FirstBiz

What is common to Facebook, the telephone and the QWERTY keyboard

facebook-logoVivek Kaul 

Are you a Facebook addict, dear reader? I clearly am, given that I spend all my waking hours logged on to the website. On days, I am not near my computer, I keep regularly checking for updates on my mobile phone.
So what is it that makes Facebook work? My ‘back of the envelope’ theory is that the website feeds on our internal voyeurism, meaning, you can see the honeymoon pictures of a couple, who did not invite you to their wedding.
But that’s making things a way too simplistic. Or as Albert Einstein once said “It can scarcely be denied that the supreme goal of all theory is to make the irreducible basic elements as simple and as few as possible without having to surrender the adequate representation of a single datum of experience.” This Einstein quote has been suitably paraphrased as “everything should be made as simple as possible, but no simpler.”
Given this, my “back of the envelope theory” needs to be worked on a little more. So what is it that makes Facebook work? Economists have an answer and they call it “network externality”, which are basically markets “where demand for a product creates more demand for the product”. As Paul Oyer writes in his fantastic new book Everything I Needed to Know About Economics I Learned from Online Dating “A product has a network externality if one added user makes the product valuable to other users…The rise of the internet has made network externalities more apparent and more important in many ways…Perhaps the best example of the idea is Facebook. Essentially, the only reason anyone uses Facebook is because other people use Facebook. Each person who signs up for Facebook makes Facebook a little more valuable for everybody else. That is the entire secret of Facebook’s success—it has a lot of subscribers.”
This to a large extent explains why Facebook has retained its dominance despite being challenged by Google. In fact, when Google launched Google+ many experts said it was a much better product than Facebook, and hence, they felt that people would gradually move away from Facebook to Google+. But that really hasn’t happened.
As Oyer puts it “Over the last few years, Google has made one attempt after another to develop a viable alternative to Facebook. Google+, its most recent attempt, is widely touted as functionally superior to Facebook. Google+ has signed up many users, but it has not put any real dent in Facebook’s dominance. Nobody is going to switch to Google+ from Facebook unless most of her friends do, too, and it seems very unlikely that whole groups of friends will act in a coordinated fashion to move from one social network to another.”
In fact, the idea that a product’s demand is based on the product’s demand is not a new one. It has been around for a while. Take the case of the telephone. It was first patented by Alexander Graham Bell in 1876. But it took a long time to get popular.
“The demand for Facebook is essentially exactly the same as the demand for telephones. Why do you have a telephone? Because everybody else has one. It was a bit difficult to get people to use telephones at first. But each new user made the demand for phones a bit higher, because a phone became more valuable to everyone else. The same logic applied to fax machines when they were first introduced,” writes Oyer.
Another excellent example of a product that worked along these lines is the Q-W-E-R-T-Y keyboard. This keyboard was developed by two newspaper editors in the United States and sold to E. Remington & Sons company. The Remington company made adjustments to the design and popularised the layout through its typewriters. It needs to be pointed out that the QWERTY keyboard was designed to take into account the practical problems of the day.
“One noteworthy feature of the Remington design is that it avoided putting letters that commonly followed one another (such as t and h) next to each other to prevent the arms from jamming when keys were pressed in succession. Furthermore, the letters in each row are slightly offset from the row above because the arms attached to them had to go up to the paper without hitting one another,” writes Oyer.
But these features were relevant when people used typewriters (having learnt to type on a typewriter, I can vouch for this). They are not relevant anymore, when the world has moved on to computers. In fact, it is widely suggested that DVORAK keyboard layout is much better than the QWERTY layout. This keyboard tries to minimize the distance travelled by fingers and at the same time tries to “make the typist alternate hands on consecutive letters as often as possible.”
But QWERTY keyboards continue to be as popular as they were. As Oyer puts it “Once it became a standard, everyone wanted to use the QWERTY keyboard because that’s just what everyone else was already doing. The QWERTY keyboard story must make Facebook executives very happy.”
Given this, it will not be easy for a product which is similar to Facebook to break its monopoly, even though it may have features that make it a better product overall.
The article originally appeared on FirstBiz.com on February 10, 2014
 (Vivek Kaul is a writer. He tweets @kaul_vivek) 

Why investors behave like football goalkeepers and how that hurts

goalkeeperVivek Kaul  
A very good friend of mine recently decided to take a sabbatical. But two weeks into it he started getting fidgety. The prospect of not doing anything was turning out to be too hot to handle for him. So, one morning he called up his boss and told him that this decision to go on a sabbatical was not the right one, and given this, he wanted to get back to work.
My friend’s boss, had taken a sabbatical last year, and understood the value of a big break away from work. Given this, he refused to let my friend get back to work so soon, and suggested that he continue with the sabbatical, now that he had decided to take one.
One more week into the sabbatical, my friend simply couldn’t handle it. One day he simply landed up at work, without consulting his boss. And thus ended his sabbatical.
The point in sharing this story is that it is difficult “do nothing”, even though at times it might be the most important thing to do.
In a recent interview to Wisden, the former Australian cricketer Dean Jones, pointed out that two thirds of Sachin Tendulkar’s game was based around forward defence, back-foot defence and leaving the ball, without trying to play it. As Amay Hattangadi and Swanand Kelkar write in a research eport titled The Value of Doing Nothing and dated February 2014 “As any coach would vouch, letting the ball go is possibly as important as hitting good shots in the career of a batsman.”
In fact, not doing anything is a very important part of successful investing. But the investment industry is not structured liked that. They have to ensure that their customers keep trading, even if it is detrimental for the them. As Arthur Levitt, a former Chairman of the Securities Exchange Commission, the stock market regulator in the United States, writes in Take on the Street – How to Fight for Your Financial Future “Brokers may seem like clever financial experts, but they are first and foremost salespeople. Many brokers are paid a commission, or a service fee, on every transaction in accounts they manage. They want you to buy stocks you don’t own and sell the ones you do., because that’s how they make money for themselves and their firms. They earn commissions even when you lose money.”
The brokers only make money when investors keep buying and selling through them. This is also true about insurance and mutual fund agents, who make bigger commissions at the time investors invest and then lower commissions as the investors stay invested.
As Adam Smith (not the famous economist) writes in The Money Game “They could put you in some stock that would go up ten times, but then they would starve to death. They only get commissions when you buy and sell. So they keep you moving.”
Levitt proves this point by taking the example of Warren Buffett to make his point. “Warren Buffett, the chairman and CEO of Berkshire Hathaway Inc and one of the smartest investors I’ve ever met, knows all about broker conflicts. He likes to point that any broker who recommended buying and holding Berkshire Hathaway stock from 1965 to now would have made his clients fabulously wealthy. A single share of Berkshire Hathaway purchased for $12 in 1965 would be worth $71,000 as of April 2002. But, any broker who did that would have starved to death.”
Hence, it is important for stock brokers, insurance and mutual fund agents to get their investors to keep moving from one investment to another.
But how do stock brokers manage to do this all the time? Andy Kessler has an excellent explanation for this in Wall Street Meat. As he writes “The market opens for trading five days a week… Companies report earnings once every quarter. But stocks trade about 250 days a year. Something has to make them move up or down the other 246 days [250 days – the four days on which companies declare quarterly results]. Analysts fill that role. They recommend stocks, change recommendations, change earnings estimates, pound the table—whatever it takes for a sales force to go out with a story so someone will trade with the firm and generate commissions.”
But why are these analysts taken seriously more often than not? As John Kenneth Galbraith writes in The Economics of Innocent Fraud “ And there is no easy denial of an expert’s foresight. Past accidental success and an ample display of charts, equations and self-confidence depth of perception. Thus the fraud. Correction awaits.”
This has led to a situation where investors are buying and selling all the time. As Hattangadi and Kelkar point out “In fact, the median holding period of the top 100 stocks by market capitalisation in the U.S. has shrunk to a third from about 600 days to 200 days over the last two decades.” Now contrast this data point with the fact that almost any and every stock market expert likes to tell us that stocks are for the long term.
This also happens because an inherent action bias is built into human beings. An interesting example of this phenomenon comes from football. “In an interesting research paper, Michael Bar-Eli2 et al analysed 286 penalty kicks in top soccer leagues and championships worldwide. In a penalty kick, the ball takes approximately 0.2 seconds to reach the goal leaving no time for the goalkeeper to clearly see the direction the ball is kicked. He has to decide whether to jump to one of the sides or to stay in the centre at about the same time as the kicker chooses where to direct the ball. About 80% of penalty kicks resulted in a goal being scored, which emphasises the importance a penalty kick has to determine the outcome of a game. Interestingly, the data revealed that the optimal strategy for the goalkeeper is to stay in the centre of the goal. However, almost always they jumped left or right,” write Hattangadi and Kelkar.
Albert Edwards of Societe Generale discusses this example in greater detail. As he writes “When a goalkeeper tries to save a penalty, he almost invariably dives either to the right or the left. He will stay in the centre only 6.3% of the time. However, the penalty taker is just as likely (28.7% of the time) to blast the ball straight in front of him as to hit it to the right or left. Thus goalkeepers, to play the percentages, should stay where they are about a third of the time. They would make more saves.”
But the goalkeeper doesn’t do that. And there is a good reason for it. As Hattangadi and Kelkar write “ The goalkeepers choose action (jumping to one of the sides) rather than inaction (staying in the centre). If the goalkeeper stays in the centre and a goal is scored, it looks as if he did not do anything to stop the ball. The goalkeeper clearly feels lesser regret, and risk to his career, if he jumps on either side, even though it may result in a goal being scored.”
Investors also behave like football goalkeepers and that hurts them.
The article originally appeared on www.firstbiz.com on February 8, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)  

Tyranny of choice: What I learnt while trying to buy a new mobile phone

SmartphoneVivek Kaul  
Recently I dropped my mobile phone into a bucket of water. The phone worked for a while and then stopped working. Given that, I had been using the phone for nearly two years now, I thought its time to buy a new one. And this is where my problems started.
I have managed to stay away from using smart phones till now. For the last five years I have been using a dual SIM model from Samsung. Given a choice, I would have wanted to buy the same phone all over again, like I had done two years back. But sadly Samsung doesn’t make that model any more ( at least I couldn’t find it anywhere on the web).
Thus, started the journey to figure out which mobile phone to buy. Gradually, recommendations started coming in. The people around me took it upon themselves to make sure that I bought the right mobile phone.
But looking at the choice that was available I ended up being all confused. First and foremost one needed to decide on the price range. Then on the company. Then on the right model. And how did one do that?
With every phone having so many features, how does one figure out which one was the better phone? In fact, feature creep is a huge problem with modern day products. As Geoffrey Miller, a professor of evolutionary psychology at the University of New Mexico in the United States in his book Spent – Sex, Evolution, and Consumer Behaviour “This [i.e. feature creep] is driven partly by the need to make each new product model different from last year’s, but also partly by the consumer’s unconscious desire for a product that is right at the limit of his cognitive ability, and one that therefore functions as a credible cognitive display. The male buying them thinks those features can be talked about in ways that will display my general intelligence to potential mates and friends, who will bow down before my godlike techno-powers.”
The question is what about those people who just want to use a phone like a phone (i.e. make calls, send smses and probably take a picture or two once in a while). How should they go about choosing the right phone? And ultimately human beings have limited cognitive ability. It is simply not possible for them to analyse a product on every dimension and then make a purchasing decision. As Stefan Thomke, an authority in the management of innovation told me in an interview I did for Forbes India “We have been in many meetings where the entire meeting is dedicated to discussing more and more features. There seems to be an assumption that we are basically done when we can no longer squeeze more features into a product. Presumably assuming that the more features a product has, the customer actually sits there and counts the features, and that somehow drives our ability to price it.”
The consumers tend to simplify this problem by trying to look at one or two dimensions, which they think are important. Take the case of computers. Here people rely on the processor speed of the chip to make a purchasing decision. But is it the right criteria on which a purchasing decision should be based.
As Niraj Dawar writes in Tilt – Shifting Your Strategy from Products to Customers “Like any summary measure of a complex system, speed has its limitations: two computers with the same processor speed on their chips may perform very differently depending on the software loaded on the computer, the transfer speed of inflation to and from memory, its connectivity to the network, and many other variables. But most buyers leave these intricacies to experts and rely instead on the simple summary measure of speed.”
This is how consumer simplify the purchasing decision by looking at an irrelevant criteria. And what true about computers is also true about a lot of other products. As Dawar points out “For example, consumers evaluate digital cameras using the simple summary measures of megapixels, when in fact the megapixel has little to do with the quality of pictures taken by the camera. It is the size of the light sensor rather than the megapixel count that determines picture quality. Similarly, automobile buyers often rely on horsepower as a measure of the muscle of the car, when it is actually torque they are looking for, as torque determines acceleration, which is the sensation that drivers seek. Customers rely on threat count when buying synthetic bed sheets, but threat count is irrelevant in synthetic fabrics—it only provides a measure of quality for natural fibers such as cotton.”
Given these reasons I started looking for an irrelevant criteria using which I could figure out which mobile phone to buy. My search is still on. And as soon as I find one, I will go ahead and buy a new mobile phone. Meanwhile, I did the smart thing. I paid Rs 300 and got my mobile phone repaired. To conclude, let me quote what Thomke of Havard Business School: “We often talk about it as a quote attributed to Leonardo da Vinci that simplicity is the ultimate sophistication. To make things simpler is very hard because that requires you to have a very deep understanding of what the user really wants. And once you have that deep understanding, you have the confidence. Mark Twain once said, if I had more time I would write a short letter.”
The article first appeared on www.firstbiz.com on February 7, 2014 
 (Vivek Kaul is a writer. He tweets @kaul_vivek) 

Why Priyanka Chopra was seen posing on the bonnet of a Range Rover

Priyanka Chopra at the Delhi Auto Expo

Vivek Kaul
The most enduring image to have come out of the Auto Expo 2014 until now has been that of the actress Priyanka Chopra posing sexily on top of the Jaguar Land Rover’s Range Rover LWB, during its launch. The actress even tweeted about it and said “Just unveiled the stunning Land Rover LWB…What a beauty she is-sleek & powerful!check it out.”
The picture got several of my friends on Facebook and Twitter talking about this sports utility vehicle (SUV). The question I asked them was why would anyone want to buy a gas guzzling and difficult to park and manoeuvre SUV ( I meant any SUV here and not just the one that Piggy Chops unveiled).
“She is a real beauty,” said one friend. “SUVs show a passion for design and give the feel of power while driving,” said another.
But there is more to why men love SUVs, than just great design and power.
Geoffrey Miller, a professor of evolutionary psychology at the University of New Mexico in the United States, writes about this in his book Spent – Sex, Evolution, and Consumer Behaviour.
Miller asks “Why would the world’s most intelligent primate buy a Hummer H1 Alpha sport utility vehicle for $139,771? It is not a practical mode of transport. It seats only four, needs fifty one-feet in which to turn around, burns a gallon of gas every ten miles, dawdles from 0 to 60mph in 13.5 seconds and has poor reliability.”
But despite being not so high on performance (or what we Indians like to call kitna deti hai?) and environmentally unfriendly, the male of the human species simply love SUVs. Why is that? “Biology offers an answer. Humans evolved in small social groups in which image and status were all-important, not only for survival but for attracting mates, impressing friends, and rearing children. Many products are products are signals first and material objects later,” explains Miller.
This tendency of men to send signals through products is referred to as the “peacock syndrome” in reference to the tendency of peacocks displaying their plumage in an effort to impress the peahens or the female of their species. In fact research carried out by Dr Michael Dunn at the University of Wales Institute in Cardiff showed that women rated a man higher if he drove a “fancy motor rather than in an old banger”.
“It appears that the stereotype of women being positively influenced by a man’s status is true and, evolutionarily speaking, this makes sense,” Dunn told www.telegraph.co.uk. In a similar research, researchers at the University of Texas studied this phenomenon and concluded that: “although showy spending is often perceived as wasteful, frivolous and even narcissistic, an evolutionary perspective suggests that blatant displays of resources may serve an important function, namely as a communication strategy designed to gain reproductive rewards.”
Dr Jill Sundie who led this research was very direct when he said “This research suggests that conspicuous products, such as Porsches, can serve the same function for some men that large and brilliant feathers serve for peacocks.”
Evolutionarily, the best strategy for a man is to be promiscuous and attract as many women as he can. As Richard F. Taflinger in You and Me, Babe: Sex and Advertising “The more women with which he mates, the greater number of children containing his genes are possible… Thus, a man’s biological criteria can be simple: 1) she must be healthy; 2) she must be young; 3) she must be receptive; 4) and she must be impregnable.”
For women things work a little differently. Condoms, birth control pills and other birth prevent measures are relatively recent inventions and given this, historically, women could not be promiscuous like a man could be. This was because sex with a man could result in a pregnancy of nine months. Hence, women needed to be choosy.
As Taflinger puts it “Women…have a far greater physical, physiological and temporal stake in producing children. This means she must be highly selective in her choice of men if she wishes to produce the highest quality children in her reproductive lifetime.”
This is something that Dunn of University of Wales in Cardiff agrees with. As he puts it “Females focus on questions of wealth and status because if the male possesses those, that male would be in a better condition to rear healthy offspring.”
And driving an SUV is a clear symbol of that. As Geoffrey Miller writes in The Mating Mind – How Sexual Choice Shaped the Evolution of Human Nature “The metaphor seems apt because SUVs make such a show of their rugged utility, all-terrain capability, enormous power, and absurd size…Their huge size demonstrates the ability to incur a high initial cost, and their large engine demonstrates the ability to incur high running costs due to poor mileage. Although capable of transporting six adults across a mountain range, they are often used for nothing more demanding than driving one’s toddler to and from day-care, through leafy suburbia…Principally, their size is a wealth-indicator.”
Hence, a man driving an SUV sends out the right kind of signal to women.
Of course, men cannot be as promiscuous as they want to be because they live in a society. And in any society there are societal pressures. But even with this, there is subconscious need among men to be promiscuous. Marketers play on this and use women to advertise all kinds of products.
Most deodorant ads run on just one formula, where women swoon over a man after he has applied the deodorant being advertised. In fact, in India even underwear ads have been targeted at the promiscuous nature of men.
Given this, it is not a surprise that Priyanka “Piggy Chops” Chopra was seen posing sexily on top of a Range Rover at the Auto Expo in Delhi yesterday. The idea was to tell the prospective customers that anyone driving this car would attract women as sexy and beautiful as Priyanka Chopra. Some marketing formulas never fail.
The article originally appeared on www.firstbiz.com on February 6, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

The Indian consumer does not get any subsidy on petroleum products

 light-diesel-oil-250x250Vivek Kaul  

The Ministry of Petroleum and Natural Gas released the under-recovery numbers on the sale of diesel, cooking gas and kerosene, on February 3, 2014.
The under-recovery for cooking gas as on February 1, 2014, stood at Rs 655.96 per cylinder, whereas the under-recovery on diesel and kerosene stood at Rs 7.39 per litre and Rs 35.77 per litre.
The price that oil marketing companies charge dealers who sell diesel is referred to as the realised price or the depot price. If this realised price that is fixed by the government is lower than the import price, then there is an under-recovery. Having said that under-recoveries are different from losses and at best can be defined as notional losses. (For those interested in a detailed treatment of this point, can click here).
These under-recoveries are typically referred to as subsidies (both in the media as well as by politicians) that the government is providing to the citizens of this country. But the question is it fair to call this a subsidy? A criterion that the International Energy Agency uses for defining something as a subsidy is whether it “lowers the price paid by energy consumers.”
As A Citizens’ Guide to Energy Securityin India points out “consumer subsidies, as the name implies, support the consumption of energy, by lowering prices at which energy products are sold.” That is clearly not the case in India. As Surya P Sethi writes in an article titled Analysing the Parikh Committee Report on Pricing of Petroleum Products“It is clear that Indian consumers are paying the highest price for lower quality petrol and more for lower quality diesel when compared to the US and Japan – the two most vociferous proponents of removing fuel subsidies. Also, Japan and the UK and, indeed, several other countries tax diesel at a lower rate.”
A large portion of the price that consumers pay for buying petrol, cooking gas and diesel is passed onto the state governments and the central government in the form of various taxes. Excise duty collected by the central government and the sales tax collected by the state governments are the two major taxes. (In 2012-2013, the central government collected Rs 62,920 crore as excise duty. On the other hand state governments collected Rs 1,10,875 crore as sales tax.) Hence, the oil marketing companies (OMCs i.e. IOC, BP and HP) are not being adequately compensated for selling petroleum products (this does not include petrol), despite the high price. The government, in turn, compensates them for these under-recoveries.
Let’s throw in some numbers here. Data from the Petroleum Planning & Analysis Cell, a part of the Ministry of Petroleum and Natural Gas, shows that in 2012-2013 that the various state governments and the central government collected Rs 2,43,939 crore as taxes on the sale of various petroleum products. A small part of this income was also in the form of dividends.
Against this, the total under-recoveries on the sale of diesel, cooking gas and kerosene came in at Rs 1,61,029 crore. As is well known the central government did not pay this entire amount to the OMCs from its own pocket. It got the upstream oil companies like Oil India Ltd and ONGC to contribute towards the same as well.
The broader point is that the governments collected Rs 2,43,939 crore as taxes even though under-recoveries were at Rs 1,61,029 crore. This is a difference of more than Rs 80,000 crore here. In 2011-2012 this difference was more than Rs 90,000 crore. So the question is who is subsidising whom? It is clear that the end consumer is not being subsidised.
As the article titled The Political Economy of Oil Prices in India points out “The total contribution of the oil sector to the exchequer has been higher than the sum of under recoveries of the OMCs and direct subsidies on petroleum products for all the years since fiscal 2004…Even the sum of duties (customs and excise) and (sales) taxes on petroleum products, which is only a fraction of the total contribution of the oil sector to the exchequer, has exceeded the sum of under recoveries of the OMCs and direct subsidies in all the years since 2004-05. The inescapable conclusion…is that there is a negative net subsidy on petroleum products in India. Another way of saying the same thing is that the government extracts a net positive tax revenue from petroleum products in India. The oft-repeated assertion that petroleum products are subsidized in India is simply not true.”
Over the years, the governments in India, both at the state and the central level, have been spending more than they have been earning. Tax revenues from petroleum products remain a major source of income for the governments. While the expenditure of the governments has gone up dramatically, their income clearly hasn’t. And that is what they should be trying to address, instead of trying to tell us time and again that petroleum products are being subsidised. They clearly are not.

 The article originally appeared on www.firstbiz.com on February 5, 2014

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