India's largest telecom company, Reliance Jio, has reeled in three mammoth investors in three weeks: Facebook invested $5.7 billion for a 9.99% stake, Silver Lake Partners, a global leader in technology (with investments in Airbnb, Expedia, Twitter, Alibaba, Didi Chuxing) invested $750 million for a 1.15% stake, and most recently, Vista Equity Partners purchased a 2.32% stake for $1.5 billion.
The deal comes amidst uncertainties caused by COVID-19, when the nation is in the middle of a lockdown and economic activity has come to a standstill barring essential services. These developments speak volumes toward the fact that India remains a lucrative market for investors, whether for strategic (in Facebook's case) or opportunistic investors.
The birth of a conglomerate
The coming together of Facebook and Jio is mammoth in nature. With 387 million subscribers, Jio is the single largest telecom player in India, with a revenue market share of 35%. Not to mention the whole suite of services that Jio offers: JioFiber (its network of fiber-optic cables), Jio-Saavn (streaming music services), JioTV (among largest streaming entertainment services), JioCinema, Ajio (Fashion Commerce), JioPay (payments platform), JioMeet and more. Jio also has ambitious plans to digitise kirana shops, which account for 85% of the retail commerce in India, through its JioMart commerce platform. However, JioMart and JioPay have so far had limited success.
With 280 million active Facebook users, India has the largest number of Facebook users in the world (nearly 50% more than US) and with an immense potential for future growth (with less than 25% current penetration levels). India also accounts for one-fifth of the 2 billion users of WhatsApp globally. WhatsApp is the single most popular peer-to-peer platform in the country, and has plans to expand into payments with WhatsApp Pay.
It's also worth remembering that in 2013 Facebook launched a project called Internet.org to bring affordable access to select internet services in India through an app called Free Basics. This was banned by Indian regulatory authorities in 2016 as being discriminatory and violating net neutrality.
Now consider Facebook's ambition, with Jio's other joint ventures. The company has a joint venture with India’s largest state operated bank State Bank of India (SBI), called Jio Payments Bank, where Jio has a 70% stake. Jio also recently entered a partnership with Microsoft to offer enterprise cloud services. It's also noteworthy that Reliance, the parent company of Jio, owns one of the largest physical retail chains in the country by revenue in Reliance Retail. The conglomerate that emerges in Jio-Facebook-Microsoft-SBI (let’s call it the Jio Conglomerate) has the capability to transform India through a wide range of services—supply chain and retail, telecom, financial services, enterprise services and digital services.
Four major giants fight for Indian retail
Today, we have the American giants in Amazon, Facebook, Alphabet and Apple and the Chinese giants in Baidu, Tencent, Alibaba and Bytedance. The 'Jio Conglomerate' could herald the era of the Indian giants. There is enough evidence to suggest that the Indian ecosystem might get further polarised to give rise to the possibility of more such strategic partnerships.
Here's the current state of play in India.
Along with Jio, Vodafone-Idea with 336 million and Airtel with 327 million customers account for 89% of the Indian telecom subscriber base. But Vodafone Idea has lost 21% of its subscriber base year-on-year, and experts have said that Vodafone Idea may struggle to sustain itself financially beyond two years. In that situation, Airtel and Jio may lap up Vodafone-Idea’s subscribers. After Jio, Airtel is the telecom player to watch out for. Airtel has already entered into a partnership with Kotak Mahindra Bank to set up the Airtel Payments Bank in 2016. In January, Airtel announced a partnership with Google Cloud to serve small and medium businesses with digital solutions.
In the ecommerce space in India, Amazon and Flipkart dominate. At $31 billion in GMV, India’s ecommerce is only around 2% of the total retail sales in the country. In 2018, US-based Walmart purchased a 77% controlling stake in Flipkart for $16 billion. Before Walmart, Amazon had 31% market share, the same as Flipkart. In 2019, Walmart’s e-commerce businesses had more than 60% share during the peak festive season compared to Amazon’s 22% as per a market research firm, RedSeer Consulting. In 2019, Amazon entered into a strategic partnership with Future Retail, the largest hypermarket chain in India in an apparent move to counter Reliance Retail. It had also entered into a partnership with Shoppers’ Stop, an Indian lifestyle departmental store with a presence in major cities. Amazon also has its Prime Membership in India with an estimated 13 million customers. Flipkart owns the country’s leading fashion commerce portals Myntra and Jabong as well as a leading payments platform in PhonePe. Earlier this month, Flipkart has also announced a partnership with Spencer’s Retail to deliver essentials amidst COVID-19. COVID-19 has exposed major chinks in Amazon’s armour, as Amazon’s alternative retail model is based on creating large-scale warehouses. During COVID, many Indian startups shifted to the collaborative commerce model, wherein they became the technology platform for supporting kiranas (mom-and-pop stores) offering logistics services.
Alibaba-backed PAYTM, which had emerged as the largest payment platform in the country after the demonetisation of the currency in November 2016, will face a tough time ahead as the user experience of WhatsApp Pay is touted to be far superior to that of PAYTM. PAYTM is currently accepted at more than 16 million merchants across the country and has a dominant share of merchant retail transactions in India.
Google is the largest digital advertising platform in the country. Its focus has been to partner with the government of India and invest extensively into joint products, driving internet accessibility for the public. It also has a payments platform in Google Pay. For Google, it is a time to re-evaluate its strategy in India.
It may also be noted that Xiaomi leads the market share for smartphones in India at 30%, followed by Samsung and Vivo (16-17% each). Xiaomi has plans to disrupt the white goods space in India. It has already launched smart TVs and experiential retail for IoT devices.
Thus, we see at least four major giants in India vying for a share of Indian retail: Jio Conglomerate, Airtel Conglomerate, Amazon ecosystem and Walmart-backed Flipkart. Besides these we have Vodafone-Idea, Alibaba-backed PayTM, Xiaomi and of course, Google. The days ahead might see consolidations in this space.
Besides these giants, there is a thriving startup ecosystem in India across various sectors such as edtech, agritech, healthtech, fintech, gaming and many others. The FB-Jio deal brings good news for startups which are complementary to the franchise—they might be absorbed by the Jio Conglomerate in future. Startups which have had poor unit economics will see a sudden dearth in funding. This is also an opportunity for investors to partner with Jio Conglomerate. Thus far, we have seen very little Indian capital in the startup ecosystem. There might be an impending change in this.
The Jio-Facebook vision for Indian retail and merchant businesses
In the press note announcing the partnership of Jio-Facebook, it was announced that Facebook will focus on the front-end user experience and payments platform whereas Jio shall tackle aggregation of kirana stores and order fulfillment. Adoption of technology among merchant retailers and small and medium businesses is very low in India. The Jio-Facebook partnership reserves the potential to change that and enable seamless adoption.
There are clear benefits for the retailer. There will be automatic reconciliation of payments without having to maintain ledgers and manage cumbersome software. Management of CASA, accounting and financial reporting becomes a lot easier. Another potential benefit is an improvement in working capital cycle. Today, there is a payment trap in the form of a perennial debt with distributor. A large corporate like Unilever gets paid ahead of time of actual sale. Given the fragmentation in the supply chain and at the merchant level, there are inefficiencies, which result in higher margins for the corporates and distributors. If Jio can aggregate small businesses and manage procurement, margins for producers and distributors will drop because of an increase in negotiating power.
On one hand, the partnership augurs well for consumers, as they will benefit from lower retail prices. On the other hand, it also raises three possible challenges: data privacy, monopolistic trade practices and net neutrality. The government as also the industry will have to keep an eye on each of the three to ensure a level playing field.
Likely extension of conglomerates to include entertainment and sports
The past two years has seen the explosion of content commerce or shopper-tainment in China and in Southeast Asia by platforms such as Lazada and Pomelo. The clear advantage this brings is performance, with immediate attributable sales.
In India, streaming platforms have attempted partnerships with commerce. The five largest broadcasters in the entertainment and sports industry in India are Disney-Star Network, Viacom18 Network, Zee Network, Sony Network and Sun TV Network. Of these, Sun TV has a regional play in South India.
In 2018, Flipkart and Hotstar (India’s largest streaming service, part of Disney-Star) joined hands to create a new advertising platform called the Shopper Advertising Platform. In 2019, there were reports of a possible deal between Amazon Prime Video and Zee5 (part of the Zee Group, a leading Indian broadcaster). In December 2019, there was a news report of two large broadcasters partnering: Sony and Mukesh Ambani-owned Network18. Network18 holds majority stake in Viacom18, which in turn is a licensee of the parent company Viacom. If these partnerships materialise, we see three shopper-tainment behemoths emerge: Jio-Sony-Viacom, Flipkart-Disney-Star and Amazon-Zee. These will redefine content commerce in India.
The coming together of these also means that the sporting rights industry will get some tooth. In 2017, Disney Star network won the broadcast rights for the largest sporting event IPL (Indian Premier League) for a period of five years outbidding Sony, which had held the rights for 10 years. In 2018, Disney-Star also won the internet and mobile streaming rights outbidding Jio, Sony and Facebook, which bid individually. Disney Star also won the media rights for all BCCI (Board of Control for Cricket in India) matches played in India. The combined might of Sony, Jio and Facebook might alter the equations in the sporting industry rights in India.
A transformation is underway
India is already undergoing transformation and the Facebook-Jio deal shows how the industry will continue to transform in the coming decade. If your business doesn’t have an India strategy yet, you might well be missing out on riding an economy that promises to be the growth engine of the world in the coming decade or two. Rajan Anandan of Sequoia Capital predicts 100 unicorns from India by 2025 (up from 19 currently) and that India will emerge as a hub of global innovation by 2040. Exciting times ahead!
Ravi Ganesh is an interim startup advisor, and was previously head of data and analytics, Havas Group India.