It's no secret that big tech has set its sights on emerging markets, particularly India.
In this week's Industry Focus: Technology, Sean O'Reilly and Dylan Lewis talk about the current state of Internet connectivity in India and what the big four tech giants -- Facebook (NASDAQ:FB), Amazon.com (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), and Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) -- are doing to port over their businesses to this huge market.
A full transcript follows the video.
This podcast was recorded on Jan. 22, 2016.
Sean O'Reilly: Rain nor sleet nor snow can stop Dylan and I from doing Friday's tech show, on this technology edition of Industry Focus.
Greetings, Fools! Sean O'Reilly here at Fool headquarters in Alexandria, Va. It is Friday, Jan. 22, 2016, and possibly getting trapped at HQ in a blizzard with me is Dylan Lewis. Dylan, do you think we have enough supplies to last through the weekend, should the worst happen?
Dylan Lewis: I think, given the stocked market and what's available there -- that's our subsidized pantry at HQ. I think we'll be OK.
O'Reilly: We're going to have to live off cashews if we get snowed in here.
Lewis: Trail mix and dried cranberries.
O'Reilly: Although I do think they stocked it up with bananas, so we will not suffer from a potassium deficiency.
Lewis: I saw some Fools scooping up some of the perishable items from the stock market, because it's probably going to go bad -- there's a chance people won't be able to ...
O'Reilly: That's actually a good point, yeah, the pears and stuff. Anyway. So that's right, ladies and gentlemen. I don't know if you've heard, but, I don't know, 30 inches on their way to D.C. as we speak.
Lewis: Yeah. I think, realistically, I'm hoping it's somewhere between 8 to 12, because that's fun but manageable.
O'Reilly: Three feet is bad.
Lewis: Yeah. Especially in D.C., where the infrastructure just isn't here to take care of it.
O'Reilly: Did you hear what happened two nights ago when we had that inch? Inch and a half? There was like a hundred car accidents! With just an inch! What do you think is about to happen?
Lewis: I saw it walking back to my apartment from the Metro. People were driving normally, and they were still putting their gas on the pedal --
O'Reilly: Maybe lower it to 10, 20 mph! Anyway. A blizzard is not going to stop us. Today, we're talking about Internet growth and usage in emerging markets, specifically India. Why are we talking about that, Dylan?
Lewis: I just thought it was an interesting topic. Typically, we're very stock-focused. And I thought it might be kind of interesting to look at one of the markets that I think a lot of major tech companies, particularly the FANG stocks, but most tech companies are looking to them as a huge driver of growth --
O'Reilly: I'm sorry, FANG?
Lewis: Facebook, Amazon, Netflix, Google.
Lewis: That's the new colloquialism.
O'Reilly: If you're listening to the show and not watching the video, I'm rolling my eyes and face-palming.
Lewis: Yes. It's becoming a thing.
O'Reilly: I actually knew what it was, but ...
Lewis: For the sake of our listeners?
Lewis: So it's a market that a lot of these businesses are going to rely on for growth in the next decade or two, and further out. It poses a lot of unique hurdles for companies to get over. So I thought one of the things that would be interesting would be to roll through some of those challenges, and then, some of the unique ways that businesses are currently adapting to them, or trying to port over their current business so it's successful.
O'Reilly: So India, specifically, is one of the world's fastest-growing economies, pushing 7% GDP growth, obviously second only to -- and probably actually slightly beating a little bit right now -- China, in terms of GDP growth and population size. What else can you tell us?
Lewis: I think one of the first major things that a lot of companies are going to struggle with in this market, particularly with the online market, is paying for goods. Here in the U.S., we're used to using credit cards as part --
O'Reilly: Machines are everywhere.
Lewis: Yeah. Or our smartphones, even. You go to Starbucks --
O'Reilly: We've been using PayPal for 20 years. Everything.
Lewis: Yeah. So, you have a lot of bankable people, people that have bank accounts and credit cards.
O'Reilly: [laughs] Americans are bankable, yo!
Lewis: Put that on a bumper sticker. [laughs] I thought, one of the great stats to look at, just to start out this conversation, is some research from the World Bank. They put out this report, "The Global Findex Database 2014," measuring financial inclusion around the world, and one of the quotes I just want to pull from that is: "In high-income OECD economies, 53% of adults reported owning a credit card."
O'Reilly: That seems low, but OK.
Lewis: Yeah, it's lower than I expected. But in developing economies, despite recent growth in credit card ownership, only 10% on average reported owning one.
Lewis: Yeah. And India is among the leaders in unbanked adults, people that do not have checking accounts, credit card accounts, anything like that.
O'Reilly: Sorry to interrupt, we were just talking about this the other day at the office. I don't know how we got on the subject of 7-Eleven, but in Southeast Asia and stuff, you use 7-Eleven-like convenience stores for literally everything. You just go there, pay your bills, everything, with cash. You pay all your utilities, everything.
Lewis: Yeah, it's totally different than what we're used to.
O'Reilly: Foreign concept entirely, yeah.
Lewis: Yeah. So that's obviously a major hurdle when you look at some of the companies like Netflix and Amazon that rely on credit card processing, or some sort of plastic, to facilitate transactions.
O'Reilly: Amazon has, like, a list of 10 different credit cards I've used in the last 12 years.
Lewis: Yeah, it's basically like a credit history.
O'Reilly: Looking at your Amazon account, "Oh my gosh, I forgot I had that one. That's one's gone, that one, that expired," yeah.
Lewis: So one of the questions from Netflix's most recent quarterly call, someone was asking about some of their plans for India, and some of these developed markets, and how they were going to handle some of the payment processing issues that are just going to happen. I mean, you need a credit card to have a Netflix account. So this is Netflix's CFO David Wells saying, "We've invested it internally in building that out, getting smart in terms of the payment systems across the world, we're pressing on gift cards and prepaid cards that might open up the market to those people who don't have access to credit and debit cards."
O'Reilly: Did they mention just getting people to pay annually? Even though that'd be $100, and that'd be a significant outlay ...
Lewis: You'd still run into the processing issue, though. A lot of these people are relying almost exclusively on cash.
O'Reilly: The reason I brought it up is I pictured somebody using a gift card once a month for $8, and I was like ... [groans, laughs].
Lewis: Yeah. The more elegant solution there might be doing something like where you can buy whatever it is, like a $96 or $120, something like that, gift card, and covering a whole year's subscription at once. I think that is probably the best way to crack something like that for the time being. So the idea is, here, that they're giving people that are relying on cash an option to participate in the digital economy.
O'Reilly: Right. So, what's Amazon doing? I can't wait to see what Jeff Bezos is doing.
Lewis: First off, if this is something you're interested in, there was a fantastic article put together by Fortune, it's called "Amazon Invades India," and that's an ominous headline, but it talks all about the various initiatives that they're putting in place, and how much they've had to adapt their business to handle what's going on there. So this is a quote from that piece: "About half the customers pay cash only -"
Lewis: "-- when their purchases are delivered."
Lewis: Amazon has partnered with thousands of small shop owners across the country to act as pickup points in exchange for receiving a small commission per package.
O'Reilly: Oh my gosh, Dylan ...
Lewis: Right. It's hard to believe, right?
O'Reilly: Oh, man.
Lewis: But this is the way they're adapting to this marketplace that is drastically different from ours.
O'Reilly: They do a little bit of that here, because you might not want a package sitting on your front doorstep if your door is on the street or whatever, so they have those lockers. They actually have Amazon lockers at the 7-Eleven up the road here. I keep talking about 7-Eleven in this episode for some reason. But this is like that to an extreme. It's like ...
Lewis: And I don't know that that is the sustainable solution for them. I think it's something they do now to gain a foothold, get people familiar with the idea of going onto this online platform and ordering. But down the road, they need to be doing something different. But, I think one of the other really interesting things that article highlights is how different Amazon's relationship is with the native infrastructure of India and the mom-and-pop shops there, because, you think about how Amazon handles its relationships with mom-and-pop retailers here, and it's kind of an adversarial relationship, right?
O'Reilly: It's not a good relationship [laughs].
Lewis: Yeah. The dynamic is like, "Hey, man, what the heck? You just took all my sales! You're undercutting me! I don't want to help you out." But because --
O'Reilly: "Join us or die." [laughs]
Lewis: Yeah. But because so few people in India -- not the majority, at least -- are banked, and have credit card accounts or debit card accounts, they need to have these go-betweens as options. Another big thing that this Fortune article talked about was, the delivery infrastructure in India, and how different it is. So, they rely heavily on people basically out on motorbikes.
O'Reilly: I was about to say, couriers.
Lewis: Yes. Delivering packages. Part of that is because you need people that have a really solid knowledge of the area, because it is not the same kind of well-built-out and charted address infrastructure that we have here in the U.S. It's much more arcane, in a lot of ways. So you're seeing Amazon lean heavily on the local businesses and local knowledge here, whereas, for the U.S., they were able to just kind of throw it on their grid and have their way with the U.S. marketplace. So I thought that was just fascinating.
O'Reilly: Wow. OK. So, we talked about the payments; talk to me about the Internet connectivity, because we actually have a contractor who I work with on a regular basis, and she's in Kolkata, and she's had connectivity problems from time to time. It's awesome, and she can work for the Fool and all this stuff and whatever, but I mean, it's not been flawless.
Lewis: Yeah. As you might imagine, it's somewhere that Internet access, broadband is still developing in a lot of ways. I know this is something you might be a little bit more familiar with; can you ...
O'Reilly: Yeah. So, fortunately, the U.N. Broadband Commission, part of the United Nations -- I did not know until today that sort of thing existed -- last year released a "State of Broadband" report. Basically, it just ranked the world in terms of connectivity for broadband connections. It's something we enjoy here at HQ. I can be editing and listening to music; it's all awesome. Basically, the bottom line of the report said that 57% of the world's people remain offline, that's disappointing, and unable to take advantage of the enormous economic and social benefits the Internet can offer. And that's somewhat sobering, because, was it last week, we talked about Netflix? Was it two weeks ago? A hundred ninety countries.
Lewis: That was two weeks ago. No, it was, that was our CES coverage.
O'Reilly: They're in 190 countries, but 57% of the world's people in these countries can't use Netflix. So that's a problem. Anyway. India, unfortunately, ranked No. 131 out of 189 countries on the fixed broadband subscriptions in 2014, and that's actually down from being ranked No. 125 in 2013. That's ... kind of disappointing.
O'Reilly: I mean, you've got cable ... that's a big country, obviously. Yeah, so, this lends itself to the idea, I'm sure you've heard Mark Zuckerberg's plans to get everybody in India cell phone service, and that actually seems to be a little bit more viable at this point.
Lewis: Yeah, the Internet.org initiative for all of its net neutrality opposition, and some of the regulatory issues they're running into with that, seems to be a relatively well-intentioned idea. And you can see that there's such a huge addressable group of people that that would be aimed at, and who would hopefully benefit. But it's obvious that there are major broadband infrastructure upgrades that need to happen for India to enjoy the same type of connectivity that we do here.
O'Reilly: Yeah. And I don't know what it costs to get everybody in the United States broadband, but everybody here doesn't have broadband. I mean, we're in the nation's capital, so of course, it's easier for us. But it's mostly cable connections. But I don't know, hundreds of billions of dollars, a trillion dollars, something to get us to where we are here.
Lewis: In the U.S., what most people are probably on is 3G or 4G.
O'Reilly: Yes. And this, of course, led me to wonder what the deal was over in India, because obviously, Zuckerberg thinks that cell phones are the best option and all that. Most of the country is on 2G and 3G, and I looked at the map, I actually went over to opensignal.com, and they have a convenient India cell coverage map; anybody can go check this out.
Lewis: That's nice.
O'Reilly: And you have ... any of the providers here that actually have coverage maps, you go into the Verizon store, and they have the little dotted map, and everything red has signal and everything. It looked pretty similar to a map here over in India for 2G and 3G. Pretty much anywhere that isn't ridiculously rural, like, anything close to a city or a decent population center, you would have 2G or 3G, you would be fine. The major cities, about 20, 25 of them, were the only places that had 4G coverage, and that was a little bit disappointing. That includes cities like New Delhi, Kolkata, Hyderabad, Mumbai. And there's no 4G coverage outside of these major cities. There's about 20, 25 of them by my count, I just ballparked it. But they need a few more towers, I think [laughs].
Lewis: So, the big issues with these types of connectivity problems is, A, there's people that aren't connected at all, and B, there are people who are connected but aren't on networks that would support streaming.
Lewis: Or it would make streaming prohibitively expensive, if they were on, like, a per-megabyte-type plan.
O'Reilly: Right. And that's a problem for Netflix in particular, because they do the streaming. Not as much a problem for Facebook. We're used to video ads and everything, but really, Facebook is just reading and looking at people's photos and stuff. So not as bad as Netflix.
Lewis: Yeah. And I think there are two distinct, different ways to attack this issue, and two tech companies who've done it differently, and I kind of like both of them here. Kind of similar to what you're saying with Facebook, one of the things they did was roll out Facebook Lite.
O'Reilly: Was it what I had in college? Is that what it is? [laughs]
Lewis: Well, probably. It's probably similar to that. But it's for mobile users, and basically, it's a stripped-down version of the app that requires far less --
O'Reilly: It's lower calories.
Lewis: Yes [laughs]. And it tastes great. Basically, it's for low-bandwidth connections. I think as of their most recent conference call, they have 50 million people on that.
Lewis: So it's definitely gaining traction, and it's a nice way to get your platform out there without being so expensive and having it be so onerous for people to try to access. The other way that you can get around some of the connectivity issues is let people get content when they have strong connections. This is something that YouTube has done very well. YouTube is extremely popular in India. Since maybe 2007 or so, it's been there.
O'Reilly: Is it the same business model there? Ad-based?
Lewis: Yeah. So Google introduced offline video playback in India, among several other markets; I think the Philippines, maybe Indonesia, too. The idea is, you can access content that you want to watch when you have it and download it so it's offline.
O'Reilly: Does this require a big hard drive or anything like that?
Lewis: It depends on the file size, but for the most part, this is all mobile-oriented.
O'Reilly: OK, so it's doable on phones.
Lewis: Yes. So you then have it for 48 hours to access. So say you're in a city center where you have fantastic coverage; you can, whether it's music videos or TV shows or something like that that's available there, you can have it so it's offline. Just click the button that you need to and then watch it when you're back home. So, that's one way they've been able to --
O'Reilly: That would totally work, because I've got 20 or 30 one-minute videos of my kid running around doing crazy things. Theoretically, I could have 10 YouTube videos I downloaded today and queue them and everything. So, yeah, that's not too crazy at all. Cool.
Before we move on, I wanted to point our listeners to the newly redesigned focus.fool.com. There, you'll discover a special offer to join The Motley Fool's Stock Advisor newsletter. Start your year off Foolishly. All loyal IF listeners have access to a special discount on Stock Advisor that works out to $129 for a full two-year subscription. Just go to focus.fool.com to take advantage of this offer, once again, that's focus.fool.com.
So, Dylan, what are some of the other issues that are going to be a little harder to address? Because obviously, YouTube is having some success with their offline downloading. Facebook is having Facebook Lite. That's not the whole problem, though.
Lewis: No. There are some other issues. Like we've said, tech companies have been very good at finding creative solutions to cater to Indian consumers right now. I do think that there are some things that are going to be a little tougher to get around, one of them being there's a very pervasive culture of ad-supported models in India. Not a problem for your Facebooks and Googles. A little bit more of a problem for Amazon, depending on how much appeal you think their Prime streaming option really has. But obviously, this is tough for Netflix. So there's another fantastic article I'd like to point some of our readers to: "India Offers Atypical Video Challenges", this is from the Times; I think it came out in late December of last year.
One of the companies they profiled was Eros International (NYSE:EROS). This is actually a publicly traded company on the U.S. exchanges. They're a studio that, in a lot of ways, are the Indian Netflix. And rather than just have the premium model of $8 or so a month, they have a free limited catalog option for people, and it's ad-supported. I think the fact that the native competitor for Netflix, it's like a Bollywood studio putting out the type of content that Netflix would be in a lot of ways. Doing that just kind of signals that it's something that, you need to change the appetite of the consumer a little bit, and get them used to paying for content a little bit more. I think one of the reasons that YouTube has been so successful in India is because they were able to get some major studios on board with putting out their content for free, and have it be ad-supported and do an ad revenue split.
There wasn't really a rerun culture in India for a while, and YouTube and Google did a lot of convincing to get those studios to do that; they were like, "Hey, why don't you put this online? People will still want to watch it." And they've enjoyed some nice ad rev slips because of that. So I do think that's one thing that's a little difficult to overcome. On the same note, torrenting, in parts of Asia, India in particular, is everywhere, it's pervasive. That's another thing. I think torrenting also plays into the idea of only having limited connectivity. Right? So if you know that you are going to have really great connection for three hours while you're hanging out with your friends or something like that at the library, you're going to take advantage of that, download something you can watch offline, a full-length movie or something like that, and then watch it when you're back home, because you have it in an offline file. So that's another issue, I think, that will be particularly difficult for, like you said, Amazon's streaming option, and Netflix's streaming option, as well.
O'Reilly: Yeah. And I have to think this problem will eventually get solved, because as I understand it, India's film industry, with studios like Eros, it's fairly sizable. I have to imagine a world where Jeff Bezos is wanting to get in on that and distribute it through Prime or something.
Lewis: In the Fortune profile on Amazon and their efforts in India, they said this was a trillion-dollar opportunity. "We are looking to explode in India." So they're throwing a ton of money at it. I'm sure they'll crack code. Like we've said, it took some creative solutions to really cater well to the market. With some of the other issues, I'm sure these companies will do the same here, with torrenting and the reliance on the ad-supported model and that familiarity, but it might take some time.
O'Reilly: Cool. OK. Thanks for your thoughts, Dylan.
Lewis: Always a pleasure. Sean, before we go, we over at fool.com have put together a list of the best articles from 2015. Do you know that?
O'Reilly: I do, I've actually read them all.
Lewis: So the editors went through the 20,000-plus articles published in 2015 --
O'Reilly: We did not do that many!
Lewis: I think we did. Yeah, we were over 2,000 a month.
O'Reilly: Wow! All right.
Lewis: So the editors at fool.com have gone through the 20,000-plus articles published in 2015, and hand-picked maybe the five or six best from each month, and put it all together in a nice, nifty little report called "Fool.com's Recommended Reading 2015." So if you are interested in getting it, email email@example.com.
O'Reilly: Yep! We are more than happy to send that to you. Again, that's firstname.lastname@example.org. And of course, if you have any questions about the show, or suggestions, feel free to email us there as well.
Lewis: I think that does it for me. I think I can set off now.
O'Reilly: Yeah. Awesome. And you need some water, it sounds like [laughs].
Lewis: Yeah, I'm getting there.
O'Reilly: As always, people on this program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Dylan Lewis, I'm Sean O'Reilly. We're going to go build a snowman. Thanks for listening, and Fool on!
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Dylan Lewis has no position in any stocks mentioned. Sean O'Reilly has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon.com, Facebook, Netflix, PayPal Holdings, and Starbucks. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.