The Paradox of Internet Growth in Emerging Markets

Stephen DeAngelis

May 7, 2009

Most Internet start-up companies dream of the day when their company succeeds in gaining a huge online following, like Google, eBay, or Amazon. They anticipate that growth will be accompanied by profits, but some wildly popular companies are finding that growth doesn’t always translate into profits — especially if most of that growth takes place in the developing world [“In Developing Countries, Web Grows Without Profit,” by Brad Stone and Miguel Helft, New York Times, 26 April 2009].

“Facebook is booming in Turkey and Indonesia. YouTube’s audience has nearly doubled in India and Brazil. That may seem like good news. But it is also a major reason these and other Web companies with big global audiences and renowned brands struggle to turn even a tiny profit. Call it the International Paradox. Web companies that rely on advertising are enjoying some of their most vibrant growth in developing countries. But those are also the same places where it can be the most expensive to operate, since Web companies often need more servers to make content available to parts of the world with limited bandwidth. And in those countries, online display advertising is least likely to translate into results.”

I have often written that there are profits to be made selling to the bottom billion (the world’s poorest individuals), but few of these profits are generated through advertising. The poor buy what is available and affordable. They buy in small portions and quantities. Profiting from such sales means that manufacturers and distributors must rely much more on word-of-mouth than advertising to turn a profit. Faced with this conundrum, some dot-com companies have opted to block users from emerging market countries. For example, Stone and Helft discuss a company called Veoh, a video-sharing site headquartered in San Diego. Last year the company “decided to block its service from users in Africa, Asia, Latin America and Eastern Europe, citing the dim prospects of making money and the high cost of delivering video there.” Such decisions are not made easily, they note, because most entrepreneurs philosophically believe that the Internet should be used “to unite the world in a single online village.” However, money talks; and there isn’t a lot of online talking from ads coming from developing countries.

 

The ironic thing is that people from largely disconnected countries are hungry for the content provided by companies like Veoh. “They sit and they watch and watch and watch,” says Dmitry Shapiro, Veoh’s chief executive. “The problem is they are eating up bandwidth, and it’s very difficult to derive revenue from it.” Veoh’s revenue challenge exposes a gap mirrored in the business strategies of most Web 2.0 start-ups. The going in assumption for most social web start-ups is that garnering large online audiences, attracted by free services, will result in large advertising revenues that will cover operating costs and generate profits. However, that strategy hasn’t translated well inside developing countries. As Stone and Helft report, “There may be 1.6 billion people in the world with Internet access, but fewer than half of them have incomes high enough to interest major advertisers.” They go on to address how this conundrum is being addressed by various companies.

“MySpace — the News Corporation’s social network with 130 million members, about 45 percent of them overseas — is testing a feature for countries with slower Internet connections called Profile Lite. It is a stripped-down version of the site that is less expensive to display because it requires less bandwidth. MySpace says it may make Profile Lite the primary version for its members in India, where it has 760,000 users, although people there could click on a link to switch to the richer version of the site. Perhaps no company is more in the grip of the international paradox than YouTube, which a Credit Suisse analyst, Spencer Wang, recently estimated could lose $470 million in 2009, in part because of the high cost of delivering billions of videos each month. Google, which owns YouTube, disputed the analysis but offered no details on the site’s financial situation. Tom Pickett, director of online sales and operations at YouTube, says the company still hews to its vision of bringing online video to the entire globe. In the last two years, it has pushed to create local versions of its site in countries like India, Brazil and Poland.”

Stone and Helft report that YouTube “does not rule out restricting bandwidth in certain countries as a way to control costs — essentially making YouTube a slower, lower-quality viewing experience in the developing world.” They claim that Facebook is also contemplating lowering the quality of videos and photographs that its service delivers in some regions. I’m still convinced that connectivity is critical for helping to bring developing nations out of poverty, but e-commerce connectivity is much more important for doing so than social networking. In Kurdistan, for example, Enterra Solutions® has established a business-to-business trading exchange where Iraqi businesses can offer their products online. We call our service EnterraOneWorld. In order to create a middle class that can be targeted by online advertisers, developing countries need to create jobs and diversify their economies. Our Development-in-a-Box™ framework is aimed at doing just that. Once a sustainable middle class emerges, social network providers will find that the developing world will become profitable. The trick is maintaining interest in advertiser supported services and surviving long enough to witness the emergence of the middle class.