Hope our first issue set you thinking about the feasibility of some (rather many) internet-based startups in India today. If not, you may want to have a look at it here. Just because US has Amazon and China has Alibaba, it doesn’t mean India will necessarily have a mighty Flipkart some years down the line.
Reason? The components that are critical to the business environment- consumer behavior, technology, regulatory framework, operations and infrastructure support, and the various bottlenecks that come with it, are drastically different in India as compared to other countries.
Add to it, a low internet penetration of 34.8% and a speed of 2.8 Mbps which is half of the global average, and you can see that the models upon which established giants like Amazon, Priceline, Facebook, eBay and Expedia thrive in the United States may not be effective in India. The German company Rocket Internet’s repeated failures in its Indian ventures are an example.
US is far. Why go far? Let’s look at the voluble Chinese e-commerce ecosystem. In China three major players have assumed the role of holding giants in their respective competencies, Baidu (search), Alibaba (e-tail) and Tencent (communication). With a combined market cap in excess of $400 billion, they form the backbone of the $520 billion market. On the contrary, the Indian ecosystem today is abuzz with numerous players of various shapes and sizes, each trying to go one up on the other.
If we leave out the Amazons and the Ubers, then most of the competition for the present $38 billion online market in India is amongst domestic startups. Presently four players control 90% of the e-commerce market share by GMV (Gross Merchandise Value). Flipkart (45%), Snapdeal (26%), Amazon (12%) and PayTM (7%).
Recently, Morgan Stanley Research revised its 2020 estimates for the Indian internet market from $137 billion to $159 billion in terms of GMV. The previous estimates valued the e-commerce market at $102 billion, e-travel at $28 billion and online classifieds/advertisements at $7 billion, all for the year 2020. These are big numbers, predicting a CAGR of 66% for Indian e-commerce within the next four years, from $38 billion presently. $100-$120 billion worth of untapped potential. That’s the kind of business everyone wants to be in, right?
Wrong. E-commerce isn’t for the faint of heart. Before it transitions into a smooth system wherein established models can be put to practice, the Indian e-commerce ecosystem needs to evolve. The Flipkart management realized this and is still having a difficult time trying to restructure and reshape, to move away from the Amazon model and adapt to the local environment. We have our own, a very different set of problems. Amongst these, there’s one that no one seems to be thinking about.
Is this $100 billion potential a mirage? A false allure?
As it stands today, a market share of almost $35 billion is in the kitty of domestic firms. This, at a time when we are just beginning to find our feet in this space, when many global giants are keenly looking upon India as the land of opportunities. Many like Amazon (with 12% market share by GMV) are already making life tough for our domestic firms. Others are observing as it all unfolds, waiting to strike at the right time. With the developed markets in America and Europe approaching saturation, it is but obvious for them to look for new markets. Where do they go?
BRICS? With Brazil, Russia and China in doldrums, and Africa a no-go, digital India is their blue-eyed destination. Moreover, with both China and Russia having cordoned off their online space and established their own homegrown versions of these US internet companies, India becomes all the more important for behemoths like Google, Amazon and Facebook. A huge market with favorable demographics and a rapidly expanding smartphone and internet user base.
With a population of 1.28 billion, an internet user base close to 360 million and 240 million smartphones, India is second only to China in all the three aspects. Considering this, our appetite for all that the internet has to offer and the ever-rising disposable incomes of people, India seems like an excellent business opportunity on a platter for these behemoths.
Problem? In a flat and extremely competitive world Swadeshi won’t be a preference, especially in the online B2B and B2C domains. Therefore, small domestic e-commerce firms will suffer the major impact. Indian startups simply won’t be able to compete based solely on investor funding. Hence, the entry of these global firms, whenever it happens, is bound to have an impact on the market share that will remain for the local startups. In our second episode, we look to analyze this impact on the Indian internet market.
What is (or will be) taken and what abides in it for the Indian entrepreneur?
Most of the big US internet based firms like Google, Facebook, and Amazon have a user base in India too. If e-commerce has taught us one thing, it is the importance of having a loyal customer base. These firms have a significant market share in the Indian internet market. Our objective is to approximate that share and then conclude what’s really left.
The Method: Now there’s a catch. To calculate this share, we need an apt proxy that we can link to the US market capitalizations of these firms and then calculate their share in the Indian market. There can be no better proxy than the online traffic (number of users) on their sites. First, we determine what percentage of the total traffic on their sites is generated by Indian users. Then we calculate the value of their share in the Indian market as this percent of their US market cap. The info-graphic below shows how the aforementioned experiment pans out.
The method surely has flaws. The most basic one being the fact that in the online market, converting a first time user into a customer is a long, uncertain process. There are users that generate traffic, but not revenue. Account for other similar factors and you may need to discount the final figures at 25-30%. But what it does is that it gives us a tool to analyze the basics. You shouldn’t be doing business where there’s no market.
So, the total India-linked market value of the top 10 American internet companies comes out to be around $150 billion. Even if you discount it by 50%, and add the current $35 billion that Indian unicorns command owing to their valuations, opportunities start vanishing. Time to rework those numbers maybe?
So, what are the major takeaways from all of this for the average Indian entrepreneur operating in the online space?
Firstly, it is clear that the future internet market and growth projections seem inflated. The market up for grabs is smaller than that being proclaimed. Coupled with intense competition amongst a large number of startups, that too, growing day by day, the smaller startups appear to be in a spot of bother.
There are chances that much of the growth assumed for our current unicorns is also vastly over-estimated. $4 billion is a huge amount and Morgan Stanley’s devaluation of Indian e-commerce’s favorite son, Flipkart, by 27%, from $15 billion to $11.1 billion correctly raised eyebrows. Even firms like Flipkart and Snapdeal stand the risk of losing their market share once global powerhouses start parading into India.
Therefore, if a large Internet business in India is to be built, then it has to be done by differentiating it from these powerhouses. Instead of trying to make an Indian version of a global hit, focus should be on making an Indian blockbuster that does well across the globe.
Thinking globally and acting locally has probably never done any harm to anyone. On the contrary it allows you to prepare better strategies. Indian entrepreneurs need to look at markets outside India. They need to aggressively tap into foreign markets that offer much less competition and possibly higher returns, handpicking profitable geographies where the multinational giants are not that effective.
What else do you think is Amazon doing in India? They tried to scale up in China, but it was too uphill a task, even for Jeff Bezos.
Another takeaway that we need to focus on is that this can be a very unforgiving, unpleasant place to be in. The higher the competition, the murkier it gets. In any niche concerning the internet market, you either get all or nothing. To the victor belong the spoils. Thus, consolidation of the fragmented market will be the key for sustaining the interest of all stakeholders.
The (so-called) established Indian firms like Flipkart, Snapdeal, PayTM, Ola and Zomato need to take responsibility for this. They need to mature, build upon their core competencies, and turn into holding companies, patiently guiding the internet-based startup ecosystem’s fragile ship across these turbulent waters. Build a robust setup, one that can withstand the imminent huge waves of attack from these cash-rich multinationals.
Going for an IPO might help. But are the startups ready to shoulder the responsibility and complications that come along with it? Herein lies the question. Flipkart, for instance, has been trapped in these complexities for some time now. Getting listed on a foreign stock exchange isn’t that easy after all.
Strategy and decision-making by these firms need to be right on the money, else this beautiful dream can turn into a nightmare. We will talk more about all this in our subsequent issues. Till then keep the entrepreneurial spirit alive!!