By Sramana Mitra and guest author Shaloo Shalini
SM: You are saying that in terms of the Indian market, customers want local support network and vendors to have retail offices [in India].
SB: Yes. Netmagic is located in India, and that offers a face which people can see and relate to. I would say this is more of a psychological barrier. It is not a mindset that will go away any time soon.
SM: Also, I think the cost structure in Indian markets allows companies to provide that kind of hands-on customer support. That is the advantage in India. Is there anything other than those two areas, in terms of the actual cost of the operation, that can still be squeezed? Is there anything unique that Netmagic has that enables them compete on price with Amazon?
SB: I don’t think so. I think that overall, Amazon’s base cost must be less than Netmagic’s. If Amazon wanted to start a price war with Netmagic today, Netmagic would probably not succeed.
SM: That is owing to the kind of volume Amazon deals with today.
SB: Yes. But I am sure that Amazon buys their basic hardware much more cheaply than, say, what Netmagic pays for it because of the sheer volume of hardware that Amazon deploys. But at the same time, I think the infrastructure provisioning business, be it for cloud-based infrastructure or SaaS, is always going to be a big man’s game. The bigger you are, the better you will be. Look at the electricity model. There is no such thing as a niche electricity provider because the more electricity you can generate, the cheaper your operations are. Therefore, the basic infrastructure in clouds will always be the “big boys’ club,” and companies like Netmagic will become big by exploiting regulatory niches rather than cost advantages.
SM: I think a natural progression would be for Amazon to buy Netmagic or an equivalent provider in India and set up their own local shop. A local operation of Amazon could deal with factors in the Indian market such as low-level customer support, regulatory issues, the Indian credit card system, and so on.
SB: I agree. That is where Amazon is progressing; they did set up a data center in Singapore. My guess is that Amazon is targeting Asian markets by getting more local. But right now, the market for Amazon in Asia will still be small compared to its market in the United States, and that is probably where the opportunity for a Netmagic-like startup lies.
SM: That is absolutely right.
SB: Even in terms of Amazon’s main business, the book-selling business, Indians buy a lot of books from Amazon. Estimates are of the order of $10 million a year, which from the Indian book sales point of view is significant. Indian book sales are about $100 million to $120 million [total]. Ten million dollars is a big chunk, and it is probably as much as all of the e-commerce book vendors in India put together. But for Amazon, $10 million is too small to set up an operation locally.
SM: Of course.
SB: That is one of the reasons why a company such as Flipkart still prospers in the Indian market.
SM: Yes, and that is where I was going when I talked about these 400–600 SaaS vendors that are offering cloud services in various slivers of business. Basically, various business applications are available in the U.S. market from startup companies, and they are all priced in dollars. My point is that I see an opportunity for concept arbitrage on these applications, an opportunity to offer them to Indian businesses at a dramatically different price point. There is an opportunity for the cloud computing vendors to get these businesses, do customer validation in India, reach out, and later possibly even sell the same services to the international market at that same price point because then they can compete against international vendors.
SB: Yes! You are right. I think India is now starting to grow very large from an internal market point of view, which wasn’t the case, say, 10 years ago. There are solution providers that could do this concept arbitrage; Zendesk is an example. They are a widely successful help desk application. But again, Zendesk is dollar priced in the Indian market, and this dollar pricing is far too expensive for India and for businesses like ours. Therefore, if an Indian vendor came along today and said that it would give us a service similar to Zendesk but priced in rupees, we would probably take it in a flash!
I am sure that if a local vendor offers Zendesk at competitive rupee pricing, after maybe four or five years of selling in India, they will have the kind of revenue base that allows them the surplus to the market it to the rest of the world.