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What’s your password?🔑

Netflix doesn’t think you should be asking that question anymore.

This is edition 246 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

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,

It’s Friday.

Everyone wants to ‘Netflix and chill’
And shared passwords are a thrill.
But now Netflix isn’t pleased,
Because its bottom line is getting squeezed.

That’s just my shoddy attempt at a rhyme. I’ll let Anand do the heavy lifting when it comes to rhyming about the central government’s ‘religious dilemma’ around its fuel taxes.

We’re looking at the reemergence of the virus with a vengeance in India. Also, what’s the alternative for investors when central banks indirectly push money into the stock markets?

Netflix is losing its chill

What helped get Netflix popular was, inarguably, password sharing. But the company is looking to clamp down on the very thing that brought it more users. 

The Wall Street Journal reported that users have begun getting messages that prompt them to verify their identity through a text message. 

Netflix recognises that password sharing is in the very nature of online streaming and has even accepted that reality. It even has separate pricing for two to four concurrent users. But that is no longer enough. Competition is closing in on Netflix, which has 200 million subscribers worldwide. Disney+, in just over a year, has already surpassed 100 million subscribers. It is estimated to pip Netflix by 2025.

So, Netflix needs to convert everyone using shared passwords to subscribers. 

Password sharing costs companies a lot of money. U.S. streaming platforms lost an estimated $2.5 billion in revenue in 2019 because of password sharing, and that amount is expected to increase to $3.5 billion in 2024, according to Parks Associates, a research firm.

Leichtman Research Group reported that 30% of Netflix subscribers share their passwords, while 23% of Disney-controlled Hulu’s subscribers and 20% of Amazon.com Inc.’s Prime users share their account credentials, based on a survey of nearly 2,000 people between June and July 2020.

But if all other streaming services tighten password sharing and if Netflix stays liberal with its policies, the gains could be disproportionate. After all, Microsoft showed that piracy is what helped it reach ubiquity status with its Windows suite of products. And let’s admit it, password sharing is the new piracy. 

Bill Gates told an audience at the University of Washington. “And as long as they’re going to steal it, we want them to steal ours. They’ll get sort of addicted, and then we’ll somehow figure out how to collect sometime in the next decade.”

So one way for Netflix to go is, “As long as they share passwords, we want them to share ours.”

Is your Netflix usage linked to the availability of a free password? Take our poll. 

Do you use a shared Netflix password?
Yes
No

India’s fuel tax ‘dharam-sankat’

If you owned the goose
That lays the golden egg
Will you swap and choose
Even if down many a peg?

The govts count so much
On petro excise, sales tax
Shift to GST or such?
Seems just rhetoric max

What’ll be the right rate?
How will it be shared?
Of a revenue-deficit fate
Powers-that-be be scared

It’s a perfect storm—petrol, diesel prices are now sky-high, even as crucial state polls are nigh. Political parties are promising lower fuel prices if elected to power. Sigh! 

The Finance Minister talks of “dharam sankat’” (religious dilemma) on fuel pricing.

“Ideally, it is a matter which both States and Centre should discuss because it's not just Centre which has duties on petroleum price, States are also charging. When the Centre draws revenue, 41% of it goes to the state. This is a layered issue and therefore I would like both state and central to discuss together," said the Finance Minister.

Also, there is loud thinking about the possibility of moving petrol and diesel to the centralised Goods and Services Tax (GST) regime—away from excise duties and sales taxes. That, it is hoped, will bring down the burden on consumers. Sure, it will. But can governments afford this game-changing shift? Unlikely. Here’s why.

The maximum rate (including cess) under GST is 45%, far lower than the effective rate of 125-160% on diesel and petrol under the current tax regime. Also, the benefit of input tax credit (tax paid on inputs is reduced when tax is paid on output) would make the effective rates under GST even lower. So, it’s a long shot that the Union Finance Ministry and the States will agree to this huge gap in revenue—even if the matter is duly discussed and lip service paid in the GST Council meetings.

Besides a revenue-neutral rate that could protect the exchequer, there are other tricky questions. For instance, what will be the basis of sharing revenue between the Centre and states, and of the revenue compensation shortfall mechanism? It is precisely for these reasons that petrol, diesel, crude oil, natural gas, and aviation turbine fuel were kept outside the GST regime in the first place. 

Petroleum products are big contributors to the governments’ tax receipts. According to the Petroleum Planning and Analysis Cell (PPAC), in 2019-20, the petroleum sector contributed 18% of the Centre’s revenue receipts and 7% of state governments’ revenue. Most of this comes from excise duties and sales tax/VAT. 

The exchequer’s dependence on petroleum-products would have shot up sharply in 2020-21, with the governments leaning more heavily than ever on petro-products to offset the Covid impact on revenues. The Centre raised excise duties on petrol and diesel sharply last year when oil prices crashed; many states, too, raised their taxes. 

The cow is being continuously milked. To put it in perspective, a BloombergQuint article claims “Modi’s oil tax bonanza surged 460% in seven years”.

And such cash cows are seldom given up. 

Re-emergence of a crisis

Covid has returned with a vengeance. And since pictures speak louder than words, we’ll give you five graphs to present growing concerns over the pandemic in India. 

Two weeks is all it has taken for Covid cases in India to surge from close to 17,407 per day to 28,902 cases, a 43% jump. 

According to this heatmap from the Ministry of Health, a surge of 150% was seen in districts coloured in deep orange, and a 100-150% surge in districts coloured ochre yellow. Most of them are confined to 17 states located primarily in the western and northern parts of India. 

VK Paul, a health advisor at the policy think-tank Niti Aayog also stated in the press briefing on 17 March that the spread of the pandemic has shifted to tier-2 and -3 cities.

And while cases are increasing in an unprecedented manner, the number of persons vaccinated each day in certain states still remains low, added Union Health Secretary Rajesh Bhushan. 

Vaccine wastage has emerged as a growing concern. On average, 6.5% of all vaccine vials are being wasted due to non-utilisation caused by improper storage conditions. But this number is higher in some states like Telangana—17.6%, and Andhra Pradesh—11.6%. Smaller states like Himachal Pradesh have lower wastage at 1.4%, but then, the hilly state also has the lowest number of average doses administered in a day. Now 6.5% extrapolated nationally means two million doses of vaccines gone down the drain, according to this report.

A lot about wastage could be related to the disparity in vaccination centres across urban and rural spaces that the central government is now trying to geo-tag.  While urban areas have more vaccination centres, they are far and few in rural areas. Fewer centres in rural areas also mean that people have to travel far to get their vaccine, and thus could skip their chance to get inoculated. Also, leading to considerable wastage. There have also been cases in hilly states like Uttarakhand where a vial containing 10 doses of vaccine was not opened because only one person showed up for vaccination. That person was compelled by local authorities to bring at least nine more people to get their due. 

The ground realities that India is fighting with to vaccinate are complex. Only time will tell whether we can battle the rising second wave with vaccination. 

TINA: There Is No Alternative

Ever since central banks across the world decided that the only way to get out of a recession or financial crisis is to print and pump money into the economy, there has emerged a playbook for the stock markets. 

First, there comes a market scare. About anything.

Large investors sell and pocket some gains. The smaller guys sell too. At a lower price of course. Then, one of the larger guys suddenly appears on TV and says that the market needs to be supported.

A big central bank then obliges—usually the US Federal Reserve, which has the power to even part the seas—and either puts out a calming statement or rushes to print more money that eventually finds its way into the market again.

What this means is that market corrections are becoming even more short-lived. 

Remember the great stock market crash of March 2020, which seems like it was in another era? From then on, it has been one of the fastest turnarounds from doom to boom. The US Fed and other central banks jumped in. They slashed interest rates, which are the borrowing rates. So bond yields dropped. And nothing excites the stock markets more than a low bond yield. 

And that’s the story of how the market reached the astronomical levels of today. 

You could say the central banks didn’t directly have anything to do with the markets, but you know it isn’t entirely true. They are worried about how their policies affect the stock markets (even ex-central bankers).

China will risk “huge economic losses” if it tries to curb asset bubbles through monetary policy tightening, a former central bank official warned, adding to a debate that’s roiled financial markets this year.

But fund managers aren’t really concerned about ‘bubbles’ in the markets. They know that central banks will rush in if there’s a scare. They’re more worried about a rising bond yield, which is a function of inflation. 

Why?

As we’ve written earlier (BFO#241):

Stock prices are a function of future cash flows of a business discounted back to the current day. The discount rate is the yield. Lower the yield, higher the value that can be ascribed to the stock.

For a while, it seemed like the Fed didn’t care about stock market investors when bond yields began inching upwards. But that changed on Wednesday, when Jerome Powell, the Chairman of the Federal Reserve, basically said, “Listen, we like growth, and that’s going to come with a side of inflation. But don’t worry about us raising interest rates, we’re going to keep it low for as long as possible. No surprises, pinky promise.”

That’s the unwritten mandate of central banks now—managing stock market volatility. 

So this eventually boils down to the question, what does the future of investing money look like? After all, the US S&P 500 has just had the best start since the 1930s. 

Ray Dalio, the billionaire hedge fund manager of Bridgewater Associates, published a note on LinkedIn earlier this week outlining his thoughts.

The TL;DR version of it is “bonds are stupid.”

Also, 

I believe cash is and will continue to be trash (i.e., have returns that are significantly negative relative to inflation) so it pays to a) borrow cash rather than to hold it as an asset and b) buy higher-returning, non-debt investment assets.

So, the stock markets are still the place to be in. And about ‘bubbles’, back in February, he wrote:

In brief, the aggregate bubble gauge is around the 77th percentile today for the US stock market overall. In the bubble of 2000 and the bubble of 1929 this aggregate gauge had a 100th percentile read.

A couple of days ago, another billionaire investor, Howard Marks, who runs Oaktree Capital Management wrote in his famous ‘memo’:

In many ways, we’re back to the investment environment we faced in the years immediately prior to 2020: an uncertain world, offering the lowest prospective returns we’ve ever seen, with asset prices that are at least full to high, and with people engaging in pro-risk behavior in search of better returns. This suggests we should return to Oaktree’s pre-Covid-19 mantra: move forward, but with caution. But a year or two ago, we were in an economic recovery that was a decade old – the longest in history. Instead, it now appears we’re at the beginning of an economic up-cycle that’s likely to run for years.

That’s a cautious way of saying that the probability of the stock markets continuing to make money is high.

With central banks still pump-priming the economy, is there any other alternative?

PS: When Dalio wrote “buy higher-returning, non-debt investment assets”, I’m sure Bitcoins and NFTs are top of the mind for many.

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 on Monday.

Stay safe,
Nithin
[email protected]

PS: Some of our best stories from The Ken Southeast Asia have now been removed from behind the paywall, and crafted into narratives that explain how the region is building the future. Here is the first one, about the best of SEA’s homegrown ventures. Read at length, and share widely!

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