The invisible ceiling in India’s growth story
A story about the allure of freebies in India
There isn’t anything exceptional about the Indian Premier League (IPL) 2023. Except that it is a pivotal moment in the history of cricket broadcasting.
Billionaire Mukesh Ambani bought the streaming rights for the IPL for over Rs 22,000 crores and decided to stream it for free on Jio. And of course, everybody understands it wasn’t Ambani’s magnanimity to let Indians watch IPL for free, it was a shrewd business move.
And more importantly, an agonising reflection of India’s growth story.
IPL on Jio Cinema - showing a mirror to the India growth story
Roughly about 9% of Indian households have fixed broadband - that’s about 30 million households; putting us at the lowest in the world. And within the small broadband market, Reliance is the market leader with 7.7 million subscribers and 31% market share!
Why? It’s quite possibly found a pricing sweet spot, along with dangling the OTT content carrot and the IPL bait.
On the face of it, Jio’s IPL bet doesn’t add up -
It spent Rs 22,000 crores to acquire digital streaming rights to stream it for free, which means they’ve got to make up for it in ad revenues. Except that they’ve set an internal ad revenue goal of Rs 3,700 crores for 2023
So, what’s the catch?
Reliance owns/backs a pretty big chunk of India’s internet service providers (ISP), including Hathway Cable and Datacom - and they’ve removed Star India’s channels from their base packages last week. Star, as I’m sure you know, holds the TV rights for the IPL.
Which means, they’ve bet their money on more people ditching their TVs for streaming. That will most likely translate to a huge surge in the purchase of internet services. And as India’s largest telecom firm and with a considerably large “prepaid” user base, Reliance Jio will likely benefit the most from this change.
Aside from this, it has understood three core behaviour patterns of Indian consumers:
We hate the act of signing up - Jio Cinema users don’t have the friction of signing up because it comes with installing JioFiber and/or having a Jio mobile network connection
We value our money more than our time
We love free stuff
What’s the India growth story here, you ask? One of unemployment, stagnation, and why we don’t want to pay for anything that isn’t a necessity
Paying consumers, in short supply
Jio’s OTT content carrot only works because it’s part of the bundle of connectivity (a neccessity) + TRAI regulation-free broadcasting of channels + IPL.
But OTT content doesn’t work for everybody in India. Almost nobody actually.
Selling subscriptions in India is already a tedious business. Paying for an entertainment service is a discretionary expense—it’s among the first to get cut during any kind of downturn or financial distress. Imagine getting people (at scale, in India) to first pay for data and then for so many individual apps, each with their own walled gardens of content. It’s hard.
Take MX player for instance.
Back in 2018, it reached over 175 million monthly active users(MAUs) in India. It went from 175 million MAUs in 2018 to 250 million MAUs in 2022.
But the revenue it’s generating from paid users? $2 million. In 2022, MX generated $34.7 million in ad revenue from its massive 350 million user base. Not a good sign.
Paying for content is still an alien concept for most Indians. Guess how many people pay for YouTube premium in India? 0.8 million, compared to YouTube's active base of 468 million.
In a country that likes freebies, and especially with players like Jio streaming IPL for free (content that people would probably pay for), OTT content platforms find it frustratingly hard to make a profitable buck.
Even the world’s biggest OTT platform Netflix’s CEO has bemoaned the lack of success in India.
It’s not only OTT content - India’s paying user share is low across services, despite the paying user spending less than their peers in the west!
Look at this conspicuous chart from the Blume Indus Valley report ‘22
The number of transacting users across the hottest startups and international big wigs in India puts the growth story to shame.
It’s evident even in SaaS products.
Late last month, Quickbooks, an accounting software for small businesses, announced that they are going to shut down their India business.
They had it all - a big brand name, a talented team, access to virtually unlimited capital, and domain expertise.
In my view, here are some plausible explanations for QuickBooks shutting down -
One primary factor contributing to this was the intense competition within India's accounting software industry, where QuickBooks struggled to compete effectively.
Local companies provided alternative software options at lower price points compared to QuickBooks and also offered offline versions of their products.
To address the market dynamics, QuickBooks conducted various pricing experiments, ranging from Rs.500/year to Rs.18,000/year.
However, despite these efforts, the revenue generated from India probably remained insignificant for the company.
Also, over the past five years, the expenses associated with cloud infrastructurehave skyrocketed, posing a significant challenge for SaaS companies. These companies heavily rely on sourcing cloud infrastructure from major providers such as Google, Microsoft, and Amazon.
However, Indian small and medium enterprises (SMEs), known for their price sensitivity, have been reluctant to accept frequent price increases. This situation has put immense pressure on the profit margins of B2B SaaS companies operating in the Indian SME market.
Indians value money over time. Let that sink in.
Why? Because we can’t afford to value time over money - because: :
1. Stagnation
a) Our middle class is not evolving. One way to examine this hypothesis is by looking at ownership of durable assets like vehicles.
India’s share of households owning a four-wheeler rose just 4.8 percentage points over 15 years to 7.5% in 2020 ( an annual rise of 0.3 percentage points)
Maruti Suzuki’s chairman RC Bhargava in a recent interview said the company doesn’t see much growth in small cars in FY24!
I’d urge you to read this short twitter thread by Rathin Roy, who makes a compelling case for why the middle isn’t growing!
b) Our economy is actually slowing down
India’s annualised growth rate between the calendar years 2020-2022 was a feeble 3.5%, about the same as in the year immediately preceding the COVID crisis.
Describing India as a booming economy based on extrapolations from the latest pandemic rebound is wishful thinking clothed in bad economics, as the economy experienced a slowdown in the second half of 2022, which has persisted into this year despite the pandemic-related constraints being mostly behind.
2) Unemployment
Anaemic job creation: Meeting the employment needs of India's working-age population is an almost insurmountable task over the next decade, as the economy failed to create any net new jobs in the past decade, despite an annual influx of 7-9 million jobseekers.
In 2019, the Indian railways received an overwhelming response with 12.5 million applicants vying for just 35,000 job openings, resulting in a ratio of approximately 1 job for every 357 applicants. Amid the scarcity of urban jobs, a significant number of workers, numbering in the tens of millions, returned to the agriculture sector during the pandemic, where they continue to earn meagre livelihoods. As a result, the distressed agriculture sector in India now employs 45% of the country's workforce. Farming families face persistent challenges of high underemployment, with limited work opportunities on shrinking plots due to generational subdivision.
We value our money over our time and there are a couple of lessons there - one for SaaS founders and two, for anyone that’s giddy about India’s economic prospects.
Lessons for SaaS founders
A prevailing trend among B2B SaaS companies has been the shift away from catering to Indian SMEs and instead focusing on global markets.
Over the past two years, this shift has gained momentum, with SME-centric B2B SaaS startups only receiving Series A funding from venture capitalists if they target customers outside of India.
Numerous examples illustrate this shift, including Druva, Zoho, Freshworks, AgileCRM, Easysendy Pro, IBSFINtech, CloudCherry, Facilio, Paperflite, Vymo, and many others.
Initially, these Indian B2B SaaS companies targeted the domestic SME market but a combination of price sensitivity, lack of tech readiness and general sense of hesitation to go ‘digital’, compelled them to focus on overseas markets.
Indian SaaS companies have an exceptional opportunity to establish highly successful B2B/SaaS companies by exclusively targeting large global markets with high-quality products. Being based in India provides a significant advantage in terms of unit economics related to demand generation, inside sales, and research and development (R&D).
Lessons for anyone that’s giddy about India’s economic prospects
The Jan Dhan-Aadhar-Mobile (JAM) trinity, India’s famously resilient entrepreneurs, the demographic dividend, and a forward-looking government embracing technology, came together to create the illusion of growth.
I’m calling it the productivity lollapalooza effect.
But, with the persistent increase in job demand, the economy will face mounting challenges in providing quality and respectable employment opportunities. Instead of relying on wishful thinking, policymakers should prioritise investments in human capital and actively strive to increase women's participation in the workforce to drive sustainable economic development. That’s what all economically successful countries since the Industrial Revolution have done!
More jobs = more purchasing power = more paid users!
Don’t write me off as a cynic just yet. I have hope.
If there’s anything to be excited about, it’s the sheer size of our population. We have a hard-to-beat size advantage and a government that embraces technology with open arms. So long as we don’t enter a deep recession, we will continue to be an attractive market for global brands.
I’ll close with one of economist Nirajan Rajadhyaksha’s arguments, nearly a decade ago
“The habitual optimists will have to explain why they think India can grow substantially faster than it has done since 1980 while the dire pessimists will have to explain why India is now headed for a far lower growth rate”
Still rings true today!
P.S. - Our work in MSME lending with IIFL has won an award at SamvAAd - an Account Aggregator community event! I couldn't be more proud of the team we've built at FinBox and our collective efforts towards making credit available for the next billion!
That's all from me this week!
Cheers,
Rajat