In whichever way the legal battle between Amazon and Reliance-Future plays out, consumers stand to benefit. A digital supermarket dominated by one or two players often leads to cartelisation — introduce a strong third player and predatory instincts subside.
We are seeing this play out in the mobile telephone industry. India is heading for a 3+1 formulation — Jio, Airtel, the merged Vodafone-Idea Vi and a likely merger of BSNL-MTNL. The average revenue per user (ARPU) is rising steadily.
With one billion mobile phone subscribers in India, an increase in ARPU of even Rs 10 per month translates into an overall revenue increase of Rs 10 billion (Rs 1,000 crore) per month or Rs 12,000 crore a year.
A rise in ARPU of Rs 50 per month with greater data usage will increase revenue, industry-wide, by Rs 60,000 crore per year. That could transform the fortunes of an industry buffeted by AGR dues and predatory pricing.
In e-commerce, predatory pricing works differently. Two strong players are already competing fiercely: Amazon and Walmart-Flipkart. Reliance Jio is rapidly scaling up its digital platform. Tata is building a superapp. Once again, as in mobile telephony, we could end up with a 3+1 formulation.
All four players have deep pockets. In calendar 2019, the Amazon group (including its cloud service AWS) had a consolidated revenue of $280.52 billion and a net profit of $11.58 billion. Its market cap hovers around $1.6 trillion. Reliance Industries recorded a consolidated revenue of $92 billion in 2019-20 and net profit of $6.2 billion. Its market cap recently crossed $200 billion.
Walmart-Flipkart and the Tatas are equally resource-rich though the Tatas need to build their superapp quickly to compete with the other three. India’s e-commerce marketplace, currently valued at $64 billion, is estimated to more than triple to $200 billion in 2026. The Tatas’ bid for grocer BigBasket and other e-commerce verticals could make its superapp a dark horse in what will end up as a four-way race.
It’s important for consumers that predatory pricing doesn’t hollow out the competition. Jio did that in telecom and drove several mobile operators into either bankruptcy or a fire sale, including Anil Ambani’s Reliance Communications, Tata Teleservices and Aircel. Vodafone and Idea have barely survived by merging.
Amazon too is known for its predatory tactics. A recent Bloomberg report highlights the cost of such predation: “Barak Govani made a big bet on Amazon.com Inc. earlier this year that he now regrets. He shuttered his New York Speed clothing store on Los Angeles’s storied Melrose Avenue, packed up $1.5 million in inventory and shipped it to Amazon warehouses around the country, putting his fate in the hands of a company that has routinely presented itself to the world as a friend of small business.
“Today, the 41-year-old retail veteran is broke and couch surfs between his mother’s home and his sister’s place. Govani hopes to start anew by getting Amazon to pay him for inventory the company destroyed after suggesting his products could be fake — an accusation Govani strenuously denies. His lawyer in September sent a demand for $800,000 — along with invoices to verify his merchandise came directly from fashion brands — and they’re waiting for Amazon’s response.
“Recourse is limited because when merchants set up shop on Amazon, they waive their right to a day in court by agreeing to binding arbitration to resolve any disputes. Amazon doesn’t negotiate terms with merchants. The boiler plate agreement is take-it-or-leave-it, a telling reminder of who has the upper hand in the relationship.
“How Amazon treats third-party sellers is at the heart of a recent House Judiciary Committee report concluding that big technology companies often abuse their power over smaller partners. The committee’s recommendations include providing adequate recourse to sellers and eliminating forced arbitration clauses from contracts that deprives them from filing a lawsuit.”
The Indian e-commerce market is big enough to accommodate three large players including Amazon, the Godzilla in the room. But a fourth? The total value of India’s online commerce in 2019-2020 ($64 billion) is dwarfed by the US ($709 billion) and China ($1.94 trillion), by far the world’s largest e-commerce market.
For US giants Amazon and Walmart, which bought Flipkart in 2018, it is the promise of the future that draws them to India. Walmart paid $16 billion for Flipkart. That valuation has doubled in two years with Flipkart-owned digital payments subsidiary PhonePe itself valued at $10 billion.
Amazon has been in the e-commerce business longer than anyone else. It knows that profits can take years to materialise. It lost money for years after its IPO in 1997. It made its first profit (a puny $5 million) in 2001. But even up to 2015, Amazon’s profits were relatively modest.
The surge in profitability began in 2015. In 2014, it had incurred a loss of $241 million. In 2015, that turned into a net profit of $596 million. Net profit in 2016 quadrupled to $2.37 billion and in 2019 it quintupled to $11.58 billion.
The e-commerce play that Reliance is now building is qualitatively different from Amazon. It is more akin to China’s WeChat where you can shop, order food, watch movies, surf TV shows — and chat.
Tatas again have a different model in mind: a marketplace where diverse products from dozens of Tata companies can be bought — from jewellery and electronics to food and fashion.
Amazon and Walmart-Flipkart will therefore contest the pure ecommerce segment leaving Reliance to be India’s WeChat and Tatas a version of the multi-product Chinese marketplace Alibaba.
The consumer will end up as king on both choice and price.
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