In which of the following businesses does Google make a profit…?
If you are a typical Internet user, Google Maps and YouTube are probably not far behind Google Search in their value to you. And, if you’re under 20, there’s a good chance YouTube is among the most frequent sites you visit [i]. With all this usage, and so much value to consumers, you’d imagine that Google is raking in the revenue.
But, Google makes almost all of its revenue from Search. They like to say that their revenue is from advertising, which is true, but it’s mostly advertising on Search. Apart from Search, analysts believe that Google is losing money on YouTube [ii], and probably for Maps, as well. (No one but the folks at Google knows for sure, but the financial analysis and circumstantial evidence is compelling [iii].) In any case, Google isn’t trumpeting their profitability.
Why does the Jester care about Google making a profit? Why should international development care? Well, because if Google – sometimes hailed as the world’s smartest company – can’t break even on products that people love, then there’s not a lot of hope for the rest of us to extract revenue from the world’s poorest people for things they’re not even sure they want (see Myth 3).
Unfortunately, another myth – the myth that there is a “fortune at the bottom of the pyramid” – has caught on wildly in development, and for now it shows no signs of subsiding. People have been taken in by the smooth rhetoric of C. K. Prahalad and gangs of me-too business professors, eager to demonstrate their dubious relevance to the problem of poverty. Even non-profits with good successes behind them seem to have swallowed this nonsense, and have begun a hunt for more profit-oriented solutions. Let’s examine this rhetoric, which the Jester calls the “BOP fallacy.” Like Swiss cheese, it’s full of holes.
First, the claim is that non-private organizations – i.e., governments, non-profit s, and multilaterals – haven’t achieved much in development. Now, on the one hand, this might be true, because the record of development itself is bleak, as William Easterly has noted extensively [iv]. But, the alternative without non-private investments in global development would be far worse. In most countries, the vast majority of education and healthcare costs are taken on by governments – and efforts to privatize these industries have had a poor record. Next, whatever you may believe of the eventual value of the Green Revolution in Asia, over two decades, it flipped countries like India from net importers of food to net exporters. Much of the research and implementation of the Green Revolution was funded in great part by large non-profits like the Rockefeller Foundation, by multilaterals like the World Bank, and India’s own government. And, what about smallpox, still the only human disease to have been systematically eradicated? The credit goes to the World Health Organization and national governments all over the world.
Second, the BOP fallacy says that non-private organizations can’t sustain themselves financially. This is another ridiculous claim. Foundations like the Ford Foundation and the Rockefeller Foundation were established a hundred years ago, and not only have their coffers not shrunk, they’ve grown over time, with ups and downs due to investment markets. Organizations like the International Red Cross have been around for even longer, and they subsist largely on private donations. In fact, non-profits are amazingly good at sustaining themselves (in some cases, the Jester would even say, too good – once established, non-profits, like most other organizations, want to preserve themselves; no one wants to be out of a job).
Third, and based on these first two fallacious points, the BOP storyline concludes that only for-profit initiatives can deliver the world of poverty. But, Prahalad himself struggled to find real exemplars of for-profit initiatives to make his point. His book is full of questionable examples. The e-Choupal village information centers are a cost center for ITC, and while they fan the flames of the PR they get from it, the number of centers has remained at 6500 in the six years that I’ve known of them. (Richa Kumar’s financial sensitivity analysis shows that at best, they are just barely breaking even – and she was being kind[v]. In 2004, when I went to visit an e-Choupal center, the sanchalak proudly showed me a PC gathering dust.) The Jaipur Foot, a $20 prosthesis, is given away free by the non-profit society who developed them in India. The Jester believes it’s a great program, but he’s not sure how that story fits into a book subtitled “Eradicating Poverty through Profits.” ICICI Bank has been one of the most persistent in trying to make inroads into poor, rural markets, but as of 2007, they have quietly, but dramatically, curtailed their activities in this area. Most telling is the transfer of Nachiket Mor, who energetically led ICICI’s rural banking initiatives as an executive, to president of the ICICI Foundation for Inclusive Growth. Why a foundation, if he could have made ICICI a fortune while inclusively providing growth opportunities for the poor? (One of the very few credible cases in Prahalad’s book of a self-sustaining organization doing good is the Aravind Eye Hospital, but it would be wrong to suggest they are making anything resembling a “fortune.” In fact, their social impact could be credited to the fact that they are focused primarily on ending blindness and not at all on making a fortune.)
If anyone is making a fortune with the BOP, it’s Prahalad and self-styled BOP consultants. The Jester guesses that BOP conferences outnumber BOP successes, 100 to 1. They make their money by charging gullible companies and serial entrepreneurs the corporate rate. It turns out you can make a fortune off of clueless corporations.
The reality is that it costs a tremendous amount to do business with very poor communities. Poor people live in communities that are harder to reach – they’re less likely to be on a paved road; they often don’t have fixed addresses; in rural areas, they’re more geographically dispersed. Systems that are well-greased for capitalism in rich societies are absent or full of friction in poor communities – identification, bank accounts, credit reports, and so on. And, often, human capital and institutional support is lacking. It’s not trivial to remove these frictions one at a time just with a tweaked business model. As most formal banks in India will tell you, the poverty premium is very real. The last thing you want is to have to set up a branch in every village, with a human teller, so that poor village residents can line up to take 15 minutes each making deposits and withdrawals of $2-3 dollars. Prahalad acknowledges this as the “poverty premium,” but as a stalwart business-school buccaneer, he claims that this difficulty is a huge opportunity. He’s wrong. The poverty premium exists for systematic reasons that are inextricable from poverty. Any business that is really “for profit” will quickly swim upstream where there is less market friction and more disposable income. And any businesses really in it to help, will quickly run into Tracy Kidder’s “mountains beyond mountains” [vi]. In fact, the Jester recommends a change of title for Prahalad, who could have gotten it right with one of two slight tweaks:
- The Fortune at the Bottom of the Pyramid: Eradicating Poverty and Discovering that Compassion is a Greater Treasure than Profits, or perhaps,
- The Fortune at the Middle of the Pyramid: Eradicating Middle-Class Disposable Income Through Profits.
Combine Myth 3 and Myth 4, and the conclusion you come to is that it is very, very difficult to devise a workable for-profit business model, especially if it’s poor people who are expected to pick up the bill for things that outsiders believe they “need.”
Having said all of the above, the Jester would like to issue some clarification, because his outlandish statements are prone to misinterpretation.
First, everything’s worth a shot. There are, to be sure, thriving businesses whose products actually benefit poor consumers. Soap for handwashing is one. Mobile phone voice calls are another. Er, maybe that’s it. But, except for mobile voice calls, these opportunities don’t add up to the kind of fortune that would excite the global business community. In fact, the story these days in the Bay Area is that venture capitalists don’t want to touch social enterprises – they’ve discovered there’s no money there.
Second, business as a whole, of course, is undoubtedly a driver of national economic development. If you could convince rich serial entrepreneurs to move to sub-Saharan Africa and start locally relevant businesses there, hiring local people, that would be worthwhile. Or, better yet, they could mentor local entrepreneurs to expand their own businesses. Geek Corps is one effort along these lines. The Jester believes in mentoring and building capacity on site.
So, to conclude, if you find that you’re just short of breaking even in an ICT4D project, especially after three years of tweaking and alongside 20 other smart, determined people who are trying something similar, you might want to consider the hard truth: Sometimes, there’s just no business model.
And, that’s why there are governments and non-profits.
[i] See, for example, Whitney, L. (2009) Kids’ search terms: sex, games, rock ‘n’ roll. CNET News, Aug. 11, 2009. http://news.cnet.com/8301-10797_3-10306357-235.html, retrieved Apr. 3, 2010. Bausch, S. (2006) YouTube US web traffic grows 75 percent week over week, according to Nielsen/NetRatings. Nielsen/NetRatings, Jul. 21, 2006. http://www.nielsen-online.com/pr/pr_060721_2.pdf, retrieved Apr. 3, 2010.
[ii]Analysts appear to agree that Google isn’t making money on YouTube. For a summary, see… Silversmith, D. (2009) Google losing up to $1.65m a day on YouTube. Internet Evolution, Apr. 14, 2009. http://www.internetevolution.com/author.asp?section_id=715&doc_id=175123&, retrieved Apr. 3, 2010.
[iii]Analysis similar to those for YouTube don’t seem to have occurred for Google Maps, but there is a lot of circumstantial evidence that Google is struggling to earn revenue there, too: Lenssen, P. (2009) Which Google apps make money? Google Blogoscoped, Jan. 7, 2009. http://blogoscoped.com/archive/2009-01-07-n84.html, retrieved Apr. 3, 2010. Darlin, D. (2005) A journey to a thousand maps begins with an open code. The New York Times, Oct. 20, 2005. http://www.nytimes.com/2005/10/20/technology/circuits/20maps.html, retrieved Apr. 3, 2010.
[iv] See, for example: Easterly, W. (2001) The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics. MIT Press.
[v] Kumar, R. 2004. eChoupals: A Study on the Financial Sustainability of Village Internet Centers in Rural Madhya Pradesh. Inf. Technol. Int. Dev. 2, 1 (Sep. 2004), 45-74. http://itidjournal.org/itid/article/view/192, retreived Apr. 8, 2010.
[vi] Kidder, T. (2003). Mountains Beyond Mountains: The Quest of Dr. Paul Farmer, A Man Who Would Cure the World, New York: Random House.