Killing them Softly
Paytm may soon have a monopoly in the booming digital wallet space. The impending sale of FreeCharge at the behest of SoftBank has something to do with it
The news was tucked away in an inconspicuous corner of the Times of India. It had the usual congratulatory and aspirational tone that one has come to associate with lifestyle magazines. Paytm’s Vijay Shekhar Sharma had just paid a substantial amount to buy a Rs 82 crore bungalow in Lutyens’ Delhi. Fresh on the heels of entering the Forbes billionaire list, Sharma announced his entry into the exclusive gated community that is Lutyens’ Delhi by buying a property that the hoi polloi who use his company’s app would never dream of owning.
Paytm owes its success not only to the fact that demonetisation came around at the right time to unlock a user base that previously did not exist but also to the fact that it has no stiff competition. Paytm does close to five million transactions a day. Its nearest competitor, FreeCharge, does a measly 3,50,000. Like a predator at the top of the food chain, the Noida-based company has grown and grown in size.
The underperformance of FreeCharge in the mobile wallet space has less to do with Paytm and more to do with the fetid Darwinian game being played by their common investor: SoftBank. SoftBank, led by one of the richest men in Japan, Masayoshi Son, has plowed in around $2 billion (Rs13,500 crore) in India over the last 18 months, making it one of the largest investors in the country’s startup ecosystem.
To analyse why FreeCharge is languishing it may be useful to remember that FreeCharge was not always the laggard. In 2015, Snapdeal paid out nearly 400 million dollars out of which the cash component was 80 million dollars to acquire FreeCharge. For Snapdeal the intention was to counter Flipkart’s move to launch its own payments app called PhonePe. Strategically this made sense. FreeCharge came with a trove of payment data of the estimated 10 million users on its platform. Besides, buyers were transacting on mobile devices in ever greater numbers, meaning that FreeCharge users become potential customers for Snapdeal. The deal made perfect sense. In 2016 the valuation for FreeCharge was close to $900 million. A year later, its valuation is $70 million.
FreeCharge never grew in size because at critical junctures its purse-strings were tightened. While Paytm built use cases and partnered with cash cows like Uber and Cafe Coffee Day, FreeCharge spent its resources betting on a feature that never took off. Trying to emulate the Chinese chat app Wechat, FreeCharge baked in social pay features within a chat function. The idea was that people would pay people while chatting with them. The company went on a media blitzkrieg to promote the feature. The end results were disappointing. Transactions on the social pay feature amounted to only around Rs 5,000 a day. Peer to peer payments have never amounted to much in the Indian digital landscape and this experiment just reinforced the scepticism around the same.
FreeCharge was further hamstrung when SoftBank turned down an offer from Paypal. The underlying reason was that SoftBank had already bet big on Paytm and ceding control to Paypal would mean that Paytm would end up having a fierce competitor with deep pockets. Jasper Infotech, the parent company of both Snapdeal and FreeCharge, tried to deal with this setback by trying to sell the company to PayU. PayU is part of South Africa-based internet and media conglomerate Naspers, which is one of the largest technology investors in the world. Jasper did a lot of harrumphing, at the end of which FreeCharge remained unsold. Starved of critical funds it needed to compete with Paytm, the digital wallet went through the motions. Simultaneously, its valuation kept falling faster than the Challenger shuttle did when it was crashing to Earth.
As things stand now, Paytm is looking to acquire the Bengaluru-based startup at a cut price deal. Paytm has reportedly signed a non-exclusive term sheet to acquire FreeCharge in an all-cash deal from Snapdeal. If the deal goes through, it would be pegged at $45 million to $90 million. What this merger would do is essentially take one key competitor out of the market and lead to market consolidation. A scenario which is a far cry from what would have happened if Paypal had entered the Indian digital wallet scene. From an ideal vantage point, it should be Flipkart who should have swooped in to scoop up FreeCharge along with Snapdeal. According to a leading investor, the deal makes more sense for Flipkart, “Flipkart should have been more interested in FreeCharge than Snapdeal, which will anyway not add any value to Flipkart. Getting one of the top three consumer wallet companies onboard as part of the deal (Snapdeal-Flipkart merger) is something the top e-commerce company should have been eyeing as their PhonePe has not been able to get the kind of brand visibility that FreeCharge has in the market.” This view finds echo in various business journals. Flipkart has been struggling to get traction for PhonePe despite spending a lot of money on it. Having a solid digital wallet option would enable it to move goods even faster than it is already doing. All that will happen with Paytm acquiring FreeCharge is that a virtual monopoly will be born in the digital wallet space. Not to mention the fact that SoftBank would get a huge share of the equity pie in the consolidated firm. SoftBank has been increasing its stranglehold on the Indian internet space. It has stakes in Ola, Oyo Rooms, Housing.com, Grofers and InMobi. It is behind the upcoming Flipkart-Snapdeal merger. It has also orchestrated the consolidation of Big Basket and Grofers in the hyperlocal delivery space. Now, with the Freecharge sale, it would ensure that it has significant equity in some of the most valuable internet properties in the country. And it would have acquired this dominance in a way Niccolo Machiavelli would have been proud of.