Smorgasbord

A Veritable collection of ... anything !

Monday, March 27, 2006

McDonald's and Dell - Beyond Burgers And Computers


Thomas Friedman's The World is Flat is easily one of the best books of '05. While the whole book is insightful, opinionated and punchy, its also very comprehensible and relevant, for, its about the Globalized world in the 21st century. The theme of the book as such are the forces that are flattening our world and the effects that they will have, in the context of today's globalized world. The explosion of advanced technologies now means that suddenly knowledge-pools and resources have connected people all over the planet leveling the playing field as never before, so that each of us is potentially an equal and a competitor of the other.

One of the insights that Friedman provides in the book is extremely interesting and worth understanding in quite an obvious way. He puts forth two compelling theories called The Golden Arches Theory of Conflict Prevention and The Dell Theory of Conflict Prevention.

One of the more traditional forces that could stop or even reverse the flattening of the world is a good old-fashioned war that could affect the world and destroy economies of countries. China may have had enough of Taiwan trying to become an independent state and may decide to set things straight once and for all; North Korea may decide to use nuclear weapons against South Korea or Japan, out of fear or insanity; Israel and Iran may have a go at each other; or India and Pakistan may finally nuke it out. Any of these geopolitical situations could erupt at any time.

These conflicts could be moderated or influenced by a new form of collaboration fostered and demanded by the flat world, Supply-chaining. The flattening of the world is too young for us to draw any definitive conclusions. But as the world flattens, what will be interesting to watch is the interplay between the traditional global threats and the emerging global supply chains. Like the interplay between old-time threats (China versus Taiwan) and just-in-time supply chains (China plus Taiwan).

The extent to which countries tie their economies and futures to global integration and trade would act as a restraint on going to war. No two countries that both have McDonald's have ever fought a war against each other since each got its McDonald's. However, border skirmishes and civil wars don't count here. Friedman calls this the Golden Arches Theory of Conflict Prevention. According to the Golden Arches theory, when a country reached the level of economic development where it had a middle class big enough to support a network of McDonald's, it became a McDonald's country; and its people didn't like to fight wars anymore, they would rather stand in line for their burgers! As countries got woven into the fabric of global trade and rising standards of living, which is symbolized by the network of McDonald's franchises, the cost of war became prohibitively high for both the victor and the vanquished.

The Golden Arches theory held up pretty well until almost every country in the world got it's own McDonald's, except rogues like North Korea, Iran and Iraq. But now there was need for a revision and Friedman offers The Dell Theory of Conflict Prevention. According to this theory, the advent and spread of just-in-time global supply chains in the flat world are an even greater restraint on geopolitical adventurism than the rising standard of living that McDonald's symbolized. The Dell theory stipulates that no two countries that are both part of a major global supply chain, like that of Dell, will ever fight a war against each other as long as they are both part of the same supply chain. Because people involved in these supply chains don't want to fight wars anymore, they want to make just-in-time deliveries and enjoy the better standard of living that follows.

Michael Dell himself has a good feel of this theory. He says that the countries now realize the risk premium they have and want to protect their equity. The people have tasted economic independence, better lifestyle, good lives for their children; and they don't want to give it up. Any war or prolonged instability in any of these countries will have a huge chilling effect on their economic progress and will undo a lot of good work. These countries cannot take time off for war without disrupting industries and economies around the world and thereby risk losing their place in that supply chain for a very long time to come. For a country with little natural resources it would be a big loss, because being part of such a global supply chain is like striking oil that never runs out, unless someone throws concrete in those wells.

Japanese technology companies are moving a lot of low-range manufacturing work to China despite a legacy of mistrust between the two countries. Historically a strong China and a strong Japan have had problems co-existing, but not anymore as it's a win-win situation now. China and Taiwan have had problems between them, but now both of them are deeply connected in many computer, electronics and software supply chains. The vast majority of the world's computer components comes from coastal China, Taiwan and East Asia. Taiwan has over $100b invested in mainland China and its exports run many high-tech manufacturing companies in China. So a Silicon Shield protects Taiwan from China. Taiwan has become the third-largest computer hardware manufacturer after the United States (US) and Japan. Any military aggression by China would cut off a large portion of the world's supply of computer hardware wiping trillions of dollars off the market value of technology companies listed in the US, Europe, Japan and elsewhere. Even if the politicians don't realize this, their kids can remind them. Former President Jiang Zemin's son is a partner in a wafer fabrication firm in Shanghai with a Taiwanese group. And its not just Taiwan that would be hard up in such a situation, even China would suffer with huge investments moving out of the country to other more stable parts of the world.

In December '04, Taiwan had its parliamentary elections and the two main contenders were pro-independence Democratic Progressive Party and the opposition Nationalist Party, which favored better relations with China. The elections turned out to be a virtual referendum on whether Taiwan should declare itself independent from China ending the deliberately ambiguous status quo. Eventually, motherboards won over motherland. The Taiwanese voted against the pro-independence party thereby opting for de facto independence over de jure independence and avoiding an uncertain future.

There is a caveat to both the Golden Arches and the Dell theories though, they do not guarantee there will be no more wars between these countries. But what they will guarantee is that the governments will think many times over before starting a war for any reason other than self-defense. It is one thing to lose a diet of the McDonald's burger, but its quite another to lose a position in the global supply chain which may not come back for a very long time.

Another case where the Dell Theory proved itself was that of India and Pakistan in '02. But in this case, the theory was working only on the Indian side as Pakistan wasn't (and still isn't) integrated into the world economy in a big way. India is a key member of the world's knowledge and services supply chain; General Electric's biggest research center outside the US is in Bangalore; chips for many major cell-phone brands are designed in Bangalore; tracing lost airline luggage and processing work for major car-rentals is done in Bangalore. India is the back-office for many global accounting and computer maintenance companies. In May '02, the US State Department issued a travel advisory urging American citizens to leave the region as the prospect of a nuclear exchange was very real. Both India and Pakistan were massing armies on their borders and the American companies that had moved their operations to India were unnerved. Many of India's information technology firms explained to their government that a stable and a predictable operating environment is the key to India's development. This situation was a real education to India's elderly leaders who had not fully comprehended how critical India had become to the world's knowledge supply chain. Eventually, India acted with a sense of responsibility, mostly with a desire for self-preservation in today's global economy. India opted for a better future over more territory and avoided an ego-satisfying war with Pakistan. Even the US needs to keep this reality in mind. Although one should not advocate shipping jobs to India just to maintain peace, but if this happens driven by its own economic logic, then it will have a net positive geopolitical effect. India would still do whatever it takes in self-defense, but only if imposed by the reckless behavior of other nations like Pakistan.

Unfortunately, the forces that flatten the world not always lead to good things. Friedman explains how the Al-Qaeda is using the same flattening forces of the globalized world to its advantage and to spread terror. The new paradigm in information diffusion, the Internet, will make no distinction in transmitting irrationality as against rationality. The ease of reaching people and propagating fundamentalist ideologies has helped terrorist organizations in recruiting suicide bombers through a well-oiled supply chain similar to the global supply chains discussed earlier. Investigations have revealed that Al-Qaeda used the Internet in a big way in planning and coordinating the 9/11 attacks. Much of the fund raising for donations to such causes also happens on the Internet though decoy organizations. Hell hath no fury like a terrorist with a satellite dish and an interactive website.

According to the Bible, the Tower of Babel was a tower built by a united humanity in order to reach the heavens. This was heresy and so to prevent the humans from succeeding, God confused them by making each of them speak a different language, so they couldn't communicate with one another and they did not succeed. After that, those people moved away to different parts of the world. If we do something similar today to prevent communication between all people, to prevent such ill-effects of globalization and technology, we would be doing so at our own peril. We must use the new ability to communicate and collaborate for the right ends. If building a tower to usurp God's power was megalomaniacal, Osama Bin Laden's attempt to flatten the towers that symbolize the globalized world is also megalomaniacal. Collaboration must be used to achieve mankind's full potential.

It was constructive collaboration among other things that prevented the Indo-Pak nuclear crisis from precipitating in '02. That cease-fire was brought upon not by General Powell but by General Electric. We bring good things to life.

Sunday, March 19, 2006

The Google Economy


Everybody seems to like Google! If we need some information, about anything, the first place that we look up now is on Google. We do not ask anyone, we do not go looking for a book, we just go to www.google.com. It's become so natural, that we do not think twice before searching for something on Google. And almost always, we find what we are looking for. That's why we have come to trust Google as much as we do. And Google has achieved this in just a few years without any advertising spend. Googling has become a pastime, it's also become a word in the common lexicon now.

Google as a concept and as a company fascinates me. The story of how Google began and how it evolved is very interesting, but I'll leave it for another day. This post is about the most interesting aspect of Google. How does Google make so much money? What is its business model? And how did that model evolve?

Before that, here's some background on Search engines. A search engine connects words we enter (search queries) to a database of web pages it has created (index) and produces a list of URLs (Uniform Resource Locators) and summaries on content it believes are most relevant. Although there may be other approaches to search, this text-based approach is the paradigm that every major search engine is driven by.

A typical search engine consists of three major parts - the crawler, the index, and the runtime query processor. The crawler is a specialized software program that hops from link to link on the World Wide Web, scarfing up the pages it finds and sending them to be indexed. It sits on its own server and sends out many requests to pages on the Internet, just like your browser does. Those requests bring back web pages, which are sent to the indexer. It also takes any links it finds on these pages, and queues them for more requests, which find more links...and so on, ad infinitum. The more sites the crawler crawls and the more frequently it crawls them, the more complete the index is and the more relevant the search results will be. The index organizes the information such that given a set of words, the search engine can come back with the most relevant URLs. The indexes also have tags or metadata. Pages might be tagged as written in a certain language or as belonging to a certain group.

Once the crawl data is analyzed, indexed and tagged, its dumped into a runtime index which is a database ready to serve results to the front end which includes the Query server and the User Interface (UI). The Query server transports the search query from the UI to the runtime index and brings back the results. The query server also combines some intelligence by removing query incoherence and noise words.

Let's come back to Google and its business model now. Google has two key advertising programs. AdSense for Web publishers and AdWords for advertisers. AdWords allows advertisers to list ads targeted to users who are looking for their products or services. On the Google search results page, ads can appear on the right hand side of the page and sometimes also above the search results, and these are clearly labeled as advertising links. AdWords puts these ads there and they are triggered by the search query. This is called as Keyword advertising. Keywords are terms that advertisers choose to trigger their ads on Google. When a user searches for something by entering a search query, AdWords delivers ads relevant to that query. The advertisers hope that the users will click their ads and go to their websites to do some business. Keyword advertising has its distinct advantages. It allows the advertisers to target their ads specifically to users who are looking for similar products or services. This translates into a better Return on Investment (ROI) for the advertising budget, and the risk is minimal. Another benefit for advertisers is the ability to target specific potential customers based on location and language. Targeted ads also helps Google ensure the users keep coming back for more searches, which means more potential customers for its advertisers.

With the AdWords program, Google charges for impressions or clicks, based on the type of campaign. For keyword advertising, AdWords uses the cost-per-click (CPC) pricing approach. A click is defined as any action the user takes to select the ad and be taken to the advertiser's website. Under the CPC model, the advertiser is charged only when a user clicks on the ad and not when the ad appears on Google but is not clicked on. For site-targeted campaigns, the advertisers are charged on a cost-per-impression (CPM) basis. An impression is defined as the appearance of the ad on the Google network. We will soon see what the Google network is. Under the CPM model, the advertiser is charged for each impression irrespective of whether the ad is clicked on or not. CPM bids are made per thousand impressions, hence the name.

Another industry term to be understood is Clickthrough Rate (CTR). It's a measure of the number of clicks the ad receives against the number of impressions. This metric shows how well the ads and the campaign itself are doing. The more relevant the ads are, the more the number of clicks they accrue, and the higher is the CTR. A point to note is that the CTR cannot be compared across the board, it varies from industry to industry and from keyword to keyword. The CTR helps determine the Quality score. The Quality score is the basis for measuring the quality of the keyword and determining the minimum bid amount for the keyword. The Quality score is determined based on three main factors - CTR, Ad text relevance and historical keyword performance.

The Ad Ranking is determined by the maximum CPC, the maximum CPM and the Quality score. Ad Ranking decides which ad appears first, which appears second, and so on. The advertiser has to pay only the CPC necessary to have a rank higher than that of the next lower ad, so he never pays more than he has to. The minimum bid is the amount assigned to a keyword based on its Quality score. Its the least amount the advertiser can pay in order for the keyword to show ads. Separate bid amounts can be set for search and content clicks, if the advertiser wishes to do so. The higher the Quality score, the lower is the minimum bid amount, the lower the price the advertiser will pay per click and the farther the daily budget fixed by the advertiser will go. This is how Google rewards its advertisers for good quality keywords and campaigns.

The Google network includes Google's partner websites which show ads delivered by Google. This is called Ad Distribution. Google has thousands of such partner sites and the only thing the advertiser has to do is choose if the ads have to appear on these sites. You would notice the Google search box on many sites and all those sites are part of the Google network for keyword advertising, also called as the search network. The network is important for advertisers because search result pages make up only about 5% of the pages on the Internet and they are an even smaller portion of where users spend their time considering purchases.

Apart from search distribution, AdWords also delivers ads based on content distribution. Google delivers site-targeted ads to its partner sites on the content network and the advertisers may choose on which sites they want their ads to show. Content distribution also includes Google's own GMail, where the ads appear based on the content of the email. This has infact led to privacy concerns and Google obviously defends its system and denies there is any threat to the privacy of GMail users.

The major benefits that AdWords offers to advertisers are Reach, Cost, Timing and Flexibility. AdWords offers the advertiser access to as much as 80% of the Internet users in the United States and millions worldwide. There are thousands of partner websites worldwide on which the ads can appear. Thus the number of interested visitors coming to your site can dramatically increase. There is no minimum spending limit for AdWords. This allows smaller companies with tight advertising budgets to get the best out of their budgets. The advertiser can choose a daily spending limit, beyond which no more ads will appear on that day. This way the advertising spend is always limited. The advertiser can choose the maximum amount he wishes to pay for each click. Google's automated auction system will pick the ad only if the ads wins the auction for the keyword. Thus the advertiser will never pay more than the bid amount, infact he may pay less than that amount, just enough to win the auction. And ofcourse the advertiser pays only when a user clicks on the ad. AdWords helps advertisers have their ads at the right place and at the right time. Ads appear based on the search query and they appear when the users are actively reading and searching for information related to the product or service. Therefore the users who see these ads are more likely to convert into customers. The advertiser can create an ad and it can show up on Google in a few minutes. The ads can be changed or edited at any time and the system is always available. Thus AdWords empowers the advertisers like no other system does.

AdSense is Google's program for Web publishers. AdSense delivers relevant text and image ads precisely targeted to any site and its content. And if the Web publisher chooses to have a Google search box on the page, AdSense will deliver search results and text ads relevant to the search query. The Web publisher does not have to maintain any advertiser relationships. AdSense, fed by AdWords, represents advertisers ranging from large global brands to small local businesses. Web publishers can use AdSense to monetize the search results on their sites and it requires no money and little time to participate. And it keeps the users on their site longer. AdSense has filters to show only appropriate ads; competitor ads, inappropriate ads, adult ads are filtered out. The advertiser can choose to show the ads in a way that suits the look and feel of the site. (Here's an interesting factiod. In '03 Google acquired Blogger, the site on which you are reading this post! And it probably used Blogger as a test ground for AdSense and since then it has not interfered with Blogger much.)

All this means a lot of money coming in as revenues for Google. Be it a dime at a time or a few dollars per single transaction. But there are a few things that can throw the proverbial spanner in the works and the most important of them is click fraud. Click fraud is perpetrated by generating invalid clicks on the ads. Invalid clicks may be generated by repeated manual clicking, a click robot or deceptive software like an auomated clicking agent. The purpose of such fraud could be either to inflate a Web publisher's earnings with AdSense or to drive up the AdWords advertising costs for a competitor. For example, a competitor may employ spam clicks to exhaust the advertiser's budget too early, thus eliminating competition in ads delivered by Google. Google claims to have sophisticated tools and techniques to detect such fraud and the advertisers do not have to pay for such clicks. Although Google does a lot of self-policing and often provides credit to advertisers when it detects such fraud, the general perception is that it's not as receptive to complaints from advertisers as some of its competitors like Yahoo. This is probably because although Google has the data to act on click fraud, there is no incentive to do so. Obviously Google rejects such claims and sticks by its "do no evil" credo.

Another issue that causes problems for Google is their refusal to disclose their search technology and tools they use to detect click fraud. Google does this on the grounds that this knowledge may be used by people with malicious intent or even by its competitors. Infact, just yesterday a US court has ruled in favor of Google saying that it need not reveal search terms because of privacy considerations but has to only reveal some websites it has indexed, in response to a subpoena from the government.

So how much money do these advertising programs bring in for Google? Lots... and more. Here are some numbers that bear this out. Google Inc. was incorporated in Sep. '98 by Lawrence Page and Sergey Brin and as of '99 its sales stood at $220,000 and its losses were to the tune of $6.1m. By the year 2000, sales had jumped to $19m, but the losses had grown to $14.7m at the same time. Google saw its first profit in '01 and it ended the year with sales of $86.4m (up 352% yoy) and $7m in profits. It ended '02 with sales of $439.5m (up 409% yoy) and profit of 155.3m (up 2119% yoy). In '03, Google sales were at $1.5b (up 241% yoy) and profits were at $395.4m (up 155% yoy). In Aug. '04, Google went public at a price of $85 per share. Trading under the ticker symbol GOOG, the shares more than tripled in its first year, and were trading as high as $475 earlier this year. Google ended the IPO year of '04 with sales of $3.2b (up 113% yoy)
and profits of $977m (up 147% yoy). By mid '05 Google had doubled its sales and profits had shot up 500% from the same period in the previous year. The company had $3b in cash and no borrowings. As of today (Mar.17 '06) GOOG was trading at $340.

Just how big is Google? Here's a comparison of the market capitalizations of major US corporations as of Aug. '05. Microsoft lead the tally at $287b followed by Wal-Mart at $197b. Time Warner came in third at $85.9b and Google came in fourth at $79.6b. Google is more valuable than companies like eBay, Disney, Yahoo, McDonald's, General Motors and Amazon, the others in the top m-cap list.

But how did these advertising programs come about? There's an interesting story behind this and we have to go back a few years and look at the history of how search engines evolved as a business. Bill Gross is not a household name like Larry Page or Sergey Brin, but had history turned out a little different it could have been the other way around. Gross's IdeaLab founded many companies, but one of them survived the dot-com bust, Overture. Founded in '97 as GoTo.com, Overture remains Bill Gross's greatest success. But Gross is not ecstatic about it, rather he regrets it. Because Overture might have been Google. When GoTo launched, Google was still an obscure graduate school project. And Search was seen as being "good enough" having already had its day. Those were the days of the portals, trying ever so hard to retain eyeballs. If search was going to take the users away from the portal, then it wasn't in the portal's interest. With no one interested in search, innovation took a back seat, and spammers took control of indexes pushing irrelevant results to the top. To counter this, Gross thought up the plan of forcing the friction of pricing into the equation. He made the differentiation between good traffic, undifferentiated traffic and plain crap. Gross studied the IdeaLab companies' traffic acquisition numbers and computed the cost of the campaigns down to the single visitor. He concluded that any business would pay more for the right kind of traffic and that he could drive the price per click down to a few cents or even less as he got good at it. That rationalization became Gross's eureka moment and it spawned today's Internet advertising economy. And the Internet already had a model for an engine to create intentional traffic, called the Search engine, only nobody seemed to care!

At the heart of Gross's plan was that the search query is inherently valuable and it could be priced, and this is what drives the search economy today. When a user searches for something, say movies, he would want to see all the information and products about movies, to review and maybe to even buy. But this required that the merchants selling those products and services had to participate. And they would, because GoTo provided them with intentional traffic which was hard to come by. And Gross believed GoTo could make big money by charging in pennies for transactions. Unfortunately for Gross, not many people understood the intrinsic value of the search query; until he could prove otherwise he was just selling theory. So Gross came up with a unique idea, a performance-based model where advertisers paid only when users clicked on the ads, and he priced them as low as one cent per click. And it worked for GoTo. In six months, it had the cost of driving a search meet the earnings from it. This was way ahead of schedule. In Apr. '99, GoTo filed to go public.

But the industry and the business press as a whole was still not warming up to GoTo as much as Gross would have liked them to. Putting paid advertising as part of search results was seen as being similar to selling editorial space. As business grew, GoTo developed two lines of business, its main site (GoTo.com) and a syndication business (similar to what Google now refers to as its distribution network). By 2000, the syndication network provided 90% of the traffic for GoTo; and its biggest syndication partner, America Online (AOL), insisted that GoTo shutdown its own site as it was seen as a competitor. In Sep. '01, Gross reluctantly shutdown GoTo.com and changed the name to Overture reflecting its core business of delivering paid introductions. But soon, Gross's worst fears came true, Google was gaining ground as a pure search destination. In the middle of '99, Google did not have any business model to speak of, Page and Brin were still wondering how to make money on Google and in GoTo they saw a business model they liked. In late '01, Gross suggetsed to Page and Brin that Overture and Google merge. But they turned it down and the reason they gave was that they would never associate themselves with a company that mixed paid ads with organic results. Gross finally sold Overture (www.overture.com) to Yahoo for $1.63b in '04.

In '02, Google announced its AdWords initiative with the pay-per-click model. Overture sued for patent infringement, but the case was settled just before Google's IPO in '04. By then, the business model that GoTo pioneered, had matured and Google was getting credit for it. To add insult to injury, AOL did not renew its deal with Overture but instead went with Google. Bill Gross did not disappear after Overture though. He announced that he had the next economic paradigm in search. In '04 Gross delivered SNAP (www.snap.com), a new search engine that ranks sites by factors such as how many times they have been clicked on by prior searchers. Instead of just relying on computer algorithms to rank search results, Snap uses click-stream information from a network of Internet users. By recording and processing which websites users spend time on, and which sites they quickly leave, Snap improves the likelihood that the search results will be the results users are really looking for. But there's more to Snap than search. Snap offers a revolutionary way to advertise - Cost Per Action. This approach virtually eliminates advertisers' risk because Snap only gets paid when the user completes a purchase or any other action like giving an e-mail address or registering on the site. And Gross is open about what motivates him - Google! Gross says Google is getting spammed and he thinks Snap has done one better over Google.

Make a mention of AdWords to Bill Gross and former Overture employees and they still bristle. So not everybody likes Google!

Sunday, March 12, 2006

Speaking Our Feelings

Okay, before you read further, open a notepad window and type a few lines about your mother. Not too much, just 3-4 lines, about how you feel about her, it should not be too difficult right, after all its about your mother.


Here's an example:

When you came into the world crying, it was the sweetest sound she had ever heard. You grew up fast. But not too fast for her to stop and stare at you in wonder. You filled her life with deadlines, shoelaces, breakfast, homework, your first cycle, your toothaches. Ever remember her missing even one? Then you passed from the age when you wanted her to drop you to school. To the age when you wished she didn't. Year after maturing year, she understood. Now after you come back from a hard day's work, the food is always warm but you are too tired to notice something warmer.
Stop. Take a day off for someone who hasn't had one, from the time you were born. You brought her joy the day you were born, its time you did it again. Compared to what she's done for you: still a morsel.


That's right, I did not come up with this! Couple of days ago, a friend of mine pointed me to this advert on the last page of a newspaper. The ad was for a credit card. And this is the text from that ad. So I owe this post to the unknown copywriter at Contract who wrote these lines and to my friend who has an eye for good things for showing me this ad!

The day referred to in the text is Women's Day which was Mar. 8, last week. Ofcourse then the ad text veered towards the crux of the matter, which was to suggest that you treat your mother to a dinner on the credit card and then get cash back. But you could ignore that for the wonderful few lines I have reproduced above. This piece strikes a chord because it reflects what we feel. And it does so very well in simple words. If you think all this is too high on the mush quotient, just read on and do post your comments!

Now, did you type a few lines as I told you to? If you did, its great. If you didn't, I'm sure you are not alone. We all know what we feel and how we feel about our near and dear ones, but we almost always don't know how to express it. I don't think we don't want to express it, the 'how' seems to be the problem. For a lot of people expressing emotions is a big problem, because its seen as a weak trait, as being vulnerable; and they fear turning into sissies. Maybe many of us would treat our mothers to that fancy dinner on Women's Day or Mother's Day or on her birthday, but not many of us would say anything like what's in the text above. For that matter, its not just the mother, it could be anybody we connect with. Maybe we feel that there is no need to explicitly say such things because the vibes in any relationship say it implicitly.

And when someone says nice things to us or thanks us for something, we don't know how to react or how to handle it well. It may just feel weird.

Is there a need to tell your spouse out loud, even after five years of marriage, that you love him/her? Is there a need to tell your mother how wonderful it is to get good warm food everyday, at the end of a hard day's work? Is there a need to thank your sibling for being a good friend? Is there a need to thank your best friend for just being there for you when it mattered?

I think there is. To quote from a poem: "don't take for granted the things closest to your heart, cling to them as you would your life, for without them life is meaningless". So I think putting our feelings in words once in a while, does help. Maybe we should give it a try. Would you?

Saturday, March 04, 2006

Midnight's Brahmins


Book Review - The IITians

The IITians celebrates the institution that has created a name for itself worldwide and has produced some of the most successful people to come out of India. Its a must read for those of you who were in the IIT (Indian Institute of Technology), but it will make very interesting reading for non IITians (like me) as well.

The IITians has been written by Sandipan Deb, an IITian himself, and now the managing editor of Outlook and the editor of Outlook Money. He is married to an IITian as well. The book was first published in Dec. '04.

The IITians traces the evolution of the IIT as an institute and as a brand from the time it was set up in the late '50s. Deb tells us that the impression that IITs were Jawaharlal Nehru's dream is not entirely correct, they were the brainchild of a Parsi technocrat Ardeshir Dalal. However, Nehru deserves credit for recognizing a good idea and backing it to the hilt. Also, the IITs were modeled after the MIT (Massachusetts Institute of Technology) in the US rather than a British institution like the Imperial College. India was already casting aside the legacy of the Raj.

Deb meets and talks to the many successful alumni of the IITs about their lives while at the IITs and what they learnt most in those four or five years. One thread that can be picked up from most of these interactions is that hardly any of these superachievers remember what exactly they learnt in the classroom. Its the learning outside the class that matters, they say. The experience of staying and working on a daily basis with some of the best minds in the country, is what is cherished most. The extra-curricular activities were most instrumental in their development. If one can get through the IIT system, one can then face anything. And it also gives an opportunity to get to know people and cultures from other parts of India and opens their mind to a whole new world. These last two facts resonate with those of us, who have been in institutes although not as reputed as the IITs, yet follow a similar tough regimen.

Another facet that is often discussed in the same breath as IIT's superachievers is that of brain drain. The IITs are heavily subsidized by the tax-payers' money. So doesn't it make sense to put in place safeguards to ensure that these elite graduates serve their own country rather than see the IITs as a one-way ticket to the US?

The book cites many examples of IITians doing great work within India like Prof. Ashok Jhunjhunwala at IIT Madras and Sam Pitroda, Rajiv Gandhi's point man and visionary telecom czar. Prof. Jhunjhunwala has done astonishing work in the area of rural connectivity. He has also successfully created an acedeme-entrepreneurship linkage while declining to take a stake in any of the companies he has incubated. Sam Pitroda is the man we have to thank for the ubiquitous PCO phone booths all over the country. This is the single most important contribution he made towards the penetration of telephone use in India.

However, the most talked about IITians all seem to be abroad, mostly in the US. Vinod Khosla, Purnendu Chatterjee, Kanwal Rekhi, Gururaj Deshpande, Rajat Gupta, Arun Sarin, Shailesh Mehta, the list goes on. But the sense one gets from the book is that there is no point trying to stop someone who wants to go abroad. When you choose the brightest minds in the country and give them the best possible education, its essential that when they get out of the IITs they get to work on challenges that will interest them. Unfortunately, India, atleast in the past, did not have such challenging work to offer. So we produced some of the best people, but did not know what to do with them. Naturally they went abroad. The vast majority though, got stuck in some mundane job or the other and got lost in the obscurity of the American dream; they were successful in that they bought a house in the suburbs of some American city and settled down for the rest of their lives, but did not fulfill their potential in terms of achievements that are expected from an IITian. Only a few, like the names I mentioned earlier made it big.

But there have been innumerable others who have stayed back in India and done a lot of good work. We may not hear about them often or they may not be as popular, but they are spread over various companies, both in the private sector and in the public sector, and have done a lot of good work over the years. Some of the names that come to mind are Nandan Nilekani of Infosys, R. Gopalakrishnan of Tata Sons, social activist Dunu Roy, and so on. There are astute IITians in politics as well, commerce minister Jairam Ramesh and former Goa chief minister Manohar Parrikar. The book offers some interesting trivia as well, for example, Nandan Nilekani and Jairam Ramesh together formed a formidable quiz team at IIT Bombay!

Talking about IITians doing good work in India, its not necessary that all of them need to be popular and well-known, because media hype and merit do not always go together. One specific example cited in the book fascinated me, that of Arvind Gupta. Gupta makes toys out of everything that we would throw as useless: empty boxes, film-roll cans, bicycle tubes, old newspapers, used pen refills, matchsticks and so on. He does it so that underprivileged children, or for that matter even privileged children, can make their own toys they can have fun with, and at the same time learn the principles of science, aerodynamics, hydraulics, electromagnetism, acoustics, etc. His story is well worth reading, particularly for those of us who are eternally obsessed with doing well in the corporate world and earning loads on money.

More about the alumni - there is also a detailed account in the book, of how they have contributed immensely to the progress of their respective alma mater. There is a feeling among the IIT professors and the administrators that it would be like going around with a begging bowl to ask the alumni for donations, but the alumni are trying to change that perception. The alumni want to help, and its evident from the monetary contributions they have made. The IIT Bombay alumni have raised $15m, IIT Kharagpur alumni have raised $10m, followed by Chennai and Kanpur with $5m each and Delhi with $1m. This money has helped create management schools, research laboratories, technology centers, auditoriums and sport facilities.

Deb explains how the IIT dream still gives hope to the many parents in the country, who have the feeling that they were not able to fulfill their potential for various reasons beyond their control, and now want to ensure that their children get the best shot possible at making it big in life. IITs are seen as the passport to a successful life.

Deb also discusses how tough it actually is to make it into an IIT and how much pressure there is on the children to crack the JEE (Joint Entrance Exam). No surprise then, that there are so many coaching classes that have mushroomed all over the country. A typical IIT aspirant starts preparing in Class IX and continues until he takes the JEE at the end of Class XII. By sheer statistical probability most of the aspirants do not make it on the first attempt and then they spend another year to give it a second shot. And a vast majority fail to make it yet again. So there are thousands of youngsters who end up spending five years preparing for the IIT JEE and are then forced to take a painful decision to look at other options.

The author asks a very relevant question, is getting into the IITs really worth spending so much time and energy on? A young person, who spent the most part of five years cramming math, physics and chemistry and spent little time on other things, would most likely be low on knowledge of the world, on confidence and on attitude. How useful will it be to provide him a top-class education, when his attitude is not in the right place?

Also, its not that if one misses the IIT bus, there is nothing else worth going for in life. Some of the most successful people today in technical fields and in business are not from the IITs. People from rural and lesser colleges have also made it big. Its all within oneself and the environment can only help.

I mentioned earlier that the author is also married to an IITian. And that in itself is an achievement! Because the ratio is so much skewed towards the boys, even to this day, that there are too few girls on campus. The gender ratio has been improving from 40:1 some years ago to today's 24:1, but its still a big problem for the boys in the IITs today! And that is perhaps one reason why, just out of IIT, the graduates struggle to work alongside women and seem completely out of depth when dealing with women. Ofcourse, this also reflects on our society which gives the girls a feeling that there is no need for them to make it big in life as long as they marry well.

Deb also talks about the future of IITs. There is a need for IITs to decrease their dependence on government funding and eventually become economically independent. This is important for two reasons - one, the government funds will be far more useful in primary education and rural education rather than subsidizing higher education for a few hundred elite students; and two, this way the IITs will be free to take their own decisions and be releived from the interference of the babus of the HRD ministry and the AICTE (All India Council for Technical Education). But one factor the author points out is the reluctance of the IIT professors themselves who are wary to move to a new order. They are not too keen on doing cutting edge research but are satisfied with the teaching role and the salary they earn. This attitude may also be going too far to the extent that they get jealous of their own students who earn more than them, as soon as they graduate. So there is an impression that they try to bring their students down in those four years when they can control them.

So how best to describe the IITians? As "Midnight's Brahmins". This is the suggestion of IITian, commerce minister and a key member of the economic cell of the Congress party, Jairam Ramesh. The IIT was the first educational institute set up by India after its tryst with destiny at the stroke of midnight on August 15, 1947. And created with the specific purpose of creating a new elite, the new Brahmins, except that they wouldn't be reading the scriptures, they would be technocrats. And also, the IITians have got the respect of society that was historically reserved for the Brahmins in India. But the Brahmins were often accused of not passing on their knowledge for the society's greater good. Are the IITians like the Brahmins in this respect too? The author says no, because of the many IITians who are not necessarily famous but have done so much good work in India across manufacturing companies, in scientific research, in the government, in the social sector and so on.

The IITians is a must-read for anyone interested in the history of modern India and the place of the IITs in today's scheme of things.

Cracking the Chi-doku

No, its not about another Japanese puzzle. Its about the Budget that the Finance Minister P. Chidambaram presented last week. But it still needs some cracking, and hence the title!

The annual budget making exercise is a big deal in India because it sets the tone in terms of policy and direction for the economy for the year ahead. The significance of the exercise is visible in the way the FM of the day presents the budget and the way the people follow it, with ritualistic zeal. Well, that's the macro picture. For most of the aam junta its just "how much taxes do I have to pay this year?" or "how much will the onions cost now?"

Here are some highlights of this budget from my perspective.
  • Direct Taxes:
No change in the tax slabs, no change in the tax rates.

But the bone of contention for the salaried class as well as their employers was the Fringe Benefit Tax (FBT) that was introduced last year. This had created dissatisfaction across the board because of the debate and disagreements regarding what constitutes a fringe benefit. But the FM has done some good in this regard this year with which a large population will be happy; and that is to exempt contributions upto Rs. 1 lakh made by employers to the superannuation funds of their employees. Companies were very prompt in stopping the superannuation contributions last year and instead paying that amount as a monthly taxable component, thereby passing on the tax burden to the employees. But whether they will revert to the superannuation system now, is something we will have to wait and see, because there is no benefit for the companies in reverting to the old system now. But the FBT is here to stay and probably rightly so. Only it needs some more rationalization in terms of identifying fringe benefits and arriving at reasonable tax rates.

The much-publicized one-by-six scheme has been abolished and one wonders why. Probably the FM feels there are better ways available to track tax evaders. But what harm was this scheme doing? It must have been given a longer run. However this amendment, if passed, will be applicable for FY 05-06, so do not file your returns yet under this scheme, wait and watch, maybe you do not need to file your returns at all!


  • Individual Investor:

There is a minor hike in the Securities Transaction Tax (STT) from .02% to .025%. But this will not affect you and me, unless you happen to be a day-trader.

Fixed Deposits kept with banks for atleast 5 years will now get tax breaks under sec. 80C. But there are so many instruments in the 80C umbrella of one lakh now, that its better to invest some time to decide on your tax saving investment vehicles.

Last year the FM had asked us to brace ourselves to pay taxes on maturity of assured return investment instruments like PPF, NSC, MIS, etc by announcing an intention to move towards the EET(Exempt-Exempt-Tax) regime, but no timeframe was set. And there was no mention of EET in this budget. However, it was later clarified that the policy to move towards EET still stands and a decision will be taken sometime this fiscal.

  • Consumer:

Small cars are now cheaper. Soon after the FM proposed to cut the excise duty, the manufacturers announced lower prices and passed on the benefit.

A host of food items have been given excise duty cuts including poultry, oil, biscuits, aerated drinks, fish, packed foods, milk products, tea and coffee. But how much of savings will this translate into for the household budget of the common man remains to be seen.
Other household items which will see price cuts include DVD players, glassware, LPG stoves, clothes, cosmetics, toiletries, medicines and paper.

  • Hardware and Software:

The 12% excise duty on computers has been reintroduced. This may see desktop and laptop prices move up by upto 5%. But the hardware sector is taking the duty in its stride as the FM has assured to provide funds to achieve the goal of making India a preferred destination for hardware manufacturing. The FM has also accepted some of the proposals of the Indian Semiconductor Association.


A new 8% duty on packaged software has been levied. Clearly, not only does this go against the efforts to promote the use of IT but also defies the logic that lower software prices will help curb piracy. The IT minister Dayanidhi Maran has already said that he will bring this up with the FM.

  • Service Tax:

Services will now cost more, the tax rate is up from 10% to 12%. So brace yourself for a rise in your monthly utility bills. Also, more services have been brought under its ambit - CAs, BPOs, share transfers, registrars, ATMs, event sponsorships, PR services, internet telephony, outsourced credit card services, etc. As for the tax on ATM services and outsourced credit card services, it remains to be seen as to how much of this tax will be directly passed on to the customers. Interestingly, lawyers and doctors still remain outside the service tax net, one wonders whether its a coincidence that both the FM and his wife happen to be lawyers!

Clearly the FM is tuned in to the reality of the forthcoming polls and has annouced a budget keeping in mind the common man with many policies and programs geared towards the constituencies that worry about roti, kapda and makaan.

Who is the real Narendra Modi ?

In my last post, I made a mention of two important decisions that came out from the Indian courts last week. But there was another important verdict delivered in the same week, which I felt I must mention. It was in the Best Bakery case related to the post-Godhra riots of '02 in Gujarat.

Nine of the 17 people charged with torching the Best Bakery in Vadodara killing 14 people were convicted and awarded life imprisonment by a sessions court in Mumbai. The court issued show cause notices to all the witnesses, including Zaheera Shaikh, who had turned hostile, asking them why they should not be prosecuted for perjury.

But I'm not talking about the case or the decision here. I want to bring up the obvious dichotomy in the character and the image of the state of Gujarat and its chief minister Narendra Modi.

For decades, Gujarat has been the epicenter of business activity in India. The community has spread far and wide across the world and has made a name for itself. They are probably the most successful Indian community in the US and elsewhere, alongside the Punjabis and more recently the Gults. In the US, its more a rule than an exception that a typical Shah or a Mehta would drive a Lexus or a Mercedes rather than a Toyota or a Honda.

In India, the business acumen of the Gujaratis is well known. One of the biggest empires in corporate India today, Reliance, has its roots, and its refineries in Gujarat. The meteoric rise of Dhirubhai Ambani is well-chronicled along with his business acumen. The entrepreneurial spirit of the Gujaratis is epitomized by people like Karsanbhai Patel of Nirma fame who took on the might of the multinational in Hindustan Lever and gave it a run for its money. Karsanbhai who was earning a paltry salary of Rs. 400 started delivering on foot, the detergent he concocted and today Nirma has a 35% market share.

With just 5% of India's population and 6% of the area, Gujarat accounts for 16% of the country's total investment, 10% of its expenditure, 13% of its industrial production, 21% of its exports and 30% of the stock market capitalization. The state's growth rate has been over 10% consistently for the last few years. Those are very impressive numbers.

Gujarat also stands first in terms of industrialization in the country. Gujarat is a leader in various sectors like chemicals, pharmaceuticals and dairy. Also, it has some of the most important ports in the country including the first private sector port.

Ofcourse the credit for this goes to the successive governments in the state over the years and to the spirit of the Gujarati people.

That was the positive side. But there is a lot of negative opinion going around as well, that Narendra Modi is single-mindedly pushing a religious agenda and crushing the minority Muslim community.

But the economic environment has in no way been affected, atleast in a visible way, by the post-riots situation. Narendra Modi has been portrayed as the villain of the episode. He has been convicted many times over, not by the courts, but by a large part of the opinion-shaping public, the opposition parties, human rights groups and the international media. However he has been very supportive of the economy all along.

Modi has been directly blamed for the Gujarat riots and its aftermath. And just a couple of days ago, the Banerjee committee probing the possible cause of the fire in the Sabarmati Express, which sparked off the Godhra riots, has held that the mishap was an accident and not a conspiracy. The fire that killed many kar sevaks was alleged to have been set off by members of the Muslim community. This report from the Banerjee committee has given further ammunition to the opposition Congress to condemn Modi. They have referred to Modi as being beyond shameless and that he should now look within and resign.

So why this dichotomy? On the one hand Narendra Modi is the progressive chief minister facilitating business and fuelling the economy, and on the other he is the source of hatred and animosity towards the Muslim community. The dichotomy arises because its hard to believe that these two facets could come together in one person, one ideology is progressive and the other is regressive. So who is the real Narendra Modi?

For the sake of the Gujarati asmita, Modi has to make an effort to answer that question. From his side he has to take steps to make the Muslim community feel safe and comfortable. At the same time, the opposition and the media must take an objective view and shed the seemingly irresistable urge to make a villain out of Modi. They must stop using the situation to their political advantage, because this attitude is doing no good to the pride of the Gujarati people.

The two sides must make peace and move forward so that Gujarat retains its prominent place in business as well as in culture.