The telco balls of brass

Here. Admire the telco chutzpah. Telcos getting back with a vengeance with 3G iPhone pricing that is nothing short of a rip off. Get ready to pay Rs 31,000 for the entry-level 8GB phone and Rs 36,100 for a 16 GB memory. Both Vodafone and Airtel will launch the iPhone on August 22 and early reports suggest that they would be able to sell over 100,000 phones in the next 12 months.

It is much cheaper in the US (because the telcos subsidize it) where the handset is available for $199 (Rs 8,358) plus $99 (Rs 4,158) as an annual contract with the carrier that has the exclusivity. In India however, neither company will offer a subsidy.

The telcos here flout all license conditions but will shamelessly cry for a level playing field when TRAI chose to open up open access internet telephony to ISPs that are technically resellers and not carriers. Our experience with Indian carriers has been one of abject apathy to overcharging despite their vast customer base. Unless TRAI tracks down areas where telcos gouge Indian customers and direct them to slash costs, they will never. Opening up internet telephony is the latest.

But tell me something. Isn’t there a recession that we’ve been bracing up until a few days back? Now I hear folks queuing up to buy iPhone at nearly 3x the price that it sells in the US. Have we turned incurable gadget freaks or is it that we have suddenly discovered a ton of data to download or that we get lost on our way home without a state of art GPS or will we die starved of entertainment feed from much touted direct connection to YouTube that the 3G avatar is expected to provide?

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Oligopoly in Indian REITs...?

Inox Leisure investing Rs.100 crore in Ajay Piramal’s Indiareit – for a strategic stake as well as “preferred client status” with a ROFR in its future portfolio of RE assets.

The report quotes Industry analysts view that the alliance will help Inox widen access to upcoming real estate projects across primary tire I and tire II cities, thus getting the right customer exposure to multiplexes and branded outlets. Indiareit could ensure preferential access to Inox for these properties. The new alliance would also bring financial support, expertise, presence of leading brands and strong pre lease to developer.

With a handful of REIT/PE funds with mighty financial muscle and just so few parcels of land available, are we not running into an oligopolistic mess? Has Ajay Piramal been inspired by Sam Zell…?

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A tale of two business models

Born less than decade ago, Google Inc. (NASDAQ: GOOG and LSE: GGEA) now reigns as the most profitable—and probably most powerful—force on the Web. As usual, Google's financial firepower flowed from its search engine. That ubiquitous tool has become the hub of the Internet's largest marketing network and appears to be getting even better at identifying the right ads to display with its search results, which in turn helps elicit more revenue-generating clicks

Google 1st Quarter 2007 results snapshot

Revenues - $ 3.66 b
Net Income - $ 1.0 b
EPS - $ 3.18 per share

No. of employees – 12,238 nos.
End quarter cash balance - $ 11.9 b
Quarterly revenue productivity per employee - $ 299,068

Date of Incorporation : Sept. 7, 1998
IPO : August 19, 2004
[19,605,052 shares were offered at a price of $85 per share ]
CMP of stock - $ 482 [ P/E – 35 ]
Market cap - $ 152 b

Did you say scale ?

What stands out or boggles my mind in more ways than one is the amazing power of an ingenuous yet easily scalable business model that Google espoused. Being less manpower intensive (just 12,238 employees now) and more equipment / server capacity centric, it is least affected by the ubiquitous problem afflicting the IT industry – one of employee attrition.

Pitched against the business model of Indian IT bellwether Infosys Technologies Limited (NASDAQ: INFY) which recently celebrated its 25th anniversary, the contrast is glaring. While it can’t be compared strictly because of inherent diversities, the power of robust business models that enable rapid scaling and by that, shaping the very fortunes of businesses is evident here.

Infosys 4th Quarter 2007 results snapshot

Revenues - $ 898 mm
Net Income - $ 272 mm
EPS - $ 0.48 per share

No. of employees – 72,241 nos. (incl. that at subsidiaries)
Quarterly revenue productivity per employee - $ 12,430

Date of Incorporation : July 2, 1981
IPO : February 1993
[1,378,947 shares were offered at a price of $2.26 per share ]
CMP of stock - $ 42 [ P/E – 22 ]
Market cap - $ 30 b

Here’s where the significance of the business model hits home. While it took 23 years for Infosys (with its strength of 72,241 employees) to notch up a billion dollars in revenues, Google’s business model helped it achieve $ 1.46 b in 2003, in just 5 years of its incorporation and one year before its IPO – with just 1/6th of that strength.

Throw in a few other companies like TCS, Wipro, Satyam, HCL Tech and not wanting to be outhired, MNCs like IBM and Accenture too open shop locally and adopt massive ramp up from the limited pool of qualified engineers, you create a mecca for job hoppers. They are all in the same turf just to stay competent. Hiring becomes a non-process as anyone who can spell binary is recruited diluting the quality of the hire. Skill gaps are hurriedly addressed by on-the-job training if not on induction itself. If the hires are not on a project, it hits their bottomlines hard. Billability becomes the watchword instead of quality.

This lacuna is being realized now and precisely the reason why Infosys top brass is tempted to rethink the viability of its business model. Related news item is here and my earlier insights here and here.

What do you make of it ?

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[PS – I must also place on record the fact that the indian companies mentioned above took birth in the third world aiming to work for the first world. These companies started operations with severe handicaps when Indian businesses were reeling under the yoke of licence raj, a period between 1947-90 when the state policy was riddled with red tape, hostile to businesses, with severe import restrictions even for high end technology. Exports were severely restricted too.

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Despite the ongoing reforms, India still ranks in the bottom quartile of developing nations in terms of the ease of doing business; and the average time taken to incorporate a company or to invoke bankruptcy is much greater.

Google by contrast took birth in the capitalist mecca - USA, and measured by that yardstick, it took off with an inherent advantage.

My purpose here is to bring out the criticality of business and revenue model in shaping the fortunes of businesses alone and not to denigrate the shining Indian star corporates mentioned above.]

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