February 2008 - Anshublog: The Stack Fallacy

I just returned after spending a few weeks in New Delhi, India. The incredible pace of growth in India inspired me to see if I can participate in the growth by investing. India does not allow direct investment in equity markets for non-resident Indian citizens (and definitely not not foreigners). I do invest in US-listed ADR (like Infosys) and exchange traded funds (or ETFs like IFN) but I wanted to invest directly. One option available is real-estate.

The numbers when it comes to real-estate just don’t add up though. Real-estate in India is incredibly expensive and not just by Indian standards (with per capita GDP of US$ 700 per annum). Here are some numbers:

Condos in New Delhi, India: 2-bedroom, 1000 sq ft apartment for $200,000. [$200 per sq ft] (Source: 99acres.com)
Condos in Chicago, USA: 2-bedroom, 1000 sq ft apartment for $400,000 [$400 per sq ft] (Source: Google Housing)

Now, remember that the median income in Chicago is 50 times more than that of New Delhi. Why Chicago? Because New Delhi can grow in all 4 directions much like Vegas can (and Chicago can in 2 directions) as compared to Manhattan and San Francisco that are geographically restricted.

Next, look at agricultural land prices.

Agricultural land in Faridabad, Haryana (adjacent to New Delhi much like New Jersey is to New York): $250,000 per acre (source: 99acres.com)
Agricultural land in New Jersey: $12,000 per acre (source: USDA, and for comparison its $6,000 per acre in California and $8,000 per acre in Florida)

One may argue that Haryana is too close to Delhi. Land in Dehradun is available at only $100,000 per acre while its much cheaper at only $20,000 per acre in villages in Himachal Pradesh. All at prices way higher than Florida or California. Commercial land is even more expensive.

The issue of population density pops up every time I discuss this. Let me be clear, the population density of India is much higher than USA. But, when you compare New Jersey and India – New Jersey is actually slightly more densely populated. And New Jersey is much more densely populated than Haryana, India.

The next issue that comes up is one of regulation and availability. Yes, real-estate is regulated in India with laws that prevent easy buying and selling and land records that are poorly maintained. This simply means that the prices can be artificially inflated in the near term (that could last several years) but in the long-term must return to rational values.

Will someone please explain this to me? How can farmers that make less than $1000 per annum continue to own land that is valued (notionally) at several $100K? Are the low rental yields (2-5%) indicative of the bubble?

Update: Today, Wall Street Journal writes about a trader that made billions betting against the real-estate bubble.

“Most people told us house prices never go down on a national level, and that there had never been a default of an investment-grade-rated mortgage bond,” Mr. Paulson says. “Mortgage experts were too caught up” in the housing boom.

In several interviews, Mr. Paulson made his first comments on how he made his historic coup. Merely holding a different opinion from the blundering herd wasn’t enough to produce huge profits. He also had to think up a technical way to bet against the housing and mortgage markets, given that, as he notes, “you can’t short houses.”

I heard the same arguments repeatedly in India – house prices never go down etc. We shall see!

Update (Oct, 2008): Time reports Mirroring the US, India’s Real Estate Sector Melts Down – here is excerpt:

Over the past few years, increasing demand had pushed up prices, with speculators jumping in to further inflate the market. Eventually, inventory piled up when buyers refused to pay unrealistically high prices. “So many transactions were taking place between speculators and investors that no one bothered to find out what the end user, the family who would eventually live in the house, would be willing and able to pay,” Shukla says.

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Google has a clear lead over Microsoft when it comes to desktop based internet search and advertising. The big pond that Google is going after to expand its market is to aim for a bigger share of the advertising pie that includes print, radio and even television advertising.

Meanwhile, Microsoft is trying to catch up with Google in search and advertising. But that is not where they can out maneuver and beat Google. This may be the reason Microsoft is targeting ubiquitous computing – the new internets that are yet to be dominated.

My Car’s Internet
Americans spend a significant amount of their lives in cars commuting and picking up kids from school. Microsoft, working with Ford, is far ahead in the connected-car game. Think of it as the Microsoft Operating System for Cars.

Source: msmobiles.com

The addition of Yahoo! to the basket of technologies and services Microsoft can offer, especially Yahoo! Go, can help Microsoft further gain leadership here. Yahoo! Maps activated by voice integrated with your car’s GPS. The possibilities are endless.

My TV’s Internet
After the car, we spend a significant portion of our lives vegetating in front of televisions. And even though the amount of time we spend on TV vs computers is declining – it is still significant.
Microsoft IPTV initiative, now re-branded as Microsoft Mediaroom, is a leader in this space. And Microsoft has done a tremendous job of building alliances around this. Taking a page from its Windows play book where the Dell, HP and IBM’s of the world helped it become the leader, Microsoft is tieing up with partners be it global telcos like BT or regional leaders like Reliance in India.

Source: Microsoft Watch

My Game Box’s Internet
So, we all know that after the initial hiccups and skepticism, XBox strategy is finally ready to pay dividends (Microsoft is expected to finally make a profit on XBox this year) – but even without the profits, it is hard to deny that XBox has captured a significant market share. Yahoo! has done well with its casual games and is a leader in the space. It would be interesting to see what synergies can be brought to bear through this alliance.

Source

Searching for Success
So, yes search and advertising is a huge market. And Google could become the first trillion dollar market cap company according to some. By the way, where is Henry Blodget now that the Google stock growth has, how shall we say it, slowed down. I guess Henry Blodget timed it perfectly again – pretty much making the most bullish claim at the height of Google valuation – that should have been a signal to the rest of us (see my and Barron’s post on the Blodget call).

Henry Blodget Timed It Again Perfectly In October
Image Source: Yahoo! Finance

Coming back to search and advertising – even if Google continues to win and maintain marketshare in search and advertising, Microsoft can win big by focusing on the new internets.

Theoretical Framework: Blue Ocean?
Although there may not be any method to this madness (the $45 billion bid), I am drawn to the blue and red ocean analogy put forward in the book, Blue Ocean Strategy. Here is a summary from Wikipedia.

Blue Ocean Strategy

The metaphor of red and blue oceans describes the market universe. Red oceans are all the industries in existence today—the known market space. In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here companies try to outperform their rivals to grab a greater share of product or service demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities or niche, and cutthroat competition turns the red ocean bloody. Hence, the term red oceans.^[3]

Blue oceans, in contrast, denote all the industries not in existence today—the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. Blue ocean is an analogy to describe the wider, deeper potential of market space that is not yet explored. ^[4]

The corner-stone of Blue Ocean Strategy is ‘Value Innovation’. A blue ocean is created when a company achieves value innovation that creates value simultaneously for both the buyer and the company. The innovation (in product, service, or delivery) must raise and create value for the market, while simultaneously reducing or eliminating features or services that are less valued by the current or future market. The authors critique Michael Porter‘s idea that successful business are either low-cost providers or niche-players. Instead, they propose finding value that crosses conventional market segmentation and offering value and lower cost.

Clearly, search and advertising is a red ocean with existing leaders and several startups getting funded by venture capitalists. Microsoft would do much better to use both its existing assets and Yahoo! properties – to go after the new internets.

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India, Real Estate and Some Numbers

The New Internets: Is Microsoft Already Ahead of Google? Who Needs Yahoo!?

Archives for February 2008