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Should Indian startups take on global Internet giants?

Yes, definitely the Indian startup has matured enough. The growth of mobile phones, particularly smartphones, has been significant in the last decade. And as the market has grown, naturally the service providers and the app developers have also grown. So we have an ecosystem that’s very active with a large number of consumers and service providers. What is missing has been the infrastructure piece. But in some ways, we have also been able to develop expertise in infrastructure; for example, on payment gateways. Since demonetisation and other changes, payment gateways have become substantially stronger. Today, I think the Indian startup environment is mature. But one thing we need to be cognisant of is that, if we’re really looking at competing effectively with the likes of Google and Facebook, then we need to be well prepared. We need to build like-for-like capabilities, the way Google has done over the years.

India’s startup ecosystem is still in its first innings. The U.S. has been playing this match over and over again. Even markets like China have evolved and raced past India. Just to give you one data point, in the fourth quarter of 2019, you had $34.2 billion of venture capital going into the U.S. market. India had only $6 billion and that’s supposed to be a record-breaking quarter. In the first quarter of 2020, we had only $2 billion. From a product point of view, we don’t have the infrastructure that is required to build and scale nimble startups, at least not yet. For example, a lot of startups are launched on Amazon Web Services, or Google Cloud, or on Microsoft Azure. India doesn’t have large infrastructure players that can help set up stuff. Everybody in the Indian startup ecosystem knows that we’re not there yet.

So, do we want to take on these giants? I would argue that we should not compete, but cooperate. It is best for a country like India to have an approach where we compete when it makes sense, on a level playing field; and cooperate and take help from whatever quarters it comes from. Do we need an Indian app store? There is obviously always a case for more competition in the market but an app store is a very tricky challenge to take on. It is the expression of a bunch of things that have come before it, which is your hardware. India has zero strength in hardware. We have practically no real manufacturing or chipmaking. That said, we have companies like Indus OS which have built app stores, and have about 100 million users. That’s a sizeable population, but it’s still not deep enough to be like a Google or Amazon which coexist in an ecosystem like India. So, my view is we don’t need to take a confrontational approach.

Why does Google work? There is an element of trust that Google’s invested in building up. Its products are user-friendly. It has also spent a lot of time expanding the market by localising its products. So, from that point of view, Google has been investing in the Indian market. Now, from an Indian entrepreneur’s point of view, the concern is legitimate. Are we paying too much to access our own users by giving a 30% cut to Google when you are selling a service or a product through an app on the Google App Store? These companies also have to advertise via Google to reach their customer base. In effect, a large chunk of all the money that these companies make goes to Google and Facebook. The challenge is that India as a market itself is poor, in the sense that it doesn’t have enough spending capacity. For digital services to take off and be profitable and viable, one of the thumb rules that several companies talk about is that the GDP per capita should be above $4,000. For example, in markets like Indonesia, where the GDP per capita recently touched $4,000, companies have also been growing profitably and faster. India is still at about $2,000 to $2,500. So, here your potential to monetise this user is very low. If you end up spending a ton of money on distribution and on your commissions to Google and others, you end up with practically nothing. That’s the challenge that entrepreneurs have been flagging. Google has been reasonable, I think. After the PayTM fiasco, Google has come back and said that it will revisit the 30% commission policy some time next year.

One of the raison d’etre for businesses is to create shareholder value. The mechanisms by which shareholder value is created keep changing as the company moves across its life cycle. Startup companies create value by being innovative. Bigger companies like Google and Facebook create shareholder value by building barriers that startups cannot afford to create. They have much larger tools in their arsenal to be able to create barriers. One of the tools they use is to buy all competition to ensure that they stay in the market and create shareholder value.

Now, the question is, when does the consumer benefit? Is it going to be in the short term or in the long term? In the short term, the consumers will benefit because as the bigger companies assimilate these innovations, these innovations become stronger and the bigger companies can use their infrastructure to make them available to a larger number of people. But what happens in the long term? As the stickiness of the services increases, and the consumers find it very difficult to break away, there’s something called a creeping expropriation of consumer surplus. Gradually, the billings start rising and consumers end up paying more because there is not enough competition in the market. To overcome these circumstances, the Competition Commission of India and others ensure that the monopoly position is not being abused by companies. For example, they can ensure that the companies don’t overcharge or they can ensure that the companies are split into different smaller entities. It is going to be a very dynamic interaction between the size of the companies and the regulatory framework in countries to ensure that the competition as well as the consumers benefit.

Companies like Google or Amazon also do not operate like a foreign entity. They have set up base in India and have a stake in the market; which means they also work with policymakers. I would like to think that it’s good to have these foreign competitors who are willing to abide by local laws. We also cannot have too much of reactive policymaking against them as it doesn’t signal well for attracting foreign investors. Also, it is a slippery slope to be nationalistic about products that are built for the Internet, which is global. If we create a very strict policy environment which encourages only local Indian innovation and tries to stave off foreign competition, I suspect we are going to end up with subpar products, and large industrialists capturing policy.

It’s a very tricky balancing act, where you have on the one side investments that these larger companies are making and on the other side, you have to think of Indian companies. Now, the truth is that a lot of these Indian companies are also funded by Chinese or U.S. investors. So, it’s not as easy as saying ‘I’m an Indian company and I want regulations for India.’

We cannot just hope for it to happen. There has to be a conscious strategy. In the technology sector so far, in the Indian context or even in Silicon Valley, the role of the government has been very little. We could probably take the example of what the government in China does. Specific technologies and companies that developed these technologies are chosen; and then there is unwavering support from the government. The government does it in multiple ways, such as giving domestic startups favourable access to the market, giving them an opportunity to grow and to stabilise their offerings. There is a conscious strategy to develop a giant that can compete with the global leaders. Today, we are looking at these kinds of long-drawn-out strategies in other areas; for example, in winning gold in the Olympic Games. People are trying to put a programme in place so that we just don’t hope that an athlete or a sportsperson will win a gold, but we are able to work towards that in a very planned manner, so that the results are there in a time frame that we have chosen. I think that is a good way to go up against Google.

However, you cannot compete with what Google is today. Because, it may take us, let’s say, five years to be where Google is now; and in five years, Google would have moved away from what it is today. So to be able to compete with Google, we will have to be where Google is going to be five years from now. That requires significant time to plan and execute our strategies. Then it is not a question of this or that — but doing both. If there are any antitrust actions globally, join those right now or provide overt support to ensure that dominant positions are not misused. At the same time, create a programme to ensure that we are able to create an Indian giant.

Jayadevan P.K. is a startup founder and writes on technology. He now works on brand building for startups; Thillai Rajan is a Professor in the Department of Management Studies, Indian Institute of Technology Madras.