Odd-Even : Fortnightly Release for Dilliwallas

Just the other day one more 'innovative initiative' was announced by our Yugpurush. Christened as odd-even scheme, it was proclaimed highly successful (successful part is debatable). Now again he is back with the same scheme and there are debates running on every damn news channel around its pros and cons. Of course after much shouting and cross charges debates were inconclusive as is always the case. However one thing stuck me quite strongly and my grey cells became active. What was quite prominent is the limelight AAP has hogged because of this idea. This topic since highly contentious will be debated to maximum and it will always give prime time space to AAP without any expenditure. Mind it, with elections in Punjab next year, any publicity (good or bad) is welcome. In fact Yugpurush already had got international recognition and appreciation for implementing this in January.

One more innovation in this 'innovative initiative' is that scheme make a comeback every 15 days. Had it been implemented without break, this topic would have died its natural death. But with this uniqueness, same reel can be played over and over every fortnight. So much so that our 'party with a difference' will continue to appear on front page providing ample bread and butter to so many media houses. Just to add some spice, AAP is already paying 'kickbacks' in white money with a planned allocation of 500 crores at taxpayer's expense. Interesting to note is that not many print or news media have annual revenue > 500 crores. So AAP is a prime customer always getting positive coverage.

Now coming to idea itself. I would call it a completely absurd and rubbish. Those who do not agree with me should go back in time and present their views on forced sterilization led by Sanjay Gandhi. Whether it was 1976 or 2016, you cannot force such ideas in a democracy. Also it borders on 'Divide and Rule' policy. By including only the petrol/diesel cars, with so many exemptions and if I add those who already have multiple vehicles to bypass this scheme, it might leave me not even with 10% (even 5% would be expansive estimate) of the population and that will comprise mainly middle class. From the highlights of survey in favor of re-implementation - 80% want the plan back on roads. You can do the maths.

One big assumption which this idea is that Dilliwallas do not go for car-pooling. This idea will force everyone to scout for car pools and that will be the biggest benefit. However, I can still recall, 15-20 years back, my Dad was car pooling because of parking problems in his Old Delhi. I was car pooling while going to my office in Gurgaon. For the families where both husband/wife are working, they mainly use one car. Now they might buy another one as EMIs will be cheaper than paying for a cab. Delhi by itself has loads of businessman that travel throughout everyday and for those whom time is money, they will not wait for public transport etc.

So I doubt Yugpurush will deliver any benefit other than troubling that small minority whose votes anyways will not come to him because of his frequent drama. And he seem to be biggest beneficiary, putting him on path to replace 'Pappu' as challenger for biggest post. On a lighter note, it will be interesting to see some FB/Twitter posts from Delhi cabinet using cycles to reach  office in this not-so enormous heat - more so in month of May, June or rainy July and August.

SpiceJet waging interesting battle

So again SpiceJet has come back with super sale, that too for travel as early as next month. It made sense when such offer was launched initially. But now every other day there is a super sale offer that I am tempted to equate it with road-side sales which run throughout the year. The mode for them is simple - put the price tag to an exorbitant amount and then offer discount to tempt the buyer. Simply put, Airline fares are probably only 20% cheaper in these super sale. They appear much cheaper as fare is artificially inflated during non-sale period. During last one year, the aviation fuel has not got any costlier. Though it was costliest in Sep 2013 when it crossed the last peak of August 2008 for the first time, the price has remained subdued in last year on account of global price movement. As projected by Airlines, aviation fuel constitutes close to 50% of running costs, so there is no genuine reason for airlines to increase price by 30% during non-sale season of off-peak season.

I did mentioned earlier that such discounts do make sense at end of the year as it makes balance sheet healthy and gives access to easy cash. However discounts everyday and even for period till Oct next year smells bad. For Indigo which is probably only airline in black, it has been a catch-up game as it is a market leader and is planning to come-up with an IPO soon. It simply cannot afford to loose any market share to SpiceJet as it will have impact on its valuations. Though such strategy might not bode well if IPO is delayed as the revenues will take a hit with such discounted fares for immediate travel (of course for trips beyond 4-5 months, I can bet its a good strategy).

But what of SpiceJet which has reported losses in excess of Rs 1000 cr in last fiscal. It is in hard need of cash to run operations. To keep the flag high, it is selling tickets till October 2015, more than a year later. It is a fool's guess if someone will buy a ticket for next October, but whatever small percentage it manages to sell, it still brings in liquidity. It will be difficult for it to sustain operations with such discounted fares and I am afraid it is going Kingfisher way. Just scared with the thought if this airline gets grounded or taken over in near future.

SpiceJet must be hoping that with economy reviving, people will start flying again and that will help it tide over this crisis. But it is hoping against hope. Since the slowdown of 2008 that led to travel freeze in most companies, people have learnt to work though audio and video conferencing. With economy reviving, this trend is not going to reverse as now even any infrastructure is not needed for video conferencing. In addition to downturn in Business Travel, baggage allowance restrictions turned away the family traveler. Cheap tickets for foreign destinations and new domestic airlines is not helping either. Recent incidents with airlines made matters worse.

So what this means is that SpiceJet is overburdened with over capacity. When everyone is offering discount, it is probably to lure passenger from other segment, but it is surely not a planned strategy or work of cartel. With all airlines offering discounts in response confirms the fact that supply is more and it is more of action and reaction.  Hoping for an revival in flying habits of passengers might hit them below the belt. Such frequent discounts is only going to harm the sector as a whole and someone should put in serious thoughts that working like a frenzied strategist. Probably some of my EPGP mates can help these guys ;).

Cloud - What it might mean for laptops?

One Device Fits All

Few years back if someone would have told me that we will see the end of laptop soon, I would have laughed at it. Laptop can be considered a natural descendent to desktop in terms of innovation. As laptop started providing more storage and RAM, and that too by occupying very little space, Desktop computer became thing of past. From big desktop machines to heavy laptops to light weight machines -they just kept on getting lighter and better. Next level of innovation was flexi screens, probably rollable screens as well. Laptop designers kept on doing away with once considered necessities like CD Drive, huge storage space etc all result of technical innovations like pen drive or portable hard disk. Continuous innovation did managed to impress the old timers like me who has grown up booting desktop through 4" floppy drive. However Gen 'Y' who is growing up on smartphones is giving it a miss. They are so used to working with smartphones that I doubt they will ever need laptop for their work.

I wrote an article few months back that this generational shift and preference for tabets and phablets will break WINTEL 'cartel' (if I may say). Little did I realized that this erosion is faster than I anticipated leading to its death and number of new technological breakthroughs are contributing big time. Key among them is evolution of Cloud. Everyone keeps on talking about it, but once its full potential is realized, I would not hesitate in chucking laptop on the ground. The biggest challenge for any cloud computing solution is reliability, security and speed. Even though I am a fan of dropbox, google drive etc but that is only to ensure availability of documents anytime, anywhere. I still have thick client installed and keep a local copy. The simple reason is ease of use and updating.

If technological breakthroughs are to go by, these challenges with Cloud computing will disappear very soon. Private clouds are the solution to security and cloud providers are investing heavily to pacify nerves here. Fibre optics have led to speeds unimaginable only couple of years back. A normal retail customer can get speed in excess of 15 MBps (in India) and in excess of 100MBps in matured markets which makes it indifferential to access data on cloud. The network connections are getting more and more reliable with 24*7 access QoS. Telcos are investing heavily to augment cloud computing and are coming up with special offerings for this solution which will make market more mature. With cloud access through Internet, it does away with need of VPN too.

If we take away the storage feature, there is very little ground left for smartphones to cover. Available RAM has already crossed 2GB and storage has already reached 64GB. Of course it is in high-end smartphone, but laptop does not come cheap either. In the excitement to make laptops lighter, one of the thing was to remove the burden of excess storage and providing it over cloud. That actually became its bane. If I can get a smartphone which has a port to connect to a screen and a keyboard, I would not require a laptop. And I don't think that day is quite far.

So what does it exactly mean? In simple terms, laptop could be thing of past. Users are comfortable with one device rather than carrying multiple devices performing similar functions. With dwindling user base, there would not be money to invest in innovations and it will be stucked at this level itself. No doubt, laptop manufacturers like Dell and Lenovo has seen the writing on the wall and are trying their hand at smartphones. It will be very sad to see a marvelous product dying but that's the crux of innovations and it will not be wrong to say that laptop has scored self-goal by pushing cloud computing forward!!!

Disruptive Innovation leading to Convergence of Services

Couple of days back, read about a bunch of students from Bangalore offering free calling services. The catch is that users will have to listen to advertisements during the conversation. At onset my reaction was like 'what the heck',  I don't want any silly advertisement to disrupt my conversation. But the response to this service has been phenomenal, more than 4 lakh calls within 5 days of beta testing. On similar lines, in January, Micromax launched a app on its smart phones to reward users for watching ads and similar scheme was launched by Tata DoCoMo where free airtime was offered. There are many such variations being launched where users get freebies for simply watching advertisements.

This got my grey cells ticking. Who could be the users of such services, who would not mind small disruptions for the sake of talking free. Of course not those people who are always pressed for time and won't mind shelling extra pennies to save the time. Had it been 5 years back, these innovations could have targeted college going crowd. But with calling rates already at the floor and with numerous free options available like voice chats, whatsapp, viber etc., it makes no sense. To me, it looks like these strategies are searching fortune at the bottom of pyramid.

So is there a pattern or trend which is emerging? Though some sort of targeting was seen earlier when companies provided free billboards to shop owners, but it never benefited actual customer which we are seeing now. People are getting those services free which they have always assumed to be paid. No one would have imagined that they would get to make free calls or would get paid to watch advertisement. On the other extreme we see emergence of paid services which were always assumed to be free. Gone are the days of free broadcast by Doordarshan when advertisers used to fund the content. People are now paying to watch TV and even going to the extent of paying more for On-Demand channels or ad free channels.

So what should we call it. To me it seems more like convergence of services to target specific segments. One section getting paid for watching advertisement while the other paying extra to get rid of commercials. Both the target segment is different. And the type of commercials will be different. So you can expect those free services targeting poorest socio-economic group or a shade higher. Ads will be more like for products like Nirma, Wheel, soaps, Re 1 shampoos etc. I am expecting, we will soon see this disruptive innovation in number of other areas like transport where one can travel free or cinema halls screening movies free while generating revenues through advertisements. On the whole, it makes a win-win situation as everyone, from advertisers to customers, will be benefiting from this convergence!!!

Economics of Advance Booking of Airline Tickets

Starting December, the airlines ticket prices started going up. It was understandable considering that holiday season is the best chance to make some profits and demand outstrips the supply. What was surprising that the price of tickets for non-holiday season also displayed increasing fares. Bangalore-Delhi round trip which used to cost 9k-11k with 15-30 days advance booking, was costing 15k for month of February. Now suddenly we see 30-day advance booking fares reduced to as low as Rs 8000 for round trip Bangalore-Delhi. It seems to be a great deal which ideally should not be missed and that is why everyone is gung-ho about this scheme. But what is the benefit in this for airlines and on the surface it does seem that airlines will be making a loss with such schemes when they are already bleeding(?).


First of all, such schemes are being launched close to the financial year end. This scheme brings huge cash to the airlines and also make their cash flow statements a bit healthy. The revenue is still considered unrecognized and shown as liability in Balance Sheet till the time customer take a flight, but if it is cancelled with such revenue recognized the previous year and only balance is shown as unrecognized (same scheme was launched last year). Minimum of 40% of this revenue will stay with the company as that is the cancellation fees for tickets, if all customers decide to cancel their tickets. It can be assumed that now started, these schemes will come every year as otherwise operating cash flow will take a hit.

Economics of it: Lets consider the Delhi-Bangalore sector. Regular advance fare on this sector are Rs 4500-Rs 4900. During this scheme, the tickets are priced at Rs 3900. If the cost of capital for airlines is 16%, averaging for an half year to keep it simple @8%, airlines would have paid Rs 312 as interest to get this revenue. Since no one is sure of plans 6 months in advance, lets say 15% of tickets are cancelled and 15% are schedule changes. It brings in additional Rs 474 (Rs 1580 as cancellation/change charges). Airlines do consider these cancellation/schedule changes and overbook factor @20% brings in additional Rs 780. In total, a seat which is being sold as Rs 3900 is actually bringing in Rs 5446 as revenue to airlines companies. This is much better than the regular advance fares which used to be sold at Rs 4500-Rs4800. It is actually a good strategy.

So does this mean are we being cheated? Not exactly, because it is working more like insurance, as you do get cheap fare if you actually take the flight. For travelers, cost of capital is not more than 8%, which averages to Rs 156 for 6 months. So your total cost for flight is only Rs 4050. The only catch is premium for this insurance is very high. It would be a good entrepreneur opportunity for someone to start such exciting insurance schemes. However, airlines have resorted to gimmicks to make this scheme attractive. Like artificially inflating advance fares by 20-30% a month earlier. There has been no recent developments to justify this rise.

But is that reason to complain. I do not think so, as it still works in benefit of customer. In addition, this adds to load factor of airlines and brings in some new customers. Not to ignore huge sum of cash as revenue and not borrowings, that makes their life easier. To me, it is more like a win-win combination and those gimmicks can be termed nothing but Corporate Strategy!!!

Why I think WINTEL is under pressure

For last many years, Microsoft and Intel have sort of monopoly in the PC (laptop and desktop) despite markets being allowed freely competitive. This kind of monopoly in a consumer industry is rarely seen. Few years back, Unix was gaining popularity, Java-based applications were on a roll and it seemed that Microsoft is under attack. Hard-core developers are still fans of Unix OS. But over last couple of years, I have experienced that Microsoft has come up with large integrated suite of applications with tons of features that makes it easier to work with its operating system. I am not considering iOS as it caters to niche segment and has its own share of limited supporters. In micro-processor space, Intel hardly faced any challenge from any chip manufacturer. In terms of performance, AMD is way behind Intel. Market leadership and monopoly of these two leading companies is popularly known as WINTEL.

So what can go wrong? There is no indication of any competition surfacing even in distant future for these two companies. So why I feel that they would soon be under threat or they would be under fire soon? In my view, they are under pressure from a category which was not perceived as a threat initially and that can change the complexion of the game. Tablet and Smartphones are getting popular day-by-day. The sales are increasing exponentially for these products while for PCs (laptop and desktop), it has been negative in 2013. It is expected that in 2014, the sales for smartphones and tablets will be more than PCs. According to a research report by IDC, by 2017 87% of the connected devices will be smartphones and tablets with only 13% accounted by PCs.

The latest report by Cisco mentioned that there will be more than 3.6 billion internet users by 2017. A couple of years back, most of this traffic was expected to be routed through PCs. In addition, most of this growth was expected to be in emerging markets like India, China. So why PC manufacturers under pressure? Probably the experience or expectation that emerging economies will follow developed world. When smartphones were launched in Europe or US, the PC market was more or less matured and most of the users brought these as add-on devices. Even then users were still comfortable with PCs and there were limitations with iPhone or Blackberry. But things changed drastically with launch of iPad in early 2010. It brought in portability that was not experienced earlier. With launch of Nexus series using Android OS in 2010 and then series of launches by different manufacturers using Android OS, devices became affordable too. Cloud computing has also taken care of the big limitation of storage capacity on smartphones and tablets.

What this all mean that now you do not need a $1000 instrument to just stay connected with your friends or to store your data like music or pictures. Though PC sales are heavily impacted in developed world, it is going to hit PC manufacturers more in emerging countries as it is considered big market. The 'junta' is more than happy with the connectivity provided by 2G and 3G data connection. A single sub-Rs 15000 or $300 price tag for a device that does most of the functions you need. Besides the flexibility of carrying it in your pocket and you do not need to run around searching for internet connection wherever you go. For those who need slightly bigger screens, Phablets do the trick. And in this space, we have large number of OS and chip manufacturers and WINTEL has not even started to capture the ground. Even the Ultrabooks are not catching fascination as was expected.

So where does this leave WINTEL? The sales of PC will still continue in corporate world. I will still need MS office to do my work faster and better on a laptop. But instead of buying a personal laptop outside the one which office will give, I would probably buy a Phablet. There have been launch of OS for mobile by Microsoft but it is to create a space for itself and to garner some market share from iOS and Android. Similarly Intel has started focusing on mobile microprocessor but Qualcomm or ARM has already occupied the market share. Both have missed the bus, especially Microsoft and I believe that the days of WINTEL supremacy are numbered. I do not see any trick up their sleeve, and many laptop manufacturers have already started selling smartphones (like Lenovo, Dell etc). I think it is going to meet fate like Blackberry. Just as smartphones killed camera, it is also going to deliver similar blows to PCs. Till then, Wintel can just hope to make as much money as they can.

 

Fed Tapering - Good or Bad for India?

Stock markets goes into a swing as and when there is a news on 'tapering' by US. If there is a news on push back, the markets react positively but the moment there is an news on 'tapering' being implemented, the market goes onto a tailspin. Lets first understand what actually is 'tapering' that is generating so much instability in markets world over. 

We know that short-term interest rates are reduced whenever a need is there to stimulate growth. But in the process, Fed reduced the rate effectively to zero which means that there was no scope further to stimulate growth. US Fed used Quantitative Easing to fuel growth that meant it started buying long term financial assets or bonds from commercial banks and private institutions that was aimed at reducing the yield on bonds that would have led to lowering of borrowing costs ultimately fueling growth. There has been so far three round of QEs popularly known as QE1, QE2 and QE3 through 2008 to 2013. Recently there was a news that the US would gradually reduce funding to this bond purchase program that is commonly known as 'tapering'.


From 2008 to 2010, Fed pumped in more than $2 trillions in the financial markets and kept in pumping more money as we can see. However, it did not translated into growth in US markets as was expected. The growth normally is realized if the money available with banks through this program is lend to local borrowers. Then where did this money go? On one hand, when the growth was stagnated in US and European markets, Asian economies like China, Singapore, India were not effected by this global downturn. Even though business were experiencing slow growth, property market and stock market was booming. To think of it, ideally 'tapering' should not have any effect on global market as Fed stimulus was aimed at reviving US economy and as it seems reviving, Fed is withdrawing the stimulus. It should be a local phenomenon .

So it can be safely assumed that Fed stimulus has actually made way to these emerging economies. Financial and private Institutions of US have been investing the Asian countries particularly India  and China. Between 2009-2012, property prices in India have more than doubled, inflation has assumed alarming proportions with no sight of it slowing down, and most of the stocks returning more than 20% despite no growth signs. Though exchange rate fell from over 50 in 2009 to 45 in 2010, it was almost stagnant at 45 rupees a dollar till mid 2012. My guess is that to keep the exchange rate competitive, Central Bank pumped more rupees into the Indian economy. Ideally this should have translated into investments for future growth of the economy, but that was not the case.


Is QE responsible for this?

So where did all this extra money go? Most of the money made its way into the property market. That probably was reason for such high appreciation in property markets.  I know many a friends of mine who have shifted their focus from their industries to real estate. Also as more and more money was available into the hands of public, this was also one reason for high inflation during this period. In last five years, average inflation rate was also high at around 9% over last 5 years, and  unfortunately for us, it did not translated into growth of Indian economy.

 

With tapering, financial institutions in US would need the money for paying for bonds on maturity and they would be taking back the money pumped into emerging economies like India. With no buyers and large number of sellers, this could actually led to collapse of stock markets and property bubble burst in India (and other economies). Though Us government has been giving mixed signals on tapering, there is a huge risk of this happening. RBI governor is aware of this and probably the reason for tightening of monetary policy since he took charge. But the risk still looms and we all should be prepared for this plunge.

But I also have a view is that though tapering is going to impact us in short term, it will be beneficial in long term as the recent inflation was not growth-led. This might actually turn out to be blessing in disguise and may led to revival of Indian economy. It might also bring back local investors to stock market who have been shying away because of prevailing uncertainty. Property market might bring in actual buyers rather that speculative investors. It is a hope for now that can turn into an opportunity by effective fiscal and monetary policy and efforts from the government. Hoping for it to happen!