Why Flipkart’s Flyte is shutting down and Apple’s iTunes won’t

Vivek Kaul 
Flipkart is shutting down its digital music store Flyte. The company announced this in an email to its customers on May 29, 2013. For music lovers, Flyte was a one stop shop for almost all kinds of music. From Runa Laila singing Bangla folk to Ilaiyaraaja’s soulful Tamil melodies from the 70s and the 80s. And of course it also had the most obscure Hindi film songs (This writer even managed to locate songs of a film called Shabash Daddy, made by Kishore Kumar, which has some really soulful songs sung by his son Amit Kumar). It did not just cater to connoisseurs. All the latest music was available as well.
At a price ranging from Rs 6 to Rs 15 per song, a lot of good music was available at one place. A winning proposition one would have thought. But things did not turn out as they would have been originally envisaged. And the digital music store is being shut down nearly 15 months after it was launched.
Several questions crop up here. Why did Flipkart shut down Flyte so quickly? How does Flyte compare to Apple iTunes which is more than a decade old and still going strong?
The quick answer is that Flipkart is shutting down Flyte because it was a loss making proposition. And it was a loss making proposition because Indians do not like to pay for their music anymore. Everyone wants to download music for free. Or buy pirated stuff which comes very cheap.
As Nikhil Pahwa writes on www.medianama.com “Flyte Music had struck deals for India based music downloads on web and app by paying music labels an aggregate minimum guarantee (MG) of around $1 million (Rs 5.5-6 crores) for the year, multiple sources told MediaNama. Given the advent of music streaming services like Gaana*, Saavn and Dhingana, where users could stream music for free, but more importantly, the prevalence of piracy, the number of users willing to pay for a-la-carte music was fairly limited. Revenues from song downloads were fairly low – not even 50% of the minimum guarantee amount (only around Rs 2-3 crore is what we heard).”
And if this wasn’t enough the revenues from this business were not growing as fast as from other businesses that Flipkart runs. “More importantly, revenues from Flyte Music grew in a linear manner, unlike Flipkart’s physical goods business, which was growing exponentially, month-on-month. Flyte, with low revenues and low growth,” writes Pahwa.
Then there were other issues. Many people now listen to music on their phones. And a lot of new phones came with songs inbuilt into them. 
As a report in The Times of India points out “A service like Flyte also faces challenge from companies like Nokia and Sony that allow people who buy their smartphones to download millions of songs for free or at very nominal cost. Though these songs can be played only on specific devices.”
So this was the quick answer to why Flipkart shut down Flyte. Now to answer the second question as to how does Flyte compare to Apple iTunes. Why has iTunes been a viable proposition and Flyte was not? The easy answer here is that Apple is a great company and whatever they do has to turn out to be successful. But this answer is basically unfair to Flipkart, which has literally changed the way Indians shop. We need to get into little more detail.
The need for Apple iTunes came up after Apple iPod was launched in Ocotober 2001. The iPod had two godfathers: the Sony Walkman and the Napster website.
As John Mullins and Randy Komisar write in 
Getting to Plan B – Breaking Through To a Better Business Model “For Apple, there were some analogues to light the way, starting with Sony’s Walkman… Further, some 26 million Napster users worldwide, sitting around in their jeans and t-shirts sharing their music files, made it clear that individual songs were just as much, if not more, appealing to music consumers than complete albums.”
Napster was a peer to peer website from which music could be downloaded for free. It soon ran into copyright infringement as music companies got their act together and sued Napster and it had to shutdown.
So the Apple iPod had a problem. Like Napster, it could also get into trouble if the music companies decided to sue it, for encouraging the proliferation of pirated music. As Mullins and Komisar write “Apple had officially entered the consumer electronics industry. But to complete the picture, Jobs (then Apple CEO Steve Jobs) needed a way to sell music as well. Let’s use Gillette as an analogue: Apple was already selling razors (the iPod), but Jobs wanted to sell the razor blades (music), too.”
And unlike Napster, Apple needed to do this legally. It needed to create some sort of a digital service, from which those who bought the iPod could download their music legally.
Jobs personally called individual artists… to persuade them to make their music available on the service. Apple was the first to negotiate and reach agreement with five record companies, allowing Apple to sell hundreds of thousands of songs from artists… In a revolutionary move Apple worked out a deal to sell (not rent) each song for 99 cents. Once they shelled out the cash, Apple’s customers could keep their songs indefinitely, share them on as many as three Macintosh computers, burn them to an unlimited number of CDs, and transfer them to any number of iPod portable music players,” write Mullins and Komistar.
The iTunes website launched in April 2003, caught the fancy of people, and on its first day, sold a million downloads. But it barely contributed to the revenues of Apple. On a standalone basis iTunes wasn’t probably worth the effort. As the authors write, “Of course, no one was really going to fill an iPod with thousands of songs at 99 cents each. Sure enough, by 2007, only about 3% of music on iPods was downloaded or copied from the iTunes music store. The rest was downloaded from other places and was therefore, unprotected and playable on any device. But Apple didn’t care.”
So on its own Apple iTunes did not probably make sense but Apple still persisted with it due to various other reasons. “The iTunes music store completed the user experience, and as long as the critical mass of people bought at least some of their music from iTunes site, Apple could keep itself out of trouble with the Recording Industry Association of America (RIAA). Shrewdly, Apple had turned the traditional “razor and razor blades model” on its head: Apple could make its money selling razors — the growing assortment of iPods — even if customers continued to steal most of the blades,” write Mullins and Komistar.
Cut to 2013, how do things look for iTunes now?. 
For the period of three months ending March 30, 2013, Apple posted a revenue of $43.6 billion. Of this nearly $4.1 billion or almost 9.4% came from iTunes and other software services. So the share of iTunes in the total revenue posted by Apple has gone up from 3% in 2007 to nearly 9.4% now. If we look at the period of three months ending March 30, 2012, Apple posted a revenue of $39.1 billion. Of this nearly $3.2 billion or around 8.2% of the revenue came from iTunes and other software services.
The contribution of iTunes in the overall Apple business has gone up in the decade since it was launched. What does this tell us? Well people are still listening to a lot of pirated music but a whole lot of people are buying music as well. This may be due to the convenience of finding different kinds of music at one place. Also while downloading from iTunes one is assured of the quality of the song and there are no risks that one might face on peer to peer networks or websites that let users download music for free. Or for the fact that people genuinely want to pay because if they don’t, how are those creating music expected to make a living. If people can pay for books, why can’t they pay for music as well?
Apple iTunes took nearly a decade to start making a substantial contribution to the total revenues of Apple. But during that period it supported the other business streams of Apple. And even though it may not have made sense for Apple to run the business on a standalone basis, it did save them a whole lot of trouble they could have otherwise faced from the music industry. Flipkart’s Flyte did not have the same kind of luck. Neither could it supported by the other divisions.
Also, all new concepts don’t catch on automatically. Some concepts take time to mature. And during that time need to be supported by the company. Of course, that is easier said than done. In case of Apple iTunes that had been possible, but in case of Flipkart’s Flyte it was not. Flyte had to be revenue spinner on its own and if not that at least show some growth potential, which it did not.
Having said that, if Flipkart had found some way of keeping Flyte going, it could have been a potential money spinner in the years to come. Because Flyte is an idea, whose time will come.
The article originally appeared on www.firstpost.com on May 31, 2013

(Vivek Kaul is a writer. He tweets @kaul_vivek)

Why Pritish Nandy is thoroughly wrong about the IPL

Pritish_NandyVivek Kaul
Pritish Nandy has a major grouse against those who seem to be spending a lot of time in unearthing the rot that has set into the Indian Premier League (IPL). Or so he points out in a blog titled Three idiots and a scam that won’t die.
He feels that this attention to the cricket’s biggest money spinner is undue and is taking away attention from other important issues that plague the country. He also feels that at the end of the day, it doesn’t really matter because Indians will still watch cricket, match fixing or not.
As he writes “
The day news channels were chasing Gurunath Meiyappan all the way from Kodaikanal to Madurai to Mumbai to the Crime Branch at midnight, millions were happily sitting in front of their TVs watching Mumbai Indians battling Rajasthan Royals at the Eden Gardens, proving yet again that there are two Indias with their own sets of concerns and priorities. I confess I was among those watching the game, rooting for Rahul Dravid whose team lost with a ball to spare.” 
This is a rather specious argument to make. A lot of people watched the match Nandy is talking about (including this writer). And among those who watched a significant portion must have been rooting for Rahul Dravid and Rajasthan Royals(including this writer). Now that does not mean that people are not bothered about the rot that has set into the IPL and wouldn’t want the dirt to come out. In fact, I can make a similar generalisation and say that a lot of people that I know stopped watching IPL after the spot fixing allegations came out. Also, people were interested in the match to see how Dravid and Rajasthan Royals perform after three of their cricketers were arrested for spot fixing. Truth, as is always the case, is mutli-layered.
Nandy feels that N Srinivasan should be allowed to continue as the President of the the Board for Control of Cricket in India (BCCI). Srinivasan is also the Vice Chairman of India Cements, the company which owns Chennai Super Kings (CSK), the best performing team in the IPL. The logic that Nandy offers is that “
a father-in-law is the last person to know what his son-in-law is up to. Allowing him to stay in his holiday home in Kodaikanal is not the same as endorsing his petty vices or (as yet unsubstantiated) attempts to fix IPL matches.” That is a fair point when viewed in isolation.
But how does Nandy explain the zeal with which Srinivasan has gone about disassociating himself and CSK from his son in law Gurunath Meiyappan? The people of this country have even been told that Meiyappan was just an enthusiastic supporter of CSK and nothing more. This despite the fact that there is a lot of evidence in the public domain to the contrary. Gurunath Meiyappan’s Twitter account clearly said he was the Team Principal of the CSK. So did his visiting cards.
As the old adage goes 
Caesar’s wife should be above suspicion which is clearly not the case here. At least till the various investigations into spot fixing are over, Srinivasan should stay away from the BCCI. And anyway there is a huge conflict of interest with Srinivasan being the BCCI president as well as the Vice Chairman of the company which owns CSK.
As the India Today points out “Srinivasan’s team (CSK) is under the jurisdiction of the tournament’s governing council, which in turn is under his own jurisdiction as the board’s all powerful boss.”
Nandy gives further reasons in support of Srinivasan and calls for the status quo to be maintained. As he writes “
But I really think we are all playing into the hands of those who have much more to hide than these dolts. Srinivasan’s enemies (and heaven knows, he has far too many of them) are having a field day. But ask yourself, do you really care whether he heads the BCCI or Sharad Pawar. Or Rajiv Shukla.”
This is a statement which has fallen victim to the fallacy of relevance “two wrongs make a right”. What Nandy is basically saying here is that I know Srinivisan is the wrong man for the job, but then so are Sharad Pawar and Rajeev Shukla, and given that Srinivasan should continue. But since when have two wrongs started to make a right?
Nandy also rues the fact that so much attention has been given to the spot fixing in IPL that the retirement of Vinod Rai, India’s bravest Comptroller and Auditor General has gone unnoticed. As he writes “
What bothers me is the carpet bombing scam coverage that ensured there were no goodbyes for the man who with evangelical zeal exposed the sleazy underbelly of Indian politics over the past 5 years, and did his best to set it right. Worse, there was no debate over who his successor ought to be. So the Government sneaked in its own nominee, clearly to undo some of the outstanding work Vinod Rai, India’s bravest Comptroller and Auditor General did in his own low key style.”
In case Nandy does read India’s largest selling English newspaper, The Times of India (Nandy’s blog is published on the newspaper’s website) he would have realised that on May 20, 2013, a full page interview with Rai was published. Now when was the last time you saw a mainstream newspaper carry a full page interview with a retiring bureaucrat? Forget that, when was the last time you saw a mainstream newspaper carry a full page interview with a politician?
Rai’s retirement was well covered by other newspapers as well. Hence, holding IPL responsible for Vinod Rai not getting a proper send off from the media doesn’t really hold. And more than that the media played a huge role in publicising a lot of what was written in the CAG reports on the various scam. Rai admitted to as much in the interview when he said “
The other factor that worked in our favour was you – the media, the 24×7 channels. Media has become so alert and it knows what needs to be highlighted. From our report, the media picked up only substantial issues.”
Nandy feels that all the attention that IPL has drawn is putting other issues on the backburner. “
Several other crucial issues that were being debated in the public space, like China’s incursions in Ladakh, the Vadera land deals, Muslim youth arrested and held for years on trumped up terrorist charges and now being released and, above all, the Supreme Court demanding the freeing of the CBI from the Government’s unholy clutches are now on the backburner. Even the Ranbaxy issue, where intrepid whistle blower Dinesh Thakur exposed the grave misdemeanours of one of India’s leading pharma companies and the dangers implicit in those for millions of us who buy its products, have been largely ignore,” he writes.
Let’s take the Ranbaxy issue here first. The company has to pay a fine of $500 million for selling adulterated drugs in the United States. This is big news, which was covered on the front pages of most English newspapers. But is this piece of news bigger than spot fixing in the IPL? The answer is no, simply because more readers would want to read about spot fixing than Ranbaxy. And a newspaper has to cater to that basic need.
This will happen anywhere in the world. The readability of any piece of news is likely to decide how much it is played up in comparison to other news. Let me give an example here to elaborate. Lets say baseball or basketball in the United States faces fixing allegations. At the same time some big drug company (lets say Pfizer) is fined for selling adulterated drugs. Which piece of news is going to get more coverage in general American newspapers? Of course the fixing scandal. A business newspaper on the other hand may concentrate more on the drug company. Most Indian business newspapers have covered the Ranbaxy story in great detail.
Also, if any newspaper were to concentrate more on the Ranbaxy issue and not on spot fixing in the IPL, it would lose readers, given that other newspapers wouldn’t be doing the same. Nandy having been an editor in the past, should surely understand this rather basic point.
As far as the other issues like freeing the CBI from clutches of the government is concerned, a lot has been written by newspapers, magazines and websites. And as and when some new information comes out they will surely get back to it.
Nandy concludes his piece by saying “
Frankly, my dear I don’t give a damn.” There are number of reasons that the spot fixing issue needs to be sorted out through and through. In the year 2000, a certain Mohammed Azharuddin was accused of match fixing. A lot of evidence was put forward. But ultimately other than a life ban nothing really happened. Azharuddin is now a Congress MP. Another accused Ajay Jadeja, is now a cricket expert on television. It is important that those responsible for the spot fixing in IPL be punished enough so as to ensure that they don’t come back to public life again.
India is a country starved of heroes. Our politicians are corrupt. Our bureaucrats are corrupt. And our businessmen are corrupt. Its the cricketers who are our roles models. And if these role models also turn out to be corrupt, who will we look up to? Given this, the mess in the IPL needs to be sorted out.
Let me conclude with the oft used cliché. C
ricket is not just a sport in this country, it’s a religion. And when you mess around with religion, people are bound to be angry.
The article originally appeared on www.firstpost.com on May 30,2013
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Chhattisgarh attack: Is DDLJ attitude the heart of Naxal problem?

Vivek Kaul 
Raman Singh, the chief minister of Chhattisgarh should resign, taking moral responsibility for the killing of 27 people by Maoists near Darbha in Jagdalpur district, 340 km south of state capital Raipur.
Or so feels the Congress Party. “Raman Singh should step down… We did not want to say anything political as we felt that the chief minister would himself resign owning responsibility…The irresponsible attitude of the state government has led to a huge loss to democratic values and the chief minister should resign admitting the security lapse,” 
Congress spokesperson Bhakta Charan Das said on May 28,2013.
Those killed included state Congress leaders Mahendra Karma and Uday Mudliyar. The state Congress chief Nand Kumar Patel and his son Dinesh were also killed. Senior Congress leader Vidya Charan Shukla, who was the information and broadcasting minister during the dark days of the emergency, was severely injured and is now battling for his life.
It is clear that the Congress party has woken up only after its leaders came under direct attack. The party had been very quiet 
when 76 CRPF jawans were killed by Maoists in April 2010, near Chintalnar village in Dantewada district. So by wanting the Chief Minister of Chhattisgarh to resign does the Congress party want us to believe that a life of a politician is more valuable than that of a CRPF solider? And that every time a Congress politician is killed democracy in this country comes to a standstill?
The second point that comes out here is that by asking Raman Singh to resign, the Congress party is trying to project Naxalism as a state level problem, which it clearly is not. Naxalism is a menace in other states like Jharkhand, Andhra Pradesh, Maharashtra, Orissa, Madhya Pradesh and West Bengal, as well.naxalThe Prime Minister Manmohan Singh 
had acknowledged this in May 2010, after the massacre of CRPF jawans. “I have been saying for the last three years that
remains the biggest internal security challenge facing our country…We have not underestimated the problem of Naxalism,” he had said.
Also what is interesting is that Chhattisgarh is one state where the Maoists are concentrating on. Most of the top Naxalite leaders in this area are Telgu speaking and not locals. 
As Ramachandra Guha writes in a column in The Hindu “From the 1980s, Naxalites had been active in the region, asking for higher wages for tribals, harassing traders and forest contractors, and attacking policemen. In the first decade of this century their presence dramatically increased. Dantewada (in Chhattisgarh) was now identified by Maoist ideologues as the most likely part of India where they could create a ‘liberated zone.’ Dozens of Telugu-speaking Naxalites crossed into Chhattisgarh, working assiduously to accomplish this aim.”
This is further evidence of the fact that Naxalism is not just Raman Singh’s problem. For the sake of argument, if the Maoists had decided to concentrate on the neighbouring Andhra Pradesh, from where they have been driven out, an attack of similar proportions could have happened there. So would the Congress party then have asked for the resignation of its own Chief Minister?
Also the party seems to be trying hard to pin all the blame on on the state government. 
As an earlier article on Firstpost had pointed out, in a meeting that party Vice President Rahul Gandhi had with the Chhattisgarh government after the attack, he kept asking “who will take the responsibility?”
Naxalism did not start overnight. It started in the late 1960s, taking its name from the 
Naxalbari village in West BengalThe story goes that an anonymous poet wrote on the walls of the city that was then known as Calcutta “Amar bari, tomar bari/Naxalbari Naxalbari”(My home, Naxalbari/Your home, Naxalbari)”, giving the movement its name.
The state of West Bengal was then ruled by the Congress party and so were large parts of India where Naxalism spread in the decades to come. Raman Singh became the chief minister of Chhattisgarh only in December 2003.
Also, the home minister of the country is responsible for the internal security of the country. When the attack happened home minister Sushil Kumar Shinde was in the United States on an official tour. He has since extended his stay there. 
The Indian Express reports that sources say that the minister is visiting close relatives of his wife in Maryland.
So much for the seriousness of the Congress led UPA government in tackling the Naxal problem. Of course, the official Congress line is that Shine is monitoring the situation from the United States.
 But as BJP spokesperson Meenakshi Lekhi put it “You can sit on the moon and say we are monitoring everything but that is not what is expected of a person who needs to be on the ground and be in control of the situation.”
Hence, the Congress is more responsible for the Naxal problem in this country than any other party. And in time like this to seriously tackle the issue of Naxalism, it should be working together with the state government rather than asking Raman Singh to resign.
One of the Congress leaders killed in the attack was Mahendra Karma. He was the leader of the opposition in the Chhattisgarh state assembly between 2004 and 2008, and was instrumental in the formation of 
Salwa Judum (which means purification hunt in the Gondi language).
Salwa Judum was essentially a local militia which was created to take on the Maoists. On July 5, 2011, the Supreme Court of India declared the militia to be illegal and called for its disbanding. Karma had the support of Raman Singh when it came to the Salwa Judum operating freely in the state.
Ramachandra Guha recounts his meeting with Karma in his column in 
The Hindu. He writes “We spent an hour in the company of the movement’s originator, Mahendra Karma. He told us that he was fighting a dharma yudh, a holy war. We asked whether the outcome of this war was worth it. We told him of what we had seen, of the homes burnt and the women abused by the men acting in his name and claiming that he was their leader. He answered that in a great movement small mistakes are sometimes made. (The exact words he used were: “Badé andolanon mein kabhi kabhi aisé choté apradh hoté hain.”)”
Karma’s quip was inspired from the famous dialogue from the Hindi film Dilwale Dulhainya Le Jayenge (DDLJ), which went like this: “Bade bade deshon main aisi choti choti baatein hoti rehti hain (in big countries these small things keep happening)”.
Salwa Judum further exaggerated the Naxal problem in the state. The tribals had to bear the brunt of it. As one of them told Guha “ “Ek taraf Naxaliyon, doosri taraf Salwa Judum, aur hum beech mein, pis gayé” (placed between the Maoists and the vigilantes, we adivasis are being squeezed from both sides).” And Salwa Judum ultimately even consumed its creator in the end.
The broader point here is that the attack by the Maoists was primarily against Mahendra Karma and a few other Congress leaders instrumental in launching 
Salwa Judum. As a letter sent across by the Maoists after the killings clearly says: “The purpose was to punish Mahendra Karma who had launched the anti-Maoist armed movement Salwa Judum and some other Congress leaders.” Or as the old saying goes “live by the sword, die by the sword”. Or in Karma’s own words “ Badé andolanon mein kabhi kabhi aisé choté apradh hoté hain.”
So the Congress party (with more than a little help from Raman Singh) was instrumental in ensuring that Naxals got further determined, after unleashing a private militia on them as well as the people of the state.
These lessons should have been well learnt by the Congress party by now. Indira Gandhi was assassinated by her Sikh bodyguards after she messed up big time in Punjab and propped up Bhinderwale against the Akalis. Rajiv Gandhi was assassinated by LTTE, a problem created first by his mother Indira.
The final point I want to make is that the tradition of taking moral responsibility and quitting doesn’t exist among the politicians of this country anymore. Lal Bahadur Shastri resigned as the Railway Minister in 1956 after a rail-accident occurred in Ariyalur in Tamil Nadu, killing 144 people. 
As an editorial in The Hindu points out “In fact, he had put in his papers when an accident had occurred in Mahboobnagar three months earlier, killing 112. But Nehru had not accepted it. He refused to continue in the post after the Ariyalur accident.” They don’t make men like him these days.
When was the last time you heard a Railway Minister quitting after an rail accident which killed hundreds of people? In fact in July 2011, Mukul Roy of the Trinamool Congress, who was Minister of State for the Railways, even refused to visit Assam, 
where a train had derailed injuring hundreds of passengers.
The Congress government did not resign when Bombay (now Mumbai) was bombed by Dawood Ibrahim and the ISI in 1993, even though it was a huge lapse of security. Neither did it resign when rains and floods brought the city to a standstill on July 26, 2005. It finally took the savage attack of November 26, 2008, to get the heads rolling. Shivraj Patil kept bungling up as the Home Minister of India between 2004 and 2008, but was allowed to continue, finally being forced to resign after the attacks of November 26, 2008. Narendra Modi, the Chief Minister of Gujarat did not resign after the 2002 riots, despite almost everyone calling for his resignation, including those in his own party.
The culture of politicians resigning taking moral responsibility does not exist anymore. And this works across the political spectrum. Hence, the Congress asking for Raman Singh’s resignation sounds very hypocritical, when it’s leaders have behaved differently in similar situations in the past.

The article originally appeared on www.firstpost.com on May 29,2013
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Why Amway case is similar to a ponzi scheme


Vivek Kaul 

William S Pinckney, the chief executive officer of Amway India, was arrested yesterday by the crime branch of Kerala Police along with two other directors of the company.
A report in the Daily News and Analysis (DNA) quotes a top official of Economic Affairs Wing (EOW), Kerala as saying “With the call of easy money, they have been luring people to come and invest. And in turn, the new members had to get more people and this was leading to illegal money circulation. As a result, we had received several complaints against the company and we decided to arrest the officials.”
The company is said to have been violating the Prize Chits and Money Circulation Schemes (Banning) Act. More specifically, Pinckney and the two other directors were arrested in connection with a case filed by a certain Visalakshi of Kozhikode. She claimed to have incurred losses of Rs 3 lakh in trying to sell the products of Amway through its multi-level marketing network.
A report in The Mint quotes P A Valsan of the EOW of Kerala Police as saying “They were charging 10 times the value of their product. For instance, they sold product priced at Rs 340 at anywhere between Rs 2,700 and Rs 3,400…Also, they were involved in money chain, which is prohibited under the Prize Chits and Money Circulation Schemes (Banning) Act 1978.”
So there are multiple reasons behind the arrest. It is for the Police and the Courts to establish whether the products were being sold at many times their price. But the other part about whether Amway is a money circulation scheme or not, needs some discussion.
A money circulation scheme is essentially a Ponzi scheme. A Ponzi scheme is a fraudulent investment scheme where the money being brought in by newer investors is used to pay off older investors. The scheme offers high returns to lure investors in and it keeps running till the money being brought in by the newer investors is greater than the money needed to pay off the older investors whose investment is up for redemption. The moment this breaks, the scheme collapses.
Before we get into a detailed discussion on whether Amway is a Ponzi scheme or not, it is important to understand how Amway and other multi-level marketing(MLM) companies go about their business.
An MLM company like Amway appoints independent distributors to sell its products. Amway sells products like diet supplements, toothpastes, shampoos, multi-purpose liquid cleaners, soaps, grooming products etc. These distributors are not employees of the company. They make money by selling Amway products.
As per the Amway Business Starter Guide there are three ways a distributor can make money. First and foremost he makes what the company calls the retail profit margin. “Distributors buy Amway products at Distributor Acquisition Price (DAP) and may resell products at a retail price, not to exceed the maximum retail price, as published. In this case, the Distributor’s income would be the difference between the DAP and retail price,” the Business Starter Guide points out.
This is the way almost any distributor for any company makes money. He buys goods directly from the company at a certain price and then sells them at a higher price, which cannot be more than the maximum retail price.
The second way a distributor makes money is through what Amway calls the commission on personal purchases. “Distributor may earn commission on the volume of the Distributor’s individual purchases of Amway products during the month,” the Business Starter Guide points out.
The third way a distributor makes money is through earning commissions on group sales. “A Distributor may recruit a sales group and based on the success and productivity (as defined by product sales) of the sales group, a Distributor may earn commissions. It is important to note that a Distributor only earns commissions on the volume of Amway products actually sold,” the Business Starter Guide points out. So a distributor can sponsor other distributors and then make a certain commission on the amount of Amway goods sold by those distributors. The new distributors can appoint more distributors and so the chain grows. The original distributor gets a commission on all the products sold under his chain.
Prima facie this sounds like a perfectly legitimate though not a normal way of doing business. Amway products are not available in shops. If you want them, you have to buy them directly from Amway distributors.
There are many multi-level marketing companies in the market which claim to sell a certain product. These products include gold coins, holiday memberships and so on. These MLM companies appoint distributors who in turn appoint new distributors, with the idea of selling the product of the company.
The catch here is that the product is just a façade. Nobody really interested in selling the product. The money is made by distributors by appointing new distributors who are a charged a certain commission for joining the MLM scheme. The new distributors in turn appoint newer distributors and so the chain continues.
The return to the upper levels comes from creating new levels rather than the sale of the product. The wealth gained by participants at the higher levels is the wealth lost by participants at lower levels. So these MLM schemes are essentially Ponzi schemes where money being brought in by newer distributors is paid off to older distributors. There is no legitimate business activity going on.
The Federal Trade Commission in the United States looked at Amway in the 1970s and tried to answer the question whether Amway was a legitimate business or a Ponzi scheme?  The Commission held that, although Amway had made false and misleading earnings claims when recruiting new distributors the company’s sales plan was not an illegal pyramid scheme (another name for a Ponzi scheme). “Amway differed in several ways from pyramid schemes that the Commission had challenged. It did not charge an up-front “head hunting” or large investment fee from new recruits, nor did it promote “inventory loading” by requiring distributors to buy large volumes of nonreturnable inventory,” said Debra A Valentine, a general counsel for the FTC, in a seminar organised by the International Monetary Fund in May 1998.
So that’s another point in favour of Amway not being a Ponzi scheme.
But there is one thing that we need to understand here. Like in an MLM scheme which is a Ponzi scheme, the business that an Amway distributor does, depends on finding new distributors and then hoping that these new distributors sell Amway products and at the same time are able to appoint newer distributors. If a distributor is successful at this he makes more and more money.
The trouble is that we go along it becomes more difficult to appoint new distributors. Lets t
ry and understand this through an example. Lets say the first distributor that a genuine MLM company appoints, in turn appoints five distributors.
These five distributors now appoint five distributors each. So we now have 25 distributors at the second level. Each of these distributors now in turn appoints 5 distributors.

Table explains the number of distributors.
So we now have 125 distributors at the third level. If the chain continues, at the 12th level we will have around 24.45 crore distributors. This is equal to around 20% of India’s population. The total number of distributors will be around 30.51 crore.
What this simple example tells us is that it is difficult to keep appointing more and more distributors. This is similar to a Ponzi scheme, where for the scheme to keep going more and more newer investors need to keep coming in, so that the older investors whose money is falling due can be paid off. The trouble of course is that that the number of people is not infinite, as the above example shows us.
The problem for Amway distributors (or any other genuine MLM company) entering the game late is that it is difficult for them to sponsor new distributors. It is also difficult for them to sell Amway products given that there are so many distributors already operating in the market and they have selling relationships in place. Also, products sold by MLM companies typically tend to be more expensive than similar products being sold in the open market, making it more difficult to get customers willing to buy.
Hence, even in a legitimate MLM business like Amway, it is important to enter early. Those entering the business at the lower levels, find it difficult to get on new distributors and also end up with a lot of unsold inventory, thus leading to losses.
Amway requires its distributors to buy back unsold inventory from the new distributors that they sponsor. But that is easier said than done.
To conclude, an individual entering a legitimate MLM business at lower levels is likely to face losses and be unsuccessful at it. To that extent, even legitimate MLM businesses are similar to Ponzi schemes, where it is important to enter the scheme early. Also, like Ponzi schemes even legitimate MLM businesses project the prospect of unrealistically high returns while soliciting new distributors.

The article originally appeared on www.firstpost.com on May 28,2013

(Vivek Kaul is a writer. He tweets @kaul_vivek) 


The Rs 80,000 crore food grain scam no one is talking about

Vivek Kaul

That the food grains management policy of the Congress led United Progressive Alliance (UPA) government is in a mess, we all know. But the tragedy is that the mess is getting messier.
A new report titled
Buffer Stocking Policy in Wake of NFSB (National Food Securities Bill) authored by Ashok Gulati and Surbhi Jain of the Commission for Agricultural Costs and Prices (CACP), Ministry of Agriculture, provides more information on the issue.
The Food Corporation of India (FCI) directly and through other state government affiliates procures rice and wheat from farmers at the minimum support price(MSP) set by the government. These food grains are then distributed by the government through the various programmes that it runs, using the public distribution system. As per the current norms FCI buys all the rice and wheat that farmers bring to it, as long as it meets a certain quality.
Over an above the grains required for distribution, the government also maintains a “strategic reserve”. This reserve is kept for bad times like a drought or any other unforeseen shock, when production of food grains tends to drop or their free movement is restricted. In such circumstances, the price of rice and wheat tends to shoot up. The government can utilise these strategic reserves, release them into the open market and ensure that the prices stabilise.
As per the prevailing norms the government needs to maintain a total food grain stock of 31.9 million tonnes as on July 1, of every year. But the actual amount of food grain stock is much higher than this number. As the CACP report points out “T
he country is currently loaded with large stocks. On July 1, 2012, e.g., it had 80.2 million tonnes, and is likely to have similar or even higher amount this year, despite emerging as the largest exporter of rice (around 10 million tonnes in calendar year 2012) and exporting about 5.6 million tonnes of wheat in FY 2012‐13.”
The situation seems to have continued this year as well. The food grain stock as on April 1, 2013, stood at 59.8 million tonnes against the norm of 21.2 million tonnes, that the government needs to maintain as on April1, of every year. The situation is expected to continue even after the current wheat procurement season ends. The government procures more than 90% of the wheat, during the months of April and May.
After the procurement of wheat ends CACP expects that the total food grain stock will touch around 82.2 million tonnes, as on July 1, 2013. This is way more than the total stock of 31.9 million tonnes that the government needs to maintain as on July 1, of every year.
What is interesting nonetheless is that the wheat procurement has been way less than what was originally projected. “In 2013‐14, the procurement of wheat was initially estimated to be 44 million tonnes by the government after due consultation with state governments, before the procurement season began in March‐April, 2013. Gradually, it was realised by the end of April that it may not touch 44 million tonnes, but stop at around 40 million tonnes. With each week passing in May 2013, the estimate is being reduced and by the middle of May, it was being realised that total procurement of wheat may not cross 32 million tonnes. Such a drop in procurement estimate from 44 million tonnes to 32 million tonnes within less than two months is a cause of concern, and indicates the challenges in honouring the commitments under NFSB,” the report points out.
But even with this lesser procurement the food grain stock is way more than the requirement of 31.9 million tonnes. One explanation for the excess stock is that the government is preparing to introduce the right to food security, which will lead to an increase in the total amount of rice and wheat being distributed by the government. And hence, the greater stock.
Even taking that into account, the total food grain stock is much more than required. As the report points out “Anywhere between 41 million tonnes to say 47 million tonnes, would be a comfortable level of buffer stocks, covering both the operational needs of the NFSB as well as strategic reserves to take care of any drought or other exigency.”
So around 41-47 million tonnes of food grain stock would work well. But as on July 1, 2013, the government of India is likely to have around 82.2 million tonnes of rice and wheat. This means that the government will have 30-40 million tonnes of excess stocks of food grains. This is food grain for which the government has paid the farmer but hasn’t released it into the market, leading to inflation.
As the CACP report points out “The value locked in these “excess stocks”, evaluated at their economic cost, ranges from Rs 70,000 crore to Rs 92,000 crore. This infusion of “excess” money into the economy without corresponding flow of goods is evident in the paradox of rising prices of rice & wheat amidst overflowing stocks in government godowns.”
What is ironical is that the government doesn’t even have enough space to stock all the food grain that it has been buying. The total storage capacity available is around 71.9 million tonnes. Now compare this to the total expected food grain stock of 82.2 million tonnes as on July 1, 2013. What this means is that more than 10 million tonnes of food grain will be rotting out there in the open. And while that happens, food grain prices will continue to go up. Cereal inflation in April 2013 was at
16.65%. In comparison it was at 4.62% in March 2012.
The government has been buying up more and more of rice and wheat being produced in the country over the years. In 2006-2007, the government bought 32% of the total rice paddy produced. In 2011-2012, this had shot up to a massive 54%. In case of wheat, in 2006-2007, the government bought 18% of the total wheat produced. By 2011-2012, this had nearly doubled to 35% This has led to the government stocking up much more food grain than it actually requires.
As a recent report
brought out by the Comptroller and the Auditor (CAG) General of India pointed out “The total food grains stock in the Central Pool recorded an increase of 45.8 million tonnes between 2006-07 and 2011-12.”
This has meant that the amount of food grain available in the open market has gone down and leading to higher prices. It has also more or less killed the private trade in the sector. As the CACP report points out “
In recent years, the government has procured more than one‐thirds of the total production and more than half of the marketed surplus of rice and wheat. Such large scale public procurement has strangulated the private trade (as has been the case in Punjab, Haryana and now Madhya Pradesh & Chhattisgarh). Of the total market arrivals of wheat and rice in these states, more than 80‐90 percent is bought by the government, indicating a defacto state take‐over of grain trade. This reminds one of the failed experiment of wheat trade take‐over in 1973‐74.”
And any monopsony (a market where one buyer faces many sellers) be it the government or the private sector, is not good. This takeover of the grain trade in the country, by the government has come at a huge cost. The government has excess stocks of around 30-40 million tonnes of food grain with an economic cost of Rs 70,000-92,000 crore or lets take the midpoint of around Rs 80,000 crore. More than 10 million tonnes of this grain is rotting in the open i.e. around Rs 20,000 crore of public money gone down the drain. And this is a government which is struggling to control its burgeoning expenditure. India currently has one of the highest fiscal deficits in the world. Fiscal deficit is the difference between what a government earns and what it spends.
As the CACP report points out “It is creditable that India is currently in a state of ‘plenty’ but holding excessive stocks in godowns, which serve no worthwhile purpose, begs the question of economic efficiency in public expenditure. It will be much rational policy choice to liquidate these “excessive” stocks. The money, i.e., around Rs 80,000 crore under the most likely scenario, would certainly come in handy in the current times of high fiscal deficit and the increased availability of wheat and rice in the markets would rein in high food inflation, especially cereal inflation.”
Now that’s something worth thinking about.

The article originally appeared on www.firstpost.com on May 28,2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)