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?

There is tremendous innovation possible at the intersection of online and offline commerce if it were driven by an innovator in alliance with B&M retailers. However, since traditional retailers perceivedly have more to lose from this in the short term and have large stores to run, this innovation is currently driven outside-in by eCommerce companies and startups.

What if we were to design commerce from the grounds up, ignoring the above market pressures, and design instead for optimal economics and consumer experience? Today’s technologies could enable a very different and much more efficient system than the one we have today. Consider this scenario: Large traditional stores in expensive locations get replaced by smaller ‘showrooms’ that display sample merchandise or their holograms using the latest technology. You browse through lots of merchandise without having to hike through a maze of aisles. You scan  merchandise you like with your smartphone, compare product features and read online reviews. Perhaps you even ask a few friends on social networks and chat with them. You decide on a product you like. Finally after selecting everything you need,  you ‘checkout’ at the spot by just tapping your phone at a counter and head back home. Just after you reach home, the products you ordered are delivered at your doorstep from a nearby warehouse.

For many consumers, this solution is a better experience than traditional retail (don’t have to hunt through aisles or carry back large bags; better product information) or eCommerce (can see/touch/try products, shorter lag to product delivery). It is also economically more efficient than traditional retail since it requires lesser use of expensive commerce space. The cost base for such an offering should be more comparable to that of eCommerce. This would imply lower prices for consumers than traditional retail.

The exciting part is that all the technologies for this setup are available today, and we are seeking some early steps in this direction. Walmart and Amazon are clearly fighting towards a piece of this opportunity. So when do we actually see the world move towards a showroom and warehouse model?

Here are some such areas that come to mind (in no particular order):

• Linear TV. Why do we still use remote controls from the sixties to look for content? In the era of search, discovery, AI, predictive analytics, social, mobile we surely have better solutions, but haven’t yet found a scalable way to mass adoption. Till we do, happy channel-flipping.
• Personal Information Management. We live in the age of information explosion, from all directions – twitter, blogs, news sites, pictures, videos, email, facebook, calendar items, youtube, deals, sms, chats, iTunes, yada yada. Too many passwords. Too much useful information. Too much content. Too much news. Too much personal data. More than one can manage. Dropbox, Evernote and Flipboard are addressing various pieces of this problem, and have  built spectacular businesses already. I think we’ll see immense further innovation in this space
• Digital payments. Beyond the Paypal variety. Pulling out your credit card and entering the digits and your address, and/or your password is so 20th century. How about if there were a system that you could use from any device anywhere, using biometrics, and transfer any amount however big or small to anyone else? No passwords. No credit card numbers. No addresses. No minimum amounts. Just a swipe of a finger or an iris scan. Just imagine the kind of consumption this would fuel.
• Online content monetization. There is so much great content being created all over the world, but how does it get paid for? Advertising is great, but its not the one-size-fits-all for monetizing all content. A couple of years back, I wrote about the huge opportunity in micropayments. Micropayments have indeed continued to take off significantly since, but I believe we are still in the early phase. There is still no good model to universally purchase content. Movies, news, books, TV shows, music, games, whatever. On one platform seamlessly, from any device. Amazon, Apple, Netflix are all moving in that direction, but we aren’t quite there yet. Consumers are consuming content voraciously online, and sometimes willing to pay for it. And content owners (ask the studios or publishers) are desperately searching for models that help them better monetize their efforts online. There just isn’t any good universal platform yet to connect this demand and supply.

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?

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!

One basic way to compare stock market valuations over time periods is to look at the market’s P/E ratio. This metric can be quite volatile due to short term variations in both price and earnings. A more stable metric is  the ratio of price to earnings that are averaged over a few years. This post on SeekingAlpha does a nice job of analyzing P/E ratios calculated using trailing 10 year average earnings. The chart below is quite interesting:

Credit: Doug Short / SeekingAlpha

The current market’s P/E ratio of 21.7 is significantly above the long term mean of about 15. So is the current market significantly overvalued?

Look carefully at the period after 1980 on the bottom chart. It appears that over the last 30 years, the market has systematically risen above its long term mean P/E ratios, and has stayed there – in spite of the two mega crashes of 2001 and 2008! Why should that be the case?

When looking at market valuations and P/E ratios over such a long term, a few other things come into the picture. Here are at least three reasons which could lead to secular changes in ‘normal’ P/E for the market:

1) Sustained period of strong growth expectation. This is the obvious one. However, it’s unlikely that the US market is factoring this in at the current point.

2) Risk free interest rate. The lower the interest rates are, the lower the denominator (discount rate) that the market factors into the valuation of each component, hence leading to higher overall P/E. Future interest rate expectation is disproportionately impacted by current interest rates, so the market would typically have a higher P/E when interest rates are very low – like now. Interest rates in the Western world have consistently fallen over the last 30 years. This coincides with the trend of higher P/E ratios over the same period.

3) The third confounding factor is the overall demand/supply for equities in the market. It would be interesting to see how the evolution of market P/Es correlate with wider equity/mutual fund ownership among the general population. Empirically, the advent of the ‘information age’ has made it much easier for small retail investors to own equities and mutual funds. Additionally, in the US, government-driven focus on 401K (retirement savings) plans has also increased equity market participation.  Both of these trends have significantly driven up overall demand for equities. Such a sustained increase in general demand would also lead to higher market P/E ratios over the long term.

I think the above factors could have led to a long-lasting shift in the market’s “normal” P/E ratio.  Wonder if there is a good way to assess market valuations in light of these additional factors?

Pre-1995: The web is a potpourri of gopher, ftp and then http sites, with no easy way to search through or organize them. The average user’s entry point was the address of the site that the user wanted to visit.

1995 – 2000: There are now way too many websites for every user to remember. Yahoo, with its directory approach organizes the websites neatly by category, becomes the primary entry point for Internet users, and thus becomes the dominant Internet company. As of late nineties, it’s unclear what or who will unseat this powerhouse.

2001 – 2006: By now, the Internet has way too much information to be organized and accessed using directories and portals. Google, with its keyword search approach, and ability to index billions of pages, becomes the de-facto entry point to the web. As of early 2000′s, Google appears set for world domination, and it’s not clear what or who could match Google’s strength.

2007 – Present: There are so many information sources and forms of media that keyword search by itself is inadequate for information discovery. Users want to visit information sources that are relevant to *them*. They want to consume information that they didn’t even know existed – how could keyword search do that? In comes facebook, along with other social networks, which provide ways to not only stay connected with your social circle, but also a more personalized way to discover and consume news, photos, videos and other media that have proliferated over the past few years.  It appears that Facebook will dominate the world and Zuckerberg shall be king.

2013 and beyond: ??

History tells us that change is, indeed, the only constant at the top of the Internet world. Although facebook’s and twitter’s reign at the throne appears uncontested as of 2010, please rest assured that forces of innovation, disruption and exponential growth are hard at work, and the 5-6 year cycle of Internet domination should only get shorter over time.

A couple of years back, I wrote about prevailing themes and trends in consumer Internet. Those themes are as true today, and trends of long tail content, convergence, mobility, social media and user-generated content have only accentuated with time. The result continues to be increasing information overload. The next generation Internet companies would be the ones that can address this.

My conjecture is that the next dominant Internet company would come with an angle of intelligent personalization and context-aware services, and would build upon the current generation social networks. What’s your take?

To understand which mobile subsectors these VC investment dollars have been going, I looked through VentureXpert data of all available VC investment transactions in the US since Jan 2008. I first filtered down that long list to all mobile transactions using some key words on the company description. I then filtered down to select only early to mid stage investments, giving a total of 87 startup companies meeting these criteria. I then manually classified each funded company’s line of business into one of few areas (such as content, infrastructure, enterprise etc). The final results are below:

The resulting breakdown is not unexpected (and aligns with recent analyses of iPhone investments), but here are some interesting highlights:

• The largest bucket was that of content-focused startups. This includes content production companies such as Booyah, location focused companies such as Buzzd and interactive TV providers such as kyte
• There’s an uncomfortably large crowd in the venture funded mobile payment/mCommerce space. The hope here is to disrupt the $60B credit card space, and more investments continue to be announced as we speak
• Lot of activity in other consumer focussed or related areas such as gaming, social media, advertising.
• Hardware and network infrastructure continue to be bellweathers of VC mobile investments, as the need for both larger pipes and better device components continues to explode.
• There has been an uncanny lull in spaces such as enterprise-focused mobile companies and those focused on areas such as smart homes/ sensor networks. There are both potentially large markets, but VCs have shied away from these areas – which in my experience is largely due to adoption challenges, lack of precedents in these areas.

My view is that these enterprise focused mobile plays should see a lot more activity shortly – as other spaces continue to get overcrowded, and the smartphone value proposition (beyond email) percolates deeper into the enterprise. The Smart home and sensos network space also appears close to its inflexion point (finally).

How does this align with what you have seen?

PS: Classifying companies into narrow functional areas is highly subjective. First of all, it’s hard to even classify startups as ‘mobile focussed’ or otherwise, as many digital media and internet startups have a sub-focus on mobile. Second, the functional buckets I have chosen are arbitrary. The goal was to have a broad picture of the space, for which this should suffice.

Apple’s iTunes and iPhone apps are the best examples of this. The seamless purchase mechanism and small amounts involved transform the user’s software purchase decision from a meditated one into an impulse purchase. The result is the ongoing “Gold Rush” where thousands of paid apps are being downloaded hundreds of thousands of times for a few dollars each. What does this signify for similar platforms on the web?

There is an immense potential to monetize online media and content through micropayments. Online micropayment systems have been around for almost as long as the Internet. However, several factors prevented first generation micropayment systems from taking off, including a) Lack of differentiated short-form content and applications that users would pay small amounts of money for b) Lower comfort with online credit card transactions c) Lack of trustworthy micropayment systems that presented a seamless experience to the user and were widely adopted.

However, with the wave of online apps (including those on social networking platforms) and the iTunes-iPhone mindset, all of the three factors above seem to be changing substantially. There is a large variety of apps, music, videos that is now legally available. And customers are more comfortable using their credit cards online, thanks to the increasingly high adoption rates of online ticketing and travel. 

Players to watch out

Besides Apple, there are a number of players who are positioned to take advantage of this trend. Here is an attempt to capture some of the categories:

• Startups such as Spare Change and Tinker which are enabling monetization of social network apps and blogs. Space Changeis apparently already processing $30M of micropayments annually. Expect to see social networks such as Facebook and MySpace start their own competing micro payment systems, or buy some of these small players.
• Mobile phone companies, which already have billing relationships with customers are really well positioned to build micropayment systems of their own. Indeed, Apple is eating what could have been AT&T and Verizon’s lunch, had they given up their walled-garden approach as the times evolved.
• Similarly, ISPs and Cable companies such as Comcast/CIM have an opportunity to create or integrate micropayments into their broadband customer sites, use micropayments to monetize some of the premium content on their new media sites, and charge customers directly through their monthly bills. 
• Other usual suspects who have customer relationships and/or customers’ credit card numbers include Internet giants Google, Yahoo, Microsoft, Amazon and Ebay/Paypal, and eCommerce providers.

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.”