RBI Credit Policy Update — Minor Tweaks only! Tuesday, Oct 30 2007

 

Today, the RBI issued its credit policy update. A few months ago, I had put out an article outlining the central Banks rather unenviable position. This credit policy update seems like the RBI is still trying to juggle too many of their financial balls around.According to the traditional economists who run the Federal Reserve and the ECB, banks should not worry about their actions impacting exchange rates. The RBI governors and economists would just laugh at those deluded Americans and Europeans who don’t know better. One of the RBI’s many targets is a desire to keep the Indian currency at a certain price band versus the dollar. This is called a currency peg. In order to keep the currency reasonably weak, the Central Bank has decided to raise the Cash Reserve Ratio (CRR), which is the percentage of cash deposits that the banks have to keep with the Central Bank.

Raising the CRR: How does it help?

Well, the concept is simple. Any money the banks don’t have access to, they cannot lend. If banks cant lend money, there will be less money floating around the system. If there is less money floating around, then inflation can be controlled.

Are there any other consequences?

The answer to this is not quite so simple. The RBI would love to say, heck NO! But they know better. The central bank has in this case kept the basic lending and deposit rates on hold. By doing this, they hope that banks will keep their interest rates constant. But for a bank, things look a little less nice. Any money that is not being lent has some interest being paid out on it, and the bank therefore loses money. Now, RBI has told the banks, “Lend less money, but keep your interest rates the same.” This would translate to lower profit margins for banks, which is never a good thing for those money minded bankers. So what banks are actually likely to do is keep the borrowing rates constant, but start hiking rates on what they see as easy targets. For banks, the easy targets are Consumer Durable loans, auto finance, and personal loans. And of course, the lower margins also mean that they cannot undercut each other in offering easy liquidity, and will be a bit more choosy in whom they give money too.

So, why CRR…why not Interest rates and other things like that?

That is the big question, isin’t it? The answer is a little bit complicated, but here it goes. If the RBI raises interest rates, international money will be attracted by the better yields, and start pouring in money. This money that comes into India will be converted into Indian Rupees, which will in turn raise inflation, which devalues the currency. Now, because the Indian economy is rather strong right now, a case might happen that the foreign in flows will not cause inflation (which is somewhat the case now), but will instead cause the Rupee to strengthen…weakening the ability of India to export its goods. All in all, raising interest rates is a signal to foreign investors to come and put their money here; which is what they are doing right now as it is.Right now, the RBI is handling the foreign inflows by selling rupees madly to buy dollars. Since the RBI prints its own money, it does not really have a shortage of rupees. But the problem is that all these rupees end up in the Indian Bazaars, and the central bank is terrified of the bogey of inflation. So, by making the banks hoard more money (raising the CRR), it is hoping that it is taking money out of the system in the same proportion as the foreign funds coming in. And if timed well, it might well work.

The Catch: Mundel and Fleming have their revenge

Of course, the Mundel-Fleming model of economics (described here) states that in an open economy it is impossible to control interest rates, inflation and exchange rates. But the RBI is seemingly managing this impossible juggling act. But Mundel and Fleming have their revenge. In reality, the RBI is able to maintain all three only by making the banks hoard money. In other words, they are no longer as competitive as they would like to be. Thus, the economy is not truly open. In the long term, if the Central Bank continues to increase the CRR, it will no longer be profitable for banks to stay in business, and the economy might well nosedive.Analysts (nameless up to now) believe that one way of reducing the liquidity is strangely enough; to reduce interest rates. (conventional economics states the opposite). This is because currently, huge foreign inflows are happening due to the interest rate arbitrage that exists due to the low US rates and the comparatively higher Indian rates. If this differential is reduced, foreign money will no longer be flowing into India at the current high rate, and the amount of money that RBI will print to keep the exchange rate constant will naturally reduce.I am not so sure. While the RBI will have to eventually drop interest rates, another way out could be to let go of the currency ball. IF the Indian currency were to find its own natural level, the money supply in the Indian Bazaars would remain constant. The worry for India is that the favourable exchange rates might well prompt increased imports, and hit Indian exporters hard. But in the long term, this might be the only real option available to the RBI.Of course, like most economist solutions this is not perfect. The real worry that Indian industry cannot really cope with lean mean Chinese manufacturers and others of their ilk cannot be ignored. Making imports cheaper with a stronger currency could well decimate India’s advantages in cheap labour and hit our exports so hard that they may never recover. But my belief is that the Indian corporate is now ready to take on the rest of the world. If we free the Indian corporate, he will also be free to take over his foreign competition with the stronger Indian currency.

Summary

Well, that is all hypothetical though. In reality, the RBI has raised Cash Reserve rates in order to reduce the money floating around in the market while keeping interest rates constant. All this is just to keep balancing the tightrope that the Indian rupee is walking. And of course, to fight the demon of inflation, which is hovering at a comfortable 3% today.

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Price Elasticity in the real world — Oil Prices Monday, Oct 29 2007

What better way to test price elasticity with that most insanely difficult commodities to price, oil. Most people say that oil price is determined by the whims of local dictators rather than by the laws of supply and demand. But lets have a slightly closer look, and see how it goes. Maybe we can get some trends.

First lets look at the price of oil. For our analysis, which is hardly going to be in depth, we will only bother about the last 2 decades or so.

Year	Prices	Consumption (million barrels/day)
1988	18.53	65
1989	14.91	66
1990	18.23	67
1991	23.76	67
1992	20.04	66
1993	19.32	65
1994	17.01	67
1995	15.86	69
1996	17.02	71
1997	20.64	72
1998	19.11	74
1999	12.76	75
2000	17.9	77
2001	28.66	78
2002	24.46	79
2003	24.99	81
2004	28.85	83
2005	38.26	85
2006	54.57	86
2007	65.16	87

The data above is a little detailed, but anyone will notice that as the price goes up, the consumption of oil is increasing. This is rather silly, is it not? After all, the price elasticity thing says that if the price of a commodity goes up, the demand for it will go down. Yet, oil consumption has gone up rather than down. Not at all as per theory, is it?

Well, there is a reason for that. While the overall consumption of oil has gone up, a breakup of regions tells an interesting story. While global demand has gone up by about 22 million barrels a day, North America has only risen by 4 million barrels, and Western Europe is even worse, with practically no change in consumption. It is in Asia where consumption has shot up, with Asia accounting for an increase of almost 13 million barrels a day, which is an incredible 60% of the global increase in consumption. Africa and the middle east account for the remaining rise.

Now, the reason why prices have gone up and consumption is still moving up is becoming a bit clearer. The problem is that a previous zero consumer has entered the market, and the production of oil must catch up. Until then, the prices will just keep going up. In the case of oil, while global consumption today is about 85 million barrels a day, the spare capacity in the world is only about 2-3 million tonnes a day. One attack in Nigeria, or one storm in the Florida Keys would lead to a shortage in supply.

And like I pointed out, elasticity is not just about price setting the supply. Sometimes, supply sets price. As there is no feasible substitute product for oil, the elasticity of oil is very low, maybe as low as 0.1. Let us now evaluate a hypothetical situation, where the supply oil drops by 1%. And lets see what happens to price.

Now, from the formula, Price Elasticity (0.1) = Percentage change in supply (0.01)/Eq. Change in price

Cross multiplying Eq. Change in price = 0.01/0.1 = 10%.

Now, we see the problem. The smallest supply disruptions lead to a HUGE change in price. Now, over the last 20 years, oil demand has increased by about 20%. Even if supply rose by 10%, the gap in demand and supply is still 10%. With a price elasticity of 0.1, you can see that the resultant change in price is at least double. If you add an inflation rate of about 5%, you can see that a rise in oil price from $18 to about $ 70 dollars seems reasonable.

Of course, oil is ruling at quite a bit more than that. Its at close to $90 today. And this is where I inject caution. It would be tempting for me to lower the price elasticity of oil still further and get the required $90 per barrell as the price that oil should be at. But that would not be accurate. In reality, the additional 20 odd dollars is the risk premium of oil owing to the Very small amount of spare capacity and low price elasticity of oil. The market knows that if oil supply just drops by 5% the price of oil could well go up 1.5 times. And disruptions to supply are rather high probability events these days! Some amount of the oil price today is therefore exaggerated to take into account this risk. But to assume that prices will drop to the levels of the early to mid 90’s once the security risk is removed is to live in a fools paradise. Unless substitute products are discovered, or far more reserves than are currently available are discovered and utilised, high oil prices are here to stay.

So there you have it. How price elasticity can be used in the real world with oil prices. This pretty much completes the Price elasticity section that I had. Hopefully, next section onwards will be on some other topic!

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Economics 102: Price Elasticity…What is it? Friday, Oct 26 2007

Well, first things first. I have forgotten to point out one of the assumptions behind economics. Its a rather basic one. It basically says that the actions of an individual are perfectly rational and are motivated by the desire to maximise gain.

Now most of you will jump the gun and say “What Tosh!”. And while it is true that most of us do not behave terribly rationally most times, as a group we are much more predictable. Besides, we do things for gain at all times. It may not be monetary or measurable…but sometimes peace of mind may be more important than money (or the other way round).

Ok…now that that is done, lets move to our topic for the day. Today’s topic is Price Elasticity.

Egads: Yet another dull topic?

I hope not. But you never can tell till a topic is done! But without waiting for any more fanfares, lets start!

How is demand dependent on price?

Price elasticity attempts to quantify changes to demand if there is a change in price. There is a bit more to it than that, but we will save that for later. First a definition.

Price elasticity is the ratio of the change in quantity bought of something,  versus a corresponding change in price of that something.

An Example

Confused? Well, lets explain it with an example. I will go with a practical problem that I faced. When I was a kid, the Price of Maggi ™ Noodles was Rs. 5. And I loved Maggi Noodles. We used to have it every Sunday for lunch (my sister and I). Then one fine day, the Price changed from Rs. 5 to Rs. 7. And suddenly, instead of buying 2 packets of Maggi every week(about 8 packets a month), we had Maggi Noodles once every 2 weeks, which dropped our demand down to 4 packets a month.

The change in Price of Maggi was Rs. 2 on a base of Rs. 5. At the same time, the quantity demanded dropped from 8 to 4. So elasticity of demand is now seen to be (4/8)/(2/5) or (4×5)/(8×2)=1.5.

Now…what the heck is this 1.5? What does it really mean? Well, basically it means that every time you increase the price of Maggi by 1 unit, my demand for the Maggi will fall by 1.5 units. (oversimplification here, but it suffices). Even this does not impress you, oh fine reader!

Revenues and Profits now

Ok…lets do a revenue calculation and now you may be able to see how Price elasticity is cool. Before, I used to spend about 8×5=Rs 40 on Maggi. Now, after the price increase, I spend 4×7=Rs  28 on Maggi. Let us also assume that it takes only Rs 2 to actually produce and sell the Maggi Noodles. Thus, previously, the company was making a profit of 3×8=Rs 24. Now, they would make a profit of 4×4=Rs 16. So the poor company has shot itself in the foot. By increasing price, they would have imagined, they would increase profits. But because of elasticity of demand, they have actually lost money! So when you have pricing decisions, you better worry a heck of a lot about how elastic the demand for your product (or service is).

So, what is elastic, and what is not?

That is a 64 million dollar question indeed. If you have an elasticity more than 1, it basically means that your product sales are extremely sensitive to price. A change in price of 1% will alter the demand for your product by more than 1%

If you have elasticity between 0 and 1, it means that the demand will change less slowly than the price change. So a 1% change in price would lead to a change in demand of less than 1%.

Factors affecting Price Elasticity

1. Can you do without? : If the price of maggi doubled, my consumption would drop pretty drastically, because i dont really think Maggi is worth Rs. 20. But the same cannot be said of electricity. If the price that the company doubled, I might be able to cut back a bit. Maybe a couple of cold showers instead of the hot bath, or Switch off the lights while sleeping. But, I cant really cut electricity consumption by too much. So, if a product is essential, its elasticity will be low.

2. Are there substitutes?: If tomorrow, Maggi prices doubled, I would go and buy Top Ramen instead, which would drop Maggi sales drastically. A more practical example. Lays has reduced the quantity of its chips packets (or increased the price). But I continued to buy Lays chips, because there was no acceptable alternative. But then ITC came out with Bingo Chips, which is cheaper (and crispier too). So, I switched to Bingo, which is practically the same as Lays, and cheaper too.

3. Is it a huge part of your income?: Now, the price of sugar can double. Is it going to change my consumption of sugar too much? Not really. Its not that the sugar has no substitute (i could use sugar free). Its just that if I earn 20,000 a month, and spend Rs 50 a month on sugar, I dont really care whether I spend Rs. 50 or Rs. 100. Its still a negligible amount of my total funds. But the situation would change completely if my 3 bedroom house rent doubled from Rs. 10, 000 to Rs. 20,000. Now there is no way I could live there and survive. So my demand for a 3 bedroom house would plummet!

So, there you have it. Price Elasticity of Demand explained. I just hope it made some sense. For further entertainment on elasticity of demand, we will take a live case, which is going to be oil consumption and prices. Lots of fun and frolic promised.

p.s: All Trademarks belong to their respective owners, whosoever they may be.

p.p.s: I did not like Bingo Chips too much…even if they were crispier than Lays!

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Tonnes of new management stuff up Thursday, Oct 25 2007

I imported some stuff from one of my old blogspot blogs. I admit, my blog is now Extremely big. Well over a 100 posts and about 40,000 words of random gyan now. In the interest of the (hypothetical) reader who cannot go through my entire gamut of blogs just to see the posts that I had written in blogspot several months ago, you can find them here.

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Applied Economics: Currency appreciation! Wednesday, Oct 24 2007

 

 

Ok. Today, we try to analyse currencies from a pure economic demand and supply perspective, and will try to explain why the US of A is so pissed off with China, and how the RBI is imposing controls to ensure that the Rupee does not suddenly become more valuable too!

Demand and Supply: Market determines Price…Or is it the Chinese Government?

A really quick intro first. China is exporting more than it is importing. This in economic parlance is called a trade surplus. What does this mean for china in Demand and supply terms.China is making $110 of sales to the world, and is ending up only buying about $80 worth of things. So, China is netting a profit of $30 (oversimplifying a bit). But there is only one problem. China does not use dollars! It uses Remnebi, or Yuan as its local currency. So, this $30 is actually worthless to a common Chinese guy on the street. He cant buy anything with it in China, and since he does not buy anything from the outside world, the mystery is…what happened to that missing $30?Now standard economic theory says that if someone has $30 that they don’t want, they will try selling it cheaper. Now, one dollar buys about 7.5 Yuan. But now this guy has excess dollars, and he is quite desperate to buy some new Chinese Toys for his kid. So he shouldbe willing to pay a bit less for the Chinese Yuan. Maybe he will pay one dollar to get only 6 Yuan. And if he does that, then the Chinese currency is said to strengthen, which will make its exports a bit tougher, and its imports a bit more expensive, thereby eliminating that pesky Trade surplus.But the Chinese Government is a ways smarter than that. They want to keep that trade surplus going (don’t ask why). So what they do is simple. They go to this Chinese guy who holds the $30 of the trade surplus and tell him…”Hey boy, we will give you 7.5 Yuan for every dollar you got. Just hand over the money to us.” Of course, Mr. Chinese dude is overjoyed at getting a good rate, and hands over the cash to the chinese government. The Chinese Government in turn puts this in a special place, which it calls the Currency Reserve, and as you can imagine, this is like a bank vault for American dollars that the Chinese People cant really spend. This explains how the Chinese dudes have a currency reserve of $ 1 Trillion. Its simply because they can’t find any Chinese guys who want to buy American goods!

What about India?

Yup. What about India? India is getting huge amounts of money coming in to it via foreign investments and surely our software firms are making American dollars just take wing and fly down here. So we should be in a similar situation to China. Well…sort of. India has this wonderful thing called invisibles, which is where the software sector is defined. IF you take out invisibles, India has a whacking big trade deficit. But if you add investment and other such things then we are similar to China, with a comfortable trade surplus. This of course means that the Rupee is getting more valuable, as the demand for Rupees from foreigners increases. The problem for the RBI is that there are simply too many foreigners with cheap dollars now wanting to enter India. IF the RBI tried to do a Chinese Government and give every person with 1 dollar Rs. 44 (Which is what the Indian Rupee used to be), you would be left with a heck of a lot of rupees floating around in the country, which increases inflation inside the country. But letting the rupee become more valuable would mean that the software industry (and textiles and half a dozen others) would raise a stink to the high heavens and claim that they cannot pay taxes ever again. So, this strengthening of the Rupee now has to be blocked by telling the foreigners to go slow

Enter the P-Note…Err…Exit the P-Note

Upto now, there was this thing called the P Note. What was it? Basically, it was a magic wand by which any person could invest in India, and no one would know who. Now, RBI wants to block this P-Note. Thus only identified individuals would be permitted to trade in India, which would (hopefully) reduce the amount of dollars flowing in. Is this likely? In the short term, certainly the stock markets reacted with fear that the dollar tap would be shut off. But in the long term, with the Indian economy growing at 9%, you might well find that it does not (unless Indian Bureaucracy manages to hobble applicants). There will be a hoard of people registering themselves to trade in India, and the RBI will have to find a new way to slow down the arrival of cash.

So there you have it. Why the US thinks that the Chinese Government is distorting the world economy…and why the Indian rupee might rise…or not!

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Futures and Forwards : Hardcore Management Gyan here (please avoid if Allergic) Monday, Oct 22 2007

Ok…I actually wanted to do this light piece on Infy and their 6 day week, but I found out that its all just unsubstantiated rumours, so I had to think of something else. I don’t quite remember if I have written about how futures and options work, but its time to explain that now!

Statuatory Warning: This is a super boring topic for most of humanity. Anyone who does not really want to read it ought to skip it!

What the Heck is this future thing anyway?

Well, to answer this question, we go to Japan in the 1600’s (what is with me and Japan!). Now, the rice farmers in Japan in the late 1600’s were faced with a lot of uncertainty. Japan is not a very large country, and rice crops profits were fluctuating wildly at the central market place in Osaka. So, in 1710, an idea was tried out. Lets illustrate it with two Chaps, named Hu, and Tad (tell me where you heard those names before, and you get a brownie point).

A Typical Forwards Contract

Now, Hu is a farmer, and he wants at least 2000 yen from his crop of about 20 tonnes. That is about 100 yen a tonne then. Tad is a merchant, and thinks that in 4 months time (when the crop is harvested) prices will go up to 150 yen a tonne. So he negotiates with Hu, and they write up a contract where Hu promises to deliver 20 tonnes of Rice at 125 yen a tonne in 4 months time to the Central warehouse in Osaka. This is a typical forwards contract. So lets take a look at what are the features of this contract.

1. Settlement Date: This is a date at which delivery of the underlying commodity (ie: rice) is to be done. Not to do it on this date is breach of contract and can be prosecuted

2. Futures Price: The pre set price that both Hu and Tad have agreed to (125 yen) is the futures price that the contract should have

3. Amount: This is of course, the amount of the underlying commodity that has been decided upon (20 tonnes)

So there you have it, the primary constituents of a forward contract.

Futures and Forwards: What is the difference?

Well, what I explained right now was a forwards contract. Now, what is a futures contract? One of the features of a forward contract is the date of delivery. Its a contract that can only be settled on that particular date. So, Hu and Tad will have to settle up with each other on the date specified. But a futures contract is tradeable. What does that mean?

Lets say that Tad makes a futures contract with Hu and finds out from his second cousin Tokagawa that the government plans to offload 10000 tonnes of rice on the open market in 3.5 months. Obviously, this would change his calculations significantly. He might now make a loss on his deal with Hu. So he goes to a new merchant Shinta, and sells his contract with Shinta at 120 yen per tonne of rice. Here, Shinta is going to pick up the additional 5 yen of profit when delivery happens (here shinta hopes that the market price will be 125 yen), while Tad now escapes from a potential nasty situation where he would have been holding 20 tonnes of rice when the market would be overburdened with it! Tad can do that with a Futures contract, as futures contracts are standardised, and can be traded freely. But a forwards contract is a one-to-one contract, which means that he cannot do such a thing.

Differences between Futures and Forwards Contracts

1. Futures are standardized contracts….Forwards are one-to-one in nature

2. Futures are exchange traded (ie: you buy and sell them on a derivatives exchange)…Forwards are traded over the counter. (basically, harder to trade them)

3. Delivery in a futures contract is decided by the exchange clearing house. For a Forwards contract, the contract clearly specifies whom the delivery is made to.

Where is a speculator in this?

Well honestly, I am not all that interested in taking delivery of 20 tonnes of rice in real life. After all, its not like I own a convenient warehouse to take delivery! So what can I do in this market? How do I SPECULATE on this market?

Well, actually, it is possible to do so. Lets say that Tad has negotiated a futures contract which is for taking delivery of 20 tonnes of sugar at 125 yen on december 31st. It is currently November 1st, and the harvest outlook looks bad!

Jargon Warning: Long and short of it!

Now, Tad has what is referred to as a long position. Basically, a long position is taken whenever the party has to accept delivery. IF Tad does not have a warehouse to accept delivery, he is going to be in deep trouble soon. But he has an escape route. First let us summarise Tads position right now.

Tad has bought 1 contract of Japanese rice futures at 125 yen to be settled on 31st December where the takes delivery (1 contract in this case is worth 20 tonnes).

Tad has to do something simple. He goes to the Osaka Grain Exchange, and tells them that he wants a covering position.

A covering position for Tad is a contract where he Sells 1 contract worth of rice futures on 31st december at the currently traded rate (Say 135 yen).

So for Tad, we can say that what he did was buy 20 tonnes of rice at 125 yen, and sold it again at 135 yen….making a nice profit too. Of course, Tad never actually bought or sold the rice. In order for him to trade on the exchange he pays a certain amount of margin money, (typically about 20% of the amount he neeeds to pay) and he makes a pretty packet.

Now you can see the huge gains this could make. For Tad, who actually invests only about 1000 yen (20% of 5000 yen) and makes about 200 yen profit in just about a 2-3 months. If he were a physical trader, he would have had to invest 5000 yen in this venture to make 200 yen profit. So, you can see that with only 1000 yen, he could make a huge profit. Of course, the converse is true as well…If for example there was a glut in Rice, and the prices dropped by 20% he would be left with nothing at all! Classic leveraging, in other words.

This is a brief example of the Futures and forwards market. I wanted to do options as well….but well, work calls!

Till my next post.

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How do Internet Companies Make Money? Saturday, Oct 20 2007

Hmm…This is a topic where I might have covered the individual components in separate blog posts. However, I got asked this question by Ratty and got to thinking about it. The multiplicity of Facebooks, LinkedIn’s, MySpace’s, Second Life’s et al have led to a boom in the idea of the socially networked world and the Web 2.0 revolution. Is this justified? Is there any way by which we can figure out which business will succeed, and which probably will be the next mammoth turd.

Of course, standard caveats apply. The following is my opinion only, and if you think I am wrong, you are free to disagree with me.

 Summary:

Internet companies that make money sell one or more of the following 3 things

1) Users

2) Products

3) Services

Fine, a bit more detail:

The summary says it all, but lets elaborate it a bit here, cause I love typing! I am saying that any company that makes real cash profits will need to sell something. You cant get something for nothing, so lets take the example of 3 companies that sell stuff and make money.

1) Google –sells users

Google actually sells ads, but ads are clicked by users….so lets simplify it by saying that the deadly duo actually sell users rather than ads. Yahoo also sells ads, which means that they ride on their user bases. You might scoff, but advertising is a phenomenal industry, and Google is laughing all the way while hefting $3 billion dollars in profits every year! Right now, I am not sure that the Facebook’s of the world make money…but one important source of future revenue for them would be ad revenue.

The danger: There are only these many ads that can be sold. The other problem is of course that you have to provide value. People will come to your website if they use it….not because you want them to click ads. So you have to offer a service (like Google is offering). Only then will they even bother visiting your site. Of course, the corollary of this is that your utility acts as a substitute for location. A billboard in the city centre is worth quite a pile of cash. A website that people use for a reason is the closest thing to a great billboard. But at the end of the day, that is all these companies will be. Great providers, which hide the fact that they are a huge billboard behind quality services.

2) Sells Products: Amazon.com

Amazon.com is the worlds largest bookstore (if you believe them). But they don’t sell only books. They sell music, Action figures and quite a bit more too. But at the end of the day, they sell you something that is either a physical product that has to be shipped to you (or more rarely) that has to be downloaded by you. Apple’s Itunes is an example of a download service. Now, the fact that these are internet companies makes them in NO WAY different from traditional product companies. Except that they use the net to cut down costs (lower inventory) and to increase their reach (global customer base).

The Danger…and Opportunity: The model makes the largest web stores real price warriors. If run well, their operational costs will drop down to next to zero, and traditional brick and mortar stores cannot dare to compete. The danger…a brick and mortar store can build up the web infrastructure at no great expense, and the resulting competition will make amazon.com profit margins go down to Walmart like lousy levels.

However, the emergence of these web stores has resulted in a radically new market phenomenon. Previously, a music store in India would never bother tracking a group like Gaelic Storm, and store their CD’s. But for a itunes.co.in (which does not exist yet) would not incur any cost stocking its entire global catalogue. And if someone does buy Gaelic Storm music, then they make a nice profit out of extremely small niche customer bases. This phenomenon that the web has engendered is called the long tail of consumers. And this is a truly new segment that means that the web has increased the customer base that normal brick and mortar could never have had with their physical inventory costs.

3) Sells Services — Ebay, cyworld.com

This is where there is room for some disagreement. Technically, you could claim that yahoomail is a service as well….but in my books, its sold only if you pay hard cash for it. So, YMail is not a service, but Ymailplus is a service. In the same way, eBay makes money acting as an online auction house. cyworld, which is a korean social networking site makes money of selling products (music), but also makes money by selling something that is purely virtual (IMHO) which is customizable avatars, who live in a virtual house. Sure, you could quibble and call it a product, but let me call it a service.

The Problem?: Service businesses on the web are dicey things. The first problem is the culture of the web means that charging for a service is rather unfashionable. So while Facebook offers the service of linking up networks, they are not sure whether to charge for it, because this would drive out most of their users, which would make the network non functional. The problems that bedevil pricing in a Real world service business like a barbershop are even more pronounced in the web, where a competitor comes up out of the blue and offers the same services for free. While getting users for free services is rarely a problem,  how to make it pay is the 64 million dollar question.

So there you have it….the newbie’s guide to how web businesses make money. Till my next post then, ta ta!

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Lousy names and tag lines Friday, Oct 19 2007

This just caught my eye. Hero Honda has just launched a new bike…called the HUNK!

Good grief. I am sorry guys, but unless that bike is the greatest thing ever, I am unlikely to go and buy it. I know that its cool to be individualistic, but what do I tell my friends? Umm Guys, I came here riding a Hunk? Or maybe…My bike is a Hunk?

Egads….I thought bike ads were bad. Now I know that bike namings are just as dreadful.

I still remember the Pulsar when it came out. It was “Definitely Male”. What sort of dumb tagline was that? The double entendré’s it generated were too good to pass up. Mind you, the bike itself is great. I just wish they would change the tagline on it!

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General Random Stuff…feel free to skip! Thursday, Oct 18 2007

Well, today i was bored out of my skull, and did not really feel like writing anything managerial. But I got asked a question as to how I am able to talk about everything….here is part of the answer. Today’s reading for the day

1. J Krihnamurthy — Random stuff about him

2. Balanced Scorecards — A management topic on HR, that I really know too little about, and need to learn more

3. How to apply eye-makeup! (dont ask…truly random. I learnt about almond eyes and raccoons)

4. How do Internet Companies make Money (research for my net blog post…will save this one)

5. News stories on the Sensex crash….background on the whole P-Notes thing (not really interesting enough for my blog)

6. Sugar Prices in 1974 and bubble economics  (coupled with fundamental analysis of price forecasting, this was tough going)

7. Another couple of Ron Paul articles….(at first I was excited by this guy…but now am not so impressed.)

There was more, but that stuff I don’t quite remember. And if I don’t remember it, I could not possibly have read it!

well, I hope to post tomorrow on something a bit more, but right now, lack the motivation to actually research/write on a topic with enough interest. Hope things get better tomorrow!

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Gay Rights…and lefts. Getting a Grip on the Issue Tuesday, Oct 16 2007

My blog consultant Ms. Potnis has insinuated that too much management and Japanese history can be rather debilitating for a blog’s health.

Topical issues are all the rage these days, and she said…what about Gay rights, boyo? Surely there must be a tonne of things that should be said about that poor discriminated minority. I am known to be chivalrous to a fault, and hence dropped everything else to help this poor persecuted minority. Of course, I got sidetracked into gay personalities, and here is the result.

We look at a historical character first. George Micheal, famous for shaking his behind in the video for Faith, was made rather more famous when he jumped out of a hiding place (left nameless) requesting some “Satisfaction”. Unfortunately for the daring formerly young boyband member, his request was denied with extreme prejudice.

Elton John had a rather better time of it. Early on, he decided that if could not have Marilyn, then he would not go out with any member of the female gender, and started wearing purple sunglasses and white suits.  Of course, the lucky boy did find true love, and is now happily married…err civil unioned with Davide “Dave” Furnish, who also did their apartment.

This brings us to the whole problem of Gay rights. After all, its rather inconvenient to say “Oh, Dave and I were Civil Unionned just last month”. You would picture grim faced surgeons performing a Civil Union rather than happy bridesmaids dodging flower bouquets. But then, the critics of Gay Marriage say, “well…what would you call them, Mr. And Mr. John?” To them, I have this retort…does anyone remember Mr. Margeret Thatcher? (his poor man’s name was Dennis, by the way)

But lets abandon Mr. John, and Dave to their collective fate together. What about Famous Indians who are gay. First comes Karan Johar surely is what I thought (after hearing various remarks made about the chap). But try as I might, not a single quote could I find where the chap jumps out of the closet (or anything else for that matter). Sure, he wears pink shirts…but then, so does Slayman…err Salman Khan, and no one says that he is gay! Ok…so he waves his hands effeminately (but then, so does everyone). So the rumours about his gayness remain just that. Rumours!

So there must be someone who is a famous Indian Gay man. I began to look in earnest. The closest I could come to a famous dude is a Mr. Wendell Rodericks, who is a fashion designer. He therefore satisfies ALL the typical stereotypes of the average gay man. He is in the fashion industry, wears and loves the colour white, and makes comments such as “I want to live like a common man”. He also gay unioned his french boyfriend at Goa, which is rather more well known for its beaches than the marriages being conducted in the French Consulate.

But that was dreadful. It was so bad that I actually had to wiki the man just to find out what on earth he was famous for. Which leads me to ask, “Are all gay men in India hiding behind convenient rocks?” But then I found Vikram Seth!

Now Mr. Seth is more well known for writing 1000 page books written wittily in poetry, and for all sorts of rhyming stuff. But he is less well known for being gay…and unlike George “Jumping Jack” Micheal, has been a bit less public about it. As he says…or would have “My sexual preference is none of your business, neighbour.” But he recently sidled out of the closet in support of the 50 Million people lurking in the sidewalks of India.

A rather less enlightening example comes from someone on the other side of the pond. This genius from Idaho, Senator Larry Craig was entrapped by an enterprising cop in a public toilet for making a commonly known gesture asking for certain inappropriate favours. Senator Craig apparently plead  guilty just to escape the advances of this policeman, and has since learned that a lifetime of being an anti-gay rights demagogue gave him no protection. The poor lad had to quit because his bosses started claiming that he was not toeing the party line. Poor chap, if he had not tip-toed around in public toilets so much, he would still be making ads and be wooed by presidential hopefuls.

But the most recent example has been of a Catholic Cardinal who “anonymously” provided an interview to a local gay radio channel. (or a radio channel that was doing a gay related programme). Unfortunately, for the poor man, nobody was fooled by his imitation of Deep Throat, and everyone from his chauffer to Pope Ratzinger…err Benedict the whatever, got his name without even 3 guesses. The poor man was hurriedly stripped off his red spiffy robes and been demoted to think about the benefits of keeping his big mouth shut.

All in all, if you are gay, here is a word of advice. DO NOT hang around public toilets unless you want to get arrested. Also, disguising your voice is not ONLY about speaking through a handkerchief.  And of course, pink shirts are only an expression of colour blindness. Not anything else!

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