to to look at the way indices work - and the economics behind it.

What should a market index reflect ?  It should be a consistent & fair representation of the underlying supply & demand. Is that the case behind petro price indices ? Lets look at a few data points first.

Globally, there are two main crude indices  - Brent & WTI . Brent crude index is computed as a mathematical function of spot & future prices of North Sea oil ( Click for details ) . Similarly, WTI or West Texas Intermediate is function of primary crude contracts settled in Cushing, Oklahoma . Both have different Sulphur content, density etc - which means there are different costs to refiners, though the end - market - Consumers is largely the same

For most part of the last 5 years, Brent has been higher than WTI. If you look at the Brent - WTI spread (   ) , you will see a few interesting points. The spread has been highest ( $20+ ) at the peak time of quantitative easing.  Or in other words, loose money often tends to flow into easily accessible commodity markets.  The intermittent spikes have largely coincided with the political flare-ups. And, as of today, the spread stands at $3.09.

Suppliers naturally tend to lean to higher indices as it suits them.  A large portion of oil purchase agreements are ( were ? ) based on Brent. But, is Brent, a fair representation of the market ? Most of the Brent Crude flows to Europe  ( Of late, Russian oil also has a sizable market share there ) . When the market is largely limited to a region,  is it really prudent for a consumer - in say China / India - to strike a contract based on an index that is not really favorable to them ?

The geo-political realities today are much different from the last decade.  ONGC & CNPC - which represent two large consumer nations today have taken stakes in a lot of African / Russian oil fields. And these are driven by large volumes - which dwarf North Sea capacity ( It is depleting as well ) .

What this essentially means is that, in terms of producer - consumer combinations, the oil market has become a bit more fragmented / decentralized . In a decentralized market, centralized indices that predominantly cater to the demand of a region will lose relevance.   Imagine, LIBOR being used as a standard to price securities world-wide.  Using Brent to price crude is in some ways equivalent to that  .  As more and more consumers realize that, a large number of them will move away into different modes of pricing  -  Governments will tend to take stakes in oil fields  ,  Companies will tend to rely on more localized & independent indices .

Another problem with these indices is that it is kind of self-reinforcing. Suppliers strike contracts based on indices - & indices take those contract settlements to recalculate themselves.  It is somewhat debatable as to how quickly the demand signals get reflected in such a mechanism. What gets easily reflected are the speculative positions taken based on external political events.

How can indices stay relevant ?  Can we imagine a world in which a consumer strikes a petrol contract with a next door petrol pump based on XYZ index ? I would say, fuel market will be truly deregulated only on such a day.

Oct 10, 2014

Kailash Satyarthi's Nobel - A slap on the face of mainstream Indian Media & System ?

Like most of the fellow Indians, till 10-Oct-2014, I've never heard of his name.  Nobel prizes are not announced out of thin air. Extensive evaluations are done on the nominations. Even the fact that an Indian was on the shortlist should have made the news, but our media was so bankrupt on information about this personality so that some of them even quoted the wikipedia articles blindly.

This day kind of made me aware how hollow the Indian media system is.  The so called grass-root journalism - even if it is done - rarely gets the deserved attention. To a public which enjoys gossips & cleavage talk much more than anything like this, Indian news channels spit out a continuous stream of that.
All that even the well networked channels like NDTV could do is to trace couple of children saved by him - tell them to narrate their stories.

I took a look at Satyarthi's Wikipedia page as well.  There are 13 'awards & honours' including the Nobel 2014 listed there. But whats striking is that, there is not even a single Indian accolade. So whose fault it is ?  Media's fault in failing to highlight his work ? The Indian system's fault in failing to support people like him ? Or the Indian public's apathy in turning a blind eye towards the social issues ? I think it is a collective failure in which you and me are a part of.

PS:- The important factor in Satyarthi's work is that, its not just about rescuing a child worker -which many can do - It is also about creating an eco-system or enabling environment for the kids to study & develop themselves without ever wanting to go back to the clutches of exploitative employers.

Aug 30, 2014

Uber-mess - Why RBI is right ?

 Reserve Bank of India has kicked up a storm by preventing the use of foreign payment gatways in local transactions.. The first casuality of the move is Uber. Traditional media & social media is up in arms against RBI quickly for killing innovation with archaic laws. Even some of the most learned economists have written against RBI move ( )

In reality, is the RBI really a regulatory villain in this case ?
Here's the link to the original circular

There are three main things that are emphasized in this circular, directly or indirectly

(1) Transctions between two residents of India should be in INR. 
(2) The INR credit card transaction should be acquired by an Indian bank through an Indian payment gateway if the card is issued in India. .I.e, there should not be any forex flow in such transactions.
(3) There should be a two-factor authentication in Card -not - present (CNP ) transactions.

Make no mistake, Uber is a great step forward in terms of convenience.The iphone-app based billing is a true innovation. Taxi cabs across the world is feeling the heat of market disruption resulting in strikes in London , Paris and many more.

From a consumer's perspective, the convenience that Uber brings about is really un-paralleled.
However RBI has multiple responsibilities. Its not a pure consumer rights watch-dog. One of its mandate is to ensure currency stability. While, advocates of free market mechanisms scorn against this role, the reality of India is that your INR exchange rate has a great bearing on inflation. 

And, insisting that the transaction between two residents ( driver and the passenger ) should be entirely in INR is perfectly justified. Why should such a transaction cause a foreign exchange flow ? In Uber- model, the credit card transactions are routed through a gateway in Netherlands, and the payment to the driver comes from a different US / EU bank account. Meaning, in every transaction, there is a foreign exchange inflow or outflow that puts Indian banks at the possible risk of gain/loss depending on the exchange rate fluctuations. Add to that, the settlement risks in CNP's is much higher. Any chargeback claims will additionally result in forex flows.

What I find more disturbing about this model of currency flows is that the state loses its right to tax such transactions. These transactions are not going to hit Uber - India's bank account, and there is no way for the taxation authorities to assess the flows as gateways, banks etc are located abroad.
There's this well known method of tax avoidance in movie industry in India. If you look into the financial statements submitted by actors, production houses etc, you would see that the lead actor/actress was paid, only about say , 1 million INR.  In reality, much of the actual financial transaction takes place in tax havens outside of India. 

To curb volatility in currency markets, it is essential that these forex flows are controlled . To me , the spirit of this ruling is more on forex flows than on two factor authentication.

The point on two factor authentication is more from a consumer protection front to prevent incidents of card cloning and reducing chargebacks. From a systemic perspective, how do you build more faith in the credit card system - by reducing chargebacks and making consumers feel that the card is secure.
Two factor authentication does bring more comfort to that front, at the cost of convenience.

If Uber routes all these transactions through Indian gateways and Indian banks, then the concerns of RBI on forex flows is addressed. The only remaining point would be this consumer protection argument  of two factor control. If adequate auth controls and checks are present at the time of enrolment into this app, then the two factor auth at the time of actual transaction can be done away with .

As I put it initially, this ruling is more about forex flows. On that front, RBI is fully justified.

Jul 12, 2014

A tribute to Oranje - WC 2014

So, yet again Netherlands lost it near to the cup.  This time it was Semi-final..  It wasn't the most magnificent team.. Infact, it was a pale shadow of 2010 team which convincingly beat Brazil , Uruguay and many others before losing to Spain.. Yes Robben is a diver.. Yes RVP was largely absent minded..  But there is something special about the Dutch team that makes me sit glued to the TV every time they take the field.. And they have rarely disappointed me after I started following them from 1994 WC.    

Maybe, its the ability put up a strong fight, maybe its pace of their players starting from Overmars to Robben.. Maybe the forwards like BergKamp to RVP,  or maybe it is the rock solid defensive players like Jap Stam to the unlucky Ron Vlaar..  Or maybe it is the ability to lineup young talents one after other from Ajax & Feynoord football schools... Or may be, even the legacy of Cruyff , Van Basten & Gullit..

Yet again, they will be a good force at Euro '16 at France or WC' 18 @ Russia.. There won't be much more of Robben / RVP.. There will be the new lineup of prodigies like Clasie & Strootman ..

To me, the special factor about this Dutch team was their coach Louis Van Gal with his spot - on substitutions.. Have to say that Manchester United is in safe hands :) ..And as he does, I don't really care about who wins in the third place play-off.. But will watch it !

Jul 8, 2014

Travelogue - Hallstatt

A bit late, but nevertheless, the Austrian experience won't be complete without a post about this wonderful place - Hallstatt.  It is an Alpine lakeside village, about 3 hrs in train from Vienna , followed by a short ferry ride across lake Hallstatt ..

Well, what makes Hallstatt special -  The place is so beautiful that the Chinese have created an artificial Hallstatt . The village is a UNESCO heritage site as well .. I would rather let the pics speak about the place than write about it :)

For more information, you can visit

May 30, 2014

Travelogue - Salzburg

I guess no other city in the world would be driven this much by a single person's legacy . Even after more than 200 years of his death, Salzburg lives & breathes Wolfgang Amadeus Mozart everywhere.  From chocolates & T-shirts to an international foundation,  Mozart's name and spirit is everywhere in Salzburg. It got me thinking -  What percentage of economy of Salzburg is directly or indirectly related to Mozart ?

Historic Old town of Salzburg

Salzach cutting across the old town of Salzburg

Apart from the usual visiting places like Mirabell Gardens and Mozart's house, a short walk from the old town is Salzburg castle.

Situated on top of a hill, the view of Salzach river cutting across Salzburg is really great.

For fans of "sound of music", there is a sound of music tour that takes you various locations in the movie.

A painter painting Salzach & Salzburg

Salzburg markets itself as "Stage of the world" .. And it is true in every sense.  Be it the music and culture festivals or be it the roadside musicians and artists who are trying to eke out a living, Salzburg reserves a special place in its heart for art & artists. This city has touched the lives and careers of lot of modern day musicians and artists

Stage of the World - Stage for everyone

If Vienna is about cultures & intellect,  Salzburg is all about music and art..

The beauty of Salzburg is that it'll make you realize how much you can be at peace with yourself by virtue of music & art .  The city strives to preserve those musical traditions with the same intensity as those days of Mozart.  

May 17, 2014

Travelogue - Vienna

Vienna or 'Wien' as locals call, is a melting pot of cultures. I guess you won't see any other European city with these many people with different Ethnic origins. This is where many political & economic philosophies originated.. Apparently at one point in time Trotsky , Stalin , Tito & Hitler lived in this city quite near to each other.

A good starting point to explore this 'Old Vienna' is Stephansdom or Stephen's Cathedral.. The different streets that originate from this place now sell all the modern brands like Prada , Gucci etc. But perhaps, this is a place ( quite like the Istiklal street in Istanbul, if you have been ) where you should go to feel the heart of this city.

There are a few palaces in this city, the most notable one being Schonbrunn.. A good visit.. but not very spectacular .. I tend to subconsciously benchmark any palace that I see now with Peterhoff &  Hermitage

Schonbrunn Palace

This was built by Habsburgs.  And was under their control till the end of first world war.
Unlike other European dynasties, Habsburgs kept the Church at an arm's length from the state matters.  Vienna is not a city littered with cathedrals. You would see a few here and there. But the erstwhile rulers apparently ensured to a great extent that your faith is not connected too much with the governance that you receive.

I think this attribute of freedom developed the Viennese culture.. Its Cafes, Operas & intermingling of cultures.  And that entropy continues to fuel new and new ideas in various spheres of life.

Sacher Torte ( Viennese Chocolate Cake )
Vienna as a city has got much to offer.. Be it the museums , palaces , cafes or the vibrant night life. There are couple of things that you should do if you are in Vienna..

1 - Walk into one of the numerous cafes in the city and experience the Viennese cafe culture. Quite near to our hotel, there was this place - Cafe Schwarzenberg..  A quintessential Viennese Cafe joint.  You would see that in most tables, everyone is talking something or other in a quite intense way,  yet quite at their own comfort.

2. See an Opera. Vienna state opera is perhaps the most famous, and obviously very crowded concert location.. We opted for another one - Beethovenplatz  .. I'm not a musical person.. Yet this concert kept me involved till the very end.

Town of Melk & Danube - View from the Abbey

River Danube cuts across Vienna. We did a cruise in Danube through the Wachau valley, the place where lot of Austrian wines come from. That trip takes you to the Abbey of Melck , one of the famous monastic sites with a rich history

This is a city where you can spend 4 - 5 days easily to experience it. And finally I did have a bit of regret that we spent just 2 full days here.. And I hope I can come back one day to see and experience all that I feel I've missed

Apr 26, 2014

Travelogue - Dachau

"Arbeit Macht Frei"  ( Work Sets You Free ) ..
Dachau Camp Gate
Engraved in metal on the gate.. You get an eerie feeling as you step inside this area. As you come across various visuals , that eerie feeling transcends into a chill down your spine.. As it dawns on you that you are walking on an area where unspeakable and unimaginable atrocities were committed to mankind, you suddenly realize how privileged you are...

We were in Munich at the fag end of our trip through Austria .. Unlike the remaining attractions in / around Munich, it is a bit difficult to get details of this memorial. It is remarkably absent from the tourist brochures or hotel information booklets.

Inside Museum
Two subway rides & a short bus ride from Munich, you can get to Dachau ( pronounced as Da'hau ) concentration camp memorial.

Next to the gate, a plaque in respect of US 42nd Rainbow Division which liberated this camp is put on a pillar.

Barbed Wire & Courtyard

The moment you step inside, you see a large open ground with couple of buildings on the side, of which one is a museum with stories of the way camp prisoners were treated , history of Nazism & camp and so on.

Exhibits are in three broad categories.. The first one shows you visuals and writings showing the reasons of Nazi movement , war history & camp details..

The second set has got more to do with the way prisoners were treated there. About 400 men stuffed into living quarters to the size of about 50, details on the food , sanitation, treatment of prisoners etc. It also details on the SS hierarchy and the the people in charge at the camp.  To the outside world, these camps were portrayed as re-education camps . A large section of population who lived around the camp had no idea about what really happened at the camp.

Crematorium & Gas Chamber
The final set of exhibits portray details on various prisoners there. Political opponents, prisoners of war, Jews, gypsies , local criminals , homosexuals... practically anyone who was remotely considered a threat to the Nazis were candidates for imprisonment. The museum also displays various writings , letters and all such items that highlight the sheer willpower of survivors .

The fact that the liberators of the camp had a tough time separating dead and alive people speaks a lot about the way in which people lived over here.  They show a documentary highlighting all this as well.

Once you have covered the museum, you can see a few buildings which include living quarters, crematorium , gas chamber etc..

Dachau Concentration Camp Memorial is a good example of the way you should treat history..  Just the facts, without any prejudice or bias.. Explaining the story in its rightful way..

The way Germany has treated its past is something that you need to appreciate.. Different nations which have troubled pasts often tend to suppress or even refuse to acknowledge them.. Admirably, Germany acknowledges the mistakes committed by Nazis, salutes the spirit & courage of former inmates. The atmosphere inside the camp memorial is apologetic to the entire humanity.

Visiting a concentration camp is a life-defining experience. It makes you aware that a lot of basic things that you take for granted were denied to scores of people  who were forced to live a life worse than animals..

( Special credit to Amritha Balasubramanian for the photos :) )

Jan 1, 2014

Inflation in India - Is it driven by easy money ?

Last month,  I was in India for a week. One of the aspects that I couldn't look away from was inflation.. Maybe some of the figures that I quote may seem to be quite normal for resident Indians. However for someone like me, who has moved abroad from 2011 end, there was a marked difference in the level of prices..

Observation 1 - I picked up a tooth paste - some colgate variety - from a reliance fresh outlet. Normally when I pick up any house-hold item like that, I don't pay much attention to the prices individually.. When the bill came, this item had a price tag of 200/- .. Not really sure if Reliance was jacking up the price or Colgate.

Observation 2 - Place : Guruvayur.. A roadside restaurant near the hotel where we stayed.. Price of few items - Masala Dosa (45/-) , Meals (105/-) ..  This is just a normal eatery with minimum facilities.. Inspite of the price range, this place is swarming with people - middle & lower middle class range.

Observation 3 -  Railway station cafetaria - No lunch item priced less than 100/-.

Observation 4 - A prominent political party worker came to collect donation for an upcoming election rally of a National level political reader. As per him no donation less than 500/- will be given a receipt and they don't require it :)

And much more.. In any decent textile shop, most of the items start at 300/- plus.. Any normal purchase of bakery items cost 150 plus.. No manual labourer can be hired at a rate less than 500/- per day..

All this gave me a feeling that there is too much money floating in the economy atleast in certain pockets.. Otherwise, FMCG companies cannot charge such rates and survive.. Roadside hotels cannot  charge that much unless people are willing to pay that high.  Our lose monetary policy has infused such a high amount of liquidity into the system so that people have started losing faith in rupee.

Markets have different ways to react to all this.  In our locality, inspite of the presence of  2 or 3 supermarkets,  there is a  - Nadan Pachakkarichantha - or local market to sell locally grown vegetables and fruits.. And, apparently it is at this place where you get cheapest vegetables.. Not any of the supermarkets.

I heard that in some of the property transactions, people have started using gold instead of cash to negotiate and pay ( can't vouch for the authenticity ) - partly to dodge taxes, partly because there is no guarantee on the value of rupee. It made me recall one of the documentaries that I had seen about the great depression.. The idea conveyed in that is that when currency becomes too weak, alternate items start functioning as currency - or  in extreme cases,  certain elements of economy start following barter system ( Haven't observed such instances so far fortunately )

All this points to the fact that abundant doles , subsidies, loands, pay hikes and all lose monetary elements have rendered rupee much weaker. Not commenting on the political side, however economically we should keep interest rates high to bring sanity to the economy.