[The Outline By Inc42 Plus] Killing India’s Digital Media, Softly

Dear Reader, 

We write obituaries of companies and delve deep into the reasons which lead to the shuttering of startups. But the media rarely publishes anything beyond a few lines (the who- what-where-when-and-why) when one of our ilks shuts down. 

But the closure of HuffPost India earlier this week, after the acquisition of its parent company by BuzzFeed from Verizon Media, demands a closer look as it could be the first of many more casualties. 

An image tweeted by media commentator Maxwell Tani, which has been doing the rounds on social media, shows Buzzfeed founder and CEO Jonah Peretti saying:

“The India team was surviving within a grace period. Verizon Media wouldn’t have been able to own them for much longer either…” 

Why is it so? 

It is the same reason why VCCircle was sold to a mainstream India media group in July this year for $801K by NewsCorp, the owner of storied publications such as WSJ, The Times and The Sun. The international media giant bought the digital media startup for $3 Mn in 2015.

As always, there is a backstory here. Last year, the Indian government restricted foreign direct investment (FDI) into the sector to 26%, effectively limiting any overseas stake in a digital news outlet to that amount only. But at the time, the government did not elaborate who all would require to follow the FDI norm.

In October this year, the government came out with a clarification that drove the final nail in the coffin for any digital news organisation which was banking on foreign capital to experiment with content formats and business models in a sector already reeling under the disruptions brought in by Google and Facebook. Not only have the tech giants made a lot of reportage redundant as users post news, images and videos from ground zero but they have also cornered the lion’s share of advertising dollars which earlier went to traditional news media.  

The operative part of the notification states:

The decision of permitting 26% FDI through Government route would apply to following categories of Indian entities, registered or located in India: 

1. Digital media entity streaming/uploading news and current affairs on websites, apps or other platforms
2. News agency which gathers, writes and distributes/transmits news, directly or indirectly, to digital media entities and/or news aggregators; and
3. News aggregators curate and collate news content from various sources such as news websites, blogs, podcasts, video blogs, user-submitted links and more 

Clarification Gives Rise To More Confusion

The government notification has not helped much in dispelling the doubts about which players need to comply with the mandate. For instance, would the Indian digital news arms of US-based magazine VICE Media, British broadcaster BBC or news agencies like Reuters and Bloomberg will have to bear the burden of the regulation?

Experts with whom Inc42 spoke have differing opinions. According to many, the overseas entities which own these platforms or websites are not incorporated in India, and hence, they need not comply. But there is a counter-argument. The phrase ‘registered or located’ means it would include any digital media company with a presence in the country. 

While Bloomberg LP did not respond to our queries, a BBC spokesperson said that the company is still figuring out the implication of the rule and its possible impact on the media house.

However, foreign news media agencies are only one segment of the players left in the lurch. Another major confusion remains as well. What does the notification imply for digital platforms which aggregate news? Will Google, Facebook and Twitter also fall foul of the new regulation? 

Sumedh Chaudhry, cofounder of the news aggregation app NewsBytes, said, “This might even apply to Google News or MSN. It will be important to see how the government views Google News because it is a 100% foreign-owned subsidiary.” 

The counter-argument that could be made here is that these tech giants only have their back offices in the country and their news-linked operations happen elsewhere, which means they should be able to escape this mandate. 

“It will have to be seen what kind of business operations are carried out by the Indian subsidiaries. If Indian subsidiaries are directly or indirectly linked to the uploading and streaming of news material, then, of course, it is an issue. These questions are likely to come up,” said Namita Vishwanath, a technology lawyer and a partner at corporate law firm IndusLaw.

Yet another issue is the definition of aggregators. Would it only include the platforms which aggregate news content? Or would it also cover social media platforms where users post news links and discuss news items?

Hitting Indian Digital News Startups Where It Hurts

Whether or not the social media giants come under the regulation, it is quite clear that homegrown platforms such as Inshorts, Dailyhunt, and Newsbytes would bear the brunt of the FDI restriction. Inshorts has raised $65 Mn and Dailyhunt has attracted $135 Mn from global venture capital firms, including Tiger Global, Addition, B Capital, Goldman Sachs and Sofina.

“When you are building a media enterprise these days, it is extremely difficult to make money. Now you are stifling the sources of capital like VC funding or a strategic stake owned by a global media company,” said VCCircle cofounder Sahad PV who sold the company to NewsCorp in 2015.

According to reports, Dailyhunt is already scrambling to rework its ownership structure. The company had a new round of foreign VC investment since the notification came out. 

Lawyers and investment bankers say, if eventually, the restriction does not apply to entities which are incorporated abroad, it may lead to an exodus of homegrown digital media companies to locations like Singapore and Hong Kong — a path that startups like Flipkart, MakeMyTrip, Ola and Oyo took to escape several regulatory provisions.

NewsBytes’ Sumedh Chaudhry said, “Although we do not have more than 26% FDI at present, it is bound to impact us if we go for massive fundraising in the future. It will also stifle innovations in this market. We are an AI-driven media house and we do not have reporters, our machines write the content.

But it is not just technology or innovation that is in the crosshairs. Digital media startups are also trying out new subscription-led business models which require capital-burning at the outset before revenues start picking up. 

Missing The Wood For The Trees

One argument in favour of the current FDI restriction is that it protects traditional media players — print media and broadcast media — who face 26% and 49% limits, respectively, thus ensuring a level playing field. 

Interestingly, the Indian Digital Media Association (IDMA), which includes the online arms of several broadcast media players such as the Republic TV, NewsX, OTV and others, has come out in support of the restriction on digital news media companies.

Not all mainstream media houses support this move. According to AK Bhattacharya, editorial director of the financial daily Business Standard and a former general secretary of the Editors’ Guild of India, “The goal of ensuring a level playing field could have also been achieved by raising the FDI limit on the print media to what was permissible for the digital news media. FDI with limits should not be frowned upon. But instead of increasing the curbs or lowering the limits, it makes greater sense to reduce the curbs or enhance the limits.”

Another reason that is generally cited for FDI restriction in the media is that foreign ownership could lead to news stories which are detrimental to national interests and may endanger national security. However, online media has been there in India for the past 25 years, starting with Rediff.com. But there had not been any such issue for all these decades. Moreover, key sectors like banking, defence, telecom and ecommerce enjoy more liberal FDI exposures ranging from 74% to 100%.In fact, the FDI restriction on digital news companies should be seen in the context of what has recently happened to OTT players. After a happy period of self-regulation and revenue bursts, they have been brought under the purview of the ministry of information and broadcasting, following which the regulations governing the print, radio and television content would also apply to them.

“Whether it is the FDI policy, OTT coming under the Ministry of Information and Broadcasting or the Sudarshan TV case, it would be a mistake to consider them in isolation. All these happened within six months. What does this point to? They are making these policies to control (the media),” said Abhinandan Sekhri, founder and CEO of media critique website Newslaundry.

While it is the government’s prerogative to regulate foreign funding in any industry, the rules need to be thought through so that businesses can make timely, strategic decisions about road maps. But that has not happened when the latest notification hit the digital news startups and threw them into a state of confusion. The future is foggy in terms of content strategy, funding sources and shareholding patterns. One cannot ignore that all this has happened amid a global pandemic when the government is trying to help different sectors recover by easing policies.  

Most of the digital news outlets are worried about the road ahead. “In this environment, when raising money has become difficult anywhere in the world, the government wants people to raise the capital and buy back stakes if companies have reached the 26% mark. And even if you do it, how will the tax authorities see it? That you raised funding by selling stake for $5 Mn last year and sold it at $2 Mn this year — will it be seen as round-tripping of funds?” asked Sekhri of Newslaundry.

Killing Differentiation In Ecommerce?

Dealing with changing regulations is an inescapable part of doing business in India and perhaps one of the reasons why a lot of international companies and investors stay away. 

With an ecommerce policy already in the works to regulate internet marketplaces and a ‘place of origin’ tag being made mandatory, the regulatory burden on ecommerce companies is set to increase. Now that the government is planning to develop protocols for cataloguing, vendor discovery and price discovery, how will their growth story pan out? 

According to reports, a committee of 11 members has been set up — members include representatives from various ministries and industry sectors — and a pilot project will kick off next month for developing an Open Network for Digital Commerce (ONDC). It will standardise ecommerce platforms across the board.

Meanwhile, the tax department has turned down a proposal by the Department for Promotion of Industry and Internal Trade (DPIIT) to extend tax benefits to all future startups which may set up operations by April 2026. The current window expires in April 2021.

Reports state that the proposal was about revising the definition of eligible startups for tax benefits under Section 80 of the Income Tax Act. However, the tax department told DPIIT that the government policy is to remove all income tax exemptions and reduce income tax rates.

Killing Regulatory Overload In Agriculture

Although there are many problems in India’s regulatory universe, one bright spot seems to be emerging — agriculture. For decades now, farmers are compelled to sell their produce in government-regulated markets, but changes are in the works to bring farmers’ interest back on track. 

Recently, the Parliament has passed two farm bills which allow farmers to sell directly to corporates, albeit required quality standards and consistency are to be met. Both supply-chain startups and venture capitalists look at the policy changes as an excellent opportunity to widen the horizon, revamp business models, reach more farmers and offer them fair pricing. 

According to Inc42 Plus, market-linkage startups in India bagged $305.2 Mn in investment between 2014 and H1 2020, out of the total funding of $467 Mn raised during the same period. As the bigger scenario requires a transparent, stable and profitable supply chain to make Indian agriculture great again, can tech-driven farm-to-fork startups like Ninjacart or WayCool rise to the occasion and create better supply chains?

As the bigger scenario requires a transparent, stable and profitable supply chain to make Indian agriculture great again, can tech-driven farm-to-fork startups like Ninjacart or WayCool rise to the occasion and create better supply chains?

With regulations being relooked at in agriculture, ecommerce and fintech to support technology-driven innovations, digital news media startups can only hope that the government eventually sees the opportunities which foreign capital can bring to the sector.

Until next time,

Deepsekhar

Note: We at Inc42 take our ethics very seriously. More information about it can be found here.