Issue#3. Asian Tech Woes, App Spending Rifts & Metaverse Commerce
Asian tech companies grapple with profitability, app markets show stark regional variances, and European consumers approach the metaverse with skepticism.
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Asian Tech Giants Continue to Lose Money
GoTo, Grab, and Sea Ltd. are the leading digital conglomerates in Southeast Asia. GoTo dominates Indonesia’s digital economy. It's the result of a merger between Gojek, a major ride-hailing service, and the e-commerce platform Tokopedia. GoTo commands 50% of Indonesia’s ride-hailing market (with the other half going to Grab), 35% of the e-commerce market, and 43% of the food delivery market (with Grab closely following with a 49% share). Meanwhile, Grab holds 54% of the food delivery market in Southeast Asia and 75% of the ride-hailing market. While Sea Ltd. leads in the entertainment sector, its subsidiary Shopee boasts over half of the e-commerce market in key Southeast Asian regions.
However, none of these companies have achieved profitability. In 2022, GoTo reported losses of $2.6 billion, Grab was down $1.7 billion, and Sea Ltd. faced a deficit of $1.6 billion. It's quite a situation, especially considering these companies have been active for over a decade and largely influence the region’s digital economy.
And it’s not like they aren’t growing. Each platform's Gross Merchandise Value (GMV) has grown by more than 26% CAGR in the past three years. GoTo's losses continue to grow; Sea Ltd.’s losses have decreased since 2021 but are still higher than 2020; and Grab's losses, while lessening, are still a hefty $1.7 billion.
The reasons why these companies sustain such losses are varied: some stem from growing pains, some might be due to management issues, and some are certainly geography-related. Let’s zero in on that last point. Five key factors play a significant role in the profitability struggles of these digital conglomerates.
1. Dispersed market. As Bloomberg highlighted, Southeast Asia doesn't have China’s cohesion or the US’s spending power (maybe Europe is a more fitting comparison, but that's another story). This restricts companies’ ability to achieve economies of scale. Even basic language barriers demand additional personnel for operations management. Generally, entering new markets means pouring more capital into marketing, legalities, infrastructure, etc. Different markets also bring different competitors, pushing companies to adapt their strategies depending on the country.
2. Network effects limited to a single country. This ties back to the first point. Aggregators thrive on network effects: the more customers a platform can offer suppliers, the more suppliers join, which in turn attracts even more customers. These effects create an unparalleled business moat – just think of giants like Google or Meta. However, establishing such effects in one country is challenging, let alone across multiple nations, especially when the service is local, like taxi rides or food deliveries.
3. Limited digital advertising spend. Southeast Asian companies aren't massive advertisers. Sure, part of this is due to the limited spending power of consumers, but there's more to it. For instance, Indonesia contributes 1.3% to the global GDP and Thailand 0.5%. However, their shares in the global digital advertising market stand at just 0.4% and 0.2% respectively. Why's this an issue? Because digital advertising is a scalable business with high margins. Just look at Amazon.
4. Regulatory challenges. Every business grapples with regulations, but Southeast Asia isn't exactly the poster child for clear and simple rules, as indicated by its Doing Business rankings. Numerous issues arise, like Indonesia’s move to reduce the commissions companies can charge drivers from 20% to 15%. Or consider the tax law intricacies that led to Grab facing a $25 million fine in the Philippines.
5. Fragmented supply. Southeast Asia has a proliferation of microstores, tiny street cafes, and restaurants. For context, Indonesia has 3.98 million grocery stores, while the US boasts about 1.07 million retail stores in total. This means companies face a greater onboarding challenge, and the value of any individual store or cafe diminishes since their small size limits their overall contribution to the platform.
Will the profitability situation get better? It might. But it's far from certain. New challenges could pop up anytime. For example, there might be more regulations on the horizon regarding independent contractors and their classification. Add political and economic instability to the mix, and the road ahead becomes even more challenging.
Downloading and Spending on Apps: Regional Discrepancies
The app economy has been thriving for some time. While there was a decline in 2022, app developers flourished from 2016 to 2021. During this period, consumer spending on apps grew at an annual rate of 24.4%. Over the next five years, the market is projected to grow by 12% annually, with app downloads increasing by 4.7%.
The broader picture does mask some regional differences:
North America: The region will experience the slowest growth in downloads (App Store at +7%, Google Play at -6%). However, strong spending habits persist (+134% on App Store and +78% on Google Play). Smartphone penetration in North America is at 84% and has virtually stopped growing. With both the US and Canada being among leaders in household disposable income, there's little room for download growth, but nothing much holds people back from spending on their preferred apps.
Europe: Here, growth in downloads is moderate (+26% for the App Store, +6% for Google Play), but revenue is anticipated to surge (+111% for the App Store, +54% for Google Play).
Middle East: Recognized as the most digitized region. According to Kepios reports, both the UAE and Saudi Arabia boast a 99% internet penetration rate, outpacing the US's 92% and Germany's 93%. People, on average, spend over 7.5 hours online, compared to less than 7 hours in most developed countries. In the UAE, there are more social media users than its actual population. Metrics like mobile payments and ecommerce spending on mobile outstrip those in Europe, signifying a digitally engaged population with a significant portion being wealthier than their European counterparts.
Asia: This region offers a unique scenario. Though it's projected to have moderate growth in downloads (+9% for the App Store and +41% for Google Play) and consumer spending (+54% for the App Store and +23% for Google Play), Asia's vast size makes rapid growth challenging. Additionally, the spending gap between Asia and the US/Europe is vast. In India and Indonesia the average revenue per download is $0.09 and $0.22, while in Germany it’s at $4.08 and in the US it’s at a crazy $10.74. That explains why the gap between downloads and revenue is much smaller in Asia. In Europe and North America, revenue is primarily driven by social media, which boasts a higher proportion of daily users. In contrast, shopping apps in Asia depend more on weekly users, fueling the region's growth in this sector.
Africa: Unlike Asia, Africa isn't a mature market, and spending power is restricted. Growth is expected in both downloads and revenue, but revenue won't significantly outstrip downloads. The region might still be in the early stages of app monetization, focusing first on building a user base and understanding their preferences.
Latin America: This region is projected to see the highest revenue growth (+159% for the App Store and +123% for Google Play). Latin Americans, especially Brazilians, use their mobile devices more than Germans use both PCs and smartphones combined. Coupled with a higher spending power than Asia or Africa, this boosts revenue per download and overall revenue.
Another noteworthy point: Even though 71% of the global populace uses Android, 67% of the revenue is driven by iOS. In almost every region, iOS consistently outpaces Android in revenue growth because its users tend to spend more.
Buying in the Metaverse
The hype surrounding the metaverse has died down a bit since its peak in late 2021, early 2022. But still, Walmart is working on metaverse experiences and Ernst & Young is publishing pieces on how to achieve success in the metaverse. Analysts from respected institutions are publishing some might say aggressive estimates of how large the metaverse economy could be, ranging from a mere $800 billion by 2024 to $5 trillion by 2030. To put it into perspective, the global automotive market is just over $2.5 trillion.
Although belief in the metaverse is fairly high with 77% of consumers globally believing that immersive experiences will change the way they shop, the purchase intent is lower. Purchase intent isn't the greatest metric in the world since we are pretty bad at predicting what our future self would do, but still.
Productsup's study showed how people in Europe and the US feel about buying in the metaverse. And there are several observations we can take away from the simple graphic below.
On the one hand, consumers in Southern Europe are more optimistic about the metaverse. Over half of people in Spain and Italy are open to buying in the metaverse if it provides life-like experiences or saves time.
On the other hand, in most countries, the metaverse isn't an attractive proposition, and people aren't willing to dive into it, even if it improves the customer experience.
Almost everywhere, people are more willing to shop in the metaverse if it would save time, not if it provides a life-like experience.
Will the metaverse become a real industry, or stay a buzzword that can be understood in seven different ways? Who knows. But for businesses betting on the metaverse, the fact that most buyers aren't that excited about it doesn't seem to be a good sign. And that's considering that shopping and entertainment are the two industries that metaverse developers would focus on.