The Hindu Business Line : Challenge of getting more Asians online

Venture capital is widely acknowledged for its role in the success of digital economies internationally, but Internet start-ups in Asia have not always been as successful as their global counterparts in attracting the much-needed equity and interest.

One reason for this — heard mostly from offshore investors — is that parts of Asia lag behind in the culture of entrepreneurship found in traditional investment hotspots such as Silicon Valley and Europe, making some countries and their start-ups less attractive to equity investment.

But this ignores the years of technology innovation and entrepreneurship in consumer electronics and semi-conductor production that contributed to the economic development of Korea, Taiwan and Singapore turning them into major technology hubs. There is no reason why this culture of innovation and entrepreneurship has not been transferred to start-ups in other emerging sectors. A more likely reason for the perceived shortage of Internet start-up entrepreneurship in many Asian economies is the lower take-up of Internet services and PCs. Roughly, only five per cent of households in the emerging markets of South-East Asia, India, and China have PCs.

Internet and PC penetration

While Asia has the largest number of Internet users worldwide — approximately 510 million — it has the second lowest rate of Internet penetration in the world.

Take-up is primarily affected by the cost of accessing Internet services and purchasing PCs, and the amount of discretionary income available. This has an impact on innovation and entrepreneurship, because if people can’t afford either a PC or Internet access, there is less impetus for entrepreneurs to develop digital content and Internet applications for them and, therefore, even less reason for consumers to aspire to purchase them in the first place — a vicious cycle, if ever there was one.

Entrepreneurs, however, must also accept their role in the slow take-up of Internet services and computers in parts of Asia. In the past 25 years, the popularisation of PCs together with access to the Internet has had a profound effect on many peoples’ lives. In emerging markets, for example, PCs and the Internet mean that farmers in China’s Guangdong province can access city markets to sell their produce; while the digitalisation of Baramati, India, has enabled farmers to access information on agricultural best-practices, improving farm productivity and education, among other benefits.

Many entrepreneurs failed to recognise the profitability of these types of emerging market applications for computers and the Internet. There is evidence to suggest that, until recently, few digital products and services effectively targeted lower-income households in emerging markets in the mistaken belief that the segment was simply not profitable enough.

The surging popularity of netbook PCs — Internet-centric devices that appeal to first-time users and low-income families — appears to offer a turning point. These specialised, low-cost computers have taken off in recent months with commercial products from local OEMs in India, Indonesia, Malaysia, Thailand, the Philippines and Vietnam, including HCL, Axioo, Zyrex, F-TEC, SVOA, Synnex, Supreme, Neo and CMS.

Popularity of notebook PCs

According to recent statements from Asus, the early response from the market for its EeePC had exceeded all expectations having reached 350,000 units hitting shelves in its first quarter of shipment. Already these netbook PCs are sporting a range of operating systems, such as Linux distributions: Ubuntu and Asianux, and Windows XP, which demonstrate vendor interest in the growth potential of the market. Intel is also focussing on netbook PCs and similar classes of simple and affordable Internet-centric computers via its new Atom processors, which are expected to underpin a second generation of commercial products by mid-2008.

At the same time, WiMAX technology has the potential of lowering the cost of new infrastructure build out for carriers compared to the cost of building DSL networks, making it economically desirable for carriers in emerging markets to reach regional and rural communities.

Innovative carriers are also starting to sell PCs in a similar fashion to mobile phones by bundling them with service contracts, further increasing Internet accessibility in emerging markets.

As Internet services and PCs become more affordable to low-income households, few doubt the business opportunity presented by bringing these users online — it comes down to the cost-effectiveness of making it happen, and a value judgment (most likely by private equity providers and investors) on the digital applications that will be most useful to these new users — and profitable for the businesses that make or fund them. This presents some key challenges for both entrepreneurs and technology investors moving forward.

Key challenges

For entrepreneurs, particularly those in the emerging markets, the question is how much or how little to take from the lessons learned in successive overseas Internet booms, when making decisions on the types of Internet businesses to start. For example, while content monetisation methods are likely to be similar, there may be regional variations in the types of Internet-based businesses that are viable and sustainable in the Asia Pacific, compared to the US and Europe.

The development of online applications targeting health services, education, e-government and agriculture, for example, may prove more profitable than social networking and e-commerce products, because they target a section of the market that overseas start-ups have so far failed to recognise and/or capitalise on.

For prospective investors, the dilemma is similarly how much weight to put in the success of Internet business types overseas when reviewing applications for funding by local start-ups. There is certainly a case for investors to re-focus on Internet businesses that align with key economic drivers in Asia Pacific more so than applications that could be described as Web 2.0.

The latter may prove lucrative for Asian developers marketing products to Western economies, but again, the confluence of Internet and PC penetration provides a unique opportunity to explore — but potentially profitable — areas of the local Internet market.

Even start-ups that appeal to niche, but targeted, requirements in Asia Pacific have the potential to find volume growth in this new wave of Internet and computer users, both regionally and internationally.

Asiasoft, Friendster and mtouche already are among a growing band of Internet ventures in Asia to reap regional and international success from this new wave of digital opportunity.

As the cost barriers to Internet and computer take-up are broken down, there is likely to be a rise in the entrepreneurship and start-ups seeking to take advantage of the burgeoning digital economies.

Both governments and investors will do well to watch these markets closely, make strategic investments that serve to encourage Asia’s entrepreneurial culture and create growth opportunities for the digital transformation.

(The author is a Senior Solutions Architect in the Intel World Ahead Programme. He focuses on solutions to connect the next billion users to the digital world.)

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