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Google opened its first office in India almost a decade ago, and executive chairman Eric Schmidt has since watched the country’s technology sector expand rapidly. In this video interview, Schmidt is optimistic about the role technology can continue to play in India’s development but warns that the regulatory environment must keep improving. This interview was conducted by James Manyika, a director in McKinsey’s San Francisco office, and what follows is an edited transcript of Eric Schmidt’s remarks.

Interview transcript

The Indian Internet

Well, to me, India is still well behind in the potential that it’s going to have with a connected society. India has about 120 million users on the Internet, which is less than 10 percent of the population. So we have no idea what is going to happen when the next 50, 60, 70 percent of the Indians—which represent a sixth of the world population, I might add—join the conversation. We hope that it’ll be the same as what we’ve seen before, but we don’t know. And unleashing that creativity is a great opportunity and challenge for the next few years.

There’s never going to be the kind of broadband infrastructure in a physical place at the scale that we see here in America. But it’s perfectly possible that India can leapfrog much of the technology that we’ve taken for granted over the last few decades and build very, very powerful fourth-generation LTE networks to handle the tremendous load of all these Indian users and consumers. So the Indian Internet will be lower cost, mobile. But I’m sure it will be very creative and very clever.

A smartphone revolution

One of the greatest things in the last decade has been the arrival of the modest-cost mobile phone for the developing world. People who do not have televisions, refrigerators, literally, stable bathroom situations, have mobile phones. And if they don’t have mobile phones, someone in their village has a mobile phone.

Technology is a declining cost industry. And the phone that we have today, which using US prices is a $400 phone, will be a $200 phone in a couple of years, because of Moore’s law, and a couple years later, it’s a $100 phone. So if you simply take the phones from two years ago, wait two years and distribute them, you have a $50 to $70 phone by the time you’re done. And that’s without subsidies.

There’s every reason to believe that in the next five years we can get Android-type phones, through partners that are doing it at volume and doing it in a very clever way. We’ll get a basically successful smartphone with a modestly powerful screen. And the price points can be well below $50.

The general rule in these markets is that at a price point below $50, people will save up their money. They can pool their money together, they can do it for a village, and that will change the world. The other issue that India and other countries have is very high data rates, because there’s not enough competition in the telecommunications industry.

India’s addressing that by bringing in more competition for the LTE layers. But one of the simple solutions there is to have much more access to WiFi hotspots and the ability to be mobile between them. So even there, we have some solutions. I think there’s every reason to believe that in five to ten years, the majority of Indian citizens will have good access to the Internet.

And it’ll be modest in the sense that they’ll have a browser, they’ll have reasonable bandwidth—certainly nothing compared to what we will have in the same time. But it’s life-changing for them. That’s what’s important. Life-changing. Access to information they never had. Access to the world’s information. Access to all those languages. Access to pictures, the ability to take pictures of what’s going on around them as a security measure. On and on and on. For them, it’s a huge deal.

India’s tech sector

A reasonable expectation for a developing country is not that they’re going to produce a global Boeing or Google or what-have-you company within a decade. A reasonable expectation is that they will build local firms that have unique talents and skills. Those firms will have high wages, high growth, and really transform the country.

That opportunity is available to India because of the quality of the people, the educational system and, frankly, the large domestic market. There are hundreds of large firms for the Internet that will be founded and will be successful—ones that are simply for Indian consumers—as India gets connected.

Indian taste, Indian style, Indian sports, right? Cricket as an example. There are many, many, many examples where the local culture, the local languages, and so forth will drive a local solution. As to whether such a company could ultimately become a global powerhouse, it’ll take more than a few years to see, but of course they can.

But the way it works is you first start with your domestic market and you do a great job. The reason to think that an Indian company can do this is that American firms have worked for a long time with Indian engineers in India. So we know the technical talent is there. It’s not a question of talent, and it’s not a question of education. It’s a question of the way in which the system is run, the regulations, the way capital is formed, and so forth. And there’s evidence that those issues are changing.

India’s impact

India has had a big impact. Sun Microsystems was founded by someone who’d been to an IT university in India. And here in Silicon Valley, there is evidence that 40 percent of the entrepreneurs are Indian foreign born. So it gives you a sense of the scale and reach of Indian entrepreneurs outside of the country. So the problem is not the Indians, the problem is the country. And the country appears to be relatively dysfunctional politically, and has some corruption issues. You can see the potential when the Indians come here. Imagine if they were there and they were doing the same things with the same kind of structure. They’d change the world.