Revisiting Product Innovation in India

Reduced down to the core basics, a successful business involves building a product (anything of value) and selling it. Both building and selling are core to most businesses.  However, typically one of these areas is the main differentiator, which makes a company the leader in its space, while the company ‘checks the box’ in the other area.

Amazon, Facebook, Google, Apple and most other global consumer Internet leaders today are product driven companies. Product is their core strength. They are (usually) good at sales too, but that’s not where they differentiate. They are  simply outstanding at building products, and consumers self-discover their products/services and stick with them.

The Indian tech landscape has looked different historically. The first wave of IT and Internet leaders in India excelled at sales and execution, while (often barely) meeting the baseline on product. Market leaders emerged from innovative use of offline sales forces, larger marketing spends, offline presence, stronger sales teams, partnerships and better distribution. Product development was secondary. And rightfully so, given the market dynamics that existed.

There have been both demand and supply side reasons for this. On the demand side, the online consumer base was small, non-so-discerning and spread-out. Good self-discovery mechanisms didn’t exist. So market leadership was established primarily through sales, distribution and reach. On the supply side, there wasn’t enough availability of product talent or venture money. I blogged a few years back about this.

I think we are starting to see an inflexion point in this dynamic now. As customers get more savvy and approach a critical mass, they figure out ways to beat down a path to the product that works best for them. In the era of social, this is easier than ever. The game is changing quickly from constant paid acquisition and re-acquisition of customers to virality and retention. On the supply side, the number of ‘product’ persons (engineers, architects, UX designers, visionaries) is slowly building up, propelled in part by global osmosis. Venture money is abundant now, even for product plays. Consequently there is an increasing number of Indian offerings now with great products and user interfaces.

This momentum will only accelerate, as the above is a virtuous cycle – Consumers become more discerning after using better products.  We’ll see an era of intensely product focused businesses disrupting the Indian online space. Some of these products will also go global. Those companies that don’t pay sufficient attention to product and continue to play by the old rules would do so at their own peril.

Agree/Disagree?

The case for a new telecom operator in India

Yes, the title of this post sounds a bit crazy, given the intensely competitive telecom industry in India. Allow me to explain.

Large telecom operators in India are still focused primarily on new customer acquisition. New customers acquired in the market today are marginal, and must be lured using rock bottom pricing. Rock bottom pricing means rock bottom costing, which means low quality customer service, deprioritzation of network investments, and a generally poor experience for all customers. That’s why you and I can’t make a 15-minute call without dropping it or having connection issues. While operators struggle to maintain profitability.

Now imagine a telcom operator that doesn’t drop calls, delivers fast data downloads, respects you when you call in, and resolves your issues efficiently and politely. In other words, the AmEx of telcos. I am willing to pay more for such an operator, and my back of the envelope estimate is that there are at least 10M other such customers in India, and growing faster than market.

Most other services get segmented, and you see consumers willing to pay more for higher quality experiences. Think hotels, airlines, credit cards, retail, restaurants and real estate. Think Taj, Kingfisher, AmEx, Spencers..  You can choose to pay more and you generally get a better experience. Not so in telecom. There you only have the option of rock bottom pricing with rock bottom service.

One reason is that Indian telecom industry has till recently been focused solely on new customer acquisition for growth. This should change now, given that the market has been virtually exhausted. Another reason is that telecom is a scale business and  larger operators have a significant advantage over smaller ones. However, given that these 10M+ consumers are mostly concentrated in a few geographical areas, it may be viable to run a smaller, but highly profitable telecom operator in India that focuses on quality rather than quantity. Any takers?

eCommerce in India

Recently started answering a question on Quora about the future eCommerce in India, and realized that it was turning into an article. So I thought I’d share it here.

Question: What is the future of eCommerce in India? And who’s going to lead the pack in terms of profitability by 2012?

My Answer:

Very broad question, but I’ll take a stab. Let’s divide eCommerce into three categories:
1) eCommerce for physical services
Already taking off in a big way – e.g. travel ticketing, jobs, matrimony, events etc. Some leaders already visible in various categories. Larger number of consumers are becoming comfortable paying online (or are finding someone to do it for them). This category was helped by the fact that fulfillment of digital orders is not a logistical nightmare, and the alternative (standing in line) is a royal pain. This category has opened the path for the following two categories by generating consumer awareness and creating the enabling layer (payments, analytics, support/logistics software). This category appears set for continued success and perhaps accelerating growth rates as the whole ecosystem grows, payment mechanism bottlenecks are reduced, and consumer awareness increases. The market is really betting on this category with MMYT trading at 30X real revenues.

2) eCommerce for physical goods
This is the category that is currently riding way up the hype cycle, with new startups/stores launched every day. First avatar of this category was a relative non-starter with players like Indiaplaza and even eBay India remaining at limited scale. However, v2.0 disrupted here in true Clayton Christensen fashion.
Apart from early leaders such as Flipkart, Infibeam, Homeshop18, Indiatimes etc, expect to see slew of additional horizontal and vertical retailers over next couple of years selling everything from mobile phones to pet food. Expect price wars, shakeouts, extensive warehouse buildouts, monster fund-raises in this space, but not profits. Great for consumers, but I’d personally stay away from investing here at the current point. Remember, it took Amazon a decade to turn its first profit – in a much larger market.
I’d expect there to be some successful smaller players in this space that come from the left field with innovative models around delivery, or niche product sales, or as providers of enabling services.

3) eCommerce for virtual goods (Music, Software, Movies, In-game etc)
Has been a relative non-starter in India so far, largely due to piracy issues and perhaps social mindset (“who pays for virtual stuff”)?. The only green shoot in paid digital content is the anachronistic operator MVAS model. Expect significant changes in that equation over the next few years. Looking for someone to disrupt this space, by getting some Category 1 customers above to start paying for virtual goods as well. Let me know if you find such a company

So to answer your second question, I expect a company from the first category to lead in profits (or be closest to profitability) in a couple of years. A few large player from category 2 might have respectable revenues, but are likely to be far from profitability. Also likely to be some smaller interesting players from category 3.

Note: I have not touched upon the local commerce (couponing, LBS, checkins, yellow pages, classifieds etc) space in this answer, which is starting to have significant overlaps with eCommerce. The local commerce space can be a topic for a PhD thesis in itself!

Tim Draper on Indian VC Scene, Drought of VC backed IPOs et al

A few days back I came across this interview with Tim Draper: part 1 and  part 2.

Tim is a real maverick, innovator and risk taker if there ever was one. Not only has DFJ backed some truly pathbreaking innovations, but they have also led some innovations in the VC industry itself – globalizing through their affiliate network is one good example. 

Here is one statement from the interview, that I couldn’t agree more with: “[India is] a fantastic country, with huge opportunities, very large marketplace and a group of highly educated people. The culture is incredibly entrepreneurial. I don’t know what you guys did during that time before the free market, but you really know how to deal with a free market.”

Product Innovation in India

I was recently asked to comment product innovation in India – i.e. the often-raised questions around why we haven’t seen extensive product-based innovation from Indian companies, what the challenges have been, and how that can change etc. I have given thought to this issue a few times in the past, and I’ve copy pasted some of my thoughts below.

Product innovation is a step in the life-cycle of an industry’s evolution that comes after significant maturity. Product innovation requires a complex interlinked talent pool (engineers, researchers, designers, managers, executives, lawyers etc), sufficient amount of risk capital, and proximity to the customer. None of these had achieved critical mass in India till a few years back, but this should happen soon (possibly with the exception of the ‘researchers’ category).

Moreover, the need for path-breaking innovation wasn’t very apparent in the past. Most consumer needs were best satisfied by taking concepts already invented elsewhere, and customizing those to the Indian landscape. This still continues to be the case – after all, what is the point of reinventing the wheel? The best returns to customers, investors and entrepreneurs still continue to be from these so-called incremental products. However, the zeal within a lot of Indian entrepreneurs, engineers and even investors for helping build some truly innovative products is tremendous.

However, there clearly are several encouraging success stories now in the product domain in India (especially wireless equipment and mobile apps), but I think there is still some ways to go for Indian products in the areas of:

• User interface: The UI of a large chunk Indian products and websites has a lot of catching up to do. There are obviously some notable exceptions though, and the situation will change as UI design talent availability in India improves. The core of the IT ecosystem in India has been composed of teams working on outsourced or off-shored work, and in the past, the UI design work was typically not done in India, which propagated the dearth of UI design talent in India.
• Product management and customer focus: Most products and services built in India in the past were targeted at a Western/foreign customer. Innovation is an exercises that is intricately intertwined with customer input and feedback, and becomes an order of magnitude harder if the innovator is removed from the customer. 
• Focus on quality
• Research-based Innovation

We are now seeing some decent products coming out of Indian startups. Also, large tech companies such as Google, Cisco, Microsoft, Adobe etc are now developing a few of their products almost entirely in India. This will create a viruous cycle that iteratively reduces the intensity of the aforementioned challenges. 

I think that the first wave of products is/will be around areas where there are direct customer touch points in India, so this would include areas such as:

• Information and advertising services tailored to more restricted interfaces such as SMS, VoiceSMS etc
• Payment and micro transaction mechanisms
• Products around new media formats such as interactive TV, digital signage and animation
• Gaming (both mobile and otherwise)
• Wireless equipment
• Productization of services such as security testing, banking software, specialized accounting etc

I believe (and hope) that we would start to see extraordinary companies of the magnitude of Apple, Google, Microsoft and Facebook being created in India within the next 5-7 years.