In the 12th June edition of Three Longs & Shorts we highlighted Infosys Chairman Nandan Nilekani and Chief Economic Advisor V.Anantha Nageswaran’s piece in Mint on Open Network for Digital Commerce (ONDC) – see https://marcellus.in/story/
To quote Nilekani & Nageswaran: “The idea of ONDC was conceived and has been widely discussed since April 2020, soon after the first wave of covid, when ensuring essential supplies across containment zones was found to be a challenge and a need was felt to alter the current digital commerce approach of “scaling what works” to a new approach of “what works at scale”.
ONDC is a globally first-of-its-kind initiative that aims to democratize digital commerce, moving it from a platform-centric model (where the buyer and seller must use the same platform or application to be digitally visible and do a business transaction) to an open network. It is based on open-sourced methodology, using open specifications and open network protocols, and is independent of any specific platform. ONDC is expected to digitize the entire value chain, standardize operations (like cataloguing, inventory management, order management and order fulfilment), promote the inclusion of suppliers, derive efficiency in logistics, and enhance value for consumers.
This platform envisages equal-opportunity participation and is expected to make e-commerce more inclusive and accessible for consumers as they can potentially discover any seller, product or service by using any compatible application/platform, thus increasing their freedom of choice. It will enable consumers to match demand with the nearest available supply. It enables transactions of any denomination, thus making ONDC a truly ‘open network for democratic commerce’.
ONDC would enable small businesses to use any ONDC-compatible applications instead of being governed by specific platform-centric policies. This will provide multiple options to small businesses to acquire what’s needed to be discoverable over the network and conduct business, without having to pay deep cuts to aggregator platforms. It would also encourage easy adoption of digital means by those currently not on digital commerce networks.”
Now the venture capitalists at 3one4 Capital have written a very interesting piece on the implications for corporate profitability if ONDC were to become a reality. The piece is based on a discussion between the between the high priests of India’s tech architecture including the legend that is Dr Pramod Varma, Chief Architect of Aadhar & India Stack. We suggest that you read this super interesting piece in full because it is highly likely that your business will be impacted by ONDC. However, if you are time constrained here is a key excerpt [note: DPG stands for Digital Public Goods eg. Aadhar, UPI]:
“After emphasising the sheer scale of opportunity that India offers, and the possibilities for value capture that emerge for private enterprises as DPGs become mainstream, Mr. Varma touched upon the role that DPGs, especially the Open Network for Digital Commerce (ONDC), can play in creating a level playing field for enterprises and encouraging greater innovation by bringing in some semblance of unification. Something like a lingua franca for the digital economy, built on open-source protocols, and interoperable, modular, and scalable architectures. This will surely result in a degree of commoditization, he argued. But such commoditization is imperative. “If we don’t commoditize, your competitors will.” This singular sentence has served as the prompt for this piece. What role, after all, will commoditization play in the digital commerce industry? And how will it impact businesses’ profitability?
Commoditization refers to the conversion of a business offering or product with unique, distinguishable characteristics, and possibly even elements of proprietary value, to one that is essentially interchangeable with others of the same type. Of late, there has been a growing chorus of concern around businesses’ ability to create and sustain profits when building on, or competing alongside, open-source DPG driven solutions. Much of the brouhaha has been around the UPI and its expected impact on the revenue potential of digital payment applications. The underlying fear is that democratisation and access enabled by DPGs can lead to industry-wide commoditization which could render value creation and product differentiation difficult, if not impossible. This could, in turn, limit margins and stifle growth.
As mentioned earlier, a certain degree of commoditization is inevitable when businesses start building for the same stakeholders digitally. But does commoditization necessarily lead to attractive profits vanishing across the value chain? Or do they merely shift over time? And should commoditization in a value chain be seen as being diametrically opposed to value chain integration?
In most value chains, modular and commoditized architectures often simultaneously coexist with more integrated or interdependent ones. Taken together, they constitute a continuum rather than a strict binary. They work in tandem to optimise the weakest link in the chain- the aspects of the product which are as yet not good enough to satisfy consumer demands for improved functionality, low latency, and high reliability. Attractive profits are thus usually contingent on the nature and extent of proprietary value add, attributable to a large degree, of course, to interdependent architectures. Businesses tend to prefer building such architectures in-house, deploying proprietary technologies and expertise with an aim to achieve product differentiation by leveraging their existing competitive advantages. The likes of UPI and ONDC may not give businesses a lot of room for manoeuvrability in this regard by democratising the underlying infrastructure and laying down the technological rails for all to use. But again, does that mean that pursuit of attractive profits will prove to be a mirage? Most certainly not.
As the remainder of this post will show, DPGs can potentially make proprietary value, and correspondingly the associated profits, shift to a different stage in the value chain but attractive profits are conserved. In fact, the swell of inclusive, and accessible innovation enabled by DPGs such as ONDC will lead to a massive net increase in revenue and profit numbers for the industry at large. This network has a high likelihood of opening floodgates of opportunity for an aspirational class of merchants and service providers who have up until now been denied entry to various rent-seeking, “walled garden” platforms making hay out of India’s astounding digital growth story. The normative contract for DPGs in India is underpinned by tenets emphasising democratisation, equitable access, promotion of autonomy, sustainable and inclusive wealth creation, and a broadening of the community of beneficiaries of India’s ongoing digital revolution.
Clayton Christensen—author and former professor most famous for developing the concept of disruptive innovation—has done some of the most fascinating work on how profits shift across a value chain over a period of time. Much of what has been conveyed in this paragraph as well as the previous one come from his book with Michael Raynor, The Innovator’s Solution. He argues that once proprietary, interdependent architectures undergo disintegration and eventually become commoditized—mostly on account of businesses responding to altered consumer preferences for speed, convenience, or lower power usage rather than continued functional improvements—attractive profits do not just disappear, they merely shift to a different stage in the value chain. Christensen christened this the law of conservation of attractive profits: “in the value chain there is a requisite juxtaposition of modular and interdependent architectures, and of reciprocal processes of commoditization and de-commoditization, that exists in order to optimize the performance of what is not good enough. The law states that when modularity and commoditization cause attractive profits to disappear at one stage in the value chain, the opportunity to earn attractive profits with proprietary products will usually emerge at an adjacent stage” (The Innovator’s Solution).”
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