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Emerging Markets, Pockets of Excellence: India in a Global Internet Economy
By Madanmohan Rao

(excerpted from The Internet Economy of India, 2001. Edited by Osama Manzar, Madanmohan Rao and Tufail Ahmad Publisher: INOMY Media Pvt Ltd, New Delhi, India (www.inomy.com) 222 pages, paperback.)

Low PC penetration. High access costs. Low credit card usage. Inadequate fulfillment systems. Not enough locally relevant content or services.

Sounds like the Internet market in India or some other Asian countries, right? Well, this also applies to much of the Latin American Internet market—and delegates from the Americas and parts of Europe gather frequently at conferences in locales like Miami, Buenos Aires, Los Angeles, Sao Paulo and New York city to grapple with these thorny issues. Similar conferences and events about the Asian Internet market are often held in Bangkok, Beijing, Bangalore, and Boston.

In fact, an “umbilical cord” of venture capital and technology transfer seems to tie emerging Internet markets around the world with the more mature Internet economy of the U.S. Hence it would be instructive to compare and contrast emerging pockets of excellence in Internet economies around the world, and see how Asian countries like India fare in this regard.

Let us begin with the most advanced Internet market of the U.S., and then take a tour around some of the other concentrations of e-market potential; this “e-travelogue” is based on research reports from the various market consultancy firms around the globe, interspersed with experiences from the author's own speaking engagements at Internet conferences in over 35 countries around the world.

(1) The U.S.

Despite the current dotcom bust, the U.S. Internet market will continue to be the global trendsetter and benchmark thanks to its size, consumer/business/government spend, core research, venture capital culture, and stock exchanges for raising growth-oriented financing. The clout of the Fortune 500 companies will put them in centre-stage for driving much “hub and spoke” activity revolving around B2B commerce and market exchanges.

There is also a well-established and smoothly-oiled mechanism of research & development collaboration between academia, the government, and the private sector, which will help with initiatives like Internet2. In addition, the U.S. Internet sector also creates significant global mindshare thanks to the creation of an international media industry focusing on the Internet economy; this includes books, trade magazines, TV, radio and online media properties covering Internet developments and impacts (such as O'Reilly Publications, IDG magazines, Cnet, InternetNews.com, Upside magazine and FastCompany.com).

(2) Latin America

Between the Americas and Europe, there are about 40 million online speakers of Spanish and Portuguese across the globe, constituting one of the most dynamic online markets in the world.

Indeed, it is probably Latin America that offers one of the best case studies worldwide of how the Internet can simultaneously be a local, regional, transcontinental and multilingual medium for content and commerce.

“The objective conditions and people’s perceptions of the Net are changing throughout the region. The worldviews and lives of millions in the region are being transformed by the Net,” according to Fernando Espuelas, CEO of StarMedia, the leading media player in the Latin American Internet market. “The Net is creating a new dynamic in Latin America. It is victory for all—how often can you say that in life,” he says.

Latin American growth in the Internet user base exceeded even that of Asia for some time—but Asia seems to be bouncing back from the economic crisis of the late 1990s, and is estimated to be the fastest growing regional Internet market today.

The leading Latin American markets today are Brazil, Mexico, Argentina and Chile. The Portuguese-speaking Brazilian market stands out as the single largest national market, whereas, the rest of the Spanish speakers are distributed throughout the other dozen countries.

As in other emerging economies of Asia, the Latin American Internet market is witnessing a simultaneous explosion of activity in basic access, mass portal, vertical portal and e-tail sectors—unlike the U.S., where these models sequentially evolved over time in the past few years. And like Asia, the average regional penetration will remain relatively low, reaching just about ten percent of the population in the next five years.

There are huge opportunities opening up for advertising agencies wishing to target pan-Latin as well as more local audiences. Cable TV and cellphone markets in Latin America are also growing explosively, offering new opportunities for convergent Internet access and content. Some of the most outstanding innovations in the region are probably in the area of free ISPs, community access models, and e-commerce logistics systems.

One of the most powerful access innovations comes from Peru, where the Rede Cientifica Peruana (Peruvian Scientific Network—RCP) pioneered the concept of Internet community centres in the early 1990s. This model also forms the basis of the community access centres which Sam Pitroda’s World-Tel plans to replicate in several states in India.

“Internet access through leased lines and shared devices in community centres—not just individual dial-up access—holds the key for growing the Internet as a mass medium in emerging economies,” according to Jose Soriano, founder of RCP.

RCP is exporting this model of affordable Internet access (now available for under 40 cents an hour in Peru) to Colombia, Argentina, El Salvador, and Brazil, said Sariano. “We are also working with World-Tel to extend this model to India,” according to Sariano.

And there is of course the huge entertainment potential of the Latin American market. “Latin American music has global appeal. Nations like Brazil, Cuba, Mexico, and Puerto Rico have always produced more than their fair share of great music,” says Jamey Stout, founder and CEO of music site DGolpe.com. Many more music giants like Carlos Santana, Ricky Martin or Caetano Veloso can now be discovered on the Net.

Players in the Spanish language markets are emerging not just in Latin America but from the U.S. and Spain as well, such as AOL, Yahoo, Microsoft, Prodigy, and Telefonica.

For this reason, cities like Miami in the U.S. are emerging as a major hub for e-commerce companies operating in Latin America; Miami also happens to be one of the most visited destination cities for shoppers and tourists from Latin America.

Some local players are on the other hand arguing that excessive dependence on the U.S. stock market could be unhealthy by increasing vulnerability of local players to downturns in the U.S. markets.

(3) e-Europe

As the Internet user population outside the U.S. exceeds the user base within the U.S.—a historic landmark which was just passed in year 2000 -- powerful innovations and business models for online access and usage are emerging from outside the U.S. as well.

One of the most dramatic innovations to sweep the access market in recent times has been the explosion of free-usage ISPs in countries like Britain. Despite operational challenges, the phenomenal success of free ISPs has ignited the imagination of telcos, ISPs, retailers, content publishers, and commerce ventures elsewhere in Europe and other parts of the world.

And while the U.S. may lead in diffusion of the Net via PCs, Europe has a much greater diversity of other interactive platforms such as digital TV (DTV). In terms of content, sites focusing on European sports like football and rugby have a much more international appeal (especially in Asia and Latin America) than U.S. sports like baseball and basketball, and can thus scale up to global audiences and ad revenue streams more easily.

European businesses in cities are taking on broadband connections much faster than the U.S. More European sites tend to be multilingual and localised for many countries, as compared to U.S. sites which are largely in English only. Furthermore, traditional European media companies on the Net have already dared to cannibalise their own content, as compared to many U.S. media companies who have been sidelined by Internet pure-plays.

Interesting developments are also unfolding in Scandinavia in areas like Internet applications for cellphones, and creative uses of corporate Intranets. For instance, shopping for clothes is possible from Ericsson's Intranet.

“Though the mass markets for the Internet are in Germany, UK and France, the Scandinavian markets show higher sophistication,” according to Even Neufeld, vice president of international research at Jupiter.

With an increase in convergence of communication and financial services accessible via cellphones, a Scandinaivan enthusiast has reportedly remarked that “your phone will be your remote control for life.”

In fact, some countries in Europe such as Spain and Italy are expected to largely leapfrog the PC-based e-commerce phase and directly get into m-commerce. Telefonica Italy is rolling out cellphones with preconfigured Internet access.

There will also be a huge market in Europe for content and devices which don't necessarily depend on a visual interface such as a screen, but can be accessed on audio devices—such as music, radio programming and MP3 players.

European digital TV companies like France TPS and NTL Interactive are rolling out interactive Web-enabled shopping services coupled with cable TV content, where users can view music videos, dig up album and artist information in Web formats, and then place orders via online credit card transactions.

A major issue for European Internet companies is withstanding the fierce competition from U.S. players moving into Europe. A big challenge for players in Europe is scaling up their existing information and technology base to pan-European operations, a feat which U.S. players like publishing group IDG, portal Yahoo, and online service AOL have pulled off remarkably well.

European retailers are feeling market share erosion from US online retailers—for instance, from, Amazon.com which has operations in Germany and Britain, and from U.S. travel companies.

In the U.S., it is easier for new ideas to scale up quickly, due to the larger and more homogenous user base. European Internet professionals also do not have as much access to sophisticated and comprehensive market research resources as their U.S. counterparts, though this is beginning to change as more market research groups launch or scale up their European operations.

Despite Europe's different languages, cultures and cuisines, many observers note that a “European consumer” is starting to emerge from the region's economic convergence, single market and modern means of communication.

In January 2002, the Euro will become the only valid currency in 11 European countries, creating a market of 400 million consumers whose younger generation has been weaned on technology, world travel, and the Internet.

“Because of this, they will adopt more uniform buying behaviour than their elders,” according to Jacques Habib, a partner at Andersen Consulting in Paris.

In sum, it is in four areas—wireless Internet access, integrated DTV, multilingual publishing, and free ISP models—that Europe is at the cutting edge of the Internet economy.

But European companies also face massive shortages in skilled IT workers in gearing up for the Internet age, and numerous reports from research firms like IDC predict shortfalls of hundreds of thousands of knowledge workers in the coming years. Many of these are likely to be filled up from non-EU countries like India.

(4) Middle East and Africa

The concept “algorithm” -- on which much of computer science is based—derives its name from Arab mathematician Abdallah Al-Khwarizmi, who was born in Baghdad in the 8th century A.D. Though Arab countries seem to have fallen behind in the IT race today, some are making determined attempts to catch up.

While the Internet market in the Middle East and African countries is just moving from embryonic to emerging stages, pockets of notable developments are visible in South Africa, Dubai and Tunisia.

The Internet population worldwide is expected to double in the period 1999 to 2002, and the Internet user base in the Middle East and Africa is expected to triple; there will be an estimated 12 million Internet users in the Middle East by 2002.

Dubai has announced the launch of a tax-free Internet City which has attracted more than 190 companies including Microsoft, Compaq, IBM and Oracle. Dubai Internet City has no corporate or personal income tax, allows foreign companies to maintain 100 percent ownership of their businesses, and aims to become a “regional oasis” for local startups.

Notable emerging projects in Tunisia include TradeNet Tunisia (www.tradenet.com.tn), a one-stop online documentation and financial service for importers, exporters and freight organisations; PubliNet (public Internet centres) to increase Internet access options via community centres; “Internet Caravans” (www.caravanes-internet.tn) to take mobile workshops about the Internet around the country; and the Tunisian postal agency's smart card project called e-Dinar (e-dinar.poste.tn).

Areas ripe for harnessing for online global media markets include Arabic music, which is receiving significant international attention thanks in part to pop star Sting's recent track “Desert Rose,” which features Algerian singer Cheb Mami. Popular sites like Mazika.com now feature discographies, fanmail, and music downloads of Arab musicians.

Japanese management guru Ken-ichi Ohmae, in his recent besteseller “The Invisible Continent,” observes that smaller and more nimble countries like Ireland and Singapore have done a remarkable job of transforming themselves into regional “e-hubs” in the information age.

Perhaps a similar approach would serve Tunisia well too, especially if it harnesses the talent and capital of its diaspora and leverages its strategic location between Africa, Europe and the Arab bloc.

(5) Asia-Pacific

With a population of over three billion people, the 23 countries of the Asia-Pacific region represent a rapidly growing and lucrative segment of the global Internet market.

According to market research firm Yankee Group, Asia will have 374 million users at the end of 2005. But despite dropping costs of Internet devices and access tariffs, there will be some bumps up ahead on the Asian information superhighway, in the form of ambiguous or unfavourable regulations, lack of scaling in infrastructure, inadequate investment in start-ups, and management challenges in running companies which have gone public.

Asia exhibits a wide diversity of telecom and broadcast environments, ranging from teledensity-poor India and China to advanced info-societies like Singapore and Hong Kong where provision of basic universal telecom access is no longer an issue.

“Getting the regulatory house in order remains a primary challenge in much of Asia,” according to Mark Hukill, professor at the Nanyang Technological University in Singapore.

Luckily, role models for the Asian Internet have already emerged, leading global investors have taken a serious interest in the Asian Internet, and government regulations on the Internet market are slowly easing.

Three key trends are emerging in the Asian mediascape: the rise of new technology platforms and associated socio-economic behaviour patterns such as NTT DoCoMo's i-mode service for mobile Internet access in Japan, the growing clout of countries like India, Singapore and the Philippines as hubs of e-commerce solutions development, and the rise of the “digital keiretsu” or networks of Web properties via mergers, acquisitions and alliances.

At the head of the Asian Internet market is Japan. “The basic foundations of the Japanese Internet economy are coming together,” according to Allen Miller, president of SunBridge, a U.S. firm focusing on early-stage investments in Japanese Internet companies. Japan is much ahead of the U.S. in mobile communications and related technologies like Internet appliances, mobile emailers, and Web-enabled iMode phones.

Tens of thousands of i-mode sites are available in Japan for mobile Internet access, offering banking, travel ticketing, news and email services via a “portal tone.” Soon NTT plans to roll out 3G W-CDMA services with 2 Mbps bandwidth and broadband content, as the number of users accessing the Net via mobiles exceeds those accessing it via PCs. The pervasive, “always on” nature of mobile Net access will undoubtedly continue to spin off entirely new innovations in online services.

Japanese e-commerce pioneers have also shown a lot of innovation via creation of digital vending machines in public places for downloading maps and music, and the integration of convenience stores (such as 7-Elevens) in the e-commerce logistics chain for delivery of goods to customers near their homes or train stations.

Australia tends to lead the region in early adoption of new media; unfortunately, it has not been able to creation conditions favourable for the formation of a “regional Silicon Valley” in the Asia Pacific.

On the regulatory front, there is widespread community support for government-citizen-industry partnerships for cyberspace regulation in Australia. The Australian scheme has three components: a hotline for complaints about online content, a community advisory and educational body called NetAlert, and codes of practice formulated by the 600-member Internet Industry Association of Australia. Many countries are looking at the Australian model of cooperative regulation with a lot of interest.

The proliferation of the Internet has also been leveraged by regional political movements hampered by governments, such as the opposition movement in Malaysia and the student movements in Indonesia. Web sites used by activists have helped ensure more open elections in east Asia, exposed corrupt politicians in South Korea, and spread environmental viewpoints in India.

“Out of 3 billion people in Asia, more than two-thirds—over 2 billion—are less than 35 years of age. They have grown up in an expansive and expanding environment, and are finely in tune with new media, awareness of outside influences, and a sense of momentum,” according to Frank Brown, president of MTV Networks Asia.

“For a long time, Asian countries like Singapore have been nations of employees. Our challenge now in the digital millenium is to spawn a nation of entrepreneurs and innovators,” according to Lim Swee Say, Singapore's minister of state for communications.

Another major Internet player in East Asia is Korea. The Korean government has launched an ambitious programme called “One PC, One Home” to accelerate PC diffusion. Korea leads the world in per capita diffusion of broadband Internet access as well as activities like online stock trading and Internet gaming.

Mainland China is expected to become a leading global market in five years. China declared 1999 to be the Year of the Internet. “E-Commerce is the future of business,” Chinese president Jiang Jemin is reported to have said during a recent APEC summit.

In comparison, India is an extremely content-rich country with a very free press climate, unlike some of its other Asian counterparts: the news, culture, entertainment, sports and medical knowledge base of this country can easily sustain dozens of portals and vortals for a content-hungry consumer marketplace.

The Indian diaspora are spread across the world from Silicon Valley and Sydney to Singapore and Southall, and their strong community ties have led to global audiences for content offerings as well as interlinked networks of venture capital and a superb flair for collective international Netrepreneurship.

India's cutting-edge competitive infotech and design skills are leading growing numbers of U.S., European and Australian companies to outsource much of their software development and even customer service to companies based half-way around the world in India.

Indians in the U.S. -- like Vinod Khosla (co-founder of Sun Microsystems), C.K. Prahlad (management studies guru at Harvard Business School), Ravi Kalakota (e-commerce professor at the University of Texas in Austin), Rajat Gupta (CEO of McKinsey Consulting), Gunjan Sinha (founder of eGain), Gururaj Deshpande (founder of Juniper Networks), Sandeep Sidhu (founder of i2 Technologies), Kanwal Rekhi (former CTO of Novell Networks), Sabeer Bhatia (founder of Hotmail), Rakesh Mathur (co-founder of Junglee) and Rohit Chandra (founder of eCode) -- have been making quite a mark in the computer, Internet, academic, and business fields in the U.S. They are now forging new links with their home country for the New Economy—turning a “brain drain” into a “brain bank.”

“Silicon Valley is built on ICs—not integrated circuits, but Indians and Chinese,” jokes regional economics scholar AnnaLee Saxenian, a professor at the University of California in Berkeley who has published research work on how Indian Internet professionals are building technology transfer and venture capital bridges between Silicon Valley and India, paralleling developments in Taiwan a decade ago in the hardware industry.

Having a large domestic user base means India can sustain a lot of local infrastructure, content, foreign capital investments, and an online market in general—unlike smaller countries like Ireland and Singapore, who need to be focusing much more on overseas markets.

But India still lags behind in becoming a powerful services hub like Singapore or Ireland, which have much more robust infrastructure, less bureaucratic red tape, and more political stability.

The challenge ahead is to grow the scope and scale of these targets while also extending the benefits of the IT and Internet revolution to the rest of the Indian economy and society at large, overcoming the digital divide in the process. India will also be hard-pressed to meet the target workforce size of 2.2. million IT workers by 2008 (up from 300,000 today).

Other challenges include creating the right regulatory environment, growing the domestic market, bridging the digital divide, breaking into non-English markets, improving global marketing skills, dealing with the global trend towards shorter lifecycles, and migrating up the value chain from basic software maintenance to full-fledged IPR creation. Generally risk-averse, many Indian companies have also preferred to stick to low-risk highly-contractable work, though this is beginning to change as a new generation of “Netrepreneurs” is emerging.

Areas ripe for foreign companies to consider Indian alliances include strengthening Internet security, data caching, Web-enabling legacy systems, XML-enabled application integration, implementing e-commerce sites (eg. auctions, B2B exchanges), developing enterprise portals, managing content-heavy sites, standardising plug-and-play technologies, evolving WAP utilities, spinning off hi-tech consulting services, remote education and training, and online market research.

According to a NASSCOM-McKinsey survey, The domestic IT market in India is still largely untapped, thanks to low PC penetration (3.6 per thousand people, as compared to 362 in the U.S., 217 in Singapore, 145 in Ireland, and 9 in the Philippines), low computerisation of government departments (Singapore is a notable role model here, thanks to electronic government and the Singapore One broadband initiative; Malaysia is also ambitious in this regard), and low IT spending as a percentage of GDP (0.2 per cent, as compared to 2 per cent in the U.S., 1.8 in Sweden, 1.0 in Singapore, and 0.8 in Ireland).

Regulatory obstacles are currently responsible for higher costs of leased data lines, inadequate interconnectivity between various communications networks, and lack of VoIP services. Other developing countries like the Philippines are ahead of India in this regard; Manila is now an important hub as an animation centre for Disney, call centre for Intel, help desk for AOL, and Java skill centre for Sun.

Due to reasons of much more diverse business and political cultures, it may be more difficult for Asia to have pan-Asian Internet players than other continents like Europe and Latin America, where pan-European ISPs and pan-Latin portals are rapidly emerging.

Asian Internet players are also facing challenges in attracting talented management, drawing on “smart capital,” and harnessing employee strengths via stock option programmes.

And as long as infrastructural obstacles and regulatory obscurities persist, the Internet phenomenon in many Asian countries may continue to be characterised as a gradual evolution rather than a dramatic revolution.