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For India to create more tech unicorns, govt should break up monopolies of global internet giants, Retail News, ET Retail


For India to create more tech unicorns, govt should break up monopolies of global internet giants By Gaurav Dalmia

Stakes for the Indian technology sector are high. Last year, $13.5 billion was invested in Indian tech startups. Flipkart, Paytm and Ola raised $4 billion, $1.4 billion and $1.1 billion, respectively. The remaining went to 882 startups, all hoping to disrupt industries.

The stakes for Indian consumers are higher still. India’s middle class participates in 325 million monthly mobile wallet transactions. The digital divide is being overcome as mobile penetration increases. By 2020, half of India’s internet users will be rural. Nine out of 10 new internet users are non-English speaking. The internet is about to transform the consumer segment just below the affluent middle class, what market researchers call “India 2”.

Given this backdrop, making India’s technology sector globally competitive is an important national agenda. While Indian entrepreneurs are globally recognised, India is behind its global peers. The world currently has 252 unicorns – companies valued at $1 billion plus in private markets. Of this, 106 come from the US, 98 from China, and 10 from India. While India has a lot to celebrate, we need to set our sights higher!

Startup financing requires a regulatory rethink. Financing tools that startups in Silicon Valley, Israel and Singapore consider standard – such as liquidation preference, valuation resets and non-voting stock – are not allowed in the current regulatory environment or are difficult to execute. Indian law needs to provide all the financing bells-and-whistles to Indian startups if they are to be globally competitive.

Many internet businesses benefit from network effects. The attractiveness of their service to customers increases as more people use it. Unlike offline businesses, this creates winner-take-all markets. Almost 89% of incremental online advertising revenues worldwide accrue to Google and Facebook.

Such duopolistic industry structure needs regulation of potential anti-competition action. In the late 90s, Microsoft’s investigation focussed on whether it was using its dominance in operating systems to bundle and get unfair advantage in application software. The initial verdict was to divide Microsoft into two “Baby Bills”, one for Windows and the other for its office applications. Microsoft subsequently managed to contain the problem during appeal.

India needs a savvy regulator as a check on the market power of technology companies and adjudicate as they try to dominate “adjacent spaces” based on customer lock-in. As an example, Alibaba leveraged its dominance in e-commerce into payments and then to start a money market fund, Yu’ebao, which grew 40% last year to become the world’s largest money market fund, amassing $230 billion and eclipsing the $150 billion managed by its nearest rival, JP Morgan. All this in five years. Such is the power of having captive 500 million customers.

Many problems may not fall into the standard definition of misuse of market dominance. It’s the classical “two-sided market” from economic theory: internet companies offer free service to obtain data, which in turn can be monetised in multiple ways. In this new economy, monopoly power can be used without price hikes!

Related to this is the question of ownership. In most countries, investors are limited to an ownership level of a bank, as people’s savings are a sensitive industry. For instance, RBI mandated Uday Kotak to reduce his shareholding in Kotak Bank from the current 30% to 15% by March 2020. Activities of foreign banks are monitored even more stringently.

In consumer internet businesses, which have concentrated market power and deal with sensitive consumer information, we need a similarly comprehensive framework. This is not a strategy to cultivate national champions, even though Chinese unicorns have greatly benefitted from restrictions on foreign companies. It is about a forward looking mindset which will pre-empt event based over-reactions.

Data localisation is another important imperative. Increasingly, countries are fixated on government access and mandating data storage in local servers. China has been undertaking data security legislation since 2006. It started with e-banking data and now covers medical information, online publications and cloud computing. France, Germany, Malaysia, South Korea – all have consent requirements for critical data transfer outside their borders. India needs to take heed.

Regulating technology companies is not a protectionist indulgence. India’s dynamic technology entrepreneurs can take on the global giants. Delhi-bred restaurant search company Zomato now operates in 23 countries. Nasdaq-listed MakeMyTrip, with a 42% market share of the Indian online travel industry, is going from strength to strength. Ola dominates India’s ride hailing business with twice the number of drivers that Uber has, and secretly hopes one day it will acquire Uber’s Indian business, as Grab did with Uber’s Southeast Asian business last week.

There is a buildup of concern about disruptions internet companies can cause. Leaders such as Nobel laureate economist Jean Tirole, Theresa May, and George Soros are concerned about “concentration of power”, “brain hacking” and “weaponised” media.

Worldwide web founder Tim Berners-Lee, an advocate for regulating tech firms, is right when he says: “I want the web to reflect our hopes and fulfil our dreams, rather than magnify our fears and deepen our divisions.” It’s up to the decision makers to press reset and change the way global internet giants operate in India.

(The writer is Chairman of Dalmia Group Holdings)





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