TECH TALK: Facebook: Looking Ahead

Fred Stutzman writes:

Facebook seeks to become a starting point for its users web experience. In essence, it is solving the “what’s next” problem by providing users a potentially endless set of experiences to encounter within the Facebook framework. Facebook knows that it has limited resources, by ceding some control of its space to third-parties, it retains users while enabling them to spend more time exploring the endless depths of the Facebook experience. In a sense, this is Second Life applied to Facebook; Second Life is only as interesting as the environments developed within – Facebook is no different.

Sounds like a great plan, right? I agree, it does sound good on paper. But how it shakes out in the real world is still left to be known. Facebook users engage with the service to have social needs answered; while Platform adds a bunch of new capability to the service, does it actually answer social needs? I think you could argue that the diversification of information presented on a profile is a relevant social need, but what about an Amazon marketplace? Is that a relevant social need? The ultimate question revolves around how these applications enable mutual disclosure between friends – how they help friends learn more about each other. That’s been the killer app of Facebook since day one, and just because the audience has changed somewhat I don’t believe it is no longer relevant.

Read/Write Web thinks Facebook will go in for what could be the biggest IPO since Google:

We may never know the full story on why Yahoo and Facebook couldn’t agree terms on a $1Billion deal. But you have to commend Facebook for its brave move of going it alone and building out a development platform themselves. It would’ve been much easier to go the MySpace route and sell themselves to the highest Bigco bidder.

Could we eventually see the biggest IPO since Google, when Facebook puts its hand out to the public for cash? It’s looking like a good bet now. And as Facebook’s current stats show, they are growing at a remarkable pace. They have the vision, the user base, and 3rd party developer support. It seems the monetization isn’t quite worked out yet, which could still end up spoiling the party. But one thing is for sure, Facebook has gone well beyond what MySpace has to offer – and is looking distinctly threatening to not only MySpace, but the other big Internet companies. Facebook has grown up!

While Facebook is not officially in India, its user base is starting to grow. While Google’s Orkut remains the dominant player in the social networking space in India, Indian start-ups like Minglebox (which received funding from Sequoia) and established players like MySpace are also likely to be forces to contend with. My belief continues to be that in India social networking will need to take a mobile-centric rather than a PC-centric approach. So, from that perspective, the space still remains wide open.

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TECH TALK: Facebook: The Vision

Fortune wrote a story on Facebook:

“Imagine that when you shopped online for a digital camera, you could see whether anyone you knew already owned it and ask them what they thought. Imagine that when you searched for a concert ticket you could learn if friends were headed to the same show.

Or that you knew which sites – or what news stories – people you trust found useful and which they disliked. Or maybe you could find out where all your friends and relatives are, right now (at least those who want to be found).”

“We want to make Facebook into something of an operating system so you can run full applications,” Zuckerberg [said]. He said Facebook is becoming a “platform,” meaning a software environment where others can create their own services, much the way anyone can write programs for Microsoft’s Windows operating system on PCs. Facebook, he explained, is a technology company, not a media one.

Today, social networking is fragmented. There are networks for dating, for philanthropy, for pet owners, for parents. But each has its own ways for members to register, describe themselves, communicate, and interact. Facebook aims to make much of that unnecessary. It will provide the underlying services – a platform – and offer access to its prerecruited pool of members. It will retain some online real estate and will still generate the lion’s share of its revenue from advertising.

Michael Parekh wrote:

If Facebook is able to even partially execute on the promise of this strategy, it could pose a long-term dilemma for the mainstream portals. Tactically, it makes a ton of sense for all of them to make sure their individual portal services are represented as applications within Facebook, thus leveraging Facebook’s networked audience.

Strategically, Facebook poses strategic risks for the major portals no less than what Google posed for Yahoo!, AOL and Microsoft back in the nineties, when they all used Google’s search engine as an outsourced service.
For smaller Web 2.0 companies, Facebook could be their best friend in the short-term. They potentially get substantial, and relatively inexpensive customer acquisition via Facebook, by making their services “applications” on Facebook’s platform.

In that sense, Facebook’s strategy is brilliant, since it makes a tail-wind out of the fact that the biggest problem facing hundreds of VC and angel-funded Web 2.0 startups, is to get massive, quick, inexpensive distribution.

Tomorrow: Looking Ahead

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TECH TALK: Facebook: The Early Days

Wikipedia has this about the early days of Facebook: In early February of 2004, Harvard University sophomore Mark Zuckerberg founded “The Facebook”, with support from Andrew McCollum and Eduardo Saverin. By the end of the month, more than half of the undergraduate population at Harvard were registered on the service. Additionally at that time, Zuckerberg was joined by Dustin Moskovitz and Chris Hughes for site promotion and Facebook expanded to MIT, Boston University, and Boston College. This expansion continued in April of 2004, when it expanded to the rest of Ivy League and a few other schools. The following month, Zuckerberg, McCollum, Hughes, and Moscovitz moved to Palo Alto, California to continue work on Facebook’s development with additional help from Adam D’Angelo and Sean Parker….Facebook received approximately $500,000 from PayPal co-founder Peter Thiel in an angel round. By December , Facebook’s user base had exceeded one million.

Mashable put together a timeline of the key events in Facebook’s history:

2004
February – Mark Zuckerberg and co-founders Dustin Moskovitz and Chris Hughes launch Facebook from their Harvard dorm room
March – Facebook expands from Harvard to Stanford, Columbia and Yale
June – Facebook moves its base of operations to Palo Alto, Calif.
September – Groups application is added; the Wall is added as a Profile feature
December – Facebook reaches nearly 1 million active users

2005
May – Facebook raises $12.7 million in venture capital from Accel Partners;
Facebook grows to support more than 800 college networks
August – The Company officially changes its name to Facebook from thefacebook.com
September – Facebook expands to add high school networks
October – Photos is added as an application
Facebook begins to add international school networks
December – Facebook reaches more than 5.5 million active users

2006
April – Facebook raises $25 million from Greylock Partners and Meritech Capital Partners;
Facebook Mobile feature launches
May – Facebook expands to add work networks
August – Facebook development platform launches;
Notes application is introduced;
Facebook and Microsoft form strategic relationship for banner ad syndication
September – News Feed and Mini-Feed are introduced with additional privacy controls;
Facebook expands registration so anyone can join
November – Share feature added on Facebook, simultaneously launched on over 20 partner sites
December Facebook reaches more than 12 million active users

2007
February – Virtual gift shop launches as a feature
March – Facebook reaches over 2 million active Canadian users and 1 million active UK users
April – Facebook reaches 20 million active users;
Facebook updates site design and adds network portals
May – Facebook launches Marketplace application for classified listings

Mashable has an earlier article profiling Facebook.

Tomorrow: The Vision

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TECH TALK: Facebook: The Platform (Part 2)

Splashcast Media, one of the companies creating applications for Facebook, had this to say about the platform: Facebook is announcing the opening of what its calling The Platform a system for 3rd party companies to program their services for use inside of Facebook user pages. As part of the announcement, about 30 preselected companies that have integrated with The Platform ahead of time are being showcased to demonstrate what kinds of things are being made possible. This goes beyond the ability to post media from outside into Facebook and it goes beyond the previous Facebook API (also called The Platform) – outside companies are now being allowed to deploy advanced functionality inside the Facebook site…Some monetization in Facebook will be permitted, so long as its not done on the same pages where Microsoft ads are being run. More may be possible in the future. That is a remarkable differentiator compared to other, similar websites that maintain tight control over monetization in their ecosystems. This is one of the big unknowns in regards to Facebook opening up but there is every indication that this will be a real game changer. When companies cant monetize their presence in larger ecosystems, then innovation becomes far less affordable. If Facebook does allow meaningful monetization to occur, they could serve as a lifeline to hundreds of small companies that will then take risks, develop innovative new products and change the face of the web.

Fortune added:

From here on it will be wide open. Anyone will have access to Facebook’s so-called “markup language,” which is intended to be usable even by those with rudimentary programming skills. So kids in dorm rooms will be able to create simple applications to coordinate TV-watching or trips to the cafeteria with their friends. And some creative amateur coders are likely to come up with amazing new things to do inside Facebook. Companies, too, will find many ways that Facebook applications can improve productivity and collaboration.

The company will impose no limitations on what kinds of applications others can create, except that they be legal. Says Zuckerberg: “They can sell sponsorships, they can have ads, they can sell things, they can link off to another site – we are just agnostic.” He promises that Facebook will not give its own applications any special privileges or exclusive access to its members.

TechCrunch thinks of Facebook’s approach as the opposite of MySpace: The payoff is two way. Not only do developers get deep access to Facebooks twenty million users, Facebook also becomes a rich platform for third party applications…Facebooks strategy is almost the polar opposite from MySpace. While MySpace frets over third party widgets, alternatively shutting them down or acquiring them, Facebook is now opening up its core functions to all outside developers.

GigaOM had this to say: This move is more than catching up with MySpace and Bebo and what have you by adding outside widgets; Facebook has become a primary relationship and identity broker for millions of people. Now outsiders can capitalize on that information in a safe way, pulling from users expressed interests in their profiles, building on their stated intention to attend events, or simply giving them more dedicated tools for expressing themselves. The outside apps will be woven into a structure thats already been built and is utilized every day…Admittedly, there is some reinventing the wheel going on. Wasnt the browser declared to be the new OS just, like, two years ago?

Tomorrow: The Early Days

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TECH TALK: Facebook: The Platform

Last week, Facebook launched its Platform, effectively positioning itself as a social utility. Facebook’s rise has been as astonishing as MySpace was over the past couple years. It is, arguably, as interesting a company as Google in terms of the innovations that it is coming up with. In this week’s Tech Talk, we will take a closer look at what various people have been saying about Facebook. Let’s begin by taking a look at the Facebook numbers.

Read/Write Web has some stats on Facebook:

Facebook is growing 3% per week (100,000 new users per day) and the fastest growing demographic is the 25 and up age group. Active users have doubled since Facebook expanded registration in Sept 2006. The international user base is still at an early stage, but obviously has room for large growth. Currently Canada has the most users outside of the United States, with more than 2.5 million active users; followed by the U.K. with more than 1.4 million active users.
As well as quantity, Facebook has on its side that it is a very sticky site – 50% of registered users come back to the site every day. Facebook is generating more than 40 billion page views per month, from 24 million “active” users – 50 pages per user every day, which is very very high. In comparative terms, Facebook is now the 6th most trafficked site in the U.S. and gets more page views than eBay.

Facebook also has an impressive range of social software apps – it claims it has the no. 1 photo sharing application on the web and it has just released a video app to take on YouTube.

The New York Times wrote about the launch of Facebook’s platform:

Facebook…is inviting thousands of technology companies and programmers to contribute features to its service. They can even make money from the sites users by doing so, and, at least for now, Facebook will not take a cut.
Some of the new features, demonstrated by software developers at a Facebook event on Thursday, will allow members to recommend and listen to music, insert Amazon book reviews onto their pages, play games and join charity drives, all without leaving the site.

Facebook is thinking big. In the parlance of its 23-year-old chief executive, Mark Zuckerberg, the company is positioning itself as a social operating system for the Internet. It wants to sit at the center of its users online lives in the same way that Windows dominates their experience on a PC.

Dan Farber puts the announcements in a broader context:

Facebook CEO Mark Zuckerberg calls this latest interation of the service a social utility, which is an apt term.

Its a utility in terms of a tool for the 24 million Facebook users, but it also reflects Facebooks desire to become a utility, like an power company, in which potentially billions of people use the service in their personal and professional lives. Facebook, MySpace, and other growing colonies of linked communities with semi-permeable walls represent the rise of the social Web and Web utility companies.

Zuckerberg describes the Facebook core function that the new third-party applications can tap into as a social graph, the network of connections and relationships between people on the service.

Tomorrow: The Platform (continued)

TECH TALK: Indias Digital Infrastructure: Mobile Data Services

Indian mobile operators need to think of themselves as running two businesses. One targeted at top and middle India, and the other at bottom of the pyramid India. While the latter has huge growth potential (an untapped market of 250-300 million Indians in the next 3 years), the former is stagnant, addressing a saturated market with flat ARPUs and little growth.

All of the mobile operators strengths are in building out the user base in India. They have done this very well in the past few years and continue to do so. They also have plenty of work left in this regard hundreds of millions of Indians left out of the telecom revolution are finally going to get connected. Creating the infrastructure to get these millions on the network is a huge challenge.

In doing so, they need to rethink their role for the existing user base. This user base has been mobile for a few years now and are hungry for new services. India has a world-class wireless data infrastructure but it is barely talked about. By closing their walled gardens, the mobile operators are making a big mistake. This user base can pay a lot more after all, there were many who paid Rs 8-16 per minute for phone calls (as against Rs 1-2 today). They have money to spend. But the services available to them are limited even though for many, the mobile is the primary or even the only interactive device in their lives.

Mobile operators need to do two things to make the mobile Internet a reality in India for the first user base. First, they need to open up their data networks so consumers can go to any website they desire. Second, they should encourage the creation of a cornucopia of services by creating a business model which has more favorable revenue share terms for the service providers. Mobile operators can still make a lot of money and I would argue, that this will be a magnitude higher than what they do today by billing consumers for data traffic on open access. In other words, instead of thinking of themselves as media and worrying that they will just become bitpipes, mobile operators need to think of themselves as services pipes. If they do this, consumers will see them as the genie that made the mobile into a magic lamp.

There is a lot at stake for India. The Internet is core and necessary digital infrastructure if we are to continue to develop. Home computers and mobiles are the two necessary devices which will become the windows to the world of services. Even though we are not there yet, forward-thinking organisations and entrepreneurs can take us there.

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TECH TALK: Indias Digital Infrastructure: Network Computing Devices

So, we are in a funny situation in India in the context of the Internet. The mobile industry has plenty of devices but very few services. The PC industry has plenty of services but very few devices. As such, the real benefits of the Internet both for consumers and businesses arent easily visible and accessible. For urban consumers, the Internet can help ease lifes daily inconveniences. For rural consumers, the Internet can help increase incomes by providing access to information and markets. For businesses, the Internet can accelerate information flows and speed transactions creating real-time enterprises. And yet, for all practical purposes, the Internet has still not become an integral part of Indian lives. What needs to change?

For the PC Internet to take off, we need to get computing devices into Indian homes connected to the Internet cloud via DSL, cable or wireless broadband networks. (Given the regulatory realities and technical challenges, the best near-term bet is on DSL offered by the two government-owned telcos, MTNL in Mumbai and Delhi, and BSNL everywhere else.)

These computing devices need to be affordable and manageable just like mobiles phones. To make this happen, we need to think of thin clients or network computers. These are computers which will strip away the costs and complexity of todays desktops, without compromising on performance. At a sub-$100 (Rs 4,000 or so) price point, they will be affordable for the large Indian middle class. People will not have to make do with a few minutes of cybercafe usage every once in a while they will have a computer in their home for use whenever they want. This is what will make computing and the Internet a utility in their lives.

The $100 upfront cost will be complemented by a $10-12 monthly (about Rs 400-500) charge for connectivity and basic software and content services. The server infrastructure to complement the thin client will be at the telco exchange and thus, there will be no incremental cost for the last-mile bandwidth used. Besides the underlying operating system to provide the desktop, video and other bandwidth-intensive services can be co-located at these mini-Grids in telco exchanges to ensure fast access.

In fact, the network computing model also creates interesting opportunities for additional revenue through value-added services. The desktop could be made up of a collection of icons from different commercial entities each paying for the privilege of offering customers one-click access to their websites. One can think of this as analogous to the value-added services that exist on mobiles and account for 5-10% of revenues for the mobile companies.

For the network computing model to become a reality, MTNL and BSNL need to think of themselves as more than mere pipe providers and think of themselves as computing service providers. In doing so, they will resuscitate their landline business and create the computing infrastructure for PC-based Internet services to thrive. By leveraging their billing relationship with customers, they will also share in the upside as customers do transactions.

If MTNL and BSNL do not want to do this, they should, at the very least, allow BVNOs (Broadband Virtual Network Operators) to use their network to offer services in return for carriage charges. Either way, we need 50 million Indian households to experience the joys of home computing in the next five years.

Tomorrow: Mobile Data Services

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TECH TALK: Indias Digital Infrastructure: Mobile Internet

There are 170 million mobile users in India, but only just over 1% of them use their mobiles for Internet access. Of course, not all mobiles have the ability to access the Net, but from a technology standpoint, I would estimate that at least 30% of the phones in India on GSM and CDMA would be able to access the Internet. And yet, few of us do. We seem quite happy just using the mobile for phone calls and SMSes. Some of us use the operator portals to get ringtones, wallpapers and games. But thats about it. Why not more?

There are a number of reasons. First, while CDMA phones have a convenient button dabao (press the button) to access a portal, the GSM phones need some extra configuration to get connected over GPRS. Second, mobile operators want to keep the users who do get connected within their walled gardens. So, they become the gatekeepers for the services. So much so, it is almost impossible for any independent service provider to create a portal that can be accessed by all users who have active data connections. Third, short-sighted pricing plans for data ensure that the ones who do want open access will have to pay a high price for it.

In addition, no one in India is really promoting the mobile Internet. Mobile operators are busy focused on new customer acquisition after all, every new $3 ARPU (average revenue per user per month) customer adds anywhere between $500-1,000 to their market cap! The handset makers like Nokia focus mostly on features that are native on the handset like a great music experience. The mobile value-added service players have still not gone out and determinedly create independent off-deck brands which attract users presumably, because they know few can access them as of now. The PC Internet companies are, well, focused on the PC Internet.

Put it all together and we have a mobile Internet that has neither users nor services. Can this logjam be broken? If so, how? Can the mobile become like a magic lamp fulfilling all our wishes? What are these wishes? When the Nokia N95 ad asks if is this is what computers have become, why dont we feel like going out and buying one? Is there really an opportunity for mobile data services beyond the downloadable ringtones, wallpapers and games?

For the mobile Internet to happen, mobile operators need to believe that Data, not Voice, will change the direction of the ARPU trajectory assuming of course that ARPU matters. In India, currently, everyone is happy focusing only on the minutes of usage. A time will come in the not too distant future when voice will go to zero-margin and then to zero. It is for that world that mobile operators need to learn from the PC Internet that creating an open platform can foster innovation in a way no closed environment can.

Tomorrow: Network Computing Devices

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TECH TALK: Indias Digital Infrastructure: PC Internet

Let us start by taking a look at the PC-based wireline Internet. We have 7 million computers in homes in India, growing at around 2 million a year. (Indias total installed base of computers is about 20 million, growing 6 million annually.) Compare that with the mobile industry: it is growing at 7 million a month, or over 80 million a year, over an installed base of 170 million.

Because of the low home computer base in India, people largely use cybercafes to access the internet, paying between Rs 10 and Rs 40 per hour. Indias Internet user base is estimated at be around 25-45 million (depending on which source one believes). Broadband access in India too has been slow to grow in part because most new investments have focused on the mobile infrastructure. But the bigger issue has been that the new home computer market is only a couple of million. That severely limits the target market for broadband providers. (Yes, there are about 5 million computers still not connected by broadband. If these people have not gotten broadband access to the Internet now, then I can only surmise that either access is not available or they have no reason to get one.)

Of course, broadband in India is not really broadband. Although the advertised bandwidth may be 256 or even 512 Kbps, actual speeds are often a fraction of that. Furthermore, since access plans often have very low data transfer limits, broadband in reality is at best an (almost) always-on narrowband connection.

With MTNL and BSNL controlling the most-effective form of access in the form of DSL over copper (telephone cable), private providers (ISPs and the telcos) find it hard to get ubiquitous coverage and provide cost-effective connectivity. Cable companies have got into the fray but reliability remains a big challenge.

The Internet has myriad services. New sites keep popping up daily. It is almost trivial for anyone to create an Internet presence. So, even as services mushroom, the growth of the Internet in India is hobbled by the lack of connected access devices.

Computers at Rs 15,000 or more are, relatively speaking, much more affordable than they were a few years ago. The starting prices of computers have come down and income levels for the middle-class have gone up. Yet, people have not adopted computers like they have done with mobiles. I think there are two reasons for this beyond the affordability dimension. First, they lack desirability; they are not must-have devices. And second, they are perceived to be complicated to operate.

One could argue that the new generation of mobiles are in fact multimedia computers. While thats partly true, the experience of the big keyboard and display of a computer cannot be replicated with todays mobiles. One can imagine teleputers mobile phones which have the ability to connect to external keyboards and to large external displays. But thats not available today and perhaps lie some years into the future.

Whats needed for the PC-based Internet to take off in India is a solution that combines the affordability and the manageability of mobiles. With such a solution, it will be possible to take computing to 50 million Indian homes in the next five years.

Tomorrow: Mobile Internet

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TECH TALK: Indias Digital Infrastructure: Overview

Recently, Business Today asked me to write a column about the Internet in India. This is what I wrote.

The Internet is back! There’s a buzz among entrepreneurs as venture capital companies are putting money into companies focused on the Indian market. Online advertising (display, search and classifieds) is growing. Users are starting to spend on transactions going beyond ticketing. All in all, the long-promised boom of the Indian Internet is underway. What needs to be done to ensure that the boom isnt just a transient bubble?

There are, in reality, two Internets segmented by the access device and the type of connectivity. The PC-based wireline Internet has about 30-40 million users, with a majority of the users using cybercafes. With only 7 million computers in Indian homes, this Internet is still a long way from becoming a utility in people’s lives. The mobile-centric wireless Internet can potentially reach a significant portion of the 165 million cellphone users in India. However, the reality is that other than voice, there are only two services which touch a large fraction of this user base SMS and ringback tones. The mobile-as-India’s-computer paradigm still has a long way to go.

Looking at it another way, for the real boom, the wireline Internet needs more devices (home computers) and the mobile Internet needs more services. What will it take to make both happen?

To solve the device problem, one needs to rethink computing in a world where broadband exists and thus make computers affordable and manageable. For this, the answers lie in borrowing two ideas from the mobile industry create a device that costs Rs 5,000, and combine it with a monthly service charge of Rs 500, and make the device simple to use without requiring its owner to become a technology expert!

The solution to these twin challenges lies in thinking ‘thin’ computers for Indian homes connected over DSL or cable to servers over high-speed networks. All the computational processing is done at the server-end, and the network computers become simple ‘on-off’ devices without compromising on the performance that current desktop computers offer.

To make the mobile Internet a reality in India, two changes need to happen, and they have to be driven by the mobile operators since they are the ‘gatekeepers.’ First, an open publishing platform is needed to allow anyone to create a mobile website that is accessible by everyone just like on the PC Internet.

Second, mobile operators need to change their billing philosophy for value-added services. The bulk of the revenue that users pay must be given to the content providers. Mobile operators should, instead, charge for packet data flow through their ‘pipes.’ At a broader level, just like NTT Docomo did with its i-mode service in Japan in 1999, Indian mobile operators need to encourage the creation of a value-generating ecosystem.

Taken together, these innovations can help build India’s digital infrastructure, create a framework for other emerging markets to emulate and provide a large domestic market for companies to finally think India First.

There are a number of ideas which I did not have the space to expand upon in the Business Today column. I will use this Tech Talk series to elaborate on the various points mentioned.

Tomorrow: PC Internet

TECH TALK: The Emerging Internet: The Next Google

Let us summarise the key points so far. My contention is that the next Internet what I call the Emerging Internet — will be built around mobiles, rather than PCs. It will be a window to the Live Web, rather than the Reference Web. Subscriptions, rather than Search, will be the way we will interface with the Live Web. Invertising, and not Advertising will be dominant business model in the Emerging Internet. And to take it one step further, the company that will dominate this new Internet will not be Google or one of the existing players.

If one looks at a bit of history, it is hard to find the leader of one era continue to dominate the next one. IBM dominated mainframes. Its leadership was usurped by Intel and Microsoft as the game shifted to personal computers. Yahoo first, and then Google, have dominated the landscape in the Internet era.

As the scene shifts to mobiles, its more than a change of screen sizes. How the device gets used changes. And so do business models. Microsoft makes its money from software which Google now gives away free. Google makes its money from advertising which helps in new customer acquisition for businesses. But as businesses build relationships with customers, the repeat business for companies like Google will lessen giving rise to new intermediaries, almost the anti-Google (just as Google is in many ways the anti-Microsoft which itself was the anti-IBM).

This may be hard to believe now given Googles dominance. But just 6-7 years ago, Googles current domination would have been impossible to believe. So, times change, and so does market leadership. For a new leader to emerge, many things have to go right and have plenty of luck. It also needs the courage to stand alone and not be tempted to sell out, however attractive the offers. It also needs to create an environment where it creates an ecosystem around itself thus making it a hub for new business activity.

I believe that emerging markets like India offer a great opportunity for giving rise to the new leader because they are where this new world built around mobiles, the Live Web, subscriptions and invertising will first emerge. Because shifts are going to happen on multiple dimensions, it will be hard for the existing leaders to match. Exciting times lie ahead as they have always! Innovation and entrepreneurship-led change is the only constant.

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TECH TALK: The Emerging Internet: From Advertising to Invertising

Advertising has become the primary business model on the consumer Internet. Even though display advertising has been around since the early days of the Internet, it is search-linked and context-linked advertising that is now dominant. Whichever way we look at it, companies pay to be in front of users on the Internet. Whether we are surfing content sites or searching for things, advertisers use a mix of text and banner ads to attract our attention. The Internet has made advertising campaigns easy to roll out for a large number of businesses all one needs is a landing page where users click to and a credit card to pay for anything starting at a few dollars. Advertisers are also able to track the clickthroughs thus enabling them to measure the response to their ads. In other words, the Internet has brought efficiency and metrics to advertising.

There will be two issues as the game shifts from Search and the Reference Web on the PC to Subscriptions and the Live Web on the mobile. First, the small screen of the mobile is not conducive to show a lot of advertising content will need to be pushed down to accommodate ads (theres no space on the side), and users may not take too kindly to that. Second, much of the current advertising on the Internet is focused on lead-generation. That is good when users can browse for more information and fill up a form or complete a transaction. The small screen of the mobile will not lend itself well to both at least for the foreseeable future.

On the mobile, as greater control shifts to the user, advertising will need to be re-thought as invertising advertising that becomes information and which the users invite into their lives. To understand this a little better, let us look at the five states of customers.

First, there are existing customers that a business has. These are the entire universe of customers who have done at least one transaction with the business. Second, there are loyal customers, who do repeat business and thus are the more profitable ones. Third, there are the future customers the ones who have yet to do a transaction and whom the business is interested in targeting. They can also be thought of as prospects. Fourth, they are former customers or a competitors customers, who have either exited the relationship with the business or are doing business with a competitor. (There may be some overlap between the third and fourth categories.)

Advertising helps businesses build brand, retain existing customers, and convert prospects into customers. Invertising helps build relationships with existing customers to make them into profitable, loyal customers and prevent them from becoming former customers. In fact, invertising can also help in educating future customers to initiate a business relationship.

So far, businesses have not had the means to do invertising and build relationships. This is where the mobile comes in with its reach, its ability to handle subscriptions and provide new content to users as soon as it is published. Brands and businesses can encourage users to subscribe to content channels published by them think of these as infostreams. Users can subscribe to these infostreams by simply sending an SMS from their mobiles a capability available on every mobile. To unsubscribe, users can send yet another SMS. This ability to start and stop infostreams shifts control to the users and ensures a spam-free environment.

Think, for a moment, about the relationships one would like to have wherein we are as interested in knowing whats new as the business as in letting us know. The neighbourhood kirana store, the bookshop, the multiplex, the phone manufacturers, deals from the supermarkets these will form the anchor for the invertising-centric business model of the Live Web. They will all be willing to pay a relationship fee to maintain an open communication channel to customers.

Tomorrow: The Next Google

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TECH TALK: The Emerging Internet: From Search to Subscription

In the early days of the Internet, Yahoos directory service was the way we surfed the Web because it was still indexable and classifiable by human editors. But the Web grew too fast for this to last. The first-generation of search engines like Altavista, Lycos, Webcrawler and Excite mirrored the pages on the Web and provided textual search capabilities on the documents. It was good for a short while until spammers figured out how to infiltrate the system. For a while, it seemed we would need to go back to maintaining bookmarks and remembering URLs to go to different sites. And then along come Google with its PageRank technology which enabled search based on the importance of pages as measured by incoming links. Search was back in vogue and has stayed that way ever since.

Search engines are the primary way to navigate the Reference Web. We no longer bookmark sites or even try and remember their URLs; we Google everything. This becomes possible because we trust Google to have made a copy of everything that has been created and appropriately ingested it with its algorithms. Search works very well with the PC screen most of the space is taken up by the results with some relevant ads thrown around. This works great for us, the search engines and the advertisers.

As the Live Web starts to occupy a greater importance in our lives, Search on a PC will no longer be the dominant form of interaction. Instead, I believe it will be Subscriptions delivered to a mobile screen. Let me explain.

The Live Web is about events and incremental information. There are a number of things we would like to know as soon as they happen. In this context, the best way to be alerted is to set up an alert. So, when we want to track something, we can set up a Subscription to that site. All that the site needs to do is to publish its new content via RSS and then ping a central server whenever it gets updated. That central server can also track who all have set up subscriptions for that particular site and therefore can be immediately notified. The mobile is the perfect device to send out an alert to since we can be pretty sure that the user will see the message almost immediately.

In emerging markets like India, access to the PC is still limited, but mobiles (and SMS for now) can reach over 150 million users. Also, even those who access the PC dont do so all the time a majority go to a cybercafes once in a few days. The mobile this becomes the ideal device to send people information about the Live Web.

Search does not become irrelevant for the Live Web. In fact, we will still use Search for things we cannot Subscribe to in advance. My point is that Subscription will be the dominant way we interact with the Live Web just like Search is the primary way we interface with the Reference Web.

With this change in behaviour and device, the business model will also morph.

Tomorrow: From Advertising to Invertising

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TECH TALK: The Emerging Internet: From Reference Web to Live Web

Much of the Web that we see around us is the Reference Web. The content is mostly static. Pretty much anything digital will be accessible to us at our fingertips if it is not already so. It is like being in a large digital library. Millions of websites have aggregated all kinds of information and made it available for anyone to use mostly for free. More than a decade of enhancements in publishing technology have also made it simple for users to add to the treasure trove thats already out there.

For a long time, the Reference Web was mostly about text and images. This is now changing. Bandwidth improvements are now making it easy to access multimedia content. YouTube has become the worlds largest repository of short-form video content. Most of the media houses are now also starting to make available their video libraries. The longer form of video content TV shows and movies are also slowly getting out on the Internet, as content owners realise that the costs to make them available are small compared to the potential for monetisation (largely through advertising).

The content in the world wide web is primarily designed for accessing on a big screen and hence the PC is the window into that web.

In contrast, the Live Web is the Web that is incremental in space, time and topics. I also think of this as the Now-Near Web (the N3 Web). It is about here and now, the real-time event stream. It is just getting created and used. This is a Web that needs to have almost instantaneous publishing and distribution capabilities. It is about knowing what my friends are doing now, it is about knowing the traffic on the route that I am about to take, it is about knowing whats happening in my neighbourhood today evening.

The data-enabled mobile is and will continue to be at the core of the Live Web. Because the Live Web is about immediacy, there is no other option. Mobiles are two-way devices enabling us to publish as well as consume, both text and rich media. As wireless data networks become faster and cheaper, use of mobiles for sensing the world around us will grow.

If the underlying plumbing for the Reference Web is in the form of HTML documents being pulled by users, then it is RSS being syndicated to users that is at the heart of the Live Web. And this means the primary way we interact with the two Webs will be different shifting from Search to Subscription.

Tomorrow: From Search to Subscription

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TECH TALK: The Emerging Internet: From PCs to Mobiles

The epicentre of innovation is shifting. One of my core beliefs is that it is going to be the emerging markets like India and China that will give rise of the next set of global technology companies. These companies will create solutions for a mobile-centric world. Mobiles will be the dominant form of Internet access devices in the developing markets.

Even though the idea of the mobile Internet has been around for a long time (since early 2000), much of the focus has been on usage in the developed markets where many alternatives already exist. Also, at that time, neither were the devices good enough nor were the networks fast enough. Today, mobiles masquerade as handheld multimedia computers (see the campaign for Nokias N95). Wireless data networks are near ubiquitous because they are layered on an ever-expanding mobile infrastructure. For consumers in emerging markets, the mobile has rapidly become the centre of their lives, an extension of their body.

This new world is very different from the wireline-centric broadband world dominated by thick desktops with Intel chips inside. True, people have the best of mobiles and there is as good a wireless infrastructure in many of the developed markets also. But there is a key difference the mobile is for the most part an adjunct to the desktop in the developed world. In emerging markets, the mobile is the primary, if not the only, interactive device that people own. This Mobiles First and Only Mobiles environment and lifestyle is going to very different from that of the developed markets. For example, SMS and not email becomes the dominant form of asynchronous communication. The Contacts on the phone and not the IM Buddy List is at the centre of social interactions.

I have seen the Internet since its early days in 1994-5 from my base in Mumbai, India. For the first five years, I was in the thick of things as an Internet entrepreneur managing a growing set of portals for the global Indian community. For the past two-and-a-half years, I have been working in the mobile space imaging and creating a platform (and investing into an ecosystem of companies) which reflects my belief that the services we will see on the Internet that is being created in emerging markets are going to be very different from the ones that we read about in a media dominated by the activities of companies in the developed markets.

Behind the PC to Mobile shift, there are four key elements to my philosophy about this Emerging Internet that I want to elaborate on in this Tech Talk. First, even as the PC Internet has been wonderful in helping us navigate the Reference Web, it is the mobile Internet will help us build sensors into the Live Web. Second, what search was to the PC Internet, subscriptions will be to the mobile Internet. Third, advertising as the dominant business model on the Internet will give way to invertising on mobiles. Finally, this new world will first be visible in emerging markets like India and in this new world will rise the next Google.

Tomorrow: From Reference Web to Live Web

TECH TALK: Doing Education Right: Consequences of Liberalisation

By Atanu Dey

The liberalization of the education sector in India, that is, by allowing free entry especially for-profit firms will result in increased supply of educational services. Here I will explore the predictable consequences of this. We begin by recognizing that education is not an undifferentiated homogeneous good; there are distinct levels within it, from basic primary education to post-secondary and tertiary levels. Each level has different pay-back periods for the return on investment. Furthermore, different people have different abilities to pay for the various levels of education.

Lets graph the ability to pay along the x-axis, with the very poor at the left and the very rich on the right. On the y-axis, lets graph the level of education, with basic primary at the bottom and specialized tertiary (Ph.D level) at the top. The top right quadrant of this diagram represents rich people and higher education, the lower left quadrant poor people and basic education. Recall that higher education has a short payback period and the payback is both private and social, that is, it has positive externalities. So the rich will pay for both higher and basic education if the capacity increases. Basic education, however, has long payback periods and most of the returns are social, and therefore poor people will under-invest in basic education given their shorter planning horizons.

Firms will profitably supply to the two right quadrants because the demand and the ability to pay, both, exist. The left top quadrant is also served by the for-profit firms. For the poor, who have basic education but are unable to pay for higher education they desire, if credit (educational loans) were available them, they would be able to pay for higher education and firms will supply to that need. That leaves the left lower quadrant: if the poor have public support (grants), they would be able to pay for basic education and thus the for-profit firms will supply to that market as well.

By allowing the private sector firms into education, the capacity for greater human capital increases and thus the economy itself grows larger and the growth rate increases. This increases the revenue base for the needed public support of basic education for the poor. Universal primary education can be a reality if the government raises the resources from a larger economy and allows the private sector to efficiently provide the education. Note that the funding is public but the provisioning is left to firms that compete in the market.

Guaranteeing universal basic education is a must for ensuring equality of opportunity. Even the poor, if given the opportunity, will be adequately prepared to continue on to higher education if they so wish. While for basic education the poor needed a grant, for higher education the poor will need a loan. Banks can easily enough provide these if the funds are efficiently spent on acquiring suitable higher education which again depends on the availability of wide range of choices. And the choices will exist if the education sector is liberalized.

India is stuck in a low-level equilibrium: a US$50 billion education market and a GDP of US$500 billion. It is possible to move to a higher-level: a US$150 billion education market and a US$1.5 trillion GDP, if education were freed. But those who extract their annual US$100 million today from the low-level equilibrium by controlling the education sector, will not allow the liberalization of the education sector for then they will lose the rent. Year after year, they extract the rent but keep the economy effectively shackled.

Let me stress this: education is an amplifying mechanism for economic growth and development. If we fix our education system, what we will get for our efforts is going to be far greater than what we put in it. In todays dynamic world economy, the returns to education are staggering, and so also are the losses that accumulate from a dysfunctional educational system. If need be, we should even borrow money, people, ideas from others to fix our system.

If I were a billionaire industrialist, heres what I would do. I would get a few of my fellow billionaires to create a corpus of funds say US$200 million for a Golden Goose strategy. With the money, I would simultaneously buy out all the politicians of every party so that they will en masse vote to liberalize the education sector. It will be a one-time cost for us billionaires. But that would lay the foundation for an India with such formidable growth that we would recover our investment in short order.

But alas I am not a billionaire and nor are you. We, as the saying goes, are up a creek without a paddle.

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

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TECH TALK: Doing Education Right: Freeing Education

By Atanu Dey

By liberalizing the education sector I mean that it has to be made totally free of government control and involvement. Whoever wants to provide educational services must be free to do so, be it domestic or international, for profit or not for profit, at the primary, secondary, or tertiary level. What would be the expected benefits of doing so?

The supply of educational services will increase, the quality will improve, and prices will come down. These are all everyday first-order efficiency effects of letting markets work. The second-order effects will be increased productivity, increased production, and better allocative efficiency within the sector. The third-order effects will arise from the increasing returns to scale associated with the production of education. Finally, there are very important forward and backward linkages that bind the sector with the overall economy. One of them is the use of information and communications technology (ICT) tools. It will give a boost to the IT sector in a way that is unthinkable in any other endeavor.

Increase in the supply of education is a natural outcome of removing all barriers to entry. Domestic and foreign institutions will invest in educational institutions. One can imagine corporations such as Tata, Reliance, Harvard, and Stanford opening shops in India, all eager to make a profit. This is no different from a large number of automotive companies starting manufacturing in India to supply the domestic market. The effect is predictable: an increase in the variety and therefore expanded choice for the consumers.

No longer will one have to fight to get into a good school or college. Instead of a sellers market, we would have a buyers market where the consumer is king and therefore the producers will be ever eager to reduce their costs and deliver a quality product. The best part is that with competition, even the incumbents the public sector institutions will wake up from their lack of competition induced slumber. Competition for students will force institutions to be nimble on their feet and therefore provide education that is relevant. No longer will the education system be producing graduates the majority of whom are unemployable.

Think about the waste of resources that accompanies the current supply-constrained system. Just one example: each year hundreds of thousands of students spend incredible amounts preparing for the entrance exam for IITs. That is directly unproductive use of time and money. That spending would be sufficient to fund a dozen IITs every year. Or think of the estimated US$10 billion that Indians spend in getting an education abroad.

In todays world, an educated population is more valuable than any natural resource. Yes, India has a large population with favorable demographics. But only the private sector has the resources to provide the investment required for educating them. The operative word is investment. Firms dont invest unless they expect to make a profit. And yes, there is profit to be made from providing education because education itself has positive returns and therefore people will pay for education.

Servicing such a large domestic population necessarily implies a very large installed base. That results in the industry learning by doing, and the economy gains what is called a comparative advantage in producing educational services. Which means that education in India will have a quality/price ratio that would attract foreign students. That would make India the education capital of the world, if India plays its cards properly. Indias income from producing education could dwarf what it earns from IT and IT enabled services today.

Which brings us to a very important point. Producing education will be massively dependent on the use of IT to reduce costs and improve quality. Private firms will use it intensively and effectively to produce education. Meaning that instead of a few computers sitting around in a dusty room in your average school, you will find the best technologies being used in schools and colleges. Students will be learning to use the IT tools while learning other things. More importantly, one will not have to worry about the much lamented digital divide: whoever attends an educational institution will become a digital native.

And who, you may ask, will be attending schools and colleges? My answer is: everyone. If India liberalizes the education sector, then everyone rich poor, minority, majority, this caste, that caste, this religion, that religion, you name it will be able to get an education. Only problem will be: the politicians will have to figure out some other way of dividing the country. But that is their problem, not ours.

In the next bit, I will explore why everyone will be able to attend school if they so wish.

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

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TECH TALK: Doing Education Right: Scarcity

By Atanu Dey

Consider this list: cars, scooters, telephone service, airline ticket, seats in schools and colleges, electricity, and railway tickets. Think of the year 1980. Notice the common feature of the list: shortages. Now consider the list in the year 2007. Notice some things on the list are no longer scarce. It cannot be mere coincidence that only those items which the government has released it stranglehold on are no longer scarce. Could it be possible that if the government lets go of its vise-like grip of schools and colleges, that shortage of educational services will also be a thing of the past?

Given sufficient time, shortages have a way of entering into our worldview so that we simply start considering them as normal and acceptable. Today the power supply where I live in Pune failed for over two hours. It is remarkable that I have accepted that power in India is unreliable and dont work up a sweat (only figuratively speaking, though.) It is part of our survival mechanism. We adjust to unreasonable situations. Thats how it is, we explain, and cope with it. We have become inured to the mad struggle that people go through to get their children into schools and colleges. We forget how astonishingly unnatural it is that something as basic as a good education involves almost superhuman effort.

Chronic shortages do not occur naturally. You can have acute sporadic shortages due to shocks to the system. But chronic shortages have to be carefully engineered and the machinery that creates shortages has to be kept in good working order. Otherwise the natural tendency for a market is to close the gap between the quantity demanded and the quantity supplied. This is a fundamental truth about the world of humans.

One effect of persistent shortage is low quality. Lacking the discipline enforced by the customers freedom of choice, suppliers dont have an incentive to ensure quality. The consumer is happy to receive even shoddy goods and services because it is a struggle to get anything at all. Take it or leave it, is the basic attitude of the producers in a sellers market.

In summary, it is misguided government policy that lies at the root of our dismal education system. The policy change required is to allow the private sector unfettered access to the education market. Will the private sector supply educational services? An unqualified yes because there is money to be made. Currently around 10 percent of GDP is spent on education, which amounts to around US$60 billion. Half of Indias population is below 25 years of age. That defines the addressable market for educational services. If the supply of educational services were to meet the suppressed demand, the annual spending on education will be many multiple times the current level.

Which brings up one of the most important matter associated with education. There is an implicit ban against for-profit educational institutions in India. Why this is so is hard to understand. For-profit producers of other goods and services are not banned. Indeed, it is clear to see that for-profit organizations produce most of the critically important goods and services. The only caveat is that these for-profit firms have to face competition. Thats the bottom line: allow all firms to enter the market, regardless of whether they are for profit or not. The market forces will regulate the firms so that the supply rises to meet the demand, the quality improves, and the prices reflect the underlying costs.

One final point: what about the poor? First, for education up to the secondary level, those who are unable to pay for their education should be publicly supported through vouchers which are redeemable at private schools of choice. Second, for post secondary education, those who are unable to pay should be given loans. Recall that post secondary education has a short payback period and the return on investment in education is positive. So the loan recovery with interest is not a problem.

In the remaining two pieces, I will explore the consequences of liberalizing education in India.

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

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TECH TALK: Doing Education Right: Markets Work

By Atanu Dey

Imagine for a bit what it would be like if education were provided by private sector firms. Can it be done? Would a socially optimal amount, variety, and quality of education be provided? Would there be market failures? If so, how can those market failures be corrected? Can one devise mechanisms to correct those failures?

The answer to whether the private sector can provide education is clearly yes because around the world for a very long time private firms have provided education very successfully. Both private sector for-profit and not-for-profit business models exist. Education, at some level of description, is a service like any of a very large variety of goods and services provided very efficiently by the market. The generalization that markets work holds quite meaningfully in the specific case of education broadly.

It may be worthwhile to briefly expand on what markets work means, say, in the context of a good such as computers (both hardware and software.) Basically, there is a demand for computers, or in other words, people are willing to buy them. Firms supply to the market to make a profit. They innovate to increase the variety of the goods to increase their revenues, and figure out ways to reduce their costs so that they have greater profits. Like the large number of profit-seeking firms on the supply side, on the demand side, a very large number of consumers also enter the market with the generalized desire to get the most bang for their buck. The competition that arises from the self-interested behavior of consumers and producers ruthlessly forces unfit computers (and therefore the firms that make them) out of the market and relentlessly drives up the quality and variety, while prices constantly fall.

It is a Schumpeterian world out there red in tooth and claw. But out of the dance of creative destruction, emerges things that no onehowever smart or wisecould have ever predicted. Let me stress that: no one knows what amazing stuff the market will deliver, who will make it, how it will be made, how much it will cost, how it will be improved upon and by whom. Nobody knows, and that includes government bureaucrats or politicians, regardless of how strenuously they claim to know. The inescapable fact is that every innovation, every object that you use, every service that you enjoy, arose overwhelmingly in the private sector, through the risk-taking, imaginative, innovative, entrepreneurial spirit of individuals driven by a basic desire to make a buck.

So is there no role for the government? Yes there is. First, it has to ensure what is called a level playing field, to set the rules, to resolve disputes, and maintain such institutions that are necessary for supporting the functioning of the market. Second, in case of market failures (which we will not go into here as this is not a text book on basic economics), to do what it can reasonably do without making the problem any worse. If the government cannot do better than the imperfect markets can, then it is better for us to live with the results of the market failures.

Here then is the basic recommendation that one is forced to make: let the private sector supply educational services in India. The government must not be in the business of providing education at any level. Let the market have a go at it. The government of India is not capable of providing education. It has demonstrated its incapacity over decades, and there is no reason to believe that it is even theoretically up to the job. Education is too critically important for the future of India for it to be left to the government. In todays world, more than ever, education is a dynamic service. It requires innovation, creativity, entrepreneurial talent, risk-taking ability and human resourcesall of which are sorely missing in the government. It is government control of the sector which has had the unfortunate consequence of Indian education to resemble what Keynes characterization of education as “the inculcation of the incomprehensible into the indifferent by the incompetent.”

Lets imagine what would happen if private sector firms were allowed to provide education, next.

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

Tomorrow: Scarcity

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TECH TALK: Doing Education Right: Incentives Matter

By Atanu Dey

Alistair Cooke in his weekly radio broadcast on BBC Radio 4, A Letter from America, once explained the theory of public choice to his listeners as the homely but important truth that the politicians are after all just the same as the rest of us. It is an accessible, though incomplete, definition of what public choice is about. You could read James Buchanan, who in 1986 won the The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (popularly known as the Nobel Prize in Economics) “for his development of the contractual and constitutional bases for the theory of economic and political decision-making. But Cooks version is adequate for our needs to explain why the Indian educational system is a disaster.

Politicians and bureaucrats are motivated by self-interest, and the will to power and control is deeply ingrained in them, perhaps more so than in the average person. Monopoly control of any market or institution is heady power. Controlling the educational sector is gives them an enormously powerful lever for controlling the economy. It is therefore quite understandable that the opposition to relinquishing that power would be formidable. The greatest challenge that India faces in reforming its educational system arises from this, not perhaps so much from a lack of understanding of what needs to be done, or how it is to be done. It is hard to overestimate the power of vested interests amassed against doing what is rational in education.

Here we look into what needs to be done, and leave aside for the moment the question whether it will be done, and if so how it is to be done. What needs to be done can be stated in one word: liberalization. The system is in chains.

In a socialistic economy, the state controls everything with the stated objective to reach the commanding heights of the economy, as the Indian leaders have always loftily boasted of achieving. What actually happens is that the state commands and controls and flies the economy into a very deep ditch. Remember USSR? Its gone. A land lavishly gifted with natural resources and industrious smart people reduced to rubble. We have not fully learnt from their failures of the shackling of their economy. But there is a small possibility that we could learn from the successes of the limited unshackling of our own economy.

It is of course possible for governments to efficiently produce goods and services. The question rather is whether it is probable. The evidence is strong at least in the case of the Indian government that it is highly improbable. The list of government failures is too lengthy to list here. But a few instructive examples which illustrate the general idea are worth considering.

Telecommunications was the governments sole preserve. The waiting times were measured in years, the prices were high, the quality poor. When the private sector was allowed entry, the prices dropped, quality improved, demand soared, supply expanded, and best of all, the public sector incumbents started performing as well. The same story can be told about the air transportation sector.

It is important to stress that the problem is one of government control of the sector, not whether it is served by private firms or not. Even if there are no public firms in a sector, government can control the sector by restricting entry (think license) of firms into the sector, thus limiting competition. The resulting low quantities (think permits and quotas) support high prices therefore high profits. The competition for acquiring licenses is part of the rent-seeking game that is played by the politicians, bureaucrats and private sector firms. It is a nice little game (racket?) where all the players win, and the only losers are the poor consumers and the economy.

Lets look at the education sector against this backdrop.

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

Tomorrow: Markets Work

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