Saturday, February 16, 2008

Free News Papers - Any takers?

Being in a B-School has a few (but not many) advantages. One of them is that you get pretty cheap Newspaper and Magazine subscription offers. One such offer that we got yesterday was for The Hindu Business Line. Rs.180 for 6 months which works out to 1 Re per day. When I used to subscribe before MBA it used to be at an average of 4 Rs per day. So when they can give 4 Rs paper for 1 Re, I thought why can't they distribute it for Free?

It isn't that bad an idea as it looks like though.
1) Anyway the Newspaper publishers earn majority of their revenue from the advertisers and not through sale of News papers.
2) Other Media Businesses like TV, Internet and Radio distribute content to users for free.
3) They can attract a large number of readers or at least buyers or takers by giving it for free.

Still it is a pretty bad idea. Otherwise it would have been already implemented.
1) In TV, Internet and Radio the distribution cost to each user is almost zero. Charging the users will only drive them away. In Newspapers and Magazines it is different. Printing each Newspaper and distributing it is costly and there is cost involved for each user.
2) If it is given for free. Everybody will start subscribing, whether they read it or not. So how many copies to print? far too many.
3) On what basis will advertisers know to how many audience are their advertisements reaching? Not straight forward. A separate survey needs to be conducted to find out how many people actually read them. So this will not be a favorite channel for advertisers. You don't collect money from readers and now you have driven the advertisers away. With both the revenue channels being closed, giving News papers for free makes sense only for charity purpose.
4) To make a print that many number of copies a large number of trees need to be cut. So much of paper waste is generated. Distribution becomes a massive exercise. So it doesn't make sense even for charity purposes.
5) When you charge a price that is higher you are conveying the advertisers that users don't mind paying that price to read the content. Or the users are savvy.

I tried to find numbers on the share of advertising revenues and sales revenue of the total revenue generated and expenditure details on printing, distribution, staff and so on. But there are hardly any listed News Paper company to give those details. Now the next question is why aren't News Paper companies not Public?

Sunday, February 10, 2008

I don't understand Real Estate Business

Sample this - I buy a flat near say ITPB, Bengaluru for 50 lakhs. I rent it out for 20 thousand per month to a family. Then my cash inflow per year is 2.4 lakhs after taking trouble to find the right area, house, broker, lender and tenant. Whereas if I keep the same 50 lakhs in a bank that pays 10% interest. My cash inflow per year is 5 lakhs without any problem. Ignoring the taxes in both the cases for the time being. Then why should anyone buy a house to rent it out?

One possible explanation could be that the value of the house appreciates. If I find the right house, it could probably appreciate by 20% per annum and double its value in 4 years. Then its fine if I have a job, the house is just an investment and I am not dependent on its cash flows. With this there are also risks involved such as 1) Fraud during buying or selling 2) Natural Calamities like Earth quake, flood, cyclone etc 3) Fire accident, destruction 4) Government acquiring it and 5) Property not appreciating its value.

But I don't think a Businessman who makes a living out of this would be happy with this model of getting (2.4 lakhs on 50 lakhs investment) 5% RoI. Also if he doesn't have 50 lakhs cash with him, he will have to borrow that amount at about 15% interest or 7.5 lakhs per annum. Making an annual loss of 5 lakhs.

I would rather have 1 Re now than 2 Rs 4 years from now. "Bird in hand is worth two in bush". Either people don't understand the concept of opportunity cost and time value of money or I am missing something very basic here.

Monday, February 04, 2008

Why are Air Deccan Tickets so cheap?

Yesterday while having dinner outside with my friend Praveen living next room, I just posed him a question. "What would your mission be as a Businessman?". He said "To make a difference in the lives of the people". I can safely assume that the difference would be positive ;-). He immediately also said, he doesn't believe in Wall Mart's "everyday low prices" concept. Because it only favors the customers by squeezing suppliers of all his margins. I argued saying they reduce prices by increasing the scale and supply chain efficiencies. The argument went on to the example of Indian low cost airlines Air Deccan.

One should really admire G.R. Gopinath and his Company Air Deccan for clearly understanding the middle class Indian Consumer. Their dramatic reduction of its ticket price to match train fares and connecting 64 destinations all across India has made an average Indian dream of flying in an airplane possible. When I myself traveled from Mumbai to Bangalore by this flight, I found the following reasons mentioned in their magazine on board.
1) No frills - No food provided on board. Though one can pay for it and get it. This directly reduces the cost of food per-say. The cost of carrying it to the air-craft, unloading, cleaning and so on. After who needs it when one travels for one to two hours in flight.
2) Fewer cabin-crew members - There are only 4 members other than passengers in the aircraft. Pilot, co-pilot and 2 air-hostesses. The salary costs are minimum now.
3) Simple seating arrangement - Nobody is assigned any seat numbers at all. Like in a city bus, whoever comes first can occupy a seat of his choice, could be window, aisle, front or back. There is no distinct Economy an Business Class seats. This simplifies the ticket booking system, no seat verification required.
4) Less time at airport - After landing, the Aircraft carriers will have to pay an amount proportional to the time parked at airport. Air Deccan minimizes this time by improved efficiencies.
5) Online Ticket Booking - By enabling booking all tickets only through their internet portal, they have avoided the costs of setting up Point of Sale offices at various locations, ticket printing costs, staff costs, rent, power and so on. Money flows electronically from customer's credit card and cash management is that much more easy.
6) Advertisements - Additional revenues are generated by having advertising spaces inside the air-craft.

As a customer, anybody would accept the above mentioned ideas when the costs are half of those of other carriers. But there are other unmentioned means by which they reduce costs
1) Over booking - Having said that, they have a simple uniform seating arrangement and nobody is assigned any particular seat numbers, this gives ample scope for over booking as well. They have survived many times with these tactics that somebody or the other don't turn up or come late and miss boarding. This way they have collected extra revenues. After all the ticket persey doesn't have a legal validity until the passenger gets his boarding pass. The passenger can be denied entry in spite of him having bought the ticket.
2) Poor Customer Service - When one calls the customer care call center, he may have to wait indefinitely before an executive attends his call. Man power is also hired cheap, so one can expect what quality of output to expect from them.
3) Delay and sudden flight cancellation - Flights don't always take-off on time. Worse still is that they even get canceled all of a sudden. I booked a flight from Bangalore to Trivandrum for my uncle 5 months in advance and it got canceled 3 days before the scheduled departure. He couldn't get seats on any day that whole week. Trains were also fully booked. So he had to take an expensive flight to Cochin and then go by road to Trivandrum.
4) Pilots are being stretched - Pilots need adequate rest after each flight and they are denied of this. Without rest he cannot guarantee 100% performance which is absolutely necessary. It is a question of passenger's life and safety. Short sighted managers oversee this for saving on cost.
The company in question and its idea has definitely not survived. It registered 219 crore loss for 3rd quarter. They doubled the prices from 1200 to 2500 for a Mumbai Mangalore flight. It has been taken over by Kingfischer. Some of its noble ideas are taken by other low cost carriers like Spice Jet.

Safe Travel, Convenience and Service are the 3 main ingredients of product called Air Travel and all 3 of them are compromised just for the sake of price. So, the message that we could derive is that "One needs to pay for quality". You can't expect best quality at cheapest cost. This point is obvious but the above mentioned 4 points weren't. So, Praveen as a Businessman would give his customers good product at right price.