Archive for the ‘India’ Category
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.
Seems like the slowdown in revenue for mobile operators from existing services is not just an India-specific problem. Jupiter Research has recently done a correction for its forecast for Western Europe to 910M euros in 2011 as far as ringtones go.
It has been a known fact (keep hearing that at the various conferences and industry meets) for a while that the average revenue per user in terms of calls had been on the decline for a long time and services like SMS, ringtones and other downloads were meant to keep it booming for a long time to come.
And that is the reason why Vodafone is hitting the consumers hard with their new and lovely advertisements for services that stay within the network. All the things they are pushing at you — astrology, news alerts, Art of Living updates — are nothing new, they have been around for a while, but the way they have recast it says a story in itself.
Each of the new Vodafone service is priced at INR 30 per month to the subscriber. The costs that the company incurs in getting the service online is acquiring the content to support it, the management of the same content and the billing parts of it.
Content acquisition costs are normally never tied to the subscriber base, unless they happen to be be a ringtone or a download. Which would mean that their margins would go up with every new subscriber they add on for a service. The other cost point for them would be the billing and content management services, which I don’t think (okay, sue me for the blanket guessing here) is again based on volumes, leaving the service provider with decent margins all over again.
That leaves us with distribution, which is one factor that costs pretty much nothing to the company. Most of the services (maybe, even all of them?) are SMS based. These services are available only to the service provider’s subscribers, meaning that the traffic stays well within the service provider’s network, leaving all the interconnect and revenue sharing problems out of the window and a larger chunk of the revenue for the company to keep for itself.
That leaves us with an interesting set of projections. Even 20% of Vodafone’s subscribers singing up for at least one such service would earn the company truckloads of money. Current estimates are that by the end of 2007 Vodafone would have around 38 million subscribers in its network. Take 20% of that and multiply it by 30 and you’ll get the point that I am getting at.
Going forward, a smaller percentage of that 20% will probably subscribe to multiples of these services, kicking up the revenue per user even higher. And all of this is happening at near-zero or minimal cost to Vodafone. So, next time you wonder why Vodafone is going bonkers pummeling you with all the nifty ads that should be costing them a pretty penny, remember that some sucker somewhere is actually signing up for that service and giving plenty of reasons for Mr Sarin to smile about.
This has to be one rather interesting and hilarious development. Apparently, the Bush administration has happily worked around a treaty that was meant to restrict high technology transfers to China and has allowed IBM to transfer some cutting edge technology to the nation.
It seems that the Bush White House has quietly relaxed the restrictions imposed by Wassenaar by saying there are some approved companies, operating in China, which can import technologies without a license.
So far the US has approved five companies to be in this select group, four of which are semiconductor related companies, National Semiconductor’s Chinese facilities, Applied Materials’ Chinese facilities, the Shanghai Hua Hong NEC Electronics Company and SMIC.
The government and the corporations are strange bedfellows in a free market (if there was ever an oxymoron, free market will get the first spot each and every time) and this once again proves that costs are the only benchmark for corporations to follow and eventually all such costs work back into the system via the government.
There is a larger picture to this, that the semiconductor firms are trying desperately to increase margins and cut costs and China is one of the cheaper and more reliable places to put up fabs. And SMIC is one of the largest fabs who basically do white label manufacturing for the other manufacturers like IBM.
To increase their margins, the fabs need to incorporate the latest and greatest technology and agreements like Wassenaar stand in the way of such things being made possible.
For us, in India, this is a welcome development. While we are a long way off from being able to provide the guaranteed infrastructure to support multiple fabs, at some point in the future we should see high technology manufacturing slowly making its way into India and with prior-art like what just happened being already in place, life should only be easier.
Now, only if someone would actually start building that infrastructure.
The National Venture Capital Association (NVCA) has come out with their projections for the year 2008. Much of the predictions are in line with what is already known, that tech spending is going to significantly reduce in 2008, leading to reduced opportunities that will trickle down in as fewer exits and even fewer IPOs.
According to NVCA, a vast majority of their members estimate that the investments for 2008 will be to the tune of $27 billion, which is pretty close to the number that was for the year 2007. In 2007, according to studies, India had accounted for $4.2 billion of that figure and considering the state of the US economy, the logical conclusion would be that the investors would be looking at markets outside the US for better returns, thus leading to at least that number being matched or easily crossed in 2008.
In 2008 the slowdown is expected to hit IT spending by a wide margin:
“In January, we predicted IT spending growth of 6.1 percent for 2007. It now looks like growth will be 3.5 percent at year end.” – Jim Hale, Founding Partner, FTVentures
This is a sentiment that is widely seen on Wall Street with analysts scampering to fill their portfolio with safe stocks (companies that have a limited impact in terms of exposure to the US economy by having wider exposure to emerging markets and companies that do mission-critical installations and service contracts like Cisco or Oracle, who will have limited impact). Strangely, all of the analysts seem to consider semiconductors as a safe bet since there are major cost and capacity cuts planned for 2008 to shore up margins and increased demand to due to artificially constrained supply.
So, what does it mean for India? Well, not much. The segments that the VCs are looking to invest are the following: CleanTech, Media and entertainment, Biotech and Internet specific companies. Currently, other than carbon credits, there is not much worth investing in country yet that is in the domain of cleantech. Biotech is a bit of an enigma for me and honestly, other than a barebones knowledge that the segment is doing really well, I have no clue about how much is being taken onboard in terms of venture capital in the segment. there is though a fleeting mention somewhere that the segment attracted about $125 m funding in 2006. Maybe, this will be our rock star segment for 2008?
That leaves us with the obvious and usual suspects of media and entertainment and Internet specific companies. The latter is quite an interesting segment since it is exploding in India. At the same time, it is not a cheap segment to be in. Initial capital requirements are insanely high and the cost of securing decent carriage is even higher. And I can’t really see any existing players who are looking to do an IPO in 2008, though there is the rumor of Reuters exiting the Times Now venture (I know, I know, single sourced anonymous comment means nothing!), leaving a nice chunk of equity available for being picked up. Of course, there is the much bigger rumor of BCCL itself looking to offload some equity, even as it still won’t get itself listed.
Internet-specific companies. Oh well. Which and where, are two rather interesting questions in the segment. Most of the established players already have varying degrees of of exposure to venture capital and others are already public. Even if there is intent, like in the case of Infoedge, of raising capital, the question remains where are you going t put that money into? With even IAMAI scaling down its projections for growth and usage of internet in India, the chances of a surprise segment that will manifest itself in 2008 is going to be highly unlikely.
Other obvious ones like travel have already been done to death (with established number 1, 2 and 3 players), leaving us with the rather obvious option of consolidation via M&As. Other segments like matrimony and email have the same issues and even if were to talk in terms of the potential that is present in the market, we’d end up with the usual chicken-and-egg problem of penetration stifling reach all too easily.
All said and done, this is mostly guesswork, informed and uninformed, so what actually happens remains to be seen in 2008.