Semicon Industry – Between a rock and a hard place – The Editor

If one were to meet the ten odd start ups that the Indian Semiconductor Association (ISA) had short listed for their awards recently, it would be naïve not to notice that none of these companies are VC funded. These start ups are providing high end services or making products for exciting high growth sectors such as consumer electronics, the automobile industry, healthcare and the telecommunications industry. Then one would wonder why VCs or PEs are shy of this space?

We at Viedea figure that the problem is neither in the ideas nor is it in the realm of funding. The problem the way we see it is in two areas; firstly semiconductor companies, by nature of their work, will not be able to scale up their revenues in quick time because their work is too focused on a particular industry. The R&D itself takes three years to deliver a quality chip or IP and it becomes difficult to predict success of the product in the market. Secondly there are not many Indian products that sell on a very large scale, currently, to provide a ready market for the semiconductor industry.

The eco-system of semiconductors is filled with chip manufacturers (fabless), Core IP designs on chips, Electronic Design Automation (EDA) tool providers, embedded systems companies, OEM’s and finally product brands like Apple, Samsung and the lot. No one knows the size of the semiconductor industry in India because the word semiconductor encompasses a large space and is evolving. Yes everyone is betting big on solar, but anyone who has seen the fab-city in Hyderabad will see how nothing has come out of it.

Let us come down to an example, six or seven years ago a Bangalore based company called Smart Yantra, which developed software IP in the MPEG space, was bought over by US based Genesis Microship Ltd for US $ 6 million, almost 6 times Smart Yantra’s revenue. While the deal was reasonable for a company whose revenues were of that size, the industry in India will typically see more acquisitions than fund raising for at least the next 5 years. Many of these Indian start ups have been riding on the recession wave that hit USA and Europe. There are a few players that are betting big on making their own chips and are servicing the consumer electronic space in the West. The problem is whether these guys can reach the critical mass in production and revenues even with the help of funding. This is highly unlikely as there are many such companies across the world, especially in China, where IP development is outsourced to. Unless there is demand for home grown products, but is a risky affair because of the nature of high volume low margin business in Indian retail. This typically means these companies will be bought out by bigger fish such as a TI or ARM or Analog Devices. We predict that not many will generate great buy out stories like Sling Media. Remember them! This company developed the software and hardware for ‘placeshifting’ media was bought over by Echostar for 13 times its revenues’, the deal size was estimated to be $ 380 million.

Developing core IP has always been the strength of our entrepreneurs and yes they can venture in to making their own products because there is a need for Indian based problems such as healthcare, telecommunications and energy solutions. May be this will be big in 10 years. However from the experience of Tejas Networks, which realizes now, that 10 years after its operations its revenues are yet to touch Rs 1000 crore. It is now actively seeking dollar revenues to increase top line. We at Viedea expect that raising money will be difficult for semiconductor companies, but the space will see a lot of M&A activity going forward.

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Technology’s Rural Bricks – Aravind G R

If the multi-layered supply chain for food is the reason why we have such high inflation, then the cost of setting up a successful financial supply chain in rural India is an even harder nut to crack because it is expensive to the consumer. We at Viedea believe that a technology based retail franchisee model, which sells multiple products and services of India’s financial institutions, to be the answer. But what kind of technology and distribution model works best? This is a million dollar question for a country where only half of the rural population has bank accounts.

Several industries have evolved several models to reach the elusive villager. We have listed some of them below and have tried to assess them on their ability to become an efficient financial supply chain.

Traditional channels

  • Consumer goods and telecom: These two categories, by far have the highest penetration. However, all ‘products’ pass through a multi ‘point’ distribution system and each ‘point’ needs investment and inventory management. Such a distribution system is too expensive for large scale financial transactions. For example, there is a 5 percent service charge on mobile recharges
  • Banks: Public sector banks, even with government pressures have not been able to reach below the taluk level. The same is the case for regional rural banks and co-operative banks.
  • Banking Correspondents (BCs): The RBI introduced the no-frills account designed specifically for rural masses, it is also mulling the idea of allowing petrol pumps, fair price shops, grocers, PCOs- including the government sanctioned Common Service Centre’s (CSCs)- to function as BCs. There are more than 30 million no-frills accounts that have been opened. However, a recent study found that only 10 percent of such accounts were functioning.
  • Micro Finance Institutions: Even though these institutions and groups have the reach, they are finding it hard to handle cash in remote areas because of theft and mismanagement.

Technology channels

  • Mobile payment: The largest mobile payment company, which has raised tens of millions over several rounds of PE funding, has so for been able to tie up with just one private sector bank. The promise that mobile banking provides is unmatched by any other form of technology used for financial inclusion. The mantra for mobile payment companies seems to be to build the user base (number of subscribers), but users are waiting for mobile companies to provide them access to multiple financial services before biting the bullet.
  • Electronic payment: It has limited takers in rural India owing to a myriad of factors like lack of connectivity and consistent power supply. Nevertheless, this network has been able to integrate multiple service and product vendors.
  • Combination of Brick, Tech and People (BTP): Companies like FINO are taking technology and cash to the door step of the villager. FINO claims to have reached over 15 million unbanked rural, urban savers and borrowers. However, the reliance on the cumbersome banking system seems to be the only negative factor in this model, since the end user still needs to have an ‘account’ with a financial service provider.

The right combination

The BTP model, is the most likely to work even without relying entirely on the banking system. The key is to place technology in the hands of people who reach the ‘unbanked’ rather than hoping that technology will directly reach the masses. This same person can be trained to sell multiple financial products including loans, insurance and mutual funds. The model may involve heavy investment in setting up ‘channels’ across thousands of locations to gain enough scale to attract financial institutions. Such retail franchisee system, where the franchisee shares the commission, has been a model that some companies have adapted. We also expect electronic or mobile payment companies, who have already partnered with several financial service providers to acquire or partner with BC’s or any such company that has setup distribution points in ‘unbanked’ areas. It is time for us to wait and watch whether such models turn out to be winners.

Show me the money – Uday Disley

For all those who have been hooked to your television sets to watch the FIFA World CUP, you probably missed one team playing all along. Take a guess! It is team Mahindra Satyam. They seem to have done a great job, four years into the contract, all culminating in the delivery of a world class output. Picture this, 3.14 Million tickets have been sold in this world cup; the company is tracking $1 billion worth of assets, managing viewership across 214 countries through 317 channels, managing 150,000 volunteers and 250,000 accreditations. Apart from all this, the logistics of movement of players and officials too have been tracked by Mahindra Satyam. In other words they have done what no other Indian company has done before and that too on this scale. Does this mean something for those of us in the investment banking community who follow the sports industry very closely?

If one were to look at investments in sports in India, the complaint has always been about the lack of opportunities. This is where the Mahindras have come into their own and have cashed in where the long tail wagged. We at Viedea firmly believe that the money in sports is clearly in the long value chain that large sporting formats offer. So let’s briefly summarize the main elements of the value chain – sponsorship, marketing, television, digital and technology, logistics, stadiums, teams and athlete rights. The long tail flows from these elements, for example marketing would include advertising, on field and off field promotions, event day promotions and marketing arrangements. There are not many of these large sporting formats (or franchise to use a more familiar term) that are of the size of the FIFA world cup. For arguments sake let us say that there is also the Olympics, European professional football leagues, American professional sports leagues, the F1, ATP tours, the PGA tour and of course our very own IPL, which are of considerable size. The entire value chain leading to these event centric sports is where we believe that the real money is for the sports industry both domestically and internationally.

It would be interesting to note that one of the companies that we interact with analyses sports events for its marketing clients. So you have about 150 odd people sitting in Bangalore analyzing how many times Coca Cola’s logo (example) flashes on television screens through out the FIFA world cup. Back home in Bangalore, DNA Networks which manages the ticketing, ground staff and promotional events for the IPL is another example of a support services company raking in the ‘moolah’ being associated with a successful sports property.

There are many more examples of such support service providers in India, who have the potential to cater to opportunities thrown by the entire sports value chain. The question that we need to ask is whether these companies are doing enough to reach out to large sporting formats abroad. Also, are there investors out there who believe that Indian companies can scale up to match expectations of a world class sports property?

With Mahindra Satyam leading the way, we believe that there will be many more Indian companies (if not Indian sportspersons) winning accolades in the next Olympics.

Making Moolah from Social Media – Alap Bharadwaj & Deepak Srinath

For all the hype surrounding social media and its unique ability to reach a wide range of users, the question still remains: does using networks like Facebook and Twitter help brands directly increase sales? A survey by blogworks.in and exchange4media highlights two very interesting facts – firstly over 80 percent of respondents felt that marketers either do not have a good understanding or only have a cursory understanding of social media and secondly almost 50 percent of respondents felt that agencies either have no understanding or only a cursory understanding of social media.

A lot of consumer brands in India have taken to spending a cut of their ad budgets on developing communities, games, activities and apps on various networks. From a numerical standpoint, the sheer number of signups and community members’ that brands boast of having captures some success. But there is no methodology or mechanism to track whether these users are in fact getting converted into sales. Digital agencies specializing in social media marketing have seen an ‘uptick’ in their revenues. However, they will be soon be asked to demonstrate the relation between spend on social media and sales of the product being promoted. According to the CEO of a top digital agency, “unless agencies can demonstrate a minimum monetization of 15-20 percent through social media, brands will start questioning their spend on it”.

We believe that investing in social media is a great tool for brands to increase their awareness, and absolutely necessary for ‘reputation management’ given the proliferation of blogs and online reviews with internet users (especially those in the younger age   bracket). However, driving sales by using this channel will require methods more sophisticated than just setting up ‘community’ pages. The digital medium needs to be leveraged in such a way that it converges its strengths like interactivity while enabling a dispersal of product information and a tracking methodology that can show a brand its social media RoI. There is clearly a gap between the intentions of marketers and the results that social media delivers to them. It might just be a while before we actually see the “massive potential” of social media marketing that everyone keeps talking about. Moreover, we also sense a huge opportunity of establishing market leadership for a digital agency which cracks the analytics and monetization aspect of social media marketing.

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