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The trial-by-media System
Media systems are collapsing, Tesla is crashing, and too many cooks are spoiling the Covid19 testing broth.
This is edition 118 of Beyond The First Order, a premium daily newsletter that demystifies the hidden models, incentives and consequences of the most significant events across India and Southeast Asia
Media systems are collapsing, Tesla is crashing, and too many cooks are spoiling the Covid19 testing broth.
A 🔒 paid newsletter that demystifies the hidden models, incentives and consequences of the most significant events across India and Southeast Asia. Someone sent you this? Subscribe to BFO
Good morning,
Feedback loops are everywhere. You only need to look at the connections closer. That’s what we have done in today’s edition. India’s obsession with actor Rhea Chakraborty’s involvement in a variety of allegations, is a sign of various parts of the system collapsing, but what can set that right? Similarly when new rules disrupt stock trading, new, albeit illegal, incentives kick in to restore balance. We have this and more. Buckle up.
Oh! we have also made this edition free to read and easy to share.
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The last few days have seen three young actors in Mumbai and Bengaluru, India’s financial and tech capitals respectively, being thrust into intense media trials. Each night, Indians tune in to news channels to dissect the lives of Rhea Chakraborty, Ragini Dwivedi and Sanjjanaa Galrani in detail, and then the next morning, newspapers take over (albeit with a bit more restraint).
Their crimes? No one is quite sure, and no one seems to really care. Based on ever changing leaks from investigating agencies, they range from casual cannabis use to running “drug syndicates”.
In spite of the fact that neither of the three have been convicted of any crime yet, their lives have been destroyed based on a symbiotic relationship between India’s investigating agencies and its mass media organisations. Virtually every aspect of their private lives—their chat messages, their private photos, their friendships, their family details, their bodies, their mental health—has somehow found its way to the media each day.
To understand the gleeful public destruction of the lives of three young women—regardless of their as yet unproven guilt—requires us to view things from the lens of a Systems Thinking. And of hidden incentives.
India’s bad laws are the starting point. It has too many which are archaic and outdated. The law criminalising cannabis, for instance, came about due to pressure from the US, whose own decision, in turn, had racist origins. Vidhi Legal, an independent legal think tank, put out a well-argued paper a few weeks ago calling for India to decriminalise cannabis use.
India also has too many law enforcement agencies with overlapping jurisdictions, authority and incentives. The officers manning these agencies don’t have the freedom to be independent, because they depend on elected governments at the federal and state level for their career prospects. Many often use bad laws to target the poor and marginalised, as this analysis, again from Vidhi Legal, shows.
When they do decide to go after celebrities or business folk, law enforcement agencies have a symbiotic relationship with the media, to whom they selectively leak case details of investigations under way. Newspapers every day are filled with such leaks.
This vicious feedback cycle completes the media trial, where viewers are hopped up each day with salacious or overblown details about those who aren’t powerful enough.
Lastly, it’s not easy for wronged citizens to get redressal because agencies face no consequences for their actions as lawyer Gautam Bhatia wrote in the Hindustan Times.
"This raises an important issue of justice: If individuals have been deprived of months and years of their life for no justifiable reason at all, restitution of some sort must be provided. While lost time cannot be returned, and harassment cannot be undone, at the very least, compensation can mitigate some of the harm caused.
This is not only a question of justice, but also a question of deterrence: A part of the reason why the State feels comfortable with incarcerating people for long periods without any justification is that it is a costless exercise. At best, months or years later, a court will find these individuals innocent, and order their release. But nothing more will happen, and State authorities will not be held to account for their wrongful action.
Correcting bad laws would require repealing or rewriting many, which needs both political unity and will. India currently has neither. Plus, bad laws strengthen state power over its citizens.
Correcting the behaviour of law enforcement agencies will require the political courage to grant them true independence, which again no political party or government wants to do.
Correcting the behaviour of the media will require a sizable segment of India’s hundreds of millions of TV viewers and newspaper readers to withdraw their monetary support to media companies that they deem unethical. But, much of India’s mass media is free or near-free in price, so that won’t work either.
Correcting reinforcing loops requires us to think of balancing loops that counteract. In the case of media trials, this means breaking the economic incentive for media companies to run unethical or insensitive campaigns. To do this, we must look at their primary source of revenue—brands and advertisers.
The concept of using a blocklist to filter out noise isn’t new. We’ve had email blocklists for decades. And ad blocklists. Parental browsing blocklists.
Alphabet Inc.’s Google has a long keyword blacklist that contains more than 500 words and phrases, including “privacy,” “federal investigation,” “antitrust,” “racism,” “FBI,” “taxes,” “anti-Semitic,” “gun control” and “drought,” according to a copy reviewed by the Journal. The list has made it difficult for at least one news publisher to place Google ads on its site, a person familiar with the matter said.
Blacklisting is cutting into the revenue of some online news publishers, even though they sometimes can replace blocked ads with content from other advertisers.
[…]
Ad-tech firms specializing in brand safety offer advertisers multiple ways to control their ad placements. Advertisers can block entire categories, such as “politics” or “violence,” using classifications brand-safety firms have set up after crawling the web. They can avoid certain keywords that appear in an article or headline. And they can establish a blacklist of sites to avoid or a white-list of sites they deem safe.
'Shooting,' 'Bomb,' 'Trump': Advertisers Blacklist News Stories Online, The Wall Street Journal
The rise of marketing blocklists has accompanied the rise of “brand safety”
To reconcile both the risks of appearing against inappropriate content and rewards of advertising to more people on YouTube, advertisers are becoming more proactive when it comes to managing whitelists and blacklists.
Unilever, for example, ensures that humans, either its own marketers or agency executives, help decide which videos on YouTube are blacklisted. The approach is similar to the one adopted by Mondelez, according to Adexchanger.
“Any marketer that has anything less than a high brand-safety risk tolerance needs to be working with their agencies, publishers and content platforms to actively and consistently manage whitelists, blacklists and everything in between,” said Peter Sedlarcik, Havas Media’s chief data officer.
The latest YouTube brand safety ‘crisis’ shows advertisers are taking a more nuanced approach, Digiday
In India, campaigns to convince brands to cut off advertising support to media organisations that behave unethically have been largely unsuccessful. First, because brands are often wary of cutting off advertising support to an entire publisher based on one campaign. It’s also because their actions then causes the other side to launch their own counter campaign.
Second, because targeting companies individually doesn’t scale.
A well-designed blocklist approach could allow brands to withdraw advertising from only certain topics they deem as unsafe or damaging to their brands. This effectively “demonetises” a topic that brands feel isn’t in keeping with their social responsibilities.
Also, since advertisers would subscribe to blocklists, and not directly target media companies, they cannot be accused of being biased towards any one side.
Of course, this will have pitfalls. Blocklists are unable to distinguish between programming that deals with the same topic in a responsible versus unethical manner. Thus, there will be collateral damage too.
"It’s defunding our journalism at a time when it’s imperative for us to be the front lines doing this kind of work,” said Paul Wallace, Vice Media’s vice president for global revenue products and services. Black Lives Matter coverage was Vice’s most popular news in June, yet commanded ad prices 57% lower than news about other topics because so many brands are actively avoiding placing ads in those articles, he said.
“The most frustrating part of all of this is that the brands that are sending this stuff are standing on a pedestal saying that they support BLM,” he said.
Target, MTV Blocked Ads From News Mentioning ‘George Floyd’ and ‘Protests’, The Wall Street Journal
Remember when Elon Musk, the CEO of Tesla, lit up a joint on Joe Rogan’s podcast? The electric car maker’s share price fell 9% the following day. That fall now pales in comparison to Tesla’s share price drop of 21% on Tuesday.
What did Musk do now?
Nothing. It’s more a case of what S&P Dow Jones Indices, a stock market index provider, didn’t do. Despite Tesla achieving profitability for four consecutive quarters, a metric that places it in contention for inclusion into the US S&P 500 stock market index, the index committee decided that Tesla didn’t deserve entry. At least, not yet.
That news sent investors scampering. After all, for most of Tesla’s investors, the inclusion into the S&P 500 was a fait accompli. The moment a company’s shares enters the S&P 500 index, it leads to significant inflows from passive funds, a category of mutual funds that just buy the entire index.
In anticipation of this, Tesla’s stock price had already zoomed ~1000% in the past year. To investors who hoped that an inclusion in the index would further cause the price to rally, no share price was too big to pay. Until now.
So why did the index committee give Tesla a miss?
Inclusion in the index is not just about a mathematical formula. The decision is at the discretion of the index committee. And the quality of Tesla’s profits might have weighed on its mind.
In the US, car manufacturers receive free regulatory credits from the government to incentivise sales of electric vehicles (EVs) and comply with environmental regulations. Since Tesla manufactures only EVs, it has been building a surplus of these credits over time. And it is monetising the free credits it received by selling it to other car manufacturers. The ones who need it to avoid getting fined by the regulator.
The money these sales generate goes straight to the bottom line or its net profit since the credits came at no cost to Tesla in the first place. Of Tesla’s US$6.04 billion in sales during April-June, 7% of that, or US$428 million, came from sales of regulatory credits. In fact, according to The Wall Street Journal, Tesla made more than US$1 billion from the sale of regulatory credits over the past four quarters.
Without this ‘special sale’, Tesla would not have passed the eligibility criteria for inclusion in the index.
In fact, demand for these credits is unsustainable in the long-term as auto manufacturers start to roll out their own EV models, according to Gordon Johnson, an analyst at GLJ Research.
The index committee seems to have its head in the right place. Investors, however, could do with remembering that Tesla’s streak of profitability could be just a flash in the pan.
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Testing Times
Maitri
When it comes to testing, it is a case of ‘too many cooks spoil the broth’ in India. The centre, state and judiciary, are all weighing in on how one can get tested for COVID19 in the national capital.
On 8 September, the Delhi High Court, in an order, stated:
“Any resident of Delhi who wishes to get tested at his/her own expense through RT-PCR for COVID-19 infection, need not produce a prescription from a doctor.”
But it introduced a complicated catch:
“The person concerned would only be required to fill up the form prescribed by the ICMR (Indian Council of Medical Research) and produce the Aadhaar Card (12-digit unique ID) to establish that he/she is a resident of Delhi.”
The Court’s order is in direct contradiction to ICMR’s guidelines which calls for more access to testing. And while the centre and the judiciary were bickering, on 9 September, the Delhi state government released another order to waive off the need for doctor's prescription for testing. It steered clear of making any reference to the controversial HC decision of producing an address proof for Delhi through Aadhaar.
Source: Delhi Government
So, who does one believe now? The judiciary or the state government? If the private labs follow the court orders, Covid testing could become inaccessible to all those in Delhi who are not its permanent residents and come to the city for work. It will also be tough for those who throng the capital city from neighbouring towns of Uttar Pradesh’s Noida or Ghaziabad in search of a good private lab to expedite their tests. Access to testing is poor except in major cities.
In these testing times, while red tapism rules, it is the patient who ends up suffering.
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When the regulator lights up the black market for trading
Nithin
In September, the Securities and Exchange Board of India (Sebi), the stock market regulator, introduced a few new rules. These rules will make the life of a stock market trader harder.
For every trade, investors must now maintain a deposit (margin) worth 20% of the trade value in their trading account. And for intra-day traders who buy and sell a share within the same day, the profit from the trade won’t be available for subsequent trades that same day.
On the new rules, Nithin Kamath, CEO of Zerodha, a discount broker said to Mint:
"While in the near term, this might be painful, in the long term, fewer leverages (borrowing money to place trades) will be equal to lower risk and will protect the interest of the broking community and the investors as well."
But like with any ban and restriction, the regulator has enabled things to just go underground. Away from the prying eyes of the law and the taxman, into the shadow economy. Where cash is king.
Enter the stock market’s version of the underground economy—dabba trades.
Dabba trading is an informal and illegal stock market activity that circumvents a stock market exchange. There is no formal execution of the trade, and instead, it’s only between the broker and the investor. The investor places a bet on a share, and if the share price rises, the broker pays the investor. If the price falls, the investor pays the loss to the broker. In cash.
There is no actual purchase or sale of a share and no payment to the stock exchange. And since it’s not legal, there is no additional transaction cost. As per various media reports, the underground market - popular in the smaller cities like Ahmedabad and Surat in western India—receives business worth Rs 3,000 crore (US$ 405 million) daily.
With the restrictions placed by Sebi on trading activity rising, so is the investor interest in dabba trading.
“Dabba trading is catching on like wildfire. Terminals are being circulated, mobile apps are being created, and people being hired to meet the demand. Several authorised people may migrate to this platform too.”
It’s not just the illegality that’s a cause of concern, but the impact it can have on the economy.
“(The exchanges, Sebi, the revenue department etc.) were being deprived of thousands of crores of rupees in revenue. In addition, if the brokers/investors made any gains, they would not be paying capital gains tax on their dabba trades, causing a further loss of revenue to the country’s exchequer.”
At a time when the government is battling a revenue shortfall, even the stock market regulator isn’t helping.
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Thailand’s French Guinea pigs
Jon
Closed beta testing isn’t limited to software. Thailand dabbled in the classic startup 101 when it allowed four French tourists to “pilot” a new tourism plan to allow visitors to come to the country.
Thailand is banking that it can attract longer-term tourists who want to spend a month or longer on its shores. Visitors must start with a supervised hotel-based quarantine before they are free to travel onwards in the country. The French quartet sampled the first part of that experience but have since traveled on to Cambodia.
The Thai initiative is slated to start in October on popular tourist island Phuket but it could be delayed following a recent Covid-19 diagnosis in Bangkok—the country’s first local transmission in over 100 days.
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PS: If you caught all our past BFO editions on China’s app ban and how that impacts Indian startups, you should then catch Rohin at the Conference organised by Harvard Business School & Harvard Kennedy School on 12 September at 12pm EST/ 9:30 pm IST. He’ll be discussing Indian policies towards Chinese apps and investments: headwinds or tailwinds for startups with Umang Bedi, co-founder of Daily Hunt and Anand Daniel, partner at Accel Capital. See you there!
That’s a wrap for today.
Don't forget to write in with your thoughts and observations on how this pandemic is reshaping businesses, societies and economies. We will be back tomorrow.
Correction: An earlier version of 'When the regulator lights up the black market for trading' referenced a Moneycontrol article on the value of daily business in the underground stock markets. This has been updated to reflect the value instead from multiple other sources.
Beyond The First Order is a paid daily newsletter that demystifies the hidden models, incentives and consequences of the most significant events across India and Southeast Asia. This newsletter is published by The Ken—a digital, subscription-driven publication focussing on technology, business, science and healthcare
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