Author: SK

Splitting BBMP and gerrymandering ToK

Kannada organisations have argued against splitting of the Bruhat Bengaluru Mahanagara Palike (BBMP), the civic agency that is supposed to govern Bangalore, arguing that a three-way-split of the municipal corporation, as has been proposed, will lead to “non-Kannadiga mayors” for some of the newly created corporations, and hence this is an “anti-Kannada” move. In a funny twist, the Chief Minister himself has had to make a statement that the split won’t lead to “Telugu and Tamil mayors”.

A couple of months back, Thejaswi Udupa had written this tongue-in-cheek post on the geopolitics of Bangalore, for April Fool’s Day on Takshashila’s Logos blog. The Business Standard picked it up and published it as an Op-Ed the next day. The reason the piece matters is that it introduces the larger public to the wonderful phrase ToK. Quoting,

The largest of disputed territories in Bangalore is that of ToK. Tamil occupied Karnataka. These are large swathes of interconnected parcels of land in the South-Eastern quadrant of Bangalore. ToK’s existence is mostly under the radar, and people notice it only when the census figures come in once a decade with its linguistic break-ups, and suddenly people realise that nearly 25% of Bangalore’s population is Tamil. However, there are many who believe that ToK stands for Telugu owned Karnataka, as most of the land here is owned by Telugu landlords.

So basically the concern of the Kannada organisations is that when Bangalore is split ToK (however you may define it) will become an independent city. While some people might consider it a good thing in a “ok those buggers are not in our city any more” sort of way, these organisations will see this as a loss of territory, and consequently as a loss of power. So this is a genuine problem.

While this might be a genuine problem, the fact is that there is a “genuine” solution to this problem. We had seen last month about how Bangalore city is so badly gerrymandered in terms of splitting its assembly constituencies. For example, my constituency (Padmanabhanagar) looks like a dancing hen. To refresh your memory, this is what Bangalore’s assembly constituencies look like:

So if assembly constituencies are so badly gerrymandered, what prevents us from gerrymandering the municipal corporations? And there is further precedence to this – there are primarily three Parliamentary constituencies in Bangalore, and it is not hard to argue that they have been gerrymandered in a similar manner.

It all finally comes down to the mechanics of how we split the city. If the city is cut into three by drawing North-South lines (creating “Bangalore East”, “Bangalore West” and “Bangalore”), we have a problem, since the Bangalore East thus created will largely coincide with ToK, and we might end up with non-Kannadiga mayors there, as the Kannada organisations fear.

However, considering that Bangalore is being split for purely administrative efficiencies, and for no real cultural reasons, there is no reason we need to split the city in that way. All we need to do is to draw the lines in an East-West fashion, as we have done with our Parliamentary constituencies, giving us a “Bangalore North”, “Bangalore Central” and “Bangalore South”. A split like this, well done and well gerrymandered, will ensure that ToK is split evenly into the three new corporations, and all will remain under the control of the Kannadigas.

So the Kannada organisations don’t need to fear the split. Solution exists. Only thing they need to fear is the way the split is implemented. And with precedence (parliamentary gerrymandering) on their side, they really have nothing to fear!

Acknowledgements

Thanks to Varun Shenoy for the discussions leading up to this post

Value addition through comments

My friend Joy Bhattacharjya is a star on Facebook. He has a large number of friends (I haven’t bothered to see how many), most of whom seem to have him on their “good friends” list thanks to which they get each and every one of his updates (I had recently cribbed about Facebook’s algorithm, but when your friends love you, it doesn’t matter). And most of his updates are extremely insightful, some of them funny. If you are his friend, it is not hard to guess why his updates are so popular.

There is only one problem – it is impossible to comment on them. I mean, the comments section is always open, but the problem is that by the time you see an update, so many people would have commented on them that adding one more comment there doesn’t add any value. Writing something there, it seems, is not worth the time, for you assume that given the sea of comments the author won’t have time to read and appreciate your wisecrack. And so you move on.

Recently one friend announced his engagement. Another announced the birth of her child. It was again impossible to add value via comments to either – there had already been so many comments that adding one more wouldn’t add any value! I doubt if these “announcers” even bothered to read through all the comments people had posted. A compression algorithm might have done the trick for them, for most of them were extremely banal and non-value-adding “congrats” posts!

The last time my birthday was listed on Facebook (2010, if I’m not wrong), I got so many scraps on my wall that I had no time to read them, let alone respond to them. I promptly delisted my birthday from Facebook, with the result that nowadays hardly anyone wishes me on my birthday. Not on Facebook, at least, and I’m happy about not having to respond to a mechanical action!

On a similar note, one thing I get very pissed off (on Facebook) is “thread hijacking”. You get a nice discussion going in the comments thread on some post, and then someone else comes in (usually an aunty) and says something so banal that you don’t want to be seen on that thread any more, and the discussion goes for a toss. Oh, and such thread hijacking is more prevalent on Facebook’s other product Whatsapp (:P ), especially on groups where lack of threaded conversation means deep discussions are highly prone to being disrupted by long forwards someone sends!

Recently, Facebook introduced the threaded comments feature, one that I loved so much that I resisted a move away from Livejournal for ages just for that one feature, and when I moved to this blog, one of the first plugins I installed was one that allowed for threaded comments. Facebook has done badly, though. I use it primarily through the iPad app, and the threaded comments suck big time, requiring way too many clicks to navigate. If done so badly, I’d prefer blogspot-type dumb linear comment scheme only!

I sometimes wonder why I’m on Facebook at all. I used to use it at one point in time to look at people’s photos, and what they were up to. But now i find that it’s impossible to subscribe to a person’s photos without subscribing to her political views also, which are generally downright uninformed and sometimes extreme. And thanks to blogger-style comments, you cannot keep uninformed people out of your discussion on Facebook, unlike Twitter – they just keep popping up.

And there is no way for me to explicitly tell Facebook I want to see more or less of someone’s feed (like I could with Pandora, back when I used it). I have to rely on the algorithm.

All in all, Facebook seems like a dumb social network. To use a concept I’d mentioned here a few months back, it’s an “events and people” social network, with Twitter being more conducive to ideas. I sometimes end up asking myself why I’m on Facebook at all. And then I realise that there is no other way for me to access Joy’s updates!

Dominant affiliation groups

I was writing an email to connect two friends, when I realised that when you know someone through more than one affiliation group, one of the affiliation groups becomes “dominant”, and you will identify with them through that group at the cost of others. And sometimes this can lead you to even forgetting that you share other affiliation groups with them.

In social networking theory, affiliation groups refer to entities such as families, communities, schools or workplaces through which people get connected to other people. It is not strictly necessary for two connected people to share an affiliation group, but it is commonly the case to share one or more such groups. Social networking companies such as Facebook and LinkedIn sometimes suggest connections to you based on commonly identified affiliation groups.

So my hypothesis is that when you share multiple affiliation groups with someone, you are likely to have been more strongly connected to them through one than through others. For example, you might have gone to the same school and then worked together, but your interaction in school would have been so little that it almost doesn’t count. Yet, the school  remains as a common affiliation group.

Does it happen to you as well? Do you forget that you share an affiliation group with someone because it is not the “dominant” one, since you share another? And due to that do you miss out on making connections, and thus on opportunities?

I had this hilarious incident two weeks back where I was meeting this guy W with whom I share three affiliation groups – BASE (the local JEE coaching factory), IIT Madras and IIM Bangalore. Due to the extent of overlap and degree of interaction, I know him fundamentally as an “IITM guy”. And there’s this other guy X who I also know through three affiliation groups – BASE (again), IIM Bangalore (again) and a shared hobby (the strongest).

So I was talking to W and was going to bring up the topic of X’s work, and suddenly wondered if W knows X, so I said “do you remember X, he was in your batch at BASE?”. And then a minute later “oh yeah, you guys were classmates at IIMB also!”.

The rather bizarre thing is that I had completely stopped associating both W and X with IIMB, since I have much stronger affiliation groups with them. And then when I had to draw a connection between them, I even more bizarrely picked BASE, where I hadn’t interacted with either of them, rather than IIMB, where I interacted with both of them to a reasonable degree (X much more than W).

I know I didn’t do much damage, but in another context, not realising connections that exist might prove costly. So I find this “interesting”!

Is there anybody else in here who feels the way I do?

Coffee Pricing Dynamics

I had alluded to this coffee price war once before, but I believe it deserves fuller treatment, hence this other post. This is to do with the two coffee shops facing each other at the concurrence of 7th Main, 30th Cross and the “Diagonal Road” in Jayanagar – Maiya’s and Hatti Kaapi.

So Maiya’s opened for business sometime in 2008-09 (this was the period I was out of Bangalore, and it was there by the time I returned). On the ground floor, one the side, they opened a counter where they sold coffee. It was an efficient operation – you line up, buy the token and then move over to a window where you get unsweetened coffee in a ceramic cup, to which you add sugar as per requirement and move on. The coffee was generally excellent and pricing was always premium. In August 2014, when I started patronising it on a regular basis, a cup of coffee cost Rs. 18 and ten minutes of waiting (in line).

A month or two later came Hatti Kaapi, right across the road and facing Maiya’s. Hatti priced their coffee at Rs. 10 per cup, served in a glass tumbler. Sugar was pre-mixed into the milk, though you could ask for your desired level (no sugar, “less sugar” or “normal sugar”), which would be produced as a linear combination of sweetened and unsweetened milk. Hatti Kaapi served snacks also, and presently expanded its line selling cold coffee, juices and the like. Hatti has a larger customer-facing window than Maiya’s so the operations are rather smooth.

While people might have expected Maiya’s to drop their price in view of this newfound competition, they didn’t, though the cost of a cup of coffee for customers came down – from Rs. 18 and 10 minutes of waiting time, it came down to Rs. 18 and 5 minutes of waiting time. While several erstwhile regular customers crossed the road to the cheaper Hatti, based on anecdata (length of queue every time I go for a coffee, which is about once a day), it is unlikely that Maiya’s lost customers. The presence of two quality coffee shops close together possibly expanded the market and all seemed good.

However, it seems like Maiya’s decided that Hatti had got a competitive advantage by way of serving snacks along with their coffee and decided to replicate the strategy (note that Maiya’s has a full service restaurant upstairs, but this is about the “quick-coffee-and-snacks” market). So they started giving combo offers, where you would get a hot fried snack (choice of bajji, bOnDa, samosa and the likes) with coffee for Rs. 25. The snack would be served out of the same tiny window that served coffee, on paper plates with plastic spoons.

I must confess I’ve never purchased the combo (despite the attractive pricing; the snacks don’t look attractive enough to me), but I’m not sure about the impact that it’s been having on Maiya’s overall sales. I go back to anecdata (for I have no other data; and in my defence I have a large number of data points), and it seems like the average queue length at my arrival has remained the same from the time before Maiya’s started serving snacks (and after Hatti opened). However, I find that the total time taken in queue is now significantly higher – closer to the ten minutes from the time before Hatti’s setting up than the five minutes in the intergennum where Hatti was open but Maiya was not serving snacks.

And from my observations there, this is because the snacks have now messed up Maiya’s operations. Earlier, it was simple and linear. It’s a small passage where the Queue goes in a U-shape (unfortunately I haven’t taken pictures, and can’t find any online). At the base of the U is the cash counter and then you move to the side to get your coffee. A nice linear queue.

Now, snacks are served from the same window as the coffee, and since not everyone buys them, the ordering is broken. Also, it is the same token in which people have to get snacks and coffee at the same time, and that disrupts the queue further. Then, there are people who come back for their coffee later having taken the snacks earlier, and thus go straight to the coffee counter without going to the cash counter, messing up people’s expected wait times and leading to further chaos. In other words, thanks to serving snacks, the service time at Maiya’s has gone up, while the utilisation of the barista has gone down.

Hatti, on the other hand, makes full use of its corner location such that snack service doesn’t disrupt coffee service at all.

So the coffee at Maiya’s has effectively become more expensive again (Rs. 18 and 10 minutes), and with declining utilisation, my sense is that they are making significantly less money from their coffee counter now (including snacks) than they were before they started selling snacks. I really hope they will be able to simplify the operations of their coffee and snacks counters, else they risk losing more customers to Hatti. But then it seems like the snacks have become especially popular with Maiya’s regulars, so undoing the snacks service is also not an option.

Finally, here is a piece by the New Indian Express on this price war. As for me, I still prefer Maiya’s – the difference in quality of coffee does it for me. But if they don’t improve their operations soon enough, I might make the switch across the road.

Probability of accidental death

So I’ve received two separate SMSs from my bankers over the last few days. One of them asks me to sign up for the Pradhan Mantri Suraksha Bima Yojana at Rs. 12 per annum for an insurance against accidental worth Rs. 2 lakhs. The other SMS asks me to sign up for a more general life insurance scheme (the Pradhan Mantri Jeevan Jyoti Yojana) by paying a premium of Rs. 330 per annum. Here is a poster that describes the two schemes:

Considering that you can insure yourself against all kinds of death for a premium of Rs. 330 per annum, and you can insure yourself against accidental death alone for a premium of Rs. 12 per annum, what this implies is that the probability of death by accident given death is 12/330 or 3.6%. Which seems rather low considering that it’s mostly the younger population that is covered by these insurance schemes!

That aside, it’s a good move by the government to increase insurance penetration. I don’t know about accidental death, but the rate on the life insurance is pretty good, and there is a reasonable cut for the banks too for distributing this instrument. And going by the principle that you should be insured for about 5-7 years’ of annual income, Rs. 2 lakhs is a decent amount (India’s mean income is USD 1500 (~INR 90,000) per head. But the median income is likely to be much lower ).

Moreover, the implementation of these schemes is rather simple, since the premium directly goes from your bank account and you can sign up with a SMS, and there are no medical tests. Hopefully this scheme will take off and the insurance penetration in India will increase significantly.

As an aside, I wonder what impact this will have on the life insurance industry which thrives in selling plans that are a combination of insurance and investment. Now that this scheme shows off the real cost of insurance (Rs. 330 for a Rs. 2 lakh insurance), customers might become more discerning about these combo plans and see through the margins the insurers are making, and this may not be all that good for the insurers. Though this might be offset by these insurers themselves becoming underwriters to the government plan itself.

Disclosure: I’ve worked as a consultant with a leading Indian life insurance firm.

 

Brewsky needs a webcam

When I moved from Rajajinagar 2nd Stage to Jayanagar 3rd Block around this time last year, one thing I missed in this part of town was a watering hole like Rajajinagar 2nd Stage’s 1522. It’s a brilliant pub. Not too expensive. Great atmosphere and decor. Great food. And after expansion, not too hard to get a table on weekdays.

Jayanagar missed such a place. You either had “shady bars” or places like Eden Park in 36th Cross which is ok (and has great paneer) but nothing spectacular, or downright teenager hangouts like Gandhi Bazaar’s SoHo. There was no “nice, clean, good to hang out” place like 1522 here.

And then Brewsky happened. It’s a microbrewery, though they didn’t get their brewing license for a long time (the Excise department was apparently having an issue in pricing the licenses). There’s a terrace with great views, and an indoor place (where you go iff there is no room on the terrace), and they make their own beer. And the beer is very good.

The only problem with Brewsky is that their beer menu is not consistent. They experiment frequently with new kinds of beers – which is frankly not a problem, but sometimes the choice can be severely limited. Like when I went there last Wednesday, there were only two kinds of beer available. Four days before that, however, there was the full complement of six. There have been other times in the past when I’ve been there only to find my choice of beer not being available.

What Brewsky needs is a Webcam. Basically the webcam was invented (as the story goes) to check if there was enough coffee in the communal coffee pot – for if you emptied the pot you were also responsible for refilling it. And so people could remotely track how much coffee was there in the pot and make their decision to have coffee based on the level.

What Brewsky needs, similarly, is a public board where they announce what they have on brew on that particular day. Their website sucks big time, but if they revamp that, it is a good place to put that information. So if I know that there are only two beers available, I’ll probably not go. If I want to have their India Pale Ale (which is generally very good) but it is not listed, then I’ll plan on going another day. And so forth.

The question that arises, however, is if Brewsky themselves have an incentive to put this information out. If their stocks are generally not on high, then indicating that there isn’t much variety available might push away customers and lead to low revenues on their fixed cost of real estate and waiters for that particular day. And they might just get overwhelmed with people on days when they have their full complement of beers.

But then if customers are consistently disappointed with their lack of choice, then in the long run they’ll lose such customers permanently. And that is not a good thing. Except for the fact that there is no comparable place in the Jayanagar-JP Nagar area.

Agile programming and Parliamentary procedures

Supposedly the latest (ok not that latest – it’s been around for a decade) thing in software engineering is this thing called “Agile programming“. It’s basically about breaking away from the old “waterfall model” (which we had learnt in a software engineering course back in 2003), and to a more iterative model with quick releases, updates, etc.

I’ve never worked as a software engineer, but it seems to me that Agile programming is the way to go – basically get something out and keep iterating till you have a good product rather than thinking endlessly about incorporating all design specifications before writing a single line of code. Requirements change rapidly nowadays, and unless you are “agile” (pun intended) to that, you will not produce good software.

Agile methodologies, however, don’t work in parliamentary procedures, since there is very high transaction cost there. Take, for example, the proposed Goods and Service Tax (GST). The current form of the Goods and Service Tax is an incredibly flawed bill, with taxes for movement of goods across states and certain products being excluded from the ambit altogether. Mihir Sharma at Business Standard has a great takedown of the current bill (there is no one quotable paragraph. Read the whole thing. I’m mostly in agreement).

So it seems to me that the government is passing the GST in its current half-baked form because it wants some version (like a Minimum Viable Product) off the ground, and then it hopes to rectify the shortcomings in a later iteration. In other words, the government is trying some sort of an agile methodology when it comes to passing the GST.

The problem with parliamentary procedures, however, is that transaction costs are great. Once a law has been passed, it is set in stone and the effort required for any single amendment is equal to the effort originally required for passing the law itself, since you have to go through the whole procedure again. In other words, our laws need to be developed using the waterfall model, and hence have full system requirement specifications in place before they are passed.

It’s not surprising since the procedure for passing laws was laid down back at a time when hardly any programming existed, leave alone agile programming. Yet, it begs the question of what can be done to make our laws more agile (pun intended).

PS: I understand that Agile software development has several features and this iterative nature is just one of them. But that is the only one I want to focus on here.

Pricing likes and the facebook algorithm

There is a good friend of mine who is a compulsive “LinkedIn liker”. Anything anyone in his network writes (either a LinkedIn blog or a status update or a job announcement), he is extremely likely to “like” them. While that helps the authors of such updates in getting their messages across to this guy’s networks also, the thing is that such likes add little value. If an update has come on my timeline because this guy has liked it, I’ll take it with salt since I know that this guy’s likes are “cheap”.

I don’t want to single out this guy, but there are several others on my Facebook friend list who are also compulsive likers. They like just about everything that they see, but the Facebook algorithm (by which not all of your updates are shared with all of your friends) means that their incidence is less than that of the LinkedIn liker. Then I have this one follower on Twitter who unfailingly likes each tweet of mine with a link. He engages in conversation very very sporadically, but like he does all the time!

So this got me thinking on the value of people’s likes, and what would happen if likes were to be rationed. I know it’s going to be hard to implement, but if you wee told that you had a quota of 10 likes that you could dole out in a day, how would you then ration your likes? Would such a cap make likes more valuable?

The reason this matters is that the number of likes has now become a metric that social media marketers track, and if some people’s likes are less valuable than others’, it is essentially a useless metric (and I know the problem is with the metric, not with likes). Even otherwise, from an information perspective, knowing the value of each person’s likes is useful for you in making up your mind on something!

So if say facebook decides that you get 10 free likes a day and have to pay for any more, how does that change your liking behaviour? For your 11th like, will you pay or go unlike something you’ve already liked? As a thought experiment, it is fascinating!

And while we are discussing Facebook, I must mention that I absolutely loathe its algorithm. I don’t know how it works, but it seems to me that the better updates that I put there just never get carried to my network, but some random updates that I sometimes put get propagated like crazy. I’ve been trying to reduce the number of updates there so that each update has a greater probability of getting propagated, but it just doesn’t seem to help!

And I was thinking about Facebook’s algorithm, and Twitter’s non-algorithm where every tweet you put gets carried to all your followers. Since Twitter doesn’t filter, all your followers have an opportunity to see all that you say. But the problem there is that since your followers see tweets of everyone on their timelines, your tweet is likely to get lost in the competition for attention.

So basically Twitter is like a free market where you have everyone’s tweets that get shown and compete for a follower’s attention. Facebook is like a more regulated market where there is no clutter, so every update gets undivided attention, but there is a Big Brother which decides who should see what!

I wonder if Facebook has considered making its algorithm public, and if it does, if it will have any impact on how people share. The value it will have for me is that at least I will know whether an update will get carried or not, and time and space my updates properly. But considering that one of Facebook’s revenue sources is to be paid by users to propagate their updates further, revelation of the algorithm will result in lower revenues for Facebook, so they’ll never do that.

I might just get all disgusted with the algorithm and quit Facebook some day.

Axes of diversity

Companies and educational institutions, especially those that have a global footprint and a reputation to protect, make a big deal about diversity policies. It is almost impossible to sit through a recruitment or admissions talk by one such entity without a mention to their diversity policies, which they are proud of.

And they have good reasons to have a diverse workforce. It has been shown, for example, that diversity leads to better decision-making and overall better performance. Having a diverse workforce brings together people with different backgrounds, and since backgrounds influence opinion, a more diverse team is more likely to have more diversity of opinion which results in better decision making. And so forth.

The problem, however, is that it is not easy to simultaneously achieve diversity on all possible axes. Let’s say that we have defined a number of axes, and are looking to recruit an incoming MBA class. If we want diversity on each of these axes, selection of each candidate is going to rule out a large number of other candidates and we will need a really large pool to choose from. In other words, it is akin to the eight queens problem (where you have to place eight queens on a chessboard such that no two of them are on the same row, column or diagonal). For those of you not familiar with chess, think of it like a Sudoku puzzle.

Since the pool of candidates large enough to achieve diversity on all axes is simply not feasible, firms and schools choose to prioritise certain axes over others, and seek to achieve diversity in these chosen axes. And since they can arbitrarily choose axes that they can prioritise, the incentive is to pick out those axes where diversity is most visible.

And so when you go to a global organisation or school that preaches diversity, you will notice that they indeed have a very diverse workforce/student body in terms of gender, race, and nationality, which are fairly visible dimensions. Beyond this, the choice of dimensions to impose diversity on is a matter of discretion. So you have organisations which seek diversity in sexual orientation. Others seek diversity in age profile. Yet others in educational backgrounds. And so forth.

The result of prioritising more “visible” dimensions to ensure diversity is that organisations end up becoming horribly similar in the “sacrificed dimensions”. Check out this excerpt from Peter Thiel’s Zero to One, for example, on the founding members of paypal:

The early PayPal team worked well together because we were all the same kind of nerd. We all loved science fiction: Cryptonomicon was required reading, and we preferred the capitalist Star Wars to the communist Star Trek

Now, remember that this was a fairly diverse team when it came to ethnicity, nationality and sexuality. But in a less visible dimension, the team was not diverse at all. And Thiel mentions it in his book as if it’s a good thing that they all thought so similarly.

On a similar note, I once worked for an organisation that made great shakes of its diversity policy, and the organisation was pretty diverse in terms pretty much every visible axis of diversity. And the seminars (some compulsory) they organised helped me significantly broaden my outlook on issues such as race or sexual orientation. But when it came to work, the (fairly large) team was horribly similar. Quoting from an earlier blogpost (a bit ranty, I admit):

First, a large number of guys building models come from similar backgrounds, so they think similarly. Because so many people think similarly, the rest train themselves to think similarly (or else get nudged out, by whatever means). So you have massive organizations full of massively talented brilliant minds which all think similarly! Who is to ask the uncomfortable questions?

So essentially because you had a large organisation of people from basically similar educational backgrounds (masters and PhDs in similar subjects), their way of thinking became dominant, and others were forced to conform, leading to groupthink, which might have potentially led to mishaps (but didn’t, at least not in my time).

And what of the Ivy League schools that again pride themselves on (visible forms of) diversity? Here is an excerpt from William Deresiewicz’s excellent 2008 essay:

Elite schools pride themselves on their diversity, but that diversity is almost entirely a matter of ethnicity and race. With respect to class, these schools are largely—indeed increasingly—homogeneous. Visit any elite campus in our great nation and you can thrill to the heartwarming spectacle of the children of white businesspeople and professionals studying and playing alongside the children of black, Asian, and Latino businesspeople and professionals. At the same time, because these schools tend to cultivate liberal attitudes, they leave their students in the paradoxical position of wanting to advocate on behalf of the working class while being unable to hold a simple conversation with anyone in it.

So the next time you want to make your organisation diverse, think of which axes you want diversity on. If you are public-minded and want to brag about your diversity, the obvious way to go would be to be diverse on visible axes, but that leaves other issues. On the other hand you could put together a team of people that look the same but think different!

It’s entirely up to you!

 

Pipes, Platforms, the Internet and Zero Rating

My friend Sangeet Paul Chaudary, who runs Platform Thinking Labs, likes to describe the world in terms of “pipes” and “platforms”. One of the themes of his work is that we are moving away from a situation of “dumb pipes”, which simply connect things without intelligence, to that of “smart platforms”. Read the entire Wired piece (liked above) to appreciate it fully.

So I was reading this excellent paper on Two-Sided Markets by Jean-Charles Rochet and Jean Tirole (both associated with the Toulouse School of Economics) earlier today, and I found their definition of two-sided markets (the same as platform business) striking. This is something I’d struggled with in the past (I admit to saying things like “every market is two-sided. There’s a buyer and a seller”), especially given the buzzword status accorded to the phrase, but it is unlikely I’ll struggle again. The paper says:

A necessary condition for a market to be two-sided is that the Coase theorem does not apply to the relation between the two sides of the markets: The gain from trade between the two parties generated by the interaction depends only on the total charge levied by the platform, and so in a Coase (1960) world the price structure is neutral.

This is an absolutely brilliant way to define two-sided markets. The paper elaborates:

Definition 1: Consider a platform charging per-interaction charges a^B and a^S to the buyer and seller sides. The market for interactions between the two sides is one-sided if the volume V of transactions realized on the platform depends only on the aggregate price level

a=a^B +a^S

i.e., is insensitive to reallocations of this total price a between the buyer and the seller. If by contrast V varies with a^B while a is kept constant, the market is said to be two-sided.

So for a market to be two-sided, i.e. for it to be intermediated by an “intelligent platform” rather than a “dumb pipe”, the volume of transactions should depend not only on the sum of prices paid by the buyer and seller, but on each price independently.

The “traditional” neutral internet, by this definition, is a platform. The amount of content I consume on Youtube, for example, is a function of my internet plan – the agreement between my internet service provider and me on how much I get charged as a function of what I consume. It doesn’t depend on the total cost of transmitting that content from Youtube to me. In other words, I don’t care what Youtube pays its internet service provider for the content it streams. Transaction costs (large number of small transactions) also mean that it is not practically possible for Youtube to subsidise my use of their service in this model.

Note that if buyers and sellers on a platform can make deals “on the side”, it ceases to be a platform, for now only the total price charged to the two matters (side deals can take care of any “adjustments”). The reason this can’t take place for a Youtube like scenario is that you have a large number of small transactions, accounting for which imposes massive transaction costs.

The example that Rochet and Tirole take while explaining this concept in their paper is very interesting (note that the paper was written in 2004):

…As the variable charge for outgoing traffic increases, websites would like to pass this cost increase through to the users who request content downloads…

..an increase in their cost of Internet traffic could induce websites that post content for the convenience of other users or that are cash-strapped, to not produce or else reduce the amount of content posted on the web, as they are unable to pass the cost increase onto the other side.

Note how nicely this argument mirrors what Indian telecom companies are saying on the Zero Rating issue. That a general increase in cost of internet access for consumers can result in small “poor” consumers to not consume on the internet at all, as they are unable to pass on the cost to the other side!

Fascinating stuff!