In a world with two powers, getting SoftBank Group to sign a multi-billion dollar cheque to you is a bit like strengthening your nuclear arsenal. Flipkart recently became something like a nuclear power in world politics by receiving $2.5 billion (at least half of it in fresh capital) from the world’s largest fund in its cold war against Amazon.
The world of Indian e-commerce is currently bipolar, Amazon and Flipkart ranged against each other. But, as already discussed in this column, e-commerce is a winner-takes-all game, where scale is everything.
With SoftBank backing Flipkart, the Indian e-commerce cold war has only just begun.
But from here on it will be well thought-out and unlikely to be fought on petty discount wars. They have to be strategic and not tactical, to borrow from defence analogy.
While execution matters in e-commerce as much as in any business, companies such as Flipkart and Amazon are neck and neck in almost everything. Defying the chaos of Indian roads, they deliver orders meticulously on time. Their customer service is great, and choice of merchandise is similar.
Be it Flipkart First or Amazon Prime, Independence day sales or any other frill, neither is behind the other. Customers trust both brands, even for big-ticket shopping.
As any business strategy professor will tell you, when customers perceive the products to be similar, price (in this case discounts) becomes the key differentiator. And the player that can survive the cash-bleed the longest will outlast the competition and win. This is how e-commerce has played out in market after market. Amazon has emerged the winner in most markets, Alibaba being an exception (in China).
That leaves India as one of the largest markets where the e-commerce endgame is still open. Till recently, Amazon seemed to be cruising to victory. Jabong, Myntra, and endless others sold or shut down. Even Snapdeal almost sold out until its management opted for an independent course, powered more by bravado than any clearly discernible game plan. It looked like even for Flipkart it was just a matter of time before it buckled. It seemed a question of when, not if. That was until SoftBank announced its investment in Flipkart.
Large as it is, it is not the investment size alone which makes the deal remarkable. What may be a game changer is that SoftBank has arguably the power to ensure that Amazon can’t force Flipkart to fold.
In this article, we argued that SoftBank’s $100 billion fund may give it the power to back players until they win. It seems like we may be seeing precisely that scenario playing out now.
If SoftBank gives a credible signal that it won’t allow Flipkart to be bled to death, it could change the endgame. Mind you, it need not actually fight Amazon to death but just give the credible signal.
Some of the people I spoke with have an interesting take on how the future scenarios could unfold.
“This is not unlike the Mutually Assured Destruction philosophy used to justify nuclear weapons. No nuclear power would trigger a war against the other since it would lead to complete annihilation,” says Rajan Singh, founder of ConceptOwl, an ed-tech start-up and a former private equity investor.
Will Amazon recognize that peace is the only option?
It depends on whether it believes that SoftBank will dig in its heels and fight. With the $100 billion SoftBank Vision Fund, it certainly has the deep pockets to do so. Its $5.5 billion investment in Didi Chuxing (the “Uber of China”) shows that it also has the temperament to make these big bets. Is it then a question of who blinks first, Amazon or SoftBank?
Here are some possible logical outcomes.
One scenario is that SoftBank may believe that Flipkart has what it takes to ensure that Amazon can’t force it to fold, if it has enough capital.
If so, it can signal that it will back Flipkart to the bitter end. In that case, it is unlikely that we will see a bitter end.
“We may see a merger or acquisition talks within next 2-3 years, if not earlier. SoftBank will likely not only make a good return on its investment, but will also have the satisfaction of recouping its loss in Snapdeal and winning in a huge category,” said a venture capital investor who did not wish to be named.
The other scenario is that SoftBank may wait it out for a year or two, and see how Flipkart shapes up. The $2.5-billion (which includes secondary share sale by early investors) investment gives Flipkart enough runway to execute any growth and innovation plans it may have.
SoftBank may wait to see whether it wants to go all in. If the momentum shifts and Flipkart loses market share to Amazon, then it may decide to just cut losses.
Regardless, it seems Indian e-commerce does seem to be heading towards becoming a one-horse race.
Interestingly, this may also have implications beyond e-commerce.
Can SoftBank force similar endgames in other segments? It is already a major investor in Ola and Oyo.
For start-ups leading large categories, getting SoftBank as an investor may give them an opportunity to use their nuclear option.
It may not be the perfect weapon —after all it did not work for Snapdeal. Money can’t make up for lack of competitive edge or competence. But it may give companies heart that if they have a worthy product and customer confidence, they can give a good fight to the likes of Amazon, Google and Facebook.
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This story was first published on Livemint