Is Innovation Overrated?

Take one of the most visible items of conspicuous consumption, create an even more exclusive, expensive and more importantly “blingy” limited edition of an already “limited or premium” model and in today’s wealth boom you might add $100mn to your top-line just like that. But make sure you skew supplies to the “noveaue rich” economies- the dragon, the elephant, the bear, a certain West African state and the land of Black Gold.

I am not talking of an uber premium hand bang or diamond ring. I am referring to the Sirocco series of the NOKIA’s 8800 model (originally launched in 2004), which was launched in September 2006. Now they have launched an 18k gold plated version retailing at £850( yes, you read it right). There are 2 other versions – black and light, priced at £600. My prediction - 100,000 of these will be snapped up in no time.

The Gold model is clearly positioned on bling and exclusive value. It is pitched as an evolution of the impeccable design heritage (of the 8800). The only change (i.e.the evolution) vs. the original 8800 model is the addition of an 18k real gold envelope/coating on the stainless steel body. No technological improvements are mentioned in the print ad vs. the original 8800 model, but a quick look at the Nokia website re-assures that it is functionally quite up to date.

Nokia has done its consumer research well. Not everyone is buying phones for their features – better camera lens, higher storage capacity etc. There are enough rich people who will pay for the show-off and exclusive value of such a mobile phone, if it comes with good core functionality and from a reliable and respected brand. So with no new significant investment in product design (hardware as well as software), Nokia potentially has incremental $100mn in revenues.

If my prediction (of the sales volume) turns out to be true, it will partly prove what I have always believed - “Innovation” is hyped too much and is just another “fad” in a long line of management buzzwords. A whole bunch of things which good companies were already doing in the normal course of driving growth, are now clubbed under the broad umbrella of Innovation.

The Nokia 8800 Sirocco Gold is simple and smart thinking based on good consumer understanding and category insights. This is still the cheapest way to drive growth. You don’t need management tomes on Innovation and a massive re-wiring of your organization to churn out such initiatives.

The Sirocco series has been marketed well in general. There was (apparently) product placement in Casino Royale and there have been charity auctions of celebrity signed limited editions. They also created a special Lamborghini edition. In India, the gold version can only be bought via pre-booking. The only slight niggle I have is on the print campaign. The advertising copy as well as the product shot is average, at best. Copy could have been more evocative and the product shot more alluring (i.e. in the same league as shots of luxury watches, jewelry, and perfumes in the glossy magazines). Media placement also is not stellar. I have noticed the advertisement two times now – once in TIME and the second time in NEWSWEEK. Not sure these are the right publications given the target audience. Also, a dedicated web site would have helped to synergise better with the print campaign. Its a bit deflatory to be directed to the normal Nokia site when you type “Nokia Sirocco” in Google.

Present Market Crisis - Options Before the Fed

The present market crisis has posed the first real test for Mr. Bernanke. The deepening crisis in the housing market is now threatening to spill over to other parts of the economy. The result is that hedge funds are in trouble. As they panic and bail out of risky securities, they are putting pressure on stock prices worldwide. It is now threatening to turn into a downward spiral which, theoretically could push the U.S and the world into economic recession.

The first fallout of the present crisis is that suddenly liquidity has dried up. Hedge funds who typically invest in riskier assets are the first ones to feel the heat. Central Banks, the world over have responded by "injecting" money into the system. How do they do this? They have simply gone out and bought bonds from various banks held by them as reserves. The resultant increase in liquidity, $62 billion on Thursday and Friday in the U.S. alone, has a two fold effect. It prevents a spike in the lending rates and it also reassures people that they need not liquidate their assets in a hurry, thereby minimizing losses.

Admidst this turmoil, calls for cutting the interest rates by the Fed are mounting. Critics are quick to point out that such action would simply postpone the crisis as, theoretically speaking, lower interest rates would revive the housing market and would prompt the risk takers to again start buying risky assets. Then again, should government policy be aimed at helping out billionaire hedge fund managers and their millionaire investors?

The proper course of option presently would be to wait and watch. If the number of people involved is small, the crisis would perhaps blow over, once there is ample liquidity in the system. Otherwise the Fed may be left with no other option but to cut interest rates.

How to Finance College ?

In about a month's time from now students will be heading to college for the Fall Semester. One thing which will be uppermost in most of their minds is how they are going to pay for college. The vast majority of them will be taking some kind of loan or other. The most important thing is to avoid piling up debt. This can well turn out to be a major burden when you graduate and cause constant stress of falling behind on your payments and building up a bad credit record.

Nowadays student loans are a big and hugely profitable business, what with interest rates climbing all the time. The recent loan scandals have exposed the dirt in the system, that is the advice you get from various counselors may not be the best deal for you. But what is one supposed to do in such a situation.

Experts advise that first of all exhaust your sources of federal funding, whether it be a Perkins, Stafford or a PLUS loan because it caps your interest payments. There are other federal loans as well.

It is possible that this may not take care of your entire needs and you may fall short and may have to find other sources of funding as well. While doing so it pays to have a good hard look at the discounts offered, penalties charged for delayed payments and processing fees charged because in many instances these charges may make a sizable difference to the total cost of the loan including the interest component.

Often students end up taking more than one loan. This can be very burdensome. Consolidating your loan helps not only reduce interest cost but also reduces monthly payments. You also deal with only one lender. At times refinancing your loan may help by increasing the repayment period, but this usually implies a higher rate of interest.

Finally remember to keep your grades up. This improves your chances of scholarship. Also participate in college and community activities. Take advantage of work-study programs. An on-campus job in your field of study is a big bonus.

Have a great time in college!

China's Economic Threat to the US

China's economic muscle is growing by the day and it is also flexing it. And you won't believe it, it's the US that is being threatened. An article has appeared in a Chinese newspaper in which a Chinese economist has issued a warning that if the US tries to force China into making the yuan rise faster against the US Dollar the Chinese Government might retaliate by liquidating its holdings of US treasuries.

Although it is nowhere like a threat to nuke Washington D.C. the results, some experts say could be as bad for the financial markets. China holds about 1.3 trillion dollars worth of foreign currency reserves and about a third of them are invested in U.S. treasuries, second in size only to Japan. Its trade surplus with the U.S. for the month of July 2007 was about 23 billion dollars. A dumping of U.S. treasuries, some believe would cause a collapse of the U.S. Dollar against the world's major currencies and would push the U.S. economy into recession.

But all economists do not agree with this gloomy scenario. They are quick to point out that China itself has a vested interest in having a stable U.S. dollar because any sharp fall in its value will cause significant losses to the Chinese as well by reducing the value of its holdings. Still others feel that the treasuries market is so huge that such Chinese action would hardly make a difference.

In all probability the Chinese Government is simply outlining it bargaining position. Whatever maybe the final result, it is now absolutely clear that China is in a position to retaliate against the U.S. economically as well.

The Spreading Fear of Finance

Fear of finance is on the march. Distrust of people with high salaries who work behind computer screens doing something that doesn't look like productive work is everywhere. Paper shufflers are doing better than producers; speculators are doing better than managers; traders are doing better than entrepreneurs; arbitrageurs are doing better than accumulators; the clever are doing better than the solid; and behind all of it, the financial market is more powerful than the state.

Common opinion suggests that this state of affairs is unjust. As US president Franklin D. Roosevelt put it, we must cast down the "money changers" from their "high seats in the temple of our civilization."

We must "restore the ancient truths" that growing, making, managing and inventing things should have higher status, more honor and greater rewards than whatever it is that financiers do.

Of course, there is a lot to fear in modern global finance.

Its scale is staggering. This year alone mergers and acquisitions will amount to $4 trillion, with tradable and -- theoretically -- liquid financial assets perhaps reaching $160 trillion by the end of this year, all in a world where annual global GDP is perhaps $50 trillion.

The McKinsey Global Institute recently estimated that world financial assets today are more than three times world GDP..., up from only two-thirds of world GDP after World War II. ...

But important things are created in our modern global financial system, both positive and negative. Consider the $4 trillion of mergers and acquisitions this year, as companies acquire and spin off branches and divisions in the hope of gaining synergies or market power or better management.

Owners who sell these assets will gain roughly $800 billion relative to the pre-merger value of their assets. The shareholders of the companies that buy will lose roughly $300 billion in market value, as markets interpret the acquisition as a signal that managers are exuberant and uncontrolled empire-builders rather than flinty-eyed trustees maximizing payouts to investors. ...

Where does the net gain of roughly $500 billion in global market value come from? We don't know. Some of it is a destructive transfer from consumers to shareholders as corporations gain more monopoly power, some of it is an improvement in efficiency from better management and more appropriately scaled operations, and some of it is overpayment by those who become irrationally exuberant when companies get their names in the news.

If each of these factors accounts for one-third of the net gain, several conclusions follow. First, once we look outside transfers within the financial sector, the total global effects of this chunk of finance is a gain of perhaps $340 billion in increased real shareholder value from higher expected future profits. A loss of $170 billion can be attributed to future real wages, for households will find themselves paying higher margins to companies with more market power. The net gain is thus $170 billion of added social value this year, which is 0.3 percent of world GDP, equal to the average product of seven million workers.

In one sense, we should be grateful for our hard-working merger and acquisition technicians, well-paid as they are: it is important that businesses with lousy managements or that operate inefficiently be under pressure from those who may do better, and can raise the money to attempt to do so. We cannot rely on shareholder democracy as our only system of corporate control.

The second conclusion is that the gross gains -- fees, trading profits, and capital gains to the winners totaling perhaps $800 billion from this year's mergers and acquisitions -- greatly exceed the perhaps $170 billion in net gains. Governments have a very important educational, admonitory and regulatory role to play: People should know the risks and probabilities, for they may wind up among losers of the other $630 billion. So far there is little sign that they do.

Finally, finance has long had an interest in stable monopolies and oligopolies with high profit margins, while the public has an interest in competitive markets with low margins. The more skeptical you are of the ability of government-run antitrust policy to offset the monopoly power-increasing effects of mergers and acquisitions, the more you should seek other sources of countervailing power -- which means progressive income taxation -- to offset any upward leap in income inequality.

Eighteenth-century physiocrats believed that only the farmer was productive, and that everyone else was somehow cheating the farmers out of their fair share. Twentieth-century Marxists thought the same thing about factory workers.

Both were wrong. Let us regulate our financial markets so that outsiders who invest are not sheared. But let us not make the mistake of fearing finance too much.