Do you remember when back in the 90’s every Tom, Dick and Harry was becoming an email provider and me-too’s like Lycos, Excite and others were getting multi-billion dollar valuations?
Everybody thought e-mail was the next BIG thing and that everybody remotely associated with it would end up as a billionaire.
And certainly, e-mail was and still is revolutionary.
More so than e-Commerce will ever be.
After all, who wants to go back to snail mail? Certainly not me!
Then came the Dot Com Bubble Burst of 2000-2001.
And companies like Lycos that were once valued at $25 Billion or even higher ended up getting acquired at 1/100th or even 1/1000th their peak valuation.
This is what happened to the successful ones of yesteryears (the likes of Flipkart and Zomato today).
The so-so ones (especially those that were massively funded) like today’s SnapDeal or Ola died quickly but painfully.
By the way, I know that neither Zomato or Ola is in e-Commerce, however, that isn’t the point I’m making.
Fast forward to 2016
Did e-mail prove to be revolutionary?
But how many players do we have today?
Just ONE, Alphabet/Google.
If you think companies like Yahoo or Hotmail are making their major chunk of cash through free e-mail, you’re highly mistaken.
And surprisingly, even Google isn’t making any money through its free e-mail. The ads basically subsidise their losses and help convert free users into paid ones. That’s it!
Sure. Google does make some money through Google Apps. But then that isn’t free email. They don’t need to provide Gmail for free anymore, Google Apps would do just fine without free Gmail as well.
So why does Google still provide Gmail for free?
Because Google studies your e-mail content and uses it to target ads to you.
Gmail is used as a loss leader for two purposes:
One, to get data that can be used in Adwords where Google actually makes most of its money.
Two, to up-sell Google Apps to corporates to make more money on the side.
Essentially, free email didn’t really allow anybody to get rich directly.
It became popular.
But. Everybody lost.
Google came out on the top because it had a core business model that worked around providing e-mail. Rather than a model that focused on providing free e-mail and nothing more.
So. Where does e-Commerce come in?
The only truly profitable e-Commerce companies in the world are eBay, Alibaba and others who work on the same lines.
They don’t sell stuff to you.
They don’t subsidise stuff.
eBay doesn’t even consider shipping their primary responsibility.
They don’t personally engage in the selling process.
What do they do?
They provide a marketplace where they get a cut on every single transaction. They don’t subsidise the prices of their sellers. They focus on customer service.
And that’s it!
Even Amazon is yet to make a profit from its e-Commerce division if their tech divisions are put aside. They make money on stuff apart from e-Commerce.
And most of the big names in Global e-Commerce like Rakuten, Overstock.com etc are barely getting by.
They have good revenue.
But not very high margins.
Most of them have a 0.5-2% margin on revenue.
This is worse than Walmart.
The only ones that defy this are smaller niche companies that aren’t in the big league.
Even if Flipkart does have $15 Billion in revenue 10 years into the future, their Profit After Tax is likely going to be like $200 Million or so, take or give.
For such a mature e-Commerce company the P/E will be 10 tops.
So Flipkart will probably have a $2 Billion Market Cap 10 years into the future if things go as currently planned.
Not even inflation adjusted!
By the way, Flipkart had a little under $1.5 Billion in gross sales in 2015 (GMV does NOT count).
I am not saying that there won’t be profitable players in e-Commerce.
But possibly there will NOT be many BIG players in a given country.
And the one or two BIG players may actually end up making from other stuff like e-Commerce Ads (like Amazon does), Big Data, selling stuff like memberships etc.
e-Commerce may end up as a zero or even negative sum game.
Of course, it is too early to say with 100% certainty. But this is the way I see the Global e-Commerce in the future.
I may be wrong. Only time will tell.
But I’d advise startup employees to get ready for more layoffs in the coming months. IMO over 80% of startup employees are likely to end up unemployed sometime in the next 2-3 years.
Don’t tell me I didn’t warn you, my friend! 🙂
Thank You & God Bless!
Founder & CEO