Opinion | Game Theory in Indian E-commerce

The seeds were sown early this year. On 15 January, the world’s richest man and Amazon founder Jeff Bezos said the online retailer would invest $1 billion in India over 5 years, bringing 10 million small and mid-size local businesses online. While US companies are known to be tight-lipped about their investment plans, there is a reason why Amazon keeps announcing them. In it, there always is an inherent message for its competitors. This time, it was for Reliance Industries which had, just a month back in December, rolled out an early version of JioMart -- its much-anticipated online retail service, saying it will use its technology platform to tap into India’s vast network of small neighbourhood stores known as kiranas. Bezos’ appeal then to woo such businesses could be understood.

Game theory is about how you make moves in competitive situations where the outcome depends critically on your competitor’s moves. Here, signaling is just as critical as the actual action. That was Bezos’ turn. Now Reliance has come back with a $5.7 billion deal with Facebook that gives the Mark Zuckerberg company a 9.9% stake in RIL subsidiary Jio Platforms. RIL gets a lot money to lengthen its runway and secondly it makes sure that it mentions in the joint news release, unleashing ‘JioMart’ on the mammoth 450 million user base of Facebook-owned Whataspp to turbocharge ‘kiranas’. All eyes on Amazon now on its next move, which should not be undermined in anyway. And while all this happens, we have now entered the second round of Indian e-commerce wars.

The network effects will impact all spaces – payments, content, distribution, currency and ofcourse commerce. The prize is enormous. Domestic consumption, which powers 60% of India’s GDP today, is expected to grow into a $6 trillion opportunity by 2030, said a Bain report.

The first installment of the e-commerce slugfest was essentially about obliterating the homegrown local upstarts. On display was the famous Silicon Valley growth doctrine ‘Blitzscaling’ -- or losing money to win -- which prioritizes ‘speed over efficiency’, to achieve massive scale at incredible speed in order to seize the ground before competitors do. The second round brings Amazon face-to-face with Jio which is well versed with such playbook: Jio’s entry has shaken the telecom business model – free voice calls, disruptive packages and freebies. Result: stiff losses, value erosion, mergers and even bankruptcies. In other words, throw money to control consumers, ‘monopoly leveraging’ and raise prices at will.

Having spent close to $50 billion very fast to build a subscriber base of 340 million, Reliance has now created a ‘Jio-ecosystem’ which is now difficult to replicate. It is seeking to become a home-grown digital monopoly – where every digital access or service that we in India avail comes through Jio – be it either network, device or content. On the other hand, Amazon already controls roughly 40% of the US e-commerce market and is on track to own 50% by 2021. There are similar concerns that the Amazon store has become a utility infrastructure that the company is subverting for its own benefit. Both Amazon and Reliance's ambitions have few limits, and the mere specter of their entry into a particular industry can shape markets.

Then there Facebook, which suffers huge backlash from time to time. Shunned in China, Facebook counts India as one of its biggest markets. The country is also the fastest-growing mobile internet market and the extent to which Facebook succeeds here could determine much of its medium-term future.

It will put all its force behind it, especially given its history in India is complicated. It gets a powerful local ally and also monetization options. Thirdly, irrelevancy can happen remarkably quickly. True in any industry, but particularly in digital technology. Market shifts happen. Facebook is quick to realize such shifts and that gets reflected in its acquisitions and the top dollars it pays for them. For India, that shift is ‘mobile’ is ‘the’ internet. At 560 million, the Indian smartphone market is the world’s fastest-growing: larger than the population of US, with data consumption of 8.3 GB/month compared to 5.5 GB/month in China.

As we head into the second round of e-commerce wars, there are some important questions to ask: how will the future consumer look like? Will kiranas move digital so easily? Is having monopolies good for consumers? Will the regulation be able keep up with technology and the growing monopolies? One cannot deny that consumers have benefited deeply with discounts and flash sales as companies went about burning billions in pursuit of growth.