Think Flat

Reinvent or Die!

Wed, 24 Jun 2009 00:44:03 +0000

It is with great amazement I read about Netflix boss Reed Hastings predict that in the next few years his core business is completely doomed (WSJ, June 23rd 09). How many head honchos of public companies have you heard who talk about doom when their firm has added more subscribers in the first 3 months of the year more than ever, doubled their market cap in the last 8 months and garnered 25% growth in subscriber base in the last 1 year, all in recessionary times? Beyond traditional HBR style case-studies how many real-life corporate stories have we seen in the recent past predict that they will die in the next few years if they don't reinvent themselves?

For me - as a consumer, a movie buff and a Netflix customer it's an absolute "no-brainer" that watching movies through online streaming is the most natural evolutionary step in this business. It needs no market research or complex back office mathematical models to arrive at this simple evolution. But then most "no brainers" seem to be beyond the reach of large corporations who invariably cosy up to their early success where change becomes a challenge. How much research did Motorola need after their market leadership on mobile phones to reinvent themselves and stay relevant in the marketplace? Palm was a Xerox in the PDA world in late 90s but then squandered away their leadership simply because they could neither see ahead nor reinvent on their early success.

Given this backdrop, it is incredibly refreshing to see Netflix predict doom if they don't reinvent themselves, especially on the back of success in a recessionary economy. I wish the GMs and the Nortels of the world had such paranoia and their CEOs could see the future unfold. After all, the executive pays they command is precisely for that, figure ways to stay relevant and constantly reinvent for the future. Frankly if they did just that, who really cares whether they get paid in millions or billions as long as they deliver on what their firm has to deliver and not get paid for visiting Washington to receive taxpayer money.

Bank Stress Tests - Not so Stressful?

Fri, 15 May 2009 22:57:20 +0000

Released last week, the long-awaited results of the “Stress Tests” conducted under the direction of the US Treasury Secretary, Timothy Geithner, have since been picked, prodded, lauded and criticized. Pundits from the right, left and the center have unleashed a torrent of mixed opinions into the media and blogosphere. With a week gone by, I thought I would table a few questions which I envisioned might strike up a lively debate:
·         Were the Stress Tests stringent enough?
·         Rather than a true test of bank health, were the Stress Tests instead a means to boost confidence in the banking system?
·         Will the U.S. Stress Test model be emulated by other countries, especially in Western Europe?

Oracle's Sun Buy: Eclipsing the Competition?

Mon, 27 Apr 2009 09:24:17 +0000

As a mammoth union changes the technology landscape, a few things to watch for

By embracing Sun, Oracle gains huge heft and extends its shadow to cover a wider swathe of the technology industry. The two companies clearly have significant synergies. But where do these synergies lie, and how will Oracle capitalize on them? Here's an analysis of a few elements of Oracle's strategy, and some implications for the industry, that any observer of the technology industry should track over the next year or two.

Oracle's Server Strategy

The buy gives Oracle an entree into the server business, a space where it lacks a footprint. However the server business has been getting increasingly commoditized, and this trend will accelerate as Cloud Computing gains traction. This is because Cloud Computing (CC) is inherently a large-scale operation, and CC service providers tend to be behemoths that buy up servers on a humongous scale. Oracle's server business will thus see its customers' bargaining power grow, and watch its margins being squeezed. These dropping margins and Oracle’s inexperience in the hardware business have prompted several observers to speculate that Oracle will jettison Sun’s server business. However Oracle is unlikely to do any such thing. In fact, this is where Oracle can exploit one synergy : its flagship product, the Oracle database has for long been tightly integrated with Sun's Solaris, which Larry Ellison calls "the heart of Sun's business". Oracle will need an astute bundling of servers, OS (Solaris), database and Apps to pull back margins somewhat in the non-CC market.

Oracle's Cloud Computing strategy

Oracle may also perhaps become a Cloud Computing provider itself, although there is no indication of such a move yet. Sun has a fledgling CC service called Sun Cloud (a title that appears oxymoronic until you realize that Sun, with characteristic flair, has given it the ingenious tag line, "Behind every cloud, you'll see the Sun" !! ). Oracle may choose to develop this service, but will have to reckon with the formidable Google, Amazon, IBM and Microsoft which are already striding this space. If it does decide to throw its hat into the CC ring with Sun Cloud, Oracle may have an advantage in that Sun Cloud is touted as being much more open than rival CC services. This will help assuage the concerns that many prospective CC customers have, of being locked-in by CC vendors. However this openness may sit uncomfortably with Oracle, which has neither shown much predilection nor strategic commitment towards openness thus far.

Ironically, buying Sun may be sending Oracle deeper into the clouds. But a strong foray into Cloud Computing may be what it takes to put the competition in the shadow.

Oracle's strategy for MySQL

The World Economy: Clear Skies Ahead?

Thu, 16 Apr 2009 10:25:45 +0000

Why we should be optimistic about the prospects for an economic recovery
How soon should we expect the world economy to be back on a growth trajectory? I've been following statements from a varied set of economic gurus and masters of world destiny, and have found the overall sense of pessimism quite remarkable.
Jan 13th, 2009: President Bush said in a press conference that his economic advisors believed that the economic situation could be worse than the Great Depression.
Jan 23^rd, 2009: Steve Ballmer, Microsoft CEO said, “The economy could remain in the doldrums for "a year, two years..”.
Feb 14^th, 2009: the G7 meeting of the Finance Ministers of the world’s most powerful countries in Rome declared that "the severe downturn will persist through 2009".
Feb 18^th, 2009: The US Federal Reserve warned that “the crippled U.S. economy is even worse than thought, and would deteriorate throughout 2009”.
Mar 16^th, 2009: Federal Reserve Chairman Dr. Ben Bernanke, in carefully hedged remarks on CBS 60 Minutes, said the recession will “probably” end in 2009, provided the US government’s efforts to stabilize the financial markets bore fruit.
Mar 19^th, 2009: the IMF said the world economy will shrink by 1 percent in 2009, lowering its own forecast of 0.5 percent decline made in January 2009. It said recovery would begin only in 2010.
While the above assertions come from people and institutions with gold-plated credentials, I believe they are overly gloomy – far more so than warranted by the evidence. There have been ample reasons to believe at least since late December that the US (and world) economy will be on a strong recovery path well before the end of 2009, and there will be concrete signs of recovery as early as July. What are the reasons for this optimism, which appears at odds to much of the expert opinion expressed by the Gurus above?
To be sure, enormous problems remain - imbalance between savings rates in the US and other countries notably China, continuing insolvency in major industries including banking and automobiles, some divergence of opinion between major powers as to how the financial crisis is to be tackled. Yet a clear-headed look at the world economy today shows a wide array of factors that give much cause for hope:

Good Bank - Bad Bank

Sun, 18 Jan 2009 04:18:25 +0000

What a turbulent three weeks of the New Year it has been! It began with the hope that major stock markets around the world (led by the US Dow Jones Index), were beginning to thaw. But what promised to be a sneak preview to a turn-around, rapidly changed course; over the past week, the US Banking system teetered on the brink of collapse for the third time in four months. Citi finally accepted the fait accompli that its days as a Universal Bank were numbered. Bank of America’s much vaunted acquisition of Merrill Lynch almost came unstuck!

The US Treasury and Federal Reserve (along with the FDIC) have made multiple attempts at resuscitating the credit markets. After the TARP approach of investing in Banks’ preferred stock and (subsequently) using the back-stop guarantee mechanism, the latest thinking among US Government bureaucrats is to segregate the “bad” assets on Banks’ balance sheet from the good ones or what is popularly being termed the "Good Bank – Bad Bank" model.

Sheila Bair, Chairperson of the US FDIC , has mooted the idea of a “Bad Bank”, which would aggregate and consolidate the toxic assets on all US Banks’ balance sheets (read here) - an idea that was earlier espoused by US Federal Reserve Chairman, Ben Bernanke and is also gaining support among President-elect Obama’s economic advisors. Across the Pond, the UK Treasury Chief, Alistair Darling and his team of policy makers have been discussing a similar option, in the face of Bank stocks getting hammered on the London Stock Exchange. UBS actually put the concept to test in November 2008, when it spun off about $ 60 Bn in toxic assets into a separate entity with $ 6 Bn in equity (the jury is still out on the efficacy of such a move – write back to me if you have more insights).

Is creating a Bad Bank the solution to the crisis? Will this help focus Government recovery efforts like the Resolution Trust Corporation (RTC), which helped tackle the US Savings and Loans (SnL) crisis in the late ‘80s? The Washington Post has a very interesting article on the subject and suggests adopting the Swedish Bank rescue model of 1991.

Personally, I am not a very enthusiastic supporter of the Bad Bank proposition. The Swedish Bank crisis or even the US SnL disasters were events of much lesser magnitude. The US ultimately lost only about $ 150 Bn in the RTC led SnL rescue. As of today, about $ 350 Bn of TARP funds have already been deployed in battling the credit crisis, not counting the Citi and Bank of America asset guarantees of almost $ 400 Bn!

Nobel Prize winner and Economics professor at Princeton University, Paul Krugman, who is also a noted columnist for the New York Times, has made a good point about the lack of clarity around the proposition (read here).

I am keen to hear your views, as this debate livens up next week, even as the US is preparing for a historic Presidential inauguration amidst an even more historic and unprecedented economic crisis!

Madoff with Ponzi - Twin Devil on the Wall

Sun, 21 Dec 2008 17:37:25 +0000

We are yet to digest the sub-prime horror, international terrorism after Mumbai massacre and suddenly the trans-atlantic media is buzzing about a man and his master weapon- that's right, Mr Madoff & his schemy scheme , "Ponzi". With Wall Street reeling under $50 billion collateral damage, losses pouring in from Europe & parts of asia, some of the brightest investors' money under drain, this scandal has opened up the pandora's box of plight of super-free capitalist market. As the whole story yet to unfold, the big question that comes first- "What went wrong? Who is this Madoff? What is this Ponzi scheme? How come big names in the losser list got stumped by this NY man?"

Mark-to-Market Rules - Worsening the Credit Crisis?

Sun, 30 Nov 2008 12:00:02 +0000

With Citi being forced to seek the help of the U.S. government once again, it is apparent that banks will continue to feel the effects of a deteriorating housing market for some time to come. While the viability of Citi’s Universal Banking model is being debated, it is becoming increasingly clear that, regardless of Bank-type, mortgage-backed securities are drowning our financial institutions in a sea of red ink.

Many question whether this deluge of losses is actually necessary. Bankers are pressuring regulators and lawmakers to make adjustments to FAS 157, the mark-to-market accounting rule in the US. Put in place in response to the Enron crisis (Enron overvalued its assets to the point of bankruptcy) mark-to-market accounting requires corporations to value assets at their "fair value"; the price the asset would command on the open market.

Offsetting the Rhetoric Against Offshoring

Tue, 25 Nov 2008 09:31:13 +0000

A new take on making the outcries against outsourcing less worrisome

The past few years have seen mounting trepidation over job losses in the US, particularly to developing regions such as India and China.These have been accompanied by sporadic outcries againt outsourcing and offshoring of jobs, which the ravages of the current financial crisis will only accentuate. With large banks collapsing and General Motors, once the mightiest corporation in America, sending out frantic distress signals, the crisis has brought the unthinkable to pass. These traumatic events are hardly likely to make Americans –whether government, intellectuals or the public - more tolerant to the steady outflow of jobs from the economy.

Now come two substantial new arrivals - a book and a study - that should go a long way towards allaying any backlash that may be brewing in the ateliers of the protectionists.

The book is a thoroughly researched, eloquently argued and highly persuasive piece, titled The Venturesome Economy - How Innovation Sustains Prosperity in a More Connected World. It's central thesis is that technological innovation is a complex, multiplayer game in which America still leads the world by a long way. American scientific, technological and economic pre-eminence are thus not going away anytime soon. The book goes on to argue that "neo-protectionist" fears are unwarranted, and shows how they will probably undermine America's economic might in the long run.

The book comes with impeccable credentials. It is authored by Amar Bhide, the Lawrence D. Glaubinger Professor of Business at Columbia University. Prof Bhide is also a co-researcher of Edmund Phelps, 2006 Nobel Laureate in Economics who is an authority on, among other things, the relationship between investment in education and research on the one hand, and economic growth on the other.

And Prof Bhide could hardly have chosen a better time to weigh in, as anti-offshoring rhetoric can be expected to rise over the next few months. It must be noted that the primary purport of the book is not to support outsourcing or offshoring,and I am sure nothing could be farther from the author's mind than to be painted as a torchbearer for the outsourcing brigade. Nonetheless, the arguments presented therein can be read as making a substantial case for a more liberal approach toward outsourcing.

The author marshals an astonishing array of evidence in supporting his thesis, stitching together data and information from diverse disciplines. He presents data to show that protectionist fears in the 1980s that the US would soon be overtaken by Germany and Japan, which focused on rigorous planning of their scientific manpower, proved baseless as the US prospered while the ostensible aggressors largely floundered. He says things are no different this time, with China and India.

Innovation through Collaboration: Addressing Flat World Challenges in the Hi-Tech Industry

Mon, 10 Nov 2008 07:12:01 +0000

The world of business has never seen such fierce competition. Neither has it seen such an abundance of information or opportunity! This creates the perfect recipe for “Collaboration 2.0” – which can give organizations that competitive edge, while also offering the world better products and services – practically created by the consumers. Read more about this trend here. I shared my thoughts on this at Oracle Open World. You could also view my presentation here.

Now Showing: Government vs. Free Market (Part 2)

Sat, 08 Nov 2008 10:02:50 +0000

As the financial crisis reverberates thru the world economy, redrawing the lines between government and free markets, here are some objective principles that define the role regulators should play in the new world financial order.

The extent of regulation in general, and financial regulation in particular, plays a large role in defining the business landscape. In addition to determining the broad business environment in an economy, it has several micro, firm-level implications in areas such as governance, risk management and the use of Information Technology. In the first part of this essay we asked the question, How much financial regulation is "just right"? Or, where do we draw the line between government and free markets?

This admittedly difficult question has taxed the finest financial brains over the years, and we must clearly not expect any easy answers. People will approach it differently depending on their personal predilections, ideology, historical experience with regulation, current economic conditions and so forth. However, I believe it is possible to lay down a few principles that should help provide an objective basis for arriving at the "right" level of regulation, or at least to evaluate a regulatory regime once it has been devised. Here they are.

Now Showing: Government vs. Free Market

Fri, 31 Oct 2008 07:46:51 +0000

In the aftermath of the financial crisis, the lines between government and free markets are being fundamentally redrawn. As a new world financial order emerges, laying down some objective principles will help.

On November 15th, leaders of the world's top 20 economies will meet in Washington, D.C. to decide what financial regulation will look like in future. The creation of this new world financial order is at once a historic opportunity and a task of immense responsibility. People are already referring to the Nov. 15^th summit as Bretton Woods II, thus equating it with the conference that created the post-war world financial order that endures to this day.

With the notable exception of the US, almost all the leaders who will be in attendance have already weighed in in favor of greater regulation of the financial markets (see, for example, here, here, here, here and here ) and so we are inevitably entering an era of increased regulation. In this 2-part essay I will analyze past trends in financial regulation, and outline some principles that a financial regulatory regime must adhere to. I will revisit this topic after mid-Nov. and evaluate the outcomes of the Nov. 15th summit in the light of these principles.

Do we need Basel III to curb current market dynamics?

Sun, 19 Oct 2008 02:37:36 +0000

Sub-prime led credit crunch, failure of some of the leading players in capitalist market have definitely brought the question back on risk management practiced in financial world. If closely observed the demise of some of these institutions, the root cause points to single major factor - “Too much exposure to single market downplaying consequences of correlation & concentration”. Before I pin-point individuals, let’s look at the market dynamics for last 8 years till culminating to present crisis. It clearly articulates how the risk taking corporations forgot to understand the implications of traps in each step. If we closely observe each of these leading debacles – Lehman, AIG, Bear Stearns, Wachovia, Washington Mutual & plenty more mortgage providers- the reason for crisis stems from the very greed & exuberance portrayed by these players to spike their profit by exposing to unrealistic level of mortgage business & its structured products without entangling the underlying risk. Some pundits might argue that some of these investment banking units have failed due to unbelievable leverage since they do not come under banking regulatory purview and not reined by the risk based regulatory capital regime of central banks, but the failure of commercial banks at the same time questions that very conjecture. Basel II driven risk management philosophy in banks is the talk of town for last 7 years; however we see so much financial disturbance within banking fraternity globally. What went wrong then? Does that mean Basel II has its inherent weakness or not capable of answering present crisis?

Bail Out Blues

Wed, 15 Oct 2008 18:44:42 +0000

I was teaching my 6 year old a new nursery rhyme the other day, in keeping with the times…!

Baa, baa, Paulson, have you any bail out?

Yes Sir, Yes Sir, 700 billion of tax payer loot

Some for the Big Banks, some for Wall Street

And some for the Congressmen (and women)’s gravy train

But none for the poor man (and woman) who foreclosed down the lane!

Seriously speaking, the US Treasury-led bail out has generated very lively debates across academics, economists, columnists and the entire political spectrum. The fact that there is a Presidential election looming in less than 3 weeks adds to the fireworks!

When the Emergency Economic Stabilization Act of 2008 (a.k.a the "bailout plan") was signed into law on October 3rd, reaction was mixed. Various opinion leaders (notably Warren Buffett and George Soros) had differing viewpoints—many of them critical of the plan’s ability to achieve the intended goals. The market didn’t react as hoped and what followed was a massacre that the global stock markets had not witnessed (especially, the Dow Jones Industrial Average in the US) in a generation

Following UK Prime Minister Gordon Brown’s lead, on Tuesday October 14th, the Bush Administration changed course and announced what was tantamount to a partial nationalization of large U.S. banks - essentially forcing nine of America’s largest banks to accept funds in exchange for an equity stake. The markets around the world anticipated this coordinated action and responded by opening the week with one of the highest single day gains in history.

I think that the biggest conflict facing the implementation of any bail out plan is really the toss-up between protecting tax payers’ interest and the need to thaw the credit markets by freeing up the Banks’ tangle of toxic assets! I am probably reducing the challenge to a very simplistic proposition, hence I am keen to hear your views.

I have also put together a links page, polling opinions of noted economists, columnists and academics. If you have the time, click to read the extended entry below and let me know what YOU think about the bailout plan, the nationalization of banks around the world and the future of the global economy. Of noteworthy mention is Economics Nobel Prize winner, Paul Krugman’s column in The New York Times on Gordon Brown’s "equity injection" plan.

The Shotgun Wedding Planner on Wall Street!

Tue, 30 Sep 2008 16:55:34 +0000

Subsequent to my post couple of weeks back on the subject of Universal Banks, rapidly unfolding events in the US have catapulted JP Morgan Chase, Citi and Bank of America as the top 3 banking institutions in the country. With a leadership position across business parameters like Branch network, Deposit base, Credit Cards issued and hmm, Mortgages originated and serviced, these Banks carry an onerous responsibility on their balance sheets now and cover almost the entire US population in their collective footprint!

The unsung hero of all the hectic parleys that culminated in the Universal Bank proposition is the FDIC! This venerable 75 year old institution, a by product of the Depression-era legislation, has played a critical catalyst role in averting a banking crisis for the person on the street. While the more high profile Treasury and Federal Reserve arms of the Government have been publicly making attempts to get consensus on the bail out proposition, the FDIC has been proactively working behind the scenes to identify fissures in the banking system and diligently negotiating with the larger banks to take over their weaker brethren in what the market terms as "shotgun weddings"!

Bank failures can be very expensive, apart from causing an irreparable crisis of confidence in the economy; the ripple effects can cause immense stress to small businesses and individuals, by putting their lifetime earnings at risk!

Read more about the FDICs round-the-clock efforts (and the final 4 am Monday morning deal!) in the most recent Citi - Wachovia merger here.

And do you realize that, in this deal, there is already an implicit bail out package? The Federal Government, through the FDIC has agreed to absorb any losses beyond $42 Bn in Wachovia's $312 Bn asset portfolio, in return for preference shares in Citi. So much for the "noise" around bail outs!

A Firewall for Wall Street

Tue, 23 Sep 2008 07:03:34 +0000

When death-defying daredevilry goes awry

What happens when you neglect an engine that is long overdue for an overhaul? Answer: It breaks down, perhaps bringing an aircraft crashing down to earth.

And in recent days Wall Street, the engine of the world financial economy, has sadly shown that it is far from immune to the banal real-world constraints that the rest of the world is routinely accustomed to living with.

Owing to a heady and overpowering mixture of high expectations and sheer exuberance, many financial industry players were convinced they could defy the mundane aspects of the real world, such as gravity. But magic wands and pixie dust did turn out to be the stuff of fairy tales, after all.

As I wrote 18 months ago in The Long Arm of the Laws of Economics, risk in world financial markets has been underpriced by hiding it away, using increasingly arcane, complex and innovative instruments* such as Credit Default Swaps and Collateralized Debt Obligations. As I wrote,

"While underpriced (Cheap) risk is good for borrowers in the short term, in the long term it can undermine the health of the entire financial system. Thus there are good grounds for apprehension as to the robustness of the world's financial markets."