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An armwrestling match between smartphone companies & e-tailers

The new FDI rules in e-commerce may give smartphone companies an edge in negotiations with Flipkart and Amazon, but you could be the eventual loser.

Feb 10, 2019 by Moulishree Srivastava
An armwrestling match between smartphone companies & e-tailers

On February 5, five days after India’s new Foreign Direct Investment (FDI) rules in e-commerce kicked off, Samsung launched its new Galaxy M series exclusively on Amazon.

Aimed at millenials, its smartphones M10 and M20 went out of stock in the one-hour inaugural sale. Amazon ran the second one-hour sale for Galaxy M series on February 7. The third one is scheduled to begin at noon on February 12, the same time when Oppo’s new mid-range model K1, the cheapest smartphone to flaunt an in-display fingerprint sensor, goes on sale exclusively on Flipkart.

Didn’t the new FDI rules prohibit online marketplaces from getting into exclusive sales? Are Amazon and Flipkart violating these regulations?

Apparently not. The rule says ecommerce marketplaces will not “mandate” any seller to sell any product exclusively on its platform. But this doesn’t stop sellers from selling exclusively on a platform. Smartphone companies are only making use of this little caveat.

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A limited period sale is a good marketing opportunity that generates hype among users. Over the last few years, exclusive deals for smartphones had become a successful tactic for e-tailers to increase sales, attract users and block competition. For smartphone companies, locking such a deal meant paying e-tailers less commission than usual and getting more visibility on the platform.

In 2017, smartphone sales were making up to 50-60% of the gross merchandise value of online marketplaces. Flipkart fetched 75-80% of its overall smartphone revenue from exclusive deals, while the figure stood 65-75% for Amazon. The trend continues two years on, but with the new rules in place smartphone companies stand to gain more.

An exclusive deal is a function of marketing spends, visibility, commitment for sales and margins (commission paid by smartphone companies on the sales).

“The new rules are only for one set of players in the ecosystem, that is e-commerce firms. For all practical purposes, exclusive deals won’t change because these rules won’t apply to smartphone brands,” said Jayanth Kolla, founder and partner at Convergence Catalyst, a Bangalore-based research firm.

However, this puts smartphone brands and original equipment manufacturers (OEMs) in a better position to negotiate an exclusive launch. “It sort of weakens online marketplaces’ position in terms of having their terms in the negotiations. It is lopsided and inclined towards smartphone OEMs,” Kolla said. “But the way market exists today, this is not too much of a deterrent.”

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Vikas Agarwal, general manager OnePlus in India, said, “Every industry is competitive, and every industry is trying to leverage their partners' strength as well. When we sell at Amazon, we want it to be a win-win partnership. So whoever has a strong relationship, they would want to stick with it, rather than trying to use this as a short opportunity.”

OnePlus has already made a public statement that its preferred partner will continue to be Amazon, but other established brands including Samsung, Xiaomi, Oppo and Vivo may benefit from an upper hand in negotiations. Agarwal, however, said it is important to have faith in long-term relationships, and businesses cannot be built by exploiting partners in unforeseen events like this.

Changing gears

After the new e-commerce rules kicked in, Amazon and Flipkart were forced to take down many key products sold by companies they had stakes in. An upset consumer is the last thing anyone wants. If they turn away when they don’t find the products they need, smartphone companies will have to bear the brunt too.

Agarwal said many consumers discover smartphones and offers on them through these online platforms. If traffic to these platforms go down, a good share of the demand may get impacted too. “That may have a ripple effect and overall sales of smartphone brands may go down. But so far we haven’t seen any impact,” he said.

Last year, 35% of smartphone sales came from online channels, according to Counterpoint Research. In festive seasons this number goes up to 40%. Tarun Pathak, associate director with Counterpoint Research, said online sales of smartphones may decline by 3-4% in the next one or two quarters. He said smartphone companies can make up for it in the second-half once all the rules are complied with.

But the new norms are likely to make smartphone brands risk averse. Pathak said smartphone companies could tweak their strategies to be more aggressive in offline channels to counter any disruption in the future. “So companies that were selling some 70-80% of their inventory online might reduce their exposure online and go balanced between online and offline.”

Apart from Xiaomi, which has been expanding its exposure offline the last couple of years, brands such as OnePlus, RealMe and Honor have started looking at brick-and-mortar outlets as a part of their operations. “More consumer-centric products are looking at omni-channels because looking at one channel will not let them reach out to mass market,” said Anshul Gupta, analyst at research and advisory firm Gartner.

How will this change in strategy affect consumers? Amazon is offering users up to 20% off for Redmi 6A and Redmi 6 pro. Flipkart was selling Vivo V9Pro at Rs 4,000 off between February 4 and 8 and Asus Zenfone Max Pro M1 at Rs 2,500 off between February 6 and 9.

Gupta said it’s all about the exclusivity. “Amazon and Flipkart offer good discounts if a model is popular and is not being sold through other channels. But once that exclusivity is gone, these platforms will not be interested in offering those discounts, which may be going from their own pockets.”

Agarwal said if overall operations for e-tailers become expensive, margins become thin and nobody is in position to absorb the higher cost, it will eventually be passed on to consumers. Who is excited about that?

Moulishree Srivastava

Moulishree Srivastava is a Bangalore-based tech journalist. She focuses on emerging Indian startups and unicorns. She can be reached at moulishree@thepassage.cc.

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