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Kunal Bahl and Rohit Bansal – co-founders of Indian ecommerce company Snapdeal – went from zeroes to heroes overnight this week in some media reports. They fought a boardroom battle and regained control from their big investor, SoftBank, by walking away from talks to sell the struggling firm to arch rival Flipkart, proclaimed a prominent newspaper.

We don’t know what derailed the deal after months of negotiation. Was it the size of the payout to the founders that was said to be part of the deal? Was the final offer of US$950 million too low for some of the early investors in a company that was valued at US$6.5 billion at the start of 2016?

These actions harm the credibility of the nascent startup ecosystem in India.

What we do know is that Snapdeal’s runway got extended last week with the sale of its payments subsidiary FreeCharge for US$60 million, all in cash, to Axis Bank. Snapdeal may also sell its logistics arm, Vulcan Express. In a letter to employees, CEO Kunal Bahl talks of a Snapdeal 2.0, which will aim for profitability in the time it gains from selling off “non-core assets” and cutting costs.

It seems clear from the letter that Snapdeal 2.0 will be an open marketplace connecting sellers and buyers, not bothering with warehousing, logistics, and so on. It will aim to serve a long tail of small sellers instead of the large merchants who account for the bulk of transactions on managed marketplaces such as Amazon and Flipkart.

The main advantages of such a model, pioneered by Ebay, are lower costs and a broader seller base. As Bahl says in his letter, Snapdeal 2.0 will focus “on being a champion for all sellers in India, enabling anyone to set up a store online in a few minutes, and on providing a large selection of products.”

Amazon vs Ebay

One problem is that it gets harder to ensure a good customer experience in a marketplace without inventories, where all and sundry become sellers and deliveries can get messy. That is why Amazon stuck to the managed model despite the early success of Ebay, which at one time could offer a much wider selection of categories and products.

Over time, as Amazon’s product range grew, it began to trump Ebay in customer satisfaction. Its revenue took off, and so did its share price, as seen in the following chart. The share prices of Amazon (orange line) and Ebay (blue line) were within touching distance until about eight years ago, and then diverged sharply to what is now a yawning gap.

The fortunes of Ebay nosedived in India, too, once Amazon arrived on the scene. Amazon invested in a string of warehouses around the country, as did its local competitors, Flipkart and Snapdeal. Customers never had it so good, with the convenience of home delivery and payment options, not to mention the competitive discounts offered on each of the well-funded platforms. Spoiled for choice, there were fewer reasons for buyers and sellers to go to a less managed site like Ebay.

The struggle of Ebay was evident in the shutting down of operations and mass layoffs at its India centers. Finally, Ebay India was swallowed up by Flipkart as part of a US$1.4 billion funding round by Tencent, Microsoft, and Ebay earlier this year. It brought the curtain down on a journey that started 13 years earlier, when Ebay entered India with the acquisition of Indian auction site Bazee and became one of the first to foray into ecommerce in the country.

It also left a potential gap in the market for an open marketplace, which Snapdeal 2.0 hopes to fill. No doubt it makes more commercial sense to go for an asset-light, inventory-less, low-cost model when mega rounds of funding have dried up. But the question is what unique value Snapdeal 2.0 can offer to the customer.

Customer experience and price

A managed marketplace like Amazon, with control over the supply chain and inventory, can ensure faster and more reliable delivery and customer experience overall. The long-tail strategy of Snapdeal 2.0 will involve larger numbers of sellers, which will further complicate execution. It’s easier to manage a smaller set of large sellers.

Already, Forrester’s India Customer Experience Index, 2016, put Amazon India ahead of Flipkart, with Snapdeal further down in the rankings. If Snapdeal could not keep up with Amazon and Flipkart at its peak, with US$1.8 billion in funding, how will it reverse that now with the US$60 million it has from the FreeCharge sale, and possibly another US$20 million to come from the sale of Vulcan Express?

So, even though Snapdeal 2.0 can reduce cost by not holding inventory, it’s going to be harder to improve an already shaky customer experience.

See: Thriller to tragedy: what ails Snapdeal

If not customer experience and convenience, can Snapdeal 2.0 outdo the rival marketplaces on prices? This appears unlikely when you look at how well Amazon, Flipkart, and now Paytm are funded. That means the discount war isn’t letting up anytime soon in the Indian market.

Amazon boss Jeff Bezos committed US$5 billion to India last year and he’s not backing off from that – the last big ecommerce market, which is still at an early stage with huge headroom for growth, is too juicy a prize to pass up. This played a big part in Amazon coming out with lower earnings-per-share, despite beating revenue projections for the second quarter of 2017, in results announced last week. It continues to spend heavily on fulfillment centers, Prime video content, and Amazon Web Services data centers.

Flipkart is back to its gravy days with the mega round it raised in April. SoftBank, which was keen on picking up a stake in Flipkart while selling off its distressed asset Snapdeal, may now invest directly in the Indian ecommerce leader.

SoftBank CEO Masayoshi Son’s commitment to winning the Indian market matches that of Bezos – he pumped US$1.4 billion into Alibaba-backed Paytm in May. And that was after writing off most of the US$900 million it invested in Snapdeal.

Even in its heyday, Snapdeal was a distant third to Flipkart and Amazon. And now there’s a third player raising mega rounds and building a Paytm Mall on the lines of Alibaba’s Tmall in China. Snapdeal 2.0 would be a fringe player at best in this scheme of things, just like Ebay, which never committed the kind of funds to India that Amazon did.

See: How the $1.4b Flipkart funding changes the ecommerce game in India

In the case of Snapdeal, it did have the funding support to compete with Amazon, which entered India long after its local counterparts were established. But the only ways in which Snapdeal could think of growing were by discounts and costly acquisitions like that of FreeCharge and others, which Kunal Bahl described then as his string-of-pearls strategy. Amazon focused instead on its logistics infrastructure and customer experience, and matched any discounts the SoftBank-funded Snapdeal or Tiger Global-funded Flipkart could offer. Bezos was prepared to outspend them and beat them on customer experience.

Rapid decline of Snapdeal

Snapdeal lost market share drastically last year, while Flipkart managed to hold its own long enough to raise a life-saving funding round early this year.

According to RedSeer Consulting, Snapdeal’s marketshare went from 25 percent in September 2015 to a mere 4 percent by March this year. It could not match Amazon on either delivery time or quality of products. Now the seller-centric Snapdeal 2.0 will be in even less of a position to match up.

Senior executives saw the writing on the wall soon after the deal with Flipkart was called off. Several of them, including the VP of product, VP of engineering, and the heads of the IT, general merchandise, and fast-moving-consumer-goods divisions quit the company this week. Hundreds of employees are expected to walk away or be laid off.

It won’t be the first time. Back in February, Snapdeal laid off around 600 employees, with the founders promising to “stop all non-core activities, reduce costs drastically, and turn profitable” in a letter to employees.

Snapdeal 2.0 is essentially a reiteration of that plan. How do the investors take it?

SoftBank appears to have washed its hands of the company after pushing hard for the sale to Flipkart. “We look forward to the results of the Snapdeal 2.0 strategy,” it said in a statement after the Flipkart-Snapdeal deal came unstuck.

The two main early investors were divided. Nexus Venture Partners, which had remained invested in Snapdeal during late stage rounds, backed the decision to scrap the deal. Kalaari Capital, which had partially sold its stake when valuations were high, was miffed over the pullout.

“I am extremely disappointed and shocked with the founders’ disregard for investors and employee interests. We were not aware of this decision, it wasn’t discussed and did not receive our support. These actions harm the credibility of the nascent startup ecosystem in India,” Kalaari Capital MD Vani Kola told a TV channel. She had resigned from the Snapdeal board in May, but backed the deal which would have given Kalaari a payout in cash and Flipkart stock.

Snapdeal Sale 2.0?

For Flipkart, it may not be much of a setback. It never seemed overly enthusiastic about the deal, inching its offers up from US$700 million to US$950 million, while loading the terms with indemnity clauses.

On the contrary, many in the company would be secretly relieved at not having to go through a process of assimilation.

Flipkart already has a workforce of 8,000 – trying to fit in another 1,000-odd remaining employees from Snapdeal would have been a challenge. Snapdeal did have exclusive deals with some brands to sell on the platform, but these may shift to Flipkart or Amazon anyway. As for customer base, it’s likely that there’s a big overlap – in other words, the same customers shop on both sites, trying to get the products they want at the best prices.

Flipkart’s main interest in the deal was the promise of SoftBank buying equity as part of it. This may still come to pass if SoftBank invests directly in Flipkart whose main investor, Tiger Global, is keen on unloading some of its shares.

It’s less clear what the road ahead is for Snapdeal. Some observers see the founders’ Snapdeal 2.0 pitch as a smokescreen to buy time for a more lucrative deal than the one from Flipkart, which was mostly in stock and not cash.

See: The underbelly of the startup world, as revealed by a failed ecommerce pioneer

But who will buy a stripped down Snapdeal? One of India’s large offline retailers could be a possibility. Their efforts at going online have received a lukewarm response at best. For example, Tata Cliq has an Alexa ranking of 469 in India, compared to Snapdeal’s 51.

Snapdeal does have a robust tech platform for ecommerce transactions, built over seven years, and millions of online visitors. If it comes at a bargain, an offline retailer may find it easier to buy that up instead of building its own online presence.

So don’t be surprised if the grand strategy turns out to be Snapdeal Sale 2.0 a few months down the line.

This post Dissecting Snapdeal 2.0: Can it succeed where Ebay failed? appeared first on Tech in Asia.

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