[Image Credits - Netflix by Esther Vargas under CC-by-sa, GE-Schenectady by Matt H Wade under CC-by-sa, Pizza by tommy pixel under CC-0, GM Maven © General Motors under CC-by-nc]
Business strategist Rajesh Srivastava analyses some of the recent business news:
2. Why General Electric moved to Boston
3. App-based food delivery firms: Anatomy of a disaster
4. General Motors’ car-sharing service Maven
1. Netflix comes to India
Netflix, the world’s leading on-demand streaming service, has entered India.
It has over 75 million subscribers spread over 190 countries and offers hours and hours of exclusive and original content
Why is Netflix so popular globally?
Millennials—those born between 198os to 2000s—don’t like watching TV programmes when they are broadcast, on a specific device (the TV) and while being confined to a drawing room.
They like to consume content at a time convenient to them, on a device of their choice and while on the move. Netflix’s business model is designed to pander to this desire.
The India deal
In India it offers three subscription plans:
- Rs 500 per month: unlimited access to all content in standard definition resolution
- Rs 650 per month: all the above + simultaneous access on two devices + access to HD content
- Rs 800 per month: All of the above + view it in Ultra HD, provided internet bandwidth permits + simultaneous access on four devices
The subscription may appear steep when compared to home-grown competitors. Eros Now’s subscription starts at Rs 49 per month, while Hotstar is available for free. And then there is rampant piracy.
Can Netflix conquer these adversities and win over Indian audiences?
In 2016 it may not but beyond that, it will. Here’s why:
Netflix has a well oiled strategy for entering a new market.
- Internet connectivity: Netflix enters a market only when internet connectivity crosses a threshold level of penetration. India has the second largest online population in the world, estimated to be 400 million plus. Out of these, 280 million plus (70%) people access internet through mobile phone, tablet, laptop or desktop on a daily basis.
- It’s a presold concept among its cohort: This digital population is English speaking, has a higher disposable income and is up to speed on global events. Among this cohort Netflix is a presold concept. They are aware of its popular shows Orange is the New Black, House of Cards. They are familiar with colloquial terms associated with Netflix—“Netflix and chill”, “binge watching”. This cohort is likely to give Netflix a thumbs up.
- Glocal content for India: Original content is viewed as key to Netflix’ growth. This year Netflix will spend about $5 billion on programming and double its production of original series. Part of this budget, over time, will be strategically deployed in India for developing local content. By then internet connectivity will reach Bharat—the semi urban and rural parts of India. Netflix would have a bulging library of exclusive and original local and regional content to cater to their taste.
- Format encourages binge watching: Netflix streams compelling original and exclusive stories which call for binge watching. To ensure binge watching, its content is advertising-free and the entire seasons of a series are available at once.
- Delivers awesome viewing experience: Netflix believes in delivering a personalized and awesome viewing experience. For that it has earmarked $800 million to invest in technology and data analytics. It wants to personalize recommendations to every subscriber—the algorithm it uses becomes smarter as people use it more and more.
- Letting the content and experience do its advertising: Netflix does not spend money on advertisement using traditional advertising media—TV, print, outdoor, cinema and radio. It invests this money in creating awesome content which is personalized to suit subscribers’ individual taste. Result: positive buzz.
Won’t local competition and piracy hamper it?
Let us address the elephants in the room—the local competition (Eros Now, Hotstar) and piracy.
Eros Now offers local Bollywood content at 10% of Netflix’s subscription price, while Hotstar offers its content free. So why will people not prefer them? Because their content is not exclusive or original. It can be viewed on TV channels with regular monotony.
Let us move to piracy. In India piracy is not frowned upon. People indulge in it recklessly. So why will people pay to watch content which they can and have been viewing for free?
Netflix’s strategy is simple and is based on its experience in other markets where piracy is rampant. It offers a month’s trial. Once people experience the quality, they are willing to officially subscribe—for the price of a single Uber ride—and view the content in HD, without limit. Awesome content, available at an attractive subscription price will make it unattractive and unprofitable not to subscribe.
Can this strategy work in India?
Let me extrapolate with Uber’s example. In over two years since it entered India, it has gained upwards of 35% market share by disrupting the ubiquitous black and yellow taxies.
Value equations have changed. Earlier people valued getting highest quality at lowest price. Today people value good experience and are willing to pay for it. That partly explains Uber’s success.
Come back to Netflix, once users experience the exclusive, original and gripping content in HD, many in the cohort will be willing to pay the subscription price. After all, one month’s subscription is just about the same as one Uber ride.
2. Why General Electric moved to Boston
GE announced it will move its global headquarters to Boston, Massachusetts, from Fairfield, Connecticut, where it has been based for the last 41 years, supposedly due to an unfavourable tax system.
The real reasons
For that one needs to look at how its business model has changed.
GE sells machinery and equipment. But in recent years it seemed that its product range has become increasingly irrelevant. Cross-industry competitors compelled it to change its value proposition, shifting it from merely supplying reliable machinery and equipment to being outcome-based. This was done by collecting data from sensors, scanners and imaging devices embedded in the equipment, analyzing them using Big Data analytics and then providing guidance on actions to take which would lead to improved efficiencies and performance.
Take the jet engine. GE believes it is not in the business of merely selling jet engines but certain outcomes. This it does by installing sensors in the jet engines, which then spews out data at high speed. Using Big Data analytics, GE guides the jet owner on steps to take in real time which will result in improved engine performance—less down time, more mile flow, less fuel consumed. The outcome-based approach is helping GE win trust and business from new and existing customers.
As Michael Porter says in this article in The Boston Globe: “Today, manufacturing companies are moving from just mechanical and electrical to becoming software and data analytics companies.... For example, after-sales service is shifting from reactive (break-fix) to predictive and preventive. SCPs [smart, connected products] allow knowing what is wrong to make service more efficient, repairing products before they fail, and even fixing problems remotely.”
Who powers these new strategies? People.
Fairfield, the location of its current headquarters, is a small town, where the kind of talent the new GE needs is not easily available.
Boston, on the other hand, is an educational town with the right talent in abundance. It has over 55 world quality colleges—MIT, Harvard—and the state of Massachusetts spends more on R&D than most regions in the world.
As Porter says in his article, “The Boston region ... has long been a major hub in business-to-business software. Leaders such as PTC, Autodesk, Dassault, and others have a major presence here, and Boston has also spawned leaders in data storage, data analytics, sensors, and IT security.”
GE wants to be at the centre of this ecosystem so it can draw upon the required resources.
This move will also help Boston. It will have the same positive impact on the local economy as when Formula 1 reaches a city.
Indian IT biggies—Infosys, Wipro, TCS, Cognizant—too have set up offices in Silicon Valley to leverage such a culture.
What is the implication for India?
To stay competitive, more and more companies will have to become outcome-oriented. They cannot just sell products, they will have to sell outcomes and performance. For this they will have to willingly embrace digital strategies. Who will facilitate this transformation? Digitally savvy people. Companies will be compelled to make a bee-line to where these kinds of talent are available in large numbers.
College towns like Manipal in Karnataka, Vellore in Tami Nadu, Kota and Pilani in Rajasthan, Kharagpur in West Bengal, Warangal in Telangana, Aligarh in Uttar Pradesh, Vadodara in Gujarat, Pune in Maharashtra, will witness big growth and companies—startups as well as large firm—are likely to set up offices here.
State governments will have to become more business friendly to attract and retain industries, as benefits also accrue to the states by way of employment and a boost in commerce.
Will states lay out the welcome mat?
Some appear to have done so, vying to attract domestic and foreign investment. Witness Vibrant Gujarat, Resurgent Rajasthan, Sunrise Andhra Pradesh, Golden Maharashtra, Bounteous Karnataka, UP: the land of opportunities.
The Indian government is pursuing this strategy at the highest level—no visit of the Prime Minister is complete without pitching India to global investors.
3. App-based food delivery firms: Anatomy of a disaster
Till 2015, app-based food delivery companies were the darling of investors. According to Tracxn, a startup analytics firm, in 2015, 31 food tech companies raised as much as $161.5 million, with Zomato alone raising $110 million.
What went wrong
Armed with funds, these companies scaled up their operations by:
- Opening offices in multiple cities
- Hiring staff to man them
- Offering attractive discounts to acquire customers
- Giving more and more attractive offers and discounts to retain them
The single-minded objective was to acquire and retain customers at all cost. Why? Investors valued the companies based on multiple of revenues and these companies recklessly pursued unprofitable growth to win higher valuations from investors.
The customers who were showered with attractive promotional offers and discounts had no loyalty to any particular site. They scoured the net to see which aggregator gave the best deal.
Even as sales moved northward, profits moved deep-south, painting the balance sheet red.
Over time, food delivery companies started running out of cash. This time when they looked for more funding, investors asked tough questions and were unwilling to finance this reckless adventure.
Faced with this reality the aggregators cut back on discounts and the customers cut back on ordering with them. This put in motion a negative feedback cycle, which seemed to be collapsing on itself.
The casualties
In November, Zomato’s founder Deepinder Goyal sent an email to all employees painting the real picture: “We are far behind numbers that we promised our investors for this financial year (March 2016) ... We are close to not living up to that for the first time in 5 years. So we really need the sales team to achieve peak performance and it needs to happen right now.”
Desperation can be seen in the fact that Zomato advertised on porn sites, but the association damaged the brand.
Clearly, results were not visible on the ground, prompting Zomato to suspend operations in four cities.
TinyOwl is undergoing restructuring too. As a part of the strategy it laid off its staff. There was such animosity to this move that a member of the founding team was held hostage by frustrated employees.
Foodpanda is rumoured to be scouting to sell its India business. It is valuing itself at a bargain price of $10 – 15 million, but there seem to be no takers.
To put the current price in context, last year it raised $300 million from Berlin-based Samwer Brothers and Goldman Sachs to bolster its global business. A large part of this fund was invested in India to acquire Tasty Khana and Just Eat, and to promote itself to ward off threat from Zomato, Swiggy and TingOwl.
Result: On a turnover of Rs 4.8 crore it ran up a loss of Rs 36 crore (FY ending March 2015). Its top management team came under a cloud following allegations of irregularities in its operations. It has let go of hundreds of employees.
Bangalore-based Dazo had to down shutters for lack of funds and SpoonJoy too is facing a funds shortage.
Is there hope for salvage?
Here’s my take on the root cause of the problem and some solutions.
During my interaction with food app companies I got an impression that they have built business models to make investors happy and continue to take decisions to keep them in good spirits—by striving to get sales at any cost; adopting strategies that can be scaled up even if they do not deliver good experience to customers; relegating chefs to support functions; buying sales; hiring people to scale up and letting them loose to get business at all cost, without proper training and then ruthlessly sacking them when results do not show.
To live up to their promise, I would propose food tech companies do the following:
- Differentiate: Currently, leading food tech companies offer two benefits: speed of delivery and large aggregation of food suppliers. To stand out in the crowd, they will have to differentiate themselves. For example, by specializing in a cuisines, be it Italian, diet, Indian or Chinese. And they should defend this unique position.?
- Signature dishes: Today, any dish can be ordered from any food delivery app. There is no exclusivity. To create exclusivity, food tech companies ought to work with food suppliers to create a selection of exclusive signature dishes. If people like it, they will visit the app to order.
- Be an authentic consultant, not merely an order collector: Food tech companies should transform themselves into an authentic consultant, helping people choose the right food. This would help the platform build and deepen relationship with every transaction.
- Collaborate with restaurant owner to identify dishes that are suited for home delivery: They should only put up a menu on the app if it delivers a finger-licking experience. Many dishes do not lend themselves to being delivered at home—these should be weeded out of the menu.
- Collaboration between technology team and chef: Currently engineers, data analysts and visualizers populate the platform in large numbers, relegating the chef to a support function. This should change; the chef should occupy an important position in the team. Together they should keep customers at the centre and build a business model to delight them.
4. General Motors’ car-sharing service Maven
General Motors announced in January that it is beta testing Maven, a car-sharing and renting service, in Ann Arbor, Michigan.
It appears that Maven is inspired from Zipcar, but with a difference: it is not based on a subscription model. Drivers can rent it for as low as $6 per hour, inclusive of fuel and insurance.
Maven’s service will have cars parked at strategically located car parks. Drivers can reserve a car and unlock it using a special app. The inside of the car is loaded with technology—satellite radio, onboard wireless access and sync software with Apple’s Apple Car and Goggle’s Android Auto.
What made GM launch a car-sharing service?
The auto company has seen the writing on the wall.
There seems to be an attitude change among car buyers. They no longer equate buying a car with coming of age. More and more young people—who seek career opportunities in cities—do not wish to own a car. They perceive car ownership as a headache and consider it expensive to maintain. They want to rent a car when required. In the US, they prefer public transport or calling an Uber.
Progressive car companies are bowing to this shift and are experimenting with providing customers options to:
- Car-sharing: rent and self-drive (Maven model)
- Ride-sharing: rent with a driver (Uber model)
- Get self-driving cars
GM seems to have placed small bets on all three options.
Maven addresses the first option. Its $500 million investment in Lyft addresses option 2 and 3. Lyft is investing part of this fund in building autonomous (self-driving) cars.
Will Maven succeed?
Zipcar, which popularized the concept of car-sharing through a subscription model, failed. (It sold to Avis Budget Group as its operations proved unprofitable.)
What are the chances for Maven?
It seems, Maven has a better chance of survival for two reasons:
- GM, which is a manufacturer cars, will provide cost advantage and deep pockets to stay afloat.
- People are now more comfortable with the concept of car sharing and renting, than they were three years back when Zipcar launched.
Will such a trend impact Indian car makers?
The Indian automobile industry is likely to undergo a seismic change in the next decade.
- Ownership model: In India, young people are increasingly turning their back to outright ownership of cars in favour of renting. They seem to be as comfortable ordering for a car as they are ordering pizza over their smartphones. Uber’s success confirms that this trend has taken root.
- Technology: In future, software, as much as the internal combustion engine, will power cars. At the 2015 International Motor Show in Frankfurt, carmakers voiced their apprehension that Apple and Google would turn them into mere hardware makers—and hog the profit. The New York Times quoted Dieter Zetsche, the chief executive of Daimler which makes Mercedes vehicles: “What is important for us is that the brain of the car, the operating system, is not iOS or Android or someone else but it’s our brain.”
Let us take a look at Maruti Suzuki, India’s No. 1 car company, to see how prepared it is for tomorrow.
- Service stations: Maruti Suzuki believes that service station is its business moat. It owns the largest number of service stations across India, totalling over 3,060.
Tesla is changing the rules for servicing cars. Cars powered by software are likely to break down less often as they have fewer moving parts. When they breakdown, they do not have to be brought to the service station. The software will diagnose the problems remotely and dispatch software patches via the internet to rectify it. This process will make the service station less relevant and a profitable revenue stream for car companies will evaporate.
Is this scenario likely to become a reality? Just like e-banking has made the physical bank branch non-essential, physical service stations too will suffer a similar fate.
Is Maruti Suzuki taking proactive action to protect its business moat as the rules of the game change? It seems not. It is investing more heavily in opening showrooms and service stations. - Ancillary units: Such units supporting automobile companies will come under pressure because electric and battery-operated cars have fewer moving parts (they do not have piston, fuel injection pumps, etc). Hence fewer parts will be required to be manufactured. Maruti Suzuki has a strong ecosystem of ancillary suppliers who are heavily dependent on it for business. What will be their future?
- Automation: Automation has seen robots taking up position in the assembly line. The new generation of self-learning robots can be programmed to learn new skills and their attrition rate is near zero. Robots are bringing down cost, and they do not go on strike; it provides flexibility to customize cars. Is Maruti Suzuki hiring robots or still humans? It seems to be hiring humans.
- Fuel: In the near future, automobiles will not be powered by fossil fuel but a combination of electric and fossil fuel (hybrid technology), chargeable batteries or hydrogen fuel cells—the concept is being tested by Toyota. Is Maruti Suzuki working on these fuels to power its cars? Does not seem to.
Not just Maruti Suzuki, but the automobile industry seems underprepared to face the future with confidence. They should realize that whenever technology collides with an industry, disruption will happen. And technology has already collided with their industry.
