Should These Decelerating Telecom Metrics Worry Startups?
A sharp decline in the number of new mobile Internet users and the rising cost of smartphones may prove to be a double whammy for new-age Internet companies
In September last year, document sharing and tracking solution provider Dropbox DocSend released a report after analyzing 320 pitch decks prepared by startups for funding rounds. Apart from various other data points, an interesting observation was that most of the pitch decks—whether successful or unsuccessful—dedicated one slide to 'market size'.
In classical methodology, market size is calculated by multiplying number of target users and the expected value of purchase over a given period of time.
In the past few days, two disparate developments were reported from the telecom sector which may have an impact on one of the two components, i.e. the number of target users.
The first piece of news—less innocuous-sounding—was that the Indian smartphone market is likely to have fallen by a third during the October-December quarter and much of the reason is the rising cost of phones, attributed mostly to the roll out of 5G-enabled devices.
The second, and more admonitory, news was that the rate of growth of mobile Internet users fell sharply in 2022 and is expected to remain muted in 2023 as well. According to Counterpoint, a market research firm, the number of new subscribers using mobile Internet in calendar year 2022 was 35-40 million compared with the pre-COVID level of 60-70 million.
On the face of it, these two developments put together would mean that the number of target users—mobile and mobile Internet users—would remain range-bound for a while, leading to a stagnant market size, which in turn may negatively affect the financial projections made by startups.
Time to panic?
According to Siddarth Pai, co-founder of venture capital firm 3one4 Capital, while the stagnation in the number of Internet users is a cause for concern, this is more of a macro issue brought about by a variety of factors which are not in the control of most startups.
As per government data, India is among the most connected nations in the world by volume with over 837 million overall Internet users. This data point is one of the keys for the growth of the Indian startup ecosystem as several companies are built upon access to data and smartphones to create billion-dollar businesses.
"The recent slowdown in Internet user growth can be attributed to two important reasons: rising data costs and rising smartphone prices. The rising data costs were bought about by Indian telcos in as they look to shore up cash for 5G services and recoup earlier investments in 4G as well. India has had among the lowest data costs in the world, popularly known as the 'Jio Effect'," said Pai.
India's tech revolution has been fuelled by a connectivity revolution. As per data by International Telecommunication Union, the United Nations specialized agency for information and communication technologies, individuals using the Internet as a percentage of the total population grew from 5 per cent in 2009 to 43 per cent on 2020. One of the prime reasons for this phenomenal growth has been low data cost. As per data aggregator platform Statista, at $0.17 per 1 GB, India was only behind Israel and Italy in 2022 in terms of offering cheap Internet data.
Another whammy has been that smartphone prices in India have begun to rise as consumers also seem to be holding off on new phone purchases until the price of 5G models reduce, as the country enters the turn of a new cycle and nobody wants to be saddled with previous-generation tech.
The Indian resilience
According to Aniruddha Malpani of investment firm Malpani Ventures, while there will be minor blips, one should look at the big picture and not get misled by the short-term noise.
"The usage of the Internet has increased dramatically and will continue rising as Internet penetration increases throughout the country and becomes more affordable in the years ahead," he said, adding that India is currently at a demographic sweet spot and as more young Indians come online, the usage will keep increasing.
He believes that the number of new mobile Internet users is a misleading metric and one should rather look at the total number of hours Indians have accessed the Internet.
As per Statista, the average data consumption per user per month across 3G and 4G networks in India was at 17 GB as of 2021.
Another comfort for startups can be taken from the fact that not all users of Internet are online shoppers, as most use it for entertainment, social media and gaming.
Of the total Internet users in the country, online shoppers are around 150 million, or 30 per cent. "For startups to grow, there is still legroom with the existing mobile Internet user base," said Rishab Jain, managing director with Alvarez & Marshall, a global advisory firm. According to him, adoption of online shopping mostly depends on supply-side push, infrastructure and product development, and gigs investing in these areas will not witness their growth stagnating.
From the Indian startup perspective, the concern should be with the monetization of the existing smartphone userbase as opposed to growing the pie. "Startup boardrooms across the country are rife with ideas about increasing ARPU (average revenue per user) from their customer, as customer acquisition costs and discounts are being heavily scrutinized," said Pai.
According to Pai, efficiency today will aid in market expansion tomorrow.