IPL on YouTube

From the FT today

Mr Walk said a recent Indian Premier League cricket series had notched up 55m views on YouTube – more in the US than in India – and it found a market for Bollywood in Estonia by offering Striker, a Bollywood film, either on a pay-per-stream basis or free with advertising support outside India.

I watched the IPL on Willow.tv for $60 for all matches. That sounds like a high hurdle for ad supported YouTube, but it isn’t. To pay $60 for Willow.tv is actually foolish. I paid $60 for the T20 World Cup and watched 15 minutes of cricket (the India-Australia match, if you must know). Granted IPL will be different because you won’t be that wedded to any team that you won’t watch the other matches. But even so, there is the matter of the quality of the video, which is consistent but average.

YouTube being free will attract an audience that could be 100 times larger. The asking average revenue from each viewer therefore is much, much lower. The opportunity for advertising is greatly underleveraged. There were banner ads around the video frame this time from some money transfer service but I’ll bet the inventory was sold super cheap, since those were the only ads I saw. But what about the interleaved ads between overs and during drinks? Why do folks in the US have to see an Indian cellphone ad? All this can add up to much more than what Willow.tv is taking in.

My guess is that IPL will be free next year on YouTube.

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.

Piracy Pulling Down Music Sales

The FT reports that 95% of digital music downloads are illegal. The RIAA has tried many things, including taking college kids to court. Nothing works.

To my mind, piracy of music:

1. Is inversely related to the chances of getting caught, which is very low.
2. Is inversely related to the punishment if caught, which is mild.
3. Is inversely related to the disapproval from friends and family who might know that you are using illegal music. This is almost non-existent.

All of these factors might indicate that piracy can’t be vanquished. But there is something that the music labels could do to start beating it back – reduce the cost of digital music dramatically.

Today the price of a song averages around $1. The marginal cost of delivering the next song is close to zero. So if you were to somehow know what the price to downloads curve might look like, all you would do is to set a price where the product of price and downloads was maximum. But of course, you don’t. Which is why the price of a song is stuck at $1.

I don’t know if any research has been done on this or not. But it seems to me that $1 is just too high a price for a song. At that price, a high school or college student faces the choice of transferring music from his friend for free or paying $40 to get a few albums of a new band that he got interested in. There’s no contest.

You might say that by this logic you can never win against free. You can, if you make it really easy to access and download cheap music from legal sites. If iTunes had song downloads for 10 cents you would convert a large majority of “pirates” to legal downloads.

Obviously, executives in the music industry have a pretty tough choice. First, they may not be able to convince all parties – Apple, artistes – to agree to a dramatically lower price. Doing it for one song doesn’t really work – it won’t change habits. They need to go the Full Monty. That’s a tough sell. Even if they managed to get that far, it is likely that revenue would plummet in the short term before it started rising again. On the other hand, it takes one bad quarter to get you fired.

The leap of faith is that reducing the price per song to a tenth of what it is today can take the share of legal downloads from 5% to 50%. Isn’t it time someone took that chance? After all, things can’t get much worse can they?

Management Consulting in India

A new research paper Management Matters: Evidence from India suggests that the average Indian company can be improved significantly with the help of modern business practices. The study involved offering free consulting to a set of mid sized companies in the textile industry. The companies that availed of the free consulting showed a significant improvement in efficiency, lower inventories and higher profits, after they implemented the recommendations. The paper is long but is an interesting read. Also read Ajay Shah’s take on it.

The first thing to ponder is if Indian business practices are less modern. They may be technologically behind the best in the world and they might suffer on account of the creaky infrastructure that supports them. But is it also true that even in the context that they find themselves in, their business practices leave much to be desired?

The paper implies that this is indeed the case. I tend to agree with its conclusion. This is not to say that there aren’t well managed Indian firms – the research focused on mid-sized family owned businesses. But I think that it is safe to say that like technological innovation, management innovation is largely centered in the western world. A lot of it is applicable even to the Indian context, but it’s penetration is not too deep.

The authors then go on to say that the reason why Indian firms are not well managed is because management is not well informed about modern management techniques. They distrust outsiders and rarely use management consultants and so leave themselves in a low information cocoon. They don’t hire business school grads and there isn’t much mobility within the industry that could disseminate best practices.

One of the recommendations of the authors is that a robust management consulting industry could solve some of these problems. The research was supported and partly financed by a management consulting firm, Accenture. So this conclusion is somewhat self-serving, but not necessarily incorrect because of that.

After employee mobility in the industry, management consulting is perhaps the most successful way of disseminating new business practices. My sense is that Indian companies are not very open to management consulting in general. The cost is perceived to be very high. The change they bring about is thought to be too disruptive. And the improvement in the business, too chancy.

Maybe its management consultants who need to look at themselves to see if they are responsible for the underuse of their services in India.

Google and Free Speech

Google issued a statement alleging that agents acting on behalf of China had tried to hack into certain corporate networks, including Google’s and the Gmail accounts of Chinese dissidents. They also announced that they would no longer censor search results on their Chinese search engine, which is required by Chinese law.

This is pretty important in many ways. Google is willing to give up China as a market in support of free speech. Some commentators have said that they were getting thrashed by Baidu anyway and so there’s not much that they’re giving up. But that is wrong. China is going to be the biggest internet search market in the world in a few years. It is unquestionably important. To even be second in that market could be worth a lot. That Google, a public company, is willing to give that up to hold up a principle, is huge. I can’t immediately recall any sacrifice of this magnitude by a public company for a principle.


Coevolution in Telemarketing

Coevolution in species (predator-prey, for example) is a commonly occurring phenomenon. The same thing, loosely, can apply to many other things like criminal behavior and how it coevolves with law enforcement techniques.

An interesting place where you see coevolution at work is in telemarketing. If you think about it, they are the predator and you are the prey. Their objective is to get you to pick up the phone and then not put it down. Your objective is to not pick up the phone.

Before Caller ID, you were losing the battle. You had to pick up the phone. You didn’t know who was calling.

After Caller ID, it was better, but not if you were prepared to ignore every call except the numbers that you recognized. Also, the telemarketers adapted and started blocking Caller ID. But then you started avoiding calls with no Caller ID. And then they switched back to numbers but no names or innocuous names. And so on.

Then came the National Do Not Call Registry in the US. That tilted the balance decisively in your favour. It still left the non-profits who are exempted from the DNC stipulations. You were still having to walk up to the phone when the local charity called and you didn’t want to donate this year. But then you got that new phone which can read out the name on the Caller ID. And that was that. End of the telemarketing nuisance.

Not quite. Last year I started getting robo calls on my mobile phone from a company selling extended warranties for cars. I pick up most calls to my cellphone, even if I don’t recognize the number. It was very irritating. I actually lodged a complaint with the FTC about these guys. Apparently many others did too. Thankfully its been turned off. The people behind it must have figured that whatever they were doing was worth flirting with FTC for. Or maybe they don’t even live in the US. Who knows.

I still get a moderate number of telemarketing calls. If you are of Indian origin, like me, you may still be getting calls from India. With telecom costs between India and the US dropping sharply in recent years, the call activity is going up as well. We regularly get calls from DirectTV and Airtel. The latter in fact has been calling from a Delhi cell phone to my cell phone (where did they get my mobile number?).

The companies that call from India use Caller IDs in different ways. Some of them send out a US number which I think is a losing strategy (one of them sends out a toll free number). Some of them block Caller ID, which, I believe is a better strategy. With almost no calls from telemarketers in the US, you are probably losing your old aversion of picking up a call with no Caller ID. Or maybe, I have a special situation. A friend of ours we regularly talk to had blocked her Caller ID at one time.

This is known to occur even in predator-prey coevolution where a defence that the prey had developed in response to a certain predatory tactic is lost through the millenia. When the predator evolves the same trait again, the prey has no defence against it.

Callers from India seem to have the ability to put just any old number in the Caller ID. Like say “2222”. Or use an Indian number. I will pick up any call with an Indian number on it. Which is why I get snagged often.

But it doesn’t end at Caller ID and getting you to pick up the phone. Since the dialing out is typically done by a dialer which connects an agent only after you pick up the phone, there is a lag before someone starts speaking at the other end. Most people will realize it’s a telemarketing agency and put the phone down. This must cost a lot in agent time at the other end.

Which probably explains, in a crazy way, the latest Caller ID tactic. Yesterday someone called us. The Caller ID name said “Telemarketer”. We didn’t pick up the phone. But if someone does, you can be sure they want to talk. And it could be the beginning of an honest, trusting relationship.

Wall Street Bonuses are Not the Real Issue

This month the biggest Wall Street companies reported their quarterly earnings. JP Morgan Chase and Goldman Sachs reported bumper earnings, Citgroup and Bank of America, not so good. But if you leave out write downs on debt, everyone had a great quarter in their capital markets businesses. Billions have been budgeted for year end bonuses.

As could be expected, the issue of Wall Street compensation raised its head again. And this time there is the weight of the federal government behind it. Banks that have taken TARP money will see their executive compensation capped. And the Federal Reserve has suggested that all large banks that fall under its jurisdiction will be reviewed on on going basis to ensure that executive bonuses do not produce risk taking behavior that could put the banking system at risk.

There are several memes that get mixed up in any discussion about Wall Street compensation in the media. Add a lot of emotion from a distraught public and it becomes for a tangled mess where the media feeds the furore but there’s no real understanding of the underlying issues. Let’s see if we can parse the issues out.


Insider Trading

Raj Rajaratnam the boss of Galleon, a hedge fund in New York was arrested on Friday for being the mastermind of an insider trading network. That network included people in other hedge funds, private equity funds, consultants and corporate executives – all involved in trading insider information on public companies for profit.

In my four years at Gridstone, I met many hedge funds on sales calls. We offered a research platform with deep data on public companies which should have been of interest to any analyst who invested in public companies based on their fundamentals. But slowly I realized that there were very few in the hedge fund world that actually researched companies to any depth. Most just “traded the news” or were what is called “momentum traders”.

There were reasons for this. Understanding companies requires time and application. At about twenty companies in one or two industries, you start hitting the ceiling of what is possible for one analyst to cover. Hedge funds often don’t have the assets to be able to afford that many analysts.

But I think the real reason is that it is too damned difficult to beat the index just analyzing companies based upon publicly available information. Everyone is seeking an informational edge over the market. Some of this edge is through channel checks and such legal but proprietary sources. Much of it is through rumors – legal but quasi-public. And some of it is through insider information.

Informational edge is a slippery slope at the bottom of which lies insider information – the most alpha-producing informational edge. If you are a high achiever like most hedge fund managers are, and you have profited from proprietary information in the past, it is almost irresistible to cross the line. It doesn’t help that the difference between the difference between a rumor and insider information is only in how the information was procured. A rumor very well could have started its life as insider information. On large caps, placing a bet that is significant for the fund but small enough to escape being noticed is not too difficult. My belief is that insider trading is far more common than what one major bust every few years will make it seem like.

For Raj Rajaratnam and Danielle Chiesi this was about their hedge funds’ performance. But why did Anil Kumar and Rajiv Goel get involved in this? Perhaps the price of admission to invest in Galleon – which was ironically a fund whose performance was based on insider trading – on their tips.

The other irony here is that two of the major players in the insider trading ring are of Indian origin. So is the prosecuting attorney – Preet Bharara – US attorney for the Southern District of New York.

The Water in a Bottle of Water

Bottle of Water, Chichen ItzaGot back from some vacation in the Mayan Riviera (near Cancun, Mexico). Had a lovely time. The structure in the background of the bottle is the amazing step pyramid at Chichen Itza.

In Mexico I encountered a familiar problem with bottled water that I face in India all the time – when you try to open a new bottle, you invariably spill some water. [Update: My experience in India is with Bisleri bottles primarily. A reader points out in the comments that there are other brands that don’t have this problem.]

There are two reasons for why this happens. One, the plastic wall of the bottle is thin. To unscrew the top, you need to grip the bottle hard, which squishes the bottle. When the top unscrews, the bottle is still a squished and the water gushes over. The second reason is that water in the bottle is filled right up to the top which gives no leeway at all when the bottle is squished.

In India and other emerging countries, keeping the costs is not so much about making a higher margin. It is about keeping the prices down so that you can capture a larger market. The food grade plastic used in the bottles is probably the largest variable cost for the bottler. It is no wonder he tries to minimize the amount of plastic per bottle.

That explains the thin plastic walls. And my guess is that it also explains why the water is filled all the way up to the top. The volume of water must be what it says on the bottle – 500 ml. or 1l. By filling the water all the way to the top the bottler can make the bottle just a wee bit smaller and save on the plastic.

The irony is that on account of these cost cutting measures, assuming that everyone spills a little water when opening the bottle for the first time, the consumer net, net, gets less water per rupee and the nuisance of cleaning up the spillage. On the other hand, it spares the earth – the plastics are petroleum products and aren’t biodegradable. Things are never black and white.