PayPal’s Discovery



Looks like PayPal embarked on a journey of Discovery this week, adding to increasing activity in the payments arena. 

It announced a partnership with Discover (who?) as part of which it will issue special cards to all active PayPal members who will then use the cards for payments in stores which will in turn be processed by the Discover network.

Turns out that PayPal has been steadily adding retailers that accept PayPal at the checkout counter but just like with Square and Starbucks, this arrangement with Discover – effective in 2013 – provides the “force multiplier” effect and opens the door to dramatically expanding PayPal’s reach beyond sending money to friends or to pay for online purchases. 

Basically, customers can either use a PIN code via their mobile phones or a special PayPal credit card that can be swiped, in order to deduct the payment from their PayPal accounts. The solution is appealing to retailers, because it doesn’t require a significant investment in new technology, like replacing POS systems or installing some sort of NFC-based solution.

PayPal benefits of course – but how does Discover benefit?

That is unclear. 

On the face of it, this seems more of a coalition of payment processors to make the combination more appealing to consumers. 

Perhaps, given Discover’s #3 status, behind Visa and MasterCard, it is hoping that this arrangement just makes it more appealing to consumers (on top of capturing a percentage of each PayPal card’s swipe fee?) Longer-term, as more customers get used to Discover, it could up-sell additional services to them?

India, Power and Growth


India’s power problems have been in the news a bit, of late. While millions of consumers and businesses have habitually suffered “power cuts”, what was different this time of course was that it was not a “scheduled” cut but a widespread outage caused by a series of issues all put together (demand, supply, quality of the distribution grid, etc.). 

The question though is, in light of India’s much vaunted role in the BRIC block, where does it go from here?

An interesting article in the Washington Post argues that from a electricity/power investment perspective, India is where China was two decades ago and where the US was in the 1950s:

Every modern, industrial society in history has gone through a 20-year period “where there was extremely large investment in the power sector, and electricity made the transition from a privilege of an urban elite to something every family would have,” Varro said. “India is right now just at that jump point.”

There are many reasons why India needs to get moving on this, but let us focus on the business aspects of that. 

In an increasingly competitive global economy where local employment, affluence and other metrics of growth and prosperity depend on the competitiveness of exports, clearly, the power situation is not helping:

(because of factories generating their own power)…The cost of fuel makes his shirts 5 percent more expensive, “which plays a major role when you are competing in the international market with Sri Lanka and China.”

But in a few years, I suspect that clothing and apparel will max out the total number of available jobs and if India is to provide jobs for the millions of youth that come of age every year, then manufacturing is the way to go. 

So at some point, India will have to figure out a way to create new labor laws (hopefully) – something that impedes manufacturing employment and growth in almost all of its states – and become a counterweight to China and other low-wage manufacturing hubs like the Philippines, Vietnam, etc. 

According to an article in The Economist, China is becoming less attractive to contract manufacturing because of rising wages and while it still retains other advantages, I can see how, in perhaps 5-10 years, as other countries catch up, non-domestic oriented manufacturing (perhaps even that too) will start to leave China for other countries. And India may have a once in a generation chance to capture some of that business and add a significant number of jobs. 

But unlike small garment manufacturers that can live with a diesel generator, manufacturing necessitates economies of scale, which in turn mean factories and foundries that consume hundreds of megawatts of power, which in turn make low-capacity generators impractical. 

The starting point of course is massive investment (private and/or public):

World Bank studies show that a lack of electric power is the biggest barrier to job growth and investment in India today and that outages are a significant drag on industrial output and retail sales. The IEA predicts that India will need a $1.6 trillion investment in power generation, transmission and distribution to keep up with the rapid pace of energy demand through 2035 and a $550 million investment in the coal, oil and gas sectors.

But India has a tendency to throw money at problems and create various laws (with low or no enforcement) that end up wasting money and increasing red tape. 

So just investment in this sector is not the answer though and unless there is a coherent policy (which produces results like the successful “golden quadrilateral“) that takes into account all the different parameters (policy, raw material necessary to sustainably grow power generation and distribution) necessary for success, things may not change much. 

Sometimes crises have a way of crystallizing action in a way that nothing else can. It remains to be seen what comes out of this one. 

Books Reading Readers: Implications

Until very recently in human history, reading a book was a one-way experience.

With the advent of eBooks though, it is fast becoming a two-way street.

Every time someone reads an eBook (sales of which are increasing substantially, both in absolute and relative terms), the reader is being read also. According to a very interesting article in the Journallast month,

In the past, publishers and authors had no way of knowing what happens when a reader sits down with a book. Does the reader quit after three pages, or finish it in a single sitting? Do most readers skip over the introduction, or read it closely, underlining passages and scrawling notes in the margins? Now, e-books are providing a glimpse into the story behind the sales figures, revealing not only how many people buy particular books, but how intensely they read them.

As the article observes, this has some very interesting implications for publishing companies and authors, who, based on demographics and reading habits, can tailor the content of their books to increase the books’ appeal to readers and hold their attention longer.

In terms of fiction, unless someone is just a content mill I don’t think it matters too much. Writers (and publishers) of fiction may also not like the idea too much:

…”The thing about a book is that it can be eccentric, it can be the length it needs to be, and that is something the reader shouldn’t have anything to do with,” says Jonathan Galassi, president and publisher of Farrar, Straus & Giroux. “We’re not going to shorten ‘War and Peace’ because someone didn’t finish it.”

For non-fiction books where readers flock to books to learn about something, this could be highly useful. The full article explores various implications of the availability of this data from different perspectives and is worth a read.

But one thing that the article doesn’t discuss in detail are the implications for magazine publishers.

I think that magazine publishers who provide digital versions of their weeklies or monthlies (which is pretty much everyone these days) are sitting on a goldmine.

With a print magazine, no one knows how engaged readers are. Consequently, rates for advertisements in magazines are set based on some demographic data and the total number of subscriptions and single-copy sales.

Now though, with digital magazines, we can move into “dynamic” pricing for advertisements.

So if 100,000 subscribers were reading Businessweek on their iPads or other tablets, then I can easily determine which articles are skipped and which ones appeal most to readers. So just with TV shows and Nielsen ratings there, as a publisher, I could set rates for displaying ads on different pages based on how engaged readers are with those pages. As a company advertising on Businessweek, I have to love this too. Finally, I now have a way to show the right audience at the right time the right advertisement (and willingly pay a premium for it if it has the impact I think it will).

Extending the idea further, as an article in a digital magazine starts to become more popular, the publisher can increase the advertising rates just like on TV. On the other hand, ads on unpopular articles can go down in price dynamically too.

Since we are at the beginning of the digital publishing (and consumption) revolution, as long as obvious and justifiable privacy concerns can be addressed, it will be interesting to see what publishers and advertisers do here.

The “Strange Bedfellows” Files: Barnes & Noble and Microsoft

Nook LogoPolitics, they say, makes for strange bedfellows. Business makes for equally strange, if not stranger, bedfellows.

Lift, for a second, the curtain (blanket?) on Microsoft and Barnes and Noble (“BN”). 

In April this year, Microsoft announced a sizable (~ $300m) investment in BN (full disclosure: I used a Bloomberg article as the launching pad for this blog post and some of the numbers and quotes are from there) in exchange for 18% of BN’s nook subsidiary.

This was at a time when BN’s traditional brick and mortar business (like many others’) was declining. Sales of eBooks though were growing, aided in part by its Nook tablet. And with gross margins exceeding 30%, it was clear that the digital side of BN’s business was the future. In fact, arguing that BN was undervalued because the digital side was hobbled by the bricks and mortar business, some wanted the digital business (the Nook device + the eBook business) spun-off.

What does Microsoft want?

But the Nook tablet is based on Google’s Android system and while that may work for Amazon (whose own Fire tablet is based on Google’s Android system), at that time, I, for one, was not too sure exactly what Microsoft hoped to get from its BN investment. The picture is clearer today though and the investment seems like it could be a “win-win” for both BN and Microsoft.

Between April and today, Microsoft announced a Windows 8-based tablet, in order to capture its own share of the exploding tablet market and to minimize the downside resulting from tablets cannibalizing PC sales [since most PCs sold are still equipped with some version of Microsoft Windows and users typically buy or “acquire” Microsoft Office, etc., every PC sale “lost” to a tablet hurts Microsoft’s bottom-line directly.] With the global tablet market likely in the hundreds of millions (with only a very small percentage locked down by either Apple or Amazon), the tablet wars are just taking off. 

Thanks to Microsoft’s ubiquitous Windows brand, adoption and usage, I would imagine that out of the gate, it will capture a certain share of the tablet market. But Microsoft is likely asking itself how it can make sure that, every time a consumer passes over a PC purchase or considers a largish Internet access device, it can make the consumer only think of a Windows 8 tablet  (and not an Apple iPad or a Kindle Fire or …). That’s where BN comes in. 

Just another app?

BN currently has more than 25% of the eReader market, an impressive number. I am not sure what % of that is from Nook users and what % is from users of the Nook app on smartphones, PCs and other devices. Microsoft though could be eyeing the latter segment. If, with this investment, Microsoft is able to make sure that it has a compelling BN app available on the tablet, out of the box, BN users (who are used to BN’s “digital lockers”, as the article quotes BN’s CEO saying) and fans would then have one more reason to choose a Microsoft tablet and not an Apple or Amazon tablet:

All the companies (Microsoft and BN) have said about the deal is that it’s expected to close before the end of the year and the Nook app will be “deeply integrated” into Windows 8, the first version of Microsoft’s operating system that will power tablets.

That may mean users are prompted to make a pre-loaded Nook app their default reader, as Apple does with its iBooks, or it could be promoted in the Windows app store with free e-books.

Non-BN users and fans (book lovers and newspaper+magazine readers everywhere) might also be willing to give the Microsoft tablet a chance because of how good/compelling the BN app is…to be honest though, this is the one piece of the puzzle that still doesn’t make a lot of sense to me.

The Bloomberg article says that Microsoft, aside from its $300m investment, is going to spend another $305m on the partnership (over 5 years)…I have to think that for $605m, Microsoft is hoping to get more than just a compelling app and a certain “readymade” market. Is the Nook going to become a more full-fledged media platform for the Microsoft Tablet? Will BN and Microsoft launch their own video streaming service under the Nook brand? Since we are deep in speculation territory, why not go one step further and imagine that perhaps Microsoft will eventually acquire all of BN’s digital assets (as part of the spin-off) and merge them with another “compelling” tablet app provider, say, um, Netflix? Or will the Nook app be somehow engineered to gain additional insights into user behavior (superlatively insightful and useful data of course) that Microsoft can then use to increase its tablet marketshare and adoption? 

The fact that there are multiple possibilities here and/or the fact that Microsoft has something up its sleeve is possibly why

It doesn’t help that Microsoft and Barnes & Noble have been vague about how their partnership will turn things around, said Peter Wahlstrom, an analyst for Morningstar Inc. (MORN) in Chicago. Barnes & Noble must “prove they can make this into a viable model and they haven’t done that yet,” he said. Microsoft’s involvement “doesn’t fix it.”

BN’s Clear Benefits

For BN the partnership of course comes at a great time and it is easy to see why it would like the partnership.

Number one, of course, is the cash from Microsoft.  

Then, it has to be about growing its eBook market and revenue/profits. The more easy it is for consumers (across any device or platform) to buy high-margin eBooks (interestingly its Q2 2012 earnings showed flat Nook revenue but a 46% growth in digital content sales), the more BN benefits. If Microsoft is successful with the tablet and is able to penetrate the still untapped global tablet market, sheer user inertia, if not anything else, will force those that spend money on digital reading material to do so via BN’s default reading app and store. 

18% may be a small price to pay for that kind of potentially explosive growth and guaranteeing its future (either independently or as part of Microsoft).

Cheaper Luxury Shirts: Supply Chains and Middlemen


In some parts of the world, “middlemen” is a dirty word.

But by and large, on the global stage, institutionalized “middlemen” (not that kind of institutionalization) have played a large role in the growth of global supply chains. Unfortunately for them, IT and the Internet may be slowly cutting them out of the loop. 

Consider luxury men’s clothes in the US.

A very interesting story in Bloomberg talks about how smart IT-savvy clothing companies (into which venture capital firms have already pumped $300m+) are cutting out the middlemen (in this case department stores and luxury retailers) and allowing both consumers and these companies to capture more of the value created:

A men’s dress shirt costs J. Hilburn about $35 for fabric and another $22 for manufacturing. That $57 shirt sells for around $125 — about $200 less than a shirt by Ermenegildo Zegna Group sourced from the same Italian mill, Davis said. Zegna shirts cost $325 to $435 on Neiman Marcus Group Inc.’s website.

I doubt if, someday, all shoppers will buy their luxury shirts and pants from J. Hilburn (or Bonobos or their ilk) online and make luxury retailers like Nordstrom obsolete. Like with many other things, some segments of shoppers will do so and some will prefer to touch and feel their expensive clothes before buying them. Still, Nordstrom, for one, is not standing still (and it shouldn’t):

The business model is luring investment from some traditional department stores. Nordstrom Inc. (JWN) in April helped lead a $16.4 million investment round in Bonobos, an online menswear company, in an effort to improve Internet sales.

It is also interesting to note that while, traditionally, businesses worry about the scale-variety “tension” (if you want to produce 1000 shirts – but each one is unique – lets assume that it costs you $10,000 in total; if you instead chose one shirt design and produced 1000 such shirts, it might only cost you $5,000 because your per-design set-up costs are lower and you could buy the same fabric in bulk, saving money), these upstarts are able to get away with offering more variety for less costs, because other costs are drastically contained:

J. Hilburn keeps expenses in check by making items to order, eliminating costs associated with running warehouses and stores and avoiding the need to discount obsolete merchandise, said Hil Davis, co-founder and chief executive officer. A typical garment from most retailers is marked up three times as it works its way through the supply chain from the factory to the store, he said.

With a market that is sized at $327B in 2016 (per Forrester, in the article), we can expect a lot more entry in this space. 

I fully expect Amazon to shake up this space either by acquiring one of the companies mentioned here or by starting its own direct-to-consumer clothing division. Acquisitions might make more sense though – why would anyone buy an Amazon branded or associated $125 shirt?

Existing luxury retailers (like Nordstrom above), may take a more defensive approach by investing in these companies and adopting a “wait and watch” approach and/or prepare for the eventual changes in their customers’ behavior.

Consumers with a penchant for $125 shirts will have more reasons to smile soon.

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