By 26 July, 2011

Ray Kurzweil, renowned artificial intelligence expert and futurist, has a famous chart that he shows at virtually every conference, which basically highlights the fact that the rate of innovation has been accelerating over the past century (The Law of Accelerating Returns). Effectively, what he demonstrates is that the level of innovation, that earlier took decades to scale up, is now being accomplished in years; what took years, now takes months, etc. etc. etc. (to borrow a phrase from The King and I).

Anyhow, I am going to apply the above metaphor to try and explain the game of catch-up that overseas entities often play to enter emerging markets like India. My hypothesis is that, especially on the tech front, the time lag between a local player emerging as a leader in a particular space and the much larger overseas incumbent moving into an emerging market is also shrinking.

Let's take the online travel business as an example. In the travel business, there was a crop of local companies (MakeMyTrip, Cleartrip, Yatra) which began their journey around 2005 (well, MMYT was around long before that but with an US/NRI focus). These companies spent considerable time and capital, building trusted brands for Indian consumers. One could argue that they were early, since the Internet penetration in India was still relatively low. But clearly, as has been the case in other markets, digital goods (travel, movie tickets, etc.) are usually the early indicators and beneficiaries of online uptick in a particular geography. A few years later, more established players like Travelocity and Expedia entered the Indian market, finally realising the fast-growing online travel business and the high-momentum domestic consumption story. I would argue that they waited too long. So, even though they have been in India, trying to gain market share by spending significant marketing dollars, the fact of the matter is that they have not been able to make a significant dent in the market dynamics. The reason again is that, Indian consumers are very satisfied with the existing breed of indigenous travel players, with whom a trusted relationship exists. And it is difficult for oversees players, no matter how deep their pockets are, to dislodge those.

By the way, I also feel very strongly that there is 'domain name inertia' that plays a role online. It's much easier for me to type or than to type or The second dot (.) before the 'in' is equivalent to looking at the 10th page of Google search results. One can do it, but requires more effort (I am sure people have studied the correlation between domain name lengths and number of associated dots with the success of that particular site). I am sure many will disagree with that fairly simple generalisation.

By the way, my hypothesis around why Expedia and Travelocity entered the Indian market when they did, has to do with the dilemma that all large companies face of short-sighted value-accretion drivers. By definition, when a company has grown to billions of dollars in revenue, the size and impact of each incremental market that the company is contemplating entering, has to be meaningful to the top and bottom lines of that company. Timing becomes critical. Getting in too early into a market can take up resources without providing results, while waiting too long can lead to an Indian travel-like situation where category leaders have been created, and the much larger overseas players have missed the "planes, trains and automobiles."

However, the new breed of online players like Facebook, Groupon and LinkedIn are not making the same mistake as their travel counterparts. These companies, although sizable, still have a very entrepreneurial mind set and move quickly and early into emerging markets, rather than waiting for the markets to mature. The lag between their counterparts in India and these very companies entering India, either organically or via an acquisition, is, indeed, getting shorter. This also has a lot to do with the fact that smaller local companies can and do make exponential progress (companies getting much bigger much faster). While the travel guys waited for a few years, Groupon has made a bet about a year after the Indian group buying companies like Snapdeal and others started gaining traction.

Similarly, my guess is that Amazon is likely to enter the country as soon as it clearly sees the Indian e-commerce market potentially being a growth engine for years to come. Although it remains to be seen, my guess is that Amazon will not let Flipkart, Fashion And You, Yebhi and others cement a leadership position in a category that is clearly going to be very large in India. Whether these companies eventually succeed in India with its own complexities and nuances, and whether their overseas brand carries is as impactful, are unclear. But what is clear is the fact that in the e-commerce realm, timelines are compressed (companies can ramp very quickly), and as a result, the incumbents in the USA have a greater sense of urgency.

Whether these decisions are to 'make' or 'buy', clearly things are bound to get very interesting as companies from the online and mobile world come knocking.

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