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Facebook vs. India. Round 3 🥊

The social media giant has already lost two rounds. Can it turn things around in the third?

This is edition 292 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

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Good morning,

Once again, Facebook is going to court with the Indian government, but this time, it’s about WhatsApp’s new privacy policy. Does it actually mean anything for investors when a stock falls out of an index? TV’s out, as OTT (Over The Top) platforms are the new black for advertisers. 

Facebook versus the Indian Government, Part 3

The world’s most successful “surveillance-capitalism” company went to court to prevent surveillance by the government of the world’s most populous democracy. Reuters broke the news that Facebook-owned WhatsApp took the unprecedented step of suing the Indian government. For no less than attempting to “fundamentally undermine people’s right to privacy.”

WhatsApp has filed a lawsuit in Delhi against the Indian government seeking to block regulations coming into force on Wednesday that experts say would compel Facebook’s messaging app to break privacy protections, sources said.

The case asks the Delhi High Court to declare that one of the new IT rules is a violation of privacy rights in India’s constitution since it requires social media companies to identify the “first originator of information” when authorities demand it, people familiar with the lawsuit told Reuters.

While Facebook is no stranger to controversies or adversarial positions with regulators and governments, this would be its third major fight with the same Indian government. 

Facebook lost the first two.

Facebook’s first major battle against the Indian government was waged in 2015 over its ambitious proposal to offer a “zero rated” service in partnership with telcos that would make all its products work free of cost. It lost that in early 2016 when Free Basics was banned by TRAI, the telecom regulator. 

This story by Rahul Bhatia in The Guardian offers the most comprehensive account of Facebook’s first loss to the Modi government. It wouldn’t be an exaggeration to say that India’s decision to ban Free Basics effectively killed its chances globally, too. 

Facebook’s second battle was fought in 2019 and lost in 2020. This time, it took on India’s most powerful corporation, Reliance Industries, and its chairman, Mukesh Ambani. The data of Indians was a national resource, said Ambani and the Modi government.

India’s data must be controlled and owned by Indian people - and not by corporates, especially global corporations.

For India to succeed in this data-driven revolution, we will have to migrate the control and ownership of Indian data back to India - in other words, Indian wealth back to every Indian.

Facebook insisted data was more like oxygen than oil. And that India shouldn’t turn protectionist.

“There are three basic planets which will decide the fight for open or closed Internet: America, Europe and India. China has already made that decision. Of those three, we can roughly guess where America or Europe is going to go. But there is a battle over where India is going to go. (emphasis added) Will India go towards data nationalistic direction and borrow elements from China, or, as an open democracy and a great entrepreneur nation, will it embrace the openness of the Internet? These decisions, where you regulate, where you draw the line on content, elections, privacy, data portability — and the rules that need to be put in place — all of those are still to be written… My only plea would be that those decisions are taken with a view to the future, not just the present, and also with an understanding that what India does, many other countries will follow.”

Facebook lost the battle against Ambani ignominiously in April 2020 when it not only announced an investment of US$5.7 billion in Reliance Jio, but also wrote a blog post thanking Ambani for the opportunity. We wrote about it in BFO #18.

This brings us to its third battle with the Indian government, one that Facebook would not have made lightly. Not only is India Facebook’s largest market in terms of number of users, but it also has great hopes to convert WhatsApp’s nearly 400 million users to transacting customers. Here’s an earlier story from The Ken, by Arundhati Ramanathan.

“Conversational commerce will become an interesting space. People feel comfortable using conversations and already transact a certain way with it . Conversation provides rich and contextual information. This is untapped. So we want to invest in this,” said Abhijit Bose, the head of WhatsApp India, in an interview with The Ken.

“We want to focus on becoming a useful channel for financial inclusion and rural services. You will see more pilots around these goals (this year),” Bose added.

How it works is quite simple. Businesses start off by telling users about their products. Once they’ve drummed up interest, users place orders. Businesses then track the orders, and users pay through a payment link (eventually, through WhatsApp payments). This completes the commerce loop.

Will it be third time lucky for Facebook?

Update: The story has been updated to reflect that India is the most populous democracy, not country.

Guess who’s back as a stock market index heavyweight…

Bang your steel plates—it’s Tata Steel. 

Barely six months after being dropped from the 30-stock squad of the BSE Sensex, it is pushing its way back in again. Following an almost 2x jump in its stock price after its exit, it will feature once again in the Sensex 30 come June. That must be some kind of a record for exit and entry into the index.

I’ll not get into why Tata Steel was dropped or added back, since to understand that we need to look at the way stock market indices are constructed. 

Instead, let’s look at what Business Standard wrote under the headline “Sensex’s costly exclusion”:

The exclusion proved costly to investors, particularly those investing in Sensex-based exchange traded funds (ETF) and index funds. Tata Steel is up nearly 80 per cent since December 23, when it was removed from the index. “This is akin to shorting the stock around Rs 600 levels and covering your short position at Rs 1,100,” quipped an analyst.

Okay, let me say this as someone who likes index funds (where there is no fund manager who picks stocks and it’s just a simple and low-cost way of buying stocks)—who cares!

I’ll get to the why in a minute. But before that, I popped into the mutual fund analysis portal Value Research to get a sense of which actively managed large cap mutual funds are invested in Tata Steel. I chose large cap mutual funds since the Sensex 30 is a bunch of large companies anyway, and it’s the alternative that investors would choose instead of a Sensex 30 index fund. 

And no surprises, lots of large cap funds don’t have Tata Steel.  So many fund managers missed out on the price rally. One of those funds is the DSP Top 100 Equity Fund (there is no bias here other than convenience. It was easy to obtain its list of investments from the DSP mutual fund website).

Out of the ones that are invested in Tata Steel, I picked the one which seemed to like the stock the most—based on how much of their portfolio was invested in it. That was the L&T India Large Cap Fund, which has nearly 5% of its money in Tata Steel.

How have they all performed in the past six months? 

Sensex 30: 15.5%
DSP Top 100 Equity Fund: 18.6%
L&T India Large Cap Fund: 18.8%

So, there’s hardly any difference between a fund which had the stock and one which didn’t. Even the Sensex, a lowly index without a fund manager at its helm to choose stocks fared well despite missing Tata Steel.

Now back to index funds. 

Index fund investors choose to avoid funds that are actively managed precisely because they can’t be bothered about which stock their fund manager has bought and sold. It’s also to avoid wasting time pondering over their thought process: “Why didn’t DSP’s fund manager pick Tata Steel, or why did L&T? Why did L&T have only 5% of its portfolio in the stock; didn’t the fund manager realise the cycle was turning in favour of steel?”

Favouring index funds is also about realising that maybe the fees charged by active funds aren’t really worth it. Because consistently beating an index is hard (we’ve written about this often–BFO#161 and BFO#261), and fund managers go through performance cycles. 

The argument here could also be stocks that made it into an index such as the Sensex 30 are already past their prime, so the best years of their returns are behind them. But as I said, we’ve seen that fund managers can’t accurately predict future returns anyway. 

When you invest in an index fund, just like an active fund, you get the good, the bad, and the ugly. But at a lower cost. And indices go through changes as Saurabh Mukherjea, founder of Marcellus Investment Managers, wrote

The Sensex churns by over 50% over a 10-year period. That is to say, if we begin a decade with 30 stocks in the Sensex, by the end of the 10-year period, less than 15 of those stocks are in the Sensex. This churn ratio was below 15% in the 1980s, but has steadily risen over the last 20 years.

But for most investors, it doesn’t matter too much when a stock is added or replaced in an index. Because it all evens out over a longer period of time. Even active fund managers churn and get things wrong. 

Also, the regular (mom-and-pop) investor isn’t putting all their money into the index in one shot and forgetting about it. They’re probably investing a little every month, and even that helps to average out the investment value. 

So, Tata Steel’s exclusion wasn’t really a costly mistake that index fund investors had to bear. 

PS 1: The stock which it is knocking out, the Oil and Natural Gas Corporation (ONGC) went up by over 40% during the same period.

PS 2: If you know of other stocks which have made remarkable comebacks into any stock market index, do write in and let me know. 

Where is my doctor?

The ad strikes back!

After streaming platforms like Netflix set the norm for video consumption on the back of ad-free experiences, advertisements are making a comeback in the industry. 

In the US, the latest TV upfront—a gathering held by network executives and attended by major advertisers before important advertising sales periods—saw streaming giants like HBO Max, Discovery, and Disney present plans to launch cheaper, ad-supported plans for their services. 

Pandemic-related lockdowns brought on the streaming binge world-over, and with it, a sea change in both consumer behaviour and advertiser needs.

According to eMarketer, the rising costs of streaming and subscription services have created a growing willingness in consumers to pay for cheaper, ad-supported versions of platforms. People also want to access a variety of content, and such plans allow consumers to afford a wider cross-section of platforms and services. As of January 2021, 34% of US households with video-streaming capability used ad-supported services, up 6% from a year ago.

The demand to advertise on OTT platforms is rising in India too, mirroring the rise of consumer time spent on them. 

Starting June, YouTube India will place more ads, having updated its policy to advertise only via its YouTube partner programme for content creators. It will place ads on any content of its choice, and not share revenue from this with the creators on whose content it is hosted.

Amazon has also launched an ad-supported, free video streaming service called miniTV. Only available to Indian audiences, it will be available within the company’s Android shopping app. Amazon’s global growth via its advertising and sales unit, as of last month, was 77% year-on-year, reaching over US$6.9 billion in the first quarter. 

According to analysts, Amazon’s ad business may flourish as a result of Apple’s latest privacy update, which makes it easier for users to block tracking, and Google’s deprecation of third-party cookies, which makes off-site tracking harder for advertisers. 

For now, Indian advertisers believe there are not enough impressions to deliver a campaign on the AVOD (Advertising Video on Demand) side currently, as the majority of content is still being consumed on SVOD (Subscription Video on Demand). 

But things could change.

Where “no ads” was once the differentiator that propelled streaming and subscription services, the industry has come full-circle for consumers. Instead of watching ads on TV in predictable slots, they can now stream content with ads that pop up at an opportune time, or are part of an overall “brand block” where a brand can “own the entire streaming experience”. Along with personalisation and targeting capabilities that traditional TV doesn’t provide, the innovation in advertising and for advertisers continues.

That’s a wrap for today.

Hope you’re taking care of yourself, staying socially distant, masking up, and washing your hands frequently.

Write in with your thoughts and observations on how this pandemic is reshaping businesses, societies, and economies. We will be back tomorrow.

Stay safe,
[email protected]

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