Zomato, Swiggy and the threat from the Beckn Protocol
A decentralized technology protocol called Beckn, which gives restaurants greater control, might be the biggest long-term challenge for centralized food service platforms like Zomato and Swiggy
As of writing this article on Friday, 23rd July, 2021, Zomato’s IPO has been oversubscribed 38 times, share price jumped 66 per cent (Rs 50) from IPO price of Rs 76 to close at Rs 125. The total market capitalisation fell slightly short of the magical 100,000 crore rupee mark at Rs 98,211 crores.
Investor expectations of rapid future growth have driven Zomato’s blockbuster IPO. However, a decentralized protocol called Beckn, which gives restaurants greater control, might be the biggest long-term challenge for centralized food service platforms like Zomato and Swiggy. In the risk factors listed in Zomato’s Draft Red Herring Prospectus, Zomato says that, “An increase in the number of restaurant partners on the platform in turn attracts more customers. This network effect takes time to build and may grow slower than we expect or than it has grown in the past.” That one statement illustrates how e-commerce has turned into a capital intensive business all around the world.
Two-sided marketplaces/platforms like Swiggy and Zomato spend heavily to bring restaurants and customers on board their platform. Customers are attracted to platforms that have a larger listing of restaurants while restaurants are attracted to platforms that have a larger number of customers. Marketplaces that generate network effects by bringing both restaurants and customers onto their platforms create a virtuous cycle. Those that are unable to generate network effects eventually fade into oblivion. Such two sided marketplaces inevitably become monopolies or duopolies because of network effects. Hence these are termed as winner-take-all markets where only one or two players survive.
A growing power imbalance
For restaurants, this has multiple implications. Firstly, restaurants have to choose to list themselves on one or both the platforms and accept the terms and conditions set by these platforms. Restaurants have very little room to negotiate the rates and terms with these platforms. Secondly, restaurants get disintermediated. Instead of being directly in touch with their customers, their interactions are now mediated through the platforms. These platforms retain the customer data and filter the information that flows to restaurants.
With millions of customer orders being generated, these platforms can use advanced technologies like Artificial Intelligence to generate richer and richer insights that restaurants may not have access to. Platforms might use the insights generated (most popular products, most attractive price points etc.) through data to create their own competing products that drive the restaurants out of business. Lastly, the commissions charged by these platforms could significantly eat into the margins of restaurants. All these factors create a significant power imbalance between the restaurant and the platforms. Therefore, it is no surprise that the National Restaurants Association of India (NRAI) has approached the Competition Commission of India (CCI) alleging that food aggregators Swiggy and Zomato have violated laws by charging exorbitant commissions from restaurants and masking customer data from them.
Social Impact
In the early days of the Internet in India, most of us were excited about the possibilities of an open Internet (OI). It held the promise of democratizing access to knowledge, empowering small businesses and so on. Cut to 2021, and the promise of OI has been dwarfed by Closed Loop Ecosystems (CLEs) like Swiggy and Zomato where discovery of restaurants, ordering and payments happen inside an app or a website. The rise of these CLEs have spawned societal level challenges like increased concentration of wealth and rising income inequality, concentration of data, privacy issues, power dynamics that are skewed in favour of centralized platforms and against smaller players like restaurants, drivers, sellers and others within those ecosystems. While OI promised empowerment, CLEs have been disempowering to almost everyone, except the owners of the centralized platforms themselves. Is it possible to reclaim the promise of an open Internet and rebalance the power equations between restaurants and the platforms?
Reclaiming the ideals of an open Internet
The point of this article is not to blame CLEs like Zomato and Swiggy who are merely responding to market forces. Till date, it was difficult to enable discovery, ordering and payments in a decentralized manner. All that might be changing due to a technology development called the Beckn protocol and a policy development called the Open Network for Digital Commerce (ONDC). These two developments may not completely replace CLEs like Swiggy and Zomato, but they might offer a viable alternative for restaurants who wish to have a direct online relationship with customers, and have greater control over their destiny.
Beckn is not an app or a website or a platform. It’s an open protocol specification, that allows fair and transparent rules of play for the market participants. It allows creation of a decentralised digital market that resembles an open playground that is free and fair, instead of being closed and non-inclusive. Unlike centralized platforms, Beckn extracts no value or power of itself but acts as force multiplier to the beneficiaries it serves. For a simple analogy see how the SMTP protocol behind email allows a person to send an email from any email client to a recipient without worrying about what email client they use. Now compare that to CLE messenger platforms like Whatsapp that allows users to send messages only within that platform. Therefore, most of us end up on multiple CLEs like messaging platforms Whatsapp, Signal and Telegram or food deliver platforms like Swiggy and Zomato because none of these platforms interoperate with each other.
In contrast to CLEs, Beckn acts as an open digital infrastructure that is shared publicly among all participants obviating the need for a central platform, central control or authority to enable commerce interactions among the participants. Each participant, by virtue of implementing their end of the protocol APIs, becomes part of the Beckn network and becomes discoverable at their own command. For restaurants, once the Beckn protocol becomes popular, they have the option of using the CLE platforms or adopting the Beckn protocol or doing business on both ecosystems. A network of service providers will help restaurants onboard themselves onto the Beckn ecosystem, but they are unlikely to have the ability to dictate terms to restaurants. To go hand in hand with the Beckn protocol, India’s Open Network Digital Commerce Advisory Council (ONDC) set up by the Ministry of Commerce, aims to create an enabling policy framework for decentralized commerce.
Today, we are at a stage comparable to the past where CLEs like mobile wallets were the most popular payment instruments. The arrival of UPI, which was a relatively more open, interoperable network changed all that. Similarly, we are at a point where the ecosystems for delivery fleets, restaurant middleware etc. could create their own networks using the Beckn protocol. These networks could seamlessly interoperate with each other allowing restaurants to take orders directly from customers, contact delivery fleets and ship orders to their customers. This could rapidly create a viable alternative to centralized platforms. However, given the sheer size and scale of e-commerce, Beckn could be a much bigger revolution, especially if it changes the structure of the industry away from “winner-take-all” centralized platforms to decentralized “win-win” ecosystems.
