There are many religions when it comes to calculating how a particular market or an industry will shake-out.
In the automobile industry, for instance, it is universally understood that you need a certain amount of localisation in order to be successful. Smartphone companies, on the other hand, inherently understand that if you aren’t Apple, you live and die by the church of cut-throat pricing and market share.
Practicing cold logicThe e-commerce industry practices a cold logic: sacrifice profits to scale, gain size, and, in the process, kill your competitors.
Flipkart CEO Sachin Bansal, who made waves last week after his company scooped up $1 billion in funding, believes that the Indian e-commerce market has reached an inflection point, the way China did in 2005 when e-commerce powerhouse Alibaba raised $1 billion.
Mr. Bansal isn’t wrong. Year 2014, so far, has been filled with signs of different players preparing themselves for a war of attrition. In February, online marketplace eBay led a sizable investment round into e-tailer Snapdeal, and significantly increased its stake in the company. Two months later, Flipkart acquired online fashion retailer Myntra for over $300 million.
The events of last week — where Flipkart announced its $1 billion funding and Amazon countered with a $2 billion investment — are the latest indication of the kid gloves coming off.
Why is bloodshed imminent? Firstly, the amount of investment that was made public last week — $3 billion — is roughly equal to how much the entire Indian e-commerce market is now worth.
Secondly, Amazon’s decision to counter Flipkart’s announcement is more than just an attempt to stay in the media and investor limelight. By deciding to disclose its $2-billion investment, Amazon is drawing a line in the sand. There will be no golden acquisitions or mergers to save the day, no headlines that read ‘Amazon to acquire Flipkart, end e-commerce battle’ — which may happen in the case of Russia, where local e-commerce giant Ozon is not averse to being bought by Amazon.
More than this, India is a market where Amazon has something to prove. Across the BRIC countries, Amazon has struggled. While most of the struggle is due to local bureaucracy, adverse taxation or investment policies and poor logistics, the ‘Everything Store’ cannot escape the fact that it is not in pole position in most developing countries.
Competitive tensionWith this sort of competitive tension building up, the question that needs to be asked is whether the Indian e-commerce market will end up with only one winner.
There are three major ‘horizontal’ players — those who offer everything under the sun — left in the running. Apart from Flipkart, Snapdeal and Amazon, what is to be made of the smaller horizontal players such as Infibeam and ShopClues? The three choices left to them are: be acquired, die a slow death or somehow make it into the big league. Though the first and third options are not to be discounted, a betting man would indicate that the second outcome is more likely.
What is far more interesting, calculation-wise, is the fate of the strong vertical players such as HealthKart, LensKart and Jabong (to a lesser extent), who have competencies in specific and niche merchandise. Will they be able to retain independency while building a larger and stronger business or will they have to find a strong protector in the way Myntra did?
The final factor at play will be the role of brick-and-mortar conglomerates such as Reliance and the Tata Group. Though there have been rumours of an entry, no CEO has publically backed these plans with his company’s coffers. A deep-pocketed player could very well disrupt the current Flipkart-Amazon-Snapdeal Mexican stand-off, though it does not seem likely.
The only likely winner in the next one or two years, however, will be the customer. Investments will pour into infrastructure, payment gateways and logistics. Not only will prices come down, but the need for an e-commerce talent pool will lead to a better class of jobs than what the IT industry has provided so far.
In a very curious way, the e-commerce sector is leading the charge in bringing the overall Indian Internet and technology industry to a certain level of maturity. Customers can only hope that cut-throat competition in the days ahead will not bring it all crashing down.
