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December 8, 1999


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Devangshu Datta

Roadblocks to e-prosperity

The swallowing of IndiaWorld by Satyam Infoway has set off plenty of waves. Sify paid Rs 499 crore and promptly got back that and more by way of share-price appreciation on Nasdaq. Wonderful, fantastic and I am not delving into the business sense of paying $ 225 per page view. Every patriotic Indian geek is simultaneously celebrating and putting together his own web-business plan.

But there are a few hidden aspects to the deal that leave me feeling a little uncomfortable. Let me reiterate that I do not doubt the acumen or the entrepreneural qualities of either Rajesh Jain or Ramaraj. But there are generic problems here. As anyone who has tried to the log onto the IndiaWorld site knows, there are two IndiaWorld sites. The "real" one is but newbies are more likely to land on, which in fact mirrors much of the content.

The existence of parallel sites dates back to a dispute between the original founders of IndiaWorld. Mr Jain hasn't been able to shut the ".com" site down or, more importantly, obtain payment and acknowledgement for his mirrored content. The second aspect is more an issue of tardy Indian legal systems rather than of the freedom of the Net. This is the kind of thing that hamstrings all Indian business. What's the point of having laws and even cyberlaws, as we now do, if it takes an eternity to enforce, as all Indian laws do?

Remembering an "old" (ten-month-old) analysis of Net trends I had read sparked off the rest of the angst. I fished out this Fortune (February 15,1999) which had a cover story on the 'Ten trends You can Bet on.' The story focussed on tech issues and it was the distilled wisdom of half a dozen distinguished observers. When one considers India's ability to take advantage of these trends, it is time to start wondering. Let's take them one by one.

  1. The Exchange economy: E-commerce trends will be heavily skewed in favour of business-business dealings. In 1998, consumers did $ 8 billion worth of e-buying whereas companies did $ 43 billion of business. This trend will be accentuated -- projections suggest circa 2003, a $ 1.4 trillion market in e-commerce, of which 90 per cent will be business-business. Indian companies will undoubtedly benefit from this. It is a software driven business, infomediaries have zero inventory, and declining costs per customer. The only roadblock here could be the legal system. It's tough enough to enforce a paper contract in India, let alone an e-contract. Credit card default is endemic and it's impossible to legally extract payment in any reasonable timeframe. The other potential problem is the nitty gritty of excise and tax treatment for e-commerce. It could take decades to build reliable case law and contract law on e-commerce.

  2. Phones get swallowed: The Internet business subsumes the conventional telephony system in the phenomenon of convergence. Technological advance brings down costs and makes new things possible. Virtual Private Networks, Internet telephony and fax, Digital Subscriber lines etc, etc. The problem here again lies in government. Department of Telecom and its babies, MTNL and VSNL, are all monopolists who will fight tooth and nail to prevent their rates being brought down and to block all competition. It's been five years since the telecom industry was supposedly opened and almost one year since the New Telecom Policy of 1999. It can still take anything up to a month and many small "considerations" to "energise" a MTNL connection.

    In effect, the government monopolists continue to do as they please and charge the rates they choose. The supposed arbitrator Telecom Regulatory Authority of India is completely emasculated and cellular operators have been driven out of business by exorbitant license fees. I do believe that eventually DoT's roadblock will be removed under internal pressure from other government entities (Railways, Banks, National Informatics Centre) who have strong reason to change this situation. But it will take plenty of time.

    Meanwhile telecom costs in India will remain way above the norm and new technology, which could bring costs down and improve efficiency, will continue to be either blocked or offered at exorbitant "take it or leave it" rates.

  3. AOL rising: The trend described here is of deeper and cheaper Internet penetration. India will see warp speed growth in this segment. However, once again there are roadblocks in the lack of both PC penetrations (3 million total ownership) as well as phone penetration (20 million individual connections). The cable television option is more promising (70 million subscribers). The problem with is that cable is a deeply and uniquely fragmented market with very local monopolies. If your cable operator offers Internet and provides decent service standards, then fine. Otherwise you'll have to change residence! And the initial cost of cable modems is high enough to deter anybody except the big user.

  4. Storage! Surely, as Net-use increases, the opportunities for storage providers increase. This market will be about $ 35 billion in 2001 and growing at 80 to 90 per cent annually. But most Indian Net content is stored on US servers. So this is not really an area of opportunity. Some smart software chaps will, of course, work out bright ways to reliably compress data, allow quicker access etc. But the basic commodity business of storage will never be a major market for India. We don't have the tech-hardware base to manufacture the media, or the cheap, clean connections required. For that matter we don't have the cut-throat marketing expertise.

  5. PC-free devices: Again this is a hardware-based industry and it requires a sophisticated electronic manufacturing base. So that's another market where Indians will not be major players. Of course, once again, some Indians will design the new high IQ smart gizmos of the 21st century.

  6. Supersmart Cellulars: See above.

  7. Y2K: OK this is a big area of strength. While the main business will soon end, Indian software firms can hope to retain all those corporate accounts they picked up doing line-by-line drudge replacement jobs. So if they can leverage their existing relationships, this could actually provide work through the foreseeable future.

  8. Freebies Galore! The Net paradigm is heavily dependent on expanding markets by giving stuff away. Free connections, free PCs, free gifts etc. In a value-conscious environment like India this could certainly work. But only if Indian Internet businesses possess both the guts and the depth of pockets to give things away. Also if they don't run foul of peculiar Indian laws about freebies. However, the laws of competition suggest that they will eventually be forced into this freeby paradigm and it will work. The other significant problem is the difference between Indian and First World Purchasing power. While Indian Netizens come from the upper income groups, the much vaunted 200 million Indian middle-class possesses only about 11 million taxpayers with incomes in excess of Rs 75,000. How many purchases will Indian Netizens make and how much room is there to hand out freebies?

  9. The morphing of Intel: According to the Fortune analysis, Intel will stay ahead of competition in the semi-conductor field and move up the value-chain from PCs to servers etc. That's as maybe, but Indian companies won't make a packet out of it, one way or the other. Again the lack of a tech-hardware base a la Korea -- or Taiwan -- means that India cannot conceivably be a player in this market. Of course, some R&D work, probably plenty of R & D will be coming our way from Intel and its competition.

  10. Microsoft Waning: Again, there isn't a single Indian company, which is currently a credible player in products or apps, let alone in OS-es. Some Indian IT firms will undoubtedly graduate to being big players here, so the end of MS, if it happens, could be an opportunity. Incidentally if MS is broken up, I suspect Bill Gates will promptly triple his Net Worth since the loss-making Internet division which is currently seen as a drag on revenues will promptly soar in value.

So out of a list of ten identified growth trends, India is completely cut out of four and possesses possible competitive advantages in another four. All those advantages arise from the same basic source of a wonderful higher education system that churns out low-cost, high-tech capable people. Effectively, Indian IT has always benefited from labour arbitrage and could continue to do so until such time as Russia, or Bulgaria, or Bangladesh, develops even cheaper skilled labour pools.

Right now however, and well into the future, Indian IT is going to continue to be hobbled by lack of infrastructure and a sophisticated manufacturing base, exorbitant cost of capital, lack of an efficient legal system and an extant monopoly situation. None of these are problems that it can solve off its own bat.

Devangshu Datta

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