WhatsUpp with disruption | Value Research Rapid and unpredictable technology-led changes can create and destroy value faster than investors are used to
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WhatsUpp with disruption

Rapid and unpredictable technology-led changes can create and destroy value faster than investors are used to

The performance of mobile telecom networks has become so bad that I now prefer to make voice calls over WhatsApp. Of course, WhatsApp calls too don't have any chance of working well over the same mobile networks. However, when both ends are connected to the Internet through a WiFi connection that goes through a wired ISP, then they work quite well. As it happens, I now use WhatsApp for calling a lot because both my office and my home are in areas that have suffered a huge decline in mobile network quality over the last few months. A lot of people have switched to making voice calls in this manner, whether over WhatsApp, Skype, Viber or other such services.

Meanwhile, the telecom department, TRAI and cell phone operators are engaged in public arguments over who or what is responsible for the decline of network quality. What will happen to this shift to internet-based calling when (or if) network quality improves? My guess is that some usage will switch back to mobile networks, much will permanently shift to WiFi-backed internet calls, as it has from SMS to WhatsApp. People's phone usage will shift to apps that move data between their phones and through the internet. The functionality of voice calls and SMS is getting replaced very rapidly by services that just treat voice and text as bytes to be moved over a network - any network that happens to be available at the moment. Since a lot of users (especially high value users) spend a lot of time in WiFi-connected areas, even the bytes don't move over the mobile networks.

As an investor, if you are trying to figure out where the telecom industry is headed, I would say that this is a far more important trend than anything you might glean from the financials or other conventional metrics of cell phone operators.

While I was thinking about these things a few days ago, news came that the RBI has finally announced its selection of licensees for the new 'payment' banks. Payment banks will likely cause as much disruption in banking as data-centric usage of phones is doing in telecom. Payment banks sound like they will only handle payments but in fact the only thing that they can't do is make loans. These banks will result in a huge increase in the supply of transactional banking facilities of the kind that are needed at a large scale.

Again, from the investors' perspective, what this means is that our assumptions about how to value banks are going to be upended. As a fund manager explained to me recently, even though PSU banks are bloated and full of NPAs, some of them have valuations that, relative to private banks, are far more beggarly than seem justifiable. For example, Union Bank makes about as much profit as Kotak Mahindra Bank but has a market cap of about ₹13,500 crore, while the latter is valued at ₹1.3 lakh crore. The market rewards almost all private banks with similar outsized valuations.

If the new payment banks disrupt profitability at the private banks, and the scale of the actual impact of NPAs is judged realistically, we could be looking at a very different scenario quite rapidly. The threat from the new payment banks will lie in the way they will use technology and in their ability to have a very different growth-to-capital requirement balance than older banks. This is underscored by the older banks' eagerness to take a stake in the new payment banks.

Of course, the larger point is that from an investment perspective, this is a time of serious disruption. From banking to taxis to telecom to retailing, technology is unleashing new business models that have the ability to shift value from old businesses to new very rapidly indeed. It won't be easy for investors to keep up.


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