Based on his past work experience it seemed like it was a slam dunk that JC Penney was going to crush all the other department store chains like Sears, Dillard’s and Kohl’s. However, after a brief 17 month stint Ron Johnson was fired this past week from JC Penney and the board reinstated Mike Ullman as it’s CEO. It ended so quickly before it even got started, but revenues fell over 20% and institutional investors headed for the exit – the stock is down over 50% since Ron was made CEO. So what really happened?

Simple, the board felt that one guy could rejuvenate the company’s fortunes because it worked before for Ron. The board failed to realize it’s about the overall team and also the right market sentiment sometimes called timing or luck which most people tend to negate. Remember Jon Corzine? Goldman Sachs CEO whiz turned Senator, who became the CEO of MF Global and within a short period bankrupted the company. His strategy was to implement the same trading style he employed at Goldman Sachs, the difference is that Goldman Sachs had a risk management team in place whereas MF Global only had a single dude with an Excel sheet to manage the risk.

Ron was probably a rock star at Apple because of Steve Jobs’s unrelenting focus on products and simplicity. Even Jobs was not a one man show, he needed a designer like Jony Ive on his team to help dream up the amazing products that Apple would sell through their retail stores. When I moved to India in 2005, I was part of an algorithmic trading fund that launched a product in 2006 and we collected over Rs. 200 crores (USD 50 million) in a matter of months. I still get pitched by other algo traders wondering how we got so much money in a short period and honestly it was just timing. It was early 2006 and the Indian equity markets were headed for the moon and several private banks had started their retail banking operations. We went through the due diligence process for the banks and got some private investors to invest in the fund. Then one day we get a call from one of the banks and our algo product was approved for distribution to their clients. BOOM, that opened up the flood gates and the money just poured into the fund.

Would it work today? No, the regulatory environment is very different. Back then banks were getting 2% commissions which today is no longer allowed. In addition, retail investors are more risk averse today then they were back in 2006. Just because it worked back then does not mean it will work again.  It’s similar to the statement all mutual fund companies makes in their marketing – “past performance is not a indicator of future performance”…so, so true.

In emerging markets like India, the use of a credit cards never really took off because of various reasons – no credit rating system, slow legal process to go after defaulters and a large percentage of people that are not “economically viable” for credit card companies. However, it’s becoming clear that as more people open bank accounts they will want to transact and most will opt for their smart phone and not a credit card to make payments..sorry Visa and MasterCard.

Before we continue let’s run through the various payment systems available in India today:

1. Real Time Gross Settlement (RTGS) is run by the Reserve Bank of India (RBI). It deals in high value and high volume, most widely used in India.

2. National Electronic Funds Transfer (NEFT) is also run by the RBI. NEFT is more retail in nature and includes large volume but not in value. It’s a batch system and thus not real-time.

3. Immediate Payment Service (IMPS) was created by the National Payments Corporation of India (NPCI). It’s a mobile phone payment service.

4. RuPay was created by NPCI and is similar to other cards networks like Visa and MasterCard. It’s India’s own cost effective credit/debit card network.

5. Aadhaar Enabled Payment System (AEPS) was developed by NPCI in association with the UIDAI, who is in charge of the Aadhaar national identity program. It will allow for payments between Aadhaar members.

There is a lot of activity in the payment space and it’s clear by looking at the above list. Personally, I think IMPS will end up dying since setting it up is a major pain in the ass and thus most retail customers will opt for NEFT. For India to implement RuPay would be a huge win and it would bring down the transaction costs for credit cards which are currently around 3%. However, I can see Visa and MasterCard doing everything in their power to make sure RuPay never becomes commercially viable. China has their own credit card called UnionPay and it is the largest credit card issuer in the world. China has the will and ability to implement large scale projects and I believe that is where India may stumble and give in to Visa and MasterCard.

But most interesting is AEPS, as more of the population gets an Aadhaar number (India’s equivalent of a social security number) it will allow 100′s of millions of people to make payments. Remember many of these people getting an Aadhaar card never had a bank account and now are becoming part of the banking system. Teamed up with a smart phone they can now transact via their phone whereas before all their payments were made in person. The perfect storm of – low cost payment systems, national identity card and smart phones will create a whole new market for many startups and allow commerce to flow easier in India.

Like any other business, Tirupati offers various services depending on how much money you shell out, in this case a donation to the temple. And, like any other place of worship they also provide free prayer offerings. Tirupati also offers differentiated classes of service, like the airline industry does with its first, business and economy class segments.

The differentiated classes of VIP service is what probably brings in the bulk of the money. Like a freemium business 80-90% of the people visit the temple for free and the rest of the VIP attendees pay to keep the lights on and allow Tirupati to continue with its charity work. With each passing year that I have visited Tirupati I’ve noticed the lines getting longer and longer for the general admission prayer line and I get the sense it was designed that way.

Its better to have more and more people visit the temple because it increases the likelihood that a small percentage of the attendees will pay for VIP access to the temple in order to skip the long lines. Essentially the attendee has converted from the free product to the paid product. The product is the same but getting access to it has been made easier. The reality is that religions for 1000′s of years have had a freemium business model in place, its just in the last 100 years we have started applying it to other products and services.

For the medical system to be so antiquated in this day and age is a shame. Everyone is so busy we don’t have time to keep on repeating the same thing over and over. Writing down my name is actually the least of my concerns, what is more alarming is that certain things slip through the cracks.  If a persons entire medical file was put online, the doctor and/or hospital could constantly monitor what is happening and throw up any red flags if a certain medicine was given for a prolonged period of time. Or a new doctor could instantly have access to the entire patient history file online and quickly get up to speed about the patient.

Over the past 4 months, I’ve been on Storvas (a cholesterol reducing generic of Lipitor) and have had to get my liver functions tested every month as the doctor adjusts my dosage of Storvas (20mg, 10mg, 5mg…). It’s the same racket every time – I fill out a form at the hospital, they take my blood, after a day or two I pickup the results and then go see my doctor.  Could this process be automated? Of course. In an ideal world I would have given my ID, they take my blood and my results would have come via email as a PDF attachment. Then I could have forwarded the results to my doctor. (Of course, my doctor is 85 years old and I can’t see him screwing around with the latest version of Adobe Reader to view my blood results.)

Another example is when I get my car serviced by the same company that sold me the car. They already have all my information in the system but yet they will always ask me to fill out a form. And yes, the form has the basic information such as car, plate number, address, etc… Luckily, they do keep track of the work done to my car. I asked if I could get access to that historical information and of course it’s a closed system…not surprised.

Writing things down for your personal benefit is fine, the problem is when you are in a commercial setting is where things break down. In India, the writing things down system (WTDS) is super cheap and thus if someone has to write down the same thing 10 times it’s okay. It takes real money to modernize a system and I’m assuming as businesses get more competitive in India, they will have look at technology to up their game.

I thought after the tragic events of 26/11 in Bombay that security would get beefed up around the city. Instead “security theater” started to appear at hotels and malls, which is the illusion of security but is just smoke and mirrors. We would drive into the Phoenix Mills mall complex and the routine would begin, they check your glovebox and your trunk. For a period of 3 months, I had an empty suitcase in my trunk and not once did they question me. During busy periods the outsourced security guards sort of give up and just let people through.

The reason for the theatrics is to give you the illusion that things are safe but when the shit hits the fan that’s when you see the true colors.  For example on 26/11, most of the police force abandoned their posts and ran home. I don’t blame them, when you confront someone who has a semi-automatic machine gun and you have a police issued wooden stick, what would you do? If the Indian government was really serious about security it should own the responsibility just like it does for airports and providing protection for government officials.

Over the past few days, I’ve see this “security theater” playing out again but this time involving the internet. The government is trying to curb all the rumors that are being spread about what is happening in Assam and I can understand their reasoning for stopping it. What is more difficult to understand is their method for going about it.

Currently, if they find questionable content they will goto Facebook or Google and ask them to take it down. If those companies don’t take down the content then the Indian government adds that website link to their blacklist of sites to block. All of this takes time and honestly is pretty useless because people can create hundreds of links a minute and their is no way to regulate it via this manual process that the Indian government loves so much.

Twitter seems to be the current flashpoint in part because it has no business operations on the ground in India and doesn’t have to listen to the Indian government. Facebook and Google are in a tough spot since they don’t want to be known for censoring content but then again they don’t want to jeopardize their large workforce in India. Thus the Indian government is looking at various options in dealing with Twitter, if they block the entire service in India they will look stupid in the eyes of the world. But the cat and mouse game of blocking certain accounts is also a waste of time.

If the Indian government was serious about this issue they would look at creating a firewall for screening content and blocking content on the fly. But, it will never get implemented since it will cost real money and I don’t think the Indian government is that serious about this issue, again it’s about “security theater.”

I think it’s easy to lose sight of what Sachin and Binay Bansal have created in such a short period of time. Indiaplaza.com has been around since 1996 and has not reached the scale of what Flipkart has done in 5 years. Flipkart has created many new online shoppers that would have never dreamed of buying anything online in India. The Bansal’s are true entrepreneurs who essentially re-shaped a market out of thin air with nothing more than a website, books and desire.

I first used Flipkart in January 2011 when I was trying to buy a friends book (The SaaS Edge) which was not available at Crosswords at the time. Since then I’ve used them for countless purchases and delighted with their rock bottom prices and their under promising (estimated delivery in 4-5 days) and over delivering (actual delivery in 1 day). How could you not love that? Having used Amazon.com in the US for over 10 years, I was skeptical of online shopping in India because of online credit card fraud or e-tailers not processing a refund. Flipkart single handedly turned me from a skeptical shopper into an online shopper.

However, since the Forbes India story was published my usage at Flipkart is zero. The simple reason is price, they are no longer the low-cost option when buying books. Recently, when I was about to order some books I checked HomeShop18 and Indiatimes Shopping and found them lower. Even though Flipkart has spoiled me with their delivery excellence I really don’t mind if my books come 4-5 days later…they are books not perishable items. And that’s the issue when you compete on price, someone else can come in and drop their prices and take the hit on the balance sheet if they have bigger pockets. Flipkart spends a lot of money on print and TV advertising which is something that HomeShop18 and Indiatimes Shopping can get at reduced rates since they are part of larger media conglomerates. HomeShop18 is part of the Network18 group which recently sold a stake to Mukesh Ambani’s Reliance Industries. Indiatimes Shopping is part of the Bennett, Coleman and Co. a media powerhouse which owns many media outlets including the Times of India newspapers.

Can Flipkart survive? In truth no one knows, all this talk is pure speculation. The question is – Is my personal Flipkart experience just my experience or part of a bigger trend where online shoppers will always default to the lowest price option in India? With price aggregation services like Junglee.com it takes a couple extra steps to find the lowest price. I’m guessing for many shoppers like it me it will ALWAYS come down to price, it’s part of our DNA – Do Negotiate Always.

Recently I was invited to the TiE Mumbai office to talk about pricing strategies for internet companies. The truth is whether you run an internet company, or a product manager at Proctor & Gamble or an automotive giant like Mercedes, pricing is one of the most unscientific parts of the business.

A handbag at Walmart can be bought for USD 25 or you can blow over USD 150,000 on a custom made Birkin bag. Emotions, brand awareness, limited availability and a host of others factors drive these decisions when buying a handbag.

Internet companies face some of the above challenges and have their own digital issues such as the ability to move to a new product overnight (ex. switching from Yahoo Mail to Gmail). One of the most talked about pricing strategies is the freemium model – giveaway basic features for free then monetize the business via advanced features. Sounds brilliant right? It’s a lot like drug dealers who giveaway free samples to get customers hooked/addicted to the drug and convert them into paying customers.

When people talk about the freemium model two names always come up as executing the strategy perfectly – Dropbox and Evernote. Dropbox gives away 2GB of cloud storage for free and then as users consume more space they will ponying up real money to Dropbox and turn them into paid customers. Evernote is a note taking cloud solution, where you enter your notes on an iPhone and they magically appear on your iPad or other devices and computers connected to the same account. However, if you want some of the advanced goodness of Evernote you have to pay to play. Both are recipients of the freemium award called “Yeah, we know how to scale a freemium business.”

A couple days back I was listening to a podcast of Drew Houston, the co-founder of Dropbox, talking about his journey on how he started the company (I highly recommend listening to the podcast). The best part of the podcast was the Q&A session and one of the first questions was “how do you get people to pay” and it was asked by an Indian, god damn I love cheap ass Indians (disclosure – I’m as cheap as they come). Drew starts to talk about the value proposition where Dropbox allows you to aggregate all your data in a simple and easy to use interface. I’m pretty sure as Drew was talking that Indian kid was probably zoning out when he heard words like easy, aggregation, simple, etc…

The truth is what works in the US/Europe does not mean it will work in India. The freemium model is a perfect example of a model that just does not scale in India. Some of the buzzwords that companies use to entice users to their paid product include – easy UI, simplicity, saves time, efficiency, etc… Those “features” usually fall on deaf ears when talking to most Indian consumers and companies, they just can’t look past the price. The mentality is they will have “their guy” figure it out how to use the free version even if the end solution is complicated and convuluted. They don’t mind concurrently using 4 different cloud storage solutions like Dropbox (2GB free), SugarSync (5GB free), Google Drive (5GB free) and Microsoft SkyDrive (7GB free) as long as the overall price tag never exceeds zero.

I would really like to hear Phil Libin of Evernote or Drew Houston of Dropbox to chime in and prove my thesis wrong and reveal the conversion numbers from free to paid for India. Are the conversion rates the same for the US and Europe? However, having seen users jump through hoops to avoiding paying for software, I’m pretty sure my thesis holds true.

India has a large population (1.2 billion) which is great if you have a product to sell. On the downside, India has a large population. It’s a problem because how do you segment and target a specific audience for your product? Rama Bijapurkar literally wrote the book on understanding the Indian consumer. Her book is titled “We are like that only” and drills down into the behavior of the Indian consumer via the socio-economic classification (SEC) system. The SEC system helps you understand WHO your audience is, where they live and how much they earn.

If you are trying to quickly segment the Indian population that’s where the SEC classification system breaks down. One of the easiest ways to segment the Indian population is via a simple phrase – “mass vs. class.” It simply and effectively segregates the country into two buckets. I’ve always hated the term “mass vs. class” because it somehow seemed derogatory but honestly it quickly sums up India with broad strokes.

I really started to understand the power of “mass vs. class” when I was recently on vacation in Europe.  The tour guide was way more interested in India then him explaining the sights and sounds of the city we were touring. The tour guide was interested in learning how the average Indian lives and what their life might be like. That’s when I realized the easiest way to describe India was via the “mass vs. class” phrase.

So who is mass and who is class? If you look at the transportation market it becomes pretty clear. Can you name the number 1 selling vehicle in India? If your brain is going into over drive and trying to run some crazy algorithms over which Indian made car is number one, you have already lost. The number 1 selling vehicle is not a car but a motorcycle.  Last year, 2.5 million cars were sold in India and I would say 80% of those cars were low end cars like the Maruti Alto and Tata Indica. The number of two-wheelers sold during the same period was 11.2 million units. That gives you a grand total of 13.7 million units sold and only about 500,000 units or 3.6% for cars that cost more than 10 lakhs. 96.4% = mass and 3.6% = class.

If you live in Bombay or Delhi you might be thinking I have no idea what I’m talking about because it appears all the cars on the road are Audi’s, Benz’s and BMW’s. But in reality Bombay and Delhi live in their own little world, cut off from the rest of the real world of India. Think about this stat – Audi sold 5,511 cars last year in India whereas in China it sold over 313,000 units and in the US it sold over 117,000 vehicles.

Another example of “mass vs. class” are travel options – planes, trains and automobiles (also the title of a great movie).  If you’ve been to India then you know automobile travel is not the best choice, so that really leaves planes and trains.  Last year, over 61 million people travelled by planes and the good old Indian Railway system setup by the British? Over 30 million people per day. 99.5% = mass and 0.5% = class. For airline travel we are not even talking about 1% we are talking half of that.

After running these numbers I realized the “mass vs. class” phrase is similar to the stance of the Occupy Wall Street Movement whose slogan is “we are the 99%” which means the remaining 1% are the elite or class. The numbers seem to reflect the same in India.

Links to where I got my stats from: Overall market size, Audi, airline and railway.

I wasn’t about to write yet another post about Air India or the airline industry. However, when I read this mornings newspaper about the 15 vacant floors in the Air India building in Nariman Point I was speechless…of course, not so speechless that I couldn’t pen this piece.

Just to frame this, Nariman Point had been the business district of choice in Bombay until a couple years ago when it ceded the throne to Bandra-Kurla Complex (BKC).  BKC has become the destination when you are looking for massive floor plates, however Nariman Point still has the cachet.

So this brings me to Air India. What are they thinking? Air India is consistently asking for money from the government yet they are sitting on 15 floors of prime real estate. They may not be in the real estate business but they could outsource that to someone like Knight Frank or Jones Lang LaSalle. The fact they are not monetizing the Air India building seems like a missed opportunity. Granted it might not move the needle much in terms of cash flow for such a debt ridden organization but it’s a step in the right direction.

One way to fix Air India would be to privatize the airline but that of course needs political will and that just won’t happen. Which is really too bad because in the current scenario the Indian government is throwing good money after bad.

In other news, over the past couple of weeks the industry has gotten more bad news:

- Air India needs more money for a bailout
- Fraport which owns part of the Delhi airport wants to exit India
- Foreign direct investment (FDI) for aviation is still up in the air (no pun intended)
- Kingfisher is still bleeding

Everyone is eagerly waiting for the foreign direct investments (FDI) norms for the aviation sector. Even if the rules come out tomorrow, I doubt any foreign investor is actively looking at the sector. They might have been looking at the space in 2007, but today it’s a much different picture. I love this quote from the CEO of Fraport India which sums up the current atmosphere in the sector:

this government doesn’t have any spine or drive. So I personally doubt that anything will happen in the lifetime of UPA-2

I love the candor of foreigners when they don’t have to suck up to politicians. I’m pretty sure with that quote, Fraport won’t be doing any more new business in India.

In between is that fine line that needs to be in place for markets to be efficient, transparent and trustworthy. In an emerging market like India, the regulators should be first and foremost focused on protecting the consumer. Secondly, in order to attract first time consumers the regulators should be promoting a culture of openness, simplicity and easy to understand language for financial products.

However, over the past 3 months the Indian regulators seem to be going in reverse and making it more difficult for first time consumers to make decisions. They appear to be adding more financial jargon to the process and potentially scaring off first time consumers. For most consumers in India, there are 3 government regulators that have oversight over the bulk of their money:

- IRDA (Insurance Regulatory and Development Authority) – insurance sector
- RBI (Reserve Bank of India) – banking industry
- SEBI (Securities and Exchange Board of India) – oversight of the equity/debt markets

About 3 months back the IRDA essentially shot itself in the foot when it announced new guidelines for websites that aggregate insurance information. Overnight the guidelines killed the business models for insurance aggregators. Personally, if I’m shopping online for insurance I want to be able to compare the various products and understand the pros/cons of the various offerings. However, with the latest IRDA ruling it has banned these websites from providing “opinions” on products or ratings. For first time consumers a rating is such a quick way to decide which product is better. Instead you force the consumer to read through jargon filled insurance material and in the end they will probably not buy anything because its difficult to decipher.

Likewise, SEBI recently introduced new guidelines for the type of information that mutual fund companies can provide in their marketing materials across all mediums – print, TV and web. Specifically, mutual funds companies can no longer provide a rating from someone such as Morningstar, Value Research or S&P. In addition, rankings or testimonials are also off limits. Once again this is moving in the wrong direction, a star rating is easy for someone to understand like a hotel rating – 1 star vs 5 star. Of course, consumers could just goto the websites of Value Research or Morningstar and get the star ratings and rankings themselves.  But, that assumes a first time consumer would know about Value Research or Morningstar which I doubt.

The flip side is that these rankings and ratings were leading some consumers to skip researching these new products altogether. My feeling is if consumers are that stupid to part with their money that easily, then no amount of change in regulations will curb that kind of behavior.