Ideonomics: Turning Ideas into Economy: November 2013

Startup Asia is always a good event to attend, especially the latest one when I see the attendance growing, the overseas visitors expanding and there are many new faces I met in the event. By having a good conversation with friends here and there, I would take a risk to predict the Indonesia Internet landscape in 2015. Many of the information I heard and found can't be confirmed or disclosed, and I make these notes for myself as an investor, to write down my personal thinking and gut feeling, so read this at your own risk.

The Consumer Internet Has Finally Arrived

Various studies projecting the Indonesia Internet users in 2013 will reach about 70 - 75 million users and it will grow to 90 - 95 million users in 2015. This is already more than 30% of the Indonesian population. True number of Internet users is difficult to calculate since one person can have multiple access to the Internet through various devices. But this doesn't really matter. In other countries, this 'mainstream' adoption of Internet is the most crucial factor of the consumerization of Internet. This means Internet will become ubiquitous like electricity and water. You simply want to 'connect' as this has become your basic needs. The Internet is no longer for the early adopter, it's for everyone!

And when everyone have an access to the Internet, there will be a change of behavior, people will use Internet for everything. Internet was used for communication, then social media. Now with the mainstream adoption, the shopping behavior will change; people will shop online more and more. Companies will use the Internet for everything, from procurement, sourcing, operation, finance, distribution and many other functions.

My focus to invest is now the consumer Internet. Companies like Urbanesia that works like Yelp, is now becomes valuable since so many users need to access a localize information. This will be followed by local social media like PicMix and others. The rest of the 2.0 model like AirBnB, Kickstarter, Uber might see its first incarnation in Indonesia as Internet users grow so much. The solution might come in various model, the one that suitable to solve local problems.

Infrastructure Challenge: When Telco Has Too Much Profit

This growth will face its biggest challenge by Indonesian lack of infrastructure investment. Telkomsel revenue in 2012 was IDR 54.5 Trillion and IDR 30.6 Trillion profit. This is more than 56% profit. Despite its commitment to invest on the infrastructure, this capital expenditure consider low for Indonesia that has a strong needs for broadband connectivity. We need a bigger investment for the infrastructure. Indosat that is owned by Ooredoo and XL that is owned by Axiata is mostly foreign companies. So they don't have benefit to invest in infrastructure.

Telkom as the fixed line provider targeting 1 million hotspot for Wifi. Branded as WifiID, these hotspots are aimed as new advertising channels. It still less than 100 thousands hotspot installed as of now.

It should be job of the state owned company to invest on infrastructure and lower the cost of broadband connectivity so there will be more people have an access to broadband. Like what happen in Jakarta traffic, we have seen it in our mobile connectivity. Indonesia lack of investment in the infrastructure will be the most drawback of the Internet growth.

The Indonesia Digital Media Landscape: Google, Portal and the Media Giant

In 2012 from USD 6.2 Billion in Indonesia advertising spending, digital media only take 2.2% of the advertising revenue. And worst, 60% was spent on Google and Youtube. Local media has yet to compete for its advertising share. TV group doing this by package the TV spending and digital media altogether. Local media like Kapanlagi turn into content marketing servicing clients such as Unilever for its owned media strategy in the case of Clear.co.id.

Portal war is not over yet; Yahoo is leading the portal media segment by having its own editorial team. PlasaMSN as Telkom and Microsoft digital media subsidiaries has seen a strong traffic growth but it didn't get attention and investment it deserves. Successful model by Microsoft and Yahoo in other countries are NineMSN and Yahoo7 in Australia. Local TVs and international portal players might replicate this model. Major portal players from Korea and China now are eyeing Indonesia and definitely consider to partner with local TVs that have massive contents in their arsenal.

By understanding the Indonesia media landscape, we can understand who is going to be the major digital media players. There's only a handful giant players in the Indonesia media landscape:

MNC Group owns RCTI, Global TV, MNC TV and Okezone.com
SCTV - Indosiar group own Liputan6.com
Trans Group owns Trans TV, Trans 7 and Detik.com
AnTV, TV One and Vivanews.com
Kompas Gramedia group owns Kompas print and Kompas.com
Jawa Pos group owns various print publication in East Java that is yet to embrace digital media

Beside these big groups, there are only two future digital media players that might challenge the big guys:

Kaskus, owned by Djarum Group
Kapanlagi group, affiliated with Trikomsel – Skybee

Kaskus has somewhat hard to be described as social media or classified ecommerce, but it has its place to Indonesian users. Kapanlagi group is the only independent media company at this moment.

With the consumerization of the Internet, the next competition will be in the vertical media and user generated content. On social media frontier, Indonesia is yet to find its own 'Mark Zuckerberg' and howegrown social media is yet to be born. If China has QQ and RenRen, why can't we?

Digital Content and Apps Distribution

Digital content is driven by hit. Our investment is TouchTen, a game company that is very good creating hit games one after another. This is quite rare. And they use channel like iTunes and Google Play to distribute the game. Other case study from Indonesia is Icon Pop Quiz, creating a successful quiz game franchise to global market that is also using the same channel. Most of the business model is the advertising, but this model has its own limit simply because the lifecycle of games is no more than 3 months. We are yet to see digital item business model that proves to be the most scalable business model for game. This model enable a longer lifecycle and even with only small percentage of users willing to pay, it still generate much more revenue to the publisher than advertising.

3G phone in Indonesia is still below 30% and focusing only for Indonesian market is not sizable enough. Kota Games is a mobile game portal focusing on feature phone has a pretty good adoption. This open possiblity for game and apps market.

The market leader for messenger in Indonesia is Blackberry, followed by Whatsapp. Line comes 3rd, then Wechat and Kakaotalk are next. Looking at this number, Indonesia is now the single most important market for Blackberry, but this company is not serious about Indonesia. They don't have a strong local team that localize their offering to the Indonesian. This is a shame.

Blackberry is valued at USD 4.7 Billion; I think company like Telkomsel have the budget to own controlling shares of this fledging company and make it an Indonesian innovative acquisition like what happen with Lenovo acquired IBM laptop business. Say by partnering or joint venture with handset maker from China like ZTE, then we can enjoy low cost blackberry below USD 10 price. Blackberry should become an Indonesian company!

For Indonesia, it's truly an opportunity to get the best intellectual property acquisition as well as acquiring the loyal users from its popular messenger. I can only hope that telco does think beyond its current business model. If not, then Ooredoo, Axiata or Singtel might want to consider this option as well since they already have its stake in Indonesian telco.

Line, Wechat and Kakaotalk now are very serious to set its foot in Indonesia. And Whatsapp as a western company is usually not serious about Indonesia. Looking into their marketing muscle and business model, I believe Line will become the winner eventually. If this is the case, Naver will definitely use Line as its adoption strategy for their other services.

Beside messenger as the gateway to content and apps, historically there will be a few apps portal that will last. iTunes and Google Play are two of them. Telco with its channel will have their own apps store. Then another player emerge base on their existing users from other services, in China and Korea this is driven by search.

Within the next 2 years we will see a big battle for apps portal.

The Ecommerce is Still a Darling

Fashion, gadget and electronic product, then health & beauty are the 3 biggest categories in ecommerce today. Sales traction for fashion ecommerce site like Zalora and Berrybenka has shown significant growth in 2012. Basically they fought its way to become offline retail giant like Matahari. Then site like Lazada and Blibli has fought its way to get an exclusive deal to sell gadget and electronic products that people know. They are willing to commit significant investment of marketing budget to offer the best deal to the customers. Tokopedia as the most visited marketplace today, got its major transaction from beauty products. It is able to facilitate transaction over 600 million IDR per day only from the health & beauty products.

What interest media the most is what defines the ecommerce trend in 2014. The answer is simple: Brand Goes Online! Every individual brand now sees that ecommerce is one of the most crucial channel for them. Each brand wants its own online store, either only as a catalogue or allows online transaction. This will drive the needs of services for online commerce for individual brand. That's why Singtel wants this ecommerce slice by bringing Shopify as a solution for small medium size online store.

In recent years, I see market adoption for vertical ecommerce market, especially in property. When looking for or selling properties, Rumah.com and Rumah123.com becomes the first destination, but we are yet to see more advance property site like Zillow.com or Trulia.com in Indonesia. Online ticketing is also a major vertical ecommerce used by mainstream market. Agoda is the leading airline and hotel online transaction, which recently challenged by Tiket.com. There are many other vertical ecommerce yet to fill in the market needs, like music ticket, automotive, etc.

Indonesia biggest challenge is distribution. To make the most of the economic of scale, fast moving consumer goods company separate itself with distribution and retail. Learning from US, Walmart excel to become the biggest retailer by becoming the best supply chain leader. Amazon is able to compete with Walmart by challenge its supply chain management. By integrating supply chain, distribution and ecommerce, Amazon now becomes the biggest online retailer on earth. So far there are no companies in Indonesia are able to provide this kind of efficient supply chain and distribution.

Alfamart and Indomaret, the biggest modern retail market now becomes the point of sales for train ticket. 7-Eleven goes as far as selling concert ticket in their store. KFC now is the biggest music distributor compare to any music store as they have more retail chain. Music publishers experimenting on using modern market to sell music CD as well.

The true leader will emerge as the one that is able to integrate supply chain as it's offering to the ecommerce players.

Digital Payment Solution: Who Is the Winner?

Even though total credit card in Indonesia is almost 20 millions, each person has at least 2 or 3 credit card and they used the credit card for discount card. So credit card will not gain massive traction to become the mainstream solution for digital payment.

In ecommerce, majority transaction is still done through bank transfer. So having account on BCA and Mandiri is the most crucial part for merchants as these 2 banks accounts for 80% of the Indonesian consumers. Both banks has launched their token payment for ecommerce. Companies like JNE, First Logistics and RPX are among the first to offer cash on delivery solution for ecommerce. COD is now the fastest payment solution adopted by ecommerce.

Indonesia is unique, more than 95% of our mobile phone users are using prepaid. PC multiplayer games in Indonesia like Point Blank, Ragnarok, etc. also happened by prepaid system. Basically the consumer habit is already there. A significant player is Indomog focusing on digital content ewallet beside the one provided by each of the big MMORPG players.

In late 2013, Mandiri launched its e-cash similar to CIMB Rekening Ponsel (mobile phone account). Mandiri e-cash has a strong value proposition for ecommerce as this payment allow us to pay anybody with cellphone even they don't have an account in Mandiri. The real benefit is that merchants can withdraw the money in any Mandiri ATM.

Telco also have similar payment solution, Telkomsel with T-cash, Indosat with Dompetku, XL with XL Tunai, but the telco solution still needs to work with bank to withdraw the money. So I believe telco model will work better for digital content rather than for ecommerce.

I believe that bank ewallet has the most chance to success even though there's no precedent of ewallet success for ecommerce.

Oriental Invasion & Western Civilization Comes in a Good Term

During 2 days in Startup Asia, Ideosource, venture capital that I founded with Edward Chamdani was part of the Startup Dating program, in which startups can meet investors. Within an hour, a VC can meet 12 startups for them to pitch their business. If there's a further interest, then the VC and startup can schedule to meet later. This is a rewarding process for both sides. Investors can see the idea, the company business model and meet the founders without having to spend so much time. The startups can meet with various investors without having to chase after their schedule. The chance of meeting the right partner is easier now.

What intriguing about the venture capitals are I see so many Japanese venture capitals taking part of this Startup Dating. It seems that Japanese model of investment is to pick the local founders and invest some smaller bet to see its traction before committing to a bigger investment. Beside the Japanese investors, the only US based investment company in the Startup Dating is 500 Startups lead by Dave McClure that visited Indonesia earlier this year.

This is different with Korean model of strategic investment. SK Telecom doing joint venture with Telkom to build Melon, the digital music service. Within 3 years, this company has turn into USD 7 million revenue. SK Planet also doing joint venture with XL Axiata to build their own ecommerce marketplace with USD 40 million investment. Chinese companies also prefer doing strategic investment like the joint venture between Tencent and MNC for WeChat apps.

One of the earliest investor in Indonesia tech scene is Tiger Global, the investor of Detik and now Dinomarket. Naspers, the investor behind Tokobagus and now defunct Multiply, has put so many stakes to bet on the Indonesian ecommerce. Last year Tokobagus spend more than USD 4 million in TV advertising not to mention out of home and digital advertising.

Most of Indonesian biggest companies are yet to put digital investment and bet on Indonesian startups. As Indonesian, this is sad that foreign investors believe Indonesian more than the local companies. The good thing of having venture capital model is that the Indonesian founders and startups keep the majority ownership by Indonesian.

By nature, Indonesian companies prefer to have its strategic investment since they already have their grip in the local market compare to foreign investors that prefer to lower the risk by having smaller bet in many companies. In corporate strategic investment, most startups invested will have a conflict of interest with the bigger corporate group since the group wants the startups to add value to the big group. That's why local startups have their most advantage when they get foreign investment since the investors will fully rely on the founders to scale the companies.

Indonesian should become the leading key players, not just the spectators. All the investment by foreign investors in Indonesia should be seen as a great opportunity for Indonesian entrepreneurs to reach its maximum potential.

Viva Diaspora

Last year I had a chance to visit Silicon Valley. It was a good trip to visit Google campus, Stanford that gives birth to many of the Internet companies like Sun, Yahoo and Google. What I enjoy the most was meeting with fellow Indonesian who is currently working at Yahoo, Flipboard, Google and many Internet companies.

When you see the history of Silicon Valley, many of the most successful Internet entrepreneurs comes from Paypal, Microsoft, Apple, Google and Facebook. Why is this so? The answer is because these people face a real problem and learn how to solve it in a scalable way.

In Indonesia, I have seen the similar trend; people from Detik, Plasa, Multiply, Koprol, Zalora are people with the previous Internet company experience that later starting their own companies. This is simply because they have proven experience.

The big wave of diaspora, all the Indonesian that is successfully living and work abroad, now are coming back to Indonesia to build the Indonesia Internet landscape. Kaskus, Disdus are among others.

I believe that the combination of Indonesian Diaspora and foreign investment will enable Indonesia Internet players to become global Internet players.

Going Public with USD$100 million in Indonesia: Media, Ecommerce or Payment?

When Trans Group acquiring Detik in 2011, it was valued at USD 60 million with USD 15 million revenue, the valuation is 4 times the revenue multiplier. Kaskus was rumored to have USD 30 million valuations when it was invested by Djarum group. With only USD 2 million revenue, it has 15 times revenue multiplier. This maybe base on lifetime value of Kaskus users that is more loyal than other media.

What will happen in 2015?

There will be at least one Internet company with the minimum size USD$100 million is going public!

Media that has a higher margin is naturally the first to reach such valuation. If we use 8 - 12 times revenue multiplier, the media companies need only USD 8 - 12.5 million revenue to reach that valuation. Detik, Kompas, Kaskus, Kapanlagi and Vivanews are all in those bracket. If we use EBITDA multiplier instead of revenue multiplier, Indonesia historically value companies with 14 times EBITDA. To reach USD 100 million valuation, companies need to have USD 20 million revenue and USD 7 million profit, still achievable.

Retail ecommerce that has bigger margin then is naturally the next contender to go public as the category matures and they need a big investment to build its supply chain. Digital payment that has more margins is also the next candidate to go public. Both ecommerce and digital payment that is focusing on content are capable to deliver 25% margin and 15% profits. With the same EBITDA multiplier, to reach USD 100 million valuation, each company need USD 47 million gross merchandise or transaction value.

If the investment market believe in Internet, the 14 times multiplier gets bigger to 20 to 30 times multiplier, then smaller companies are able to go public faster or the mature companies valued higher. In other way, it will be a winning formula for Internet companies.

I have high hopes for Indonesia Internet scene, so let's see who is the first company going public is in 2015: Media, Ecommerce or Payment company.