What May Hurt Indian Internet & E-com Biz

Two years ago, as an Internet analyst based out of Silicon Valley (covering Google, Amazon, eBay, Yahoo! and all other global Internet majors), I wrote a  sector-defining report on India Internet. The market then was at a nascent stage except for online travel and online classifieds. Since then, we have seen a huge euphoria about the Internet, especially a sizable adoption of e-commerce. This euphoria is not a short-term trend and will continue for many years to come. India is not only among the top three countries in terms of Internet population but also among the most underpenetrated when it comes to e-commerce, online advertising and content/subscriptions. So opportunities are huge and India will continue to see growth for these sub-sectors of the Internet at 2x-3x level, compared to the rest of the world.

In my last note here at VCCircle/Techcircle, I highlighted why e-commerce in India could reach $70 billion in GMV (Gross Merchandise Value) by 2020 or 140x larger than the current level. In this note, I am highlighting four issues which, if not addressed well in time, may hurt the e-commerce industry's growth and adoption from a long-term perspective, i.e. lack of innovations, short-term approach, absence of regulatory support and weak ecosystem.

Before I talk about those four issues, let me give you an overview of the Indian Internet sector and the outlook for e-commerce for additional context.

India Internet Overview

India, with nearly 125 million of Internet users, is the third largest country in terms of Internet population after China at 500 million and the US at 220 million. However, the Internet penetration is still extremely low with only 10 per cent of the population online versus 40 per cent in China and close to 80 per cent in the US. By 2014, India will exceed the US in terms of Internet population. Almost all categories of the Internet are underpenetrated and will continue to see secular growth adoption for the next one decade.

India Internet can be broadly divided into 10 sub-sectors:

1.      B2B, e.g., India Mart, Trade India

2.      Online travel, e.g., MakeMyTrip, Yatra

3.      Classifieds, e.g., Naukri, Bharat Matrimony, Carwale, Magic Bricks

4.      E-commerce, e.g., Flipkart, Yebhi, ShopClues

5.      Online advertising, e.g., Google, Yahoo!

6.      Content and subscriptions, e.g., Rediff, Money Control

7.      Social and gaming, e.g., Facebook, Ibibio, Game2win

8.      Mobile and gaming, e.g., One97, inMobi

9.      Online commerce services, e.g., CCAvenue, BillDesk

10.  Online marketing services, e.g., Komli, Interactive Avenues

Both B2B and online travel are now fairly penetrated markets and all four sub-categories of online classifieds, i.e., career, car, matrimony and real estate, have the presence of noticeable players. I believe that in the next five years, India Internet will reward e-commerce, Internet advertising and mobile plays in big way.

Outlook For E-commerce In India

Before I throw more numbers and percentages, let me first say that the definition of e-commerce, which is often used in India, is misleading, especially when it comes to comparing it with the rest of the world. For an apple-to-apple comparison, we must exclude online travel and online classifieds from the commonly used e-commerce definition in India. Online travel is considered as a separate sub-sector of the Internet and online classifieds is part of online advertising globally.

With this context, when I talk about e-commerce outlook and growth, it is only the part, which we commonly call e-tailing/e-retailing in India or excludes online travel and online classifieds. I expect e-commerce to grow 15x by 2015 to reach $8 billion (roughly 1 per cent of the $750 billion retail market) and to grow 140x by 2020 to reach $70 billion (6 per cent of the $1.2 trillion retail market).

Four Key Issues With Long-Term Repercussions On The Evolution Of E-com Industry In India

The rise of India Internet is no longer just the talk of the town but is being discussed at a global level. However, critical factors such as the speed of innovation focus on fundamentals including path to profitability, and contribution in making the ecosystem healthy for the industry remain less of a focus by the majority of the players. While some entrepreneurs have adopted a cautionary stance, irrational behaviour by well-funded e-commerce companies continues, e.g., excessive reliance on COD, offering free shipping as norm and excessive marketing spend with no measurability.

So, here are the four issues that are not talked about much but have long-term repercussions on how the e-commerce industry will likely evolve for the next decade.

Lack of innovations: As far as lack of innovation is concerned, most companies are focusing on "Me Too." While there is nothing wrong with that and emerging markets are always characterised by "Me Too" concepts, the e-commerce companies are not driving innovations – be it UI, payments, delivery, cataloguing or customer services. There are many companies who claim to be Zappos or Amazon of India but we are not sure whether they truly are. Most of these companies almost appear to be like real estate companies focusing on land grab from 2002 to 2008. The industry must promote innovations that will benefit customers and ultimately a stronger sector will emerge that can thrive for the next couple of decades.

Short-term approach by majority of existing e-commerce companies: In my view, the majority of e-commerce companies in India have a very short-term approach. Most of these companies are built to sell in 2-3 years' time horizon. This kind of myopic approach results into a habit of covering dust under the carpet – so that the surface continues to look clean. This kind of phenomenon will backfire as investors demand higher level of scrutiny in subsequent rounds of funding. Also, keep in mind that possible acquirers have a rich experience in acquisition across geographies "they have acquired anywhere between 30-100 companies each in the last 10-12 years.

Absence of regulatory support: E-commerce can generate close to two million jobs by 2020 but regulators in India have done very little, if anything, to promote e-commerce. For example, VAT, CST and Octroi rules completely dismiss the presence of digital commerce as these laws were written a century ago. Besides, nothing has been done by policy makers to promote this industry, e.g., no sales tax on e-commerce in the US or tax holiday for ITeS in India for a long time.

Weak ecosystem: In my view, quality of the Internet bandwidth, online payment infrastructure and scale/sophistication of shipping/logistics providers remain very weak and the biggest impediments for e-commerce adoption. Also, compared to the majority of other countries (especially in the emerging markets), India remains a low-trust market and that causes a myriad of issues for healthy trade. E-commerce industry's ecosystem must become stronger and scalable; else we will start seeing more cracks by this Diwali.

Let me conclude by saying that as far as e-commerce is concerned, the high tide has come for sure and many boats have gone up or will go up. But many things have to happen at the individual level of e-commerce companies, regulatory/policy-makers' level and ecosystem level for this high tide to remain a norm and let e-commerce evolve, keeping in mind how IT-enabled services grew from mid-90s until now. While India is likely to achieve 1 per cent penetration of e-commerce by 2015 and close to 6 per cent by 2020, India has the capacity/potential to achieve 5 per cent e-commerce penetration by 2015 ($35 billion in GMV) and close to 15 per cent by 2020 ($180 billion in GMV), given how weak and underdeveloped traditional retail sector is.

We, as an industry, must make sure that e-commerce does not turn out to be another bubble but a fundamentally strong industry and envy of every e-commerce market globally.

(Sandeep is the founder and CEO of "ShopClues.com". He has 16 years of global experience in business operations, strategy and investment, focusing on Internet and technology. He is counted amongst leading Internet experts globally, and has regularly appeared on CNBC, Fox, ABC News and regularly quoted by Wall Street Journal, Fortune, Forbes and other prominent media outlets. Prior to founding ShopClues.com, Sandeep was among the most renowned Internet analysts on Wall Street based out of Silicon Valley, providing research coverage on Google, Yahoo!, eBay, Amazon, Netflix, Priceline, Microsoft, MakeyMyTrip etc. Prior to being an analyst Sandeep worked in strategy roles with Microsoft in Seattle and Schwab.com in San Francisco. Sandeep is chartered member of TiE Silicon Valley.)