Wireless telecom (mobile) services industry was the first technology-based industry to scale rapidly in the consumer space in India. It is the original “growth hacker” of the Indian consumer-technology space, growing at a CAGR of 67% between 2000 and 2012.
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Currently, we are witnessing the significant adoption and rapid growth of internet enabled E-Commerce industry in India.
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Both these industries offer technology-based solutions and services to mass-market Indian consumers. Considering the 10 to 12 years of difference between the adoption curves of both these industries, there are some parallels that can be drawn between the growth rates of Indian mobile services and e-commerce industries, and the latter can derive some key lessons from the former:
1. Capex/Asset Light Model is Optimum for Scaling, But is Undesirable Upon Maturity
In 2004-05, Indian mobile carriers have changed their strategy from the traditional Capex model to the opex model, by outsourcing network and IT implementation and operations to the network vendors on a revenue-share basis. They adopted the “Minute Factory” model, in which carriers catered to large numbers of subscribers offering (voice) minutes of use profitably. This enabled Indian mobile carriers to garner ~40% EBIDTA margins with one of the lowest ARPUs (~USD 2) in the world.
Apart from this, Indian mobile carriers (primarily, GSM players) also did not own the mobile devices inventory (like their counterparts in the developed markets), focusing only on voice, text, VAS and data service offerings. This allowed them to scale rapidly. However, now in the mature state of the telecom industry, the key reasons for delay of 4G services launch in India is the lack of device harmonization and supporting network (transmission, metro fiber, etc) readiness. Had Indian mobile carriers, in the later part of their growth phase, tried to integrate the value chain, they would have been in a better position to handle launch of new technologies and services and scale them, instead of worrying about losing revenues to third parties and OTT players.
Currently, we are witnessing E-Commerce companies in India, in their early stages of growth, move away from the inventory model to pure-play marketplace model. While this model allows lesser Capex investments, better cash flows and most importantly, rapid customer acquisition, upon maturity the quality of service (and by extension, customer retention and business growth) is better offered in an ecosystem with integrated value chain that provides better control over end-to-end offerings.
2. Capitalize on the Cross-Selling and Up-Selling Opportunities
Indian mobile carriers had the opportunity to grow the share of non-voice revenues through VAS (Value-Added Services), before the advent of smartphones and apps led data growth. But, not only did they fail to innovate on creating compelling products and services, they stifled innovation by other ecosystem players by demanding ~70% share of VAS revenues. Moreover, instead of educating the customer and encouraging and motivating them to adapt and use the VAS services, Indian carriers used myopic sales tactics such as pesky OBD (Out-Bound Dialing) marketing calls, URLs in SMSs, flash SMS, etc. They failed to create the stickiness for these services, which led to ~60% churn rate across the portfolio of VAS services in India, in 2008-10, and VAS failing to grow more than 10% of overall revenues.
Had Indian mobile carriers succeeded in educating and motivating the consumers to appreciate the value of VAS, today their job of monetizing their data services and increasing data ARPUs in the smartphone and apps led data ecosystem would have been much easier.
E-Commerce players in India should focus on capitalizing on cross-selling and up-selling opportunities of quality and relevant products instead of excess inventory liquidation through discounts. A well targeted cross-selling and up-selling strategy could work wonders in terms of consumer engagement and their retention.
3. Regulations and Government Policies Will Eventually Impact Growth
In the telecom industry, Indian government has created a highly unstable and self-contradictory regulatory environment, which led to difficult business and operating conditions and lack on investor confidence. Be it retrospective tax, awarding and then rolling back new telecom mobile carrier licenses, rolling back subscriber-linked spectrum allocation policy, introducing auction as a form of license extension and spectrum retention, delaying decision and implementation on spectrum sharing and trading policies, etc., it has become difficult to build and execute on a long-term business plan (in such a volatile regulatory environment) in Indian telecom industry.
Most of these regulations and policy changes were introduced after 2009, once the telecom industry was readying to settle into steady state and grow on value and quality based offerings.
Even for the e-commerce industry, some time past the hyper-growth phase, in order to create a level playing field and/or safeguard consumer interests, regulatory bodies and policy makers could potentially introduce various policies and regulations that could hinder the growth and/or change the direction of the industry. Early movers/incumbents and established players should factor this risk into their growth strategies.
4. Low Entry Barriers Will Adversely Impact the Cost of Operations
In 2008-09, Indian government offered wireless carrier licenses and pan-India 2G spectrum for ~USD 400 million. This led to the increase in the number of private carriers in India to grow from 5 to 14 in less than a year. During the same timeframe, driven by the rapidly reducing component costs, the extremely short turnaround times and product development cycles of mobile device ODMs (Original Device Manufacturers) based in China and Taiwan, there had been a sudden surge of mobile device brands in India. The number of mobile device brands grew from 5 to over 130 in a span of less than 2 years.
This led to increased competition, increased marketing spends, increased channel partner margins, increased cost of operations and overall reduction in profitability of all (established) players. These phenomena led to a decline of ~40% in ARPM (Average Revenue Per (voice) Minute) for incumbent mobile carriers and 40% to 50% reduction in the gross margins of leading mobile device players in India.
Even in e-commerce industry in India, the entry barriers are extremely low. And, at its peak, there were 1,732 e-commerce companies operating in India, leading to significant dilution of value proposition of the industry as a whole. Currently, for some players, the cost of customer acquisition is in excess of USD 25, an increase of over 100% in the past two-and-a-half years. If continued, this could lead to a loss-leading proposition for the late entrants and prolonged gestation period for the early movers and incumbents.
5. Consolidation Will Not Be Easy
Of over 130 Indian and Chinese mobile device brands that emerged between 2008-10, less than 10 are currently relevant. We have not witnessed a merger or acquisition of even a single mobile brand in India, although that was the popular exit strategy for most of the players. Among mobile carriers, BPL Telecom’s acquisition by Airtel fell through. Although many players including Videocon, Tata Teleservices, Aircel and MTS managed to build significant customer base, brand, network assets and revenues, they are finding it difficult to be acquired.
Consolidation, as much as it makes sense, does not happen easily in the Indian technology space. Even though it makes strategic sense, overlapping assets, poor quality customer base, valuation disagreements and lack of adequate financing makes M&A fairly difficult in India. And, the longer the life of the company trying to be acquired, the difficult it becomes. The challengers and late entrants into the Indian e-commerce industry, across various verticals, should be cognizant of this risk and factor this into their exit strategies.
6. Loyalty is a Big Ask in India – From Consumers, Employees and Channel Partners
Nokia was the leading mobile devices brand in India for over two-thirds of the last 15 years of Indian mobile industry growth. And, to the most part of that period, the company had over 75% of market share in the country. “Nokia” was synonymous with “Mobile Phone” in India. Despite that, it took only about two years for the company’s competitors – both global and domestic – to replicate Nokia’s strategies, capitalize on its products’ feature and portfolio gaps and steer its consumers away. In the last three years most of the Nokia mobile device users upgraded to its competitors’ products. The company also lost its once stronghold on its channel partners to competition (most of Nokia’s exclusive retail outlets – Nokia Priority Dealers, migrated to become Samsung’s exclusive partners (Samsung Smartphone Café’s) in a span of an year).
Ever since MNP (Mobile Number Portability) has been introduced in India (over four years ago), over 153 million – close to 1 out of every 6 mobile subscribers – have opted out of their carrier networks. Most of them are early adopters and subscribers. In percentage terms, mobile subscriber churn is one of the highest in the world.
Most of the employees in the telecom industry, especially on the business side came from the FMCG and F&B industries, and in 2007-08, many of the telecom industry professionals moved to the then sunrise industry – Retail. Currently, e-commerce industry has employed a significant number of former telecom industry professionals.
It is extremely difficult to offer quality (of service, employment and business partnerships) at scale in India, primarily due to the inherent structural deficiencies of the market. And, Indian consumers, employees and channel partners shift loyalties extremely fast. This by far is the biggest issue that should be considered (and factored in) by the e-commerce industry in India.
7. Need to Grow Product Thinkers and Product Marketers
Wireless telecom is a fairly technology-heavy industry. And, due to Indian mobile carriers’ and other ecosystem players’ overnight shift in strategy (in 2004-05) to scale rapidly by building consumer-facing businesses, the business decision makers of this industry did not get adequate opportunity to be educated on the potential and depth of various underlying technologies of telecom industry. Currently, one can find either of the two types of professionals from Indian telecom industry – Network Engineers who understand various technologies and Sales and Marketing professionals who understand distribution, brand building and tariff planning.
Indian telecom industry missed out on an opportunity to evolve and grow “Product Marketers” in the industry – professionals with the requisite technical aptitude to understand what it takes to productize a technology, and the necessary consumer understanding and business acumen to package it in a way to make it valuable (not just attractive) to the end users. And, considering the unique requirements of Indian market and consumers, global product roadmaps and strategies seldom work in this country.
Going forward, every technology-based industry in India will require “Product Marketers” and “Product Thinkers” – professionals who analyze the technology trends, understand the intricacies of engineering a product, influence its development, and position it with an eye on the customer likes & dislikes and drive potential adoption. And, e-commerce industry, also being technology-centric, should take the onus of developing such professionals for its own future and that of other technology-based industries in India.