February 2010 – 6 am pacific

Kindle Doesn’t Quite Work for Non-Fiction

I’ve come to the clear conclusion that it simply isn’t suited for reading the vast majority of non-fiction. You might not even notice it when you’re doing it, but when you read a non-fiction work like this one, you tend to flick backwards and forwards a lot, skim past the bits you already know about, re-read earlier passages in light of later ones, that sort of thing. And that’s prohibitively difficult with the kindle, which is designed primarily for reading narratives where you start at the beginning and make your way steadily to the end. Truly narrative non-fiction a la Krakauer is fine, but “learn about the crisis” nonfiction just doesn’t lend itself to being read on the kindle at any price. If you’re the kind of person who reads footnotes, you will get very annoyed very quickly with the kindle whenever they start appearing.

I have come to the same conclusion and have started ordering dead tree books when they are non-fiction. Any book where illustrations are important gives you a suboptimal experience on the Kindle. And as Salmon says, skipping chapters or going back and forth is just very difficult in a Kindle.

But this is not inherently a problem with an e-book. It’s just that Kindle hasn’t addressed the issues involved. One is about laying out a book specifically for the Kindle. Today it is laid out for the actual book and that is essentially sucked in for the Kindle. No doubt the variable font settings on the Kindle make this challenging, but the problem can be solved. And with color e-ink displays coming, there shouldn’t be the wide gap between the layout of non-fiction books and their e-book counterparts.

The other issue is with usability. The big question that I don’t have an answer to (but somebody does) is – can an e-ink display have touch capabilities? If it can, the Kindle reader can easily flip back and forth within a book. The experience might be different from a real book, but much better than today’s Kindle.

Europe is Getting Less Secular

The latest flap over halal meat served in a restaurant in France

A French fast food chain’s decision to serve only halal meat in eight restaurants with a strong Muslim clientele has sparked a wave of criticism from politicians decrying the step as unacceptable.

Quick, the restaurant chain, is also not serving any pork products in these restaurants.

Right wing politicians are making hay out of the incident. But to anybody not blinkered by religious prejudice, there is absolutely no logical argument that you can make against Quick’s decision. Quick is free to tailor their product to suit individual or group preferences. Customers who don’t like halal meat, even though it tastes identical, are free to go elsewhere for their meals. Customers who would like pork in their meals could also follow suit.

I would spend a little more time on searching for a grain of logic in the arguments of the critics, but that would be a waste of time. What is clearly happening is that Europe is seeing growing pressure against its secular principles. Switzerland’s minaret ban vote is another case in point. France itself is pretty close to banning the burqa, which I have to admit is not as illogical as the tirade against halal only restaurants, but is fueled largely by political calculations and an anti-minority sentiment.

When jobs are scarce, people turn against immigrants. Most of the Muslims in Europe are immigrants from North Africa or South Asia. Add that to the fact that some people can’t separate terrorists from the religion itself and you have a situation ripe for exploitation by politicians like Jean-Marie Le Pen.

This movie still has a few reels left.

My Son and Asperger’s Syndrome

Autism is in the news. My Name is Khan was released last weekend. The movie takes on some important topics (Asperger’s, religion based profiling). The movie was very average, but any movie with SRK in it is automatically big news.

The other big news is that the American Psychiatric Association has recommended that Asperger’s Syndrome (AS) be dropped from the DSM (Diagnostic and Statistical Manual of Mental Disorders). Asperger’s Syndrome will be subsumed under Autism and will disappear as a separate diagnosis altogether.

The reason for this change, from an op-ed in the New York Times:

The change is welcome, because careful study of people with Asperger’s has demonstrated that the diagnosis is misleading and invalid, and there are clear benefits to understanding autism as one condition that runs along a spectrum.

Several NYT readers have written in, most of them against such a move.

Elsewhere, a new movie about Temple Grandin, an autistic inventor and writer was released by HBO this month.

All in all, a very active month for Autism. Which is good. My son, Naren, has Asperger’s Syndrome. We welcome the light that is being shone on Autism and AS. Autism is not well understood in schools and by the general public. Since the most important deficiencies among Aspies (as they are called) are social deficits, and the incidence of Autism is the highest it has ever been, society benefits from a better understanding of Autism.

In the US today, 1 out of 150 kids get a diagnosis of Autism. That is a very high incidence of a disorder of any kind. In fact, there is some thinking that the genetic traits that are responsible for Autism are far more widespread than we think. In many people, the compulsive need to create order is actually a symptom of a muted Autism trait. Tyler Cowen an economist has a book out which is partly about the need for Autistics to impose order on a disorderly world. The question arises as to how Autism traits could be so widespread in the face of evolution and natural selection. The answer, some people suspect, is that in some ways Autistic traits can offer benefits and therefore increase evolutionary “fitness”.

Undeniably, there are many talented and famous people who, it is thought, were Autistic. Albert Einstein and Emily Dickinson, for instance. Vernon Smith, a Nobel prize winner in Economics, considers himself to be autistic. A five minute interview of Smith on CNBC is here.

That Autistic children can be talented is not something I need convincing about. My son Naren was identified very early as a GATE student (gifted program in California). In eighth grade, while he was having all his problems at school, he was still pulling straight As in his Honors courses. He writes with clarity and maturity [the link was wrong. fixed now]. And he is a talented musician. He plays the piano, the trumpet and the guitar and has composed four delightful pieces for the piano. Here’s one.

Harpsichord Hero

We are so proud of Naren’s achievements. But Naren also has problems. Like most autistic children, he doesn’t automatically learn the norms of social interaction. He stands out in a group of children. His interests – music, DC comics, manga – are deep and narrow. He has no interest in sports. It’s tough for him to make friends.

In middle school, Naren also started showing behavior problems. Teenage and Asperger’s didn’t mix well for him. Many things now frustrate and anger him. Last year he started having anger outbursts. The problem grew to where the school district didn’t think he could continue in mainstream education. We disagreed and are negotiating for the placement we think he deserves.

We know Naren will get better and be successful. He is of course, getting the inputs he needs – doctor, therapy, group work and a lot of love and support from his family. But most importantly, Naren himself, really wants to get better.

Till very recently, we never got a definitive diagnosis of AS from any doctor. Naren’s AS is typical in many ways, and atypical in others. But now, a clear AS diagnosis from both his doctor and neuropsychologist is actually a relief. That is the power of a category, or a label. Naren can now be told that he is an Aspie. He and we can now relate his condition to thousands of other Aspies. We are now part of the AS community. The resources – treatments, therapies, books, online support – available to AS kids are now available to Naren. As a descriptor – Autism is just too broad and fuzzy. On the other hand, Asperger’s is a single word that gets you very much in the neighbourhood of where Naren is.

Which is why we will keep calling it Asperger’s regardless of what they do with the DSM. I suspect most people with AS will too. People want to identify with a group with shared characteristics, which is why the group is formed in the first place. If those characteristics are shared weakly, the strength of the group identity weakens too.

We took Naren to see MNIK. In the first 15 minutes he said “I’m not like him at all.” But at the end of the movie he said “This was the best movie I have ever seen. It was all about me.”

Is Offshore Services a Scale Business

Earlier this week I wondered why Indian Offshore Services companies weren’t “bulking up” – basically acquiring companies just like themselves – just smaller and with perhaps lower P/Es.

A reader left a thoughtful comment :

I guess one of the common reasons for M&A (to add bulk) is to achieve economies of scale. Indian IT outsourcing is services business. In services industry, (compared to manufacturing industry) the economies of scale flatten out relatively fast. The profit/revenue per employee for a 10,000 employee company may not necessarily be better than a company with 5000 employees. After all its all about humans, not machines.
So a large company (Infy,Wipro etc) doesn’t gain much by acquiring a smaller size company. Their own brand name is already so powerful, that they don’t need much help in that department.

The comment makes a lot of sense and it would be hard to disagree with the fact that the IT Services does not have the economies of scale that a steel manufacturer does (ergo, Mittal acquiring every company in sight). But there are important economies of scale at the top of the range. Let me explain.

If you look at the financial metrics of an IT Services company, it is almost entirely a variable cost business. Both capital intensity (capital investment required to produce a unit of revenue) and fixed costs are low.

Also, IT Services revenue tends to be sticky. Especially, if the revenue is of the kind that “runs the company” rather than “changes the company”.

So you have an industry where you can get into business with very little capital. You breakeven fast because the fixed costs are low. And the revenue you have is relatively immune to competition. Which explains why you have so many small companies in the industry.

But you also have giants in the industry – IBM, Accenture, Infosys, TCS. There must be something that makes the giants grow faster than the guys at the bottom of the range.

There are indeed. Some things like Overheads and Sales costs could both be more efficient (lower % of revenue) and more effective (cover more industries, more countries in the world) with size. But these aren’t that major factors. The important one is the economies of scale related to branding.

Outsourcing large scale IT or BPO, more often than not, comes down to a matter of trust. A C level executive at a Fortune 1000 company is making a huge bet that can make or break his career and perhaps even a few quarters for the company. And while a part of that trust is derived from the service provider’s representatives working on the deal. A big part of it comes from that intangible – the brand.

And when it comes to branding, size matters. It’s not just that you can spend much more on advertising if you are bigger (like IBM or Accenture). Your brand automatically benefits from your larger presence. You have more client references (who have hopefully had good experiences with you). The analysts know you, the deal consultants know you. You are public. You are in the news. You are automatically on every short list.

Branding also matters at the other end of the value chain – in hiring. Employees like to join large established companies and will often forgo a higher paying job at a smaller company. (Silicon Valley may be the one exception to the rule and even here, things have changed). So Infosys is basically getting the cream of the crop at a lower cost than their competitors. Is that worth a few points on the margin? You bet.

Here’s the nub. There are several companies around $1B that are well run companies, but they run the risk of becoming marginalized, of losing the mindshare game to the big guys. In a market where growth may be harder to come by, they will have to compete harder against bigger brands, if they want to keep shareholders happy. Inorganic growth (acquisitions) can be one plank of your strategy in such companies. Obviously, it can’t be the only thing you’re doing.

That said, gaining economies of scale is not the only reason to bulk up. It has to make financial sense. Relative stock valuations, cash on the balance sheet – those are the table stakes.

An Unsmart Phone and an iPad

My relationship with my phone is at a nadir. As I explained in an earlier post I had to get an Android phone because I use Google Voice which Apple refuses to allow into the iPhone app store.

I got an HTC Hero on Sprint. It looked good and had great reviews. But it is in general underwhelming. And as a phone its close to a disaster.

When someone calls me, they call me on my Google Voice number. Google then routes the call to my cellphone. For some reason, there is a big delay between when someone calling me starts hearing the phone ring at their end, and when it actually starts ringing on my cellphone. This delay is negligible when GV is forwarded to my land line. If I forward it to my wife’s Verizon phone, the delay is a bit longer but still OK. On Sprint the delay is so long that my phone rings for only 10 seconds before it goes into voice mail. Sprint technical support can’t solve the problem. So basically I miss calls when the phone is anywhere but in my pocket and even then, I have to be quick.

Anyway, sorry I subjected you to my tale of woe. I am hoping someone from Sprint or Google will pick up on this and do something about it. I may be locked into a two year contract but I still have my free speech!

That’s not the only problem with the phone. It is seriously underpowered. Performance is like molasses. The calendar sucks and I’m not willing to get one from the Android marketplace unless it is great and doesn’t require me giving my Google credentials to a third party. And there are dozens of UI problems.

Plus there are a set of problems which are problems with the whole smart phone category. I regularly hit the wrong keys on the phone dialer. I still haven’t gotten used to typing out emails or messages on the keyboard. And while I like the fact that my Google Reader goes with me wherever I go, the font is just too small to read for any length of time.

So, as I was thinking hateful thoughts about my phone today a thought occurred to me. What I really need is a regular, unsmart phone and an iPad. Move all the intelligence to the iPad and have a sturdy, single purpose, idiot proof phone that is small, cheap and works great.

Something to think about. Just for a moment, before I go back to hating my HTC Hero on Sprint.

Employees Vote Apotheker Out of SAP

There are several interesting things about the change of guard at SAP. That Leo Apotheker resigned, (or his contract was not renewed) is hardly unique. But for the Chairman Hasso Plattner, to actually apologize to customers, and take some of the blame himself, is refreshing. From the Financial Times,

“Unfortunately SAP has made a few legal and technical mistakes, especially in Germany,” the billionaire co-founder of the 27-year-old software maker said. “This is nothing that can be put into Léo’s shoes. We have made a mistake . . . I was personally involved in decisions about the maintenance fees.”

Then there’s the new organization structure with two co-CEOs. I think much will be made of this but the reality is that neither of them will be the boss – Plattner will. He owns more than 10% of the company, is its Chairman and has two co-CEOs. He won’t be sailing much in the near future.

But the most important takeaway for me was this:

Mr Apotheker had lost the supervisory board’s confidence after an employee survey highlighted dissatisfaction in SAP’s top management.

Only 50 per cent of employees gave a vote of confidence in the executive board.

Am I understanding this right? That Leo Apotheker lost the confidence of the employees of SAP and was shown the door because of that? That would be a shocking development, if it didn’t actually make a lot of sense.

Employees are stakeholders in the company. In fact their stakes are driven much deeper than shareholders who can just sell the stock and be done with it. Employees at SAP also happen to know what’s going on. SAP’s challenges are probably very well understood by employees – a shrinking market for big ticket ERP software, the threat of SaaS and competing with Oracle. If the Supervisory Board (like the BoD in the US or India) doesn’t have its ear to the ground, at least they have the sense to get feedback from the employees.

Would this work in other companies? It wouldn’t work in Walmart, for example. Employees’ own interests there are largely in conflict with the company’s interests. Also, individual Walmart employees wouldn’t have a sense of the broad sweep of what’s happening across the retail market.

But there certainly are many companies in the technology and financial services industries where an employee survey could reveal a lot. If shareholder democracy isn’t taking a hold, maybe we should try employee democracy. But please, no unions.

Offshore Services: Whither Consolidation?

In the last 18 months the markets took a deep dive and then recovered. Valuations in the Offshore Services industry yo-yoed, business prospects sank and then recovered. Yet amidst all this, the pace of acquisitions didn’t go up much. Apart from the Satyam acquisition by Tech Mahindra, deals have been small and infrequent.

The question is why? From the industry structure it would seem like the Offshore Services industry is ripe for consolidation. It has a few major companies that have scale, geographical and service breadth and brand names both in the market and the talent pool – companies like Infosys, TCS, Wipro, Genpact, Cognizant. And then you have companies distributed across the revenue spectrum. There are mid-sized companies, small companies and tiny companies. Shouldn’t the market be consolidating?

Not necessarily. First there is the timing issue. Valuations are back to being on the high side – which makes the buyer skittish. More importantly, growth is back. When the industry is growing, sellers don’t see a reason to sell. The companies that are growing don’t want to sell because they think they’ll get a better price next year.

But is growth evenly distributed in this recovery? It doesn’t seem so. I haven’t looked at the data, but my sense is that recovery of growth has been spotty for smaller companies. Which should mean that larger companies with a high P/E should be happy to bulk up with, but that isn’t happening.

I think the reason is the quality of revenue. Acquiring companies are looking at quality of revenue – acquisitions that bring them geographic penetration, domain expertise or a wider service footprint. And because these acquisitions are complementary the companies being acquired can be quite different from the acquiring company. Company culture, business operations, core skills may be different enough that the acquiring company is afraid of biting off too much. Which is why the acquisitions are small. “Pearls in a necklace” as Wipro has called it in the past.

But a scalar acquisition strategy – basically bulking up – can make a lot of financial sense. If you are a well managed company with a P/E that is higher than the industry, an active acquisition strategy can make sense.

First, if you can negotiate a price for the target that is somewhere at or below your P/E, you are already looking good.

Second, acquiring a company with a similar business, has fewer integration risks.

Third, this industry, even though it has low entry barriers, is a business of scale. Visibility, brand, lower sales costs and overheads – all come from scale.

I think the Satyam acquisition is going to be a big test case. If the merged operations of Tech Mahindra and Satyam are successful as a single company, it will prove that large acquisitions can work and can work financially, if the price is right. As growth in the industry slows down, especially for undifferentiated mid-size companies, acquisitions should pick up pace.

Money Begets Power Begets Money

Larry Lessig calls campaign fund-raising another form of corruption. It is interesting that in India if it were possible to get special interests to lawfully contribute to the campaign funds of politicians and not their own private accounts, we would probably declare victory against political corruption.

But, if you leave aside the fact that one is pernicious but lawful (the US) and the other is illegal and pernicious, there is little to choose between the two forms of corruption. The Indian version enriches the politician and his family. The primary use of that money is to fight elections (where the funds are used to buy mixer-grinders for the electorate, not TV ads). Money therefore becomes the means to stay in power.

In the US, it is the other way around. Campaign funds are used to fight elections. Once you win there are other legal ways to make money. Like through your spouses.

Ultimately, money and power are both means to ends and ends in of themselves. Whether special interests provide money to the politician or his campaign fund, they corrupt government and weaken democracy.

Corrupt Congress

Larry Lessig has an important article in The Nation about how campaign fund-raising has corrupted Congress.

This is corruption. Not the corruption of bribes, or of any other crime known to Title 18 of the US Code. Instead, it is a corruption of the faith Americans have in this core institution of our democracy. The vast majority of Americans believe money buys results in Congress (88 percent in a recent California poll). And whether that belief is true or not, the damage is the same. The democracy is feigned. A feigned democracy breeds cynicism. Cynicism leads to disengagement. Disengagement leaves the fox guarding the henhouse.

Read the whole article. You’ll hear a lot about this in the coming weeks (I fervently hope).

Here’s where you can sign the petition to Change Congress.

Sena Mobocracy

As the Shiv Sena stokes the fires of communalism, parochialism and other uglisms, Shahrukh Khan remains unfazed.

Siddharth Varadarajan writes

When confronted by the mob power of the Shiv Sena, MNS or other right-wing groups, the police in India invariably give in to their demands, no matter how irrational or unreasonable, and force the targets of their illegal pressure to give up their rights. So art galleries anywhere in India think once, twice and a hundred times before exhibiting a single painting by M.F. Hussain, movie hall owners agonise over whether to show ‘controversial’ films or not, screenplay writers and movie directors allow politicians, pundits, granthis and maulvis to vet their projects before they are launched, scholarly works of history are banned because their contents do not conform with the cherished hagiography of some group or sect, writers like Taslima Nasrin are hounded out of the country by mobs who claim to have been offended by books they have never read, shops fear to stock Valentine cards because of threats by self-appointed guardians of morality and ‘Indian culture’.

To me this is a law and order issue. Regardless of whether the protesters are right or wrong, if they go from protesting to rioting and arson, the police must act swiftly and decisively.

In India this is not as simple an issue as it might seem like. There are too many people, typically unemployed youth, who will gladly participate in a riot for the money. If the risk of being injured in a lathi charge goes up, all that will change is the asking rate for a rioter.

But letting the rioters destroy public and private property is just not an option. It subverts our freedoms and creates an alternate extra-governmental power center. Don’t feed the beast.