Venture Capital’s Next Bets

Knowledge@Wharton writes about the new areas where VCs are investing:

The Internet, though not the darling it was a few years ago, still gets attention, thanks to the advances in online video that, for example, powered YouTube. “Video is a key driver right now,” said Roland Van der Meer, co-founder of ComVentures in Palo Alto, Calif. “There is amazing technology coming out of MIT, Stanford and Cal Tech addressing problems like, ‘How do you render video differently and how do you insert ads in real time?'”

Clean tech, for its part, represents a host of technologies and has been propelled by widespread public concern over carbon emissions and global warming. Given the scientific consensus that human-produced pollution has heated the world, established companies are seeking ways to reduce its impact and startups are offering up all kinds of environmentally friendly alternatives.

Mobile Advertising

Telecoms.com writes: “The key to the promise of mobile advertising lies in the fact that the mobile device provides a very personal, direct and interactive communications channel to customers, he points out. In advertising terms, mobile operators own some of the best advertising inventories available anywhere. In addition they own two key assets: the customer’s location and personal identity in terms of behaviour, demographics and content preferences. This puts mobile operators in a very strong position when competing for advertising budgets.”

Microsoft and Mobiles

Om Malik writes:

Windows Mobile, which is one of the two future platforms of growth for the company. (Xbox is the other.)

While it is unlikely that I would switch to Windows Mobile anytime soon, I have seen how some friends of mine like the platform. In fast growing mobile societies like India and China, Windows Mobile devices are popular despite their high price tag. Many use Windows Mobile (and other phones) for what we view as computing tasks in the US. It is their computer.

Microsoft has to work hard with device makers to bring the prices down to $100-a-pop range, and see its market share zoom. Microsofts relevance (and more importantly future profits) in these new mobile societies are going to come from mobiles, not PCs.

Urbanising India

The Mint has an article by Atanu Dey and Reuben Abraham:

India has a choice of futures, say, in 2030. Will the majority of Indians continue to live in 600,000 small villages engaged in near-subsistence agriculture or will they be in living in 600 well-planned vibrant cities (or 6,000 towns of 100,000 population, for that matter) working in non-agricultural sectors and enjoying a rich social and cultural life?

Depending on how we use our resources, the latter future can be a reality. Achieving that reality would be the greatest challenge for India and arguably, the most rewarding as well. Rather than trying to trap people in villages and agriculture, the focus should be on the creation of new urban centres which will lead to economic growth and development of people

TECH TALK: Doing Education Right: The Rent-Seekers

By Atanu Dey

One underhanded way to scare a neoclassical economist out of his wits is to creep up on him and shout monopoly power. Economists regard monopolies with the same mixture of dread, contempt and fascination as biologists regard cancer. They recognize the awesome virulent power of monopolies to wreak havoc on their world of mutually beneficial voluntary exchanges. Monopolies, whether public or private, lead to social welfare losses. At the other extreme, perfect competition leads to maximization of social welfare, subject to some reasonable conditions often approximated in the real world.

In a competitive market, a large number of firms compete amongst themselves to supply the stuff that consumers demand. Each firm strives to reduce its own costs to increase profits, while at the same time reducing prices to lure buyers away from its competitors, and in the resultant shuffle, prices are bid down to the level of costs, thus competing all profits away. Unlike in a competitive market where firms make no economic profits (they make only accounting profits), a monopolist makes economic profits because they are able to dictate the price by controlling the quantity it supplies. By sufficiently restricting supply, a monopoly can charge prices that are way above costs, and thus extract what is called rents, or economic profits.

One feature of the Darwinian world we live in is that there is always competition. It is good to be the king because the king has power. But the more power the king has, the greater is the competition to be the king. Sure, the monopolist is the king in the market, extracting rents and imposing social welfare losses. But somewhere along the way, the monopolist has to pay the king-makers. There is a competition for the market as if to compensate for the lack of competition in the market. The competition for the market leads to welfare losses, a sort of negative image of the social welfare gains from competition within the market.

One parsimonious explanation for not allowing free entry into the market for education is that by retaining monopoly control of the education sector, the government acts as a monopolist. By requiring licensing from the government, and by restricting the licenses, the government encourages competition for the right to serve the market and thus reduces the competition within the market. Restricting the licenses increases their price. This is the rent collected by the government. The licensed firms (schools and colleges) have to recover the costs incurred in obtaining the licenses. They in turn, given the legal protection from reduced competition, have the means to dictate price and the outcome is predictably low quantities (shortages abound), high prices, and rampant corruption.

This is purely anecdotal but is useful in clothing the bare outlines of what I conjectured above. Some institution wants to start a medical college somewhere in India. It applies for a license and is told off the record that the price is Rs 20 lakhs (approximately US$ 50,000) per seat. For the 200-seat license applied for the price is Rs 4,000 lakhs, to be delivered in unmarked bills in a large plain brown envelope. That fee is routed through the licensing bureaucracy with appropriate payoffs to different peoplethe lions share ending up in the appropriate political hands. After all, securing top positions at the bureaucracy is not cheap; and running elections is a costly business.

The firm having paid the whopping fee to operate a medical college, now has to recover its costs. Perhaps its actual cost of training a medical student is Rs 5 lakhs per year. It adds on a special college entry fee of say Rs 10 lakhs (remember to bring in unmarked bills in a plain brown envelope) to the normal tuition fees. The hapless students are forced to pay because seats are limited. The four year medical training which should have cost only Rs 20 lakhs if free entry were allowed into the field now has to pay Rs 30 lakhs, and perhaps gets substandard training. Further down the line, doctors are in short supply and therefore they command some market power and thus are able to recover their costs. The patients suffer but that is why they are patientsthey suffer.

What needs to be done will occupy our attention the next week.

Write to atanudey at gmail.com if you have questions or comments.

Next Week: Doing Education Right (continued)

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