Bus. Std: Tech’s Disrupting Power

My latest column in Business Standard:

The recent bid by Comcast, the largest cable company in the US, for Disney, one of the worlds foremost entertainment companies, highlights how technology is disrupting industries. Through Disney, Comcast is seeking ownership of content for its fat pipes. The driving force in media and other industries is digitisation of text, audio and video, and the availability of a high-speed internet for distribution.

Rapidly increasing computing horse power, smart software and broadband networks have accelerated the process of digitisation by providing users and organisations the ability to manipulate content and transmit it cheaply and quickly anywhere across the world.

The impact of digitisation is not limited to media and entertainment. The telecom world is also being shaken up as voice-over-internet protocol (VoIP) services cut the cost of making phone calls and eat into the revenue of telcos. In fact, the US Federal Communications Commission is preparing rules that would allow delivery of the internet through power lines and make online phone calls cheaper. In some countries, WiFi networks are already providing an alternative to the cellular networks in providing ubiquitous internet access.

Digitisation puts power in the hands of the users. Napster forced the music industry to rethink its pricing and distribution policies, with the result that now many online music stores offer songs for as little as 99 cents (Rs 45). Apples iPod is one among a whole new generation of small, portable devices with the capability of storing and playing thousands of songs.

The creators of Kaaza, a decentralised file-sharing software which has become the most downloaded program and is now on over 300 million computers worldwide, recently launched Skype, a peer-to-peer VoIP service. Skype allows computer-to-computer phone calls over the internet for free without the need for any centralised switching system. As Fortune magazine put it, it is disruptive for even the emerging IP telephony service providers: It costs the top provider of paid Internet telephony (Vonage) US$ 400 to add a customer. It costs Skype US$ 0.001.

Personal Video Recorders (PVRs) like TiVo in the US are allowing users to timeshift content. The TiVo allows TV programs to be recorded on a computer hard disk at home, for viewing at the users convenience. TiVo users can skips ads (or replay the ones they like). Imagine the potential for PVRs in a TV-crazy country like India no longer does one have to worry about being home at a specific time to watch ones favourite soap operas.

Highspeed networks are also proving disruptive to the traditional software industry model of selling software for a high one-time price (with incremental payments for periodic upgrades). Now, a new generation of application service providers (ASPs) like SalesForce.com offers software on a rental basis for a small monthly fee via the internet. Updates are instantaneously available to all users. The same concept is being applied to online multi-player video games and is driving internet usage (and profits) in countries like South Korea and China.

So far, digitisation has had only a limited impact in India. But this is about to change. Two key factors offer India an opportunity to leapfrog into the digital world: affordable products and broadband networks. India will benefit from the incessant drive by technology providers to keep lowering the prices of their products. We have seen it with TVs and cellphones, and are now seeing it with DVD players and computers.

This will be complemented by the availability of always-on, high-speed network connections which are becoming available in pockets across the country. From telcos to cellcos, from cable companies to energy providers, everyone wants to build the digital bridges.

As the digital infrastructure gets built, a process of creative destruction and reconstruction will take place. It will be possible to deliver music, movies, software and games electronically from centralised computers, thus combating piracy which has been the bane of the various industries for long. Video-on-demand can open up new opportunities not just for the entertainment companies, but also for training and education. The combination of 802.11-based wireless networks and VoIP have the potential to offer flat-rate telecom access.

Consider one of the areas which digitisation can have a positive impact education. In India, there are great disparities in the quality of education imparted across institutions in urban, semi-urban and rural India. India needs quick and scalable solutions to deliver quality education to hundreds of millions of children and youth to prepare them for the world of tomorrow. The availability of low-cost computers and high-speed networks can completely transform education through its value chain from content creation, translation, delivery and facilitating teacher-student interaction.

The force of digitisation is here. It brings change and opportunity. Old and new economy entrepreneurs and managers need to understand and embrace it, and see how it can be integrated into their way of doing business and life. Because their customers already are.

Technologies to Drive Demand

AlwaysOn Network writes: “According to research outfit Precursor, tech growth won’t be driven by breakout technologies and product cycles as it had been in prior years. But the research outfit recently highlighted emerging technologies to watch for and the companies that may benefit.” Among the technologies are: 10 Gigabit Ethernet, VoIP, Wireless Broadband, Web Services, RFID, Open- source software, IP storage, Systems that control voice across both circuit and package networks, and business-process-management applications.

China’s Alibaba help SMEs

I have tracked Alibaba since it was launched about 4-5 years ago. In some ways, I would have liked to do something similar for Indian SMEs. Alibaba helps Chinese SMEs connect to each other and with international buyers. It raised a lot of money in its early days (in excess of USD 25 million) from the likes of Softbank and Goldman Sachs. Then, as the bust happened, it too hit a wall. There were some doubts on the company’s road ahead (reflected in 2 HBS case studies).

Well, as it turns out, 2003 has been a banner year for the company – it had a free cash flow of USD 12 million, and recently announced that they have raised USD 82 million in fresh funds. Alibaba is now Asia’s largest the biggest b2b sites.

WSJ writes (also excerpted from another story whose link is not available):

Electronic commerce is changing the way companies all over the world do business, making it easier for them to buy and sell to each other and to connect with customers. But in China, e-commerce is having an especially big impact in helping small private businesses sell nationally and even internationally.

Hampered by poor roads, a creaky transportation network and fractured local markets, small companies have a hard enough time doing deals in other provinces within China; traditionally, it would have been near-impossible for them to identify potential partners abroad. By acting as global trade fairs, Chinese e-commerce sites are allowing many smaller companies to reach a far wider market and to compete directly with larger competitors.

Fu Xiaohui, a researcher who works for a consulting company under the Ministry of Information Industry, estimates that the value of business-to-business deals hit 275.6 billion yuan ($33.30 billion) in 2003, while business-to-consumer deals were valued at 5.2 billion yuan.

Alibaba.com seems to be off to a strong start. Founder Mr. Jack Ma says the company has nearly three million users in 200 countries and attracts nearly 6,000 new users daily…Its sites include two business-oriented ones: an English-language site matching Chinese and international businesses; and a Chinese-language one targeting companies in China. A third Chinese-language site links Chinese consumers with other consumers and businesses, much like U.S.-based eBay.

While anyone can access the two business sites, users who pay a membership fee are entitled to post detailed information about themselves, and can access additional information and services. Alibaba.com charges an annual fee of between $5,000 and $8,000 for Chinese suppliers who post detailed content about themselves on the company’s international business-to-business Web site, for example. More than 4,000 Chinese suppliers have signed up for the for-pay international service, with a 70% renewal rate, Mr. Ma says.

For its domestic business-to-business Web site, suppliers who pay a $300 annual membership fee are entitled to additional services, after they have met background and credit checks by Alibaba.com. Mr. Ma says that Alibaba.com had 30,000 paid subscribers for the domestic service in 2003 and that the company receives more than 3,000 inquiries daily about the service.

A key goal of these services, Mr. Ma says, is to help small and medium-size companies earn money by linking them directly to buyers and markets to which they otherwise wouldn’t have access. Another is to help them assess the credit-worthiness of potential business partners. As China’s market economy takes off but before the establishment of any national credit-rating systems, the ability to accurately assess potential partners’ credit-worthiness is critical to running a successful business, whether it be a national commercial bank or a corner store.

To reach Mr. Ma’s goal of becoming a global player, Alibaba.com will have to make the transition from serving as an online global trade fair to a for-pay, online transactions service — a critical test that faces the company over the next few years.

“That’s always been the holy grail for B2B,” says Duncan Clark, chairman of BDA China Ltd., a technology-research company, referring to companies that facilitate online business deals. “If Alibaba wants to live up to Jack’s promise of becoming a major force in global business, it will need to be taking a fee on the deals it is facilitating.”

Mr. Ma said the funds will go toward developing technology, training personnel and building customers to move the company’s business-to-business Web sites from a “meet at Alibaba” model to a “work at Alibaba” model.

The Home of the Future

WSJ looks ahead:

Researchers and commercial labs around the country are building experimental homes to test technology that could make domestic life easier and extend the independence of older homeowners. Such efforts go beyond so-called universal design, a trend toward building houses with wider doorways, grab bars and adjustable kitchen cabinets that took off in the early 1990s.

“These are lifestyle services empowered by a new generation of technology,” says Joseph Coughlin, director of the Massachusetts Institute of Technology’s AgeLab in Cambridge.

In many cases, the mechanics for the gizmos already exist — mainly wireless sensors, cellphones, broadband access and home computers. What’s been missing, and what researchers now are trying to develop, are ways to harness the hardware to run your entire house with little effort or technological savvy — letting you turn up the heat remotely, anticipating when you want the lights on, or deciding automatically how long your food should cook.

Software Outsourcing

Another day, another story on software outsourcing from the US to India. Business Week takes a look at it from the eyes of a US and Indian software engineer.

U.S. software programmers’ career prospects, once dazzling, are now in doubt. Just look at global giants, from IBM and Electronic Data Systems to Lehman Brothers and Merrill Lynch. They’re rushing to hire tech workers offshore while liquidating thousands of jobs in America. In the past three years, offshore programming jobs have nearly tripled, from 27,000 to an estimated 80,000, according to Forrester Research Inc. And Gartner Inc. figures that by yearend, 1 of every 10 jobs in U.S. tech companies will move to emerging markets. In other words, recruiters who look at Stephen will also consider someone like Deepa — who’s willing to do the same job for one-fifth the pay. U.S. software developers “are competing with everyone else in the world who has a PC,” says Robert R. Bishop, chief executive of computer maker Silicon Graphics Inc.

For many of America’s 3 million software programmers, it’s paradise lost. Just a few years back, they held the keys to the Information Age. Their profession not only lavished many with stock options and six-figure salaries but also gave them the means to start companies that could change the world — the next Microsoft, Netscape, or Google. Now, these veterans of Silicon Valley and Boston’s Route 128 exchange heart-rending job-loss stories on Web sites such as yourjobisgoingtoindia.com. Suddenly, the programmers share the fate of millions of industrial workers, in textiles, autos, and steel, whose jobs have marched to Mexico and China.

This exodus throws the future of America’s tech economy into question. For decades, the U.S. has been the world’s technology leader — thanks in large part to its dominance of software, now a $200 billion-a-year U.S. industry. Sure, foreigners have made their share of the machines. But the U.S. has held on to control of much of the innovative brainwork and reaped rich dividends, from Microsoft to the entrepreneurial hotbed of Silicon Valley. The question now is whether the U.S. can continue to lead the industry as programming spreads around the globe from India to Bulgaria. Politicians are jumping on the issue in the election season. And it will probably rage on for years, affecting everything from global trade to elementary-school math and science curriculums.

Countering the doomsayers, optimists from San Jose, Calif., to Bangalore see the offshore wave as a godsend, the latest productivity miracle of the Internet. Companies that manage it well — no easy task — can build virtual workforces spread around the world, not only soaking up low-cost talent but also tapping the biggest brains on earth to collaborate on complex projects. Marc Andreessen, Netscape Communications Corp.’s co-founder and now chairman of Opsware Inc., a Sunnyvale (Calif.) startup, sees this reshuffling of brainpower leading to bold new applications and sparking growth in other industries, from bioengineering to energy. This could mean a wealth of good new jobs, even more than U.S. companies could fill. “It requires a leap of faith,” Andreessen admits. But “in 500 years of Western history, there has always been something new. Always always always always always.”

I would agree with what people like Marc Andressen say. Change in industries is natural. It is only that the US software industry had been largely isolated from the impact of globalisation and digitisation. I also think we in India are partly to blame for all this noise that’s happening. We should just go about doing the work quietly rather than shouting that India is IT. Just get the work done with less talk.

New Economy Learnings

Fast Company takes a reality check: “The New Economy isn’t dead. It just didn’t happen in the way we all imagined. And now it’s been long enough that we can think more analytically about which of the shiny and alluring ideas of the New Economy were lasting and real, and which were just the iridescent glint of a bubble.”

Boom-Time Buzz: The Internet changes absolutely everything.
Cold Reality: Absolutist statements are absolutely a bad idea.

Boom-Time Buzz: Free Agent Nation is a utopia. The Brand Called You makes you more marketable than ever.
Cold Reality: Free Agent Nation is a jungle. The Brand Called You is the only way to survive.

Boom-Time Buzz: IT spending has fueled an unstoppable productivity boom that has ended the business cycle.
Cold Reality: Productivity is still strong–and so is the business cycle.

Boom-Time Buzz: Move first–or die.
Cold Reality: Move first without a real business–and die.

Boom-Time Buzz: The Internet gives the customer new, limitless power.
Cold Reality: New power, yes. Limitless, no.

Boom-Time Buzz: Destroy your business, or someone else will.
Cold Reality: Incumbent businesses aren’t so easily destroyed.

TECH TALK: As India Develops:

A much-discussed Goldman Sachs report looks ahead to India in 2050 and sets out what is needed for growth:

India has the potential to show the fastest growth [among the BRICs – Brazil, Russia, India and China] over the next 30 and 50 years. Growth could be higher than 5%over the next 30 years and close to 5% as late as 2050 if development proceeds successfullyIndias GDP outstrips that of Japan by 2032. With the only population out of the BRICS that continues to grow throughout the next 50 years, India has the potential to raise its US dollar income per capita in 2050 to 35 times current levels. Still, Indias income per capita will be significantly lower than any of the countries we look at.

As developing economies grow, they have the potential to post higher growth rates as they catch up with the developed world. This potential comes from two sources. The first is that developing economies have less capital (per worker) than developed economies (in the language of simple growth models they are further from their steady states). Returns on capital are higher and a given investment rate results in higher growth in the capital stock. The second is that developing countries may be able to use technologies available in more developed countries to catch up with developed country techniques. As countries develop, these forces fade and growth rates tend to slow towards developed country levels.

Countries also grow richer on the back of appreciating currencies. Currencies tend to rise as higher productivity leads economies to converge on Purchasing Power Parity (PPP) exchange rates.

A set of core factorsmacroeconomic stability, institutional capacity, openness and educationcan set the stage for growth. Robert Barros influential work on the determinants of growth found that growth is enhanced by higher schooling and life expectancy, lower fertility, lower government consumption, better maintenance of the rule of law, lower inflation and improvements in the terms of trade. These core policies are linked: institutional capacity is required to implement stable macroeconomic policies, macro stability is crucial to trade, and without price stability a country rarely has much success in liberalizing and expanding trade.

Thomas Friedman writes in the New York Times (22 February 2004) on the changing attitudes in urban India:

The Zippies Are Here,” declared the Indian weekly magazine Outlook. Zippies are this huge cohort of Indian youth who are the first to come of age since India shifted away from socialism and dived headfirst into global trade, the information revolution and turning itself into the world’s service center. Outlook calls India’s zippies “Liberalization’s Children,” and defines one as “a young city or suburban resident, between 15 and 25 years of age, with a zip in the stride. Belongs to generation Z. Can be male or female, studying or working. Oozes attitude, ambition and aspiration. Cool, confident and creative. Seeks challenges, loves risks and shuns fears.” Indian zippies carry no guilt about making money or spending it. They are, says one Indian analyst quoted by Outlook, destination driven, not destiny driven; outward, not inward, looking; upwardly mobile, not stuck-in-my-station-in-life.

With 54 percent of India under the age of 25 that’s 555 million people six out of 10 Indian households have at least one zippie, Outlook says. And a growing slice of them (most Indians are still poor village-dwellers) will be able to do your white-collar job as well as you for a fraction of the pay. Indian zippies are one reason outsourcing is becoming the hot issue in this year’s U.S. presidential campaign.

Business World featured a cover story (8 December 2003) by Rama Bijapurkar on The New Improved Indian Customer which traced the demographic changes that are driving the local market: income growth, affordability growth, the rise of the self-employed, environmental changes drive aspiration, pragmatism in consumption and preference for ‘real value’ products and services, comfort with borrowing to fund future consumption, comfort with consumption, comfort with technology. She adds:

Current levels of penetration influence the pace of future penetration. Penetration increases are not linear, instead they accelerate as base penetration increases till a point where saturation sets in. If only one out of 20 households in a given affluence grade have a washing machine or a two-wheeler, adoption will be slow. But when one out of every 10 has it, it becomes something that gets on the radar screen of aspiration for the rest. And when it gets to one in five families, it serves to rapidly penetrate the remaining households because it now becomes a ‘must have now’ product for them.

For consumer durables, the top (in terms of affluence grades) 40 million households in India – 24 million in urban India and 17 million in rural India – based on their penetration levels would constitute the core consuming class. The magic number of 200 million consumers (assuming five members to a household) has arrived at last!

Within rural India, there are two different grades of overall affluence, which we can call the developed and the developing states. The developed states comprise Punjab, Haryana, Gujarat, Maharashtra, Karnataka and Kerala. They account for about one-third of the rural population and have shown higher penetration in most categories.

The market has enough scale to offer, and enough desire to consume. The consumer is ready and waiting to be served. The new Consumer India will pose a huge challenge to marketers because it offers a difficult revenue model of large but not enormous volumes, modest prices and high benefit expectations. It will reward real innovators and ignore marketing hype. Most of all, it will continue to comprise many markets at different stages of evolution, demanding a complexity of strategy that is far in excess of its worth. And yes, it will continue to throw up unexpected answers to the arithmetic of (medium penetration) x (large size of consumer base) x (low price-willing to pay) x (modest per capita consumption).

So, what does development really mean?

Tomorrow: A Tutorial on Development

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