The frenemy question for Google, Facebook and others

The internet is rife with talks of Facebook and Google entering eCommerce. While they have both dabbled with the idea of doing stuff on their own through Google-Shopping or Facebook Virtual-Goods, they seem to be going the 'buy-button' route. What this means is that they, and their advertiser-eCommerce businesses, will need to face the Frenemy Question.

Both these companies learn and earn a lot from eCommerce, where they're risking a change of position from partner to competition by going deeper into the purchasing funnel. eCom businesses on the other hand depend a lot on Google and Facebook for their traffic and app-downloads. Once the app is installed, these two aren't that important, but just given the existing eCom penetrations (let's say sub-1% in India to a maximum of 6-7% in large developed markets and just-maybe a couple of exception-markets at 10%), the task of bringing new people online will remain important for a long time. That means Google and Facebook have a huge role to play even in the app-only world that some eCom businesses are trying to morph to.

Now Google and Facebook are just the biggest examples, but we know every other business from Pinterest to Twitter to WeChat is in some way considering getting into the eCommerce play if they aren't already in. Last year in India saw everyone from Gati and HDFC and Airtel and PayTm all announce plans to get into eCommerce. Unconfirmed reports surfaced about anyone and everyone - from payment companies to wallets to logistics to large retailers to brands to distributors all trying to create their own eCommerce destinations.

The moot question is why - is it just for the valuation multiples? Or is it a genuine belief in being able to make a positive difference in the way it's done today?

And the other question is if the role that these companies are trying to play as end-to-end eCommerce providers creating more value than the role they play today?

Let's consider this, a typical company here is a platform

• that multiple eCommerce businesses plug into,
• that everyone's customers share data with,
• that sits in the "revenue-positive" (read 'money-making') part of the value chain,
• that has its risks spread wider than the success of any one business it services

And now it's moving to a situation

• that is far away from making money today (apologies for the generalization, but I'm sure you get the point)
• that is a task of creating unfamiliar competencies
• that is a high-risk grow-big-or-go-home space today,
• has irrational hyper-competition

...and so on.

To make it worse, it's an either / or decision. It is difficult to be a service provider in an industry one competes in oneself. And this may be a big difference between a Google and a logistics provider. Most eCommerce sites, which have money to spend, may not have an alternative but to spend money on Google - they might just get a bit cagey about what they share, but they'll have a choice of moving completely away from a logistics player who they perceive as a threat. And that's a big aspect to consider.

In the end, the point is that this decision to encroach on your customers should be led by more than the prevailing multiples. It should be a function of your bargaining power, your eCommerce skills and insights, and most importantly, your ability to forsake the part of your existing revenue and trust that may go away - forever.

Published in ET Retail on October 8, 2015