[The Outline By Inc42 Plus] Google’s Commission Saga!

Dear Reader,

Two hundred years ago, British taxation systems such as Ryotwari and Mahalwari had oppressed Indian farmers by claiming as much as 50-60% of the land’s revenue potential. The imperialists believed they had the right to seek rent from the agricultural real estate that they directly or indirectly controlled.

Cut to 2020, and Western imperialism is rearing its head again. The sufferers this time are the app developers, who are being forced to pay high commissions to companies like Apple and Google that control the entire real estate of fast-growing digital space.

But there are twists and turns in business models that confuse stakeholders. For instance, Google will reduce its Play Store commission that developers have to pay for in-app purchases of digital goods and services to 15% from the current 30% starting July 2021. 

The catch: The reduction only applies to the first $1 Mn earned by app makers.

While the tech giant wants to present this as a concession, several startup founders from India say it is an eyewash to diffuse the anger and resentment it is facing in the country.

The backend story here is reasonably well-known. In September last year, Google came out with a notification, highlighting that the app makers would have to adopt its billing system by September 2021 (later pushed to March 2022). This boils down to two critical mandates: Apart from paying the 30% commission, they will be compelled to use the payment gateways of Google’s choice (more on this later).

In the aftermath of the hullabaloo that erupted, the Indian government was reportedly considering the launch of an Atmanirbhar app store and more than 150 startups came together to build an alternative app store. Even Vijay Shekar Sharma’s Paytm launched a mini app store with zero commission (apart from the standard payments charges of 0-2%). 

What The Fight Is Really About

When the search giant came out with its Play Store deadline, it was thought to be aimed at streaming giants like Netflix and Spotify that do not use Google’s billing system and direct customers to a web browser for processing payments as a workaround. But Google has said in an explainer that such practices are not acceptable and all app developers/digital businesses on the Play Store have to abide by the mandate.

According to a top executive at a food delivery unicorn, “Google might be chalking out different deals with bigger players like Spotify and Netflix. But individual developers and small startups who do not have that kind of bargaining power will lose out.”

The executive who does not want to be named adds that loyalty programmes like Zomato Pro and Swiggy Super are not currently considered digital goods and services. But foodtech companies will be compelled to sell such deals on their websites if the search giant expands its definition.

As of now, digital goods and services cover the following categories:

• Digital items (such as virtual currencies, extra lives, additional playtime, add-on items, characters and avatars)
• Subscription services (such as fitness, games, dating, education, music, video, and other content categories
• App functionality or content (such as an ad-free version of an app or new features not available in the free version)
• Cloud software and services (such as data storage services, business productivity software and financial management software)

More than 95% of the smartphones in India (estimated to hit 750 Mn in 2021) use Google’s Android operating system, according to Statista, making Google Play Store the default app marketplace for almost all smartphone users in the country. So, the global tech giant wants to use its dominant market position and pocket a big chunk of the app makers’ earnings from the sale of digital goods and services. 

Even Apple has a similar policy. But the company has not faced Google-like criticism in India as it has a small single-digit market share (2.74%) when it comes to the Indian smartphone OS market. However, app developers worldwide have been up in arms against these app marketplaces as the duo try to leverage their dominance to optimise their revenues. 

For context, Apple globally made $72 Bn in 2020 from its app store fees, while Google Play Store earned $39 Bn, according to app research company Sensor Tower.

All That Is At Stake For Indian App Makers  

The first major downside of the 30% levy is that it will severely hit the profitability of Indian startups building digital products. Ravi Mittal, founder and CEO of the dating app QuackQuack, told us earlier that this payment policy would have serious repercussions for digital-focussed startups. “The majority of our users are on Android, and enforcing Google Play billing will have a huge impact on our margins and the users’ ability to pay,” he said. Although app makers have not clarified it, experts believe that end users will bear the brunt of the ‘high’ commission expense.

Vaibhav Vasa, director of the Mumbai-based SaaS company Biz Analyst that offers enterprise tech apps and services to SMBs, says, “SaaS companies in India have a lower margin on the app pricing. If we have to pay an additional 30% to Google, the cost increase will directly impact the SMBs or other end customers.” 

But app makers have a bigger concern — adopting Google’s billing system will also hurt user experience.

Since the digital payments space is extremely fragmented in India, most apps have to offer a slew of payment options to ensure user convenience. But Google Play does not have such versatility. In India, it allows the purchase of digital goods and services through credit/debit cards, but only MasterCard and Visa are supported. Therefore, users with cards from other networks like Maestro and Rupay will not be able to transact. 

More importantly, apps usually do not opt for a single payment gateway on their platforms. Most of these enlist the services of multiple payment gateways such as Paytm, Razorpay, PayU, Bill Desk, Juspay and more and pick one of them for transactions on a dynamic basis, depending on success rates. For example, an app may enable transactions through Gateway A if it has a bigger success rate than Gateway B on a particular day or if Gateway B is suffering an outage/downtime.

If end customers are compelled to use Google-specified payment gateways, this may affect user experience due to downtime or a lower rate of successful transactions. 

Irked by both excesses, Snehil Khanor, cofounder and CEO of the Delhi-based dating platform TrulyMadly, “Even if the commission is reduced to 15% flat for everybody, it is still very high. The issue is not just the high commission but forcing app developers to remove other payment gateways, which provide the same service at 1-2% commission and remit us money at t+1 (settlement happens one day after the transaction) instead of a monthly settlement. As a developer, we should be able to choose what is good for our business.”

25 Years And More: Zoho’s Journey Of Excellence From Local To Global

If technology is a moat for the world’s biggest companies, it is also a disruptor in equal parts. A study by Credit Suisse analysts showed that the average lifespan of an S&P 500 company has shrunk from 60 years in the 1950s to a mere 20 years today.  

That is why Zoho’s silver jubilee is a landmark feat. With 50+ products in almost every major business software category, more than 60 Mn users worldwide and 9,000 employees, it is a technology behemoth that has survived the vagaries of time and thrived. 

The SaaS giant is not only one of the few profitable unicorns in India but has remained so since its launch in 1996. The company reported a 29% increase in its consolidated revenue in FY2019-20 as it continued its profitability streak for yet another year. The bootstrapped company clocked INR 4,385.99 Cr in revenue in FY20, a sharp spike from the INR 3,410.74 Cr reported in the previous financial year.

The biggest achievement of Zoho has been the creation of a SaaS mafia — employees who have built successful SaaS companies of their own. Interestingly, many of them continue to work for Zoho despite running their own businesses. This focus on encouraging employees to keep building and growing has helped Zoho retain its edge and created a fountainhead for SaaS entrepreneurs.

On March 17, 2021, the day Zoho marked the completion of its 25 years, a LinkedIn post by an employee, Abdul Alim, went viral. Alim had joined the company as a watchman in 2013. But a senior executive soon spotted his talent and took Alim under his wings. For the next eight months, the young man would complete his 12-hour shift and learn coding at night. Eventually, he became an engineering trainee at Zoho and has been a member of the technical staff ever since.

Startup IPOs Make Steady Landing

The past week has proved wrong all the naysayers who think Indian capital markets show no appetite for internet companies. The IPO of the gaming company Nazara Technologies was oversubscribed 175.5 times till Friday (March 19), the final day of bidding. According to the bid details on the BSE, the offer received bids for 58.65 Cr shares against the IPO size of 29.20 Lakh equity shares. The company is planning to raise INR 583 Cr through the public issue. 

When a company goes for an IPO these days, a price band is set within which investors bid for shares. Based on the bids received, the final price for issuing shares is decided. Oversubscription of shares means the ratio of the bid applications received to the number of shares floated by the company for listing.

But there is more. Online travel company Easy Trip Planners, which runs the portal EaseMyTrip, debuted on the stock exchanges on Friday (March 19) after being oversubscribed 159 times. The company’s shares were listed at INR 212.25 per share on the National Stock Exchange (NSE), a 13.5% premium over its issue price of INR 187. On the Bombay Stock Exchange (BSE), its shares were listed at INR 206/share, at a premium of 10.16% over the issue price. At the day’s high, its share price rose to INR 233, up 25% from the issue price.

The two IPOs show that both startups and policymakers have misunderstood the maturity of Indian retail investors. Last week, we wrote in this space how Indian startups are looking to go public through SPACs — a route that merges an IPO aspirant with a shell company in the US to ensure an overseas listing.

With American tech giants eyeing the revenues of Indian tech companies through policies like levying 30% commission on the sale of digitalware, we should perhaps take a step back and evaluate our priorities. Listing in the US could be another way of playing into the hands of digital imperialism.

Until next time,

Deepsekhar