Footage

So after a fifteen year gap, I was in the Times of India yesterday, writing about the joys of working from home (I’d shared the clipping yesterday, sharing it again). The interesting thing is that this piece got me the kind of attention that I very rarely got with my six  years with the HT Media family (Mint and Hindustan Times).

The main reason, I guess, that this got far more footage, was that it came in a newspaper with a really high circulation. ToI is by far the number one English newspaper in India. While HT may be number two, we don’t even know how much of a number two it is, since it seemingly didn’t participate in the last Indian Readership Survey.

Moreover, ToI is read widely by people in my network. While the same might be true of Mint (at least until its distribution in Bangalore went kaput), it was surely not the case with HT. I didn’t know anyone who read the paper, and since my articles mostly never appeared online, they seemed to go into a black hole.

Another reason why my article got noticed so widely was the positioning in the paper – it was part of ToI’s massively extended “page one” (it came on the back of the front page, which was full of advertisements). So anyone who picked up the paper would have seen this in the first “real page of news” (though this page was filled with analysis of working from home).

On top of all this, I think my mugshot accompanying the article made a lot of difference. While the title of the article itself might have been missed by a few, my photo popping out of there (it helps I have the same photo on my Twitter, Facebook, LinkedIn and WhatsApp – thanks Anuroop) ensured that anyone who paid remote attention to my face would end up reading the article, and that helped me get further reach among my existing network.

ToI is going to pay me a nominal amount for this article, far less than what Mint or HT used to pay me per piece (then again, this one is completely non-technical), but I don’t seem to mind it at all. That it’s given me much more reach among my network means that I’m satisfied with ToI’s nominal payment.

Thinking about it, if we think of newspapers as three-sided markets connecting writers, readers and advertisers, it is possible that others who write for ToI do so for below market prices as well, for it has an incredibly large reach among “people like us”. And that sets the size-related network effects (“flywheel” as silicon valley types like to call it) in action among the writer side as well -you don’t write for money along, and if it can be sort of guaranteed that a larger number of people will read what you write, you will be willing to take lower payment.

In any case, this ToI thingy was a one-off (the last time I’d written for them was way back in 2005, when I was a student – it’s incredible I’ve given this post the same title as that one. I guess I haven’t grown up). But I may not mind doing more of such stuff for them. The more obscure the paper, though, the higher I’ll be inclined to charge! Oh, and henceforth, I’ll insist my mugshot goes with everything I write, even if that lowers my monetary fees.

 

News, Subscription, Advertising, and Bias

Dibyendu Mishra and Joyojeet Pal of the University of Michigan have some very interesting research out on the political bias of Indian news publications. Rather than do complicated gymnastics such as NLP, they’ve simply looked at the share of articles from each news publication that is retweeted by BJP and non-BJP publications, to draw out a measure of their bias (see link above for methodology).

They have made a nice scatter plot (the other axis is how “popular” these news outlets are in terms of the number of articles retweeted), and looking left to right, you can see the understood (by politicians) bias of various Indian news publications. As Helmet pointed out on Twitter, the most “centrist” news outlets seem to be the Times of India and the Economic Times, both from the Bennett, Coleman and Company group, who people crib about for “being too commercial” and “having too many advertisements”.

This reminds me of another piece of analysis that was in the news a few months ago, about how subscription-driven online news has led to news outlets being politically polarising. For example, Zach Goldberg did some analysis of frequency of words/phrases in the New York Times that are associated with the extreme left.

Note the inflexion point sometime in 2012 or so, around the same time when the NY Times put up its paywall.

David Rozado has a more comprehensive picture (check out his nifty tool here).

The idea is this – when newspapers depended on advertising for most of their funding, they needed to be centrist. Taking political sides meant that large mass-market advertisers wouldn’t want to advertise in this newspaper, and the paper would thus lose revenues. Hence, for the longest time, whatever the quality of the reporting and writing was, news outlets strove to be reasonably politically unbiased – taking sides would mean a loss of money.

Once digital took off, and it became clear that digital advertising wouldn’t really sustain the papers, they started putting their content behind paywalls. And subscription revenues meant two things – news outlets weren’t as beholden to advertisers as they used to be, and it was easier to get paying subscribers if you had a strong ideology. Moreover, online you can provide targeted advertising (rather than mass-market), so you can get away with being biased. And so with the coming of paywalls, newspapers started becoming far more political as the New York Times graph above indicates.

In India, there haven’t been too many publications behind paywalls, but media is evidently getting more and more polarised over time. Papers and channels are branding themselves (implicitly) as being pro or against a particular political party, and that is driving their viewership.

While these media outlets are good for fanbois (and fangirls) of particular ideologies, the ideological bent has meant that it has become harder to get objective news.

And that’s where money, and advertising, comes in.

The positioning of ToI and ET in the middle of the Indian media ideological graph is interesting because they belong to a group that is brazen about commercialisation and revenues (from advertising). And in terms of news objectivity, that’s a good thing. Since ToI and ET are highly money minded, they want to get as much advertising as possible, and in order to attract mass marketers, they need to not be biased.

Taking a political stand means pissing off people belonging to the opposite political persuasion, and that means less readership, which means less advertising revenues. And so if you read the editorials of these newspapers (I read ET everyday), you see that they maintain a careful balance of not appearing too biased in favour or against any party. And you see them raking in the advertisers while more biased (and “ideological”) competitors are forced to request for donations, or put up paywalls restricting their readership.

Putting it another way, there is no surprise that ToI and ET are not biased in their news, and are retweeted by politicians of all persuasions. It is the classic money-driven media model, and that is the one that is capable of providing the most objective news.

Why You Need Market Manager

I must mention at the outset that this is not a paid post. I haven’t been paid, either in cash or in kind or by any other means, for writing this. This is an honest endorsement, based on principles of market design, on why one of my wife‘s products is awesome. 

I spent five minutes this morning interning for my wife. The more perceptive of you will know that she runs Marriage Broker Auntie, a one-stop shop for (right now “arranged”) relationships in India. As part of this, she offers a product called “Market Manager” where she manages people’s matrimonial platform profiles for a fee.

Five minutes of interning as a market management internship convinced me why this is such a great product.

 

The “job” I did as part of my internship was straightforward. First, I got a lowdown on one of my wife’s clients, and tried to understand him and what he is looking for in a partner. Then, I had to go to shaadi.com (the wife had already opened and logged on on this client’s behalf), where I had to evaluate profiles and decide on whether to send them an “interest” or not (think of this as being similar to swiping left and right on Tinder. Having missed that boat (I met my wife before Tinder had launched), this was interesting).

Every day, Shaadi.com sends each candidate ten “recommended profiles”. My job was to look at these ten on this client’s behalf and decide which of them to pursue. Having achieved the task in five minutes (I might have said yes to two or three of the ten), I was asked what the experience was like.

“I must say I quite enjoyed doing this on behalf of someone else – someone I don’t really know. But doing this for myself or for a close relative would have been nerve-wracking”, I said. And that is precisely why the Market Manager product needs to exist.

Having briefly been in the arranged marriage market before I got lucky enough to met my wife, I know the pains of going through the process. The matrimonial websites have a lot of “market congestion”, in the sense that for every profile you might like, you get shown tens (or even hundreds) of profiles. So sorting through the profiles is a massive task.

Also, the heavy congestion means that both errors of omission and commission can be plenty. It is very possible that you might decide to reject someone who might have been a perfect match for you. It is also possible that you might pursue, and maybe even go on a date with, people who are bad matches for you. And that, as a candidate in the market, can be extremely disheartening.

You send requests to people who you think might make for great spouses for you, but you might end up in their “errors of omission” pile. You lose heart just a little bit each time this happens. Then you look at all the profiles of people who are clearly unsuited to you. And you start wondering if that is your lot. And you lose heart a little bit more.

You lose heart sufficiently that even when an awesome profile comes across, you aren’t sure how to go about it any more. You are jaded. You are unsure of yourelf. Your self esteem has gone to an all-time low. You start wondering what might be wrong with this “awesome profile” that she has expressed an interest in you.

What if someone could instead manage your profile for you, weeding out the clearly unsuitable, and sending on the good matches only once there has been a mutual connect? What if you only got “qualified leads” that you should theoretically have a higher chance of  scoring from?

A lot of people employ their parents or close relatives for this purpose, and while the candidates themselves might be saved all the trouble of weeding through and losing heart, you don’t want a parent or close relative to lose heart in your search as well. Moreover, a parent or close relative will only be managing one profile (yours) at a time, and when things don’t go well it’s as easy for them to lose heart as it might be for you.

A professional (such as Marriage Broker Auntie), on the other hand, represents you, understands you and looks out for you, but can also do so in a very dispassionate manner. They manage profiles of several profiles like yours, so the process is something they’ve refined. They know how to handle rejections and congestion without losing heart. And they are great at understanding people and finding out the specific requirements and looking out for them, rather than what a matrimonial site bot can do.

So if you’re right now in the arranged marriage market, do yourself a favour, and employ Marriage Broker Auntie to manage your profile. Yes, the service is not particularly cheap, but in terms of the mental effort saved and increased chances of finding a good match, it will more than easily pay for itself.

Sometimes I wish this service existed 11 years ago, when I was in the market. Then again, I don’t know what would have been the chances of marrying the Marriage Broker Auntie herself if she had been in this business then.

More On Direct Listings

Regular long-time readers of this blog might know that I’m not a big fan of IPO pops (I’ve written about them at least four times so far: one, two, three and four). You can think of this as Number Five, though this is specifically about Direct Listings.

In case you don’t have patience to click through and read my posts, what is the big deal about direct listings? And what is the problem with traditional IPOs? To put it simply, companies looking to raise capital through IPOs are playing a one-time game (you only do an IPO once), while companies that are investing in them are playing a repeated game (they participate in pretty much every IPO that comes on the market – ok may be not WeWork).

This means that investment banks, which stand between the buyer and the seller in such cases, have an incentive to structure the deal to favour the (repeated) buyers, and they price the IPO conservatively. This means that when the company actually lists on the market, it usually does so at a price higher than the IPO price, resulting in a quick win for the IPO investors.

This is injurious for the original investors in the company (founders, VCs, employees) since they are “leaving money on the table”. A pop of 10-20% is considered fair game (a price for the uncertainty on how the market will react to the IPO), but when MakeMyTrip lists 60% higher, or Beyond Meat lists 160% up, it is a significant loss to the early shareholders.

Over the last few months (possibly after the Beyond Meat IPO), Silicon Valley has woken up to this problem of the IPO pop, and suggested that the middleman (equity capital markets divisions of investment banks) be disintermediated from the IPO process. And their vehicle of choice for disintermediation is the direct listing.

A direct listing is what it is. Rather than raising fresh capital from the market, the company picks an auspicious date and declares that on that date its stock will list on the exchanges. The opening auction in the exchange on that day sets what is effectively the IPO price, and the company is public just like that.

Spotify was among the first well-known companies in recent times to do a direct listing, when it went public in 2018. Earlier this year, Slack did a direct listing as well. Here is Benchmark Capital’s Bill Gurley (a venture capitalist) on the benefits of a direct listing.

Direct Listing is all well and good when a company doesn’t have to raise capital. The question is how do you go public while at the same time raising capital (which is what a traditional IPO does)? Slack and Spotify were able to do the direct listing because they didn’t want capital from the IPOs – they just wanted to offer liquidity to their investors.

The New York Stock Exchange thinks it can be done, and has proposed a product where companies can use the opening daily auction to price the new shares being offered. There are issues, of course, about things like supply of shares, lock-ups, price support and so on, but the NYSE thinks this can be done.

NYSE’s President Stacey Cunningham recently appeared on the a16z podcast (again run by a VC, notice!) and spoke eloquently about the benefits of direct listing.

The SEC (stock regulator in the US) isn’t very happy with the proposal, and rejected it. Traditional bankers are not happy with the NYSE’s proposal, either, and continue to find problems with it (my main source of this angst is Matt Levine, who is a former ECM Banker and who thus has solid reasons as to why ECM Bankers should exist). In any case, the NYSE has refiled its proposal.

So what is the deal with direct listings?

In a way, you can think about them as a way to simply disintermediate the market. The ECM Banker, after all, is a middleman who stands between the buyer (IPO investor) and seller (company raising capital), helping them come up with a smooth deal, for a fee. The process has been set for about 40 years now, and has become so stable that the sellers think it has become unfair to them. And so there is the backlash.

Until now, the sellers were all independent entities with their own set of investors, and so they were unable to coordinate and express their displeasure with the IPO process. The buyers, on the other hand, play the game repeatedly, and can thus coordinate among themselves and with the middlemen to give themselves a sweet deal.

The development in this decade is that the same set of VC investors invest in a large number of go-to-public companies, and so suddenly you have sellers who are present across deals, and that has changed the game in a sense. And so direct listings are on every tech or investing podcast.

Among the things I wrote in my book (which came out a bit over two years ago) is that one important role that middlemen play is to reduce uncertainty and volatility in the market.

One concern with direct listings is that there can be a wide variation in the valuations by different players in the market, and the opening auction is not an efficient enough process to resolves all these variations. The thing with the Spotify and Slack listings was that there was a broad consensus on the valuation of these companies (more in line with public company valuations), a set of investors who wanted to get in and a set of investors who wanted to get out. And so it all went smoothly.

But what do you do with something like WeWork? The problem with private market valuations is that with players like SoftBank, they can be well divorced from market realities. In WeWork’s case, the range of IPO valuations that came up differed by an order of magnitude. And that kind of difference is not usually reconcilable in one normal opening auction (imagine a bid of 8 billion and an ask of 69 billion, and other numbers somewhere in between) without massive volatility going forward. In that sense, the attempted traditional IPO did a good job of understanding demand and supply and just declaring “no deal”. “No deal” is usually not an option when you do a direct listing.

OK I’ve written a lot I know (this is already 2X the length of my usual blog posts), so what do I really think about IPOs? I think all this talk about direct listings will shift the market ever so slightly in favour of the sellers. Companies will follow a mixed strategy – well known companies (consumer brands, mostly) with stable valuations will go for direct listings. Less well known companies, or those with unstable valuations will go for IPOs.

And in the latter case, I predict that we will move closer to a Dutch auction (like what Google did) among the investors rather than the manual allocation process that ECM bankers indulge in nowadays. It will have the benefit of large blocks being traded at time zero, at a price considered fair by everyone, and hopefully low volatility.

Advertising Agencies: From Brokers to Dealers

The Ken, where I bought a year long subscription today, has a brilliant piece on the ad agency business (paywalled) in India. More specifically, the piece is on pricing in the industry and how it is moving from a commissions only basis to a more mixed model.

Advertising agencies perform a dual role for their clients. Apart from advising them on advertising strategy and helping them create the campaigns, they are also in charge of execution and buying the advertising slots – either in print or television or hoardings (we’ll leave online out since the structure there is more complicated).

As far as the latter business (acquisition of slots to place the ad – commonly known as “buying”) is concerned, typically agencies have operated on a commission basis. The fees charged has been to the extent of about 2.5% of the value of the inventory bought.

In financial markets parlance, advertising agencies have traditionally operated as brokers, buying inventory on behalf of their clients and then charging a fee for it. The thrust of Ashish Mishra’s piece in ate Ken is that agencies are moving away from this model – and instead becoming what is known in financial markets as “dealers”.

Dealers, also known as market makers, make their money by taking the other side of the trade from the client. So if a client wants to buy IBM stock, the dealer is always available to sell it to her.

The dealer makes money by buying low and selling high – buying from people who want to sell and selling to people who want to buy. Their income is in the spread, and it is risky business, since they bear the risk of not being able to offload inventory they have had to buy. They hedge this risk by pricing – the harder they think it is to offload inventory, the wider they set the spreads.

Similarly, going by the Ken story, what ad agencies are nowadays doing is to buy inventory from media companies, and then selling it on to the clients, and making money on the spread. And clients aren’t taking too well to this new situation, subjecting the dealers ad agencies to audits.

From a market design perspective, there is nothing wrong in what the ad agencies are doing. The problem is due to their transition from brokers to dealers, and their clients not coming to terms with the fact that dealers don’t normally have a fiduciary responsibility towards their clients (unlike brokers who represent their clients). There are also local monopoly issues.

The main service that a dealer performs is to take the other side of the trade. The usual mechanism is that the dealer quotes the prices (both buy and sell) and then the client has the option to trade. If the client feels the dealer is ripping her off, she has a chance to not do the deal.

And in this kind of a situation, the price at which the dealer obtained the inventory is moot – all that matters to the deal is the price that the dealer is willing to sell to the client at, and the price that competing dealers might be charging.

So when clients of ad agencies demand that they get the inventory at the same price at which the agencies got it from the media, they are effectively asking for “retail goods at wholesale rates” and refusing to respect the risk that the dealers might have taken in acquiring the inventories (remember the ad agencies run the risk of inventories going unsold if they price them too high).

The reason for the little turmoil in the ad agency industry is that it is an industry in transition – where the agencies are moving from being brokers to being dealers, and clients are in the process of coming to terms with it.

And from one quote in the article (paywalled, again), it seems like the industry might as well move completely to a dealer model from the current broker model.

Clients who are aware are now questioning the point of paying a commission to an agency. “The client’s rationale is that is that it is my money that is being spent. And on that you are already making money as rebate, discount, incentive and reselling inventory to me at a margin, so why do I need to pay you any agency commissions? Some clients have lost trust in their agencies owing to lack of transparency,” says Sodhani.

Finally, there is the issue of monopoly. Dealers work best when there is competition – the clients need to have an option to walk away from the dealers’ exorbitant prices. And this is a bit problematic in the advertising world since agencies act as their clients’ brokers elsewhere in the chain – planning, creating ads, etc.

However the financial industry has dealt with this problem where most large banks function as both brokers and dealers. It’s only a matter of time before the advertising world goes down that path as well.

PS: you can read more about brokers and dealers and marketplaces and platforms in my book Between the Buyer and the Seller

The market for gay relationships

The market for homosexual relationships is an interesting one from the analysis perspective. Like the market for heterosexual relationships, it is a matching market (we are in a relationship if and only if I like you AND you like me). Unlike heterosexual relationships, it is not a “bipartite” market, since both the nominal “buyer” and the “seller” in a transaction will come out (no pun intended) of the same pool (gay people of a particular sex).

The other factor that makes this market interesting (purely from an analysis perspective – it’s bad for the participants) is that there is disapproval at various levels for homosexual relationships. Until today, for example, it was downright criminal to indulge in gay sex in India. Even where it is legal, there is massive social and religious opposition to such relationships (think of the shootout at the gay bar in Florida, for example).

Social disapproval has meant that gays sometimes try to keep their sexuality under wraps. Historically, it has been a common practice for gays to enter into heterosexual marriages, and pursue relationships outside. In fact, there is nothing historical about this – read this excellent piece by Srinath Perur on gays in contemporary hinterland Karnataka, for whom Mohanaswamy, a collection of short stories with a gay protagonist, was a kind of life changer.

Organising a market for an item that is illegal, or otherwise frowned upon, is difficult, since people don’t want to be found participating in it. If I were a gay man looking for a partner, for example, I couldn’t go around openly looking for one if I didn’t want my family to know that I’m gay. So the first task would have been discovery – “safe spaces” where I would be happy to expose my sexuality, and where I could also meet potential partners.

When demand and supply exist, buyers and sellers will find a way to meet each other, though often at high cost. One such “way” for homosexual people has been the gay bar. Though not explicitly advertised, such bars act as focal points (I have a chapter on focal points in my book) for gay people.

They also act as an “anti focal point” (a topic I HAVEN’T covered in the book, for a change!) for heterosexual people who want to stay away because they don’t want to be hit on by gay people (thus reducing market congestion – another topic I cover in my book). Similarly other cultural activities have acted as focal points for gay people to get together and meet each other.

Like in heterosexual relationship markets (this is the link to a sample chapter from the book), the advent of dating apps has revolutionised gay dating, as apps such as Tinder and Grindr have provided safe spaces where gays can look for relationships “from the comfort of their homes”. There are studies that show that Grindr has changed the nature of relationships among gay men, and how these apps have “saved lives” in places such as India where homosexuality was criminal until today.

Today’s Indian Supreme Court ruling will have a massive positive impact on gay relationships in India. For starters, there are still millions of people in the closet – while apps such as Tinder and Grindr allowed more people to participate in these markets (since this could be done without really “coming out”), that gay sex was a criminal act would have led to some people to err on the side of caution (and deprive themselves of the chance of a relationship). Gay people who were worried about criminality, but not that much about social sanctions, will now be more willing to come out, leading to an increase in the market size.

Barring congestion (when “bad counterparties” prevent you from finding “good counterparties”),  the likelihood of finding a match in a market is generally proportional to the number of possible counterparties. Since gay relationship markets are not bipartite, we can say that the likelihood of finding a good match varies by the square of the number of market participants (and this brings in the Indian Prime Minister’s infamous 2ab term). In other words, it not only allows the people now coming into the market to find relationships, but it also allows existing players to find better relationships.

Then, there is the second order effect. Decriminalisation will mean that more people will come out of the closet, which will mean more people will find homosexuality to  be “normal” leading to better social mores (to take a personal example, I used to use the word “gay” as a pejorative (to mean “uncool”) until I encountered my first openly gay acquaintance – someone with whom I share on online mailing list). And as social attitudes towards homosexuality change, it will lead to more people coming out of the closet, setting off a virtuous cycle of acceptance of homosexuality.

In other words, today’s decision by the Indian Supreme Court is likely to set off a massive virtuous cycle in the liquidity of the market for homosexual relationships in India!

PS: It is a year since my first book was published, so we are running a promotional offer where you can buy the Kindle version for one dollar (or Rs. 70).

 

Pertinent observations on liquidity in startup markets

“Liquidity” was one of those words Wall Street people threw around when they wanted the conversation to end, and for brains to go dead, and for all questioning to cease

– Michael Lewis in Flash Boys

The quote that begins this blog post is also the quote that begins my book, which was released exactly a year ago. Despite its utility in everyday markets and economics, the concept of liquidity has not been explored too much outside of financial markets. In fact, one reason I wrote my book was that it appeared as if there was a gap in the market for material using the concept of liquidity to analyse everyday markets.

From this perspective, I was pleasantly surprised to come across a bunch of blog posts written by investors and tech analysts and startup fellows about the concept of “liquidity”. Most of these posts I came across by way of this excellent blog post by Andrew Chen of Andreessen Horowitz. It is always good to see others analysing topics in the same way as you are, so I thought I’ll share some insights from these posts here – some quotes, some pertinent observations. This is best done in bullet points. If you want to know more, I urge you to click through and read the blog posts in full. They’re all excellent.

  • You wonder why some startups make a big deal of how many cities they are in. This is because they usually function as within-city marketplaces, and so they need to be launched one city at a time. Uber famously started operations in San Francisco and remained there for a while.
  • “The best way to measure liquidity in the marketplace is to track the % of items or services that get sold/booked, and within what period of time. The higher the % and shorter period of time, the more sellers are making money and buyers are becoming loyal customers” – from here
  • “Where absolute pricing management makes most sense (i.e., where the marketplace operator sets prices) is where there isn’t a proper barometer for what the supply side should be charging and when the software can leverage systems should to optimize for liquidity” – from this excellent post
  • “In a zero sum game there, it’s most likely the marketplace with the most demand wins”. This was in the context of delivery marketplaces, and why Uber was likely to win that game (though it’s not clear if they’ve “won” it yet)
  • Trust is critical in building marketplaces. Both sides of the market need to trust the intermediary, and this can make marketplaces fragile. I had a recent incident where I appreciated the value of AirBnB landlord insurance (a lamp at a property I stayed at broke just after my stay, and the landlord wanted compensation). This post talks about how this insurance was critical to AirBnB’s growth
  • The same post talks about why even early stage businesses often make acquisitions – usually earlier stage businesses. “Marketplaces are normally winner-take-all markets. If we had lost ground to European competitors in 2012, we may have never gotten it back”
  • Ratings are a critical measure to build trust in a marketplace. And two-way ratings can help establish trust on both sides of the market
  • During the book launch function last year, there was a question on how marketplaces should build liquidity. I had given an example of the Practo/OpenTable model where you first sell a standalone service to one side of the market and then develop a marketplace. Another method (something I helped put in place for one of my current clients) is for the marketplace itself to become a “proprietary supplier”. The third, as this blog post describes, is about building markets where buyers are also sellers and the other way round (classic financial markets, for example).

For more on liquidity, and how it affects just about every market that you participate in on a daily basis, read my book!

We’ll miss sushi

One food item that my daughter and I will really miss when we move back to India is sushi. It is not that it is not available in Bangalore – restaurants such as Matsuri and Harima make excellent quality sushi, just that the transaction cost of procuring it will be far higher.

I grew up vegetarian, and didn’t eat meat until I was twenty eight. The decision to try meat was ad hoc – at a restaurant in Monastiraki square in Athens, the meat looked fantastic and the vegetables looked sad. And I decided that if I were losing my religion, I would lose it all the way and started my meat-eating career by eating beef souvlaki.

It wasn’t until a year later that I tasted fish, though – from childhood the smell of fish had put me off. As it happened, I first ate fish at a restaurant in Karwar, en route to Goa. Then, a consulting project in Mumbai happened, with a fish-loving client who took me to the best fish restaurants in that city (sometime during this time, I discovered I’m allergic to prawns).

It would take another year or two before I would have raw fish, though, in the form of sushi and sashimi. The first time was a trip to Matsuri, where my wife was treating me. I quickly grew fond of it, and would have a Japanese meal (at either Harima or Matsuri) at least once in six months (these are easily the best and most authentic Japanese restaurants in Bangalore. Edo is good but overpriced).

My love for sushi really took off during the three months I spent in Barcelona in 2016. That city has loads of sushi shops (it helped we were living in a dense district), mostly run by Korean immigrants. it is not too expensive either, which meant I would have it once a week at least (I might have eaten more often, but the wife was pregnant then, and hence off raw fish).

London doesn’t have the same density of sushi shops as Barcelona, but there are some chains that make pretty good sushi (Wasabi and Itsu, though I prefer the latter). Like other things London, it is not cheap, but we end up eating it reasonably often (it helps that the daughter loves sushi as well, though she only eats salmon nigiri – which also happens to be my favourite kind of sushi).

While craving sushi and planning a sushi run for dinner earlier this evening (finally we ended up eating at a Korean restaurant), it hit me that I won’t be able to have sushi so regularly in Bangalore. I started wondering what it would take for the likes of Freshmenu to be offering sushi on their menu. And I remembered a chapter in my book on specialty food.

The problem with low demand products is that the volatility of demand is high relative to the average demand. This means that for a retailer to stock items with low demand, either the margin needs to be high, or the inventory levels will be so low that customers might be disappointed rather often – neither of which is sustainable.

Making matters worse is the fact that fresh fish is an integral part of sushi, and it has an incredibly short shelf life. So unless demand can be aggregated to a high level (which Harima and Matsuri do, by being located in the middle of town and especially catering to the Japanese population in the city. In fact, I’m told the Chancery (where Matsuri is located) is the hotel of choice for Japanese visitors to Bangalore), it is not feasible to run a sushi restaurant in Bangalore.

Oh, and in the same chapter in the book, I discuss why people like to live with other people like themselves – others demanding the same thing you demand is the only way you can ensure that there is supply to meet your demand.

Information Technology and Large Cities

In my book Between the buyer and the seller, officially released exactly a year ago, I have a chapter on cities. In that I explain why industry clusters form, and certain cities or regions become hubs for certain types of industries.

In that, I spoke about the software industry in California’s Silicon Valley, and in Bangalore. I also mentioned how the Industrial Revolution wasn’t evenly distributed around England, and how it was clustered around textile hubs such as Birmingham and Manchester. I also used that chapter to talk about the problem with government-mandated special economic zones (this podcast with Amit Varma can help you understand the last point).

Back when Silicon Valley was still silicon valley (basically a semiconductor and hardware hub), it wasn’t as concentrated a hub as it is today. It was still fairly common for semiconductor companies to base themselves away from the valley. With the “new silicon valley” and the tech startup scene, though, there is no escaping the valley. It is almost an unwritten rule in US Tech startup circles that if you want to be successful with a tech startup, you better be in the valley.

And this is for good reason, as I explain in the book – Silicon Valley is where the ecosystem for successfully running a tech startup already exists, including access to skilled employees, subcontractors and investors, not to speak of a captive market. This, however, has meant that Silicon Valley is now overcrowded in many respects, with rents being sky high (reflected in high salaries), freeways jammed and other infrastructure under stress.

In fact, it is not just the silicon valley that has got crushed under the weight of being a tech hub – other “secondary hubs” such as Seattle (which also have a few tech majors, and where startups put off by the cost of the valley set up) are seeing their quality of life go down. The traffic and infrastructure woes in Bangalore are also rather similar.

So why is it that information technology has led to hubs that are much larger than historical hubs (based on other industries)? The simple answer lies in investment, or the lack of it.

Setting up an information technology company is “cheap” in terms of the investment in capital expenditure. No land needs to be bought, no plants need to be constructed and no machinery needs to be bought. All one needs is an office space (for which rent is paid monthly), and a set of employees (who again get paid a monthly salary). Even IT infrastructure (such as computing power and storage and communication) can be leased, and paid for periodically.

This implies that there is nothing that stops a startup company from locating itself in one of the existing hubs. This way, the company can avail all the benefits of being in the hub (supplier and customer infrastructure, employee pool, quality of life for employees and investors) without a high upfront cost.

Contrast this to “hard” industries that require manufacturing, where the benefits of being located in hubs is similar but the costs are far higher. As a hub develops, land gets expensive, which puts off further investors from locating themselves in the hub. This puts a natural limit on the size of the hubs, and if you think about it, large cities from earlier era were all “multi-purpose cities”, serving as hubs for several unrelated industries.

With information technology, though, the only impediment to the growth of a hub is the decreasing quality of life, information regarding which gets transmitted in indirect means such as higher rentals and commute times, and poor health. This indirect transmission of costs to investors results in friction, which means information technology hubs will grow larger before they stop growing. And as they go through this process, the quality of life of the hub’s residents suffers!

Revenue management and transaction costs

So I just sent off a letter to India. To be precise, it is a document I had to sign and send to my accountant there – who sends regular “letters” any more?

The process at the post office (which, in my suburb, is located inside a large bookstore) was simple. In the first screen of the touch screen kiosk, there was an option for “worldwide < 20 grams”. A conveniently placed scale told me my letter weighed 18 grams, and one touch and one touch of my debit card later, I had my stamp. Within a minute, my letter was in the letterbox.

The story of how we pay the same amount for sending mail over large areas (“worldwide” in my case today) is interesting. Earlier, mail rates were based on distance, but as new roads kept being built in the 19th century America, and distances kept changing, figuring out how much to charge for a letter became “expensive”. A bright fellow figured out that the cost (in terms of time) of figuring out how much to charge for mail was of the same order of magnitude as the cost of the mail itself. And so the flat rate scheme for mail, that is prevalent worldwide today, was born.

Putting it in technical terms, transaction costs trumped price discrimination in this case. Price discrimination is the art (yes, it’s an art) of charging different amounts to different people based on their differential willingness to pay. Uber surge pricing is one example (I have a chapter in my book on this). Airline fares are another common example.

Until the late 18th century (well after mail prices had gone “flat”), price discrimination was rather common everywhere, a concept I have devoted a chapter to in the book. In fact, the initial motivation for fixed price retail was religious – Quakers, who owned many departmental stores in the US North-East, thought “all men are created equal before God” and so it was incorrect to charge different amounts to different people.

Soon other benefits of fixed prices became apparent (faster billing; less training for staff; in fact it was fixed prices that permitted the now prevalent supermarket format), and it took off. The concept is the same as stamps – the transaction cost of figuring out how much to charge whom is higher than the additional revenue you can make with such price differentiation (not counting possible loss of reputation, and fairness issues). Price discrimination at the shop is now confined to high value high margin businesses such as cars.

And it works in other high gross margin businesses such as airlines, hotels and telecom. These are all businesses with high fixed costs and low marginal costs for the suppliers. Low marginal costs has meant that price discrimination ha been termed as “revenue management” in the airline industry.

During the launch function of my book last year, I got asked if Uber’s practice of personalising fares for passengers is fair (I had given a long lecture on how Uber’s surge pricing is a necessary component of keeping average prices low and boosting liquidity in the taxi market). I had answered that a marketplace needs to ensure that its pricing is perceived as being “fair”, else they might lose customers to competitors. But what if all players in a market practice extreme price discrimination?

Thinking about it, transaction costs will take care of price discrimination before businesses and marketplaces start thinking of fairness. Beyond a point (the point varies by industry), the marginal revenues from price discrimination will fall below the transaction cost of executing this discrimination. And that poses a natural limit to how much price discrimination a business can practice.