Why Facebook failed with Free Basics

Land grab! Net neutrality! Imperialism! There was a lot of justified outrage (and perhaps delight) when Mark Zuckerberg’s dream of bringing the Internet to rural Indians came crashing down recently, fueled by the 11 million people who contacted the Telecom Regulatory Authority of India in protest and 457 companies and more than 800 startups that signed letters vehemently opposing Facebook’s Free Basics initiative.

After getting hit by that tidal wave of blowback, Facebook discovered that scaling in India is not so simple. While most of the debate around Free Basics, and its subsequent defeat, centered around net neutrality, the saga is really the result of a set of larger, incorrect assumptions by Facebook on how to reach and on-ramp rural customers.

With some distance from the initial raw reaction, it’s a good time to evaluate why Facebook’s Free Basics strategy for India was fundamentally flawed, and probably not worth the fight in the first place.

Discovery, trial and viral expansion happened in other markets just by making Facebook available. Once someone tried Facebook, they would see an interesting, existing network, after which Facebook could use analytics to prompt further engagement, all from the Bay Area.

If that context held in India, then offering Facebook for free through a telecom partner would be great strategy for grabbing the next wave of rural Indian mobile Internet users. However, meaningful adoption in India often requires a far more nuanced understanding of how customers make a decision, and, ironically, a grassroots approach to managing a physical sales and distribution channel.

Focusing on core product is not enough

Companies like Amazon and Uber have learned that many of the cultural and business assumptions from markets like the U.S. don’t apply in India. This includes the first tenet of product development in the Bay Area: focus only on your core value proposition and product experience, after which adoption will follow. Unfortunately, it’s not that simple.

In the developed markets where car ownership and credit card use were a given, Uber simply needed to focus on its core job of attracting drivers and consumers onto their mobile platform. Overhead was minimal, allowing the company to expand quickly.

Then came India, which became the first market in the world to force them to bring in third-party payment partners and ultimately accept cash. Moreover, Uber needed to become a financing company as well as a taxi company, because few of the drivers owned or could easily afford a car.

The West has the tendency to assume that poor or lower-income countries simply want free stuff.

Similarly, you can’t simply ship a package from a warehouse in India and assume it will be delivered — much less delivered in a window of specific time. Amazon’s core strengths globally have been its massive selection, efficient supply management and focus on customer loyalty.

That still is the key, but to scale in India, Amazon also needed to become a highly efficient logistics company, with innovative distribution strategies and cash management capabilities, far beyond what FedEx could imagine. Jeff Bezos reinforced this in a recent article where he said that Amazon had to reassess “assumptions that American customers have taken for granted for decades. We know that in order to win in India we need to do things we have never done in any other country.”

In both cases (and others), multinationals gained traction slowly against locally grown competitors only after they implemented a comprehensive set of India-specific operations and capabilities to scale their networks.

How does this apply to Facebook? Their primary assumption to acquiring rural users is wrong and, at least for the next year or two, they will need to do something that they likely haven’t had to do anywhere else.

You will need to build a physical sales channel through partners

Any foreign company trying to reach consumers in rural India will have to compete, or partner, with numerous local companies that have built large, grassroots merchant networks across the country. Although expensive and difficult to manage, the merchants in these networks have the strongest influence over what a local consumer does, from which mobile phone they buy, to which mobile operator they choose (all operators will be sold side by side), to which apps they download to their phone.

For on-boarding the rural and lower-income population to full-service mobile Internet, the first interaction for customers will be an assisted one -– at their trusted local store. In remote areas, that store will not only serve as the one-stop, assisted e-commerce location, but also as the local financial service point for paying bills, banking and accessing government services.

Mobile Internet adoption will happen at scale in the next 24 months, whether or not Silicon Valley entrepreneurs have any part in it.

This is in part because of a cultural difference between the U.S. and India. In America, there’s a “DIY” (Do-it-Yourself) culture that encourages a person to test and try new experiences, products and technologies on their own. In contrast, India often has a “do-it-for-me” expectation — especially for new services — which means that a user often relies on someone else to do the initial groundwork, then set them on a path toward habitual use.

People who already rely on their local store for trusted help and advice are not going to stop doing this just because Facebook offers free data and they hear a passing reference to it by a minimally paid telecom sales agent. The money used to fund free data might be better utilized as incentives to the local store owner to make sure the first app downloaded and set up on a villager’s new phone (purchased three days earlier from Amazon via that same store) is Facebook and not Hike, PayTM or SBI Buddy.

Just because something is free, doesn’t it mean it will be valued

The West has the tendency to assume that poor or lower-income countries simply want free stuff; that price is the major barrier to adoption. My experience suggests that, within a certain range of affordability, people are more value-sensitive than price-sensitive.

When offered a service that delivers real value — whether it is real-time communication with any family member, pre-paying for an hour of electricity to cook food or reading via a low-cost LED lamp — even people at the bottom of the pyramid make decisions and pay money based on utility as opposed to what’s free. They also make decisions in line with that which they are familiar and comfortable.

We have worked with several financial service institutions that are bringing microloans, pensions and other banking services to the masses. When asked whether a villager will give up Rs.50-100 ($1-2) per month to set up a pension scheme, villagers are more than willing to do so. The business problem wasn’t generating consumer demand but operationally scaling face-to-face awareness and collections.

From a strategic point of view, Facebook and other companies should focus on which part of their service can deliver immediate gratification and financial or lifestyle benefits to a user. WhatsApp is no doubt useful, but what else can Facebook offer with the data or features that they have to solve first-principle problems for a family.

Adoption will happen, with or without the West

Marc Andreessen ignited a Twitter firestorm with his comments that implied that, without Free Basics, Indians were going to be kept off the grid. The reality is that the big barrier to rural mobile Internet adoption is non-terrestrial high-speed mobile network connectivity, access to low-cost smartphones and the availability of services or goods that fill immediate needs (e.g. banking, communication, consumption, government services), not the availability of social network services.

Here’s a final message to Silicon Valley — don’t worry about Indian adoption. It will happen, and at a pace faster than anything the U.S. will have seen. More than one hundred million bank accounts were opened within six months last year after the government and public sector banks made it a focus. Mobile Internet adoption will happen at scale in the next 24 months, whether or not Silicon Valley entrepreneurs have any part in it.

To his credit, Zuckerberg has been largely graceful about the defeat of Free Basics, perhaps taking a page from Jeff Bezos. Zuckerberg has responded that he remains committed to his programs in India. For him to succeed, Zuckerberg will have to do the hard work of building a scalable, physical distribution channel that incentivizes merchants to bring consumers on board, one by one.

This will be a slower, more labor-intensive approach, but it’s the best way to connect and have a meaningful impact on the Indian consumers Facebook is trying to reach. That’s the lesson all entrepreneurs can take from Free Basics.

Featured Image: MANJUNATH KIRAN/AFP/Getty Images

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