The Internet model of a single winner who controls everything from supply chains to payment systems is creating a fragile, monopolistic ecosystem that can potentially harm society. The lobbies can work towards maintaining this model for short-term gains. But they harm suppliers, vendors, and even the economy and ecosystem. retail investor By damaging the markets and reducing the points of failure for some “too big-to-fail” entities.
The challenge of this “winner-take-all” (WTA) model in the corporate world is that the competition has to end with whatever is necessary, with the ultimate objective for the winner being a monopoly (sole buyer) and a monopoly (sole). Seller). There is no room for a second or third player in this model.
The WTA model requires huge amounts of money – business fundamentals such as profit or revenue are also not important. The model’s assumption is that equity can cover the deficit; Revenue is not important as long as there is only one player standing. Basically, billions of dollars are pumped into a single unicorn ($1 billion-plus valuation) to make it a deacon ($10 billion-plus valuation) by deeply discounting the service or product it is offering. to reduce competition. This violent pricing model stifles innovation and growth in the economy, as a single player controls everything.
For example, a large part of the e-commerce model is based on free delivery as it is the most important cost that determines whether a consumer will buy online or offline. It also changes consumer behavior from buying in bulk at one go offline store to automatically buying more than one item at a time online. For a long time, e-commerce companies have kept the delivery pricing at zero. So much so that it has made it impossible for delivery firms to survive. Investors in delivery firms also follow the WTA model which has resulted in consolidation – only one strong player will stand out, not many players.
zomato-blinkit case study
Even the latest acquisition of Blinkit (earlier Grofers) by Zomato is a move where a restaurant or food aggregator is merging with a grocery delivery company. Zomato, which invested $100 million in Blinkit in 2021 for about 10 per cent stake, seems to be getting it to prevent write-offs of its investments. Zomato is a publicly listed company and this acquisition of Blinkit is leading to the loss of private equity funds being written off by retail investors. This is not a good way to get private losses by a public company and goes against many corporate governance norms. It is strange that Zomato’s board, headed by veteran financial expert Kaushik Dutta, is allowing this all-stock-deal to happen.
Zomato and Swiggy are food aggregators and suppliers. He decided to diversify into grocery delivery as he felt it was a natural progression from food delivery. This category was already dominated by BigBasket and Milkbasket and Amazon also entered the grocery space and margins went down.
Swiggy and Zomato launched grocery delivery service in their existing app. Swiggy still does this through its Instamart service. Zomato stopped the grocery delivery service in September 2021 after burning millions. It then decided to tap this segment through its $100 million investment in Blinkit. Blinkit needed this money because it was bleeding cash. The idea was that Zomato would focus on its food delivery business and ride out Blinkit’s growth in grocery delivery through its investments.
But now, with the acquisition, risk is back to square one. As Zepto emerged with the new model of 10-minute delivery of groceries, Blinkit’s losses increased. Now, more delivery persons and a larger network were needed to stay in the winner-take-all game. Zepto also has a bleeding edge but it has been successful in removing at least one competitor from the market. Meanwhile, Zomato is being trolled for its promise of 10-minute food delivery, something that is not only unnecessary but will burn more public money. Zomato should also drop the idea of such a service; They cannot reduce competition or follow the WTA model in the grocery and food delivery business.
This is not going to be the end of consolidation. Sooner or later Zomato and Swiggy, which are left only in the food aggregation business, will consider merger. Because, they have a common shareholder, SoftBank. The largest private equity firm in the Internet space believes in a winner-takes-all model. As the interest rate cycle accelerates, with liquidity running out, SoftBank will begin to consider exiting some of its extravagant Internet investments. Let’s say Zomato and Swiggy merge, what will happen to the grocery market: Will it still exist or will it be left to Amazon and Tata-owned BigBasket?
More importantly, what will the consolidation of food aggregators or even delivery companies mean for the consumer, the ecosystem or the overall risk? The interesting thing is that initially it does not affect the consumer as the price of the products remains the same. The Competition Commission of India, in a 2019 report, for the first time acknowledged that the current legislation is inadequate to address monopolies on Internet platforms. The CCI initiated an investigation into the dominant position of the Android operating system with over 98 percent market share in the smartphone market in India in April 2019. Subsequently, CCI came out with a order against google,
look beyond the competition
Monopoly or single-player control over segments of the digital ecosystem is also a long-term concern from a risk perspective. The Russian invasion of Ukraine has shown that US companies providing global services are ready to comply with US administration orders when economic sanctions are imposed. More than 400 US companies have exited Russia, including companies such as Cogent Communications that used to offer high-speed Internet access.
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Google and Apple’s payment services have been withdrawn from Russia, disabling consumer payment Internet services for micro-payments. This has resulted in the near collapse of digital services in Russia. This is the first time that digital services that enjoy a monopoly in a region have been weaponized in war. This has raised several issues regarding ownership of these companies not only in the WTA model but also as a country level risk.
Until now, critical Internet infrastructure was defined from the perspective of hard infrastructure telecommunication networks, and more recently data centers with data localization. Is there a need to take a closer look now at some of the service providers on the Internet as well as the portion of critical infrastructure services that need to be cordoned off or protected so that they are not exposed to the risk of economic sanctions from any country?
For example, as e-commerce expands, it will become the digital business lifeline of the country. Any disruption in the e-commerce service or any risk faced by a critical service will have an economic impact on the country. How will India view the players in this segment of the industry? Do some critical areas of internet and digital services need to be de-risked so that any disruption due to any economic clearance does not make the Indian system vulnerable?
For example, are pharmaceutical e-commerce companies important to India’s healthcare system? Will the monopoly affect the growth or availability of medicines for patients in India? Till now the winner-take-all models have been looked at only from the point of view of competition. But other aspects of this model also need to be studied.
K. Yatish Rajawat is CEO, Innovation Center in Public Policy, He tweeted @yatishrajawat. The views expressed in this article are those of the author and do not represent the stand of this publication.
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