Daybreak - What happens if we kill Swiggy, Zomato, Ola, and Uber?

Episode Date: June 1, 2023

When the govt launched Open Network for Digital Commerce (ONDC), the idea was to build the world largest e-commerce platform to check the monopoly of giants like Amazon and Flipkart. You could think of ONDC as the UPI of e-commerce. From ride-sharing and food delivery, to groceries, the platform can be used to buy and sell anything. Lately, ONDC has been doing some interesting things with pricing. For example, someone ordered food on it for a price that was 45% lower than Swiggy. This, obviously, got thinking. Could ONDC kill the likes of Swiggy and Zomato and others?While there is no exact answer to that because of a bunch of factors, what made us more curious was this: Do we want ONDC to win? And if it does then what could be the consequences?Tune in to find out.Recommended reading: Why everyone wants a piece of India’s open e-commerce platform  Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production. Sita and I are still reeling from the intensity of our first studio recording.

Intermission launches on March 23rd. To get an alert as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcasts or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. When the government launched O&C or the Open Network for Digital Commerce, the idea was to build the world's largest e-commerce platform to kill the monopoly of the giants, like Flipkart and Amazon and the likes.

You could think of it as the UPI for e-commerce. Anyone selling anything can be on ONDC, from ride sharing and food delivery to groceries and more. Now, what's making ONDC stand out lately is the way that it's been playing with pricing. Let me give you an example. It was reported by Money Control a couple of weeks ago, and I'm quoting,

when Ankhid Prakash, the founder of Eritic, an automation platform ordered a paneer burger and Pepsi combo from Indiana Burgers on Ptm, which is a seller app on ONDC, he found that it was priced about 45% cheaper than what Swiggy was charging for the same. So like Prakash, other users began comparing prices across platforms, creating a lot of buzz on social media, which in turn pushed up ONDC's daily order volumes by 2.5 times, from 10,000 to 25,000 orders in a span of a few days.

End quote. So after this, people began thinking of the obvious question. What if ONDC killed Zomato and Swigy? As of now, the two control 90% of India's $5 billion food delivery market. But that is not the question that we're going to be answering today because it depends on a lot of factors and quite honestly, it's not that interesting. Instead, today, the question that we're going to try an answer is this.

Do we want ONDC to win? And if it does win, what will be the consequences? Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nick Das Sharma, and I Don't Chase the News Cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. Today is Friday the 2nd of June. Remember some time ago on daybreak, I told you about Namayatri,

the auto-risha hailing app that was launched in Bangalore in Karnataka with the support of the state government. I spoke about how it was expected to disrupt the monopoly of Ola and Uber with its zero commission and no cancellation charges model. That is a whole different story. The reason I'm bringing up Namayatri today is because it is built on top of the top of of ONDC. Now, Namayatri has been doing something very interesting. Say, you're trying to book an auto-risha with Nola. Once the search fails or you cancel it after waiting as long as your patience

lets you, the app sends you a question. It says, search again with a tip. And the subtext says, and I'm quoting, tip might help increase the chance of getting a ride, helps the driver during peak hours compensate for empty return trips, end quote. So you see, just like with food delivery, ONDC is also playing with pricing in ride-hailing services. So when Namayatri introduced tips, they change something very fundamental in ride-sharing. The Ken CEO, Praveen Gopalakrishnan,

explained it beautifully in an edition of his newsletter, The NutGraph. You see, right-sharing is. essentially the business of matching people who want rides to cabs that won't riders, a two-sided network. So naturally, there are times when more people are looking for cabs, but there are not enough cabs to serve all of them. There's more demand and not enough supply. So it has to be corrected. So how can this be fixed? Basically, there are two ways in which networks fix this problem. The first is to create a floor. Let me explain what that means. During peak hours or in certain areas where demand is more than supply, both Uber

and Ola apply surge charging. And boy how we hate it. But Praveen says that surge charging or pricing is vastly misunderstood. We think of it simply as an option available only for people who can afford it, rich people. But if you look at it from an economic standpoint, the reality is that everyone benefits from the surge pricing, even if they don't. realize it. And here's how it works. If you take everyone waiting for a fixed number of cabs and enforce a fixed price on all of them, everybody is worse of. Because there is a lack of supply. You will have to allocate cabs to people randomly. And on an average, this will increase the wait time for everyone. But the truth is that many of the people waiting will be willing to

pay more to skip the line. And once the price goes up, it increases the rate. It increases the the number of available cabs, and this in turn brings down prices again. And that reduces the waiting time for everyone. So the market corrects itself, and everyone on an average is better off. And if you think about it, what has really happened is that the rich have paid more to subsidize those who pay less until the supply matches the demand. So in a two-sided network, this surge pricing mechanism, is called a floor. It is a minimum amount that needs to be paid in order to match demand and supply.

Floors are set all the time, but they are super useful when supply is constrained. Most two-sided networks use floors. But there is also another way to fix the demand supply problem. And that is by creating an auction. This is exactly what Namayatri has been doing with tips. You open the app, you bid, others do the same, the auto driver looks at all the bids and he picks a winner. That is how the price is set. But still, the number of riders who successfully find an auto on Nama Yatri right now is somewhere around 20%, which honestly is quite low. So what happens when you replace floors with an auction in a supply-constrained market? Stay tuned to find out.

Praveen called up Sriansar Dash, an expert in transportation and auctions, to find out what happens when you replace surge pricing with auctions in a market that has a supply problem. Dash thought about it and said that when demand is more than supply, it does not matter whether you do surge pricing or an auction. The market more or less will arrive at the same outcome and allocation of resources. But there is a condition. He said, and I'm quoting, the key is whether there is enough density or liquidity in the market.

Uber and Ola can surge because they have a bunch of historical data that allows them to set granular floors with high confidence. Density also allows them to refresh faster if they have set a bad floor so that the opportunity cost of that is not high. With some of the new players, they do not have this data or refresh speed and face high chances of wrong floors. At the same time, they want the surge functionality to make sure that the supply stays. The easiest way is to ask users to bid. End quote.

In other words, Dash was basically saying that Namayatri chose to conduct an auction because it does not have the data that Uber and Ola do. Coming up next, another example of an experiment in China that gives us a lot of insight into the auction method, whether it is a good idea or not. Stay tuned. A few years ago in China, DD Dash, their equivalent of Uber, conducted an experiment. When the demand was high, instead of introducing surge pricing, they asked users to place bits. But very quickly, the Chinese government got involved. and put an end to this experiment. Turns out, the problem with auctions is that you may end up at the same end point as you

would with floors or surge pricing, just like Dash had explained to us. But the road you take to get there is the worst option out of the two. It is much less transparent, it incentivizes coalitions and it is vulnerable to exploitation. In many ways, these are the same problems that are popping up with ONDC's food delivery. But in the opposite direction. In food delivery, the supply is heavy and there were discounts introduced to create a demand. Except nobody knew who funded these discounts, how they were done and there was no third party involved.

And once the discounts were removed, the orders fell back. ONDC is already taking steps to deal with coalitions that may be formed due to artificially raised demand. This is the world that we will live in if ONDC wins. Regulations, price caps, limits on incentives and sublimits, coalitions, negotiations and no transparency. Not like Zomato and Swiggy are perfect companies, but it is worth considering what the alternatives actually look like.

A good place to see the effect of these coalitions is Namayatri itself. The reason why Namayatri is struggling to scale is quite simple. It is because auto drivers, at least in Bangal, already have an informal surge pricing that they resort to when demand goes up and supply is constrained. And we've all seen what they do. They simply switch off the app and quote inflated prices when you stop them on the road.

This is far more efficient than, bids and auctions. Bids may sound like a cool idea, but they are inefficient for everyone. So what then is the real difference between auctions and floors? Dash explained it to us. He told us that in the bidding system, the counter starts from scratch every time block. No information is carried over from the past trends on that particular route and time block. Basically, it is price discovery from scratch. The only way to push it is to use the pass to set some floors. And he believes that because of this, the market making will be inefficient for both riders and drivers.

And this finally brings us to the most important difference between the two systems. The bid system forces users to think about things like their value and their maximum price. And over time, most users will end up hating it for this very reason rather than the economics of it. In Dash's own words, because users, as far as I know, are lazy. Daybreak is produced from the Newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras.

Head to the ken.com and click on the red subscribe button on the top of the website. I am Snigda Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.