Earlier today, I wrote on organically regenerative capabilities of most great web businesses like Google and Facebook. I have made a video to take the perspectives home.
As you look into how these companies operate, you can see clear utilities in action. You can even be bolder: monopolies in their respective technology categories. There is nothing that will change the trajectory in the near future. Even if government breaks them apart, the fact remains that another company will take over their positions. Web businesses have this inherent feature that makes them organically regenerative: if you break Facebook because of its influence, another company will just take over its position. That regenerative capability is that ability to get better with more user data. That is what they call network effect:
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So breaking Google will not fix the issues. One day, another company will grow to replace what Google does today. Web businesses get better with growth, unlike meatspace companies where more customers like in a bank hall will frustrate the users. This is a special feature I have captured in inversibility construct:
That feature is why the more the users the better, and that means the best in technology will re-grow even when broken apart provided it has enough users to seed that moment. Over time, there will be convergence. WeChat is the Internet first operating system which practically does everything: WhatsApp, Facebook, Twitter, Instagram, all in one. It is a seed that will keep growing, and breaking it will have minimal impacts, unless you want another name, not WeChat, to do the same thing tomorrow in China.
Interesting insight on the regenerative capabilities of the web based companies. I always enjoy your teachings. This brings to mind the Uber case in London. Yes Uber ignored the cues and left a lot for ‘very late’, but my 2 cents is that as long as the value proposition has been effectively delivered to satisfy that latent need for the sharing economy , if legislation stalls one player, customers will gravitate to similarly positioned alternative offerings, but may not rekindle their old desire for the city people’s black cabs. The desire to satisfy that need with the nascent approach will only regenerate itself as available market share for other sharing economy players. After all, uberisation is now a word.
Apple’s cash balance is about $261.5 billion. And the stock prices of Google (yes Alphabet), Microsoft and Facebook are trending higher and higher. Amazon and Apple are in their own leagues, hitting close to the highest numbers they have ever recorded. This is turning out to be a golden age of technology. Technology is ruling nations and markets are totally being redesigned. Today, energy companies like Exxon Mobil are systematically making ways for technology firms as the most valued entities.
The fascinating thing is that this is a virtuoso circle: the more capital these companies have, the easier it will be for them to buy out new entrants and also fend off competition, in any form. Facebook owns a platform and the users generate the raw materials (the photos, comments, feeds, etc) which the company feeds upon. Google specializes in aggregating web contents and videos, making them available for users to peruse. The capacity to aggregate contents makes these companies to be asset-light with high scalable advantage running at marginal costs for new users approaching near-zero.
As you look into how these companies operate, you can see clear utilities in action. You can even be bolder: monopolies in their respective technology categories. There is nothing that will change the trajectory in the near future. Even if government breaks them apart, the fact remains that another company will take over their positions. Web businesses have this inherent feature that makes them organically regenerative: if you break Facebook because of its influence, another company will just take over its position. That regenerative capability is that ability to get better with more user data. That is what they call network effect:
The network effect is a phenomenon whereby a good or service becomes more valuable when more people use it. The internet is a good example. Initially, there were few users of the internet, and it was of relatively little value to anyone outside of the military and a few research scientists.
So breaking Google will not fix the issues. One day, another company will grow to replace what Google does today. Web businesses get better with growth, unlike meatspace companies where more customers like in a bank hall will frustrate the users. This is a special feature I have captured in inversibility construct:
For the Inversibility Construct, you need to turn a typical frustration in the meatspace into strength in the digital space. That means, you need to INVERSE the experiences of people, so that what annoys them in the physical becomes strength in the digital space. I provide some examples:
The Nigerian Challenge
As you see what Google and other American companies are doing, it does seem that they are esoteric with practically no chance for any company in other parts of the world to challenge them. But when you go back to history, you will notice that there was nothing like Silicon Valley before Shockley invented the transistors and legends like Gordon Moore made the two words “Silicon Valley” something iconic. So, Silicon Valley became because men (and women) made it happen.
One of the key enablers of this new ‘city” was the on-boarding of investors who came to seek opportunities. Sandy Hill Road, Menlo Park (California) became a street into the future of the world where many investors made homes, investing in game changing companies. Those companies saw opportunities and came, and they also seeded new opportunities. It became a positive continuum which remains till today.
To create such enablers in Nigeria, I propose the following specifically for the VC sector:
Government should offer new VC (venture capital) firms in Nigeria a ten year tax incentive on profits if they have asset base of at least $50 million and will deploy the capital in Nigerian startups within 10 years.
Offer new VC firms in Nigeria the opportunity to repatriate 100% of profit within ten years. That will help the country to attract foreign investors to make Nigeria home.
If we have this type of incentive, we will see many VC funds making Nigeria home to explore opportunities in Nigeria and continental Africa. That influx of capital will have many multiples of benefits to our economy, our people and the Nigerian technology space. Today, we are having the capital problem, and government can make it easier for our startups to receive the funding they need. A new reform on VC will go a long way. Government does not need to spend any of its money. All it needs to do is to make it easier for investors to come to Nigeria and do business. We simply need to make the offers more attractive to these investors.
Many years ago, a journalist asked a governor why he was recycling politicians who had served in previous administrations. The governor simply told him: “we only use those who are active”. I am not here to debate if that is an efficient method to use when building teams. Yet there is a small lesson there: we all like to join moving trains. In forming governments, the moving trains can be simply those that show up irrespective of their capabilities. Also, in companies, once they become active and start winning, a continuum is established and they just keep going. It is called positioning.
We have read that Amazon received 238 proposals for its second headquarters. Cities competed for the opportunity for Amazon to choose them for its headquarters.
Amazon.com Inc.’s second headquarters, dubbed HQ2, has lured 238 proposals extending across 54 states, provinces, districts and territories in North America, the company said Monday. Only seven U.S. states refrained from bidding: Arkansas, Hawaii, Wyoming, North Dakota, South Dakota, Montana and Vermont, according to a map Amazon published on its website.
Cities are battling for Amazon’s investment of $5 billion in construction and 50,000 high-paying jobs spread over the next two decades: New York City’s Mayor Bill de Blasio ordered landmarks around the city lit up in “Amazon orange” before the bids were due last week. Canadian Prime Minister Justin Trudeau penned a personal letter to Amazon Chief Executive Officer Jeff Bezos advocating for HQ2. Newark, New Jersey, has offered $7 billion in potential tax credits.
Notice that Newark, New Jersey, is offering $7 billion in tax credits. But that may not be enough. Amazon had made it clear that it would make the selection based on the city that can provide all the basic things (good roads, access to airport, electricity, etc) with massive “tax breaks and grants”. The grant part is interesting because that means that the city will have to give Amazon money. So, you waive tax and you also have to provide grant to Amazon.
Let me connect this to the Nigerian case: Few weeks ago, many people went ballistic when the Nigerian government noted through a minister that it was offering tax incentives to enable Dangote Group fix some roads. Some felt it was immoral to do that in a country of more than 180 million people. (I do not know the terms to ascertain how balanced the tax concessions are. Also Dangote Group has refuted some parts of the statements made by the minister.) Unfortunately, that is how capitalism works. I have called this type of incentives Conglomerate Tax: for their successes, conglomerates tax the economies where they operate as the economies indeed subsidize their businesses.
It is called Conglomerate Tax. It is a game played in all parts of the world. Conglomerates use their powers and scales to bully governments to do things the very way they want things. If governments refuse, they do not invest and nothing changes. Because they know the governments are financially incapable or strategically deficient, they hit them at the pain points: I cannot solve this problem if you do not accept my terms.
You may not like it, but there is nothing you can do about it. It is legal. From GE to Carlos Slim Grupo Carso, citizens subsidize most things conglomerates do as most times they do not have to pay tax. They get great deals you wish you can. And you can if you follow the game plan (I will explain later).
The news is that the Dangote Group will not pay tax in the next ten years for it to help Nigerian government fix roads.
Amazon does not seem to be a natural company to receive any support when you consider that it has ravaged communities through its ecommerce operation that has devastated shopping malls across America. The cities that plan to give it billions in tax credits and grants are the same cities complaining that Amazon has reduced their tax receipts by out-competing retailers who collapse taking with them local taxes. To add salt to injury, Amazon does not even collect local taxes for most cities. So, using historical impact data, Amazon should be punished by cities for what it has done on them, though indirectly.
Unfortunately, conglomerates are so critical because they open up markets and economies. What they do is so vital to communities that you can forget their past “sins”. Yes, Amazon wants to invest $5 billion but cities are offering packages in billions of dollars of tax credits. I expect the winning bid to offer around $5 billion in tax credits and at least $250 million in grants.
Now, why will a city do this? If Amazon is bringing $5 billion, it will drive the local economy. It is a virtuous circle that the $5 billion can stimulate more than $100 billion of value in the city. The cities are competing because Amazon over the years has accumulated capabilities, operating at the upstream level of the economy. The cities want more economic growth and Amazon can help them to unlock it. The fact is this: any company that attains that level of capability can get the same deal because governments are looking for entities that can fix their major pain point which is job creation. If you want to invest $5 billion in any Nigerian state, you will not just get land, you will receive tax benefits.
Conglomerate Tax is not corruption. You cannot even say that it is making the market not to operate freely and fairly. For example, Amazon competitors can say that the industry leader is getting an unfair advantage. You can say all you want, but government does not care, since if you have the same level of resources and want a deal, they will package something for you. Government does not create jobs, it only provides enabling environments.
Capitalism can be interesting because not everything seems fair. But as the Amazon case teaches us, it is better people focus on the motivating energy of capitalism. They will build firms and unlock value, instead of wasting time complaining on what the government is giving to conglomerates like Dangote Group. Every Nigerian government will keep offering benefits because if they do not, another African government will invite Dangote Group to come, offering the same benefits. Our problem is just that only one company is at the level of the Dangote Group when you talk of conglomerates. (We have other companies but most are not at Dangote Group level as diversified industrialized conglomerates.) In America, Amazon is making its own competition a show, but it could have gotten these same benefits secretly, just as GE and Honeywell do yearly.
We are at the early phase of an AI (artificial intelligence) race with amalgam of platforms available for developers to build upon. We have Amazon Alexa, Google Assistant, Microsoft Cortana, Samsung Bixby, Apple Siri, and more. For African startups, the choices will not be easy because besides the technology, we need to consider primitives and datasets which can support an African business. In this piece, I examine some things to take into considerations as founders make decisions on the AI platform to adopt. You want to build a business on a platform your customers will like to use your products.
Around 2010, at the peak of Blackberry, I wrote that Blackberry would fade and Android would rise in Africa. I took many things into considerations when I made that call. I had lived in the U.S. with constant visits to Nigeria, and I saw some enablers and anchors which were in Android but lacking in Blackberry. It was evident that the adoption of the open framework of Android in a largely emerging region would happen.
Today, I want to provide the same direction for startups looking for a roadmap into the future of AI. Google has declared itself an AI-first company, and it’s doing everything possible to awaken the world with its computational capabilities. Amazon from nowhere changed the basis of competition with Alexa, a voice AI system which is evolving as an operating system for voice. With Alexa, new possibilities were unveiled and quickly incumbents like Microsoft got themselves in a catch-up mode. But this warfare is far from over: we are just starting in this sector since AI is still at the level of infancy.
So, as an African startup, you have a decision to make, since no one knows who the clear winner will be. We do not have the same level of clarity, at the moment, on AI as we have on Search (Google is the winner), social connection (Facebook is the winner), micro-blogging (Twitter is the winner), OTT (WhatsApp and WeChat are the winners), VOIP (Skype is the winner), and so on. Yet, AI will not have the same level of shape as most other sectors because AI itself is structured to make these platforms and ecosystems smarter. So, AI can improve Skype, WeChat, Facebook and more. We may not see a product called AI because there is nothing like that. That angle will help us to understand how to approach the adoption of a platform of choice.
But in this piece, I will narrow the AI into voice-activated AI systems. That classification is amorphous but I will go with it. Voice is going to be a huge factor in Africa since we like to talk and voice does not discriminate on literacy level. If you can build the solution in the native language of the people, you have a product that can be used in insurance, banking and other sectors. I have not included Facebook in this piece because it does not have an enterprise facing voice activated AI system. Sure, Facebook does AI but that is largely for its ecosystem, not for startups to build at scale through integration.
Here are factors to consider:
Technology: The most important factor is that the technology works. If the technology does not work, there is no value even considering a specific platform. In this space, I give Amazon a lot of credit for its pioneering vision on voice assisted AI systems through Alexa. Yet, there is nothing Amazon does today that Google cannot do. Microsoft is also innovating. I will consider Amazon, Apple, Microsoft and Google as strong enough that the technology capabilities are largely even.
Popularity/Network Effect: The construct of network effect is very important. You want to build on popular ecosystems, not just in U.S. but also in Africa. Google has an edge there because if Google Assistant on-boards on Android, you will have many clients since Android is popular in Africa. For Amazon, you will need to have a new hardware which increases the adoption cost. Apple is strong but not many Africans use Apple. For this, I give it to Google. Microsoft has Windows where Cortana runs but unfortunately, laptop and desktops are largely not as ubiquitous as smartphones.
African Data: Among all the companies, Google is well positioned on data that involves Africa. YouTube had clearly documented African culture with our accents and lifestyles. In other words, Google Assistant can understand Africa more than any other platform, if it chooses to do so. It can understand how we talk, greet and stand in reverence to elders by reviewing videos we have uploaded on YouTube. No other platform comes close. So Google wins here.
African Business Presence/Developer Engagement: Google and Microsoft have invested thousands of hours to grow and nurture ecosystems in Africa. These companies have organized competitions and sponsored conferences. Apple and Amazon are largely alien in building relationships with African developers and startups. Samsung is also local and working but Microsoft and Google are far ahead.
Others: Google and Microsoft are strong on other factors. In most African major cities, you can pinpoint their offices. You cannot say the same for Apple and Amazon. Though Amazon is in the continent selling its Amazon Web Services, the focus is acceleration of consumerism. In South Africa, it operates a lackluster ecommerce operation where it has refused to invest more capital. So, Amazon seems focused on India as a place to win, neglecting Africa. Microsoft and Google do well on other factors. But Google has a clear edge because of YouTube which can help it teach AI systems how African humans hug, cook and drink through massive datasets of videos it has accumulated over the years. We have made those videos and Google can make sense of them if it finds market opportunities in the continent.
Google, which owns YouTube, announced on Oct. 19 a new dataset of film clips, designed to teach machines how humans move in the world. Called AVA, or “atomic visual actions,” the videos aren’t anything special to human eyes—they’re three second clips of people drinking water and cooking curated from YouTube. But each clip is bundled with a file that outlines the person that a machine learning algorithm should watch, as well as a description of their pose, and whether they’re interacting with another human or object. It’s the digital version of pointing at a dog with a child and coaching them by saying, “dog.”
All Together
I must note that Africa does not have any of the core technologies like Alexa, Siri and Cortana to build AI solutions. It may not really be absolutely necessary for us to pursue such goals at the moment. We do not need to have Windows before we can create products for PCs. Though I do hope we can get there, the fact is that we do not have the financial and technical capabilities at the moment to pursue such expensive endeavors. Note that I did not say that it is impossible: I am saying that if we do it, we will not win because Silicon Valley will out-compete us. Our opportunity is to find a space to differentiate on these platforms locally. Yes, we can solve local problems using these platforms. If that is our focus, I do think that local data will be catalytic to success. In that space, Google wins because it has more data about Africans and Africa than any other company. And for that, I will suggest that you consider building on top of Google platform because it will win in Africa even if Amazon Alexa wins in U.S. Yes, it will mirror the smartphone operating system platform where Apple is winning in U.S. (across many metrics and indicators) but Google is doing better in Africa.
Just making it out of a “cave” where I have been with a client working on strategy since Saturday. Yes, in this age of disruption, Nigerian companies just like their counterparts anywhere must evolve to compete locally and globally. It was a very wonderful session. But I need to quickly address a key point, as a follow-up to a recent post on ecommerce.
The main thing I am hearing is that they expect to have a dedicated space in these platforms which will be under their controls. In other words, they want a clearly defined and dedicated digital store, just as you have in physical malls. They will hold the digital key and can brand as they want in that space. Consider something like konga.com/brand-name where that page showcases exclusively what that brand offers with no other brand therein.
I have been reading comments and getting emails from founders telling me that they have the solutions. Apparently, they read the piece without noting this important line: “Yet, these companies do want to expand and are very ready to go online provided someone will handle the logistics while they drive the online sales.”
That you have a website where companies like Soulmate, Unilever or PZ can list their brands without a strategy on how they can ship the items does not solve their main pain points. The main pain point is logistics and shipping the items after the buyer has paid online. These firms can open their own websites and drive their ecommerce businesses themselves. But most are not ready to deal with logistics. And you do not blame them because logistics in Nigeria is another business entirely. With no postal service, they will need to invest capital in non-core business areas thereby degrading the efficient utilization of capital. For them to get your respect, you need to do that for them. That you have a website where you expect them to open a brand page is nothing. Anyone can create a website today.
The FMCG Distribution Model
For years, fast moving consumer goods (FMCG) companies work with distributors. These distributors buy in bulk and then help the FMCG sell to retailers. The retailers then sell to end-users in their shops. The brands never sell directly to retailers or end-users, and they do not want to change that model. It has worked for them for years.
So, if you expect them to come to your site and host a page without you offering them a way on how they can ship the items, when bought online, you are not closing the loop. They want you to handle the logistics and you have to demonstrate that you have the capability to do so. So the value proposition must be thus: I will give you a page to list on my site and we will ship all the items when bought to end-customers. You may need to have scale for them to trust you to store their goods in a case they do not want you to buy as a distributor upfront. Yes, they may handle the website page but they need you to ship, and that arrangement on where the goods are warehoused must be planned ahead to reduce delay in shipping to customers. Where you cannot afford to buy in bulk and they are not open to ship to you, the business model crashes. So, you must deal with that issue very well.
The Marginal Cost in Ecommerce Business
I have noted many times that a Nigerian ecommerce business marginal cost is high, and that cost is at the offline element of the business. The cost of adding a user online is close to zero but the cost of shipping to an additional user is non-zero. If you are operating in Lagos as an ecommerce company, you have a huge marginal cost to ship to someone in Opopo. To reduce that marginal cost, you can bound your geographical location of service as within Lagos State. When you do that, you are no more a web business which is typically unconstrained and unbounded by geography. You have been limited by location driven by marginal cost. That means you are not really running a web business: your business is offline! You may have 60,000 users in your platform but only those in Lagos (say 40,000) can be easily addressed efficiently and profitably. If I am advising you, I will make it clear that you have only effective 40,000 potential buyers since you are focusing on servicing clients in Lagos. (You may think that you can ask customers to cover the shipping cost to Opopo. Sure that can work except that there are still shops and open markets where the user can buy. In other words, you are not the only alternative and when the cost of buying from you is high, the consumer looks for alternatives. So, you have an incentive to reduce the overall cost for buyers if you expect them to use your platform.)
That is the same challenge FMCG companies are facing: how can they have websites and then restrict who can shop on their sites, due to marginal costs dominated by distribution costs? To avoid that paralysis, they simply do not want to run online shops. They are open to promote the brands, but you still have to deal with retailers to buy these items across Nigeria. Sure, they welcome distributors who can place big orders online, but not end-users buying one pack of detergent or soap.
All Together
We have huge opportunities in ecommerce. Markets will move online, eventually. But we need to understand that our biggest cost element is not the website but the logistics of moving the items. As we develop businesses in the ecommerce sector, we need to work out how partners can overcome the distribution challenges. That is the key missing link in some of the models: the nice websites are not enough. Founders that can solve that distribution cost problem at scale, affordably and efficiently can open a new basis of competition in the Nigerian ecommerce sector.
