Microsoft is no stranger to the tech scene in India. It has already invested in several companies in India– including the Walmart-owned ecommerce giant Flipkart– and it is now in talks to acquire a stake in OYO.
Founded in 2013 by Ritesh Agarwal, OYO (also known as OYO Hotel and Homes) is a budget hotel chain backed by Grab, Sequoia India, and Softbank. This unicorn started aggressively expanding overseas in 2018, entering markets such as China, UK, Indonesia, Japan and the UAE. On its website, it claims to have more than 43,000 hotels operating in 80 countries– when (or if) these numbers were updated, we are not sure.
However, OYO’s fast expansion was problematic. Its China business, which at some point looked bigger than its Indian one, quickly suffered from the fallout of management and operational issues. The WeWork fiasco and the collapse in travel amid the Covid-19 pandemic came as a double whammy.
With its losses already widening from US$52 million to US$335 million before the pandemic, OYO was forced to slow its expansion and cut spending. In 2020, it laid off 5000 full-time staff while furloughing another 4000 workers.
Such struggles have not only caused Softbank to cut its valuation from US$10 billion to US$3 billion, but also led OYO to raise $660 million in debt. The company then went quiet– despite the excitement of IPOs of Indian unicorns, you can hardly sense OYO’s presence.
Microsoft’s proposed investment in OYO thus raises some eyebrows; many are wondering why it wants to invest in this struggling business.
It’s all about Azure
From what internal sources have disclosed, this investment supposedly requires Oyo to shift to Microsoft’s cloud services. We find it quite plausible for Microsoft to have made this stipulation, especially since it appears to have made multiple investments in other tech companies in order to sell more Azure.
Bukalapak, for example, is widely known as a Microsoft-backed unicorn, but the US tech giant is only its 15th largest shareholder, holding a 1.2% stake in the company. In other words, it seems that Microsoft did not invest in Bukalapak to build its presence in Indonesian ecommerce, but to expand its Azure customer base (as some in our community have suspected).
Microsoft may also have had similar interests in its past partnership with Grab, since the latter also adopted Azure as its preferred cloud platform after the partnership.
While Microsoft would obviously prefer to fish for bigger businesses for Azure, large and successful tech companies are usually reluctant to migrate from its existing cloud services. For these companies, top line growth matters more, and their tech decision makers will find the risk of migrating cloud services outweighing the potential cost-savings.
Tencent has included similar terms as Microsoft in some of its overseas investments, but many of its investees remain on AWS. Some of Alibaba’s major portfolio companies (outside of China) are also not on Alibaba Cloud services.
Conversely, companies that are in bad shape (ahem, OYO) will find these savings on infrastructure more meaningful. They are also more willing to migrate to Azure, especially since there is little for them to lose, but much for them to gain.
This OYO investment probably falls nicely into Microsoft’s cards. It wants to hook in more businesses– and OYO is keen to bite.
In fact, it is quite possible that Microsoft investment may not even include cash, but Cloud credits that help OYO save their costs instead.
Microsoft’s eyes are locked on AWS
In the global market for cloud services, AWS still commands a significant lead– its 41% market share is currently more than double that of Azure.
Microsoft, however, seems to have established itself as the leading player in India. It has a total of three Azure regions in India– most of its competitors (including Amazon) only have one in the country.
Over the past few years, Microsoft has also sought to expand its presence in India. In 2019, it partnered with Reliance Industries (the conglomerate behind the data provider Jio) to build data centers across India over the next decade. Two of them are already being developed in the states of Gujarat and Maharashtra.
More recently, it has also finalized talks with Telangana state government for a US$2 billion data center in Hyderabad.
Microsoft, therefore, sees India as a key battleground in its fight with AWS. It wants to defend its lead in India, especially as its rivals (including AWS) are encroaching into this market.
Amazon already runs a large-scale ecommerce business in India– and depending on which metric you look at, they are either ahead of (or behind) Flipkart.
Furthermore, while Microsoft has been successful in onboarding enterprises, tech startups are just native to AWS, culturally and religiously. Just try to find me one consumer tech startup founder who tells you that Microsoft is an exciting company to work with.
The onboarding of businesses such as OYO, as well as the building of data centers, probably form parts of this play.
What’s next for OYO?
As for OYO, this proposed investment would push its valuation to US$9 billion. Many are also expecting the investment to be a prelude to an IPO, as it makes sense for OYO to take advantage of the current tech IPO boom in India.
However, the entire hospitality industry remains battered by the Covid-19 pandemic. Despite its claim as ‘a global hotel chain’, the reality is OYO has no control over its partners. In times of crisis, it will not be able to collect any meaningful revenue from them.
Maybe it is time to get a refresher on Prof Galloway’s epic essay on OYO.
