“One cannot improve human beings, but one can certainly improve systems. And the same flawed human beings with a better system will be able to produce better results”

RS Sharma, UIDAI Director

The Indian UID (Unique Identification) is certainly one of the most ambitious governmental projects ever attempted. Under the supervision of the UIDAI (UID Authority of India) created in 2009, it aims at providing a unique 12-digit identification number to the whole Indian population. Started in September 2010 in a few pilot regions, the UID has now been assigned to more than 200 million people. The code is assigned to each individual through one of the several hundreds purposely-built offices throughout the country, and is linked to a central database that records official document scans (passport, driver license, tax file number, ration card) as well as the biometric information that will later be used for secure identification: iris and fingerprint scansions.

The main goal behind the project is to provide a standardized, unique mean of identification that will be accepted by public and private institutions, in order to promote efficiency, safety and fight the widespread corruption and malpractices that hindered India’s significant development in the last few decades. Public offices and private businesses will receive from their customers a UID number combined with an on-the-spot iris and/or fingerprints scans that will be sent to the centralized government database and matched with the files of the resident, thus enabling the companies to access all the client’s necessary information (public and, if permitted, confidential information). As a result, residents would be spared the hassle of repeatedly providing multiple, identity related, documentary proof each time they wish to access services. Therefore, the UID number will provide easy identity verification and facilitate the provision of public or private services. It is also easily verifiable in an online, cost-effective way once the required inputs are entered into the specifically designed software and high quality scanners.  The most innovative feature of this project, and the basis for its reliability, is the inclusion of biometric parameters that ensure identity authentication. In fact, similar code-based projects have been implemented in many countries (Social Security Number in the US, Medical Card of services in Italy, India’s tax “PAN” card among dozens of others) and have often been successful: however, they always required a secondary mean of identification, and this strongly reduced the amount of procedural simplification they managed to achieve.

The UID, instead, will guarantee immediate identification with a scan and a code input. Given that the biometric characteristics recorded, unlike traditional ID documents, are not falsifiable, the probability of identity fraud is almost completely eliminated and the successful identification rate exceeds 99.9%. Additionally, errors that may occur can be checked and processed manually by the system’s employees, further enhancing the efficiency, reliability and security of the project. Nevertheless, several critics have raised doubts over the safety of the system and the critical consequences of a possible misuse of illegally acquired data. These voices of dissent, often coming from regional politicians, are raised in defense of their vested, non-legitimate interests that would be damaged if the UID system would be successfully implemented in all governmental agencies. The most recent ruling on the subject by India’s Supreme Court, on October 21st 2013, backed the legitimacy of the project and dismissed all the charges of privacy violation. Following this logic, the many critics that the UID project raised so far are a very good indicator of its enormous potential in fighting bribery and depriving corrupt officials of their illegitimate powers.

The UID system can be the source of important advantages to all the actors involved in its use. In order to better illustrate these advantages and what is required from the system to deliver them, it is convenient to separate the actors in two main categories: final users (Indian citizens) and institutions (the Indian Government and its agencies; private firms). The crucial point is that each member of a group needs a sizable number of users in the other group in order to maximize its own utility. The more people use UID, the more businesses will benefit from offering UID-based services; vice-versa, more businesses and government agencies accepting UID as identification directly translates into greater benefits for citizens. This twofold relationship is typical in the field of Information Systems (notable similarities explored in class can be found with the videogame and credit card industries) and is a textbook example of the ‘Network Effect’ model. The most important aspect derived from the application of the model to the UID case is the need for both groups of users to reach a Critical Mass in order for the cross–benefits to outweigh implementation costs. In other words, a sizable amount of users in a group (in theory, a precise number of them) must be using the technology to make it convenient for the other group to start using it too. The UID project managers need to acknowledge the importance of this relationship and promote the service to both groups in order to succeed in their ambitious plan. The group-specific benefits are described below, together with an assessment on the network effect externalities and the steps to be taken to reach the critical mass.

Final Users

Indian citizens that choose to apply for a UID will undoubtedly benefit from the technology in many different areas of their life. Firstly, they will obtain easier and legitimate access to welfare programs such as food distribution, direct transfers, fiscal reliefs, medical assistance and so on (recent studies suggest that 2/3 of the allocated aid resources are lost to bribery and illegal appropriation). In fact, even today only a small fraction of the population is able to establish its identity through traditional documentation. According to many Indian officials and researchers, the inability to prove one’s identity is one of the biggest barriers preventing the poor from accessing services and subsidies. Different service providers would require the demander to undergo a full cycle of identity verification, with many forms and documents to be filled out, leading to a high probability of demand rejection in case of noncompliance with the requirements. These situations constantly proved to be a waste of time and resources for both the organizations as well as the individual demanders. Furthermore, India is a country where corruption dominates large areas of government intervention, therefore the UID can significantly improve the effectiveness of the programs by ensuring that the final beneficiaries will receive what they deserve without having to bribe officials or wait too long.

Secondly, those who possess a UID can improve their interactions with private businesses and employers: easier and reliable alternative forms of payment, job applications, contracts, and so on. An interesting development in this direction is the MicroATM: a portable device that can verify one’s identity through UID code input and iris/fingerprint scan, and then wirelessly (thanks to a cellular SIM card) access the bank account of the user in order to perform safe transactions.

Thirdly, the UID can also greatly improve the quality of medical services.  In case that the patient is incapacitated, a simple iris or fingerprint scan would allow the medical staff to directly access all the vital information of the patient (blood type, allergies, medications and so on), therefore limiting errors, increasing the efficiency of the system and potentially providing a database for all medical facilities (including research centers and universities).

Given the importance of these benefits for the average Indian citizen, together with the relative ease of joining the project (UID registration is free), it does not come as a surprise that in just one year more than 200 Million people have chosen to request their new high-tech identification. However, these initial figures are likely to be over-represented by the lower-income classes, since they benefit the most from UID-based food rations. The project now faces the challenge to appeal to mid- and high-income citizens that are less interested in the ease to access welfare programs: the key to success is to reach the critical mass in the number of private businesses offering UID-based services. As of today this is far from being accomplished, as many firms still find the necessary equipment to be too expensive. The government therefore needs to find new ways to promote UID adoption by private firms.

Institutions

Private and public institutions in India can benefit from the UID mainly in terms of cost savings, increased efficiency, and accuracy of transactions. Moreover, private firms can use UID-based services as a platform for differentiating their offer: consider, for example, mobile phone providers that could include in their plans SMS-based UID services monitoring; travel agents managing visa applications for their customers thanks to the access to the complete set of their customers’ documents; employers being able to track each worker’s activity thanks to daily fingerprint scanning.

In sharp contrast with the group of end users, however, institutions face important costs when deciding to embrace UID in their business: intuitively, the initial expenses to purchase equipment (fingerprint or retina scanners, terminals to access the central UID database); moreover, firms have to deal with ongoing costs related to the management of the new services, such as extra hiring, maintenance costs, and so on. This explains the initial reluctance expressed by private firms and even local public authorities. However, as stated above, the number of institutions using UID is crucial to the success of the technology among citizens: therefore, the government needs to implement further measures to encourage the adoption by firms and state offices. For instance, financing or tax reliefs should be granted to innovative businesses developing cheap connection terminals or biometric readers; public employees should be trained on the technology and motivated to use it; private businesses should receive support for early adoption. This phase is crucial in deciding whether the project will be a universal success or remain confined to those who do not have alternatives (lower income classes); the government needs to address the stated issues, possibly pursuing proactive solutions that can help reaching the critical mass in the near future.

 

 


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This post answers questions on Netflix’s international strategy – specifically from an Asia Pacific lens. Do India and China offer a lucrative market for online movie streaming? And if they do, can Netflix dominate these markets? It probably won’t, in my opinion. Let us analyze this sequentially.

Netflix, the on demand internet movie and TV streaming media, added Internet video streaming in 2007. Perhaps Reed Hastings had realized that the future lay in internet streaming. By 2011, Netflix owned 61% of the US digital movie streaming market.  The natural course of action was to look towards global expansion. On 22nd Sep 2010, Netflix entered Canada and began its Latin America services a year later. In 2012 it began operations in UK and Ireland and earlier last month arrived in Sweden, Denmark, Norway and Finland. While we wait for most of these operations to stabilize, questions are being asked about the next international entry for Netflix. India and China seem like a big bet not just for Netflix but for other similar online movie streaming platforms. But can Netflix succeed in these markets?

There are three questions we need to answer.

  1. Does the Asia Pacific (especially India and China) online movie streaming market have potential?
  2. Can Netflix succeed in the region?
  3. If not, could they enter with a pivoted operating model? What all should they change?

A new report (“Online Movies:  A Global Strategic Business Report) predicts the total value of the global online movie streaming market to reach $4.4B in 2017. There are several drivers behind this growth. Most markets are growing internally, customers are increasingly aware of global trends and more comfortable with online payment systems, internet penetration is on the rise and movies remain popular in general.   In the US, broadband connectivity, which was a low 20% a few years back, has grown at a rapid clip over the years to reach a rate of over 78% in 2011. On the other hand, Asia-Pacific, driven by growing dominance of markets like China, India and Australia in terms of Internet connectivity, broadband penetration, and huge population base, is expected to grow at a fast clip of about 36% through 2017. Additionally, the “reach of online users” in Asia Pacific, as a share of total internet users is healthy. Asia Pacific scores an average of around 81% which is only slightly lower than the worldwide average of 81%. India and China hover around the 70% mark. Broadband penetration is growing and around 63% of the population shop online at least occasionally. However, in India, broadband penetration relative to total population is only 2% – which is small but also indicates huge potential. In China, this number is 12% – also indicating untapped potential. An untapped, growing market with enormous potential makes sense to enter.

However, I don’t think Netflix can succeed easily in these markets.

·         For starters, its expansion in Europe (a more comparable market to the US) is draining its cash reserves substantially. Netflix reported an 88% drop in its third quarter earnings this year and net income reduced as compared to last year. What this implies is that Netflix will wait for a significant time period before expanding into the lucrative markets of Asia Pacific. And while they wait, these markets would most likely be taken by home players. Even if Netflix wants to go to non-India/China markets like Korea, it will have to wait till its European earnings stabilize.

·         Domestic content providers have a much better shot at dominating these markets. They own the content and would likely host it on their websites. In India, a bunch of production houses (Eros, Reliance) have already started to do so. Netflix’s traditional licensing agreement will not be easy to pull off with such content providers. Even in China, the government-helmed China Movie Channel’s site M1905 joined forces with Jiaflix to launch a movie streaming service in China. It will be hard to displace such incumbents if you are late to enter the market. Content is king and owning it will not be easy.

·         Similar to the last point, Netflix will find it tough to negotiate with the domestic production houses in India and China on the same terms as the in the US. Will Netflix be flexible enough to take a much smaller share of the pie when it does get an in?

·         Within the Asia Pacific market, rampant piracy will hurt operations. Most of the population downloads illegally and for free. Most of Netflix’s movie and TV offerings are not the most recent releases – the latter being in the top favorite list of the population. Success of Netflix will involve changing customer behavior, which is always a long and painful process. If domestic content owners control their movies/shows then Netflix will be left offering its international collection – something most people can download in no time, for free!

·         YouTube can actually emerge as one of Netflix’s main threats in the region. Even if domestic production houses can’t host their own content (paid or free) and are unwilling to invest in a hosting website, they can always start a paid channel on YouTube which will attract the target market. How does Netflix compete with that?

So we know that the market has potential but Netflix will likely face a hard time if and when they get to it. That said, they must go into the region at some point – the potential is too huge to ignore. How then can Netflix succeed in these markets? Perhaps it can by changing its operating model.

In my opinion, Netflix would need to do away with its exclusive hosting model and share hosting platforms with domestic content providers. It brings a lot of value to the partnership – top notch technical expertise coupled with experience in providing a seamless customer experience are invaluable assets – especially for content creators that have traditionally not grappled with an online market. This takes away the fear of losing content control from the minds of the domestic production houses and also allows Netflix to have a share of the pie (albeit small). While Netflix will be able to showcase their own name of the partnered website, their revenue share will likely be much smaller as the platform will be mostly of the domestic content owner.

Additionally, there may be some content owners that are unwilling to go through the hassle of hosting their own streaming websites and Netflix could host their movies/shows on its normal website.

YouTube will still pose a huge threat to Netflix as it is also a hosting platform serving the same purpose. But YouTube will probably not be as adept in tracking customer preferences and experiences – something Netflix can and has done. It could pitch this value proposition to the domestic content owners as having a grip on preferences and streamlining experiences can help gain significant early traction. As a customer I would prefer a dedicated movie channel rather than finding and watching a channel on YouTube.

To summarize, the Indian and Chinese online movie streaming markets have a lot of potential and Netflix has the expertise to win in them – however domestic market conditions and friction with content owners will most likely hurt Netflix in actual operations. Changing its operating model for these markets is a solution but even then the road will be full of bumps. It will be interesting to see which path Netflix takes and how much success it can generate.


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Online services as a sector has seen a tremendous increase in investments in India in the last few years – more than $500Mn were committed in 2011 and upwards of 12% of total capital invested across different stages of investment this year has gone to online services. Largest global players like Amazon, eBay and Groupon are gearing up by increasing teams on the ground, releasing new features, establishing fulfillment centers to capture the growing Indian e-commerce market.

Why is the Indian market of interest? For many reasons: the population is so large, that even a small sliver from this pie means millions of customers which makes it look like easy to reach a breakeven scale for any online business; the government is supporting the ramp-up of infrastructure in terms of subsidies for connecting remote villages with telecom and internet services; there has been a tremendous increase in internet penetration, which a significantly large population still underserved – representing a tremendous growth opportunity.

But does that mean this a simple nut to crack? It’s too soon to tell, but many investors and entrepreneurs are slowing finding this will prove to be much more difficult than they had initially imagined.

How is India different?

Getting the consumer to use online services

Gaining consumer’s trust in doing transactions online has been a big challenge. Most Indian consumers, even affluent consumers, are not confortable with using credit cards or doing online transactions. Businesses have had to offer many different services in order to get consumers to start transacting – for e.g. cash on delivery, EMI payments, free delivery and the option of no-questions asked return policies of up to 100 days. This has led to several unforeseen challenges: The cost of delivery (and cash recovery) is substantially high – ~Rs. 50 per order (when the average order size is Rs. 1000-1500). Very high rates of returns further increase the cost of servicing customers with small orders. In order to avoid stolen deliveries, sometimes 3-6 attempts have to be made per order to ensure in-person deliveries.

Language

While there is a large English speaking population, majority of the population is still uneducated, unable to read English, unable to use computer or smartphones despite having access to mobile or PC Internet services. With the large number of languages prevalent in different parts of India, developing regional content for websites can prove to be a large investment. China, on the other hand has seen relative easy in adapting websites to local language.

Logistics

While the urban areas are very densely populated, nearly 70% of the total population lives in far-flung rural areas. The last mile delivery to such locations has proven to be a big challenge with very few private courier services. A lot of Indian companies who have adopted the route of in-house delivery logistics specially face a large constraint in scaling up to serve this population.

As a result of this, several businesses have come up who serve e-commerce companies, but reliability is a key issue with such setups. The consumer is easily angered by a delayed or lost delivery.

Sustainable value proposition

Online services in India have taken two routes in India: either providing convenience to shoppers sitting at home in urban areas or solving the issue of access to good quality goods in tier 2 and 3 towns and rural areas. Most of the businesses that have gone down the first path have discovered that consumers have very little loyalty to the website/company and are easily swayed by deep discounts available on other websites. This has eaten into a large part of the profits for these companies. On the other hand, the companies that have taken the mission of solving the issue of access to good quality and branded products have seen reasonable success in building consumer loyalty to their websites, but the cost of serving these customers is substantially higher given the distances.

In a difficult to serve, but high potential environment, there have been many innovations in terms of business models that companies have adopted. The success of such innovations yet remains to be proven, but there are a few worthy of mention.

  • Suvidha commerce: The company has taken an online+ offline strategy focusing on tier 2 and 3 towns and rural areas. The company has opened retail outlets where there are a few kiosks and salespeople who can help consumers shop online. The consumers can pick up the deliveries from these shops after paying for the merchandise in cash at the kiosk.
  • Offline brand stores: Jewelry website Caratlane has opened a diamond lounge where customers can browse the products, touch and feel the merchandise before placing the orders online to instill trust in website.
  • Focus on mobile transactions: A very large population has access to Internet only via mobile phones. To tap into this market, ng-pay launched a mobile shopping mall.
  • Payment methods – Cash on delivery, online banking transactions are payment methods that many companies have adopted to ease customers into transacting online.

Whether the investors finally make their returns or not, the entrepreneurs fail or succeed, the one stakeholder who stands to definitely gain from these ventures is the consumer.

From the desk of a happy Indian e-consumer

 

 


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