The Online Social Networking Revolution

With the advent of Internet 2.0, Social Networking Sites (SNS) have become the poster child of an entirely new portfolio of web based services. In a short span of about a decade after being conceptualized, the SNS have shown colossal growth and the boom is here to stay. Recent developments like Facebook’s awaited IPO and a recent valuation of Facebook at $33 Billion have generated a lot of talk among investors and promoters. All of this is an efficient measure of the market interest and future growth potential that this industry possesses.

The SNS industry today is vastly diversified in terms of the target user community and the product offering. While a majority of user volume intensive SNS cater to the casual networking needs, a substantial chunk of the industry offers opportunities for business networking. LinkedIn and Plaxo are big players in the business networking category. The differentiation of the product offering is what hugely affects the growth and popularity of any SNS. The range varies from clichéd Facebook like websites to the hugely popular micro-blog-place Twitter.

The number of SNS users has increased exponentially over the past years. The official Facebook blog boasts of more than 500 million active Facebook users. The sustainability of the SNS industry’s current bull-run depends on a lot of factors. The business model dynamics are very interesting. A high degree of product evolution is essential, the utility being offered needs to be maintained and more efficient and effective marketing strategies need to be developed. The SNS industry employs the following three vastly different revenue earning models:

The Advertising Model

The advertising model churns the largest amount of money for the SNS. A primary reason for this is the fact that there is a strong preference for free services from the SNS. For companies relying heavily on this mode of revenue generation, it is highly important to gather a very large or a differentiated user community. Number of users and frequency of use are the key revenue drivers and focus areas. Marketing and advertising aimed at acquiring more users is the major cost component. The process of acquiring users is where Orkut’s Google connection has been most effective, but it has lost the battle to Facebook owing to product evolution and differentiation.

The Subscription Model

The subscription model is mostly prevalent among business networking sites. The main revenue contributor in this model is derived from the users’ willingness to pay. Thus, the main objective is to increase the willingness to pay by offering specialized products and unique services. Although the focus is not entirely on number of users but a critical user mass is required to ensure profitability.

The Transaction Model

The transaction model is unconventional and charges the user per transaction for certain specialized services offered. The most common example of a transaction model is intangible gifts being offered for sale on Facebook. A couple of options viz. Endogenous and Exogenous transaction models exist within this model. They are classified on the basis of whether the SNS or third party produces the product or service being sold in the transaction. In this particular model, SNS focus on both the willingness to pay and a strong user base to support it.

The lucrative advertising opportunity for companies and utility for users being offered by these SNS continues to fuel this progress. However, experts in the industry predict that this growth is going to plateau out sometime in the near future.

The Revolution in India

In India the birth of the SNS revolution is directly linked to the introduction of Orkut in the Indian cyberspace in 2004. An early entry coupled with an aggressive marketing through parent company Google’s mammoth online presence quickly translated into staggering growth in Orkut’s user community. The fact that the number of unique Orkut users in India grew to a staggering 15 million figure by mid 2009 is a clear indicator of the exponential growth that it has experienced. All through this five year period from 2004 to 2009 that saw Orkut become the ruler amongst online social networks in India and Brazil, North America and Europe sang the MySpace and Facebook song.

In the past one year though, Facebook (20.9 million unique visitors in India in July) has performed on steroids and has finally beaten Orkut (19.9 million) in terms of user base in India. Facebook registered a strong 179 percent growth in its Indian user base since July 2009 against Orkut’s mere 16.6 percent. The numbers speak the truth. Facebook’s ever improving presence is more than evident for the Indian youth. This stunning performance by Facebook in India and other places around the globe has forced Google to go under a panic attack and Google’s proposal of focusing on an entirely new bunch of networking utilities such as the Google Buzz, Google Me etc just makes it clearer. For the time being Orkut seems to have lost the race in India, but it still remains to be seen how far Facebook’s growth story continues. We wonder if there is another “Ace of Spades” that Google has up its sleeve.


Strategy Digest Volume 3

Religare Technova in strategic partnership with Chase Cooper

(Expansion strategy)

Religare Technova Global Solutions Pty Ltd (RTGS) (a global IT solutions provider for capital markets) has formed a strategic partnership with Chase Cooper Ltd (a leading international provider of enterprise wide operational risk management and compliance solutions), following the acquisition of a major equity stake in its parent holding company. The global recession has re-emphasised the need for firms to focus on their governance risk and compliance (GRC) framework, of which an essential part is operational risk. Hence, Religare has recognised the risk management sector as an upcoming market especially with global regulators introducing stricter capital adequacy requirements and stringent standards like Basel II. It is to tap this sector that Religare has gotten into this partnership as this will add risk and compliance solutions to their portfolio, give them sector expertise and a greater global presence.

Algeria invites India Inc for $10-bn gas pipeline project

(Risk management strategy)

Algeria is interested in India investing in the 4000 km long ambitious trans-Saharan gas pipeline originating from Nigeria via neigbouring Niger. The reason for their interest is that they do not want only European partners for the project, since Europe being so close puts political pressure on them. Hence, involving Indian partners in capital and capacity building helps them hedge their partnership risks. The Algerian government has had good experiences with the Indian public sector firm- Indianoil and wants to increase relations with India from the current $2 billion to $5 billion over a gamut of sectors.

Reliance Broadcast forms JV with CBS to own TV channels

(Expansion Strategy)

Anil Ambani Group firm Reliance Broadcast Network (RBN) has completed its negotiations with US media conglomerate CBS Corp to form a joint venture (JV) to own and operate TV channels. The JV will be 50:50 RBN and CBS, and will own, operate and promote a portfolio of television channels in India, Nepal, Bhutan, Sri Lanka, Bangladesh, the Maldives and Pakistan. The first phase will involve launch of three new English entertainment channels that will be provide access to CBS programs, but will be customised for the Indian audience. The second phase will concentrate upon regional language and Hindi channels. This expansion is expected to be very successful, and the increase in share price of RBN following this announcement reflects that the markets agree.

Bharti eyes mobile market leadership in Kenya

(Market Penetration Strategy)

The next 18 months will be interesting for the 20 million strong mobile phone users market in Kenya, as Zain plans to invest aggressively around $308.1 million through Zain Kenya, to attain market leadership. Till now, the Kenyan counterpart- Kencell – had only concentrated its efforts on the top end of the market. Now they will move to solutions that will cater to a huge portion of the market, the masses. It is planned that distributers will be increased from 80 to 200, 3G internet access would be launched by year end etc. If successful, the economies of scale that this effort will entail will be enormous. In fact, in terms of the pricing and getting the cost structure right, the strategies followed in India are being emulated in this scenario.

Tata Group Succession Sutra

The Tata Group is all set for a paradigm shift, with Ratan Tata, 72, having announced his plans to retire as the chairman of Tata Sons, the holding company for the Tata group, in December 2012. Speculation is rife as to who will be named as his successor and head the global $71 billion conglomerate; which currently has 98 companies under its fold. A panel has already been formed by the Tata Sons to decide upon the best candidate. Several names are doing the rounds: Carlos Ghosn, Indra Nooyi, Arun Sarin and Noel Tata, to name a few.

Noel has emerged as the front runner for various reasons – He is the only Tata in the fray, and is the son-in-law of Pallonji Mistry, the largest (minority) individual shareholder in Tata Sons. He has also been made the non-executive chairman of Tata Investment Corporation and then managing director of Tata International within the last few months. However, Ratan Tata’s brief is that his successor does not even have to be an Indian, let alone a fellow-Parsi; throwing the field open for all the candidates.

While Ratan Tata could arguably do what JRD Tata did — unilaterally pick a long shot as his successor, and be proved right posthumously — such an action would not be in keeping with the corporate governance norms which Ratan has espoused throughout his career. Any procedure which the group adopts should be akin to that of any other global major in a similar position.

It is interesting to note that the search committee is packed with people who are trusted aides of Ratan Tata (for example N A Soonawala and Krishna Kumar), and it is inconceivable that they will pick someone whom he disfavours. However, Ratan is playing his cards very close to his chest and no one knows whom the great man has earmarked.

With 65% of the group’s revenues now coming from abroad, the primary skill the new chairman needs to have is a global world view and the ability to carry people from different nationalities together. Recent acquisitions like Corus and Land Rover need to be integrated into the group. The new honcho also needs to come up with the next big thing; and after the successes of Nano and Swach, the low-priced water purifier, expectations will be high.

Changes in the corner office at Bombay House are a rarity. Ratan Tata has occupied it since 1991. Before him, JRD Tata had held the office for 53 long years. Only time will tell who is going to be its next occupant.

Landmark deal for Indian defence industry

The Government of India (GoI) has embarked upon an ambitious plan of developing about 2,600 new-generation Future Infantry Combat Vehicles (FICVs) to replace the currently ageing fleet of the Indian Army.

The defence ministry has mandated that only Indian companies will be eligible for this deal and has shortlisted four companies that will be eligible for this bid. The shortlisted companies are Tata Motors, the Mahindra Group, L&T and the Ordnance Factory Board (OFB). This would mean that three private companies and one public company are in the fray for the deal.

Infantry Combat Vehicles (ICVs) look similar to small tanks and can carry about 7-8 people on board. They are lightly armoured and highly mobile vehicles which can travel deep into the army territory. The FICV to be developed for the GoI must be bullet-proof, amphibious and transportable by air. Also, the FICV should have atleast 50% indigenous content.

The defence ministry is soliciting an Expression of Interest (EoI) from each of the four companies in which the companies will detail their plan about developing the FICV, the technologies that they intend to use, the timeline involved and the estimated capital expenditure on the project. The companies are also expected to state a minimum order quantity which will make the project viable.

After careful evaluation of the EoIs, two contractors will be selected to develop the FICV prototypes. The FICV prototype which gives better field results will be finally chosen. The company finally selected will be allocated 65-70% of the order whereas the other contractor will get the remainder of the order.

The cost of the project will not be borne by the MoD alone. The MoD will fund about 80% of the total cost while the contractor will fund the remaining 20%.

It is believed that the Ordnance Factory at Medak might be utilised for making the FICVs since building a new facility for the same purpose would be a waste of resources. The FICVs should be ready for use by 2018.

Strategy Digest Volume 2

Amul Model to be applied to diamonds

After having worked wonders for the nation’s milk industry, the Amul co-operative model, will now be applied in the diamond industry. Around 1,500 small, medium and large diamond merchants have decided to float a company, Surat Diamond Sourcing (India) Ltd (SDSL), which will directly source roughs from mining companies across the world and sell it to its members — all equal stakeholders — through a tender system. The company will have an initial capital of Rs 1,000 crore. For membership, large manufacturers and rough dealers will contribute Rs 1.08 crore each and small and medium manufacturers will contribute Rs 54 lakh each. This move will help raise India’s market share and reduce costs due to direct supplies.

Tata DOCOMO launches pay per site tariff plan for browsing

Tata DOCOMO has launched a new ‘pay per site’ tariff plan which will allow subscribers to pay only for the websites they surf. There are two packs being offered – the ones interested in a single website need to pay Rs.10 per site which will be valid for 30 days and those with multiple site browsing needs can opt for a combo pack at Rs.25 per month. Customers can accordingly bundle different options together like social networking sites (Facebook, Twitter etc.), mail options (Gmail, Yahoo etc.) and chat messengers (GTalk, Yahoo Messenger etc.). After having launched “pay per second” last year, this is another example of Docomo’s disruptive marketing techniques. This could hit the other telecom firms badly as VAS is the only place where decent margins still exist. We can probably expect some reactions from competitors in the near future.

Mahindra to acquire Ssyangyong

Mahindra & Mahindra has been selected as the preferred bidder for the acquisition of a majority stake in the South Korean SUV maker, Ssangyong Motor Company. While M&M is the market leader in India with a share of nearly 60 per cent in the utility vehicle (UV) segment, its presence abroad in the same segment is limited. It does not have a manufacturing base abroad for UVs and has to depend on exports. On the other hand, Ssangyong sells its products, primarily SUVs, through more than 1,300 dealers outside South Korea. This acquisition will give M&M a global hold, and help M&M ramp up their capability for selling on a global basis. M&M intends to keep the Ssangyong brand separate from itself. Also, since the operations of M&M and Ssyangyong are very different, M&M has decided that it will try and keep a Korean CEO to head Ssyangyong, who understands the Korean market well.

Marico unit buys South African health brand ‘Ingwe’

The South African unit of Marico Ltd, personal care products maker, has acquired over-the-counter health care brand ‘Ingwe’ from Guideline Trading CC, South Africa, for an undisclosed sum. Marico had entered the South African market in October 2007 and has hair care brands Caivil, Black Chic and healthcare brand Hercules in that market. Ingwe is supposed to complement the Hercules range and will help expand Marico’s distribution network in South Africa. This is yet another example of Indian consumer firms moving to the untapped African markets where demands are rising with the growth in economy, and where the competition faced is less as compared to the more mature market of India.

PepsiCo launches PepsiMax

PepsiCo has launched Pepsi Max, its zero-calorie, no-sugar cola, in India. Pepsi Max was first introduced in the UK and Italy in 1993 and globally competes with Coke Zero, Coca-Cola’s no-sugar variant. Even though, the diet cola category in India is merely one per cent of the total sparkling beverages sales of 650 million cases a year, PepsiCo has launched Pepsi Max to have an edge over Coke Zero in the market as and when it arrives. Pepsi Max is targeting the urban consumers, especially men, in the 25-plus age group who are switching to healthier juices and non-carbonated drinks. The promotion campaign of Pepsi Max will center around, “Maximum kick. No sugar” and the advertising will be disruptive in nature. To get good trial rates, the prices of Pepsi Max have been kept low.

NSE to form Global Alliances

The recent deal between NSE and LSE to work out a joint venture and allow CNX Nifty and FTSE 100 to be traded on each other’s exchange is of great strategic significance. With such a deal in place, CNX Nifty, will become a globally traded contract and NSE will be able to offer a basket of top traded global indices. This move is expected to benefit both the exchanges and the investor community and seems to emerge out of a strong economic logic. The landscape in which stock markets have operated globally are fast changing. With advancement in IT services and almost negligible marginal costs involved in executing trades, the traditional parameters for judging a stock exchange’s competency are fast losing ground.

Typically, stock exchanges earn revenues from member subscriptions, fees from listing, trading, clearing and settlement services and charges for providing company news, quote and trading data. But with negligible marginal costs involved with each of these activities, the associated margins have dwindled significantly. Therefore, the economic viability of any exchange to a large extent is determined by the volumes of trade being transacted through it. The traded volumes in turn are dependent on the reach and liquidity offered by the stock exchange. In stock markets, liquidity breeds liquidity. Because of higher liquidity, the bid-ask spreads (the difference between the best buy and best sell prices of any scrip) become lower, which brings down the transaction costs for brokers. Because of lower transaction costs more brokers trade on the exchange, increasing the liquidity again.

Given the changing nature of the market forces, a strong case is set out for alliances among the stock exchanges. Alliances among stock exchanges will provide them with a positive network externality as a wider network would result in greater liquidity. With a wider network in place, more traders are expected to trade on that network as an order being sent out by them is more likely to get executed if there are others sending out their orders on the same network. Therefore, a network with a large order flow will attract more orders.

Apart from the strategic interests of the exchanges, such a tie-up will also benefit the investors. Traditionally, the high trading costs have limited Indian investors from taking positions in foreign stocks. The tie-ups between Indian and foreign stock exchanges are likely to make it easier for Indian investors to invest in foreign stocks.

The success of this deal is expected to set the path for future global tie-ups of Indian exchanges and provide synergies from other tie-ups of foreign exchanges. These tie-ups will add to the reach of the Indian stock exchanges and enable them to provide a wide range of trading options.

Managing Glitz

Be it brand endorsements, launch parties, special appearances or stage performances, being a celebrity in India means big money. The ever increasing influence of celebrities on consumer choice and a growing demand for their presence at events across the country has translated into an entirely new business area of celebrity management. Although still in its infancy in India, it is garnering huge interest and has resulted in the emergence and establishment of numerous celebrity management firms in the recent past. The corporate big wigs realize that they live in an era of cut throat marketing and celebrity associations are simply essential for market presence.

Celebrity management firms have traditionally acted like brokerages, but a paradigm shift is in process as they turn professional and replace madness with method. Virtually anyone with strong contacts can setup shop. A lot of veterans still perceive “Celebrity management to be more of an art and much less of science”, but the science is emerging with companies like Percept and Celebtrack who systemically focus on research and their roles as consultants rather than just being gatekeepers for celebrities.

Celebrity endorsers can be classified into three major categories. The first set consists of celebrities who follow the gold mantra and will endorse any brand as long as the price appeals to them (Shahrukh Khan, Amitabh Bachchan etc.). The job of managing them is essentially cutting the deal and negotiating rates. Concepts like brand fit hardly exist and only hard cash matters. The second set comprises of stars who position their image in the market and associate with a brand only when they think that it suits them. The third set is of celebrities who are smaller in stature and are interchangeable. They come relatively cheap and rarely have preferences. The third set of celebrities is the one that will be most attractive for firms in the industry. This category witnesses frequent deals and does not depend hugely on celebrity preferences.

The industry is still trying to find its feet and recent events like IPL have turned the game into a gold rush for the companies involved. Recent deals between Madison Mates and John Abraham, Priyanka Chopra and Krossover are signs of aggression and competition in the industry. It is a mix of glamour and professionalism as good as it can get. The numbers speak and nine digit figures are common. Experts believe that the industry is well on its way to become worth more than INR 10 billion in the near future. Ample opportunities, low entry barriers and lucrative economic benefits continue to boost growth and interest. It still remains to be seen whether all of this can actually induce some so called “management” and change anything about the tantrums and craziness that is generally associated with celebrities in India.