Trendspotting: 2020 can make or break

[Image by Gerd Altmann from Pixabay]

2019 felt like a decade packed into a year. 

Hark back to last December: Dunzo was the hottest startup in town. It appeared the economy may turn around on the back of some confident moves by the finance ministry (the Budget proved that optimism was misplaced). Softbank was the reigning emperor of startup land that could do no wrong. 

Fifty-two weeks later, whoever could have imagined mobile broadband rates will rise by 40% in the world’s cheapest mobile data market? Vodafone would all but withdraw from the race, leaving behind a mountain of debt and a troubled partner. The country would be divided over CAA/NRC. And the economy would be making its way towards a precipice.

New laws, new policies, new protests and new pains…we carry this volatility and uncertainty into the new decade. Trendspotting for 2020 is a risky affair.  

But what the heck! I’m going to give it a try.

The one-time mobile internet shift ends

Since 2016, the telecom sector has been performing contortions of all kinds to supply bandwidth at below cost-price to willing consumers. 

The outcome? An explosive adoption of cellular phones and growth in consumption of data that doubled the mobile internet market in three years, and created a one-time reset of the digitally addressable market in India.

Is there a word for "negative network effects leading to positive outcomes”?

The party has practically ended and we now have to deal with the hangover. India, home to almost 1.5 billion people, will now be served by just two-and-a-half private telecom players—Jio, Bharti Airtel and Vodafone-Idea, which happens to be in the ICU. 

Without support from the balance sheets of its twin shareholders, it is inevitable that Vodafone-Idea will witness large-scale attrition in terms of both employees and customers, further strengthening the duopoly. The only upside: their 4G spectrum will have to be shared between fewer customers, giving better service to the remaining few. Is there a word for "negative network effects leading to positive outcomes”?

Having said that, price hikes planned by the reigning duopoly aren’t trivial. Airtel intends to raise its Average Revenue per User (ARPU) from Rs 128 to Rs 300—an increase of 2.3X. As a first salvo, it has increased data rates by 40%. Its stock price has been rising in tandem. 

The longer term outcomes of this hike will be a case study in price-elasticity for economists. What impact will it have on the 10 GB of data that Indians gobble up each month? 

Will increased data prices hurt India’s internet economy? My view: only marginally

As a thumb rule, Indians ask a simple question: sasta hai ki mehenga hai (is it cheap, or is it expensive?). If the popular narrative becomes that it is mehenga (expensive), consumption can drop dramatically. 

Will increased data prices hurt India’s internet economy? 

My view: Only marginally. 

Why do I say that? Because I believe India has two internet markets.

1. There is an “Internet Viewer” market that comprises the millions who use their smartphones solely to consume content—to access YouTube, share porn, message each other on WhatsApp, drive the TikTok economy, and are too afraid to try anything else. 
2. Then there is the “Internet Consumer” market. These include those who have disposable income, and the confidence to transact on the internet and spend money. 

The  price hike will cause a shrinkage of the internet viewer market but will not hurt the internet economy. They contribute very little by way of paid consumption. The smartphone + internet was just a TV + phone in their pockets. On the other hand, Internet consumers have enough muscle in their wallet to absorb the impact of higher data bills. 

Make money, or else

The collapse of WeWork’s IPO triggered everyone to go back to basics and do some hard thinking. Can a so-called technology company demonstrate “software margins” or is it just an offline business masquerading as an online one?

No company will be too big to fail

The public markets in the US have shown they hate companies that burn billions, indulge  in opaque accounting and conflate economies of scale with network effects. That is why Softbank has ceased to be the proxy for an IPO. These tests are making their way to India as well. 

No company will be too big to fail.

Whether it be Paytm’s continuous search for a business model, or milk delivery businesses attempting to morph into grocery e-tailers—firms will have to demonstrate high gross margins and scalability typical of software businesses to continue enjoying sky high multiples. A consolidation wave will kick in again as several startups will fail these fundamental tests of unit economics.

It is inevitable then that Indian venture capital (VC) investors will go back to basics as well and insist on evidence of a strong business model, solid margins and sharp segmentation. The new story doing the rounds is "we see growth in Tier 3 and Tier 4 markets". 

But that’s just mixing up geography with demographics. Because the three segments that are India One, India Two and India Three that I described in August 2016, co-habit all these markets. 

My limited submission then is this: Launching services in 500 cities may look good on investor presentations. Tier 3 and 4 markets are exploding with internet viewers, but thin dramatically when it comes to actual internet consumers. It is inevitable then that the narrative will leave several casualties behind. 

The deck is stacked against incumbents

Slowdowns are tidal waves that sweep the weak away. 

Traditional businesses are being hit by three massive waves, each of which resembles a tsunami.

1. The cost of additional compliance and GST  
2. Slowdown in demand
3. Commoditisation by the internet: That means, anyone can fetch quotes and supplies from anywhere. 

Between demonetisation, GST and the credit crunch, the smaller ones are getting crushed and the bigger players are creaming the market. 

The excruciating damage caused by the squeeze on working capital for businesses stays out of the headlines

While there is enough commentary on what’s wrong with the economy at a macro level, the excruciating damage caused by the squeeze on working capital for businesses stays out of the headlines. The largest state-run banks are busy with their mergers. The instruments that small entrepreneurs used to keep their business afloat such as loans against shares or property have either been banned or are simply not available. 

Run short of fuel and neither a Ford nor a Ferrari can reach their destination. Working capital is that fuel

But all prescriptions are macro-focused. Interest rate transmittal, direct and indirect tax sops, for instance. But the wrong medicines are being administered. It doesn’t matter whether you are driving a Ford or a Ferrari. Run short of fuel and neither of these magnificent machines can reach their destinations. Working capital is that fuel. 

In markets that face tailwinds (such as insurance and financial services), both incumbents and tech players will grow. But in stagnant segments, the gain in share will go to digital businesses. They have the funds, they have the working capital and don’t have to bother about paying their bills from revenues. 

Venture capital will be even more of a disrupter in this slowdown and its flow continues unabated. 

Gimme your moat

Some clever startups are using technology to augment and re-bundle old value chains. Funds are flowing into hybrid offline-online models which use technology for discovery, efficiency and convenience and gain consumer traction because of the “no-hassle” nature of the experience. That explains why ideas such as co-living, co-working, shared manufacturing and shared procurement are in the news. 

Co-living, co-working, shared manufacturing, shared procurement are getting traction

The threat of irrelevance will create strange bed mates. If you can’t be a top player in your industry, partner with a tech startup to re-craft your business. The old value chains will become the plumbing for the swanky new digital businesses, much like how shiny skins are put over old buildings. 

The most encouraging examples are coming out of the financial services space, where strong, well-funded VC-backed startups are collaborating with the mid-sized banks and leverage their back-end and regulatory moat. 

NiYo Card is one such example. Its back-end is powered by DCB bank. But you’ll never see the bank or interact with it. For you, it’s just the card and the app. The bank becomes the platform. 

The future will witness even deeper integrations. And why not?

The Anti-Bank to the Bank will be built on top of a Bank

Imagine an account where your money is constantly at work as opposed to idling in a savings account. What if it can reside in a liquid fund instead (or whatever instrument you choose) and comes with a credit card attached? That’s it. 

Your salary is instantly invested and you can spend whatever you need via a  card and online bank account. 

No branches. No hidden costs. Everything under your control. Money will be just a swipe away. 

The Anti-Bank to the Bank will be built on top of a Bank. A pure investment account. Why should your money stay in a savings account? The NeoBank is just around the corner. 

The end of wallets

The Unified Payments Interface (UPI) has sounded the death-knell to digital wallets. The wallet as a repository for money is not needed any longer. Why should any consumer need a three-step handoff from a bank account to a wallet and then to the merchant? 

Regulators and banks have closed ranks around UPI

I had tweeted about this way back in 2015. Wallets are artefacts of regulations that protected ill-equipped banks. Private players were lured into pouring billions of dollars to adopt consumers and drive habits. 

The job is now done. Regulators and banks have closed ranks around UPI, which offers every bank a seamless technology platform around which they can create a friction-free payment experience for their customers. 

It reminds me of Abhimanyu’s journey into the chakravyuuh! Because digital wallets have been left high and dry. What they have been offered instead is a useless consolation prize—a path to become Payment Banks. As things are, of the 11 Payment Banks, four have already called it quits.

And now that the government is likely to announce zero MDR fees (Merchant Discount Rate, or the fee a merchant pays the bank), it will be the last nail in the coffin. 

The Payments Council of India calls the move "nationalisation of the payments industry". The existing wallets will be forced to morph into becoming enablers for other transactions (eg: Google Pay) or become fulcrums for launching new financial products.

The rise of the QR code 

Scan a static QR code with a smartphone and it can make any interaction data-driven and personalised. It bestows pseudo-intelligence wherever you stick it. 

A QR-code driven digital payments utopia will arrive when UPI becomes faster than cash, and equally reliable

We will see China-level ubiquity of QR code usage, as firms across industries learn the power of these interactions, and place themselves via QR codes in the customer’s physical environment. 

A QR-code driven digital payments utopia will arrive when UPI becomes faster than cash, and equally reliable. In other words, when digital payments work flawlessly even though both of the transacting parties are offline. Right now, a UPI payment needs upwards of 40 seconds and both parties must have working internet connections—and cannot compete with cash.

However, by cleverly combining daily limits, and security tokenisation, banks can enable low-ticket, offline-to-offline UPI transactions. There will be minor fraud costs. But these can be driven down sufficiently to rival the massive cost of handling cash for banks and the economy. 

OTT is the new TV

"In India, the smartphone isn’t eating television. It is the television” - Trendspotting 2019 

Last year I wrote about the End of TV. We are now witnessing that theme play out. 

The television set in the living room that once catered to five pairs of eyeballs, is now lucky if it attracts one or two. The rest of the family consumes entertainment, news and sports on their individual smartphones. 

This shrinkage in audiences is putting pressure on TV advertising revenues. Over-the-top (OTT) media businesses (like Netflix, Amazon Prime, Hotstar) will remain challenged because their pricing power is low and capped by the (regulated) inexpensive cable TV rates.

The only player likely to gain value from OTT in a market like this is Amazon. Prime Video is a cross-subsidisation play. Hotstar is growing very well. But when the humongously expensive sports rights and audiences are stripped out, the picture may not be as pretty. 

Netflix has dropped its price, it still doesn’t have a meaningfully wide catalogue to attract a large enough subscription base. 

But then, nobody else does. 

Smaller OTT platforms will start looking like TV channels rather than aggregators

India’s diverse, young (and therefore finicky) audiences are difficult to satisfy. The market will get carved up into many small niches with multiple OTT players, unlike the omnibus platforms that the West has seen. 

The smaller OTT platforms will start looking like TV channels rather than aggregators—they will make shows of a particular genre, to serve a specific audience. Alt-Balaji is a case in point.

Struggles with talent

When the HDFC Bank’s mobile app was down for days, it was at the receiving end of much ire and even regulatory scrutiny. But this is just the beginning. 

We will see traditional firms  struggle with everything: clunky interfaces, downtime and security threats. 

The reason? Talent. 

Large companies will be forced to ask a question: why should a 29-year-old smart coder join your business?

Large companies will be compelled to reflect upon some tough questions: Why should a 29-year-old smart coder join my business? Does an engineer or a designer wants to join a boring old company that works with layers upon layers of management for every single decision?

We live in times when you can simply code a new company into existence. Why toil away at a firm where its leadership believes that technology is another function and does not lie at its core? 

Unless incumbents let go of the past and restructure their organisations around data flows and journeys, they will be compelled to take the road dinosaurs took. The one that led to extinction.

We are witnesses as well to experiments where firms are trying to place technology teams outside their core, assuming that incubation will help their core business, or are acqui-hiring startups. But I remain sceptical. 

Until those in senior roles embrace change and accept a new normal around talent, these transitions are destined to fail. 

End of news   

The events of the last few weeks clearly suggest that every news vehicle has a jaundiced view of what is news and an equally prejudiced perspective on how facts ought to be construed. The new regulations governing online news will narrow the playing field even more, with domestic print players now getting a regulatory umbrella.

Journalism’s role as the fourth pillar of democracy that holds a mirror to society has been compromised

Journalism’s role as the fourth pillar of democracy that holds a mirror to society has been compromised. It does not hold mirrors to misdeeds any longer. Instead, it has morphed into torchlights that show viewers and readers only what they choose to point at—occluding all else out. 

Between the rise of WhatsApp and testosterone-driven newsrooms, the contest has now boiled down to who can twist facts farther to suit their agendas. 

With the rapid rise in internet viewers we have millions of uninformed Indians who can be made to believe anything

The danger here is that with the rapid rise of “internet viewers” whom I described earlier, we now have millions of Indians who can be made to believe anything using that most damaging weapon of all—the smartphone. It can plant ideas and ideology at the speed of light.

Kirana battles

Most Indians still shop at their neighbourhood kirana (corner) stores. The road to digitise and streamline this market is littered with the carcasses of many startups. 

Getting a kirana shop-owner to change behaviour is proving to be more challenging than anyone imagined

I expected to witness more progress here than we have until now. But as the whiz kids are discovering, getting a kirana shop-owner to change behaviour is proving to be more challenging than anyone imagined. They hate using technology. Entering inventory data slows them down and cuts down on possible tax arbitrage. 

Their assortment of SKUs are diverse. They have no problems with substituting brands in case of shortfalls. And they are comfortable with their own inefficiencies. The battlefield here is beginning to get increasingly interesting. There are those organising supply chains for kiranas. Then there are some aggregating demand for them. Who will emerge trumps? 

Reliance is playing the game on both fronts. The German retailer Metro has done some interesting work as well. They’ve focused on the kirana as a customer and provide them with a bunch of services. 

However, the kirana owner remains sceptical and is hesitant about creating dependency on any platform. 

I don’t claim to know the answers. But I am watching with much interest. 

Electric India

Standardisation of an input layer in an industry leads to massive growth and innovation on the layer above and around it. This, because resources are no longer directed towards creating and propagating proprietary standards. By way of example, take when batteries were standardised into AA, AAA, etc. Many industries flourished.

This is an opportune time for India to take the lead in creating a global standard for the size, shape and form of electric cells that can power e-cycles and e-bikes. India needs standard-based, swappable batteries. The cost of setting up electric charging points can be cut dramatically if batteries can be swapped at the nearest gas station or paan shop. 

The reason I say this is because India is home to some of the largest two-wheeler manufacturers in the world. If they could get this far, they will do well to free themselves of protecting their current internal combustion engine businesses for the future. 

Perhaps, it’s wishful thinking on my part to expect competitors to collaborate. But then on the other hand, like I said earlier, if an Anti-Bank is possible with the unlikeliest of entities coming together, anything is possible to survive. 

One thing I’m willing to punt on though. Electric is here to stay. And will hit us faster than we think.

Regulatory protectionism

The government is grappling with new digital animals who can morph from being principals to agents—e-pharma, e-commerce, online taxis, for instance. We are now witnesses to regulations being crafted to design a level playing field that defines the characteristics of digital players. The pressure to do this is being mounted by small merchants and entrepreneurs who are at the mercy of large platforms with access to much capital. 

Regulating new business models is tricky, because post-facto regulation can create a barrier for innovation

When I wrote Making Sense of New Capitalists in November 2019, I argued that regulating new business models is a tricky affair. Because post-facto regulation can actually create barriers for innovation. It’s a minefield we must negotiate constantly. I maintain that stand.

India must balance global interests as well. The US will be unrelenting in its pressure to keep our markets open. And India will have to ally with them given that we now have a digital arms race between the US and China. India will be compelled to choose sides. 

Actually, we don’t have a choice. 

India must ally with the US because we need them in the cyber warfare game, as well as to counter China, which is readying its arsenal in a race to win the artificial intelligence battle. We are far behind in this race, and need all the help we can get. Incidentally, two of every three smartphones Indians use are made by Chinese companies. Trojan horse, anyone? 

The global backlash against privacy abuse will deepen

The global backlash against privacy abuse will deepen and our own Data Privacy Guidelines will become law. This could create considerable upheaval in the business models of startups, especially if data sharing guidelines are strict. 

Much of the internet ecosystem thrives on the digital trails that consumers leave behind on large platforms. If that goes away, then access to digital consumers will become prohibitively expensive. 

Voice first market 

Data suggests that roughly 250 million Indians are illiterate. My guess is double that number are uncomfortable reading and writing. They’d much rather interact over voice, in their native tongues. 

Google has made significant progress in localising its services and deciphering Indian accents and languages. This means a voice-first internet where consumers speak into their devices and receive visual (pictures or icons with text, not text alone) navigation assistance. 

We’ll have to think of India as having multiple internets: Hindi internet, Tamil internet, Telugu internet

If a precursor be needed to that, Amazon has reported that globally, Indians are the most engaged users of its voice assistant Alexa. 

It is inevitable then that we witness voice-based assistants emerge and startups that create interfaces designed to cater to this market. 

What it also means is that we will have to imagine an India that has multiple internets. A Hindi internet, a Tamil internet, a Telugu internet, and so on and so forth. This, I believe, in the final reckoning, is what will propel internet viewers to morph into internet consumers.  

That sounds like an optimistic note to conclude Trendspotting 2020. And I’m tempted to do just that. But if I did that, I wouldn’t be intellectually honest.

Here’s the nub: we are right in the middle of the Great Indian Slowdown. 

Whether it is cyclical or structural is moot. However, the lack of confidence about the future is palpable. And the great Indian entrepreneurial risk appetite seems to have dipped when we need it the most. 

Most pundits have a standard refrain: The economy will recover in the next two quarters. Except they’ve now been saying it for the past four quarters! We must keep our eyes and ears open. Because any additional uncertainty, be it political or economic, could scuttle chances of a quick recovery. Lack of jobs, dashed aspirations and reopening of old wounds may create combustible mix in pockets of India. Everyone needs to realise that hatred is not a strategy. Hope is.

On another note, entrepreneurs are struggling to cope with new norms of compliance and reports of harassment of businesses have become a constant refrain. Every government agency and bureaucrat needs to read this twitter thread by Pushpinder Singh (@pushpinder). Most law-abiding businessmen are being asked to pay for the sins committed by a small minority. Instead, the focus should be on instilling fear and penalties on bad actors. As a country, we seem to have assumed that the more we regulate, the less will be the extent of wrongdoing. History has proved otherwise. The deterrent is swift justice, not more red tape.

One priority should be skilling young Indians. Creating jobs is a moral obligation

Finally, skilling young Indians and making them employable must be our immediate priority. Slowdowns will come and go. We have a moral obligation to help build a country and create jobs that can absorb young people into the workforce. 

If we fail them, the GDP slowdown we are witness to now, will begin to feel like a whimper when a storm hits us at the end of a decade in 2030.