Will Apple maintain its hold on the iPhone?

A startup has begun selling applications for iphone without going through Apple's online sales engine. At stake is not just the market for apps for iPhone but the iPhone itself. When Apple tried to maintain hold on the computer by controlling the hardware and the software, it was pushed to the periphery of the computer industry for a long time. It changed its strategy with the iPhone by opening up the space for applications for the iPhone to third party providers. If Apple loses hold of the software in the iPhone it may virtually lose control of future value from the devices part of the media value system. So how much of a threat is such a start up to Apple's hold on the iPhone?

The heart of the matter is the benefits consumers see from using an alternative application source versus Apple. For this to happen, the sheer number of applications in an alternative site would have to surpass those available with Apple. The odds are stacked against the attackers in this case because such a firm would have to create such a large number of apps for the iPhone without providing the apps sellers the level of sales that they could generate via apple. At the same time, Apple can any day open its store for any app provider with the promise of significantly higher sales.
It appears that Apple remains in the drivers seat. Thus the legal action it is taking (similar to what record labels did when facing MP3 format) appears a little surprising.

What lies beyond Kindle seems more interesting

Although Amazon is back with an improved KindleII - it made little headway in improving its chances of increasing popularity of the E-book reader as the fundamental issues why the adoption has been low still remains (see my earlier post on Kindle to understand these issues). The relative advantage of Kindle over books continue to remain the issue. However, its other e-book initiative that would allow readers to buy and read books on smart devices and cell phones may have a significantly higher chances of success as the relative advantage issue may not be as strong. It remains to be seen whether American customers will take to reading books on cell phones the way Japanese customers did.

A new innovation north star

A casual walk in the Prudential mall the other day reminded me how overnight the demand patterns change. A look at the HD radio stall used to remind me of luxury when the other day it seemed so unnecessary. When I walked into Tweeter store a few years back and saw Sonos for the first time, I was excited. The other day I was thinking why have Sonos when Airport express can do the same job for a fraction of the cost.

This change in attitude is out there too. Media is focused on how to be sensible and to welcome and adjust to the era of responsibility. So what happens to the luxuries and their makers? How can innovation help them survive? It seems that a focus on value may be the path forward - in messaging as well as in the value bundle they offer. Some of it is already happening as manifested by the nature of TV commercials. Value seems like a good north star for innovation effort in this changed world - for some time at least.

Can Amazon Kindle E-reading

E-readers are not novel nor is the concept of e-reading - they have been around for at least a decade. Although Sony's entry into the market was a major event, it didn't make much impact on e-reading. But will Amazon's Kindle make a larger impact?

First of all, this makes a lot of sense for Amazon to get into. It not only has synergies with its existing business but also has potential for significant value creation beyond those synergies. For starters, it allows Amazon to get into publishing, generate higher margins, and of course reduce competition from used books. But the question remains - will Amazon succeed in e-book readers market?

The answer would depend on what is success for Amazon? Is it to achieve market leadership in the existing miniscule market for e-book readers? Is it to make Kindle the primary mode for reading books, magazines and newspapers? Or is it somewhere in between? A 5%, 20% or 40% penetration into reader segment?

Kindle will not do much for Amazon if all Amazon gets from it is market leadership of the existing market. It only makes sense if it can increase the market size. But would it?

The simplicity, novelty and some relative advantage of Kindle over paper based media is working in its favor. The ability to sample and purchase a large number of books makes it superior to the traditional mode of buying books.

What is clearly not working in its favor is inability of new customers to try the product and some major disadvantages over the current reading mode. When I went to buy a cell phone last time, iPhone won me over because I could try it along with Blackberry - there is no place for potential customers to try kindle except by buying it.
A lack of meaningful relative advantage of Kindle over current media is the key which will prevent a large scale penetration of the concept - it is more expensive, hard to share, cannot be used t borrow from library, and needs greater degree of care.

In short, the concept of Kindle (rather than just the hardware) will need to go through iterations before it makes major impact on e-book reading.

Monetizing social networks

An enormous explosion of social networking sites (such as Linkedin, Orkut and Facebook) is the first step in unlocking hidden value from the dispersed social capital in our society. I say first step because firms are ignoring significant opportunities in this domain. A premium membership for social networking sites or a paid access to the site are not the answers to the search for an appropriate business model in social networking - there is something much bigger waiting to happen.

An opportunity exists in a business model that can appropriately monetize social capital. Such monetization of social capital would lead to significant value creation for firms that undertake it as well as for participants in the social network. Such monetization would require a currency for social capital that is not only valued but also fungible with monetary equivalents. Currently, the social capital currency is the number of network contacts without any monetary equivalents. A monetized social capital would mean something more than mere number of contacts and would also have a monetary value (the way frequent flyer miles have a value).

Consider the significant social capital existing within a group of medical professionals. Currently, opportunities chase social capital in this domain (there is no efficient social networking ecosystem for this group yet). As a result, only a small number of potential opportunities of social capital arbitrage actually see the light of the day.

If there was a currency for social capital that is funded by pharmaceutical companies, it would unlock significant value. Consider the impact on information exchange, expertise retrieval, academia - industry connection, marketing efforts of pharmaceutical companies and a whole host of other opportunities.
In a useful end state of monetized social capital for this community, a doctor would be able to accumulate such currency by lending expertise, visiting pharmaceutical company talks, giving talks, or attending a webinar for new drug launch.
Of course there are issues around such monetization as the above example itself shows. How would regulatory agencies view such currency? How ethical concerns would be handled? What is the nonmonetary equivalent of social capital and so on. The point is not that such monetization would be hassle free but that it is worth more thought.

The business models in the social networking domains are waiting for a transformation.

A financial Innovation called ETF

There was a time when market volatility such as what we are witnessing these days would have made me worked up to the extent that I would have thought about it dozens of times a day and would have made active plans to deal with it and would have taken action. Now, I keep track of it but do nothing. In fact when markets dip, I am happy! All of this is thanks to the innovation of indexing - index funds or Exchange traded index funds.

Consider a few facts which made me a convert regarding the concept of indexing.
1) Investment returns is a result of gross investment return, taxes, and costs.
2) Over the long term (last 80 years), stocks (10.5% p.a) have outperformed bonds (5.9% p.a.) and bonds have outperformed cash (2.9% p.a.).
3) Most fund managers do not beat the market.
4) Fund managers who beat the market have very low consistency. A manager who beats the market one year has a low probability of beating the market again next year.
5) ETFs and index funds have the lowest fund expenses and tax incidence (in general). A small difference of less than 1% in fund management costs can add up to thousands of dollars in returns within a decade.

From these three facts, a few clear implications emerge:
1) If I (an individual investor) am trying to pick stocks to invest in, what chance do I have versus experienced fund managers (with massive resources at their command) who often cannot beat the market.
2) If I choose to pick a fund manager, I am most likely to pick one who will underperform the market.
3) Even if I pick a winner, the manager will over longer term under perform the market.
4) If I create a diversified portfolio of index funds and /or ETFs, I have the highest probability of earning better returns than if I try to pick stock myself or use actively managed mutual funds.

Between index funds and ETFs, ETFs appear to be coming out as winners. The choice boils down on two criterion - cost and tax incidence.
Costs involve, transaction cost, fund management fees, and buy-sell spread.
- ETFs have a lower expense ratio than index funds (in most cases).
- Index funds can be bought without a fee from a fund family such as Vanguard whereas ETFs involve commissions. However, some brokerages are now offering free trades (or very low cost trades) which make ETFs no more expensive than index funds.
- Index funds have no bid-offer spread whereas ETFs have a bid offer spread which is additional cost. To understand it better, assume that NAV of an index fund and of an identical ETF is 100. You can buy the index fund at 100 whereas ETF would be selling at greater than 100 price. This can sometimes be significant in the case of infrequently traded ETFs.
- Overall, ETFs appear to have a cost advantage if you plan to hold them for a long period (which is what asset allocation requires from an individual investor)

When it comes tax efficiency, ETFs have a greater tax efficiency that index funds. Index funds often give out capital gains distributions when redemptions take place, however ETFs are bought and sold as securities (and thus the fund manager does not have to sell securities to generate cash for the investors). In case of large scale redemption by an institutional investor, ETF can hand over underlying securities to the investor (and thus avoid capital gains distribution).
Furthermore, ETFs provide a large number of options for tax loss selling (while avoiding the IRS wash rule).

If you would like to read more about creating an investment portfolio using low cost options I highly recommend the following books on this topic.

One of the best books on getting started with asset allocation using index funds is the intelligent asset allocator by William Bernstein. His follow up book The four Pillars of investing is also an excellent read.
Of course John Bogle the founder of Vanguard group (and evangelist for low cost index funds ) wrote a few books on the subject which make a convincing case for asset allocation using index funds - I highly recommend his earlier book Bogle on Mutual funds and his latter book Common sense on mutual funds.

Finally, recently even Warren Buffet spoke in favor of indexing approach.

In the end, this has been possible because of the innovation of low cost index funds and ETFs.

Bullying at workplace - A serious problem

The latest issue of Journal of Management studies has an excellent study on workplace bullying called "Burned by bullying in American workplace: prevalence, perception, degree and impact". Since the Journal is inaccessible for most, a copy of the article can be accessed here. It gives a great overview of the phenomenon. It is eye opening for anyone who has never heard of the phenomenon or has dismissed it as childish because the effect of such workplace abuse is disastrous for the targets and for the organizations.


The paper define bullying as "repeated and persistent negative actions towards one or more individual(s), which involve a perceived power imbalance and create a hostile work environment. Bullying is thus a form of interpersonal aggression or hostile, anti-social behavior in the workplace."


Bullying is defined by four attributes - frequency, intensity, duration, and power imbalance. Personal attacks of these nature in a power imbalance situation is bullying and when carried out over a period of time can have disastrous consequences including depression, post traumatic stress disorder and even suicide. Unlike the situation when someone criticizes and is shrugged off, the target of a bully is unable to do just that. What is even worse, the coping mechanisms of the target are unable to respond. It is a descent into an emotional black hole for the target.


At an individual level, it appears that bullying is akin to psychological rape. The target is ashamed of being unable to resist the attack and thus finds it difficult to come forward to seek help. Due to perceived weakness associated with being bullied, the shame is reinforced. On the other hand, bullies discredit the target and use their own power of persuasion to get away.


While the paper doesn't talk about why some people undertake such reprehensible actions, in another place Tim Field (author of Bully in sight: How to predict, resist, challenge and combat workplace bullying. Overcoming the silence and denial by which abuse thrives ) has written about the personality of serial bullies. It gives some insight into why some people may actually end up undertaking such abuse.


Organizations and organizational leaders should care about workplace bullying for several reasons. The above article points to the fact that the effect of bullies in workplace is far more than just on an individual employee (which is easy to dismiss as an isolated incident). It impacts not just the target of the bully but also others around the target. It lower satisfaction, increases stress and increases turnover. Leaders, responsible for employees, customers and shareholders owe it to them.


Such abuse can be prevented, avoided and stopped in many ways. Awareness and understanding is the first step towards preventing such abuse. Targets of abuse may not come forward because of shame; awareness can help overcome shame. Those witnessing such abuse can also help a target by increasing the target's awareness. Human resource policies can incorporate such abuse as an actionable offense.


Without articulating such abuse as a specific phenomenon with a term (workplace bullying), it is difficult to communicate, explain and understand. As a result, it can be explained away as an idiosyncratic situation. You can help make the world a better place by telling one more person about the phenomenon and increase awareness. This will be a great contribution towards transforming your workplace.


I hope that workplace bullying will become a part of the workplace lexicon just as sexual harassment became a common word. Only after this step can it become a part of human resource policies in an effective manner.