Friday, March 11, 2016

Rise & Fall of Corporate Empires

In school there would be this cliched "last but not the least" point we had to always mention at the end of the long answer to the questions like "what are causes of downfall of XXX Empire" [XXX can be replaced by either Mauryan or Gupta or the Mughal]: No empire or civilization can exist forever no matter how big of strong it is. Whatever be the reasons we may talk about, the main reason is this cycle of time - the rise and fall - which no empire or civilization can ever evade. So the Mauryan Empire had to finally come to an end.

That was how our history teacher had explained to us in a very philosophic manner: if you're born, you've to die - who has been ever immortal? When has been the water still in this river called life?

So when we saw that a company like Nokia, which even a few years back had almost 80% market share in mobile phones globally and was almost synonymous to mobile phone, suddenly vanished (almost) from the mobile space, or a company like Kodak, without which we could never preserve any moment of happiness or togetherness for more than a hundred years, shut down, or a phenomenon called Blackberry, which was at a time synonymous to another new phenomenon called Obama, suddenly lost steam, I remembered that cliched last point.

Yes, it's true that anything that rises has to fall. But it's not necessary that it should fall so soon. General Electric, the company founded by the most prolific inventor of all times, Thomas Alva Adison, has been operational for more than hundred years. IBM has been also in business for a very very long time. So has been HP, Disney and many other companies. So when something dies so soon, there has to be some good reasons apart from that natural cycle of time.

For Nokia & Blackberry (and many other semiconductor companies), the reason for their fall has been very similar. Let us look little deep into it.

Nokia has been a pioneer in mobile technology. They were the first to introduce lot of new things. They were the first to introduce games in mobiles. They were the first to bring out smart phones in a big way. Lot more. They were ahead of their competition in technology, innovation and sales. They were proud to work on cutting edge technologies. So were we all, people working in semiconductor industry. We wanted to always work on the latest technology, the most cutting edge technology, the most challenging things..., the list goes on. And in doing so, we forgot something that Tagore had said long time back: You ask me to say simple things, but simple things can't be said so simply. Nokia failed to develop a simple phone which could be used by an auto-wala, a farmer, a fisherman, the bai at my home, the security guard of our apartment... That's when, one fine morning, they woke up to see that more than 50% phones sold in India were not even branded - they were all powered by Taiwanese and Chinese hardware.

Few years back it was speculated that by 2015 close to 80% phones sold in India would be unbranded (none of Samsung or LG or Apple, forget Nokia). In reality the statistic is even more horrific presently. India sells more than 15 million phones every month and 80% of that is not a joke. Interestingly, most of these 15 million phones are very low end, costing around INR 1000 (less than $20). You do your math and you can see that any company would be well off just selling these low end phones. The remaining 20% market share would be fiercely fought for by the likes of Samsung and Apple.

So what happened actually? A very simple thing. Nokia, the leader few years back, failed to realize the importance of the bottom of the pyramid - the bai, the driver, the security guards. Or in other words Nokia failed to see the need of really cost effective products against the high end niche (elite??) stuff.

So what happened to Blackberry? Same thing. Their hi-tech solution was only for the niche corporate folks, not for my bai, my driver, my security guard. So one fine day, they too were kicked out. As Prahlad Kakkar, the ad guru, has been shouting for quite some time that as long as you don't serve the bottom of the pyramid, you would be out of business. Proctor & Gamble, ITC, Unilever discovered this long back in late 80s and early 90s. P&G started making 1 rupee cachets of shampoos and flooded even the smallest kirana shops in the most interior part of India with those. Had they sold only to the shops in cities, they would have been out of market too, very much like Nokia or Blackberry.

Not only Nokia or Blackberry, most of the semiconductor industry has been bleeding under the pressure and competition from the Chinese and Taiwanese companies, because they neither can compete with the latter in pricing nor can they stop selling at dirt cheap levels because otherwise they would miss on the bulk of the market (remember, more than 80% phones in India are powered by Chinese and Taiwanese hardware).

Another trend that we see is that the software companies are gradually buying the hardware companies: Oracle bought Sun, Google bought Motorola, Microsoft bought Nokia. So in future the entire hardware industry may be owned by software giants.

So, what's the mantra to survive if you have to stay in business? (Apple is an exception, which I'm not talking about here)
  1. You've to look down, not up (not only high end phones, like what Nokia concentrated more on)
  2. You've to innovate (use technology wisely) to bring down the cost so that more and more people would be tempted to buy (what the Chinese and Taiwanese companies did)
We see a very similar thing in publishing and music industry too. Let us bring in some analogy to explain what we're seeing there.

The conventional publishing and music industry is struggling, very much like the semiconductor industry. It's bleeding, under the pressure exerted by just only one company - Amazon. But why it's so? The reasons are also very similar to what we've seen earlier.

Companies like Penguin, Random House (both of which have merged), Harper Collins, Hachette, Macmillan etc (few big international names seen in India), have been traditionally very elitist, thinking that books are not meant for all, forget the bottom of the pyramid. In doing so, they were engrossed more with the elitist authors, whose books need some good level of knowledge and awareness in English language and literature to appreciate. Thus, they ignored a large population of readers in India (and also elsewhere).

The prices of the books were high and readers in cities, their main customers, were becoming more and more cost conscious. The urban readers were also finding it difficult to go to book stores and buy books. But the publishers were complacent to the problems of their customers. They felt that they were fine with dedicated book lovers, would would still travel the seven seas and the thirteen rivers and still come to the book stores, forgetting their work and other commitments which kept on growing with time.

Then came Amazon and solved both the problems. They first started delivering books at door-step at prices never heard of. They could do so because they didn't have to maintain the inventories like the book stores and most importantly, they very wisely used technology to optimize the cost, which the publishers had never given a damn about. Next they invented e-book, which could be just downloaded in laptops of even phones at even lower price as the entire production cost of a physical book can be done away with. Then finally they invented something called kindle, which even got away with the psychological shock of not holding a book in the hands and reading an e-book in laptop. So finally 20% of all books sold in the US are kindle titles and Amazon accounts for almost a third of the sales of all books for any publisher in the US. Amazon's revenue from book sales was $5.25 billion sometime back. Just compare with this: Hachette’s parent company, Lagardère Group, a publisher, broadcaster and retailer whose magazine titles include French Elle and Paris Match, recorded $7.37 billion in net sales in 2012.

Next Amazon addressed a major problem faced by a huge number of authors who couldn't get their books published because most publishers rejected them as they didn't fall in the category of elite or niche writers. Amazon allowed anyone to publish her book and make it available online either as e-book or paperback anywhere in the world where Amazon operates. This opened up a floodgate and in a day thousands of authors started publishing and selling their books through Amazon. Amazon started paying authors hefty royalties. On an average each of these authors sells not more than 50 copies each, but even 100000 authors selling 50 copies each makes 5 million copies (e-books). Even at a meager price of $2.99 per book and Amazon passing 90% of it to the authors, it accounts for a $1.5 million profit (as there's practically no cost involved). This could be their monthly affair and annually the same math could give $15-18 million profit, which is around 5.5 - 6.5% of Amazon's annual profit. That's not a small number.

So how does Amazon change the publishing industry?

With Amazon controlling more and more pie in the total book sales, the conventional publishers will be bled more and more by Amazon's bullying tactics. We won't be surprised if Amazon bought a few big publishers (like Microsoft bought a bleeding Nokia). Even Amazon can do hostile take over, as it's likely the shareholders will always prefer Amazon controlling a Penguin or a Harper Collins. With more and more shift to e-books, the revenues of the conventional publishers would fall, making them more vulnerable to be acquired by someone (Amazon itself or even Google or a Microsoft)

The authors may be also allured to move to Amazon slowly if they get better money from Amazon.

Amazon may directly reach out to newer readers, like our bai, driver or security guard, who were never in the radars of the conventional publishers. It may be a laughable proposition, but then remember, no body thought even 10 years back that 60% of India would have cell phone. Reaching out to the bottom of the pyramid is not an easy thing for publishers. People may argue, books and shampoos and mobile phones are not same. But then, no one thought in the past that a shampoo or a mobile phone could ever reach a village in Andaman or Ladakh. That's called innovation and I feel Amazon could do that too - take books to our bai.

We would still say:

Whether it's a shampoo or a tablet or a tale,
Business is business, it's all the same hell

So what went wrong with the publishing industry?
  1. They failed to innovate, understand their customers' needs. A product like kindle or the e-books should have come from publishing houses, not from Amazon. It's very much like Nokia or Blackberry (or even Sony) failing to understand the pulse of the customers.
  2. They failed to tap the bottom of the pyramid. There's still a huge untapped market in India in the villages.
What they can do now?

Very simple. What P&G and ITC and Unilever did long time back. Think about selling cachets of shampoos in villages, rather then selling costly bottles in cities. You may ask, how can Penguin sell something in a village? Well, that's not our job to find out. It's for the CEOs of the publishing houses to think.

The semiconductor industry has been reeling under the pressure of very less or even no profit. Mobile, the sector which has been the engine of growth for the past one decade is suddenly non-lucrative. Apple alone accounts for more than 90% of the profit in mobile. So it's not a suatainable vertical for anyone involved directly or indirectly in providing chips for mobile. Internet of Things (IOT) seems to be the next big thing even for semiconductor. Many companies are looking at that as their future. Companies like Qualcomm and Cisco have already rolled out great plans in areas of IOTs. The presence of both the companies at the Digital India event held by Modi recently at heart of the Silicon Valley in the US may not be without any reason. Digital India provides a great platform for companies to unveil their power in IOT. Cisco, in that event, announced their plans for Smart Cities in India.

Semiconductor companies which are not focusing on IOT may again have the same fate as that of Nokia or Blackberry. IOT gives end to end solutions not necessarily for 'elite' problems. The cab hailing services like Ola, Uber etc are simple IOT solutions which have touched the lives of people on the street. So here too, effectively, the same prophecy about serving the bottom of the pyramid holds good. Hence, semiconductor industry should focus on IOT as their main growth engine in the future.

It's not for no reason Mindlance Technologies too has its goal to evolve into an end to end IOT solutions, company over the years.



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