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|May 18, 1998||
Wrong, Harshad Mehta!
I am no whiz of the stock market. Harshad Mehta, I am told, is. That's why I am so surprised when he wears his illiteracy on his sleeve.
His latest newspaper column raises an interesting issue which the Big Bull, with his characteristic rhetoric, sweeps under the carpet while rooting for one of India's most popular public companies, Reliance. Analysing the amazing success story of Dhirubhai Ambani, Mehta jumps to the glib conclusion that Reliance deserves better than to be quoted at a retrospective p/e of 11 when "even a two-bit software stock is quoted higher."
I am sure Reliance does. It is a fine company and it is doing spectacularly well. But that is not the issue. The issue is what Mehta describes so disparagingly as "two-bit software stock". He argues that Reliance must do better than them because it has huge factories (backwardly integrated) with huge capacities turning out products in huge volumes. This, and the single-minded focus of Dhirubhai, who won the Wharton Dean's Medal this week, has created what Mehta describes as "the biggest bet on this country's growth."
I respect Dhirubhai and I agree with Mehta that Reliance is a great success story but I simply cannot see the link between plants and profits. Nowhere in the world do analysts give such importance to factories as we, in India, do. So do our bankers, investors, funding institutions, carrying on an old, asinine tradition of valuing machines and real estate as the main drivers of enterprise. That is why we talk so much about factories, highways and dams. Why we go on and on and on about infrastructure. Why we put so much money and effort into building more power plants, steel factories, refineries, auto assembly lines. Even though these are not exactly models of remarkable profit.
The models of remarkable profit are exactly the opposite. Wherever in the world you look. These are areas of enterprise where people use their brains, their skills, their talent, their genius to add value to what looks like astonishingly simple things. Call it value addition. Or brand equity. Call it smart thinking if you want. The profit does not lie in a plant or an assembly line. It lies in the ability to create and innovate. Like sildenaphil citrate (better known as Viagra) which came from nowhere to grab a 5 billion dollar market in less than six months.
Ingenuity is the issue. Not machines. Nor plots of land.
Look at The Titanic. It started as a 100 million dollar project. During its making, it over-ran its budget and touched an investment of 400 million dollars. The investors screamed their lungs out. Director James Cameron, seeing their outrage, returned his fees and proposed instead to take a small percentage of the gross earnings from the film. So, instead of taking a 3 million dollar fee, he will now (as a percentage earner) walked away with a cheque of 120 million dollars.
The movie has broken all records to gross over a billion dollars in less than a year and its earnings from its collaterals alone, through branding, product associations, spin-offs, is estimated to cross another 500 million. This is the power of the human mind. Of creativity. Of what we call software. This is what could earn Cameron over Rs 20 billion in one lifetime from one film alone.
No cineplex can make such profits. No manufacturer of cine equipment can match this. No studio, no laboratory, no edit suite. Only a content maker can. That, too, once in a while because that is the nature of the business. It is a business of hits and misses. Hits make huge profits. Misses lose money. And the key to both is creativity. The minds and efforts of talented, artistic people.
For every successful brand that Levers launches, there are hundreds of failures. But each success makes so much money and grabs so much mindshare that we forget the failures without a second thought. That is true for movies, TV shows, theme restaurants. That is why the most powerful profit opportunities of the future lie not in oil refineries nor in steel factories nor in cement plants. They lie in media and entertainment and information technology. In movies, TV channels, music, magazines, art, theatre, fashion, newspapers, restauranting, advertising and brand building. Content, in other words. Software.
Factories, gold, silver, flats, offices, diamonds, plants and machines are anachronisms in our age and time. But, because of vested interests, they have perpetuated their stranglehold over our economy. That is why we remain a nation of shopkeepers and traders, where the bania still rules over his decrepit, decaying empire while creativity is taboo and genius seen as too risky to fund.
That is why our bankers are always ready to fund TV studios and TV equipment but not TV shows. Yet, if you see the bottomline, content providers are doing infinitely better than studio owners and equipment renters ever can. Which is why many of them are now entering production. They (too) have finally realised that mindless machines can never give you the kind of returns software can.
Software can rediscover, redesign, refashion, re-energise itself. Whereas machines are a dead asset. BPL Oye has changed producers many times and remains young, alert, interesting. Romeo and Juliet became Scarlett O'Hara and Rhett Butler in the fifties. They returned as Romanoff and Juliet during the Cold War years. In the late nineties, they are again busting all-time records, as Jack Dawson and Rose Whatshername.
Roberta Flack's hits have been recycled by the Fugees for an entirely new generation of listeners. Puff Daddy rediscovered the Police just as U2 brought back the Righteous Brothers. Bally Sagoo remixed RD. Elton John relaunched Candle in the Wind, his dirge for Marilyn Monroe, when Diana, Princess of Wales, died. And they all made money. And how? By keeping alive good music in changing circumstances by changing creative formats.
Bill Gates makes his billions from software. Dell and Compaq can never match him because making tin boxes is not the same as creating ideas and formats. That's why Oprah will always make more money than Akai. Why Paul Bocuse is a legend. Not the restaurants that sell his nouvelle cuisine.
That's why Aditya Chopra is worth a hundred new factories but try selling that to our bankers. They would rather finance a filthy cement plant in a chikara sanctuary, that will never get past any respectable environmental norm, than fund the maker of Dilwale Dulhaniya Le Jayenge. They are blind to the profit potential. What they want is only security. Land; factory; machines. In the true tradition of the Industrial Revolution, 300 years outdated.
They do not realise that the world has changed. Profit no longer comes from dumb operations. It comes from ideas and talent. One Bill Gates is worth a hundred power plants. One Versace or one Armani is worth all our builders and contractors who have ruined our cities and tried to make real estate prices a benchmark of our economic health. One Michael Jackson, one Steven Spielberg can make more money than all the rubbish our factories produce. In a global economy we will soon realise that it is often cheaper (and healthier) to import than produce.
Instead, we can focus on talent. We can repeat Silicon Valley here. We can create Hollywood. We can give America's new millionaires a run for their money, if we encourage our young college students to set up their own ideas shops in small garages, exactly as the first Internet millionaires did. When they launched Yahoo and Hotmail. Our fashion industry is young but it is ready to take on Milan and Paris.
The problem is not opportunity. Or the lack of talent. It is the attitude of our rulers. It is an outdated view of our economy. It is a generation in power that has been brought up on old fashioned notions of productivity and profit and cannot see where the future lies.
Sushma Swaraj has dared to break the jinx by promising funds to showbiz. This could be a brave new beginning if others follow her example and try to empower the creative talent of India.
Which brings me back to Harshad Mehta. The whiz of the stock market has failed to realise that the world has moved on. You can never return to old verities, old values, old virtues. We must cope with new ideas, new stratagems. We have made a brave beginning with these "two-bit software stocks." It is time we pursued them more relentlessly and created enterprises that used our talent more effectively. Because that is where the future is.
Not with Lakshmi. But with Saraswati.
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