Friday, August 31, 2012

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Sunday, December 4, 2011

More Than Just a Game

With the technology world abuzz with the upcoming IPO of Zynga (creator of Farmville, Cityville) it is an interesting juncture to take a step back and observe how the video game industry has evolved from its inception, and where it is likely headed in the future given the tremendous change it has witnessed in the last two decades.
The origins of the video game industry can be traced to as far back as the year 1947, when a patent was filed for what was called a “cathode ray tube amusement device.”At the outset, there was no industry to speak of, and many such games were invented for different platforms on stand alone bases, often purely as experiments, without much thought given to financial gains. Naturally, these experimental games had limited visibility and remained among the inventors and the tech-savvy.
The concept of video games gained mainstream popularity in the 70s and the 80s, with the surge in arcade games. The late 80s and 90s, particularly, witnessed a steep increase in the relevance of video and computer games, one that led to the formation of what would become a massive industry that has exceeded Hollywood in annual revenues.

The golden years
The industry went through a period of significant change with the transition to home computer and video games in the 90s. The main factors that contributed to this were the rapid advancements in technology at the time (Sony Playstation, Nintendo 64, powerful PCs) as well as the rising penetration of PCs owing to falling costs. The market for home video games gained traction, and soon replaced arcade games as the major source of revenue for the industry.

The early part of the 21st century witnessed even more advancements in technology, as computers improved even more and the sixth and seventh generations of game consoles were developed. This slowly led to video game consoles dominating the PC as the platform of choice.

The coming change
From the above, it is clear that the industry has witnessed several changes during its history and each of these changes led us to look at video games differently. It is of little surprise then, that the industry is facing another change. Except this time, the change that looks to be right around the corner promises to be the most significant one yet. The principal driver behind this change has, of course, been the Internet.

The signs have been there for some time now. The introduction of the Massive Multiplayer Online Role-playing Games (MMORPG) clearly signaled that the future of the game industry would be collaborative or social gaming. Indeed, when Blizzard announced the extension of their Warcraft franchise into the World of Warcraft, some gamers were initially skeptical about how they would achieve the scale required. Today, World of Warcraft is the largest MMORPG by far with over 10 million active players, and has been instrumental in redefining the online gaming industry. This naturally led to numerous duplicates which were successful in their own right, albeit not as much as World of Warcraft. But one thing remained, game developers and companies alike tried to leverage the Internet and incorporate it into their games. A prime example of this is Microsoft’s XBOX Live and the XBOX Live Marketplace, both of which revolutionized the industry and introduced a powerful new way of doing business.

The casual gamer
A characteristic of the industry in the past was that most games were made for the serious gamer. Sure, there were always the popular ones such as Pacman and Tetris, but the focus of the industry was completely on the enthusiasts. The trend has been changing for sometime now, largely in two ways. Firstly, with breakthrough innovations such as the XBOX Kinect and the Nintendo Wii, companies are looking to make gaming a family affair and expand their audience. Secondly, and more prominently, the surge of social networking and the increasing amounts of time spent by people on such sites has given a big push to social and online gaming. Of course, the ready-to-use platform named Facebook has contributed immensely.

This is where companies like Zynga came in, looking to capitalize on this changing trend. Indeed, with a series of simple, addictive and free-to-play games (Zynga Poker, Farmville), Zynga has captured the attention of millions of users through Facebook. All new business models pose doubts about feasibility, sustainability and scalability. However, in the case of Zynga’s games, scalability was never an issue thanks to their partnership with Facebook (Which they have extended up to the year 2015).

To achieve sustainability, Zynga was able to apply elements of the model used by the MMORPGs. The motto is simple – Lure more people in by using different means (such as a buddy referral benefit), get them hooked on and make them purchase virtual goods for money. The market for virtual goods in games is astoundingly large. Zynga alone made $235mn in sales in one quarter this year, and are well on their way to achieve the billion-dollar mark in sales for the year. This is a truly remarkable feat for the company to have achieved in such a short time. For some perspective, the total sales of video games across all platforms in 2010 were $18.5 billion.

The future – Coexist or Cannibalize?
As Zynga ventures into more platforms such as Android and iOS as well as competitors to Facebook such as Google+, many have predicted that mobile and social gaming is a new trend, one that will slowly but surely supplant traditional video games. Many other startups have entered this space, looking to create the next Angry Birds or the next Cityville.

While it is true that the growth potential for online casual games is immense and social gaming is the way forward, it need not be at the expense of traditional video games. For a serious gamer, the value proposition offered by games on handhelds and browsers pale in comparison with those on the more powerful consoles, which provide for more complexity, better graphics and a larger variety in games. For this reason, it appears that social gaming and traditional video games can coexist and even thrive in their own right.

That being said, game companies will have to adapt to these changes in the industry to stay relevant. Indeed, many companies have modified their strategy for the same reason. We are seeing a larger number of sequels to popular games as companies try to build franchises around games (Eg. Gears of War), both to boost future sales as well as tap into other avenues (Hollywood adaptations). A larger fraction of games are being made for a wide range of platforms, right from the iOS to the XBOX. Companies are looking to expand their horizons by acquiring other companies. For instance, Zynga recently (unsuccessfully) tried to acquire Angry Birds creator Rovio for a staggering $2.25 bn. MMORPG creators are looking to create incentives to bring in fresh players (Such as World of Warcraft making the first 20 levels free to play).

We are entering an exciting phase in the life cycle of the video game industry, one that promises tremendous growth for companies willing to innovate. One thing is clear though, the business of video games is here to stay, and can no longer be dismissed as “just games”. 

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Thursday, October 27, 2011

The Economic Impact of Mega Sporting Events

Bloomberg reported in 2008 that an estimated US$20 billion was spent on that year’s Olympic Games in Beijing. In fact, IMF estimates that about US$ 36 billion was spent on Olympic-related infrastructure in Beijing in the run up to the games. The spending by China on the Olympics was greater than the national GDPs of 83 countries in the world (IMF estimate). The last few decades have seen several billions of dollars being spent by nations across the world in hosting large international sporting events – the so-called ‘mega events’. One wonders if huge expenditures over world-level events like the Olympics, the World Championships and regional-level events like the Asian Games are justified. One of the most compelling arguments supporting cities bidding heavily for these events is the expected economic windfall brought by hostingthem.

World-level events, led by the Olympics, have become increasingly expensive over the years. Host cities see this not only as an opportunity to build new sports infrastructure but also improve urban infrastructure including housing facilities, communication networks and public transport. Such huge expenditures had led to 21 of the first 25 editions being hosted largely in Western Europe, North America and Australia. With growing concerns of potential terror attacks, security costs have also ballooned over the last decade. It is estimated that the security expenditures associated with the 2002 Salt Lake City Winter Games and the 2004 Athens Summer Olympics were over US$ 300 million and US$ 1 billion respectively. Security expenses largely come from the country’s Federal budget and arenot included in the games’ budgets. Further, there are annual maintenance costs of large stadia and associated sports infrastructure. Private sector companies might be hit by long term costs. Hotels might have seen a construction boom but the surplus capacity might create downward pressure on room rents in subsequent years. It is reported that within 5 years of the 1994 Lillehammer (Norway) Winter Games, 40% of the hotels in the region had gone bankrupt. Despite these shortcomings, estimating the cost associated with hosting a mega sporting event is far easier and reliable than estimating the revenues and economic benefits that a city derives from it.

The Sydney Olympic Games (2000) was expected to have a US$ 6.3 billion positive impact in addition to the creation of 100,000 new jobs. The Athens Olympics (2004) is estimated to have boosted economic activity by 1.3% of GDP every year between 1997 and 2005 and reduced unemployment by 1.9% per year. Prediction studies typically derive economic benefit studies from –direct impact (number of days spent by a visitor x number of visitors x average amount spent by a visitor) and indirect impact (effect of infrastructure spending). A key argument against the direct impact figure are that since leisure travellers’ budgets are inflexible, their spending on tickets simply leaves lesser money to spend on other substitute activities in the local economy. This suggests that the direct impact figure is likely to be overestimated. The effect of ‘crowding out’ local population spending is to be incorporated in addition to negative externalities such as congestion. Further, the issue of ‘time-switching’ is ignored: A visitor planning to visit Athens few months later might just have rescheduled his visit to coincide with the games. However, the latter effect is likely to be subdued for mega events like the Olympics.

The Indirect Impact is estimated by applying ‘multipliers’ to direct expenditures towards the event. These economic multipliers are derived from complex mathematical functions that model the relationships between different businesses in the region. However, when a world-level mega sporting event is happening in a region, some of these relationships do not hold. Another problem while estimating the Indirect Impact is the inability to separate the money flowing to international chains, in which case a foreign shareholder might derive greater benefit than the local population. Further, such leakages are aggravated by the entry of external firms that provide goods and services only during the games.  The benefits derived from the huge infrastructure investments presents yet another complication. Several secondary benefits accrue from heavy infrastructure spending surrounding a mega event. Improved connectivity, increased development of available real estate and even project management capability can derived. The property market in the region is buoyant following an event of this scale. Labour market impact and the socio-economic inclusion of a larger set of people is harder to quantify.

There are numerous intangible benefits that a city or nation derives from hosting a mega sporting event. Firstly, the city gets a ‘status-lift’ making its mark at the world level and rising into the echelons of ‘world cities’. Some studies show ‘a restoration of self-confidence’, ‘civic pride’ and ‘dynamism’ among the citizens following a mega event. The 2008 Beijing Olympics made an attempt of showcasing itselfas a democratic, civilized and harmonious country. In some countries, such events are used as a legitimate excuse to get legislative approval for infrastructure and other projects that might otherwise not be possible.

Despite the less-than-accurate estimates of cost and revenues associated with a mega sporting event, hosting the Olympics has remained an elixir of sorts used by governments across the world. Large caveats that come along with the prediction models have not tempered the gigantic bids cities make to host such world-level and inter-continental events. Do the economic, fiscal, political, social and cultural benefits outweigh the public expenditure of gargantuan proportions? Only time will tell. 

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Friday, September 30, 2011

Importance of Intellectual Property in Mergers and Acquisitions

Last month, Google astonished quite a few analysts when it announced the acquisition of Motorola Mobility for $12.5 billion. The hefty amount meant that the software giant parted away with nearly a third of its $39 billion cash reserves. It also meant that Google deviated from its earlier M&A strategy of acquiring small companies with superior technologies which it could easily integrate into itself as it did with Android in 2005. It also signified a major upheaval in its operating strategy because now they have not only increased their headcount by 66% but they have also entered a space which they have relatively very little experience in and one whose dynamics are way different than the one they are used to. The question is despite such large differences, why did they take such a decision? While some may argue Google is trying to go the Apple way by making its own hardware and software (which if true, might take some time coming), the reality lies in Motorola’s intangible assets - patents and 24,500 of those (17,000 approved and 7,500 pending approval). Google believes that this portfolio can be used as a leverage to ward off the increasing number of patent litigations from Apple and Microsoft against the Android-based phone manufacturers like HTC and Samsung and thus build confidence in these manufacturers to continue using them.

Technology-Driven M&A Deals

Welcome to the world where the M&A transactions transcends the boundaries of products and customers and enters into intellectual property (IP) as a huge value addition prospect. In this knowledge economy where innovation is touted to be one of the supreme drivers of growth, IP protection takes centre stage because this model has been widely successful in encouraging innovation. So, when an M&A acquisition involves parties which are technology-driven, IP is bound to be a key asset whose importance will influence the deal in a big way.
When we talk of technology-driven M&A, we are talking of huge numbers. According to PwC, the total value of the technology deals i.e. in internet, IT services, hardware and software in US alone was $77 billion in 2008 (yes, this was the year when the world faced an economic downturn!), $53 billion in 2009 and $107 billion in 2010. If one takes the pharmaceutical sector alone where patents are considered to be the backbone of any company, there have been 1345 deals in the last 10 years with a cumulative deal size of $694 billion. When one comes to think of patents being at the heart of these companies, it’s difficult to ignore the value it can play in an M&A deal. According to Nader Mousavi, a leading IP transactional lawyer who has worked with big law firms like Sullivan & Cromwel and Wilmer Cutler Pickering Hale & Dorr in the US, “IP as a percentage of deal value in M&A has been growing over the last 30 years. IP rights have gone from, as a percentage of overall value of S&P 500 companies, in the teens to 85 % or more.”

Significance of IP in M&A Strategy

Reducing Pressure on Internal R&D – In this knowledge economy, more and more companies are turning to an open innovation process in which they buy or license innovations to supplement and even replace their internal R&D. With the increasing emphasis on innovation and decreasing technology life-cycles, it’s imperative that a company looks into the ROI of its internal R&D. This will not only help them manage their R&D expenses better but also increase the number of innovation available to them and increase the speed of their product introductions. For this, it’s essential that the companies study the patent landscape and implement strategic analyses. These analyses will help them in identify the target which is active in the desired technology domain.

Bridging the Technology Gap in the Core Business – Companies are always looking at ‘synergy’ in any M&A deal. Many a times this synergy can be derived from complementary technologies. The addition of this technology to their portfolio would mean end-to-end integration of all components required to launch the product in the market. Take the case of the acquisition of SwitchOn networks by PMC-Sierra for $ 450 million. SwitchOn was a pioneer in wirespeed packet classification and inspection technology. It provided standard semiconductor and software components to enable applications such as QoS, Load Balancing, URL Switching Firewalling, etc. at wire speeds exceeding OC-48. It also had a patent pending on this technology, which on being granted would provide it the right to exclude any other company from using this technology. PMC-Sierra, on the other hand had expertise in broadband communications and has worldwide technical and sales support network. The addition of SwitchOn's packet classification expertise was complementary to PMC-Sierra's broadband communications strategy. With SwitchOn’s acquisition, it also acquired its patent which helped it achieve the strategic leverage in its domain.

Mitigating IP Litigation Risks – In a recent survey of Wall Street professionals conducted by CRA International, 75% of respondents indicated that patent litigation exposure was “important” or “very important” in valuing investment opportunities. Well, who could be in a better position to vouch for this than our beloved Google! In order to protect itself from the barrage of patent litigations involving Android, the count of which had reached 37 by March this year, it was no less than desperate to look for a strong patent portfolio. After the Nortel loss, when it bid an amount of $‘Pi’ billion for 6000 patents, it would have realized the actual seriousness which surrounds such patents not only in terms of money but also the business sense that they make. Its acquisition of Motorola Mobility is testament to the fact that a sound patent portfolio is one of the best cushions to have in the technology space. 

Patent Trolls – Strong patent portfolios have been the targets of several non-practicing entities (NPE) also referred to as trolls. These NPEs acquire companies having strong patents but are in either in distress or are ready to be acquired (read: sell their patents) for the amounts offered by the NPEs. However, the NPEs do not develop any products around those patents. They initiate patent litigations against the practicing companies with the sole intention of receiving generous settlement amounts. While the jury is still out on the ethical part of this business model, as far as it legal, a few companies continue to do it and successfully so. Firms like Intellectual Ventures, MOSAID, Tessera etc. have portfolios running into thousands of patents. All they do is find a hot patent and assert it against large companies.

Non-Technology Driven Deals

All the technology-driven M&A deals would tend to focus on the patent portfolio which is at stake. However, there are other forms of IP like copyrights and trademark, which can figure in the strategic objectives of a company. Here are a few reasons which would cause IP to influence a company’s M&A strategy:

Improve Distribution Channels – The merger of AOL and Time-Warner was one which involved equals in their respective industries. Time-Warner had a huge collection of copyrighted entertainment media including content magazines, movies, books, music and programming. However, with the increasing penetration of internet it was looking at alternate distribution channels to reach out to its audience. Thus, the decision to merge with AOL, which had become a huge brand in the internet space made a lot of sense.

Build a Brand Presence – When Indian tea-maker Tata was faced with the decision of expanding its foothold in the lucrative US and European market, acquiring a famous brand in these regions was the obvious answer. Thus, the acquisition of Tetley saw the light of the day. The deal catapulted Tata Tea into the global arena, as Tetley is an international brand with a presence in over 44 countries. Tetley has a presence in India, Canada, the US, Australia and Europe, and is the world's second largest tea brand. The acquisition helped Tata to cash on the widely recognized Tetley trademark and use its expertise and infrastructure in sourcing teas worldwide for the Indian market too.

IP Related Issues in M&A

Valuation - There has already been a paradigm shift in the IP due diligence process which is currently being undertaken by firms that identify IP as central to their long term objectives. They look at it from a value addition perspective rather than the traditional transactional perspective and thus, conduct a comprehensive due diligence using the latest tools and analyses. However, valuation still remains the trickiest part. This is so because IP valuation has no fixed model and is largely contextual. Risks, timing, cash flows, option value, alternatives and intended use (e.g., defensive, offensive) of specific IP assets form the pillars on which the valuation may be based. At the same time, CFOs are confronted with an ever-changing landscape of tax, financial and regulatory reporting requirements that impose differing and sometimes ambiguous standards for valuing IP.

Anti-trust Regulations – Most anti-trust laws prohibit M&A which will significantly ‘lessen’ the competition or lead to a monopoly in the market. Such issues are more serious when it comes to patents, as they by nature provide the holder the right to exclude anyone from practicing the patent.

With the growing importance of a knowledge-economy in today’s context it is beyond doubt that IP will be a key consideration for the companies as they carve out their strategic objectives. IP will thus, play an increasing role in fuelling the future M&As especially in the technology-intensive industries. 

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Saturday, September 10, 2011

Public Sector & Management Consulting: An emerging paradigm

Birth of Government Consulting 
Since the inception of Management Consulting in early twentieth century, for seven decades, predominantly all the growth was in the private corporate sector. Consultants popularized the approach now commonly referred to as ‘best practices’. By nature, the private sector has always been a competitive sphere, and hence the value associated with adoption of best industry practices was immense. In the last two decades, however, there has emerged an interesting trend in the consulting world. More and more public sector concerns are beginning to hire management consultants. Governments across the globe- US pioneered the movement and UK and India followed suit- are recognizing this as a quinine tablet for many strategic and operational challenges.
There are several stories of this strengthening relationship. McKinsey & Company handled the transformation endeavored by North Carolina’s Department of Transport. Among other makeovers, it dramatically cut down a mammoth $440 million shortfall in 2005 to $2 million in 2007. In Germany, Booz is revamping Public-Sector Occupational Pension Plan, and aiding the Ministry of Education and Research in launching nationwide university projects. UK is no alien to the trend, nor is India, where McKinsey has played important roles in major sectors like infrastructure and railways. Deloitte and Booz Allen have strategic penetration in sensitive sectors like defense, in UK and US respectively.

Strengthening hold in public sector 
Kennedy Information, an American firm that monitors the consulting industry, estimates that the public sector now accounts for over 30% of the global consulting market. Kennedy forecasts that the public sector business will grow by 6-9% for each of the next three years; private-sector business, it says, will grow by only 1-4% over the same period.
Britain's Management Consultancies Association (MCA) reckons that the value of public-sector consulting to its members grew by 46% last year, while private-sector business grew by only 4%. Two-fifths of the British consulting business of Deloitte, one of the Big Four accounting firms, is now for the public sector.Mitt Romney, US presidential candidate for 2012 elections, had told the Wall Street Journal, he would have no qualms hiring McKinsey or Bain, to advise him on how to reorganize the government. Ian Davis, former managing director of McKinsey has long been known as a strong proponent of role of consultants in running the government’s businesses. In 2007, he wrote a famous article ‘Government as a Business’ which attempted to break down the complex and chaotic world of federal governments and apply learnings from the business world to achieve efficiency and productivity in government organizations.

The Indian landscape
In India, we see a two pronged trend in management consulting in public sector. On one hand, private players like McKinsey, BCG, and Bain are being increasingly hired by federal and state governments to work on varied projects. BCG, for instance, has been involved with the Central Bank, and made recommendations to streamline the public food distribution system. In parallel, there is a rising trend of establishing public sector consultancies under the ministries of central government. To name a few: Agricultural Finance Corporation, Natural Resources Management Consultants India Pvt. Ltd., Educational Consultants India Limited, are all initiatives of different ministries. While their rise inspires confidence in government’s effort to improve public sector efficiency, critics have remarked, this might as well be an attempt to evade overt scrutiny and interference by global private consultants. Understandably, this is more for time to tell than experts to predict.

Another very interesting initiative is the Consultancy Development Center, headquartered at India Habitat Center, New Delhi. This organization has been set up for promotion, development and strengthening of consultancy skills and capabilities in the country including enhancement of export of consultancy and professional services. Opportunities are being discovered and analyzed not only in India but other countries across continents. Projects are being taken up in countries like Kazakhstan, Morocco, Israel, and Turkey. Specialized training programs on consultancy management are being launched and start-up ventures in this space being promoted.

In this hour of rapidly rising acceptance of consulting paradigm in the public sector affairs, however, there are strong opponents too. David Cameron, the current prime minister of UK, though more diplomatic today, had openly condemned the ‘rotting’ influence of this fast settling norm on UK government’s functioning. “For the last decade or so, in the name of modernization, rationalization and efficiency, we have been living under a regime of government by management consultant and policy by PowerPoint. The result has been an explosion of bureaucracy, cost and irritation, endless upheavals and pointless reorganizations.” he said in a speech to the Campaign to Protect Rural England.
Similar strong emotions were voiced by the famed but controversial journalist Johann Hari, when he targeted McKinsey on the firm’s involvement in the global drive for saving rainforests. He mocked the firm’s much publicized policy on confidentiality and pointed out data that seemed to corroborate his fears on company’s vested interests rising from its mining consulting division, straining the mission to conserve rainforests. On other occasions too, there have been similar and parallel arguments like inability of management consultants to go beyond the idea of financial efficiency and view public sector affairs in a holistic light.

A different approach
Almost as if apprehending this concern, Booz Allen Hamilton, the largest public sector consulting firm in US, has traditionally divided its business into two streams; one for public-sector work and one for the private sector. It recruits separately for the two streams, and employees follow different career paths and different pay structures.
Jess McMullin of boxesandarrows takes on the challenge of consulting the public sector, and breaks it down into:
Appreciating the differences- realizing that ROI in public sector is more complex than simple finance, and involves political returns too, which often outweigh finances in terms of significance
Understanding the culture- making sense of the complex hierarchies of different governments, and making connections at all levels
Finding your niche- adapting and innovating core strengths to suit the public sector demands
All in all, these developments depict growing awareness and interest in the field of consulting. Focusing on the Indian arena, they offer opportunities both for new ventures and lively debate on policy and paradigm! Figure out what is in it for you!

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Wednesday, August 24, 2011

The evolving business of Bollywood

The story goes that while making his most renowned film Pather Paanchali, auteur Satyajit Ray had to pawn his wife’s jewellery. Fast forward to 2011 and the latest Ajay Devgan starrer Singham has racked up collections in the region of Rs 25 Cr in just over three weeks. The transformation that Bollywood has seen ever since Dadasaheb Phalke made the iconic ‘Raja Harishchandra’ has been nothing short of spectacular.
The early days
The pre-Golden age had film-makers taking the entire financial burden of film-making on their own shoulders. They themselves would reach out to people, entice them and get them ready to sell property, jewellery, and invest in this magical medium. Financial returns were secondary to the attainment of one’s artistic ideals.
The Golden Age of Hindi cinema, which lasted from the 1940s to the 1960s, saw filmmakers like Guru Dutt (Guru Dutt Pvt. Ltd.) and Raj Kapoor (R.K. Studios) organise the cinema sector. They bought land, created the studio system, formed teams on monthly salaries, grouped regular technicians and thereby tried to introduce some semblance of organization into the Hindi film fraternity.
The dark period
Slowly, through the 70’s, commercial interests began to undermine creativity and aesthetics as tradesmen from Punjab and Sind began to pump their money into the film-making business. All through the 70s, 80s and 90s, the film-making business was considered a vice by the government and taxed egregiously at rates ranging from 25 to 75 percent in contrast to the US where tax benefits were provided. With a hit to flop ratio of 1:4, the film financing business was like playing the jackpot. So it wasn’t surprising that the bulk of film-financing came from the unorganized sector. Nearly 25 percent of the films were financed by conventional money lenders who charged exorbitant rates of interest ranging from 36 to 40 percent. The informal nature of the system also made it a convenient haven for 'black money' –- cash investments by gangsters, who needed to hide their earnings from tax collectors. 
Meanwhile, rampant piracy and poor screening infrastructure had the film industry on its knees. Well-off middle class families tended to stay away from cinema halls as the sound systems, seating and air-conditioning facilities were abysmal. It was only when banners like Rajshri Productions and Yash Raj Films, backed by their seminal hits Hum Aapke Hain Kaun and Dilwale Dulhania Le Jayenge, threatened to stop screenings at poorly equipped theatres that there was some improvement.    
Era of the Multiplex
 In the early 90s, in Delhi, India’s first multiplex came up and completely redefined the film-watching experience. In starting the country’s first multiplex, PVR showed a lot of vision and foresight and an impeccable understanding of the changing urban Indian consumer who was ready to embrace the best the world had to offer and was willing to pay for it. A consumer, who up until now was paying 25 rupees for a ticket, was now willing to pay 100 bucks. This one development catalyzed the transformation of film-making in India as films were now looking at substantial theatrical revenues.
The next epochal moment came with the granting of industry status to Bollywood by the government of India in 2001. This opened the door to institutional financing, something that the industry had been waiting for a long time. 
Post-2001 stage
With Bollywood being granted an industry status, the whole business of film-making underwent a paradigm shift. The sourcing for film-financing has now assumed a new avatar with more and more films being financed through organized sources (comprising APO funds, institutional / bank loans, private equity / venture capital from institutions etc). This increase in film financing from organized sources has been led by Media & Entertainment (M&E) companies that have raised funds through IPOs over the last few years and new entrants comprising of high net worth individuals (HNI) & companies, who were traditionally not engaged in the M&E business. This has resulted in the players reducing their funding from traditional unorganized sector debt financiers by a subsequent amount. The major players in the M&E space include Adlabs Films, PVR, Mukta Arts, UTV, Pritish Nandy Communications and YRF. With organized financing came a certain level of professionalism which has ensured that even films with an experimental story and cast get to see the light of the day.  The general film-viewing experience has gone up substantially and consumers (in this case the audience) have more good quality options to choose from.
A major source of revenue in this stage has been the growing foreign market for Hindi films. In many cases, the cost of making the film can be recouped from overseas distribution rights alone. To capitalize on this segment, Bollywood has tried a number of marketing strategies. From holding annual film awards in foreign countries (case in point being the IIFA awards) to increasing the amount of dialogues in English, a number of initiatives are being undertaken to boost overseas returns.  
Challenges ahead
Not everything is rosy though. Bollywood has a long way to go if it harbours hopes of catching up with Hollywood. As of 2002, Bollywood sold 3.6 billion tickets to Hollywood’s 2.6 billion and yet was able to generate revenues of only $1.3 billion as compared to Hollywood’s $51 billion. This disparity has been driven by a vast gap in the average number of prints and the price charged per ticket.
Until the film industry is able to give better structure and organization to the production, distribution and exhibition segments, it will be unrealistic to expect Bollywood to compete with Hollywood. Also, banks are still circumspect about financing films in India as the risks are too high. As observed by the head of the Reserve Bank of India, the film industry must recognize that it is, after all, a business, and the most difficult task for bankers is “to create an environment where the dreamers understand the numbers, and the accountants understand the dreams.”

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Friday, August 12, 2011

Google's strategy for Android

The mobile industry has grown exponentially since the 1990's to have about 5 billion connections worldwide and a penetration of more than 100% in several parts of the world. This evaluates to there being more than three times the number of mobile users than PC users with about 500 million connections added every year.

Along with mobile phones, smartphones have captured majority of the cellphone market. High end smartphones have become affordable because of availability of cheaper hardware and technology and fast, affordable internet. The smartphone business has shifted from being device based to being operating system based with Android being the fastest growing operating system. Android has captured nearly 50% of the world market share in 2011 as compared to less than 4% in 2007. But how does Google benefit from all of this? How does it source its revenues from Android?

Google's derives more than 95% of its revenues from advertising using web based services like Google search, Google mail etc. Google perceives the rising consumer base of smartphone consumers both as an opportunity and as a threat. The high penetration and the huge consumer base across all demographics is a lucrative advertising opportunity for the company. However, the dependence on mobile phones for internet access can lead to less dependence on PCs for consumers where Google is the dominant web based service provider for search. But in smartphones, it is the manufacturer and the operating system that determine the default services. So, Google can end up losing its overall market dominance if the smartphone manufacturers decide to move to different default services.

Google provides Android with zero licensing cost along with an entire plethora of services like Google maps with street view and mail customized for Android running mobile phones. This has ensured presence of a complete and standardized platform across a range of manufacturers. Android gives them the flexibility to develop their own UI and enhance user experience as per the manufacturer's target segment. A tremendous surge in the smartphone market hence ensued because of lowered barriers to entry and has created a tsunami like impact on Nokia, which is now unable to make use of its scale. Google also provides cloud computing services which links all its mobile services to its online services. This gives it an edge over most of its competitors like RIM and Apple. Android gaining dominance is significant because technology markets tend to get standardized around one dominant platform. The standardization of Android and availability of many substitutes for hardware will lead to reduction in profits from manufacturing. This pushes the business in the mobile industry towards providing mobile based software services i.e. application development.

Apple with an App Store of over 350,000 applications leads in the applications race, followed by Android's Google Marketplace with over 275,000 applications. However, devices based on other operating systems have barely over 50,000 applications. The business model for both these application markets is different. For Apple, the application store acts as a major source of revenues through paid applications and hence paid applications consist of about 65% of the total number of applications. Google on the other hand encourages free applications over paid ones for the Android platform and has about 60% free applications. Google's policy is skewed towards free applications for two strategic reasons. The first one being that providing good quality free business and multimedia applications would help in increasing the consumer base and also affect consumer disposition to switch from paid applications, that Apple has created, to free applications. Another reason is that if application developers cannot derive revenues from the sale of applications then the only other way of deriving revenues is through advertisement. And Google owns AdMob - one of the largest mobile advertising companies in the world.

Apple depends on sales of applications in its App Store for its revenues. It mainly targets the segment of people who would otherwise not buy a smartphone and brings them into the world of smartphones.  These are potential consumers for Android who can switch for better services and specialized business applications (which Apple cannot move into without alienating its current consumer base) at a much lower price. Google, hence, perceives a low threat from Apple. Another area where this duopoly is heading into is the tablet PC market. This is another fast growing consumer electronic which Apple was successful in commercializing and popularizing. Now, Android based tablet PCs are entering with a similar strategy as that in the smartphones. Thus Google is trying to make Android a standardized platform for mobile phones as well as tablet PCs by creating a vibrant ecosystem of manufacturers, software providers, carriers, developers and advertisers for the consumers so as to supplement its advertising revenue and secure its dominant position in the market.

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