Blue Screen Of Duds

Where the alter ego of codelust plays

Outlook for 2008 (Part I)

with 2 comments

I won’t try and predict what is to come this year. I have always sucked at making predictions and I think it is a silly business anyway. So I’ll write about things I’d like to see in the year 2008.

First, a bit of background. It is no great secret that the US economy is progressively slowing down to a level where it is no longer possible to get a whopping rate of returns on most forms of investments. What this means is that there is money to be invested in the country, but there are no decent investment destinations where it can be plonked into.

This pile of cash sitting in the hands of VCs, hedge funds and investment bankers need to be invested somewhere for it to bring in the returns that justify their existence (and huge commissions). So it is likely that eventually a fair chunk of this will end up in China, India and other emerging markets.

Now, everyone loves the China story, but China has a major weakness that is not there with India. The Chinese economy is propped up largely by exports. Exports to the US, to be more specific. Any slowdown in the US economy eventually spills over to China, cutting down their own prospects for 2008 and the years to follow after that. This is the reason why you see interesting things like a Chinese bailout of an American institution, which would have been unimaginable a couple of years ago.

India, compared to that, has a degree of exposure which is considerably lower than China to the American (mis)fortunes? This is where we have actually benefited from not having a whopping trade surplus like what China has with the US. The coming couple of years will be entirely about companies who have limited or dynamically fixable exposure to the US markets doing well compared to companies that are dependent on the US economy for their daily bread and butter.

Most of India’s exports are service-oriented: basically software and a bunch of other trades like garments. Software will primarily take a hit on margins on existing contracts due to the exchange rate equation and an even bigger hit on margins on newer contracts. They still can afford, though, to look at ways to make through a couple of years of this slowdown. The garment trade, though, has been decimated by the downturn and the weak dollar, with many players raking up crores in losses just over a couple of months. Then again, of the entire garment segment, India still does not account for much.

Which brings us to the important point: India’s economic activity is largely internal. We can’t seem to produce enough of stuff for ourselves and with time all this economic activity is bringing an increasing number of new participants to the middle class segment that did not exist before. Of course, the trickle down is not happening fast enough, but if you consider how huge and how varied our nation is, this would come as no surprise.

But, essentially, we have a market that is looking good to grow well for the next decade (or even further), a vibrant democracy and a strong enough country that has been able to withstand and easily overcome terrorist attacks. Of course, there is much wrong with the country too at the same time, but that won’t disappear overnight. Such changes take time and we won’t see spittle-free walls or even marginally better politicians for a long time. But what we do need to appreciate is that it is improbable that even with any party coming into power, the development and economic agenda will be changed much. We will see sops and instances where politicians will play to their favourite gallery, but the larger economic agenda will keep going.

Now to the list:

Innovation: India will be one of the hottest destinations for investment in 2008, which will again be only the start of something much bigger. That said, investable properties in India are far and few, especially in the digital sphere. VCs and other players in the innovation ecosystem will need to find newer ways of finding companies and products that are worth investing into.

A lot of our products these days come from the copy-paste school of doing products. “It worked there in the west, so it must work here!” as a product peg needs to disappear. Use cases have to be considered as a must-have, alongside projections that are valid and current usage levels which is not inflated. It would be nice to see a bit of honesty within the system, just to begin with.

We have holes in our entrepreneurial system that have to be plugged. Instances like this won’t happen if the VCs step more into a mentoring role and help them along. I know the norm is that VCs like to limit their meddling in the company to the board meetings, but at least short term funding in this heavily commoditized times is not a major issue for people, VCs have to change the way they approach the business and their portfolios. If they play it right, there is a considerable amount of leverage they can exercise in terms of scale and in a scenario where the cost of replicating is product is peanuts, compared to the cost of finding a differentiator, that could be a killer point which makes all the difference to their portfolio.

You can make a decent killing in any segment by being lucky, being there first or by being plain smart a few times. Longer term profits and sustainable product lines, though, are derived from one thing: innovation. The kind of money that will flow into India will need a thought process and a product development stream that is better than what we have now.

This, mind you, is a long term change. It is something that will take years to precipitate. It is a habit that is acquired, one that needs to be forced upon ourselves before it becomes a force of habit. I think that soon enough we will be forced along that path because the volume of investment will demand that kind of effort. 2008 could be the year when we see the start of that process.

Mobile: We need to get over our fascination for SMS and the slew of value added services as the conduit through which the amazing growth is going to come. Of course, the market is constantly expanding, but with the dismal average revenue per user, the margins are not exactly mouth watering. This, in turn, will affect the telcos’ ability to move into the relatively unexplored rural markets. What they need for 2008 is a new product. They need to push out the first sub INR 5000 mobile internet access device out into the market.

As my friends know only too well, such a device is one of my pet themes and this is how it works. A Nokia E50 phone costs around INR 8500 in the market these days. This is a phone that does EDGE, has the lovely Series 60 browser that works on pretty much every website that I use on a regular basis and is rugged enough to survive India. Slap on to it the unlimited GPRS deal from Airtel (INR 500 per month) and you get a mobile internet device that has an initial cost of INR 9000 and a recurring cost of INR 500 per month.

Now, if a telco were to order this handset in bulk from Nokia, it would get them a significant discount and if they subsidize the cost further themselves, it could even be brought down to INR 5000 to start off with. You could also make it even easier by spreading out the start up cost in terms of installments (INR 50, 100 or any other amount), that could be added on to your monthly bill to beef up adoption.

It should ideally be a win-win deal for Nokia, since there is no additional development to be done on the device and they will get to move such vast numbers that the volume itself should bring in decent margins. Or, we could take the harder route, re-engineer the device, strip it down and change the orientation to bring more width than length to the screen and give it a full QWERTY keyboard.

The bottom line is that a pervasive internet experience is the thing that will save the telco soul. This will also allow them to price services and content that are not limited by what SMS and IVR currently limits you to. And if you consider how restrictive and artificial the interactivity are on those services, offering the internet experience on your handheld device can only be a winner, whichever angle you want to look at it.

And, before I forget it, did I say that it breaks the entire penetration issue?

I think this is a long enough post for now. I will post the second part a day or so later.

About these ads

Written by shyam

January 9, 2008 at 8:23 pm

2 Responses

Subscribe to comments with RSS.

  1. Misplaced optimism about the “vibrant democracy”. You also know that it’s a lie. As far as the trickle down effect is concerned, it seems to be a myth. The real incomes haven’t risen despite the “booming economy” because of inflation going through the roof. Look at the basic needs like a proper housing (real estate is a killer), rations and growing water scarcity.

    Much of the country side remains caught up in turmoil and the Maoist insurgency would become worse in the face of failing agriculture. It would need a seperate blog post to cover the decadent political situation.

    As far as the value added services for Internet is concerned, the wirless system would choke is people by and large cram the network services. It’s a long haul that people would sign up for the EDGE thingy or the telcos be content to provide plain vanilla internet access. They would wall off the content for all practical purposes. Still, we can be optimistic, right?

    Abhishek

    January 9, 2008 at 10:12 pm

  2. Abhishek,

    Why is a vibrant democracy a lie? According to me it is a perfectly fine democracy, especially since it still manages to get people elected that I don’t like. Of course, there are major trouble spots, rigging and violence, but would you rather have a system like China?

    Trickle down works, which is exactly it is called trickle. And if you think it will be uniform, you are getting the wrong picture. The interiors of Bihar won’t develop at the same rate as a town near Chandigarh. And I think inflation is not going through the roof as far as I can see it.

    Let me ask you something, is there any program which will ensure a that all parts of the country and all segments of the society grow at the same rate or that they’ll do equally well? It has never happened historically (unless you want to subscribe to the communist/marxist school of thought and carve up everything among everyone, at least in theory) and there is no reason why it will happen even now.

    What is happening is that there is genuine economic growth. Does that mean farmers will stop killing themselves or that the poor will all have houses to live and food to eat day after tomorrow morning? No way. But there will be minor changes, like a person who is making Rs 250 in a day will make maybe Rs 50 or Rs 100 more in a day.

    We’ve had insurgency, a massively messed up state in Kashmir, porous borders in the NE, bombs going off in the metros etc. Has that stopped us till date? I am afraid not. It won’t stop us in the future itself. Sure, we’d do much better if we did not have those problems, but hey, we live in a _very_ diverse country that is located in a troubled part of the world and guess what? We have managed to get over all of that and still move on.

    The wireless network may choke, but it is not like we don’t have that already happening to us. And the reason why capacity won’t be upgraded is because they don’t make enough money per user. Guess where we are going with this? It is the classic chicken and egg problem. To upgrade the networks they need a new product that will have mass adoption and the existing products won’t give them that.

    Walled content is already there in the lower price range, but the Rs 500 plan is totally unwalled and quite usable. Pricing can thus be variable. See, we have not really had a decent enough digital economy in India basically because of the adoption problem Dial up, satellite or DSL is not ever going to fix that issue. Whatever solution is there, it has to be unwired that rides atop existing tech. Till that growth happens, there will never be enough margins or innovation within India.

    shyam

    January 10, 2008 at 6:16 pm


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

%d bloggers like this: