Where did all the money go?

I was feeling a bit feverish this morning, perhaps a result of the headache I got from the Go tournament last Saturday in the Japan Club where I had two wins and two losses. The normal thing to do is to just sleep tight for a day and rest before going to work again tomorrow.

But I couldn’t do that because I had three meetings lined up today. The first was with a boutique Corporate Finance adviser where they are advising on our coming corporate exercise, the second was with our company auditor and then in the afternoon, a meeting with our corporate banker to discuss some banking facilities and to restructure the exisiting facility. And then tomorrow morning, a meeting with a leading investment banker, again for the corporate exercise.

While doing this, of course, naturally the finance side of me will take over the movie and Go side of me. Recently I read a book entitled THE WORLD IS CURVED. Of course, most people have read or heard of the book THE WORLD IS FLAT by Thomas Friedman. Ironically, I read the book over a weekend in my condo in Hyderabad and reflecting on the book in Hyderabad, I felt that I was at the right place at that time. Anyways, back to THE WORLD IS CURVED, it basically says that while Thomas Friedman’s book brilliantly described the world of commerce in goods and services, the world of Finance is essentially curved in that you can’t really see what is around the corner.

Reflecting on that book, I was of course thinking of the current economic condition that the world is in. Of course, many people thought that the crisis stems from the Subprime housing mortgage crisis but actually, the root of the problem goes further than that, even further than what is accused of Alan Greenspan, i.e. creating a housing bubble by lowering interest rate for a prolonged period of time (by the way, Greenspan’s biography THE AGE OF TURBULENCE is also a very good read and I got a lot of inpiration from it while working in Jakarta).

The thing with modern finance is just the complexity of it and thus the frequent lack of transparency in the system. Financial derivatives and structured financing masks too much of the risks involved in such financial instruments and as such exposes the holder of such instruments to very high risks, risks that they often are not really aware of due to the lack of transparency. As such, banks are “suddenly” insolvent and the government has to pump national money to rescue these troubled financial institution whereas these money would have been better used to improve the country’s infrastruture and to enrich its citizens.

So, with the government pumping so much money, in the trillions in rescue packages, it is only logical to think that those trillions are no longer in the economic system. So where did all these money go? Needless to say, they went to a small group of extremely powerful people but who are these people?

The modern world of finance is such that those who knows how to play the system will make huge amounts of money while those honest, down to earth people, will work their buttocks off day in day out, doing productive work, but finding that the money that they have earned with their hardwork is slowly eroded by the financial system, if not wholly swallowed up by those who know how to play the system.

Imagine the common American, for example, who finds that the value of his home has gone down by half and he is no longer able to pay for his mortgage while the company that he is working for is retrenching while someone in Norway has bought a repackaged asset backed securities who finds that that asset is no longer backing up the finance sufficiently and has to lose money on that investment, those money that he has saved up so hard to invest for the future. There is no more future then, and they have to start all over again, toiling day in day out, to save money again.

While some fat cats are sitting somewhere in the world, laughing at these sad and honest people. The world of finance is not fair. The world of finance is curved.

Price and Pricing

One of the most enjoyable aspect of my job is tweaking the scheduling strategy. The impact on the channel’s performance is direct and scheduling is more of a science backed by in-depth analysis of data. Eventually, a pattern will emerge and the gaps are as glaring as daylight. Another aspect of why this is so fascinating is because the scheduling landscape moves all the time because the competition is not dumb. They react accordingly, whether by accident or by design, and therefore it is necessary to be vigilant on the changing landscape and put in counter strategies. It is really like playing chess and when the numbers show positive results, it is very satisfying, just like winning a good game of weiqi.

As people who knows me knows, I am quite interested in economics and pricing does interest me too. In the course of my work, I have heard detailed analysis on pricing strategies employed, or should be employed and both of these arguments aims at the same aspect of our organisation.

One argument is such that when the ratings of a particular programme is consistently very high, one should raise the price of advertising slots to maximise advertising revenue. For timeslots or programmes that is not popular, the price should be reduced or bundled and sold as a package together with the high ratings programme. This, to many people, is actually common sense but common sense is actually a rare commodity. The real question here is this: what is the maximum price can one put in relation to the ratings numbers? Say, in the standard price list, a 30 seconds spot costs RM4,000 no matter where the spot is placed in the channel. Now, say the 7am slot has a low ratings number of X and the 9pm slot has a high ratings number of Y. Is it possible from here to construct a mathematical equation to shows the path to the optimum pricing for advertising for both these slots?

The other argument has to do with perception instead on real ratings numbers. Now, this is a lot more tricky but I can assure you that it is founded on precise mathematics as well. The key here is really competitive advantage. To what extent can a company differentiate its products based on its competitive advantages from what is available in the market will determine how much extra money they can charge. Differentiation has a lot to do with elasticity, the more differentiated, or perceived to be differentiated, the less elastic will be the price. As Bruce Greenwald and Judd Kahn said in their book “Competition Demystified”, there is really actually one aspect of Porter’s Five Forces that stands heads and shoulders above the other Forces and that is The Barriers To Entry.

Barriers to Entry, according to the authors, is really determined by three kinds of genuine competitive advantages. These are: Supply advantages, Demand advantages and Economies of Scale. As for my current company, although some people said that it is protected by the Government via licenses etc. looking at its history, it is exactly these three factors that see it win the competition. It has superior product supply – often exclusivity deals, a captive demand customer based on formed habits and stickinessof the programmes and the general economies of scale of its customer base and thus reducing its average cost per customer.

All the above needs further qualifications and needs to be guarded against. For example, in terms of supply, the exclusive content can easily be taken away by a player who has better connections with the supplier and/or and offer a significantly higher price. What is there to stop this from happening? In terms of demand, viewing habits can be changed via a superior product and marketing.

Ok, back to the question of pricing. If the company has differentiated its products effectively via the competitive advantages gained, the company should be able to charge a higher price compared to other players in the market. For example, say there is one channel that has its audience spend 40% of their TV viewing time on and the company decides to now start charging the customers after a period of free viewing. How much can it charge? There is a math in this and the correct number can be computed.

One fascinating way to compute the number is via equations using Game Theory. A simple example, here’s an abstract representation of Bargaining Problems:

[v1(z) + t] + [v2(z) – t] = v1(z) + v2(z),

where v1(z) is player 1’s benefit of z in monetary terms, t is the amount of money to be transfered between players 1 and 2.

The surplus in the bargain is represented by the following:

v1(z) + v2(z) – d1 – d2,

where d1 and d2 is the outcome for both players 1 and 2 if no agreement is made.

The above are the abstract and here is the standard bargaining solution. The standard bargaining solution is a mathematical representation of efficiency and proportional division (based on each player’s bargaining power). Each player is assumed to obtain his default payoff plus his share of the surplus. The mathematical equation is this:

d1 + n1(v* – d1 – d2) = v1(z*) + t,

where n1 is player 1’s relative barganing power, v* is the maximum joint value by determining the value z* that maximises v1(z)+ v2(z)

With the above equation, solve for t to find the optimum amount of money to transfer between the players.

Still with me? hmmmm…..I am not sure if I am still with myself. But if you put some effort and follow the equations carefully, it is really common sense.

Let’s try to put this into the pricing problems that we have and see if we can find the answer.

Is India a bubble?

After a couple of weeks in India, I began to think to myself, “How could a place such as India with such poor infrastructure and such a large population that is still not prepared can aspire to be an economic superpower?” Of course, anyone who has at least some interests in what is going on in the world would have read, or at least heard of, Thomas Friedman’s megahit “The World Is Flat”.

With the rising costs in India, which include fuel prices which is more than double of that in Malaysia and the rising cost of utilities and labour, not to mention the fickle mindedness of the the labour pool which job hops like mad, I will think that unless India do something to address the basic problems, the Indian bubble will burst very soon.

The economic foundation of India is not the same as in China. China, for what you would want to call it, is still basically a command economy. When something needs to be done, the central government will issue an instruction and it will get done. This system did prove itself to be rather effective in such a giant country like China which has to cope with accelerated growth.

India is the world largest democracy and democracy is not always the best way forward. It may even hamper growth even before the country has grown. To deal with acclerated growth in a huge country like India and China, I do think that democracy will be quite a handicap. This may be one reason why the government of India is fretting on why they are still lagging behind China by so far.

All these are speaking from a speed of growth point of view.

The Indian model, if the government is persistent enough to put through reforms to eliminate bureaucracy and corruption and improve on it’s infrastructure and mass education, will come out of the race with China a stronger country. One key reason is that India is more of a knowledge and services based economy whilst China is still a rather manufacturing based economy. The way the Indian economy is built and it’s foundation in democracy and individual enterprise will make it a more resilient economy. But then again, the government must get things moving forward as soon as possible. Before the bubble bursts.

For them