100% FDI in Marketplace: What does it mean?
Manish M.
[email protected]; Mason Fellow@Harvard. Previously Twitter, Flipkart, Intuit, McKinsey; Wharton MBA
Having run the country's largest marketplace while at Flipkart, here is how I look at it. For the first time, government has crisply defined inventory-led and marketplace models of e-commerce. By allowing 100% FDI in marketplace model and 0% FDI in inventory model, government has made things very binary. It is always good to have regulatory clarity so entrepreneurs and investors can take the right business calls.
What does it mean for large e-commerce players such as Flipkart and Amazon? Well, technically, they are marketplaces since entities such as WS Retail and Cloudtail are separate legal entities. So, as far as letter of the law is concerned, they are compliant. Therefore, this 0% or 100% FDI binary thing does not impact them. What would impact them are additional guidelines in the notification that says: (a) more than 25% sales cannot come from one seller and (b) marketplace will not exercise ownership over inventory and/or influence pricing. Given where things are today, these two additional guidelines puts some of the large ecommerce players in the "non-compliant zone". However, it would not be difficult for them to become compliant quickly, for example, by breaking-up WSR or Cloudtail into 4 entities so that each now does one-fourth of the previous sales. Similarly, a service layer can be created so that instead of directly exercising ownership over inventory or influencing pricing, they could provide appropriate "information and insights" to the "service layer". This "service layer" can then provide the necessary guidelines to inventory-owning entity, which could even be for a service fee for arms-length relationship. So from a business-essence perspective nothing changes.
What is more important area to delve into is: what is the business reason for ecommerce players to prefer inventory ownership? Facebook does not own the content that users consume. Similarly, YouTube does not own the videos that get viewed on its platform. Creating content is expensive. In addition, there is no guarantee that what you create will be liked by the audience and will get consumed. Similarly, in case of ecommerce, owning inventory is an expensive proposition as it requires huge working capital. In addition, there is significant business risk since what you own may not have a demand and may have to be written-off as slow-moving or non-moving inventory.
In the early stages of a two-sided network when the ecosystem is at a nascent stage, it is important for the network owner to (a) induce demand and (b) ensure acceptable and consistent experience for user/buyer which is habit-forming. And to do so they may have to take things in their own hand. For example, in the early days of Facebook, the folks at Facebook were directly involved in creating profiles and seeding content until things took off. And Facebook and YouTube still exercise significant influence by curating what gets seen and also how it gets monetized.
For an ecommerce venture to truly become a network effect, more buyers should lead to more sellers and more sellers then in-turn should lead to more buyers on the marketplace without any inducement or influence. Such a fly-wheel effect is yet to be seen at even the largest ecommerce player in the country. Running an ecommerce venture still requires a lot of work, not only in terms of having the right set of sellers with relevant selection, pricing and inventory depth, but also in terms of necessary delivery service levels, geographical coverage and trust and safety mechanisms to prevent fraud. We are still in very early stages so I would bat for ecommerce players to have the option to exercise influence on what gets sold and at what service level on their platform, if they need to, until the fly-wheel effect starts to benefit both the buyers and the sellers. Once that happens, the influence can be cut down to become pure marketplaces.
Imagine how the world would have been if Facebook and YouTube were required by the US government to not have more than 25% of their content from a single creator and to not influence what gets seen and consumed on their platforms in the early days of their existence !!!
Please note that these are my personal views. I am no longer associated with Flipkart. I am happy to hear alternate views on this topic and have a good debate and discussion. FDI guidelines are here. Let me know what you think about the government policy.
Architecting Digital Experiences | 25+ Years of Innovation from Web to Conversational AI
7 年Very succinctly and effectively communicated. In hindsight, can now judge what exactly happened.
Management Consultant
8 年At the end of the day retail industry if it needs to survive and be profitable,requires smart buying, efficient logistic support and some advertisement to create the footfall whether it is the physical store or web store. E commerce is here to stay and would only continue to grow. In this model there is a considerable saving in the rental that one has to incur in a brick and mortar retail model. However the current e commerce firms are trying to shore up the top line at any cost to fetch a valuation. Remember the dot com days and going bust. There would therefore be a consolidation of players and some would die a painful death. What would emerge is a combination of both brick and mortar and e platform.You would have experience stores where you can feel the product and go and order it on line. E commerce would expand in line with the expansion of computer literacy. Fittest and those with deep pocket would eventually survive. Wall marts have been successful alongside Amazon.
Founder & Director - PeakMind.in. Platform to improve Mental Health, Wellbeing and Performance. Ex-CEO Tally Education
8 年Well articulated Manish. My first reaction also to the guideline was to just break up WS retail and Cloudtail into smaller players and divide inventory among them. The service layer also will add it up and make it technically compliant. I hope that over a period it may end up being good to the other sellers and actually improve traction in the online marketplaces as the big guys lose some of their advantage over smaller sellers.
Digital Gospeller, Sr. Director, Stragility Consulting Pvt. Ltd., Adjunct Professor, IIM, Kozhikode, Author. Fomer Sr. Professor of NMIMS Univ. School of Bus. Management. Former CFO and Global Group Controller of MNCs.
8 年I agree with Manish to a large extent. That task of inducing and influencing consumers to be habitual buyers from e market place is extremely time consuming with lots of ashes from cash. While likes of Flipkart and Amazon at their own risks sweating out to do that with risk investors' support, Regulators were anxious and brick and mortar players were anguished. But if VCs and PEs are convinced that many times more pots of gold can be created, they will continue to fund and Zen YZ consumers will continue to support such virtual market place which Manish, as I understood, wants to call would be 'zero inventory players' with least influence on pricing decisions.
Consultant of Financial Services
8 年By having '25%' or the other restriction are not going to add to the cost which will be recovered from the customers? If there is proper price discovery at the market place by the customers then why not encourage it. As we mature there will be few winners and some losers. Among the winners it will be customers. Not to talk about employment generation and demand creation. We still remember the days when we had to wait for years to get telephone connection and rejoice on getting allotment of bajaj scooter.