How does Infibeam make money on Pi2?

While browsing the Infibeam website, I noticed that they had launched their new ebook reader with a touchscreen, to rival Amazon's Kindle. They price it at Rs 9999, and give 10 vouchers of Rs 1000 each. Hence, effectively, the kindle seems free. This strategy is not unique having been followed earlier by Gilette(sell the razor and earn money on the blades). A friend tells me that Amazon's Kindle costs over $150. Assuming that Infibeam can manufacture at the same cost(despite India's higher tax and cost structure), that means it would make a 20% gross profit on the same. Given that Infibeam's discount on books is 25%-40%(on average), it would not make more than 15%-20% gross profits on books. So they are effectively giving away their profits and making no profit on no loss on the transaction. So what is going on here? Why would anyone do it? The reason in my view is that

1. Boosting revenue multiples:-When dotcoms are valued on revenue multiple basis, then there is no reason why Infibeam should not book Rs 20,000 despite the transactions cancelling out each other
2. Shrinkage:-As any coupon seller knows, not all gift cards/coupons are used. Even taking a 30% shrinkage, that is money directly to the bottomline. And to encourage that shrinkage, Infibeam has
1. Limited the usage to 1 voucher/transaction=>If an item costing>Rs 1000 is purchased, then the user ends up paying cash for the difference. 
2. Relatively low limit(Rs 1000) for the voucher
3. Time limit of 6 months to use 10 vouchers. That implies an order once every 18 days!
4. Limited book selection of academic/other low profit books like NCERT etc! 
3.  long term customer value:-Anyone who places 10 orders of books/ebooks is likely to come back for more. This would expand the market and 10orders would increase their faith in Infibeam.

 However, one important disadvantage of this is the potential of misuse for institutional purchases. If I was a librarian, I would order Pi2, and use the infibeam gift vouchers to make purchases which I may anyway have done. So the concept of incremental customer value may be defeated.

Another issue is that are 10 orders enough to make the Indian into a book buyer? Few Indians read, fewer are willing to pay. And the surfeit of pulp fiction costing less than Rs 100 has devalued the category. Would more expensive books cause Indians to pirate them online? On file sharing sites, one can download illegally the latest version of books even costing $5 or less. I think that after exhausting the vouchers, it is optimistic to expect an Indian reader to purchase ebooks rather than download them from filesharing websites.

Anyways, I shall follow this matter with interest, and update you all if I purchase that reader

Chemical pesticides, antivirus software, education and medicines-conflicts of interest galore

While analyzing the business models of the chemicals, pharma and technology industries, I began to connect the dots and notice some interesting common threads, some of which I explore in this post.

Chemical pesticides are needed if the seeds are inherently weak or are not able to cope naturally against their pests. Agribusiness companies often produce both the seeds and pesticides, thus sparking an inherent conflict. Better seeds resistant to pests need less pesticides, which affects the business performance of that division. And pesticides ARE likely to be more profitable, because they cannot be reused/recycled unlike seeds(as Bt terminator gene is not widely used in India). of course, there are likely to be be Chinese walls as well as specialized seeds and pesticides companies which will keep a healthy competition-but care should be taken that consolidation sprees does not destroy that.

Similarly, writing robust code slowens the time to market and reduces the demand for anti virus. Why not kill two birds with one stone by leaving known errors, which you can then solve with your proprietary anti virus? A few techie friends of mine accuse microsoft of this.

And while pharma companies do not(yet) sell food, they do sell nutritional supplements of doubtful efficacy. And given the low awareness even among medical professionals of the interaction effects of drugs, cocktails of drugs may cause resistance and other unknown effects, thus boosting the demand for new drugs to combat that issue as well!

Some Indian education majors like NIIT, Educomp, Everonn, EdServ, Manipal Group etc are present/entering into both school/college education and also coaching/tutorials. This begs the question-which segment will be canibalized? Will a good school remove the need for tutorials or vice versa?

In all the above, the risk is greater when conglomerates take over independent and competing businesses. Therefore, having independent focussed players cuts the risk for consumers.

Is Kindle the new Napster?

Napster killed the records industry. When customers discovered that they could listen to unlimited music online without being forced to buy bundled tracks on vinyl CDs, they defected en-masse to P2P sources of pirated digital music. Though the records company legally fought back and got Napster shut, it was clear that digital music was an idea whose time had come. Hence when the Apple Store decided to sell most songs for 99 cents, music companies reluctantly joined the party because they realized that the customers had now tasted blood, and would not return to the old system. But despite the 99 cents thing, I can say from empirical evidence of both Indian and foreign friends, that the quantum of pirated music is mindboggling. Students already cash strapped with high tution, rent, mess and other expenses, are most willing to cut their spend(not consumption!) of music/films. Also, going online does make our ethics a bit more elastic. The person who would never dream of stealing 5cents from a blind beggar on a desolated street, has no compunctions downloading media content worth thousands of dollars. Whether it be rock music, Hollywood films(or even Bollywood for that matter), torrent sites and DC networks on college campuses/apartment complexes lead to large scale revenue linkage.

The books industry is quite similar. It also depends on backlists(old content that sells as classics like Enid Blyton, old classics etc) and on blockbusters(Harry Potter, fiction franchises). And given the higher entry barrier for books(literacy, time investment), people saw it worthwhile to spend on physical copies, given that they could use it during the downtime of commuting, breaks etc,. But the disruptive innovation of ebook readers like the Kindle, ensured that now ebooks could be as convinient as books. In metros, the factor of not having to endure traffic jams/long distances for buying books, is a factor. And though online shopping and free delivery of physical books is now a global phenomenon, ebook downloads allow for instant gratification,at prices often lower than physical books. Given that adults are likely to read books at best once(research shows that upto 40% of books go unread!!), ebooks are value for money, and save the space crunch which results from having huge collections of physical books.Not so long ago, children's books were the most expensive because publishers felt that children would prefer the paper and ink version of books. That assumption may no longer be valid. Kids used to their screens(TV, mobiles, PS3) may readily accept a fourth screen. And the Kindle costs just $79(around INR 3900). Infibeam's version of the Kindle costs Rs 9999-but they give 10 vouchers of Rs 1000 each, which are redeemable against purchases of books/ebooks within 6 months. So cost is no longer an excuse to avoid buying an ebook reader. And the high battery life(upto 1 month) and ease of handling makes the ebook readers suited to Indian conditions. And publishers(especially niche books) find that ebooks leapfrog the poor and often expensive distribution chain for physical books.

But as the music publishers found, the costless distribution of digital content is a two edged sword. Any level of digital rights management pioneered so far, has been unlocked by pirates. The publishers have been losing the cat and mouse battle with pirates. Cloud computing may hand the technological victory to the publishers, because they can control and revoke access at any time, and have on the clock information on WHO is reading their content. Still, given the vast ebook piracy which Kindle allows for, it can be said to be the new Napster, for more reasons than one.

Few Business systems see genuine goal subordination

Today, I opened a systems textbook and noticed the idealistic definition of system where a set of interrelated and interdependent sub systems, work together to achieve a common goal. And perchance if the sub system's individual goal(s) conflict with the overall goal, then the overall goal takes precedence. For instance, if the company's goal is to achieve maximum profitability, then it may conflict with an Operations Goal of 100% stock-in/Sales goal of 100% client coverage/Production goal of 100% capacity utilization. But it is naive to expect the respective functional heads to bend over and take it, just because of an idealistic sense of honour. After all, if their function underperforms, they can kiss their bonuses/promotions good bye, specially in the pay for performance mindset of today. Hence, controls and systems are set in place to ensure that sub units act as per the invisible hand to achieve overall goals. For instance

• Top Down Planning:- This ensures that sub units can only plan and execute within the overall boundaries laid down by management, consistent with superior goals
• Profit Centre and Transfer Pricing:-Profit Centre approach can ensure individual sub unit optimization, but may affect overall margins. That is why transfer pricing sets ground rules and dispute resolution for interactions between units, to ensure that the squabbles do not harm the organization too much.
• Cross Selling:- An acid test of the extent of integration between sub units, is the extent of cross selling done by SBUs. This metric is important especially for banks. Hence, encouraging cross selling will improve peer interaction, and boost overall profitability.
• 360 degree appraisal:- If peers have a role in appraisal, then atleast more civil behaviour and bother for overall goals will ensure.

But the best laid plans often fail. Top down planning without a strong internal audit function, often remains a paper tiger. Transfer pricing can be tweaked by smart management accountants, or rendered useless by faulty data/analysis. And cross selling is not always in the SBUs control, and may lead to misselling/fracturing the primary unit client relationships. These things are a reality of life in organizations, and how they are handled often determines 

Why politicans should make good managers

Those who have studied organization structure(right from Robbins onwards) agree on the pivotal role of organizational politics. To rise to the top level, besides competence and luck, one does need a very good ability to navigate organization politics. In both India & USA, several politicians have strong business interests/affiliations, which often predate their entry in politics. Indian examples are the Reddy brothers of Karnataka, Maharashtra sugar barons, Dhanbad coal mafia, Goa ministers, Jindals etc, while USA examples would cover a large chunk of the House of Republicans. So why does this happen? Below are some ideas

• Sociologists hold that where people need to divide limited resources among themselves, they start politicking to maximize their share. Whether the arguments be rational('economics'), spiritual('religion'), social('democracy') or by force('muscle power')-politics is the common strain. This limited resources fight is true for organizations as well. 
• The trend in India is to build a coalition of friends(and a few enemies) to keep out the common foe. These coalitions navigate several minefields, but are the way ahead in India atleast. Even in organizations, the manager needs to coordinate various functions, and have them work in harmony, or atleast work on the coalition model of acting on common minimum program(organization goals). Even outside the organization, the tendency to form alliances is now growing beyond the technological world, and entering areas like auto(Renault-Nissan) and pharma.
• By playing the divisive politics card of caste/region/creed etc, politicians instinctively know how to divide and rule. This skill would serve them well in organizations, where under the pretext of 'segregation of duties/maker checker concept', different sub units are designed to check and neutralize each other's over reach.