800 Pounds Gorilla Unleashed !
How did some Platform Businesses go out of control?
In our last issue, we has explored two platform features which have helped AAFG create impregnable moats. User side network effects and commoditisation of users/suppliers make platforms big and powerful. Theoretically, every garage-entrepreneur could build tomorrow’s Facebook or Amazon. But the aforementioned features help the platforms overcome the risk of overbuilding which is an ever-present danger to their existence.
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DTW
During the Week, Government of India issued guidelines for e-commerce players through a draft document open for comments till 6th July 2021.
It is also a good time to evaluate and analyse the reasons which created these 800 pounds gorilla stamping around and destroying everything in their way. We would examine the monopoly like behaviour of Big Tech firms including the AAFG in USA and BAT in China through two perspectives- Cross-Subsidisation and Vertical Integration.
AAFG and others have been able to gain scale and gather extraordinary power over the economic ecosystem. They have used age old tools of cross-subsidisation and predatory pricing to create user side network effects. Of course, all of this has been made possible by availability of cheap capital from equity markets both public and private which is ready to fund them with no expectation of turning profitable as long as stock price appreciation is assured. Platforms like uber spent millions of dollars to subsidise riders through promotional offers and referral bonuses. They also spent hundreds of millions on drivers’ incentives to continue providing loss making rides and target of cab availability in less than 5 minutes.
Twitter was abuzz few weeks back with CRED’s financial numbers. According to a report by Inc42 , “…… company’s total expenses stood at INR 378.39 Cr, an increase of 492% from FY19 when it recorded expenses worth INR 63.90 Cr. Hence, the company’s after-tax loss stood at INR 360.31 Cr, an increase of 492% from the FY19 loss of INR 60.86 Cr. On a unit level, it spent over INR 770 for every rupee in revenue. “.
Access to this cheap capital allows the platforms to keep aggregating user side network effects and also indulge in predatory prices to acquire suppliers/vendors. They eventually end up charging a higher take rate from the vulnerable side of platforms. This may blow up in a major altercation as seen in the Zomato/Swiggy clash with NRAI representing the restaurants or OYO’s problems with Nashik Residential and Hotels Association amongst others.
Platform have also used vertical integration to capture power and turn monopolies in multiple adjacent industries. Apple is a classic example of this behaviour. With their tight control over iPhone, they have created a vertical behemoth which while locking out competition is simultaneously locking in Apple customers. They absolute control over OS (iOS) and AppStore locks out competitors OR simply makes their business difficult. In most cases, competitors seem to be working for Apple’s business. By many accounts, about 10% of Netflix and Spotify’s top line is usurped by Apple because they control the access to customers.
On the other hand, by making competitive apps like Apple Music and Apple TV, they ensure customers have an option which is going to be easier and frictionless. Amazon with its AWS, Ad Platform and Delivery services along with Alexa does not leave any entry point for competitor.
To conclude, cross subsidisation and vertical integration through cheap capital provides platforms with network effects which make them invincible for competitors and irreplaceable for customers.
OTW
Over the Weekend, I watched Ray, created by Sayantan Mukherjee for Netflix and comprising four films with lead actors Manoj Bajpayee, Ali Fazal, Kay Kay Menon & Harshvarrdhan Kapoor.
I loved Manoj Bajpayee’s act as Musafir Ali with his mannerisms and grimaced facial expression when his co-passenger fails to understand his cultural references through his Urdu couplets. I fell off the bed while watching the scene when his co-passenger who was a wrestler in his heydays confuses पैमाना (paimana) with पैखाना (paikhana). Musafir Ali has to keep a straight face and explain that you drink wine in Paimana and urinate in Paikhana. Any ways, no more spoilers. Go watch it.
Get Vaccinated ASAP. Mask when in public.
I Love You
Shailendra
OTM
Opportunities through MountainSpeak are available at TRICE Technologies in Hyderabad.
Having grown to 200 residential gated communities in Hyderabad, they are looking for a marketing professional to manage their in-app and social media outreach. Founded in 2019 by Naveen KL, Trice is a hyper local social commerce app looking to connect entrepreneurs and users in and around gated residential communities. If you have ideas to explore, drop a message in the comments section below.
I would request my readers in corporate world to share small live projects for my current students. Idea of sprINTERNship is to create sprint internship version of live business projects focusing on marketing and strategy. These engagements would be mostly remote work involving social media, market research, data analysis and landscaping reports. Current plan is to have a SPRINT of about 40 days aggregating 100 hours. Companies would receive insights via a 2000 words report and 10 slide deck. Interns would be issued a completion certificate and may be a reasonable honorarium.
Please use the following google form to share interesting projects.