Friday, March 17, 2023

A Li-ion in every country?

 Reports of the finding of enormous quantities of Lithium are grossly exaggerated.

There have been a rash of reports recently of huge Lithium reserves being found on almost all continents. While this is undoubtedly good news for many (and music to the ears of the EV industry), there are some realities that one needs to be aware of. 

1. Mineral reserves estimation is fraught with fraud. So one needs to take all figures with sack of (rock) salt 😀

2. Minerals are far more evenly distributed across the global than we - even the best and most expert among us - realize. Actually almost all countries will have copious reserves of almost all minerals, only we’re too dumb to have found them. 😀

4. Most important, Li will probably be superceded as a key battery tech in the next few years. 

So, hold the champagne on this 

Monday, June 06, 2022

Why Disruption Often Rides on Upstart Startups

Tech disruption is generally driven by startups. Here's why. 

Why is it that large. established companies often lose out to upstarts (typically, tech-driven startups) with meagre resources? Well in my view,  Large organizations don’t get tech mainly for the following reasons: 

1. They’re so big and complex that they focus their considerable energies on large “enterprise- wide programs”, and often just don’t care enough about making small improvements to customer experiences. 

2. Even when they care enough, middle-aged corporate execs don’t understand tech well enough to use it sensibly. 

3. Even when they understand the right tech to be used, these layered and often bloated organizations usually can’t execute nimbly enough. 

Now upstart startups thrive exactly under those circumstances. Their very raison d’etre is (1) above, they’re run by people fully in touch with tech, and they’re nimble from the ground up. 

This is why large organizations (banks, manufacturers, old media,…) are ever in grave danger of being disrupted by brash upstarts. And that process will only accelerate. 


Of course, it may be argued that we can't say much about disruption without getting into the innards of how startups will actually create that disruptive technology, product or business model. But it's pointless to try to enumerate these possibilities  exhaustively - some startup somewhere has to find the right model the hard way, by taking risk and working hard. That's precisely where the startup ecosystem kicks in - there's enough talent and funds to cobble together a nearly endless stream of startups, so someone somewhere will hit the nail on the head ! 

Tuesday, April 26, 2022

Whither a Musk-owned Twitter?

 Musk's real motivation in buying Twitter

Musk has stated that his intent in wanting to wrest control of Twitter is to promote free speech. But is that even a practical vision?  Twitter is crawling with venom-spewing trolls, and allowing untrammeled free speech would be disastrous. Curbing obscenity, racism, ad hominem attacks et al is necessary. 

If he’d said his intent was to use Twitter as a tool for social /political change I’d have found it more credible.

In my view, Musk's real intent in buying Twitter is twofold: 

1. He believes Twitter is undervalued and that he can grow its value hugely. (I don’t believe he can do that but strength to him 💪). 

2. He has presidential ambitions and knows owning Twitter, with its enormous capacity to build and influence large hordes of followers, will be a huge fillip. So, will he run for US president in 2024? Difficult to say as he has businesses to run but it's a reasonable bet that he'll run sometime in the future. 


He doesn’t (yet) figure in the 2024 betting lists . But one can discount a significant probability of his candidature sometime soon. 

The Blowback from Buybacks

If share buybacks achieve the desired intent, it's purely coincidental

Recent years have seen a spate of corporate buybacks, often in the multi-billion dollar range. These are predicated upon the belief, spurred by the people who support them, that they help to shore up a company's share price. This is a dangerously wrong, even pernicious belief. Why? 

The stock market is like an infinite sink in thermodynamics. One company is puny before the tidal forces of the market at large. And by far the largest factor that determines stock price is the movement of the market as a whole (as measured by key indices). If the market shudders or collapses (a la 2008 or last few months), your share is gonna get clobbered, no matter how much money you’ve poured in !!

Seen another way, it’s like trying to boil the ocean (or air condition the world). If you spend $5 billion in buyback and the market falls say 4-5%, your stock price is where it was and you’re $5 billion poorer !

What people don’t realize is, there’s a two-speed phenomenon here. The stock market isn’t a vault, it is an information discounting machine . The value in it is notional, and varies as information (about any factors economic, financial, geostrategic, psychological etc etc etc) is received . No single entity (or group of entities) can stage manage such a diverse range of information factors. Not large corporations, not even governments. 

The money in your company reserves on the other hand, is real money, earned by selling iphones or eyelenses or whatever. When you dump it in the market it’s not like placing it in a vault, it’s like dumping it in an ocean whose level depends upon a host of uncontrollable factors and which you cannot raise. Your hard earned real money is now entirely at the mercy of those uncontrollable factors.

If you dump that money in shareholder hands (or govt hands as tax) it’s still real money. (Of course they may still dump it in the stockmarket (or the ocean 😀) but that’s their lookout.

And oh, buybacks do make money. For advisors, consultants, investment bankers and the like. 


If you doubt the ‘stock mkt value is notional’ assertion, consider Bill Gates being worth $150 billiion or whatever. If he decides to encash tomorrow, can he get 150 billion in cash? The price will collapse and he’ll be lucky to get 50 bil !! Did any cash get destroyed? No. Then where did the 100 bil go? Nowhere, it wasn’t there physically in the first place! 😀 It existed purely as a notional artifact. That’s notional value for you. Or we saw Yahoo and Aol etc lose hundred billion + in value in a short time. That wouldn’t be possible if the value was real.

Sunday, August 28, 2016

Needed: A Prescription Less Bitter

What makes the US healthcare system so confoundingly expensive and inefficient? The answer may be surprisingly simple. 

It's well-known that the United States has one of the most expensive and least efficient healthcare systems in the world. Scores of learned studies and articles have attempted to answer the question of why. The reasons are myriad and include a lack of transparency in pricing, a rash profusion of tests, and an unholy nexus between insurers and healthcare providers. Not surprisingly, the consensus view - whether among experts or the lay public - is that the problem is stultifyingly complex and will defy solutions for a long time to come. 

But there may also be a simple factor at work here that's going largely unrecognized - plain, old-fashioned industry concentration. Industry concentration means that a few companies get so big they can dictate terms to other players in their industry's value chain - customers, suppliers, competitors, and even regulators and government. Thus, with true monopolistic fervor, these few companies enjoy phenomenal pricing power and the ability to make everybody else dance to their self-serving tune. 

To check whether this applies to the US healthcare industry, let's have a look at Fortune's 2016 list of the largest US corporations. A glance shows that of the top 7 companies on that list, no less than 3 are healthcare companies with combined revenues of just under half a trillion dollars (you read that right, that's 'trillion' with a 'tr') ! This means that these 3 companies represent about a sixth of the US healthcare market - a startlingly high level of concentration (there are over 800 healthcare companies in the US*). Just to compare this with what's happening outside the US, a look at Fortune's Global list  shows that there is not a single healthcare company in the top 10. 

And if these healthcare companies have grown that big, it means they've carved out humongous strongholds in their respective corners of the healthcare industry. What's more, none of these 3 companies was in the top 10 as recently as the 2015 list, ie a scant one year ago - which suggests they're getting even bigger fast**. 

Clearly, US healthcare companies have grown outsize, have achieved industry concentrations far in excess of their global counterparts, and are accelerating that trend. 

So what's the prescription? 

Breakup via regulatory fiat (a la Standard Oil, 1911 and AT&T Corp, 1982  used to be the way to go. But not only is such a heavy-handed approach likely to be regulatory overkill, it's also likely to be mired in enough legal wrangling (remember Microsoft's break up, ordered in 2000, that never happened) to stymie the intention. 

The solution, instead, should be to change the regulatory, business and industry landscape so as to encourage a voluntary downsizing or breakup of these companies. This may include tax treatment, changing the policy framework so as to offset the scale advantages that large firms enjoy, etc. After all, the government tried for years to forcefully break up Microsoft and failed. On the other hand, HP, Xerox, Kraft Foods and Motorola broke up on their own, with no forceful nudge whatsoever. Economics is a far more potent weapon than force. And in the end, economics always wins. 

* In addition, a lot of the US healthcare demand is serviced from outside the US, viz. syringes from Korea and pharmaceuticals from China and India. Even allowing for the fact that the healthcare industry is huge - almost 18% of US GDP - the concentration implied by the above data is very high. 

** For a comparison, there is only 1 tech company in the same top 7 mentioned above. In fact, no other industry has more than 1 representative - the other 3 companies are drawn from retail, energy and financial services. 

Tuesday, August 18, 2015

As easy as a-b-c...well, not quite, Alphabet's search for a new org structure is somewhat disorganized

The Harvard Business Review avers that the creation of the Alphabet brand is driven by a desire to avoid diluting the Google brand too far in the consumer's mind. This explanation makes sense, but represents a rather limiting view. The listed entity is now Alphabet which includes all the "far-afield" brands such as Calico etc. and will suffer from the dilution problem in the eyes of the media, analysts and investors anyway. Thus the move needs to be seen thru a wider lens rather than just from a branding standpoint.

At one level, these are to be seen as growing up pangs, as Google transitions from being a hugely profitable tech icon unhindered by mundane pressures of financial disclosure et al to a regular, down-to-earth company. The iconic company hasn't yet been quite able to escape the one-trick pony fate, still deriving the vast bulk of its revenues from good old-fashioned search. Although enormously innovative, the new initiatives haven't begun paying for themselves.

Thus, this reorg has a simple raison d'etre : force Google's multifarious initiatives to grow up by subjecting them to the not-so-gentle pressures of Wall street.

The move may not quite pan out as intended. Google's promise to divulge more financials on the extended brands is both feeble and undesirable - feeble because most of those initiatives are too early-stage without even revenues in most cases, and undesirable because ventures such as Calico thrive best away from Wall street's prying eyes.

I think the better strategy to bring those initiatives to fruition is not more financial pressure but less.  Wall street is notoriously poor at recognizing or nurturing long-gestation initiatives, and is all too likely to force Alphabet to become just another regular, incrementally-innovative company rather than the radical innovator it is best suited to be. They could perhaps have retained Google  (the search+ company) as the listed entity and taken the rest of the ventures private to give them the space they need to grow up. As each initiatives matures, it could be "exposed" to fiduciary discipline either by bringing it under the Google umbrella or by taking it public on its own. That would of course entail many challenges, both financial and human-resource-related*.

However, beneath the logic presented to the outside world, I suspect like most organizational revamps, this too is driven by a somewhat idiosyncratic need - i.e., to please the key individual players rather than a grand design that they're convinced will work well for either customers or investors. The founders wanted to distance themselves from day-to-day operations and focus on "blue-sky" ventures, the new CFO wanted more disclosure and accountability, and they needed to keep key talent from sprinting nimbly off to work for competitors. The leaders have  worked out a solution that "satisfices" all of them without actually doing much long-term good for the company or its investors.

Overall, I have to say this is a rather half-baked, poorly-thought out move (to say nothing of the fact that it did not appear to have occurred to them that such a commonplace name as Alphabet would already be trademarked, as indeed it is - by BMW, as well as a host of small companies!**). To their credit, they're probably thinking of this highly sub-optimal structure as a work-in-process that will be fine-tuned as they go on, but they would do well to remember that you don't get too many shots at rebranding and there's the ever-lurking danger that people will run out of patience with too many ongoing changes.

Google has been a marvelous company doing a fabulous job of achieving its mission of organizing the world's information - let's just hope it doesn't trip up in organizing itself .
* such as giving away too much power to the new Google CEO which was perhaps unacceptable to the leadership.

** or more likely, this did occur to them but they forged ahead without buying out the trademarks / domains being infringed - a rank poor strategic move. There's too much at stake in the corporate world to let exuberance trump due diligence. 

Tuesday, March 19, 2013

Can the iWatch be more than mere iCandy? (or iWash?!)

Wearable devices will wear thin unless they’re able to meet a unique need.

Gadget-watching circles are agog  with a great deal of speculation over the latest gizmo reputed to be in Apple’s pipeline.  The excitement is perhaps understandable, given that Apple has introduced a host of glamorous products over the years*.

Here’s my take:  Nobody has yet demonstrated (or even alluded to) some functionality a wearable device can perform that a handheld device can't. Functionality being attributed to wearable computers – monitoring the wearer’s health parameters, keeping track of the user’s life experiences etc. - can be pretty much done by handheld devices. And since there are already over a billion handheld devices (aka phones) out there, it's difficult to imagine what new value a new genre of wearable devices can bring to the world. 

I'm not saying wearable devices won't be useful, just that they need to sport some really unique feature - i.e., they must meet a need that cannot be catered to by existing form factors (desktop, laptop, handheld,..) that computing devices come in.  

Otherwise, they’ll just be fashionable devices with questionable functional  value.

A similar logic applies to the much-hyped Google Glass (although I must say I have greater respect for Google’s more open approach to innovation).

* Personally I am somewhat less than sanguine about Apple’s ability to sustain its vaunted innovative prowess. Historically, the astonishing successes of Apple’s products were essentially driven by the genius of one man. And Steve Jobs did not institutionalize that innovation into the company’s DNA, so there isn’t much reason to believe it can be sustained after him. (Even Jobs’ genius is considerably diminished by the fact that barely a year after his death, his own company introduced the 7.9” iPad mini tablet – a screen size he declared would be “DOA”, and one that Apple would never make !).
Apple’s closed, proprietary, secretive approach to innovation is also likely to be a liability for the company going ahead (although Apple has shown with the Mac that it can be open when the need is high).

Tuesday, January 29, 2013

Could the cloud talk get (even) more loud?

Why the cloud will gain traction with business faster than you think.

Try this question: What’s the single largest capital expenditure item for companies? Buildings? Plant and machinery?  The answer will surprise most people: It’s Information Technology !

This is evident from the US Census Bureau's 2008 Annual Capital Expenditures Survey released March 2010, which shows that US companies spent $233 Billion on “Information Processing equipment” (a category that includes capitalized software, computers and peripherals, and communication equipment) out of a total capital expenditure of $1.33 Trillion. I verified (as you can too) that this was the largest single item, other large items being transportation equipment ($185 Bil), buildings ($164 Bil), and industrial equipment ($152 Bil).

What has driven this surprising development?

Duly surprised by this unexpected discovery, I set out to figure out why this is so. A few moments’ reflection, however, suffices to show that this fact need not sound as outlandish as it does at first blush. Over the past several decades, most forms of corporate capital expenditure have moved to “subscription-based” models such as leasing:

-          Land and buildings have long been leased or rented as a less-capital intensive alternative to purchase;
-          Heavy machinery and transportation equipment are also increasingly being leased. For example, airlines today rarely buy aircraft, preferring to lease them instead.

To be sure, IT too has begun to be subscription-based in the past few years but this trend has not yet penetrated deeply. Hence IT has emerged “by default” as the single largest capital expenditure (Capex) for companies.

This development is potentially disruptive for the IT services industry

As the single largest capex item, IT will attract increasing attention from cost-conscious CFOs in every company. As outlined above, they have become accustomed to reducing up-front costs on most other capital items thru “subscription-based” models such as leasing. Thus, pressure for reducing capex on IT will mount *, accelerating the move towards subscription-based IT models such as cloud computing, utility computing and SaaS.

As corporate IT increasingly moves into the cloud, big brands will seek larger chunks of the cloud pie, including thru alliances / acquisitions of IT services players. This trend is already visible and, driven by the above, is likely to accelerate in coming years. As large branded players gain a stranglehold, standalone players in the corporate IT market may run a risk of being marginalized. To derisk, IT services players must start combining with a leading global technology brand thru alliances / joint venture (preferably by starting subsidiaries dedicated to provision of cloud services).

The best IT services companies will thus position themselves to capitalize strongly on the immense opportunities that cloud-based computing will present as it takes off. The rest? They’ll be among the majority who’ll get “consolidated” away over the next 5-6 years, as I wrote in my last post. As for who falls into which category, time will tell.

* Thus far, the primary means of IT cost saving has been via Outsourcing / Offshoring. However these savings were essentially confined to the services stack. Now subscription-based  IT is available across the entire IT stack -  hardware, software and services.
Also while IT outsourcing has been available for some years, its attraction was limited as it did not change the fundamental cost structure of corporate IT.  Now subscription-based IT sharply reduces cost structure for many reasons including multi-tenancy. 

Sunday, January 27, 2013

Sow easy money, reap a crisis

Stock markets and asset prices are surging again. Should we exult?

All over the world, stock markets and asset prices in general have begun to boom again. Stock markets in the US, Western Europe and Asia have hit multi-year highs. The last time this happened was during the 2002-2008 period and, as I predicted (quite accurately, as it turned out) in August 2005 and again in March 2007, that boom was a harbinger of a big bust - what we now call the financial crisis of September 2008.

Given how clear the signals of the crisis were, it's disappointing that astonishingly few pundits foresaw it. (Few foresaw the ensuing recovery too, but that's a different story). What should make us sit up now is that similar signals have begun to emerge all over again, in the form of booming asset prices. This boom largely owes itself to the loose and expansionary monetary policies followed by most of the world's large central banks, in a well-meaning effort to help their respective economies climb out of the recession. An unintended, although entirely foreseeable, consequence of this easy policy is that, like a tide that raises all boats, it has steadily been raising asset prices all over the world. When there's too much cheap money sloshing around, guess what - it ends up going into various assets including stocks and property. pumping up those asset values. 

While booming stockmarkets and asset prices are quite fun while they last, they have an uncomfortable habit of running out at some stage, as happened with the financial crisis of 2008. And since we've learnt precious few lessons from that crisis, the picnic this time too is likely to end badly. So all the easy monetary policy that's being sown now may just reap a crisis down the road. 

How will the technology industry fare?

The low interest rates and easy credit of the past few years have made corporations quite inattentive to cost control, and this happy situation will continue for some time. Business performance has been - and will continue - on the upswing. But when the inflexion point (see above) occurs - most likely within the next 5-6 years, the technology industry will not be immune. The most robust companies will of course pull through - IBM for one. Amazon will continue its disruptive charge and emerge as one of the technology leaders. Others such as HP and Dell will end up on the other side of this disruption, and will almost certainly lose their independent existence over the next few years. Many middle-of-the-road companies such as Google, Sony, Samsung, SAP, Oracle, Apple and Facebook will probably survive but will be unlikely to be considered industry leaders 5-8 years hence. As for the IT services industry, which will be affected not just by this financial phenomenon but also the relentless march of cloud computing that has significant potential to dent its business, several waves of consolidation will be likely to leave just a handful - perhaps 5 or 6 - players of a multi-billion-dollar scale. 

And so the cycle of creative destruction will march ahead relentlessly, as it should. 

Updates May 28th-30th 2013: 

Sure enough, markets around the world have continued their upward surge since Jan 27th (when the above piece was written). In the brief space of 4 months, the Dow Jones Industrial Average, NASDAQ 100 and the S&P index have risen about 10-12%, most European indices by about 8-10%, and the Japanese Nikkei has soared by a whopping 45%. US home prices (as measured by the Case-Schiller Index) vaulted by a staggering 11% in the last one year. As noted, all these rises in asset prices are unsurprising - they're driven by continued loose expansionary monetary policies, particularly by the US Fed. 
Consumer confidence has hit a 5-year high - a result of booming asset prices creating a 'wealth effect'. 

Good sense however does appear to be asserting itself. Recently experts have begun a steady chorus, saying that the US Federal Reserve’s QE policy needs relooking. QE’s inflationary impact on asset prices (and the fact that it wasn’t really necessary in the first place !) have begun to be recognized, and QE is almost certain to be wound down long before the promised 2014 date. In fact, a mere mention by Dr. Ben Bernanke on May 22nd that QE may be relooked at was enough to send markets reeling across the world by 1-7% in a single day. So over the next few months, as QE is wound down, one can expect to see stock and asset markets lose some of their froth. While it’s somewhat heartening that people do realize that QE is boosting asset prices (and that its withdrawal will reverse this boost), these events also go to reinforce my old point that lucid, clearheaded thinking is at a premium in our society !

Friday, December 21, 2012

Of fiscal cliffhanging and peace dividends

The US can't afford to be the world's swashbuckling, big-spending policeman any longer.

US lawmakers are in the throes of a budget battle. Amidst all the skirmishes, sparring on tax rates, delicate and protracted negotiation of 'fiscal cliff's and so forth, it is surprising that no one seems to ask one simple question: Why does the US need to spend more on defense than the next 20 countries put together? 

It's true that the US is the world's policeman, self-appointed peacekeeper etc. (and the world does need someone to play those roles). However, Americans need to ask, at what price? 4.7% of GDP (most other countries spend in the 1.5-3% range) is a LOT of money. Scaling it back to even 4% (which would still have the US in far and away the first place) would save a whopping $100 Billion - a 'peace dividend', to spend on retraining the unemployed, healthcare, welfare, reducing taxes, investing in education, research and innovation etc., etc...*

The US is hardly in imminent danger of being attacked by any major country, so the reduced defense spending wouldn't exactly be ruinous. In any case, the US would still be spending more on defense than the next 15 countries combined . And as for the world's policeman / peacekeeper, multilateral institutions such as the UN (dysfunctional as they are) are the best bet.


* A brief historical note: US military spending was at a ridiculous peak of 70% of federal outlays in the post-World War II era, and remained fairly high (around 25%) amidst the cold-war rhetoric of the Reagan era. Expectedly, since 1991 when the Berlin wall fell (the presumptive end date of the cold war), this figure has fallen significantly and only rose a bit after 2001, with the war on terror. Since 1991, the US has thus enjoyed a 'peace dividend'.

Saturday, May 05, 2012

A Development with ‘Far-reaching’ Consequences

Elite universities are embracing online learning to reach far-flung audiences. But they may, perhaps unwittingly, be setting the stage for their own disruption. Here’s why.

Some of the most prestigious universities are going online wholeheartedly. Stanford’s MOOC (Massively Open Online Courses) initiative has reached over 160,000 students. Now, Harvard and MIT have jointly created EdX, a partnership that will free offer online courses from both universities.

I believe this development is a lot more 'far-reaching' than most people realize (and not just in the sense that the learning can be accessed from far away !). Why?

Traditionally, education from a big-name university was available only to a 'select' few, carefully chosen ones. And when you select students carefully, you are not just limiting your university’s education to those chosen few – you are also limiting where they get their education (from you!).  However in the free online world where there are no such 'captive' audiences, a Harvard, MIT or Stanford has to compete with every other provider of the same course. Whether an online course teaches electronic circuits or philosophy, it has to compete with similar courses from other providers, on parameters such as content quality, delivery skills and ease of access. The aura of the university's name, campus etc. will matter very little. The open marketplace respects nothing but quality !

If these universities have realized what a leveller online learning can be, and are still taking this initiative, it is quite admirable. Over time this can lead to the true democratization of education. Which not only means that good education will be available to anyone who needs it, but that only the best provider of that education will thrive. The playing fields of Eton are about to be leveled.

Wednesday, September 21, 2011

In data we trust...

To counter accusations of unfairness, Google should rely on the most trustworthy ally: Data

Becoming everybody’s prime gateway to the internet has its drawbacks, as Google is finding out. People are bound to suggest that a company that enjoys such a pre-eminent status misuses that privileged position.

In countering this accusation during a US Senate Judiciary Committee hearing scheduled for later today, Google Chairman Dr. Eric Schmidt should rely on the most obvious and trustworthy ally: data. He should display a table that summarizes the results of a few hundred sample searches, and makes it plain that Google serves up results that do not “favor its own content” (as they’re accused of doing).

For dramatic effect, he can actually demonstrate a few searches online during the hearing, that attest to the above. Of course, he should be prepared for committee members to suggest their own searches, and should have verified in advance that there really isn’t any bias in Google results !

On the committee’s part, one hopes they recognize the most basic principle of fairness in justice: the burden of proof lies squarely on the accuser.

Tuesday, August 16, 2011

Google’s Motorola buy: Searching for more robust results…

With its latest acquisition, Google seeks to escape a one-trick pony fate.

Many a rationale has been advanced for Google’s headline-grabbing buy of Motorola Mobility. These attribute the buy, variously, to a defensive move by Google to protect Android from patent litigation, and to Google searching for a more vertically integrated mobile phone strategy a la Apple. While there may be truth to these attributions, I think most people have just forgotten the simplest rationale: a search for revenue streams beyond search-based advertising.

Google is a marvelously innovative company. However, I’ve frequently derided Google for being a one-trick pony (as have many others), deriving more than 95 percent of its revenues from a single source: search-based advertising. And, as I've written elsewhere, such a model is enormously vulnerable to disruption. Which means, the company just hasn’t been able to convert its vaunted innovative prowess into hard cash.

But isn't it a terrible idea to become a competitor to your own customers, as Google must now compete with other handset manufacturers who have pitched in their lot with Android, such as Samsung, HTC, and Sony Ericsson? You bet it is. However, Google is adroitly straddling a fine tradeoff here – it seems to have decided that the risk of antagonizing a few customers is outweighed by the benefits. The move derisks Google and makes its business model more robust by creating an entirely new revenue stream.

And for a Google desperate to escape a one-trick pony fate, the $12 billion or so extra revenues from Motorola’s handset sales, even at low profitability, can scarcely hurt. As an added benefit, the integration gives a revenue model for Android, something it has lacked despite obvious popularity. Overall, it must be stated that this is an audacious and welcome move on Google's part as it seeks to become a strong mobile industry player. Google sure has a right to feel lucky with this one.

Friday, August 12, 2011

A standard too poor to judge nations by

Sovereign ratings such as those awarded by Standard and Poor’s are deeply flawed.

The recent downgrade of the US sovereign debt by Standard & Poor’s has three intriguing implications. First, it sends the message that like mere individuals, companies and lesser states, the US government too cannot live beyond its means. Second, S&P’s action suggests that the US is no longer the world’s prime economic mover, a status it has enjoyed for well over a century.

The former message is welcome, but the latter is less so. Just as a bunch of unruly schoolkids needs a strong chaperone, the world’s nations need a strong and credible leader to play an anchor role, particularly in terms of crisis. Institutions such as G7, G20, the EU and the IMF are too weak, too decrepit or simply do not enjoy the widespread trust needed to play that leadership role credibly. An America, however weakened, is better than no leader at all. The world economy without a firm hand on the rudder is not a pleasant prospect.

The third interesting observation from the downgrade and the events that followed is that it’s possible for a private company to take a decision that shakes the world’s most powerful governments. Nations and governments have traditionally enjoyed huge power over the private sector, and until recently it would have been unthinkable that one private company could take one decision that reverberated thru the world economy and left the world’s most powerful government scrambling to salvage it’s reputation.

But just how reliable are the sovereign ratings, and do changes in those ratings merit such mayhem? To see the answer, one has to look no further than the list of S&P’s AAA rated countries. If you could invest a million bucks in Guernsey, Isle of Man or the US, would you choose either of the first two? Yet those countries continue to retain their AAA ratings! Austria, Australia, Liechtenstein, Luxembourg, France and the UK are well-run countries, but would you really choose all of those above the US for your investments?

The US is still the largest, most diversified and most vibrant economy in the world. Whatever it lacks in quality of political leadership, it makes up in terms of these factors. America also has the world's largest private sector (which as observed earlier is steadily gaining importance). Also, America’s political process is fairly transparent so the risk of idiosyncratic or whimsical policy making is low – during the recent debt ceiling negotiations, every move was ruthlessly scrutinized by the world’s media. Many of the countries in the AAA list above have policy-making that’s opaque, run by a few individuals such as a President, Prime Minister or Finance Minister or by coteries. In addition, the US dollar is the world’s reserve currency. So as long as Uncle Sam runs the world’s money printing press, the likelihood of its defaulting is virtually nil.

Let me hasten to add that I’m no fan of the US or any other nation’s economic management – hubris, maneuvering for narrow political ends, lobbying etc. are rampant in America as in most other places. All the horse sense view is saying is, if the US is demoted from the top trustworthiness rating, so should every other AAA country be. If that doesn’t happen soon we can safely conclude that the sovereign debt rating process lacks integrity.

And let’s not forget that these ratings are being awarded by agencies that played a starring role in the financial crisis - by awarding stellar ratings to mortgage-backed securities that nearly allowed financial institutions to bring down the entire financial system, they failed investors and the financial system at large.

So, particularly given the psychological impact of these ratings, it’s incumbent upon the rating agencies to devise much more sophisticated rating methodologies that span a much wider range of factors.

Saturday, June 04, 2011

To market, to market..and don't dally on the way..!

The longer Facebook delays its IPO, the more it loses.

Without a doubt, Facebook is one of today’s hottest internet properties. It's the second most visited website on the planet with 600 million users – a tenth of the world’s population ! The Wall Street Journal places its market value as high as $100 Billion.

Those figures are probably absurd overestimates, but that's beside the point here. The point is, most of that wealth remains on paper until the company actually goes public. While the company has announced plans to do an IPO, it has also shelved those plans until at least 2012. Why do I believe this is a mistake? Two reasons.

1. Facebook, today’s social networking leader, runs a real risk of turning into a social networking also-ran. Facebook has barely scraped the surface of the humongous beast that social networking is. It’s merely the vanguard of an entire new generation of software tools that’ll have social networking at their core. And these next generation social networking tools will automate entire work processes and personal activities - those breathtaking possibilities are barely a glimmer in the eye for even today's most advanced social networking software makers.

So in the emerging social networking universe, Facebook cannot take its leadership for granted – it can easily be overtaken by hungrier rivals and even relegated to being a marginal player. In a marathon race, the runner who leads after the first few meters has no guarantee of winning (and in fact rarely wins). That’s the stage where the social networking race is at right now.

Admittedly Facebook’s huge 600 million user base will be an asset difficult for other tools to replicate. However, they may not need to – many experts believe that the future of social networking tools is in catering to specialized audiences in focused niches.

(This is why, as I’ve written elsewhere, Google Chairman Eric Schmidt is wrong to believe he has missed the boat on social networking. Agonizing in this manner, reconciling to second-best status and taking a narrow view of social networking as being confined to little more than chatting and sharing photos is only likely to discourage Googlers from pursuing the vast unexplored vistas of social networking I've highlighted in that post. But that’s a separate discussion).

2. The markets may lose their exuberance for internet properties soon. We’re in the midst of a bubble as far as internet IPOs are concerned. As an example, Groupon which has a business model that can at best be described as unproven, has an IPO in the works that values that company at upto $30 billion ! (which makes you wonder if Groupon isn’t going to be the next – a poster child for a burst bubble). Reality should assert itself pretty soon, and by 2012 that bubble may well be past.

And a time when people are mopping up the remnants of a recently-burst bubble would scarcely be opportune for approaching the markets.

* Facebook's ownership wrangles may be part reason for the delayed IPO.

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Tuesday, September 07, 2010

As geography returns to history, capitalism lives on..

Financial crises will come and go, as the world rebalances. But reports of the death of capitalism are greatly exaggerated.

A couple of very intriguing questions: How healthy is the world economy? And how will it evolve over the next several years?

The first question is the topic du jour; the second however is almost wholly ignored in public discourse. I believe both are important; the second perhaps more so, if we are not to repeat the often-nasty and always costly economic surprises of recent years.

Here are my thoughts on both these questions:

How healthy is the world economy (today and over the next 3 years) ?

The basic capitalist fabric upon which the world's economic superstructure is built has been stretched badly by the events of the past 7-8 years, but not torn. The process of recovery from the recession began in July 2009 (as I wrote it would in April 2009, based on these five factors - a view that was markedly against the tide of expert opinion at the time), and is plodding on resolutely. The US recovery has cooled somewhat since March 2010 for a variety of reasons (some enumerated in the blog post below), but the probability of a double-dip in the US, European Union or any other major economic entity is vanishingly small (less than 10%). The world economy will continue to be in rude health (barring any unforeseen cataclysmic event – by definition, an extremely unlikely eventuality).

This doesn't mean the recovery will be painless: Jobs have been marching away from the developed world to China, India, etc. and so the West will have to get used to steady-state unemployment rates of near 10%. These unemployed folks will suffer and get poorer but nothing much will be done to help them (political fulminations notwithstanding).

However cries of the Death of Capitalism, another Great Depression, and so forth which we heard in late 2008 / early 2009 (and some of which came from respected Gurus of the establishment) have proven unfounded. Europe is doing quite well - the brouhaha about collapse of the EU, death of the Euro currency and so forth was similarly an overreaction.

How will the world economy evolve over the next 4 - 15 years?

Capitalism is not decrepit, but it’s been flogged by unscrupulous businesses intent on testing its limits nearly to breaking point. Regulators who were expected to rein in this reckless behavior looked on benignly (or fecklessly). The Gurus and thought leaders who should have sounded warning bells were trapped in ivory towers, rendering themselves essentially irrelevant.

More importantly, No lessons have been learnt from the recent financial crisis. Regulatory changes such as the Dodd-Frank Act are too weak, abstract or low on specifics to deter further recklessness. Cycles are an inherent economic phenomenon (despite what many naively believed during the halcyon dotcom days and the boom of 2003-2007); weak regulation will ensure that some cycles will go far enough to engender full-blown crises. So there will be more financial crises in the next 5-15 years (and we probably won't learn much from those either).

These crises will be most likely to originate in the US or China. Europe will continue its disciplined march and play a steadily smaller role in world affairs. India will grow (albeit quite rockily) but will be unlikely to create problems outside its own borders.

A hapless world will reel in response to each crisis. However, while we won’t get much better at preventing crises, we’ll continue to learn to manage these crises better. Crisis responses will (hopefully) be as admirably coordinated and effective as the response to the 2008 financial crisis was.

Few would argue today that the regulatory failures that cause free markets to occasionally plunge headlong into crises justify a switch to the opposite extreme – the abandonment of capitalist free enterprise[i]. However, the lines between Government and free markets will need some redrawing.

Capitalism will continue to thrive, partly because all alternatives have self-destructed. The major bastions of Communism and Socialism – in the Soviet Bloc and China – have fallen. A fragmented, fractious and adversarial worldview fostered in the Cold War era has allowed these totalitarian ideologies to survive in small pockets in Asia, Africa and Latin America long after having proven decrepit in the lands of their origin. However these final holdouts are merely the last vestiges of these once-powerful ideologies, and they too are crumbling.

But capitalism will thrive mainly because it has worked (but, it must be admitted, for the occasional crisis). Free-market democracies have emerged as the most effective method to unleash the creative and entrepreneurial energies of the human race. They have promoted widespread wealth and well-being. The new generation’s aspiration for freedom - of expression and enterprise - can only be met by the liberal pluralism that only free-market democracies can provide[ii]. In the annals of ideological battles, the market is the undisputed winner.

So the real battles will shift to social, cultural and technological issues – medical ethics, the propriety of creating clones and artificial life forms, energy security, the right response to changing world demographics, and so forth. These battles will largely be devoid of ideological content, and focus on pragmatic aspects.

Meanwhile, the inexorable forces rebalancing the world will soldier on. The historical anomaly of Western dominance set in motion by the Industrial revolution and the colonial era, and kept in place by the Cold War will be erased. In 2025 the world will look more like it did in the late 19th century (in terms of relative apportioning of wealth between the geographical East-West, not in terms of absolute standards of living or technological advancement) !

Of course this rebalancing will not be painless as the newly emerging nations (China, India, Brazil,..) seek roles in world affairs proportionate to their growing economic clout.

So the world will hardly be devoid of conflict. But the conflicts of the next 15 years – and their resolution – will be guided by the invisible hand of Adam Smith, rather than by the ideological fist of Karl Marx. And we’ll continue to live in interesting times.

[i] The fact that regulatory failure played such a big role in fostering recent financial crises is an argument against, and not for, more government.

[ii] This is why China will face issues as it transitions to a true capitalist free-market society. Currently it must be considered a work-in-process, as it attempts to make this transition without a corresponding transition to democracy. It is this disconnect that may provide fodder for incipient crises. Almost inevitably however, the country will move in the general direction of providing greater representation for its people, in the democratic spirit.

Friday, May 28, 2010

Drachma drama or Dragon's dance?

While concerns remain, recent roilings in Greece and Europe are no threat to global economic recovery.

I had written in April 2009 that the US and global economies would begin their recovery from the recession in July 2009. This opinion was based on five factors, all publicly known. The opinion was however at considerable odds with prevailing expert opinion at the time: Uber-gurus Paul Krugman (winner of the 2008 Nobel Prize for Economics) and Robert Reich (a key member of President Clinton's cabinet and recently ranked by the Wall Street Journal among America's Top Ten Business Thinkers) were predicting another Great Depression; the IMF was in March 2009 foreseeing a recovery for the world economy only in 2010 and the OECD was forecasting a recovery in early 2010.

Subsequent developments suggest the July 2009 date for the beginning of the recovery was remarkably accurate – expert opinion has increasingly been veering round to such a view.
The IMF rapidly revised it's view and declared on July 8th 2009 that the world economy had "begun to pull out of recession". The OECD followed suit in September 2009, stating that "the global recession is coming to an end faster than thought a few months ago and may already be over". Dr. Alan Greenspan said August 3rd 2009 that the economy had begun to grow “from the middle of July”. This guest column I've written in CEO World magazine in February 2010 summarizes this and draws some inferences.

However, there remains on the street even today (nearly a year later) some skepticism regarding the strength of the recovery. The reason is primarily that the job market hasn't revived strongly.

In hindsight if I can be accused of anything, it's for being overoptimistic in using the word "strong" in April 2009 to characterize the impending recovery. However, the US GDP growth figures for the 3 quarters beginning July 2009 have read 2.2%, 5.4% and 3% - figures that can hardly be characterized as weak (and in fact the best growth figures in about 6 years ) ! The tenacious will doubtless argue here that GDP is an inadequate measure of human well-being, but that's a diferent debate altogether. Even the apparently moribund US job market has begun a significant uptick.

Do all the events in Europe that have roiled world markets in recent weeks disprove the recovery thesis? I've been keeping a log of events, economic data, news reports etc. over the past year, and more closely since the European "crisis" hit. The objective data is quite unequivocally in favor of continuing recovery. Significantly, the OECD upped global GDP growth projections a couple of days ago. The US growth estimate was raised to 3.2 percent this year and 3.2 percent next year. That was higher than a forecast made last November of 2.5 percent this year and 2.8 percent in 2011. Euro-area growth was estimated at 1.2 percent this year and 1.8 percent next year - an improvement from the November figure of 0.9 percent this year and 1.7 percent next year. The IMF in April 2010 raised it's global growth forecast for 2010 to 4.2%. Prof. Eswar Prasad of Cornell University and the Brookings Institution writes in May 2010 that the global economy has been in recovery since mid-2009; the Financial Times is tracking the recovery using his TIGER index.

And of course the five factors remain valid as ever. Markets are understandably spooked but much of the talk of double-dip, breakup of the EU, long-drawn out economic malaise etc. is based on unjustified extrapolation, unconvincing hunches and / or grandstanding by a few people. In fact this thinking is a product of the same lack of clearsightedness alluded to in the CEO World guest column - when things are rollicking along people will brook no bad news, but when things are looking bad even the slightest bad news spawns Armageddon-like foreboding. Given the general gloom that recessions engender, few brave souls would risk standing out like a sore thumb, making light-hearted proclamations of sunny recovery.

We also need to get used to the idea that in the post-crisis era the world has become far more inter-connected than ever before. Our existing worldview fashioned in the fragmented, fractious and adversarial Cold War era is hopelessly inadequate to understand the full effects of this new
inter-dependence. So the new hyperconnected world will be a rocky place for sometime to come, punctuated by periodic ripples, minor panics etc. However these should not detract from the fact that the underlying economic firmament (that was apparently ripped by the financial crisis) is on firm ground.

A somewhat larger and more credible threat to the world economy is from potential rumblings in the Chinese economy, with China's currency peg* being of particular concern. These rumblings are muted as of now, and there isn't much reason to doubt the ability of the Chinese leadership to handle them; however this is a region that will bear watching. Overall at this point there is, in my assessment, a probability of less than 10% for a relapse into recession for the US, 15-20% for Europe and below 5% for Asia.


Update Jun 9th 2010: Should the admittedly dismal US jobs report for May, released June 4th, cause us to abandon belief in the recovery? While it does give pause for thought, it is but a single data point and hardly constitutes sufficient evidence to declare a slide back into recession. A more reliable jobs indicator would be the 3-month moving average of jobs created - this figure for the last 3 months is way above the 150,000 threshold u
sually used to indicate recovery.
US Fed Chairman Dr. Ben Bernanke also said on June 7th that the US recovery probably began sometime late last summer, and that consumer spending and business investments appear to be taking over from the fading government stimulus in lifting the economy. In today's testimony to the House Budget Committee he said the US economy will grow at around 3.5% this year, and that he expected significant private sector job creation going forward. He also said he didn't expect a major impact from Europe's debt crisis on the US economy - the exact word he used was "modest". US Treasury secretary Tim Geithner is convinced there's a "modest but solid recovery in place". So the poor May US jobs report (and the Eurozone troubles), though disquieting, are likely the inevitable ripples as the post-crisis world structurally readjusts to a changed reality, are no reason to question our faith in the five factors, and don't detract from a recovery that remains firmly on track.

Update June 21st 2010: China's contentious currency peg (which I've referred to above as of particular concern to the global economy's health) has officially begun to be loosened from today. The timing appears somewhat dubious, and suggests this may just be posturing for the benefit of the G20 meeting this weekend. However if China is indeed serious about this move (and there are many reasons to believe it is), it signals Chinese confidence in the global economy, as Goldman economist Jim O'Neill among others thinks.
More importantly, if China does deliver on the implicitly promised upward valuation of the Yuan, then a major distortion of market forces in the global economy will be reduced over the coming months. That scenario diminishes a major threat to the world economy, and virtually banishes the fears of a relapse of Eurosclerosis. And in that case, the probabilities of an early relapse into recession then fall to below 5% for the US, between 5 and 10% for the Eurozone and well below 5% for Asia. (If you'd like to see a more detailed computation of these probabilities, drop me a mail).
* a levee.