100% FDI in Marketplace: What does it mean?

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  1. sarraf17

    sarraf17 New Member

    Having run the country's largest marketplace while at Flipkart, here is how I look at it. For the first time, government has crisply defined inventory-led and marketplace models of e-commerce. By allowing 100% FDI in marketplace model and 0% FDI in inventory model, government has made things very binary. It is always good to have regulatory clarity so entrepreneurs and investors can take the right business calls.
    What does it mean for large e-commerce players such as Flipkart and Amazon? Well, technically, they are marketplaces since entities such as WS Retail and Cloudtail are separate legal entities. So, as far as letter of the law is concerned, they are compliant. Therefore, this 0% or 100% FDI binary thing does not impact them. What would impact them are additional guidelines in the notification that says: (a) more than 25% sales cannot come from one seller and (b) marketplace will not exercise ownership over inventory and/or influence pricing. Given where things are today, these two additional guidelines puts some of the large ecommerce players in the "non-compliant zone". However, it would not be difficult for them to become compliant quickly, for example, by breaking-up WSR or Cloudtail into 4 entities so that each now does one-fourth of the previous sales. Similarly, a service layer can be created so that instead of directly exercising ownership over inventory or influencing pricing, they could provide appropriate "information and insights" to the "service layer". This "service layer" can then provide the necessary guidelines to inventory-owning entity, which could even be for a service fee for arms-length relationship. So from a business-essence perspective nothing changes.
    What is more important area to delve into is:
    what is the business reason for ecommerce players to prefer inventory ownership? Facebook does not own the content that users consume. Similarly, YouTube does not own the videos that get viewed on its platform. Creating content is expensive. In addition, there is no guarantee that what you create will be liked by the audience and will get consumed. Similarly, in case of ecommerce, owning inventory is an expensive proposition as it requires huge working capital. In addition, there is significant business risk since what you own may not have a demand and may have to be written-off as slow-moving or non-moving inventory.

    In the early stages of a two-sided network when the ecosystem is at a nascent stage, it is important for the network owner to (a) induce demand and (b) ensure acceptable and consistent experience for user/buyer which is habit-forming. And to do so they may have to take things in their own hand. For example, in the early days of Facebook, the folks at Facebook were directly involved in creating profiles and seeding content until things took off. And Facebook and YouTube still exercise significant influence by curating what gets seen and also how it gets monetized.
    For an ecommerce venture to truly become a network effect, more buyers should lead to more sellers and more sellers then in-turn should lead to more buyers on the marketplace without any inducement or influence. Such a fly-wheel effect is yet to be seen at even the largest ecommerce player in the country. Running an ecommerce venture still requires a lot of work, not only in terms of having the right set of sellers with relevant selection, pricing and inventory depth, but also in terms of necessary delivery service levels, geographical coverage and trust and safety mechanisms to prevent fraud. We are still in very early stages so I would bat for ecommerce players to have the option to exercise influence on what gets sold and at what service level on their platform, if they need to, until the fly-wheel effect starts to benefit both the buyers and the sellers. Once that happens, the influence can be cut down to become pure marketplaces.
    rudrabose likes this.
  2. rudrabose

    rudrabose Active Member

    Thanks for sharing your insights

    Very useful analysis
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