How smartphones killed India's SMS stars

Innoz and GupShup embodied how companies in developing countries were winning with low-end innovations that catered to their markets. Then came the smartphone.
Written by Rajiv Rao, Contributing Writer
Innoz's co-founder Deepak Ravindran, whose company was celebrated in Wired Magazine last year for its ingenious, SMS-based internet search product. The company has now shut shop.

What a difference a few years can make. Even as recently as a year ago, Innoz was a company that seemed to have a very clever and prescient business model that leveraged the humble SMS to provide a valuable service to the hundreds of millions of phones in India that didn't have direct access to the internet.

As I described in this article some time ago, Innoz's initial proposition allowed anyone with a feature phone to essentially "surf the net" by having them send their questions to a number via SMS, a few seconds after which the answer would be spat back out to them using the same SMS platform. This was no small business; the company serviced 5 million queries per day posed by 125 million customers while making a tidy profit of approximately $1 million, double what it was the previous year, and at a 42 percent margin to boot. Its solution was innovative enough for it to be dubbed the "Google" of feature phones.

GupShup was another uniquely Indian communications company that made at least $25 million in top line just two years ago by broadcasting popular jokes and financial information to its 65 million users via SMSes, collecting revenue through the targeted advertising that these messages would attract.

Both companies were in a sweet spot, catering to the hundreds of millions of predominantly feature phone users out there. But then, almost overnight, came the beginnings of the smartphone craze in India. Before you knew it, they were being consumed at a ferocious rate, unit sales growing at upwards of 200 percent. As you can imagine, this posed a dire existential threat to both companies.

In order to fend off the threat, Innoz decided to go "all in" by expanding its service to the hundreds of millions of feature phones out there by encouraging some 50,000 third-party app developers to create interfaces that ride on the SMS platform. These would make feature phones look very similar to what a smartphone looks like with all of the same icons. In other words, Innoz strived to make the "dumb" feature phone "smart".

Not far behind, GupShup decided that it too needed to have some kind of response to the smartphone wave, so it developed an app in nine Indian languages that would leverage a bulletin board for messages with channels for corporates to run their own forums. This, it surmised, would be a good way to begin fending off the threat from the app wave.

Even today, there are still 257 million feature phones out there in India versus 44 million smartphones, so you would imagine that these services had a little time before they were forced to morph themselves into another avatar, while leveraging their locked-in user base.

GupShup had a large fan base that consumed its Bollywood gossip and cricket scores via SMS.

No such luck. Last year spelled doom for feature phones. Unit sales plummeted from 90 percent of the Indian market to 78 percent, and that decline is just going to get steeper as price points between the two kinds of phones continue to narrow. The recently introduced Nokia X line of cheap smartphones is just one indication of how accessible and inexpensive smartphones are going to get soon.

Consequently, in a rapid fall from grace, both Innoz and GupShup decided to throw in the towel recently.

According to this report, Innoz's founders have moved to Silicon Valley to start a new venture called Quest, which, similar to its prior SMS-based version, is a question and answer app but for smartphones. When I had talked to the company last, it insisted that Innoz would be able to evolve its SMS business model along with technology shifts, but this doesn't seem to have happened.

GupShup, meanwhile, has apparently pivoted to "Teamchat", an enterprise messaging app that services employees on the road who need to stay in touch with each other through a back end that connects to enterprise systems.

After being kings of the SMS hill, both outfits will find that their new waters, flooded with competition, are even more perilous than the old ones.

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