Arvind's Newsletter

1.Noel Tata’s brahmastra: a retail success story

Indrajit Gupta (IG) of Founding Fuel’s piece on Zudio’s success story is a must read. Noel Tata’s value lifestyle brand Zudio has caught the attention of the entire retail industry. It also signals a coming of age of retail in small town India writes IG.

Zudio is rapidly spreading its wings across more than 120 locations and is likely to touch more than 500 stores by 2023. Many of these locations weren’t even on India’s retail map till now: Dimapur, Ujjain, Imphal, Pathankot, Gorakhpur, Hapur, and Madhyamgram, to name just a few. With 15-20 stores being added every month—and each new store generating significant traction—it isn’t inconceivable that Zudio will double revenues to Rs 5,000 crore in the next two to three years.

Zudio is a Turns Retailer—industry-speak for retailers with low markups and high inventory turns. There are a few tailwinds behind Zudio’s success. It signals the coming of age of India’s new consuming classes. For long, organised retailers stuck to metros and Tier 1 and Tier 2 towns. This is among the first indications of the huge opportunity in Bharat. Besides, with the GST regime, better road infrastructure, and modern third-party warehouses and transportation systems, it has become a lot easier to build a more predictable supply chain and logistics that is able to penetrate deeper into the hinterland. Read on.

2.India’s digital finance moonshot

The Central Bank Digital Currency Project (CBDC) aims to extend its position at the vanguard of financial innovation, writes Patrick Jenkins of Financial Times.

The Aadhaar identity system that has provided the foundation for the UPI rollout has been criticised for further marginalising a minority of Indians. But 1.3 bn Indians, including 99 per cent of adults, are now part of it.

Today 350mn people now use UPI system for payments, a number that should continue to expand as smartphone usage and 5G networks proliferate and services are extended to encompass credit and investments as well as payments.

To address those left behind, particularly in rural areas, India this month revealed an initiative to allow the processing of voice-based transactions. In areas with no or little internet connectivity, phone-to-phone transfers would be a viable alternative.

The UPI system has international potential too. Already real-time transfers using the network are feasible with Singapore, and the United Arab Emirates should create a similar link-up in the coming months. Links to overseas locations where Indians live or travel could transform the efficiency and cost of remittances to family back home as well as boosting the tourism economy.

All this is only one leg of India’s digital finance transformation. The country has also been exploring the potential of a central bank digital currency (CBDC). This initiative that has been boosted by broader world events — the rise of China and Beijing’s ambitions for the renminbi; the challenge posed by upstart cryptocurrencies; and, perhaps, most of all by the weaponisation of the dollar and the global payment system by the US and its western allies as a means of punishing Russia’s invasion of Ukraine.

India is among the most advanced with its CBDC project. A pilot began late last year and has since been expanded to involve 13 banks in 26 locations, compared with four banks in four cities initially. Some experts believe a digital rupee might fully launch as soon as next year. The pilot project has involved integrating it with the UPI system, so that merchants can accept digital rupee payments using the same QR code they already have for UPI transactions.

Reformers believe a digital rupee offers a big opportunity to enhance the efficiency of both retail and wholesale payments. The international potential is significant, too, if the central bank can agree bilateral or multilateral swap arrangements with counterparts abroad.

3.India’s beach paradise Goa is overrun with digital nomads, reports a piece in Rest of World. Rents are up, startups are setting up all over the state, but locals can’t get jobs easily.

The state of Goa, among India’s biggest tourist destinations, has seen an influx of tech workers and digital nomads in recent years. The new residents are from bigger Indian cities like Mumbai and Bengaluru, as well as other countries, turning Goa into an IT hub. Though the development has been good for business, local Goans complain that prices have risen steeply.

4.More streaming choices, more choosing

The number of shows and films available to stream has jumped by 39% in two years. The rise of free but ad-supported streaming services has driven the increase, according to a report by market analysts Nielsen looking at the U.S., Canada, the U.K., Mexico, and Germany (reported in Bloomberg). There are now 167 streaming providers, up from 118 two years ago, with 2.35 million options between them. Inevitably, increased choice has led to increased difficulty choosing: The average time taken to choose something to watch was seven minutes in 2019, and is now over 10.

5.Amazon has Hollywood’s worst shows but its best business model, reports the Economist.

As bullets fly around a high-speed train carrying a former Miss World and a gang of spies through the Italian Alps, shopping is surely the last thing on viewers’ minds. Yet should they press pause, they will see an option to buy items from the show: the heroine’s gold necklace, her red dress, or the teetering stilettos in which she is improbably running rings around the villains. Only her exploding perfume is not yet for sale.

“Citadel”, a thriller on Amazon Prime Video, shows what happens when the world’s biggest online retailer becomes one of its biggest entertainment producers. As well as buying merchandise from the show on Amazon’s e-commerce site, audiences can listen to its soundtrack on Amazon Music, or read about its production on Amazon’s sister site, imdb.com. Its multinational cast and plot, and planned spin-offs in different languages, are chosen to appeal to shoppers around the world.

Hollywood old hands are snooty about Amazon’s video efforts, and understandably so. Despite a reported budget of $300m, making it the second-priciest tv series in history (after “The Rings of Power”, another Amazon project), “Citadel” received lukewarm reviews and failed to crack the top ten most-streamed shows in America (Amazon says it has done better internationally). Critics see it as emblematic of the company’s high-spending, low-impact record in video. This year Amazon will blow $12bn on streaming content, second only to Netflix. It has had some hits, including “Reacher” and “The Boys”. But its 45 streaming nominations at the upcoming Emmy awards—a record for Amazon—is less than half as many as Netflix or Warner-Discovery’s service, Max. “Amazon’s hit rate is not good, nor consistent with its spend,” admits one former executive.

Yet despite its creative misfires, Amazon is quietly assembling something that has eluded most of its rivals: a model for how to make streaming pay. Its shows may underwhelm, but it is preparing to pair them with its formidable advertising machine, and is turning its streaming app into a high-margin marketplace for third-party sales, along the lines of its all-conquering e-commerce site. Hollywood might snigger at Amazon’s output. But the Seattle firm may yet have the last laugh.

Amazon has been in the video business since 2006, when it launched Unbox, an iTunes-like downloading platform. Since then the company has deployed its tech-sized chequebook to become one of the biggest forces in Tinseltown. Its main streaming service, Prime Video ($8.99 a month, or free as part of Amazon’s broader Prime membership), attracts some 156m monthly viewers—about as many as Disney+ and second only to Netflix. Freevee, its free streaming service with ads, has another 40m or so. Fire tv, Amazon’s range of internet-connected tv sets and streaming sticks, outsells every brand bar Samsung, with nearly 100m devices in use worldwide, according to TechInsights, a data firm.

The most obvious motive for Amazon’s video experiments is to increase the value of the Prime bundle, which keeps members shopping on the e-commerce site. But video has the potential to become a moneyspinner in its own right, in two ways.

First, advertising. In little more than a decade Amazon has created a digital-ads business that has disrupted the duopoly of Google and Meta. Its ad revenue this year will be around $45bn, making up about 7.5% of worldwide digital advertising, estimates Insider Intelligence, a research company. It is already more than a third the size of Meta’s ad business. But whereas Google and Meta both have healthy video-ad operations (through YouTube and Reels, respectively), Amazon’s inventory is mainly sponsored search results on its e-commerce site.

That seems to be changing. Amazon has kept Prime Video largely ad-free to preserve a “premium” feel, says one senior executive. But the introduction of commercials last year by Netflix and Disney+ has given a green light to others to do the same. Amazon has been experimenting with running ads alongside sports shows on Prime, and has shifted more of its back-catalogue to Freevee, its ad-supported streamer. Analysts expect to see more commercial breaks on Prime soon.

Among streamers, Amazon is uniquely well placed in the advertising game. Whereas Netflix acknowledges that it is mainly limited to generic “brand” advertising, Amazon has enough information on its customers, through its e-commerce site and its Fresh grocery stores, to serve highly personalised ads. What’s more, it can measure the effectiveness of those ads, by observing viewers’ subsequent behaviour in its shops. It has yet to exploit this ability fully, but viewers will get a taste of it in September when Amazon plans to run targeted, measured ads alongside its “Thursday Night Football” programme. In November it will show a blizzard of ads when it airs the first American football game to coincide with Black Friday, an annual holiday to honour the shopping gods.

It makes this a “foundational year” for Amazon’s video-ad business, says Andrew Lipsman of Insider Intelligence. “The future of their advertising strategy on video is going to really take hold.” Morgan Stanley, a bank, forecasts that within two years Amazon’s nascent video-ad business will be worth more than $5bn a year in America alone, and that in the long run its superior intel on its viewers could allow it to charge higher rates for its ads than any other video platform.

That ability will become more valuable as viewing shifts to streaming. Ads on internet-connected television make up about a third of tv ad spending in America. As that share rises, a “pot of gold” awaits sellers of digital advertising, says a former Amazon executive. What’s more, points out Mr Lipsman, “When you introduce data, it transforms markets.” tv ads are reckoned to be among the most effective, but their impact is hard to measure. As advertisers gain the ability to see how customers respond to their commercials, the tv advertising market, currently worth about $90bn a year in America, stands to grow, with the lion’s share going to the companies that offer the best measurement.

Amazon’s second approach to making video pay is to sell viewers not just its own output but other companies’ content, too. Whereas viewers opening Netflix or Disney+ see only shows on those platforms, those opening Prime Video are offered content from a range of other streamers. If a customer subscribes to another service via Prime, or buys or rents a show, Amazon takes a cut, reckoned to be between 20% and 50%. When a viewer watches a free channel via Prime, Amazon takes a slice of the ad revenue or sells its own ads in some of the channel’s slots.

Tom Harrington of Enders Analysis, a research firm, likens the approach to Amazon’s strategy in retail. The company began by selling its own products, before opening its marketplace to other traders. These days two-thirds of sales on Amazon.com are made by third parties, with Amazon taking a commission—a much higher-margin business than selling its own wares. Its aim is to be the same kind of “landlord” in video, believes Mr Harrington.

This analysis sheds light on the purpose of big-budget shows like “Citadel”. Amazon continues to stock its e-commerce site with first-party products, to maintain price competition and ensure that the marketplace has a broad enough offering to keep customers returning. Prime Video content plays a similar role: high-profile shows and live sports—something not available from most other streamers—get people to open the app, while guaranteeing them a wide range of content to choose from. “The real question isn’t how many people watched ‘Rings of Power’,” says Mr Harrington. “It’s how many people went into Prime because of ‘Rings of Power’...and then [spent] more on other content.”

Amazon seems to be succeeding in getting people to spend time on its platform. Although few of its shows break into the top ten individually, Nielsen’s figures show that Prime Video’s share of streaming in America—about 8.9% of hours watched in July—is about 70% greater than that of Disney+, and more than twice that of Max.

Becoming a content landlord is not easy. Amazon’s bargaining power over suppliers is weaker in video, where there are a few big studios with their own direct-to-consumer offerings, than in e-commerce, where millions of tiny sellers use its marketplace. Amazon’s hold over consumers is weaker, too: whereas the company accounts for nearly 40% of e-commerce sales in America, its Fire tv platform handles only about 15% of streaming traffic there.

Still, the company is carving out ways of making money in an industry drowning in losses. Amazon may not dominate the Emmys, or Nielsen’s top ten. But, says a former executive, its chief aims in video are for people to watch tv through its hardware, to buy content through its store, and to watch commercials served by Amazon advertising. Even if “Citadel” remains a critical flop, it may have done its job.