India Goes Digital

India goes Digital
A Birdseye View of the Indian Digital Consumer Industry
.com
AVENDUS
November 2011
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Dear Reader, Aashish Bhinde

aashish.bhinde@avendus.com
Karan Sharma
karan.sharma@avendus.com
Sanchit Suneja
sanchit.suneja@avendus.com
The Digital Consumer industry in India has made a surprise rebound into the public eye. Over the last 6 months, reports of internet and mobile start-ups have become a regular feature in all forms of media. Deal activity has been growing at a frantic pace. There is excitement in the entrepreneur and investment community, and most importantly, among consumers. If online travel and classifieds were the star performers of the last decade, e-tailing seems to be hogging the limelight this time around. Inevitably, valuations have become the subject of cocktail party conversations. When we started talking to investors and entrepreneurs in the industry, a few common themes kept coming up. Despite the overall excitement, a tinge of scepticism remains. Have we really crossed the chasm? Is connectivity actually growing the way we need it to? What about payment systems - how do we get people to actually spend money on the net? And so onthe ghosts of 2000 seem to be very much around and kicking. For every bear, there is a bull out there. Winner takes all, say some. The defining trend of our times, say others. Investors have pumped in money in a host of digital start-ups this year. And the business traction seems to be growing. But how far will this go? Or more pertinently, at what pace will the potential unfold? In this report, we have attempted to construct a factual perspective of the Digital Consumer industry as it stands today. We start with a detailed look at the Indian ecosystem to identify growth drivers, pain points and emerging solutions. Next, we break-up the digital consumer market into its underlying sub-segments and provide you with an in-depth perspective on each of them. In addition to data and views on the Indian Digital Consumer market, we have tried to provide extensive benchmarks with global markets to enable each of you to apply our own filters and form a well-informed and personal view of the potential this industry holds. We confess to having started on this report as sceptics ourselves - concerned as we were by the nature of the ecosystem and the depth of the industry. As we progressed through this study - capturing data, speaking to more than 50 leading industry participants and looking at global benchmarks - we found ourselves gradually shifting to the other side. We hope the data & analysis helps you, the reader, to form your own perspectives on the industry. This report, as the name suggests, is focused on consumer facing (B2C) businesses. Even though we are big believers in the value digital media holds for B2B businesses, we havent covered those in this report. We felt the dynamics in that segment are different and better dealt with separately. Finally, this report is an attempt to collate as much secondary data we could gather from disparate sources and combine that with perspectives and insights lent by industry practioners we spoke with. We welcome feedback from each of you and apologize if anything weve written (or missed out) offends anyones sensitivities. We trust youll find this report useful as you formulate your own thoughts, and look forward to a continued, meaningful dialogue with you as this exciting industry evolves.
Anshul Agrawal
anshul.agrawal@avendus.com
Kanchan Mishra
kanchan.mishra@avendus.com
Aashish Bhinde Executive Director, Avendus Capital
Prologue
3 :: 7
Is the Ecosystem Keeping Pace?
8 :: 39
Consumer-facing Business Models
40 :: 119
Global Models, Desi Adaptations
120 :: 135
How to Spot the Winners?
136 :: 139
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Investment Activity
140 :: 154
Annexure
155 :: 158
Acknowledgements | Disclaimer
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Acknowledgements
This report is the culmination of efforts of several people who contributed their views and others who worked tirelessly to compile secondary data and conduct interviews of industry practitioners. Firstly, we are grateful to each of the entrepreneurs, investors and industry professionals who lent their insights which helped enrich the perspectives we have been able to articulate in this report. We would also like to thank Amit Garg and K. Valliappan of MXV Consulting who provided outstanding support to our team for compiling data and conducting the analyses. We would like to thank Comscore India for providing data that facilitated our analysis.
Disclaimer
This report is not an advice/offer/solicitation for an offer to buy and/or sell any securities in any jurisdiction. We are not soliciting any action based on this material. Recipients of this report should conduct their own investigation and analysis including that of the information provided. This report is intended to provide general information on a particular subject or subjects and is not an exhaustive treatment of such subject(s). This report has been prepared on the basis of information obtained from publicly available, accessible resources. Company has not independently verified all the information given in this report. Accordingly, no representation or warranty, express, implied or statutory, is made as to accuracy, completeness or fairness of the information and opinion contained in this report. The information given in this report is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. Any decision or action taken by the recipient based on this report shall be solely and entirely at the risk of the recipient. The distribution of this report in some jurisdictions may be restricted and/or prohibited by law, and persons into whose possession this report comes should inform themselves about such restriction and/or prohibition, and observe any such restrictions and/or prohibition. Company will not treat recipient/user as customer by virtue of their receiving/using this report. Neither Company nor its affiliates, directors, employees, agents or representatives, shall be responsible or liable in any manner, directly or indirectly, for the contents or any errors or discrepancies herein or for any decisions or actions taken in reliance on the report.
*Comscore data is for 46 million Internet audience above 15 years of age accessing Internet from Home or Work
Prologue
A Global Megatrend Online India
Prologue
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A Global Megatrend
For those who came in late :: are over 2 billion Internet users in the world (almost 1/3rd of the world There population) If Facebook were a country, it would be the third most populous in the world Taobao has over 400 million registered users, more than the population of United States has become the biggest music vendor in the world within 6 years from its iTunes launch Pandora (an Internet radio website) is the largest radio station in the world today Zyngas valuation is now believed to be higher than that of offline games veteran Electronic Arts m-Pesa processes more transactions than Western Union all around the world Internet is now the single largest channel for advertising in the UK Today, there are over 2 billion Internet users across the world, spending over 23 hours a month online. In the US, the Internet accounts for one-third of all media consumption. 6% of the worlds retail sales and 14% of advertising are now over the Internet. In the UK, the Internet is the single largest advertising channel. The UK, US and Japan have traditionally been the front-runners in online adoption. Inevitably, China has come to the party - doubling its online market size every year over the last 3 years, with 4% of retail sales having moved online in China by 2010. Besides the obvious significance of the numbers, the Internet has also brought significant changes to the way businesses are being conceptualized and run. Zynga, for instance, combines gaming and social networks. Streaming services from Netflix and Hulu are disrupting the TV business in the US (and we dont even know the real story on iTV as yet). Social media is assuming center stage in how businesses are engaging with customers. Most companies have a social media strategy in place. Coca-Cola expects to spend as much as 20% of its advertising on social media this year. Cloud based technologies are becoming a reality with high levels of adoption across enterprises and consumers. Salesforce is a leading CRM solution in the enterprise space, while newer players like Dropbox and Sugarsync are witnessing increased traction among SMEs and consumers. Location and mobility based services are also beginning to evolve, with players like Zipcar, Foursquare and Zagat getting significant traction. Adding to the excitement is the growth of smartphones and tablets. In 2012, cumulative sales of such devices shall overtake those of PCs. 1 in 4 persons in the world shall be accessing Internet on a smart phone. In Japan, over 20% of online advertising spends have already moved to the mobile Internet. The impact of the Internet is everywhere - to the point where we dont even notice it anymore.
Prologue
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An investment rush The digital consumer industry can probably lay claim to being the first mega-industry built around VC and PE investments. Start-ups have provided the innovation and investors have enabled them to create scale. And the trend continues. In the first half of 2011 itself, VC investments in the US were estimated at $3.7 billion, close to the total investments in the sector in all of 2010. (Exhibit 1) Exhibit 1 VC investments in the US digital consumer industry
10 Value $ bn Number of deals 8 Investments in $ billion 616 530 452 4 3.4 2.7 2.2 2 200 441 3.1 4.4 3.5 5.1 5.1 4.4 400 No of deals 6 600 729 669 857 796 7.4 800 915 928 1,000
0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E
Note: 2011 value annualized based on H1 investments Source: Moneytree VC Investments Q2 11 national data (National Venture Capital Association)
The rewards have been high for those who have believed in the potential of this sector. Amazons market value has increased 230 times from its IPO value, an annualized gain of 47% over 14 years. Googles market capitalization has increased 7-fold since its IPO in 2004 - and most people thought it was overvalued at the time. The digital consumer industry has demonstrated superior performance compared to the overall market. The Internet index of NASDAQ (QNET) outperformed the NASDAQ composite index from the beginning of 2007 till October 2011. While the NASDAQ composite index delivered annualized returns of a mere 1.3%, QNET clocked 8.8% annualized returns during the same period. More recently, LinkedIn, the professional networking site, doubled its market capitalisation on IPO. Despite its travails, Groupon had a $700 million public offering this month - the largest since Google. And the pre-IPO valuations attracted by Facebook and Zynga have only heightened investor interest.
Prologue
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Exhibit 2
IPOs in 2011
Company
Valuation ($ billion)
Category
Groupon Yandex RenRen LinkedIn Pandora Qihoo 360 Phoenix New Media Jiayuan
Source: Press articles, Bloomberg
12.80 8.00 5.50 4.30 2.80 1.68 0.83 0.35
Group buying Russian search engine Social network Professional networking Internet radio Browser and portal Online news portal Dating social network
India Online
For many of us, the Internet is now an indispensable part of our lives and we hardly even notice the touch points (Exhibit 3). Annexure A captures some of the important milestones in the evolution of the digital consumer industry in India. Till last year, however, the Indian Internet story was limited to virtual goods and services tickets, classifieds and ringtones - physical retail had been stubbornly slow to take off. Issues around connectivity, consumer trust, supply chain capabilities and payment solutions were generally cited as insurmountable dampeners. India :: A country going digital 80 million Internet users 10 million 3G connections within 6 months of launch, almost equal to the base of wireline broadband connections The 2nd largest user base for Google+ and Orkut in the world 28% of travel gets booked online; 117 million transactions on IRCTC alone 47% of the classifieds business is online 7% of bank users in India access their accounts online 25% of IT returns were filed online in 2010-11 Close to 50% of music revenues in India comes from mobile downloads Over the last few months, e-commerce has become mainstream news. E-commerce companies are reporting double digit growths on a month-on-month basis. Some are recording revenues in the region of a Crore a day - rivaling retail brands that have been around for more than 10 years. A leading e-tailer expects to increase its revenues 5X this year. In South Bangalore - arguably Indias most tech-savvy acreage - companies
Prologue
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are deploying dozens of courier boys to provide personalized delivery services. Cricket matches are interspersed with ads of Internet companies. Site traffic statistics have gone up by 150-200% between May and September this year itself. And the pace is only increasing. The new poster boys Blazing the trail
But still, several questions remain :: quality of Internet connectivity good enough to drive consumption online? Is the payment infrastructure ready to support large scale e-commerce growth? Is the Indian consumers really ready to embrace e-tailing? How many are actually Are transacting? ready is the supply chain infrastructure to handle direct consumer deliveries? How have the right talent and environment available within the industry? Do we is the path to profitability? What
We start by taking a look at the ecosystem.
Prologue
Exhibit 3
A day in the life of the digital consumer
Buy a Diwali gift online for mom
Look for a lunch deal
Pay electricity bills online
11
Tweet about the meeting
12
1 2 3 4
Choose location for next month's holiday
10 9 8 7
Check Facebook Wake up with an iPod alarm app
Locate route to client's office through Google maps
Book tickets for a holiday
Check day's meetings on Google Calendar
5
Search for a job online
Check score at Cricinfo

Access Demographics E-governance capital and Risk Entrepreneurship Advertising Payments Supply chain
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As we understand it, the digital consumer ecosystem comprises several external and internal components, summarized in Exhibit 4. While internal components can be controlled by the industry, external components mostly remain outside their direct influence. External components often have a higher level of influence over the growth of the industry. Exhibit 4 Components of the ecosystem
Govt. initiatives
Payments
Access
Advertising
Demographics
Supply chain
Risk capital/ Entrepreneurs
We have tried to capture the current status of each of these components and how they are expected to evolve going forward.
Is the Ecosystem Keeping Pace? | Access
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Access :: The big story

80 million users, a long way to go There are an estimated 80 million Internet users1 in India today, which represents a penetration of 7% of the population (17% of urban population). This is significantly lower than global benchmarks (average 31% of total population). Exhibit 5 Internet penetration (%) 2011
82% 78% World Avg. = 31% 78%
36%
37%
7%
India
China
Brazil
US
Japan
UK
Source: Internet world stats, Comscore
Fortunately, this is an aspect of the ecosystem that is witnessing heightened activity on various counts. This includes the commercial launch of 3G mobile services in early 2011 and the launch of 4G broadband recently by one player (with others slated to launch in early 2012). There is also the National Broadband Plan 2010 conceived by the government, which envisages government investments of Rs 20,000 Crore ($4.5 billion) to build a National Fiber Optic Network. We have conducted a detailed analysis of the growth trends of various technologies, and expect the number of unique Internet users in India to reach 376 million by 2015 close to 5 times the current number. Exhibit 6 Unique Internet users in India (in million)
35% 30% 25% 20% 15.3% 15% 9.8% 10% 5% 0% 2.5% 29 2007 3.1% 36 2008 3.9% 46 2009 5.0% 60 2010 6.6% 100 80 2011 120 2012E 190 2013E 273 2014E 376 0 2015E 200 300 Unique users (million) Penetration (%) 29.5% 500 21.7% 400 600
Source: Avendus estimates
The number of Internet users is itself a matter of great speculation. One report has suggested 70 million. Google put out a number of a 100 million sometime back. Another report suggests that the number is now closer to 120 million. An industry expert pegs the number closer to 150 million.
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PC-broadband is an important factor for driving growth in e-commerce Among the multiple parameters that determine status of Internet access/connectivity in a country, PC broadband is perhaps the most significant. This is because, at least from a rear view mirror perspective, there has been a high level of correlation between penetration of e-tailing and penetration levels of PC broadband across countries. (Exhibits 7 and 8) This is understandable, considering that broadband plays a vital role in improving the online experience of users. That results in increasing the time spent by users online, which in turn leads to an increase in online spends. Exhibit 7 PC broadband penetration vs. online retail penetration (%) - US*
5% 76% 78% Internet/ broadband penetration (%) Internet/ broadband penetration (%) 4.0% 3.4% 2.9% 2.5% 2.1% 1.8% 1.4% 1.1% 1% 0.5% 0.2% 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1% 9% 4% 0% 0.9% 14% 20% 28% 36% 30% 45% 51% 3.6% 62% 64% 60% 90%
4% E-tailng penetration (%) 60% 3% 44% 37% 2% 31% 50% 63%
70% 66%
71%
74%
Internet penetration (%)
E-tailing penetration (%)
PC broadband penetration (% households)
* E-tailing and broadband penetrations are shown on different scales Source: US Census Bureau E-stats
Exhibit 8
PC broadband penetration vs. online retail penetration (%) - China*

6% e-tailing Penetration (%) 24.0% 28.2% 30%
E-tailing penetration (%)
20.0% 4% 16.1% 3.3% 20%
12.5% 9.1% 1.4% 0.7% 0.3% 0% 2005 2006 2007 2008 2009 2010 0.4% 0% 2.0%
2%
10%
*E-tailing and broadband penetrations are shown on different scales Source: JP Morgan Nothing but Net 2011, China e-commerce market statistical report January 2011
10
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Number of PCs is not a constraint Availability and costs (device and usage charges) are the two key factors determining Internet adoption. Currently, there are 55 million PCs in India as against 15 million PC broadband connections. PC penetration, though low, has not been the constraining factor. A BCG estimate suggests that the number of PCs in India will reach 216 million by 2015, making it a non-constraining factor. Broadband availability and cost are the major constraints Prices of broadband connections as well as availability have been the bigger constraints to the growth of broadband in India. Broadband prices in India remain among the highest in the world. Unfortunately, the expectation that the success of Indias telecom sector in driving mobile penetration would be leveraged to drive broadband penetration has not been realized this far. Availability has also been a sore issue, as the infrastructure to reach homes through DSL, digital cable or fiber was just not present across a major portion of the country. The problem is being faced even in the metros, with several areas still facing service gaps. Competition between different technologies is likely to fuel growth Currently, the number of PC broadband connections is estimated to be 15 million. DSL has been the primary driver of this - accounting for 10 million connections. While cable and wireless fixed connections have struggled to gain significant traction, CDMA dongles have grown very rapidly to become the second biggest contributor at 4 million connections. The introduction of 4G in the Indian markets is expected to be the next game changer2. We expect the growth in PC broadband to be driven by Dongles and 4G Broadband. Dongles have gained significant traction through attractive pricing, and the quality of connections offered. This has been possible due to the declining voice usage on the CDMA space, freeing bandwidth for data usage. There have also been significant investments in moving towards next generation technologies, which help in reaching speeds close to 10 Mbps. 4G is projected to achieve a 9% penetration globally by 2015, and is likely to translate into 28 million connections in India by 2015. However, we remain cautious on our estimates for 4G since the technology is new and no country has seen mass adoption as yet. We estimate around 17 million 4G connections with half of them catering to PCs by 2015 Cable broadband, though a significant contributor to broadband Internet access in other countries, has seen lukewarm performance in India. This is because the Indian cable industry is highly fragmented and unorganized. Large parts of the cable network still work on analog technology. Local cable operators (who control last mile connectivity to the consumer) have been resisting adoption of digital technology to protect their turf. We
We also have the National Broadband Plan 2010, under which the government is planning to invest Rs 20,000 Crore in building a National Fiber Optic Network. However, implementation issues with the previous plan cause us to be cautious about factoring in a dramatic impact of the current plan
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therefore remain guarded in our projections of cable broadband as well. Having said that, there could be a significant upside to our projections of cable broadband subscribers, because several factors (including government regulations and demand from consumers) could fall in place leading to mass digitization of cable networks in India. Once that happens, the industry could attract the much needed investment from institutional players to drive cable broadband penetration. We also expect the growth of DSL to slow down due to the continuous decline seen in wireline phones over the last decade. Having said that, if the National Broadband Plan even partly succeeds in what it intends to do - provide 10 Mbps connections to all homes in top 63 cities through Fiber-to-Home connections, and Fiber-to-Kerb in all other cities - we may have a significant fiber optic upside as well. PC broadband penetration to reach 15.6% of households by 2015 Summing up, we estimate India will have 39.3 million broadband connections, a penetration of 15.6% of households, by 2015. We believe this is a reasonably conservative estimate that doesnt factor in the upside of various initiatives that are underway translating into hypergrowth. Exhibit 9 PC broadband connections in India (in million)
45 39 40 35 30 25 20 15 15 11 10 5 0 4 2 2 2007 3 2008 2009 5 8 10 12 14 15 15 6 2 4 6 9 Cable Wireless fixed 4G - PC Dongles DSL 20 1 12 13 26 4 32 9
2010
2011
2012E
2013E
2014E
2015E
Mobile broadband to be the primary driver of overall Internet penetration - 3G to reach 22% of the population by 2015 Besides PC broadband, there is a massive mobile broadband phenomenon underway. 3G services have acquired 9 million connections within 3 months of launch. We expect this number to improve significantly in the coming years. Smartphones are becoming more and more prevalent, with the lowest priced smartphone being available at Rs 3,000 (~$65) already. This number is expected to further go down to reach Rs 2,000 (~$45) in early 2012, potentially opening the floodgates for smartphone adoption. A McKinsey estimate puts the number of
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smartphones in India at 450 million in 20153. The declining voice ARPUs of Indian mobile operators and the need for increased data revenues is a well-documented story. Mobile operators are under immense pressure to make 3G work in India due to the investments (Rs 67,719 Crore - $15 billion - in license fees) which they have made and the cost of infrastructure building (estimated at Rs 248,000 Crore ($55 billion), similar to China). We expect operators to continue their marketing push on 3G services and drive innovation on pricing - resulting in 279 million connections by 2015. This is in line with global penetration trends. (Exhibit 10) 3G pe busy!
Exhibit 10
3G penetration growth
India 22% 2% 13% 28% Japan 45% 58% 69% 78% 86%
2003 2004 2005 2006 2007 2008 2009 2010 15% China 18.8% 11.3% 10% 1% 2009 US 4% 18% 1% 2012 2013 2014 2015 2004 3% 2005 7% 2006 2007 2008 2009 27% 3.8% 2010 2011 2012 2013 40% 30%
Source: Avendus estimates, Morgan Stanley Research Internet trends 2010
Can India lead the mobile-Internet revolution, McKinsey Quarterly, February 2011
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Exhibit 11
Internet connections by type (in million)

0.6 1.6 2.2 3.4 3.8 6.3 7.0 10.7 2 13 51 120 196 288
15.5
10.5 14.8 20.0 25.6 19.2 32.4 4.3 2014 21.1 39.3 4.0 2015
6.6 2007
6.7 2008
6.4 2009
5.7 2010
5.6 5.1 2011 2012 4.7 2013
PC narrow band connections (million) PC broadband connections (million)
Mobile narrow band (million) Mobile broadband (million)
Numbers represent the number of connections and not the number of Internet users Source: TRAI telecom industry quarterly performance reports, Avendus estimates
While talk about the promise of mobile Internet is all good, the on-the-ground impact it would have on advertising and commerce is yet to be fully understood. This remains a nascent market globally, as can be seen from the size of m-commerce industries in different countries. Exhibit 12 3G as % of broadband vs. m-commerce as % of total e-commerce
Mobile commerce as % of total e-commerce 202 Mobile connections as % of total broadband connections
155 145 61% 123 126 74% 93 78 32% 50 12.1% 9.4 49 20.3% 10.0
0.8% 1.2 US
China E-commerce revenue ($B) Total broadband connections (mn)
Japan m-commerce revenue ($B) 3g connections (mn)
China numbers are for the year 2010; US and Japan numbers correspond to the year 2009
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Exhibit 13
Users by point of primary access of internet (%)

9%
36%
36%
37%
34%
27%
42%
59%
67%
72%
30%
26%
23%
37%
32%
19% 13% 24% 9% 7% 19% 14% 10% 2013 Mobile (%) 16% 8% 2014 14% 6% 2015
34%
38%
40%
29%
32%
2007
2008 Work (%)
2009 Home (%)
2010
2011 Cybercafe (%)
2012
Source: IAMAI I-cube report 2010-2011
Time spent online by Indian users at 16.5 hours per month low compared to global benchmarks, projected to reach 21 hours by 2015 Time spent online has a significant relationship with ad spends on Internet and hence is expected to aid the growth of online advertising. Higher time spent online also increases the chances of online spending by the consumers, thus aiding the growth of the ecommerce industry as well. Exhibit 14 Time spent online by Indian users
Average time spent online per person per day (Hrs) Average time spent online per internet user per day (Hrs) - 2010
0.43
0.46
0.49
0.53
0.55
0.58
0.61
0.64
0.67
0.70 Japan 2.87
China
2.74
US
2.27
Brazil
1.07
India 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
0.55
Source: BCG The Internets New Billion (September 2010)
Total number of users transacting online in India at 8-10 million, expected to increase to 38 million by 2015 The number which matters most to e-commerce players is the number of users actually transacting online. At present, the total number of such users is estimated at 8-10 million - about 11% of the online universe in India - a large part of this universe are users
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transacting on Travel sites. Number of unique users transacting on travel sites (only) are estimated to be around 6-7 million and for non-travel e-commerce sites is around 2-3 million today. The total number of unique transacting users is expected to reach 38 million by 2015. Exhibit 15 No. of users transacting online (in million)
Users transacting online (million) 38
CAGR = 36% 28
21 15 11 7 3 2007 5 2008 2009 2010 2011 2012E 2013E 2014E 2015E 9
Access in 2015 :: The facts that matter 80 million online users today, 376 million by 2015 costs - PCs or smartphones are not going to be limiters to growth. Access and Device pricing will play the major role PC broadband - the key driver for e-commerce growth - to have 15.6% household penetration Conventional wireline broadband likely to be eclipsed by the introduction of 4G and the growth of CDMA dongles change the face of Internet access - creating access for 22% of the population 3G will Shared, or public access will reduce in proportion as more people get personal Internet access time spent online will grow by 27% per user - driving advertising and commerce The Number of transacting users to grow from 9 million at present to 38 million
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Is the Ecosystem Keeping Pace? | Demographics
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Demographics :: Beyond metros

Tier I cities dominate, but penetration increasing fast across tier II/III cities and towns The geographic distribution of Internet users has been skewed towards tier I cities till date. However, the number of users in other cities and towns has been increasing steadily, and this trend is expected to accelerate as the next 100 million users get added. This augurs well for the e-tailing industry as 30-40% of their total sales already come from tier II/III cities. The penetration of modern retail in tier II/III cities is much lower than that in tier I cities. The Internet has the potential to solve the availability issue faced in these places. Exhibit 16 Geographic distribution of users
29%
29%
30%
36%
37%
10%
12%
12% 12% 11% 18%
20%
21%
21%
18%
41%
38%
37%
34%
37%
2006 Top 8 metros*
2007 Other Metros
2008 0.5 - 1 Million
2009
2011
Less than 0.5 million
*8 metros : Mumbai , Delhi , Kolkata , Chennai , Bangalore, Pune , Hyderabad , Ahmedabad ** Excluding the 8 metros
Source: IAMAI I Cube report 2011
The digital-divide is reducing The National Broadband Plan 2010 envisages Internet in every village by 2014, by utilizing the Universal Service Obligation (USO) fund to build infrastructure. Private players have also been playing their part in reducing the digital divide. ITCs e-choupal, for instance, is involved in building connectivity infrastructure across villages to provide real-time market price information of crops to farmers. There are over 6,500 e-choupals in operation today, covering 40,000 villages across 10 states. Similarly, Nokia lifetools, is a mobile subscription service, where one of the primary services is the delivery of weather forecasts for the region through periodic SMS updates. There are currently over 17 million subscribers to the service, making it one of the largest mediums of information dissemination to the rural populace. eFarm is another initiative that utilizes technology to create an efficient low cost supply chain mechanism connecting farmers with the end markets.
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Is the Ecosystem Keeping Pace? | Demographics
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Younger consumers driving growth There is, expectedly, a bias towards a younger demographic online. We expect this trend to accelerate, since technology adoption rates tend to be higher among younger people. At the same time, the number of Internet savvy people in higher age groups will continue to rise - improving the potential for commerce. Exhibit 17 Age distribution of Internet users
Age group 2011 Total users = 80 million 55+ 1% 45-54 4% 35-44 6% 25-34 12% 15-24 9% 0-15 5% Internet Penetration (%) 346 17% 245 40% 345 203 45% 252 177 37% 231 96 28% 170 Population (mn) 145 9% 121 2015 Total users = 376 million Population (mn) 158
Source: Comscore State of the Internet with a focus on India (June 2011), Avendus estimates
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Is the Ecosystem Keeping Pace? | E-governance
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The e-governance imperative

The Indian government is also playing its part in promoting digitalization of everyday life. While the primary role of the government is to ensure the right infrastructure and policy framework in any industry, the Government of India is playing an important secondary role too, by driving wide-scale usage of Internet technologies. E-governance is a key focus area of the government, as technology adoption can help bridge the vast infrastructure gaps that exist between urban and rural India. With inclusive development being the key theme in India over the last decade, this assumes increased significance. 25% of income tax filings are now online A case in point would be the movement towards e-filing of income tax returns, which was made mandatory for companies and firms requiring statutory audit from assessment year 2007-08. In this case, the chances of voluntary consumer adoption are high - since there are still multiple pain points in most of the services delivered by the government. For the government, there is the advantage of improving the efficiency and transparency of the government machinery. While refunds from the government took an eternity to reach an assessee in the past, e-filing has helped accelerate the process significantly with refunds being processed even within a week of filing in some cases. The process of filing income tax returns has also become much easier, with multiple websites offering do-it-yourself services for filing returns. Consumer adoption rates show that the consumers are more than happy with the movement towards e-filing of income tax returns. Almost 25% of the returns filed last year were in the electronic form and it is estimated that nearly three-fourths of all tax filings in assessment year 2015-16 will be done online. Exhibit 18 Number of tax returns filed (in millions)
25
75 32 29
5 2009-10 Offline
2010-11 Online
2015-16 P
Source: SNK E-tax, Economic Times (21 June 2011)
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The National e-Governance Plan Adoption of technology in income tax processing though is just one of the several initiatives being pursued by the government, under the National e-Governance Plan (NeGP). The vision of NeGP is to: "Make all government services accessible to the common man in his locality, through common service delivery outlets, and ensure efficiency, transparency, and reliability of such services at affordable costs to realise the basic needs of the common man. The plan comprises of 27 Mission Mode Projects (MMPs) - with clearly defined objectives and timelines - which are being implemented by the central government and/or the state governments. It involves a massive build-up of infrastructure such as Common Service Centers (CSC) being established at every village in the country, and large-scale digitalization of government records. The plan outlay is around $7 billion and the targeted completion is by 2014. 15% of the plan outlay is being utilized for building infrastructure that will get utilized across projects. Apart from this, most state governments also have taken initiatives in the e-governance/m-governance space. Exhibit 19 List of projects under NeGP, and other state government initiatives State MMPs Agriculture Commercial Taxes eDistrict Employment Exchange Records Land Municipalities Panchayats Gram Police Transport Road Treasuries Integrated MMPs CSC e-Biz e-Courts e-Procurement For eTrade EDI National e-governance Service Delivery Gateway Portal India
Central MMPs Banking Central Excise & Customs Income Tax (IT) Insurance MCA21 National Citizen Database Passport Immigration, Visa & Foreigners Registration & Tracking Pension e-Office
Prominent state government initiatives state government initiated 21 m-governance pilot projects in end 2009, Kerala including services like electricity and water bill alerts, filing policy complaints through mobile and audio guides for tourists at hotspots government has also just launched a service called Em-power Kerala, Kerala which enables delivery of all e-governance services on mobile Himachal Pradesh had awarded contracts for 6 m-governance services to Spice Digital, which was to be followed by 6 more services
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UIDs and the impact on electronic payments The government initiative to issue Unique Identification numbers (UIDs) to residents through the UID authority of India (UIDAI) is also a significant step towards inclusive development through the adoption of technology and digital media. The project aims to distribute UIDs to all residents of India, which would be easily verifiable through biometrics in a cost-effective manner. It eliminates the problem of lack of identity and address proofs which is the biggest hurdle for availability of banking and financial services for the underprivileged sections of society. Will a bank account follow?
UIDAI has also tied up with more than 50 banks to provide the option of opening a bank account at the time of getting a UID. Banks are also building a Business Correspondent (BC) network-based micro-payments infrastructure to ensure the accounts getting opened are utilized effectively. The technology backbone is expected to play a significant role in keeping the transaction costs low, which is of critical importance because the banks would not enjoy benefits of a significant float in the low-value accounts opened. The Government also recently launched the Government e-Payment Gateway (GePG) to provide a mechanism to handle all Government payment transactions by the Pay and Accounts Offices of the Government of India. It is envisioned that GePG would also be used down the road to make direct electronic transfers of subsidies to the beneficiaries, thereby making the process more efficient and effective4. While Government initiatives are typically looked upon with a certain degree of skepticism, the initiatives outlined above are a clear indication of the recognition and determination within Government circles to leverage e-governance to drive cost savings and inclusive growth.
Also see Digital India: The Rush to Mobile Money, BCG, 13 July 2011
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Is the Ecosystem Keeping Pace? | Risk capital & Entrepreneurship
AVENDUS
Risk capital and Entrepreneurship :: Let a thousand flowers bloom

A whole lot of money Availability of risk capital in the digital consumer market has been on the rise with newer VCs entering the market, and many PE investors turning towards early stage deals. The trend has got more pronounced in 2011 (Exhibit 20). Exhibit 20 Investment activity (in $ million)
900 800 700 Value in $ million 600 500 400 300 200 15 100 147 0 1999 213 46 19 7 3 35 5 103 102 242 105 111 829 0 2006 2007 2008 2009 2010 2011* 21 19 20 20 37 33 40 66 60 80 80 Number of deals 100
2000 2001
62 2 2002 2003 2004 2005
*Note: 2011 numbers are till Nov, 2011 Source: Press articles, Mergermarket, VC Circle, Venture Intelligence, Avendus Estimates (For a comprehensive list of deals in 2011 please refer to Annexure B)
Exhibit 21
Investment activity in 2011 (in $ million)

250 12 200 9 150 7 7 100 94 4 50 22 42 39 41 31 2 Mar Apr May June July Aug Sep Oct 2 0 Jan Feb Nov 108 5 3 56 57 4 2 6 6 9 200 14 12 10 140 8
Value (in $ mn)
Number of Deals
Source: Press articles, Mergermarket, VC Circle, Venture Intelligence, Avendus Estimates
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Is the Ecosystem Keeping Pace? | Risk capital & Entrepreneurship
AVENDUS
Growing entrepreneurship The entrepreneurial ecosystem has matured significantly in recent years. The current wave of start-ups in the digital consumer space is being led by first generation entrepreneurs and not large corporates. Several of the leading e-commerce companies including Flipkart, Redbus and Snapdeal stand testament to the impact first generation entrepreneurs (in their 20s and early 30s) are having in the development of a new industry. Improved support systems Support structures have also been improving with the presence of associations like The Indus Entrepreneurs, (TiE), proto.in and pluggd.in across multiple cities in India. Initiatives like the National Entrepreneurship Network (NEN) are doing high quality work in channeling entrepreneurial energies of students at the university level towards new venture creation. Incubation centers at various prestigious educational institutes5 in the country have also played their part in encouraging the top talent of India to venture on their own. Critically, the angel and seed funding ecosystem has improved significantly in recent years, making much needed risk capital and mentoring more accessible to entrepreneurs. Some of the leading organizations providing angel/seed stage financing include Mumbai Angels Network, Indian Angels Network, Seedfund, Blume Ventures, etc. Several VC firms have also started providing seed stage financing to try and catch them early. Furthermore, successful business houses and high net-worth individuals (HNIs) are also carving out a portion of their capital to invest in early stage opportunities.
Most IITs and IIMs have incubation centers
23
Is the Ecosystem Keeping Pace? | Advertising
AVENDUS
Advertising :: A well developed market

There are multiple forms of advertising which get utilized in the online space, the most prominent ones being search, display, rich media, video, and classifieds. Online advertising market estimated at Rs 1,850 Crore ($410 million), 7% of the overall advertising pie The Indian online advertising market accounts for 7% of the overall advertising industry. This is less than the global average of 15.5%, but is probably ahead of where it should have been relative to the Internet penetration in the country. Several leading advertisers in India are now spending 5-10% of their advertising budget on the Internet. Exhibit 22 World advertising revenue break-up 2011 (in $ billion)
Others :: 35
Internet :: 37 TV/Radio :: 225
Print :: 139
Source: Zenith optimedia Adspend forecast (April 2011)
Globally, online advertising is growing at the cost of a decline in print advertising (Exhibits 23, 24 and 25). That trend is different in India, where print and Internet are both in growth mode. Exhibit 23 World advertising spends by media
47% 48% 46% 45% 46% 46% 41% 39% 37% 34% 31% 29%
13% 9% 6% 10%
14%
15.5%
7%
7%
7%
7%
7%
7%
Print 2006 2007 2008
Tv/ Radio 2009 2010
Internet 2011
Others
Source: Zenith Optimedia adspend forecasts
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Exhibit 24
Online Advertising spends in Japan

2005 2010
Others :: 39%
TV/Radio :: 33%
Others :: 38%
TV/Radio :: 33%
:: 6
In te r ne t
Print :: 22% Internet :: 13%
Print :: 16%
Source: Dentsu Advertising expenditures in Japan (2010)
Exhibit 25
Online advertising spends in the US

2005 2010
Print :: 41%
Advertising is leading consumption In the US, online advertising has traditionally lagged the time spent online. But that gap is now narrowing.
:: rnet Inte 8%
Internet :: 17%
TV/Radio :: 51% Print :: 27% TV/Radio :: 56%
* Shows the split between TV/radio, print and Internet only; does not include the spends on other media Source: IAB Internet advertising revenue reports 2006 and 2010
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Exhibit 26
Time spent vs. Ad spends - US

2008
43.2% 41.1% 34.4% 28.7% 26.9% 17.3%
2010
45.7% 42.9% 33.3%
17.3% 14.1% 10.7% 10.4% 8.1%
15.6% 10.2%
Print
Radio Time spent (%)
TV
Online
Print
Radio
TV
Online
Ad spend (%)
Source: Time spent from e-Marketer, Ad spends from IAB Internet advertising revenue reports 2008 and 2010
The Indian story has been different - with growth of online advertising leading the time spent by Indian internet users online. Exhibit 27 Time spent vs. Ad spends - India (2010)
74.3%
2010
49% 40%
13.8% 10.2% 7.2% 4% 1.7% TV Online
Print Time spent (%)
Radio Ad spend (%)
Source: Indian Readership Survey 2010, KPMG-FICCI Media and Entertainment Report 2011
Some of this difference can be attributed to the extra-ordinary success of online classifieds in India, which accounts for Rs 750 Crore ($170 million) out of the total online advertising market of Rs 1850 Crore ($415 million). The other factor is the favourable demographics of the online population most of whom are the focus target group for marketers. Online advertising expected to reach Rs 7,000 Crore ($1.6 billion) by 2015 Due to increasing Internet penetration and improved user engagement, the time spent online is expected to increase significantly, leading to a 9% share (of overall media consumption) for the Internet in 2015 (see exhibit 28). We expect this to result in Internet advertising accounting for 10-15% of the overall advertising market at that time.
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Exhibit 28
Time spent - India (2015)

71%
2015
12% 8% 9%
Print Time spent (%)
Radio
TV
Online
Google and Facebook are the big winners As things stand today, global majors like Google and Facebook are the biggest beneficiaries of the growth of the online advertising market in India. They collectively account for about 29% of the direct spends and approximately 55-60% of overall spends6. While Google has dominated the search advertising market and the advertising network space to a great extent, Facebook has gained a large share of the display advertising market. Apart from Google and Facebook, the two major destinations for online advertising spends are portals and classifieds. In both these cases, the top 10 players account for a significant portion of the advertising revenues of each of the segments respectively (Exhibit 29). Exhibit 29 Composition of Indian advertising market (% share of total revenues)
Includes: Yahoo! Rediff Web 18 Times group Cricinfo MSN HT Media 29% Includes: Naukri Shaadi Jeevansathi Carwale Motorexchange Justdial Sulekha Bharatmatrimony Available advertising pie for rest of the players
22% 100%
41%
9% Total Facebook + Google Portals Classfieds Others*
* Over 50% of others is through Google Ad words, and a significant portion of the remaining through other advertising networks
Google also controls a significant part of the advertising market on third party sites through its Adwords platform
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The dominance of these players seems to suggest that the opportunity for advertisingbased business models in the Indian context is limited. This is likely to change only if the segment witnesses disruptive innovations that challenge the status quo. However, there continue to be opportunities for Indian advertising service providers which include advertising networks and agencies. Exhibit 30 Advertising value chain
Advertiser
Ad Agency
Ad networks
Publisher
Technology Platform / Advertiser Tools

Producing Ads Managing Ad Matching
Technology Platform / Publisher Tools

Managing Attracting
ROLE
campaigns Sending Ads to publishers
Advertisements to inventory & Selling prices
publisher inventory, serving ads into ad space
eyeballs
Ominicom, WPP,
DoubleClick,
Speigels sales
DoubleClick,
Liberto.it,
Global Players
Interpublic, Publicis
Google, aQuantive
force, ValueClick, Google, Right Media, DoubleClick
Google, aQuantive, 24/7 Real Media
Speigel.de, FT.com, engadget.com
The online advertising eco-system has developed on the back of advertising networks (AdNetworks) and digital advertising agencies (AdAgencies) that have facilitated transactions between publishers and advertisers. AdNetworks and AdAgencies enable a smooth flow of an impression or a click from a publisher to an advertiser and finally to the consumer. AdNetworks help in aggregating traffic across publishers and especially small and midsized publishers who find it challenging to sell their inventory directly. As a result, AdNetworks have been key vehicles in monetizing the long tail of the Internet. Today, small and mid-sized merchants are primarily the ones selling their inventory through AdNetworks. However, even large publishers sell a significant amount of their inventory through this channel. The revenue model of these AdNetworks is based on price arbitrage, aggregated offerings across geographies/verticals, a variable cost per click model and other specialized and targeted offerings. Online advertising leverages technology and delivers advertisements through a central Ad server, which enables targeting, tracking and reporting of impressions that traditional media alternatives fail to capture. Advertisers also leverage AdAgencies to create advertisements and then distribute them through various digital media. AdAgencies act as agents to the advertisers and place their ads through AdNetworks or exchanges. With time, solutions have evolved and today digital advertising is being delivered through a mix of online marketing, mobile, search, social media, blogs and video platforms. Agencies and networks are offering integrated solutions to their clients that help maximize their ROIs and reap the benefits of a 360 marketing campaign.
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Globally, Google has become the largest player with presence across the landscape. Microsoft, Yahoo and AOL are also key players in the eco-system. There are only a handful of independent players in a market that has seen a fair degree of consolidation . The top 4 companies have made multiple bets in AdNetworks, Exchanges, Mobile, Video, RSS and Real Time Bidding (RTB). Indian AdNetworks scaling internationally due to relatively small domestic market Even though a large portion of Indian advertising revenues are mopped up by Google, Facebook and Yahoo, local AdNetworks are slowly gaining popularity in the country, driven by the increase in publishers and ad inventories. Some of the key players include Komli Media, Tyroo (acquired by Yahoo), Ozone Media, AdMagnet, NetworkPlay and DGM India. Given the relatively small size of the Indian online advertising market, players like Komli have been aggressively developing a strong international network through acquisitions. The company acquired ZestADZ (India), Activ Digital (Singapore), PostClick (Australia) and Indoor Media (UK) to gain a ready client base in these geographies. It recently also gained a foothold in the video advertising networks segment through its partnership with Jivox for Asia-Pacific. The mobile advertising space has been dominated by mobile Adnetwork InMobi, which gained unprecedented attention on the back of its $200 million funding by Japanese media conglomerate SoftBank in September this year. Recognizing the limited opportunity in Indian mobile advertising (at least in the short term), InMobi has aggressively expanded its mobile ad network overseas. Within a span of just 4 years, it has grown to become a credible number 2 to Googles AdMob, serving over 60 billion ad impressions every month to more than 350 mobile users in over 165 countries. InMobi is also leveraging M&A strategically to build out its service proposition - it recently acquired US-based ad software developer Sprout which has an expertise in rich media ads for devices that support HTML 5. Ybrant Digital is another player who is developing an impressive international network of digital marketing services businesses. Exhibit 31 Name Web 3.0 Lycos Max Interactive Dream ad Oridian AdDynamix VoloMP MediosOne Ybrant Digitals global acquisitions Date Jun 2011 Aug 2010 Aug 2009 May 2009 Jan 2008 Feb 2007 Apr 2007 Nov 2006
Source: Wikipedia
Country/Region Israel USA Australia Argentina Israel, Europe USA Serbia, USA USA
Services Offered Performance based marketing and application development Search, Social Media, Affiliate Marketing Display, SEM Display, SEM Display Display Email Marketing/Software SEM, Display
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Rich content is the way ahead; mobile expected to be the next frontier It is a proven fact that TV (video) advertising is more engaging than other types of static advertisements; the same holds true in the digital environment. That fact combined with increasing broadband penetration and adoption of 3G services, video advertising is expected to gain significant traction in India in coming years. Indian video ad networks, Vdopia and Jivox are generating strong momentum as Indian advertisers increasingly seek to leverage the benefits of online video advertising to engage interactively with their customers. Online video ads deliver more product information to a specific targeted audience YouTube has turned out to be the worlds largest focus group. Brands and marketers can use the measurement tools offered by YouTube to test their video content on audiences across demographics (without substantial investments). There are 25-30 million unique YouTube users in India, which provides a strong consumer base for brands to test out their commercials. Besides platforms like YouTube, other delivery modes like in-stream video ads, mobile video ads, in-banner video ads, overlay ads, etc. are expected to be the next wave of rich content digital advertising. Though mobile advertising accounted for only 1% of global advertising spend, the level of ubiquity mobile phones are achieving globally is expected to result in rapid growth of mobile advertising. This can be expected to be more pronounced in emerging markets like India where the mobile phone has the highest level of penetration and reach amongst various advertising media. In India today, mobile advertising has been largely restricted to promotional messaging, which is highly intrusive and is facing severe resistance from regulatory authorities. The increasing penetration of smartphones can help address this issue - applications based on various smartphone platforms open up multiple options to serve ads to customers that add real value to them and hence results in better engagement. In particular, location-based advertising (of coupons, and special offers) at highly targeted and precise moments could become a very effective medium for merchants to reach out to customers on the move. Googles acquisition of Admob for $750m, Apples acquisition of Quattro Wireless for $275m and InMobis $200 million fund raise from SoftBank all indicate the phenomenal potential mobile advertising holds in the future. Outlook on online advertising :: Market currently at Rs 1850 Crore ($400 million), 7% of the overall advertising market Advertising spends are leading consumption - driven by attractive online demographics Growth to be driven by video, mobile and social media advertising Market to grow to Rs 7,000 Crore ($1.55 billion) by 2015 Classifieds have been a standout opportunity for Indian players. Other than classifieds, Google and Facebook have been the biggest beneficiaries, controlling 55-60% of the total online advertising market
30
Is the Ecosystem Keeping Pace? | Payments
AVENDUS
Payments :: Life without cards

The cards problem For Indians, the idea of credit isnt second nature (yet) and the adoption of electronic payments has been slow. India remains a cash-driven economy with over 95% of retail transactions still carried out through cash. The carded population is significantly lower than the global benchmarks, creating challenges for e-commerce players. Exhibit 32 Number of payment cards per person
4.5
2.9
2.6
2.6 1.8
1.6 1.2 0.9 0.2
US
Canada
Australia
UK
Singapore
China
Brazil
Russia
India
Source: The Nilson report, RBI Bulletin Retail electronic payment systems (August 2011)
Unlike most other infrastructure issues faced in India, where the trend lines are generally positive, credit card penetration has actually seen a decline of late. This is due to the tightening of norms by banks for the issue of credit cards, after delinquency rates shot up in 2009. There are 18 million active credit cards in circulation and an estimated 8 million unique credit card holders. This translates into an abysmally low credit card penetration of 0.7%. There is an argument that the growth of debit cards helps offset the low penetration of credit cards. Data shows that the number of debit cards in use is more than 10 times the number of credit cards in use, but the total transactions through credit cards in the year 2010-11 accounted for Rs 75,500 Crore ($16.8 billion) while transactions through debit cards accounted for just Rs 38,700 Crore ($8.6 billion). This clearly shows the significance of the credit card number. Exhibit 33 No. of outstanding cards in India (in million)
Debit cards Credit cards 182 137 102 75 50 23 28 25 228
17
18
18
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11 P
Source: RBI Bulletin Retail electronic payment systems (August 2011)
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Payment gateways space well-developed Despite the low penetration of credit cards, the payment gateway space in India has seen significant development. In recent years, several local payment gateways have emerged, and a few of them have been able to offer reliable services and appropriate solutions to the Indian e-commerce players. CC Avenues, EBS (now acquired by Ogone) and BillDesk have led the way, while the bank payment gateways - ICICI Banks Payseal, HDFC Bank and Citibank have not been far behind. Recently, Nasper (MIH) Groups PayU has rolled-out its India services. Global leader PayPals India presence has been restricted on account of regulatory issues. The presence of multiple players and increase in e-commerce volumes has helped rationalize payment gateway charges to 2.5-3.0% that used to hover around 4-7%. Key differentiators amongst various payment gateways are Merchant Discount Rates (MDR), failure rates, settlement days, fraud management, integration support and lead time. The flexibility of independent payment gateways seems to give them an edge over Bank led payment gateways. Drop-off rates in e-commerce websites hover around 30% at the payment page Payment gateways are often blamed for the high consumer drop-off rates, but in reality, there are several other factors that contribute to this. Some of these include: checkout process, which requires the user to re-enter most details every time Long they transact. Contrast this with Amazons one-click payment process Introduction of OTP and two-factor authentication, though improved the security features, have also added to the length and complexity of the payment process Connectivity issues and the power scenario in the country often impact transactions, preventing them from being completed seamlessly e-commerce sites have not addressed integration issues with their payment Many gateways, adding to the problem. Global players typically undergo more than 6 months of testing with their payment gateway systems before launching the service. Indian players on the other hand are known to do the testing post launch Technical and connectivity issues apart, there is also the issue of lack of consumer trust in online transactions. Results of IMRBs I-Cube 2009 survey shows that 99% of the active Internet users who do not shop online, do not trust online transactions. While global players like PayPal have strong consumer protection initiatives, Indian players have not yet made too many attempts to improve consumer perception of online payments. Chinese players faced similar issues, but have found respite in COD and Alipay China has a credit card penetration of around 15% as against an Internet penetration of around 30%. Even though debit card penetration is far higher, they are used primarily for withdrawing cash from ATMs. Like Indian consumers, the Chinese too lack trust in online transactions. Fortunately for Chinese consumers, other forms of payment mechanisms have emerged. And even after becoming one of the largest e-commerce markets in the world, China continues to have low penetration of pure online payments. Cash-on-Delivery (COD)7 still
India Post has offered this service for years under the heading of Value Payable Post (VPP). Will they find a new lease of life from e-commerce players?
32
AVENDUS
plays a major part in China with the CODs share of transactions of 360buy, the largest B2C e-commerce player, estimated at around 80% in 2011. The other interesting innovation is Alipay - a payment service from the Alibaba group that owns Taobao, the largest online marketplace in China. Alipay is an escrow service, wherein the consumers payment gets passed on to the supplier only after the consumer confirms that he/she has received the right product (and in the right shape) from the supplier. Alipay has gone on to become the biggest third party payment gateway with a near 50% share in the Chinese online payment market. Indian players following the Chinese path, embracing COD as the solution for payment problems Almost all of Indias leading e-commerce companies have begun pushing COD. Across categories, players are reporting between 40-60% of their overall transactions coming through COD. Exhibit 34 Benefits of Cash on Delivery Eliminates consumer drop-offs which occur due to long/complex payment processes Mitigates the primary disadvantage of e-commerce - lack of touch and feel, by giving the consumer the choice to touch and feel the product before paying for it Empowers the consumer by transferring the risk from the consumer to the supplier, in case of delivery failures Provides a back-channel for reverse logistics, in case consumers choose to return the goods COD coverage by courier companies has been increasing at a decent pace - and today covers most of the required areas. Also, VPP services from India Post are seen as a reliable means to deliver products on COD to the areas not covered by private courier companies. Third party COD models like Gharpay which enable physical cash collection through agents, have also been gaining traction. The first British postal service required cash-on-delivery - there were no such things as stamps!
Artist: Peter Jackson
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AVENDUS
However, as noted previously, COD also has its own set of issues. First, it comes with a cost - which is often higher than that of an online credit card payment (due to the collection charge of Rs 35-65 per transaction and a delayed cyclical settlement period that stretches from 2-3 weeks). Second, it adds another level of complexity to the supply chain in the form of cash handling. Third, and perhaps most important, it often is indicative of lower buyer commitment - and causes a higher level of returns. Notwithstanding these issues, COD is a necessary evil, that is playing a significant role in making consumer comfortable with transacting online. Multiple payment options, the future Today, most of the Indian e-commerce portals offer multiple payment options - credit, debit and cash cards, net banking and cash-on-delivery (COD). Some portals also offer Cheque/Demand Draft facility and EMI options (especially for electronic goods that have a higher purchase value). We expect this trend to continue, with players adding more and more payment options to their websites as these evolve. Net Banking could help fill the card penetration gap There is a silver lining in the growth of Internet banking users that account for 7% of bank account holders8 today. This figure was a mere 1% in 2007. With increasing confidence amongst consumers to pay online for their purchases, Internet banking could fill up for the lack of cards. The same is substantiated by the success of online travel, where customers are comfortable paying online - 96% of MakemyTrips total transactions were carried out online in 2010-11. Players will incentivize online payments Various e-commerce players have been able to influence payment mode choices through carrot-and-stick approaches. An electronics retailer was able to improve the share of online transactions from 45% to 85% by offering an additional discount of Rs 200 for online payments. Some portals limit the use of coupons and discount codes to online payments only, thus dis-incentivizing the consumer from using other payment modes. Additional promotional offers by credit/debit card issuers also help in making online payments more attractive. We expect the trend to pick-up with more and more players encouraging consumers to move towards cheaper payment modes, especially online payments. Innovations in the Payments landscape can help turn the tide The development of a plethora of alternative payment methods has come to be regarded as a response to the drawbacks associated with online credit card transactions. PayPal and Authorize.net emerged during the last dotcom boom in late 90s. Since then, the stakes have only grown, with the world payments industry revenues pegged at $590 billion in 2010 as per the BCG Global Payments report. With increased complexities in terms of multiple payment options and demands from the merchants, a wave of new generation payment applications are emerging to address the evolutions in Web 2.0.
McKinsey India personal financial services survey 2011
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AVENDUS
Today, one-fifth of global e-commerce is conducted via Paypal. It is estimated that PayPal processes over $315 million in payments per day clocking over 5 million transactions daily. Mobile payments have also seen a sharp increase with the advent of smart phones, improved technology, better consumer offerings and increased awareness. According to Gartner, worldwide mobile payment users will surpass 141 million in 2011, a 38.2 percent increase from the 102 million base in 2010. Worldwide mobile payment volume in 2011 is estimated to grow to $86.1 billion, up 75.9 percent from 2010 volume of $48.9 billion. Given the level of mobile penetration in India and the motivation of regulators and stakeholders to increase the adoption of electronic payments, India could witness tremendous growth in mobile payments as soon as the appropriate regulatory framework is put in place for the same. The introduction of Interbank Mobile Payment Service (IMPS), revised RBI guidelines around prepaid instruments and pilots on mobile payments/wallets from telecom operators and Banks are positive steps in this direction. Beyond Banks, we believe telecom operators will play a significant role as has been witnessed in the case of M-Pesa (Safaricom/Vodafone) in Kenya and GCash (Globe Telecom) in Philippines. The Prepaid instrument (card, mobile, virtual) has had varied degrees of success across the globe. Octopus (HongKong), EZLink (Singapore), Ukash (UK), GreenDot (US) and PaySafeCard have demonstrated the efficacy and scalability of the Prepaid solution. Even in India, prepaid/cash cards have been leveraged well around the online rail ticketing system, with ItzCash leading the show. Players that are able to leverage technology and offer suitable mobile retail payment solutions that meet the regulator requirements are set to emerge as leaders. Outlook :: analysis shows that 80% of leading Chinese e-commerce players offer 5 or more Our payment options, while that number remains at 50% in India. We expect the multiplicity of payment options to increase in India in the near future Besides credit card which is the most common mode of paying electronically, net banking is expected to play a significant role in increasing the penetration of online payments. Demographics favor such a shift as a large part of the young population has had early exposure to transacting (retail/non-retail) on the Internet wallets and prepaid instruments hold immense potential, but it is still early to Mobile comment on the pace of their adoption. A lot would depend on the aggression of mobile operators and banks, and the evolution of a robust regulatory framework will continue to be a prominent payment mode in India in the near future, but eCOD commerce players will continue to encourage/incentivize consumers to move towards other payment modes. Increased consumer confidence in online buying, trust in portals, awareness and improved consumer protection measures will help accelerate such a shift Considering the costs incurred on payments and its criticality in the e-commerce value chain, it wont be surprising if Indian e-commerce companies closely collaborate with or even acquire payment solutions companies - as has been seen globally in the case of eBay and Alibaba In coming times, the complexities in online payments are bound to increase. Innovative payment modes like Facebook Credits, BillMeLater (PayPal), Ukash, PaySafeCard, Square, etc. could be the way of the future in India
35
Is the Ecosystem Keeping Pace? | Supply chain
AVENDUS
Supply chain :: Own or outsource?

E-commerce supply chain differs from a traditional supply chain, as it delivers the product directly to the consumer, eliminating multiple players in the process. Exhibit 35 E-commerce supply chain
Long haul Principal 1 Zonal warehouse 1 Transit warehouse 1 Returns COD Principal 2 Zonal warehouse 2 Transit warehouse 2 Customer 2 Last mile Customer 1
Principal X
Zonal warehouse X
Transit warehouse X
Customer X
Tracking & Monitoring Reconciliation
Globally, top players have almost always outsourced forward logistics, while controlling the back-end supply chain such as warehousing and inventory management. Most of the energies of the global e-commerce players have been spent on establishing warehouses that are capable of handling thousands of orders per hour. But one of the unique issues facing the e-tailing industry has been the variable quality of forward logistics services. Consumers have faced numerous delays as well as deliveries of damaged products. The lack of an established returns process only added to the headache. Cost was an added concern - especially given the low ticket size of transactions in the early days of an e-commerce site. Chinese companies faced similar problems, and built/acquired logistics capabilities to tackle the problem Chinese companies have faced similar problems in forward logistics as their Indian counterparts. And they have come up with two ways of tackling the problem. Some companies have built their own supply chains, while others have acquired existing supply chains or formed strategic partnerships with such companies. 360buy went on to build its own supply chain after facing delivery bottlenecks. The supply chain allowed it to deliver parcels on the same day or the next day, and this helped them to grow at 300% over the next five years9. Taobao, which shipped 3 million parcels a day in 2009, took stakes in HTO and Star Express, two of the biggest express delivery companies in China. Taobao also has plans to invest $4.6 billion in the next five years to build a warehouse network across the country. Indian companies following the Chinese route Several players in the Indian e-commerce space - like Flipkart and Babyoye - are now building their own supply chains. They look at it as a strategic option, which not only solves the problems faced on the supply chain front, but also provides the leeway to
Chinas E-commerce Market: The Logistics Challenge, AT Kearney, 2011, Avendus Estimates * for a 0.5 Kg parcel
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AVENDUS
better manage the consumer experience. In addition, the delivery boys also generate visibility for the brand on the roads - effectively acting as an OOH marketing option. A comparison of three means to deliver parcels to the consumer - VPP, courier and selffulfillment - shows that self-fulfillment has several advantages. Exhibit 36 Comparison of different supply options
Parameter Reach
VPP High, covers Tier II and rural areas as well
Courier ~2,000 Pin Codes. Limited reach beyond Tier I Cities Medium 2-4 Days *Outstation: Rs 65-75 Local: Rs 35-45 Rs 35-45
Self-fulfillment Low
Reliability Time to Deliver Cost
Medium 5-7 Days 6% of Value
High 1-5 Days Local: Rs 25-35 at high volumes
Cash on delivery charge Reverse logistics charges Control over customer experience
NA
Low incremental costs Low incremental costs High
No extra charge
Rs 40-55
Low
Low
Delivery is becoming a differentiator Even with investments in their own supply chains, only 10% of the top players give delivery assurances to the customer and, of them, not many provide an assurance of less than 7 days. It is likely that consumer needs will cause e-commerce companies to get more sophisticated on this front. Customers will start looking for quicker delivery assurances as well as options to decide on when to get the product delivered (date, time, etc). Shorter delivery times are likely to (if it hasnt already) become a key competitive factor as the e-commerce battle heats up. We are already seeing companies investing in technologies to improve their warehousing and inventory management strategies. Most of them are also trying to ensure quicker deliveries, without necessarily providing assurances at this point. Over a period of time, we expect to see a movement towards multiple delivery options (some paid and some
37
AVENDUS
free), similar to that of Amazon, which will also provide some leeway for e-commerce companies to optimise their supply chain costs. The business case exists for ownership of forward delivery We compared the economics of owning the supply chain against that of outsourcing it to a third party for two prominent categories - books and apparel. Our analysis shows that it would make economic sense for an e-commerce company to own its supply chain in a tier I city if it ships more than 450 book orders per day (in that city). The number comes down to 110 for apparel, due to the higher transaction value. The much lower number of deliveries in apparels is due to higher returns and a higher percentage of orders being placed at COD. Both, returns and COD are heavily charged by courier companies as compared to relatively inexpensive self-fulfillment. For large volumes, owning the supply chain makes more economical sense but the process of managing the supply chain becomes a lot more complex. Exhibit 37 Comparison of the cost of forward logistics own vs. outsourced (books)
150 130 110 Cost per delivery (Rs) 90
Last mile delivery costs - Own Vs Outsourced - Books
Implications: A company with a revenue of Rs 49 Cr, with a 66% skew towards tier I cities, can manage its own supply chain in 8 tier I cities at the same cost as outsourcing
Break even point 450 deliveries a day 70 50 30 10 -10 0 100 200 300 400 500 600 700 800
Number of deliveries per day per city Own supply chain Outsourced
38
AVENDUS
Exhibit 38
Comparison of the cost of forward logistics - own vs. outsourced (apparel)

150 130 110 Cost per delivery (Rs) 90 70 * 50 30 10 (10) 0 200 400 600 800 1000 1200
Last mile delivery costs - Own Vs Outsourced - Apparel

Implications: A company with a revenue of Rs 42 Cr, with a 50% skew towards tier I cities, can manage its own supply chain in 8 tier I cities at the same cost as outsourcing Break even point 110 deliveries a day
Number of deliveries per day per city Own supply chain Outsourced
In the short to medium term, it seems increasingly likely that e-commerce companies will follow a two-pronged strategy - developing their own delivery channel for the metros and relying on outsourced parties for tier 2 and 3 cities where they are subscale.
* Scaling-up of warehouse due to increase in volumes cause the sharp increase in in-house costs for apparel delivery at 700 * deliveries per city per day". This falls as the number of deliveries increase further
39

Information Community E-commerce consumer services Online Entertainment
AVENDUS
Segmenting the market Based on the underlying consumer needs, we have classified the digital consumer space into 5 categories - Information, Community, E-commerce, Online services and Entertainment. Information, community and entertainment generally tend to be advertising-driven digital fulfillment models. Information websites provide content such as news, stock quotes, entertainment, etc and are further classified into search engines, portals, classifieds and comparison sites. Community businesses generally involve blogs and social networks, and work towards fulfilling the networking needs of consumers online. Entertainment models are further classified into music, videos and games. Some of these models work on a subscription or transaction fee basis. E-commerce and consumer services are generally supported by consumer spends. Ecommerce typically involves the movement of physical retail (e-tailing) or the selling of services (travel or deals) to the online medium. Consumer services tend to involve the provisioning of services through the Internet or mobile phone (online stock broking, elearning, etc). These models are supported by two major revenue streams: advertising and consumer spends. The latter could be further split into transactions and subscriptions. Exhibit 39 provides an overview of the segments, the key revenue streams and their sizes in 2010. Exhibit 39 The Indian digital consumer market -2010 (Segment market sizes in Rs Crore)
Consumer Facing Models

INFORMATION COMMUNITY E-COMMERCE CONSUMER SERVICES
Financial services
ENTERTAINMENT
Search (450) Portals (500) Classifieds (1,000) Comparision sites
Social networks
Travel (19,600) E-tailing (2,100)
Gaming (660) Music (420) Videos (800)
(80)
(2,000) Healthcare Education Government Consumer spends
Consumer spends and advertising
Advertising
Consumer spends
40
Consumer-facing Business Models | Information
AVENDUS
Information
Search
The core of the Internet Searching the Internet has become a routine act in many an Internet users life. Search engines were conceived to help users find difficult to locate information or resources on the Internet. And they have played a big role in helping consumers navigate the complexities of the Internet. The rapid scale up of content experienced on the web over the last 2 decades has made the search engine a quintessential tool for every surfer. Search is the core around which the performance advertising model is built. A McKinsey study put the value of search to the global economy at $780 billion in 2009. This $780 billion was through e-commerce revenues, advertising revenues, higher corporate productivity and consumer savings10. Indian paid search market accounts for 24% of the overall online advertising market Indian paid search advertising was estimated to be around Rs 450 Crore ($100 million) in 2010, accounting for 24% of the overall online advertising market. In contrast, paid search accounted for 57% of overall Internet advertising in UK, 46% of overall Internet advertising in the US and 42% of PC-Internet advertising in Japan, in 2010. At the same time, there is the increasing importance of social networks and video advertising, which would provide a thrust to display advertising. Between these two factors, we expect paid search advertising to at least maintain its share or grow slightly to be between 25% and 30% of the overall online advertising market by 2015 resulting in a market of Rs 1,350-2,100 Crore ($300 - 470 million). Google rules the Indian search market, few opportunities for local players Google continues to be the dominant force in the global search market accounting for more than 85% of overall search traffic worldwide in September 2011. Googles dominance has been witnessed in the Indian search market too, with Google accounting for more than 90% of the overall searches in India in 2010. Ask, Bing and Yahoo! are the other players who battle amongst themselves for the rest of the market. The Fortress
10
Measuring the Value of Search, McKinsey Quarterly, Aug 2011
41
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Googles strength lies in the stickiness of its users, with the average number of monthly visits made by Google users (in India) at 24.9, compared to the average visits of 3.1 seen by the next biggest pure-play search player Ask11. Given the dominance of Google in the search market, and the importance of technology in the field, the opportunities for local players seem limited. The investment scenario reflects this sentiment - the only local search company to have received funding was Guruji who raised capital from Sequoia Capital and Sandstone Capital in 2006 and 2007 respectively. Guruji has unfortunately managed to garner less than 0.1% share of the search market so far which may ring the death knell for further investments in this segment. Opportunities exist in vernacular and mobile searches; but Google is well-covered on those bases The few players to have broken the dominance of global search engines have been Baidu in China and Yandex in Russia. While Baidu has more than 80% share of the Chinese search market, Yandex has over 60% market share in the Russian search market. The censorship issue in China affected Googles market share significantly in the last couple of years, but even before that (in 2005) Baidu had 48% of the market. The success of Baidu and Yandex has been attributed to the complexity of grammar of the vernacular languages and the relative inefficiency of the global players in interpreting them correctly. Yandex cites the recognition of Russian inflexion as its biggest strength over global players. Such an opportunity has not really materialised in India as yet, with the majority of the Internet users being English speakers (so far at least). The vernacular opportunity could become real with the addition of the next 100 million Internet users. However, for textual vernacular content to come in, there is a need for more user-friendly devices and better interfaces (than transliteration). The only vernacular content which is readily available and promoted currently is multi-media content, which really takes the interface out of play. However, even when vernacular content materializes and the need for vernacular search engines arises, Google is far ahead of the other players in this space - with support for 9 Indian languages already in place. The other potential opportunity lies in mobile search. Though mobile searches have been increasing continuously, monetization has been slow so far. Mobile search accounted for just 2% of the UK search advertising market of 2.4 billion pounds in 2010. It has performed relatively better in Japan accounting for 12% of the overall search advertising market. Mobile search could evolve into a significant market in India over the next few years. But, with the increasing penetration of Android powered mobile phones, Google has probably covered that base as well. Overall, search advertising is expected to grow at a fast clip in the next few years, but there are few opportunities for newer players - Indian or global - as Google continues to dominate the market and is well-positioned to continue that dominance over the next few years.
11
Comscore data
42
AVENDUS
Portals
Most portals offer services such as e-mail and instant messenger, along with information and entertainment content. Though there could be premium services which portals offer to its users for a fee, the bulk of revenues of most portals still come from advertising. And as ad spends normally depend on eyeballs and time share, traffic becomes extremely important for portals. Internet users generally tend to devote their unplanned surfing times on portals as they give a multitude of options to spend time. While portals boast of high time spent by users, they often lack the targeting capabilities of a search engine. As a result, portals are generally at the forefront of display advertising as a specific target base of users is available on portals. The biggest portals globally are MSN, Yahoo!, Wikipedia, AOL and CBS interactive. Some of the global portals are big in India too, having developed strong local content capabilities. Portals continue to attract high traffic, ~46% of total internet users access the top portal Yahoo leads the way amongst portals, a clear 50% lead over the next placed MSN sites. Indian players, Times Internet sites, Rediff.com and In.com follow the suit. September saw ~44 million unique visitors clicking through to portals. Exhibit 40 Top portals in India by unique visitors September 2011 (in 000)
Yahoo! Microsoft Sites Times Internet Rediff.com IN.com AOL Inc. Sify Sites Webduniya Lycos Global WebIndia123 2,988 1,672 1,438 632 5,922 10,176 17,522 15,494 24,823 36,592
Source: Comscore
There is a high concentration of visitors amongst the Top 5 portals and a stark dip there onwards. This leads to the marginalisation of players outside the top 10, and making them depend on advertising networks to sell their ad inventory. The share of advertising networks ranges from 25% to 35% of the total advertising revenues, reducing the revenues further for the smaller players. With only around Rs 100 Crore ($22 million) left for all small players put together, pursuing an advertising-driven business model doesnt seem to be lucrative enough to pursue.
43
AVENDUS
It takes time to build a successful portal. It takes significant time and money to build a new online portal. A look at the top players shows that they have been present in the online space for a long period of time, or are offline media houses who own and generate significant amount of content otherwise. ESPN Cricinfo and Rediff, for instance have been around since the mid-90s. There are several ongoing opportunities in the content space - the challenge is that of creating scale. Several niche plays exist - like Pagalguy, Mouthshut and Team-BHP - but they only get around 0.1% share of the total time spent on portals. Meanwhile, social networks have become a clear and present danger to portals The advent of social networks have been putting increased pressure on the time share of top portals. Social networks now account for more than 25% of the overall time spent by users online globally, as against an insignificant share in 2005. Portals have been one of the biggest losers in this. Such a shift has been witnessed in India too, with the time spent on Facebook shooting up to around 22% of the overall time spent online in India in May 2011. Exhibit 41 Total time spent on top websites in India - September 2011 (million minutes)
7,981 7,112
2,585
573
438
420
297
233
Facebook
Google
Yahoo!
Microsoft
Rediff
Network 18
Times Internet
Indian Railways
Source: Comscore
Social networks, especially Facebook, are continuing to add users at a rapid pace. They are introducing e-mail and instant messengers, games and video features to take an increasing share of users time on the Internet. A reinvention is in order - Portals world over are expanding into videos, social networking and games Sina Corp, the leading portal in China, has entered micro-blogging and also has a vibrant video platform that telecasts popular NBA matches live in China. The other leading portal in China, Sohu has got into online games. Top Korean portal NHN has also ventured into online games to increase its time share online. In the US, portals have been increasingly resorting to multi-media content, with the top three players AOL,
44
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Yahoo! and MSN finding a place in the top 5 video sites in US. Similar trends are being witnessed in India too. Yahoo! has launched its movie streaming service Movieplex. Rediff has launched its micro-blogging platform, is actively promoting video content and has also created a deals section (now being advertised on TV as well). We expect this trend to accelerate as portals try to defend their territory from Facebook. The mobile opportunity With over 200 million mobile-only Internet users in India in 2015, there will be several opportunities for mobile portals. Mobile portals are a nascent space globally, but have been seeing a lot of action of late. Operators currently dominate the space, but 3G could change that. Although the media consumption preferences of mobile internet users may turn out to be different from that of PC-Internet users, the current portals stand a better chance of exploiting this market opportunity due to their ready access to wide-ranging content. Given the size of the advertising market and the increased penetration of devices, there could be several content driven opportunities for Indian players. However, given the power of social networking and the lack of recent investments in portals, we dont foresee any dramatic shifts in the near future.
Classifieds
Globally, the transition of Classifieds online has coincided with the declining role of print media12. In India, though, print media is still growing. Notwithstanding that, classifieds have moved online at a healthy pace and, at Rs 1,000 Crore ($225 million)13, it accounted for 47% of the overall classifieds market in 2010. India is in that sense a unique market - where online and offline growth is not necessarily at the expense of each other. However, online classifieds are expected to grow at a faster pace and grab a larger share of the market. Industry estimates suggest that the classifieds industry is expected to more than double in the next 4 years and reach Rs 2,300 Crore ($510 million) by 201513.
12
13
In the US, classifieds advertising for newspapers has been dropping by about 90% in the last decade especially in real estate, automobiles and employment ads Source: KPMG FICCI report on Media and Entertainment - 2011
45
AVENDUS
There has been good investor interest in the classifieds space; some of the recent investments are listed below. Exhibit 42 Recent investments in the online classifieds space
Year
Company
Investment (Rs Crore)
Investors
2011 2011 2011 2011 2010 2010 2009 2009 2009
Hungryzone Motorexchange Justdial Quikr Quikr Getit Quikr Justdial Getit
34 23 45 36 27 100 20 37 20
Just Eat, UK Epiphany Ventures and Canaan Partners SAP & Sequoia Capital Nokia Growth Partners & eBay Norwest Ventures, Omidyar, Matrix, eBay Astro Omidyar, Matrix Sequoia Capital Helion Ventures
Classifieds have two prominent revenue streams - subscriptions and advertising. While advertising accounted for Rs 750 Crore ($170 million) of classifieds revenues in 2010, subscriptions brought in Rs 250 Crore ($55 milllon). The business can also be divided into three sub-segments - local search, horizontal and vertical classifieds. Jobs and matrimonial services dominate the vertical classifieds market Exhibit 43A Top players in the jobs search space by number of unique visitors September 2011 (in 000)
Naukri Timesjobs Monster, Inc. Shine Indeed 1,667 1,315 4,468 5,182 6,004
Exhibit 43B
Top players in the personal search space by number of unique visitors - September 2011 (in 000)
Shaadi
897
Jeevansaathi
629
Bhratmatrimony*
603
Source: Comscore *Bharatmatrimony numbers are only for Bharatmatrimony.com and does not include numbers for its community specific marriage websites
46
AVENDUS
Jobs sites had revenues of Rs 400 Crore ($90 million), while matrimonial sites clocked revenues of Rs 250 Crore ($55 million) in 2010. Together, these accounted for 65% of the overall classifieds market in 2010. Consumer subscriptions form the primary revenue stream for matrimonial websites, and contribute to a sizeable portion of the revenues of job sites as well. Naukri and Monster are prominent players in the jobs space. Bharatmatrimony and Shaadi are the leaders in the matrimony business. Both these categories are seen as relatively mature - primarily because of the time they have been online. The iconic Hari Sadu ad
But nothing stands still in the online world. Job sites are beginning to see increased pressure from LinkedIn, as well as free classifieds sites like IIMjobs. In the US, free sites such as Craigslist have impacted the revenues of classifieds sites quite significantly. There exists significant opportunity for growth as classifieds still cater to a very small portion of the overall recruitment market. That holds true for matrimony as well. Real estate and Auto13 are relatively new categories and provide significant opportunities for growth, especially given the unorganized status of the offline players in these segments. These four categories remain the most prominent ones in US as well as UK14, and we expect them to dominate the online classifieds space in India as well. Education is another evolving category, but it is still early days. Horizontal classifieds seeing a lot of action Horizontal classifieds have had a relatively quiet time in India. But, that is beginning to change as horizontal classifieds have gained significant traction from consumers and a strong pull effect is getting created. For example, Quikrs current growth is largely driven by organic traffic (i.e. traffic not resulting from Search-Engine marketing (SEM)).
13
14
According to a Google report, 65% of Indians use the Internet to narrow down their choice of vehicle. The category has shown 72% y-o-y growth in H1 2011 for the company In these countries, Matrimony is normally a part of the broader Personals space
47
AVENDUS
Exhibit 43C
Top players in the classifieds/local search space by number of unique visitors September 2011 (in 000)
Quikr
5,546
JustDial
4,015
OLX Inc
3,226
ClickIndia
1,702
Click
735
Locanto
659
Indialist
278
Sulekha
197
Khiojle
188
Source: Comscore
Exhibit 44
Composition of investments in the online classifieds space in India (2006-11)
100%
55%
18%
27%
Total
Local
Horizontal
Vertical
Horizontal classifieds are platform plays and do not differ significantly based on geographies. Hence they provide the best opportunity for international players. OLX is one such player who has become increasingly active in this space. However, in a market like India with low Internet penetration currently, horizontal classifieds may require to build a strong offline (telesales plus feet-on-street) model to monetize the growth in their subscriber base. This creates a strong competitive edge for local search players.
48
AVENDUS
Domestic players dominate the local search space While both horizontal and vertical classifieds involve user-generated data, local search involves extensive data collection about local businesses, and providing a platform for people to access that information online. In the US, restaurant review models such as Yelp and hotel reservation assistance models such as Opentable have led the charge. This creates significant advantages for local players, and Indian players have led from the front. Justdial,, Asklaila and Burrp are prominent players in this segment. Most players operate on a hybrid model - providing offline support through call centres to supplement their online presence. While sites like Zomato and Burrp rely primarily on advertising revenues due to high user engagement, sites like Justeat and Bookurtable have adopted a lead generation based model. Though this is one of the more evolved spaces in the online industry in India, there still seems to significant headroom for growth - only 45% of the overall local search requests are believed to be satisfied currently. Mobile classifieds are growing rapidly Classifieds can be delivered on mobile through SMS, USSD or mobile Internet. SMS and USSD are areas which have seen some traction and mobile classifieds are estimated to be a Rs 200 Crore ($45 million) market already, with Verse being the dominant player in the space. The success of Verse also highlights the potential opportunities for classified content aggregators. Are vernacular classifieds the new frontier? Classifieds, by their nature, depend on textual content - and hence language becomes a key element of the service. The penetration level of newspapers - English (32 million), Hindi (134 million) and other vernacular languages (191 million) - demonstrates that a meaningful portion of the next 100 million Internet users are likely to be more comfortable in vernacular languages. Significant scale benefits The cost structure evolution of Dice Holdings, one of the top classifieds company globally, shows that there are significant scale benefits for the leaders in the this segment, especially when it comes to customer acquisition costs.
49
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Exhibit 45
Cost structure evolution of Dice holdings (as % of net sales)

48.2 42.9
32.0 34.3
28.6
14.7
9.8
13.5
17.1 16.1
6.1
6.8 7.4
7.0
3.2
Cost of Revenues 2003
Product Development 2004 2005
2.9
3.5 5.2
3.6
Sales/Marketing 2006 2007
General/Admin 2008 2009
9.8
32.2
Net Profit 2010
Source: Company annual reports
Classifieds :: 47% of the Indian classifieds market has already moved online, creating a Rs 1,000 Crore market opportunity Jobs and matrimonials currently dominate the classifieds segment, accounting for 65% of the market Horizontal classifieds growing and seeing the entry of foreign players Several growth opportunities - a growing overall market, mobile delivery and the potential for vernacular classifieds Info Edge has delivered strong financial results - growing revenues by 49% and PAT by 66% p.a. over a 7 year period
Comparison sites
Financial services, utilities and electronics are categories where comparison sites are common globally Comparison sites provide information which helps consumers compare different products on a certain set of parameters, or the price of the same product from different vendors. These sites are most common in financial services due to the complex nature of products offered to the consumers - creating a need for feature comparison. Comparison sites are also common in categories like utilities (broadband and mobile connections) and electronics globally. Sites like Pricegrabber and Pronto in US and Pricerunner in UK provide comparisons of products across almost all retail categories. Comparison sites normally work on lead generation based revenue models. This involves an electronic transfer of the lead from the website to the principal (service provider) or the retailer.
40.6 37.0
37.5
40.0
50
AVENDUS
Several players emerging in India Financial services is an area that has seen several comparison sites in India as well. Apnapaisa has been a pioneer in online financial comparison, with sites like Policybazaar and Bankbazaar making a strong entry in recent years. Among physical goods, Naaptol was one of the front runners in providing comparison services. CompareIndia from Network18 also provides a variation of the comparison theme. Multiple other small players exist in the space. Comparison sites face several challenges In general, comparison sites face several challenges in India. For instance, most sites in the financial services space sell leads to an unorganized agent network in addition to principals, as against selling largely to a principal in developed countries. Dealing with hundreds of agents as against a few principals results in cost escalations and variability in service to the consumer. It also results in reconciliation and credit issues, leading to other tangles. Direct tie-ups with principals could resolve a lot of these problems. We are beginning to see some movement in that direction. Similarly, physical goods comparison sites are impacted by the poor penetration of organized retailers in India. While comparison sites in the US and UK list around 8-10 retailers on an average, PriceIndia and Naaptol, the leading Indian comparison sites have 1-4 retailers for most products. The lack of retail chains results in the fulfillment process not being as smooth as it is in the developed countries. The (current) low penetration of e-commerce also adds to the problem, as e-commerce players are prominent listers of products in comparison sites. Again, this may change rapidly. Leading comparison sites currently moving towards end-to-end fulfillment of products and services Two of the more successful comparison sites, Naaptol and Policybazaar are now fully into e-commerce. While Naaptol operates as a marketplace e-commerce model (in addition to a highly successful Readers Offer proposition), Policybazaar has started taking ownership of the fulfillment process of selling insurance products. By doing so, they are enabling a better customer experience and capturing a higher share of the profit-pool.
51
Consumer-facing Business Models | Community
AVENDUS
Community
The community segment comprises social networks and blogs. These businesses work towards building online communities, and create a high level of user participation. A successful community website attracts a significant share of user time, and also establishes an emotional connect with the user, leading to continual increases in time spent.
Blogs
Globally, blogs have been the front runners among community websites, and they are even being touted as the key reason for the decline in newspaper circulations. Huffingtonpost, for instance, is the leading blog platform in the US and the largest read news website in US. The site has 36.5 million visitors, more than the visitor numbers of the New York Times and Washington Post. On the technology front, Techcrunch and Engadget, are among the most credible news sources15. The acquisition of Huffington Post by AOL in March 2011 for $315 million shows the potential of the blogging platform. In India, no blogging platform has anything close to the kind of readership and relevance that such blogs possess. The Indian community space is much more about social networks.
Social networks
He even has a movie made on him!
15
In 2007, Engadget posted a story that the iPhone and Leopard OS would be seriously delayed. The story was based on an internal Apple email that had been forwarded to them. Within 13 minutes, Apples stock price had declined 4.1% - a little over $ 4 billion. It seems that Wall Street follows tech blogs as much as the WSJ!
52
AVENDUS
Indians are really heavy users of social networking Indian Internet users have been among the most active in the social networking space punching far above their 4% share of global Internet users. Such high usage is also explained in terms of the reach of social networking in India (85%) being higher than the global average (73%).15a Exhibit 46 Indian social networking users (as % of total users in the world) August 2011 (in million)
Indian users (in million)
Orkut
32%
21
Google+
14%
4 Linkedin 10 Facebook 33 4% 8%
80
Internet
4%
Source: Comscore
Three prominent needs - each dominated by global players
There are three prominent social networking needs which are being pursued across the world - personal networking, professional networking and micro-blogging. All of these are currently monopolistic plays with Facebook, LinkedIn and Twitter reigning supreme in each of these categories. In India too, Facebook is the preferred personal networking site with 33 million users in August 2011, more than 40% of the domestic Internet user base. LinkedIn has become the most preferred social network for professional purposes. And Twitter has become the leading micro-blogging platform with more than 3 million users in India. Filmstars, politicians, business-persons and sports-persons - all of them have realized the power of social networking.
15a
Comscore report on State of Internet in India, June 2011
53
AVENDUS
Exhibit 47
Traffic statistics of social media websites - September 2011 (in 000)
Facebook
36,668
Blogger
19,130
Orkut
10,761
Wordpress
7,192
LinkedIn
6,215
Technorati Media
5,777
Bharatstudent
5,269
Zedge
3,709
Twitter
3,641
Ibibo.com
3,435
Yahoo! Pulse
2,570
Source: Comscore
Indian social networking websites have really struggled to make any impact in the market. None of the Indian players figure among the Top 5 social networking portals. Even Orkut has not been able to sustain its user engagement in India after the arrival of Facebook, providing further evidence of the somewhat monopolistic nature of social networks. Exhibit 48 Facebook vs. Orkut
35 Facebook Orkut 28 29 30 32 27
30 26 Unique users (in millions) 25 19 18 18 15 15 10 16 19 20 20 21 20 24 23
20
19 18 18 17 16 16 15 15
0 Mar '10 Apr '10 May '10 Jun '10 Jul '10 Aug '10 Sep '10 Oct '10 Nov '10 Dec '10 Jan '11 Feb '11 Mar '11
Source: Comscore - State of the Internet with a focus on India (June 2011)
54
AVENDUS
This has been the case in most countries across the world, with Facebook dominating the social networking space. A user puts significant amount of time on building a social networking page - leading to some level of emotional connect and stickiness with the site. And migrating from one social network to another is difficult - Google+ was successful in getting the initial sign-ups but has struggled to get the usage. Most Indian players in the social networking space have realized this, which is why BigAdda has moved into e-commerce, Ibibo into online gaming, and Minglebox into education16. Social networking sites are taking an increasing share of time spends Globally, social networking sites have been rapidly increasing their time share of usage. Apart from the stickiness factor, they have added multiple features like mail, instant messaging, music, videos and games17. The same trend has been witnessed in India with Facebook accounting for almost 20% of the total time spent online in May 2011, growing from almost nothing a few years back. Exhibit 49 Increasing time share of Facebook in US
16%
14% Yahoo Sites 12% AOL
10%
8% Microsoft Sites 6% Google Sites Facebook 2%
4%
0% Q4:08 Q2:08 Q3:08 Q1:08 Q2:10 Q3:10 Q2:09 Q1:09 Q3:09 Q4:06 Q4:09 Q3:06 Q4:10 Q1:10 Q1:11 Q2:11 Q4:07 Q2:07 Q3:07 Q1:07 Q3:11
Source: Citi investment research and analysis
Advertising is shifting to social networks Most social network sites have just started monetizing their user base. But in a short time, they have built multiple revenue streams, including subscriptions for premium services, advertising, social games, virtual goods and even hiring solutions. LinkedIn, for instance, gets 49% of its revenues from hiring solutions, 31% from marketing solutions and 20% from premium subscriptions. Renren receives 44% of its revenues from advertising, 39% from online games, 4% from social commerce and 12% from other value added services.
16 17
Medianama, 30 August 2011 Zyngas ability to leverage Facebook has made it the most valued gaming company on the planet
55
AVENDUS
Exhibit 50
Revenues of social networking sites - 2010 (in $ million)

1,860
243 77 45
Facebook
LinkedIn
Renren
Twitter
Social networks are gradually eating away into the share of other players (especially portals) - this is resulting in a shift in the display advertising market. With the opening up of its self-service platform, Facebook is already seeing a lot of traction in India, and is well on its way to become the most dominant player in display advertising. LinkedIn, which gets close to 50% of its revenues through hiring solutions globally, is also expected to have an impact on the jobs classifieds market. Social games and virtual goods are nascent markets There are two other revenue streams for social networks - games and virtual goods. Virtual goods were pioneered in Korea as a way to monetize online games, and took off in Asia before growing in America. The virtual goods market was estimated at $7 billion globally in 2010, with Korea, Japan, China and US all being $1 billion plus markets. At this point, however, the markets for both of these are very small in India. If you cant compete, collaborate Some companies have seen the size of the Facebook platform as a large opportunity Zynga and Rovio being the best known ones. Zynga has built a business, valued north of $ 10 billion, by leveraging Facebook as a platform for customer acquisition. Considering the immense potential of the Facebook platform - the capability to reach 33 million users in India on one single platform - there would be several opportunities even in India. However, international gaming content has appeal even among the Indian consumers - which means that Indian players would have to compete with foreign players to be successful on this platform. However, there could be localized opportunities, such as city or movie specific games, which could help local companies establish a base. Another category which could benefit from social networking sites is deals. Deals are a category that requires extensive supplier networks and strong consumer reach. Social networking sites could enable deal sites get the necessary consumer-reach in a short span of time.
56
AVENDUS
The elusive vernacular opportunity In the global list of social networking sites, there are three surprises - Weibo (the Chinese Twitter), Renren (the Chinese Facebook) and Vkontakte (the Russian Facebook18). All three have benefitted from their users preference for vernacular language content. Exhibit 51 Global number of users for social networking sites (June 2011) (in million)
711
200
195 124 118 66 58
Facebook
Twitter*
Weibo
Renren
LinkedIn
Orkut
Vkontakte
*Twitter users are as of March 2011'
As we get into the next 200 million Internet users in India, there could be an opportunity for building vernacular or regional social networking portals. Vernacular portals could be the best bet to provide these services. But will sites like Facebook beat them to it? The jury is still out, but so far there havent been many Indian social networking sites that have been able to build a strong connect with consumers in India.
18
The Vkontakte logo even looks similar to the Facebook logo
57
Consumer-facing Business Models | E-commerce
AVENDUS
E-commerce
Given the pace at which companies are growing and getting funded in this space, this decade could well belong to the e-commerce industry in India. In the last few years, the industry has come of age and today e-commerce represents the bulk of economic activity in the digital consumer market. By definition, it includes businesses that involve a transaction with a consumer and a one-time physical delivery of a product or a service. Online services such as financial services, education, and digital downloads have not been considered part of e-commerce in this report. E-commerce companies are growing on the back of a promise to address what Indian consumers desire the most - convenience, value for the money and availability (of desired products and services). For the purpose of this report, we have segmented e-commerce into 2 key subsegments - Online Travel and E-tailing (Mass merchants, Niche, and Deals)
Online Travel
e-tailing
e-commerce
The growth of the e-commerce market is driven by 2 key factors - total number of consumers transacting online (online shoppers) and revenue per online shopper per year. In the US, the number of transacting users was at 170 million in 2010 - comprising of 69% of the overall Internet users. This number has been growing at a rate of 8% for the last 6 years. Exhibit 52 Number of Internet users transacting online - US (in million)
80% 62% 60% 55% 57% 170 64% 66% 67% 69% 200 250
40% 107 20% 117
130
143
153
160
150
100
50
0% 2004 2005 2006 2007 2008 2009 2010E
Users transacting online (mn)
% of broadband connections
Source: JP Morgan Nothing but Net 2011; World Bank; ITU
Similar trends have been witnessed in other developed countries too - with online shoppers accounting for 90% and 70% of total Internet users in Japan and UK respectively.
58
AVENDUS
Transactions per consumer and the average transaction value also tend to increase over time, and with increased Internet usage. The revenue per online shopper in the US is estimated to be $1,550 p.a. and this has been growing at a rate of 5% since 2004. The growth was 10% p.a. between 2004 and 2007, but slowed down subsequently due to the recessionary economic conditions. As with most industries, developing countries are likely to follow a very different growth trajectory for e-commerce. China has been adding Internet users at a rapid pace, and has simultaneously been converting users into shoppers at an equally strong pace. Exhibit 53 Number of Internet users transacting online - China (in million)
40% 32% 26% 27% 28% 200 250
150 20% 109 80 55 0% 2007 2008 Users transacting online (mn) 2009 2010 % of broadband connections 50 145 100
The number of online shoppers in China has been growing at a rate of 38% over the last 3 years. The other metric, revenue per online shopper p.a. has also been increasing rapidly - a 34% growth over the last 3 years to reach $624 in 2010. Exhibit 54 Revenue per online shopper - China (in $)
700 600 500 400 300 200 100 0 2007 2008 2009 2010E 260 332 451 Revenue per user ($) 624
Taking a cue from the global trends and especially its Asian peers, the transacting user base in India is at a cusp of rapid growth in coming years. If the first phase was fuelled by the adoption of online travel, we believe the second phase of growth will be driven by e-tailing. When a Flipkart, Myntra or Yebhi advertisement is aired on national television, a middle class family is intrigued enough to explore the Internet medium and get their first Internet connection (especially since a majority of these families consist of the youth).
59
AVENDUS
In the US, which has a large organized retail sector and a mature ecosystem, 69% of its Internet users find merit in transacting online. It should not be a surprise if the transacting user growth trend takes a generation leap in India where the organized retail sector, reach and infrastructure are still underdeveloped. Exhibit 55 Number of Internet users transacting online - India (in million)
Users transacting online (mn) 38
CAGR = 35%
28
21 15 11 7 3 2007 5 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 9
The number of Indian online shoppers is currently estimated at 14% of the total Internet users; and is expected to increase at a rate of 35% over the next 4 years. At these growth rates, the number of online shoppers is likely to reach 38 million by 2015. This growth is expected to drive the overall growth of the e-commerce space in India, with revenue per online shopper also increasing at a similar pace. Indian e-commerce industry taking giant strides: Estimated to grow to Rs 107,800 Core ($24 billion) by 2015 The Indian e-commerce market is estimated at Rs 28,500 Crore ($6.3 billion) for the year 2011. Online travel constitutes a sizeable portion (87%) of this market today. Globally, online travel constitutes a much smaller portion of the overall e-commerce pie in the US, online travel contributes 37% of total e-commerce revenues (Exhibit 56). Asian markets, especially China and Japan have been even lower (less than 20% in both these countries) in terms of online travels contribution to e-commerce. Exhibit 56 Total e-commerce revenues (in $ billion) and share of travel (%) - US
300 263 250 200 150 98 100 50 0 2003 2004 2005 2006 2007 2008 2009 2010 41% 42% 42% 158 126 39% 38% 37% 37% 39% 194 41% 40% 41% 225 237 235 43% 45%
35%
Total e-commerce($B)
Share of travel (%)
Source: JP Morgan Nothing but Net 2011; Phocuswright; Jupiter research
60
AVENDUS
We expect the Indian market to also evolve towards higher contribution from e-tailing in coming years. As per our estimates, e-tailing will catch up with online travel by 2015 (exhibit 58), with each of them contributing approximately $12 billion to the total ecommerce market in that year. Exhibit 57 Total online consumer revenues (Rs Crore)
120000 1,07,800 100000 80000 60000 40,300 40000 20000 0 2009 2010 2011E 2012E 2013E 2014E 2015E 16,600 21,700 28,500 55,600 77,100
Source: IAMAI digital commerce 2011; Avendus estimates
Exhibit 58
Share of online travel and e-tailing (%) - India

E-Commerce Market Segmentation
10%
13%
22%
31%
40%
49%
90%
87%
78%
69%
60%
51%
2010
2011E Online Travel
2012E E-tailing
2013E
2014E
2015E
61
AVENDUS
Online Travel
Online travel penetration in India at 28%, is higher than that of China & Japan Travel is one of the most standardized services - making it best suited for online selling. At 44%, Scandinavian countries show the highest penetration of online travel. Overall, Europe has seen a steady increase in adoption of online travel with a 33% penetration in 2010. In the US the number was estimated to be 38%. India is measuring up to global benchmarks and at an estimated 28% penetration in 2011, India isnt far behind the US in terms of penetration of online travel. Exhibit 59 Penetration of online travel in US (as % of total travel)
300 256 250 203 200 150 100 50 0 2003 2004 2005 2006 2007 2008 2009 2010 20% 23% 28% 31% 33% 35% 39% 38% 30% 20% 10% 0% -10% 228 233 269 274 256 233 50% 40% 60%
Total travel ($bn)
Penetration of online travel (%)
Source: Phocuswright U.S. travel overview; JP Morgan Nothing but Net 2011
Indian online travel revenues are currently dominated by ticket bookings, with air and train bookings accounting for close to 90% of the segment revenues. Bus travel, hotels and tour packages have been slower to evolve but are now growing rapidly. Online travel penetration was estimated at around 28% in 2011, which is significant considering the fact that online travel in China accounted for just 16% of the total travel, and that the APAC average was at 18%. Even several developed countries such as Italy, Spain, Japan and Singapore lag India in online travel penetration. The online travel market is currently estimated at Rs 24,900 Crore ($5.5 billion) in 2011. This makes India one of the most lucrative markets for online travel.
62
AVENDUS
Exhibit 60
Reach of travel websites March 2011 (% of Internet users)

% of Internet users
45% 42% 40% 31% 25% 22% 27% 23% 15%
North America
Europe
World
Latin America
Asia Pacific
India
Russia
Brazil
China
Source: Comscore State of the Internet with a focus on India (June 2011)
We expect the online travel market to grow at a rate of 22% over the next 4 years and reach Rs 54,800 Crore ($12.2 billion) in size by 2015. This assumes a growth rate of 13% for the overall travel market and online penetration increasing to 37% (from the current 28%). Exhibit 61 Indian online travel market size (Rs Crore)
80000 31% 60000 25% 21% 40000 15% 24900 10% 20000 10500 6250 0 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 0% 15000 19600 10% 38300 31600 45900 20% 28% 33% 35% 37% 40%
54800
30%
Online travel (Rs Cr)
Penetration of online travel (%)
Source: Phocuswright Asia Pacific Travel Overview; Avendus estimates
An oligopolistic industry Globally, the OTA market has supported 3-4 large players in each market. In the US, the OTA market is dominated by Expedia, Orbitz, Priceline and Travelocity. CTrip, Baidu, and eLong lead the show in China. India seems to have followed the same pattern. As on March 2010, the top-3 OTAs commanded a 90% market share. MakemyTrip (MMYT) was the undisputed leader with 48% market share, followed by Yatra and Cleartrip.
63
AVENDUS
Exhibit 62
Marketshare of OTAs by revenues

Makemytrip Yatra Cleartrip Others
10%
18% 48%
24%
Source: Phocuswright March 2010 (from MMYT investor presentation June 2011)
Competition to OTAs from supplier websites OTAs have been increasing their market share at the cost of traditional travel agencies but there is a larger battle to be fought with suppliers (airlines/railways). Most supplier websites find a spot in the top 15, with Indian railways at 1, Jet Airways (Indias largest airline) at 8, and Indigo, Spicejet and Air India coming in at 9, 10 and 11 respectively. Of the online travel market, supplier websites commanded a 61% market share in India in 2010. Exhibit 63 Total unique visitors to travel sites in India September 2011 (in 000)
Indian Railways 8,806
MakeMyTrip
4,080
Yatra
3,813
Cleartrip
3,453
Expedia Inc
2,216
MustseeIndia
1,140
Redbus
880
Jet Airways
815
Spicejet
695
Indigo
444
Source: Comscore
64
AVENDUS
OTAs are adopting different strategies to compete effectively with suppliers e.g. MakemyTrip has recently introduced its own loyalty program to increase stickiness of its consumer franchise. Indian OTAs have maintained a firm lead over international OTAs Only one global OTA finds a place in the top ten in India - Expedia accounted for over 2 million visitors in September, 2011 and took the 4th spot amongst OTAs. Both, Expedia and Travelocity are now increasingly active in the Indian market. Travelocity acquired Travelguru (focused on hotel bookings) in 2009 to bolster its presence in the Indian market. However, both these giants have struggled to get to a leadership position, possibly because of their late entry and because Indian players were well entrenched in the market with a loyal customer base by then. Yatra, for instance, is estimated to have gotten more than 60% of its visitors in 2010 directly via its URL, an indication of its brand recall. Headroom for growth across segments and the possibility of improving margins The online penetration of train travel is around 32% and for air travel is around 50%. However, the online penetration in hotels and packages is less than 5% and that in bus travel is less than 4% of the total market today. The margins for the under-penetrated segments look encouraging too. For MakemyTrip, the only listed player in the space, net margins on air travel have hovered around 7% for the last few years. And train ticket margins range between 5% and 10%. However, margins in bus travel and car rentals are typically at 10%, while hotels and tour packages provide margins between 10% and 25%, making them even more attractive. We therefore believe that the OTA market has significant headroom for growth of revenues and profitability going forward. Several growth drivers for air bookings Air travel still holds the lions share of the online travel industry in India with a 57% share. But the industry is still evolving. Suppliers continue to hold a dominant position in the market, with 61% of the total air ticket sales directly handled by them. This has increased from 58% in 2007, despite a strong performance by most OTAs. In the US too, suppliers hold 69% market share but just around 36% in China. The Chinese market though, may not be the best benchmark when it comes to air travel - since most bookings are still offline19. Though most Indian OTAs have started offering COD payment mechanisms, it is not being promoted too well. Although it may turn out to be costlier than credit card transactions, it may be one of the best ways to expand the market as the e-tailers are demonstrating.
19
Only 10% Chinese booked their travel online in 2009 and online bookings accounted for just 37% of Ctrip, the top Chinese OTAs overall bookings in Q3 2010. In contrast, 96% of MMTs transactions are online
65
AVENDUS
Most OTAs have also been developing a wide agent network - MakemyTrip has 9,300 agents across 700 cities, in addition to the 19 owned offline travel stores. Offline presence is considered to be especially important for the tour packages segment. Even in bus travel, around 40% of the sales comes through agents and COD transactions and an equivalent percentage from tier II/III cities. This could help in expanding the market significantly. Business travel is one of the other large opportunity areas for OTAs. Though all the top players have business travel offerings, none of them have a significant share of revenues coming from this as yet. A large portion of business travel still happens through the offline route, as agents are well entrenched in the space. Yatras acquisition of Travel Services International20 in 2010 was directed at tapping this market. There could be similar acquisitions in the offing, as the requirements for the business travel market differ significantly from the leisure travel market. There are several OTAs in countries such as US, Canada, Middle East and UK that focus on travelers to and from the Indian subcontinent. This could be a lucrative market for Indian OTAs to focus on. As a validation of this, Cleartrip recently committed to invest $10 million in its Middle East focused website. Finally, there is a growing opportunity in the international travel space. International travel accounts for a small portion (<10%) of overall air travel revenues of OTAs in India and could turn out to be a significant opportunity for growth going forward. Railways - a monopoly Online train ticket bookings are estimated to be around Rs 8,000 Crore ($1.8 billion) in 2010-11, accounting for around 32% of the overall ticket bookings. We expect train ticket bookings to grow to Rs 10,000 Crore ($2.2 billion) in 2012. IRCTC has played a pioneering role in developing the entire e-commerce space, by facilitating the first online transactions of many users and getting them comfortable with the overall proposition of transacting online. Hotels and Holidays the next big wave Bus, Hotels and Packages are likely to drive the next wave of growth in travel ecommerce. In markets such as US, these segments account for as much as 55% of gross revenue share for OTAs. In terms of companies, hotel bookings contributed ~70% and ~65% to net revenues of global OTA leaders such as Priceline and Expedia respectively in FY 2011.
20
TSI provides companies with features to maintain their entire travel itinerary online
66
AVENDUS
Exhibit 64
Split of online travel revenue by category in India - 2010-11 (%)

Hotels & Packages :: 5% Bus :: 1%
Train :: 37%
Air travel :: 57%
Source: IRCTC; MMYT SEC filings; Avendus estimates
Exhibit 65
Split of US travel revenues by category in US - 2010 (%)

Packaging :: 4% Train :: 1%
Ca r: :6
Hotels :: 40%
Source: Phocuswright U.S. Online travel overview
We expect the market to see significant development in the hotels space. Consumer interest is high in this sector with almost 50% of travel searches in Google corresponding to the hotels segment. The other factor is the relative strength of the OTAs vs. the principals. In air travel, 61% of the online market is served directly by the airlines. In tour packages, that number is expected to be below 20%. So far, however, OTAs have struggled to succeed in this market. The industry remains highly unorganized with not many known brands or chains in the mid-market space. Unlike rail or air travel, aggregating supply is quite a challenge. It will need companies to adopt a Redbus-like approach (refer to case study 1.0) towards market development to really drive growth. Yatra, one of the stronger players in the hotels and packages segment, already claims to have access to 3,800 hotels in 300+ cities in India and 90,000 hotels around the world. They acquired hotel aggregation company MagicRooms earlier this year. MakemyTrip is aiming to add 500 hotels to its portfolio every month. In the case of packages, content assumes even more importance than the ticket booking space. Most players have tried to improve content, and have attempted to increase user participation through reviews and social media engagements. Holidayiq and MustseeIndia are players who specialize in this space and have a high number of visitors already.
uis Cr :5 e: %
Air travel :: 44%
67
AVENDUS
Bus tickets The pioneer and beyond Bus ticketing is a category that is developing rapidly into a sizeable business opportunity. Redbus has pioneered the growth of this industry. The Redbus bus ticketing software, used by 700 operators, has enabled the creation of a GDS in the bus travel industry. This has resulted in a boom in online bus ticketing. The market is currently estimated at Rs 300 Crore - less than 4% of the market potential. This has caused significant investor interest in the space, and also leading to the acquisition of Ticketvala by MakemyTrip. There is increased competition in the space with multiple new players launching, and the larger OTAs showing interest. Traditionally, airline OTAs have struggled in bus travel - a different target segment and an altogether different supply base. Neither do the bundling opportunities exist. Redbus remains the dominant player in this sector, with no other bus ticketing player featuring in the top 20 travel sites in India. Ticketvaala and Travelyaari are the closest competitors in the space. Interestingly, the bus ticketing companies have tended to remain focused on the segment so far. This may be because of the large growth opportunities in bus travel itself. However, there are clear opportunities for them to offer domestic packages and deals with tier 2-3 hotels. We expect there to be continued developments in that direction. Beyond ticketing - several supplementary opportunities The size of the travel industry also lends itself to several supplementary business opportunities. For instance, meta-search engines have emerged to enable price comparisons across sites - iXigo21, Zoomtra and Ezeego1 have grown to become some of the prominent players in this space. There are also a whole set of new service providers developing around the travel segment. Mygola, for instance provides travel planning support to holiday-makers. Reverse auctioning sites22 like Atyourprice, Bid2travel and Travelsurf are now making an appearance for air and hotel bookings. In the UK there are sites that enable specific travel deals and discounts (e.g. lastminute.com). To close that gap, MakemyTrip has recently introduced a daily deals section. We believe this sector has significant headroom for growth, both in the existing subsegments and through further innovations that are possible. M&A activity likely to increase We expect the industry to see significant growth with several opportunities unfolding over the coming years. Given the synergies which exist in this area, we believe there will be significant M&A activity going forward. In the near term, we expect heightened deal activity on three fronts23.
21 22 23
Acquired by MMT and SAIF partners earlier this year These sites offer discounts of 20-60% on ticket prices through a reverse auction process MMYT says that company looks for acquisitions in 3 buckets: Companies that will get it closer to the customer, companies in research and planning, and niche travel technology companies (Medianama, 25 August 2011)
68
AVENDUS
1.
2. 3.
Existing OTAs will try to strengthen their position by: Getting into unorganized sectors (e.g. bus ticketing) Completing their portfolio of services and become full service providers Acquiring superior technology capabilities Improving content availability and research capabilities, especially on the packages side Merging to create scale - reducing the cost of customer acquisition, improving their leverage with suppliers and creating listing opportunities for their shareholders Foreign players will try to gain a stronger foothold in the domestic market Offline players in the Indian travel market may try to develop a stronger position online Acquisitions in the Indian online travel space
Exhibit 66
Year 2011
Acquirer MakeMyTrip
Target My Guest House Accomodations
Target Business Aggregation, sales and distribution of budget hotel rooms/serviced apartments
2011 2011
Via Makemytrip
TSC Travel Services Luxury Tours & Travels
Travel consolidator in North India Online hotel reservations & tour packages Internet enabled GDS for hotel rooms
2011
Yatra
Magic Rooms
2010 2010 2010 2009 2007
Holiday IQ Yatra Makemytrip Travelocity Travelguru
Wego Pte Travel Services Ticketvala Travelguru Desiya
Travel community Tickets consolidation Online bus tickets Online hotel distribution network Hotel Booking Website
69
AVENDUS
E-tailing
Tip of the ice-berg: E-tailing market still under-exploited E-tailing has been the cornerstone of the digital consumer industry globally. It is typically slow to start off (compared to online advertising and travel), but invariably becomes the dominant force as the sector evolves. This is due to the sheer size of the addressable market - while the size of the advertising market in the US in 2009 was $150 billion and travel was $230 billion, the retail industry was $3,630 billion. The fact that e-tailing in the US was at $145 billion, as against $90 billion of online travel and $23 billion of online advertising gives a sense of the phenomenal potential e-tailing holds in any market. In India too, the market dynamics have been similar - the overall advertising market size in 2010 was $6 billion, travel was $19 billion and retail was $430 billion. But, the e-tailing market has lagged online travel by some distance so far. However, emerging trends indicate that the tables are likely to turn in the next half of this decade. Retail takes time to warm up to the online medium due to two reasons - the lack of touch and feel (resulting in a different user experience compared to physical retail), and the need to develop an ecosystem that helps build consumer comfort and trust. The lack of touch and feel in online retail has been a universal problem, and e-tailers around the world have to address it effectively - the solutions being identification of categories where the need for product touch is minimal (and standardization is high), and incentivizing the consumer through other means such as discounts to compensate for the perceived risk in ordering online. The savings inherent to the e-tailing model - the reduction of inventory and high-cost retail space - provides e-tailers the margins to enable such incentives for consumers. In developed countries, payments and delivery were not major issues due to the high penetration of payment cards and the presence of a mature supply chain industry. This has meant that, as connectivity improved24, penetration of online retailing improved at a rapid pace. Exhibit 67 shows how this evolved in the US market. A similar trend was seen in the UK market. Exhibit 67 Penetration of broadband vs. e-tailing in US (%)
5%
2009 4% E-tailing/ Total retail (%) 2007 2008 3% 2006 2005 2% 2003 2002 1% 2001 2000 1999 1998 0% 20% 40% 60% 80% 2004
0%
Broadband penetration (% of households)
Data corresponds to years 1998 to 2009 Source: US Census bureau E-stats; Worldbank
24
We look at PC-broadband penetration of households as the primary measure of connectivity, due to its close correlation with the e-tailing market size
70
AVENDUS
Developing countries are likely to take a different path in the adoption of e-tailing. Most of these countries face problems on ecosystem parameters. In the case of China, there were problems on both the payment and delivery sides. But the most critical issue, though, was that of connectivity. As the connectivity fell in place, the top players in the Chinese market took it upon themselves to improve the other ecosystem parameters. The growth of the Chinese etailing market was therefore slower in the initial years, due to persisting ecosystem issues. But, once connectivity assumed critical mass, and players started addressing ecosystem issues, the e-tailing market started growing exponentially. Exhibit 68 Penetration of broadband vs. e-tailing in China (%)
Data corresponds to years 2005 to 2010. Source: CNNIC; Worldbank; China e-commerce
5%
4% E-tailing/ Total retail (%)
2010 3%
2%
2009
2008 1% 2007 2005 0% 0% 5% 10% 15% 20% 25% 30% 2006
market statistical report January 2011
The success of the online travel industry in India (which does not have to depend on the physical supply chain for delivery of its service) indicates that consumer acceptance is not necessarily a major issue and that ecosystem issues are the real bottlenecks to etailing. Each challenge drives innovation and now, top players in the market are following the Chinese cue and addressing the ecosystem issues proactively. With improvements in connectivity, the market is set to explode. In our view, 2015 will mark the year when etailing in India catches up with online travel.
71
AVENDUS
Exhibit 69
Penetration of broadband vs. e-tailing in India (%)

2%
E-tailing/ Total retail (%)
2%
1.41% 2015
1%
0.90% 2014 0.58% 2013
1% 0.20%
0.37% 2012 0.12% 0.07% 2011
0%
2007 2008 0%
2009
2010
5%
10%
15%
20%
Data corresponds to years 2007 to 2015. Points in red are estimates and those in grey are projections Source: TRAI quarterly performance reports; IAMAI digital commerce 2011; Avendus estimates
Though mobile Internet has picked up pace across countries, mobile commerce has not yet seen the same level of traction (exhibit 12). Japan, an outlier in some ways, had 20% of online commerce revenues coming through mobile. More significantly, perhaps, China had an m-commerce level of 12%. Chinas performance is attributed to the high percentage of mobile-only Internet users in China, estimated at over 30%. This number (of mobile only Internet users) is expected to be over 50% in India by 2015, making India a very different market. 10-20% of the overall e-commerce market in 2015 coming through the mobile is a distinct possibility. E-tailing market already larger than most projections, to grow around 80% in 2011 and 139% in 2012 The question of scalability in e-tailing has been addressed to a large extent. Based on a bottom-up approach, we estimate that the industry is already at an annualized revenue run rate of Rs 4800 Crore ($1.1 billion). If our estimates are correct, the industry would have grown 1.8X in the last 12 months and will cross Rs 3,600 Crore ($800 million) in 2011 - 33-50% more than published estimates of Rs 2,400-2,700 Crore ($535-600 million). These metrics serve as an eye opener about the magnitude of the opportunity on hand. There is a considerable speculation about the pace at which the e-tailing industry would grow going forward. Most studies have followed an approach of arriving at the numbers based on size of the total retail industry and multiplying that with estimates of online retail penetration. Given the early stage of industry and with most players growing exponentially, we have adopted the approach towards estimating the market size would reflect on-the-ground traction more accurately.
72
AVENDUS
Exhibit 70
Assumptions for market size estimattion
Parameter Monthly run-rate of top-40 e-tailers Top-40 e-tailers share of market
Estimate Rs 300 crore 75%
Growth assumptions 2011 2012 2013 2014 2015 Exhibit 71 10% month-on-month 6% month-on-month 100% for the full year 80% for the full year 70% for the full year
Indian e-tailing market size projections (Rs Crore)

53,000
83% CAGR 31,200
17,300
8,700 1,600 2,100 3,600
2009
2010
2011E
2012E
2013E
2014E
2015E
Source: IAMAI digital commerce 2011; Avendus estimates
Based on our estimates, the e-tailing market will grow to Rs 53,000 Crore ($11.8 billion) in 2015. To gain further confidence around these estimates, we tried to validate them through an alternate approach as well. As outlined previously in this section, we estimate online penetration of the overall retail industry to reach 1.4% by 2015 - this is reasonably conservative when compared to China which is at more than 4% online penetration of etailing in 2011. As per BCG estimates, the overall retail market in India is estimated to grow to Rs 36 lakh Crore (US$ 804 billion) by 2015. With an online penetration of 1.4% in 2015, the e-tailing market will be Rs 50,900 Crore ($11.3 billion), less than 5% off our estimates. Our estimates translate into a CAGR of 83% (2012-2015). In China, the e-tailing market grew at a CAGR of 100% between 2009-2012, and on a much higher base.
73
AVENDUS
Given the small base of the Indian e-tailing market and the quantum of capital this segment has been attracting, we believe the e-tailing sector has already set off on the path that the Indian telecom industry undertook in the last decade. Large scale improvements being witnessed in the ecosystem on all parameters We had earlier highlighted the ecosystem issues which were holding the market back, in the ecosystem discussions. We now summarize some of the key ecosystem changes which are happening with respect to the e-tailing space: Connectivity and quality of connections are expected to improve significantly, with PC broadband reaching a penetration of 15.6% by 2015 Payment problems are being addressed through large scale promotions of Cash on Delivery. Number of payment options provided to consumers expected to increase further Companies are addressing the supply reliability issue by taking over the complete supply chain Focus on standard products and discounts to counter lack of touch and feel The Indian industry is following in the footsteps of its global counterparts to tackle the issue of lack of touch and feel. Categories which are seeing action in India are the same as those that have seen wide scale adoption in the US and Europe. Discounts are being used generously to entice the customer into the online space (discussed in detail in later sections). There are naturally concerns that there is too much discounting in the market - but as we discuss later, some of that is overblown. Transfer of risk from customer to supplier One of the bottlenecks to e-tailing growth has been the perceived risk on the part of the consumer. Of late, suppliers are taking an increasing part of that risk onto themselves and providing a variety of assurances to customers. Our research shows that more than 60% of the top 30 retailers have return policies which (combined with cash on delivery) completely cover all risks to buyers. No longer a childs game, despite the ads!
74
AVENDUS
Reducing friction Historically, there have been several points of friction in the online buying process, resulting in the loss of customers. One such point of friction is the cost of delivery most customers being averse to such payments. The result is free shipment - which most companies are now providing their customers. We see this as a market building mechanism as well - getting customers habituated to buying online. With respect to the buying process itself, there is still a lot of scope for improvement. Not all sites provide a smooth user experience. We expect this to be one of the focus areas for e-tailers going forward. On the payments side, one click COD would perhaps provide the closest alternative to the one click buying processes of Amazon and iTunes. However, we dont see any players offering this as yet. Time for mass-media Apart from all the tweaks to the business model, most of the top players have also got into mass media advertising. This includes companies like Flipkart, Futurebazaar, Snapdeal, Yebhi, Myntra, Homeshop18, Fashionandyou, BeStylish and LetsBuy. This is increasing the awareness about e-commerce among consumers. Importantly, most of these companies have spent years building their supply chain capabilities before going onto mass-media. So, e-tailing companies are converting surfers to shoppers and also causing non-Internet users to move online. Our projections suggest that the e-tailing market size is likely to grow at a CAGR of over 83% over the next 4 years, and if the current signs are anything to go by, this is not a mirage.
75
AVENDUS
Exhibit 72
What has changed in the ecosystem?
Limited access Past status Penetration = 0.5% Penetration = 30% What has changed?
Poor quality of access PC Broadband ~ 0%
Lack of touch and feel Global issue
Long/complex buying process Higher clicks to buy
Unreliable payment solutions Payment problems Cash on Delivery
PC Broadband = 15.6% Std. categories, Value Analytics/Personalization (2015)
Customer delight
Awareness being created
Customer-focused
Complete ownership of supply chain
Reduced market size Past status Customer disgruntlement
Lack of clarity on warranty terms Customer perception issues
Complex/expensive return process Customer unfriendly
Issues with timeliness and quality of delivery Supply unreliability
E-tailing vs. Marketplaces Exhibit 73 Business models in e-tailing

Mass Merchant
Consignment Basis
Niche Merchant
Business models which work like traditional retailers by buying goods from suppliers and selling to customers (and hence assume inventory risks), are classified as e-tailers. On the other hand, businesses which act as a platform connecting buyers and sellers without taking title of inventory, get classified as marketplaces. Exhibit 74 lists the key differences between the two models.
Inventory Model
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Exhibit 74
e-tailing vs. market place
Parameter Business model
e-tailing Buy from suppliers and sell to customers
Market place Connect suppliers and customers to facilitate the transaction Products, along with its sellers Between the seller and the customer Facilitate conflict resolution between buyer and seller
Listing Transaction
Products Between the business and the customer
Complaint handling responsibility Sourcing from
Full
Highest level in the value chain (manufacturers or distributors)
Retailers
Inventory risk
Yes
No
Marketplace models are generally easier to create and more scalable than e-tailing models. Amazon, the worlds largest e-tailer sold goods worth $34.2 billion; eBay, the biggest market place sold goods worth $61.8 billion. The economics also differ, as marketplaces normally deal with smaller retailers while etailers deal with larger businesses. Marketplaces also have two revenue streams margins on transactions and listing fees, as against just the margins for e-tailers. Both etailers and marketplaces normally avoid third party advertisements in their websites, as it diverts customer attention. A comparison of the financials of e-bay and Amazon illustrates some of the economic differences between the two models.
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Exhibit 75
Cost structure of Amazon and e-bay - 2010 (as % of gross revenues)

22.3%
18.2%
9.3% 6.7%* 4.1% 2.5%
Gross margin Amazon
Total costs e-bay
Net margin
Source: Company annual reports 2010
A critical difference between the two models stems from the control over the fulfillment experience. While e-tailers have complete control over the experience, marketplace models depend upon suppliers for this. Marketplace models have thrived across geographies. eBay sells more gross merchandise than Amazon across the world, while the market place models in China account for more than 80% of the total sales even today. In Japan too, the top 3 ecommerce players - Rakuten, Yahoo! and Amazon, work on marketplace models. Marketplace models were more prevalent than e-tailing models in the Indian ecommerce space till two years back, but have struggled to gain further traction in recent times. The dependence upon other retailers was a major issue impacting consumer experience adversely. As a result, there has been a shift towards the e-tailing model with more than 80% of the companies working on this model currently. Companies like Indiatimes shopping, who were working on marketplace models, have started moving towards hybrid models. (Exhibit 73) Some companies are staying true to the course. Motorexchange, styled after the US site Manheim, is trying to create Indias largest used-car marketplace. Since its launch in 2009, the company is estimated to have raised $ 23 million in private equity funding25. It now has 1,200 dealers using its website and claims to assist 7000-8000 sales every month26. Globally though, the market is moving towards most leading e-tailers adding market place models and turning their businesses into hybrids. Over 30% of Amazons sales are through third party sellers, while Walmart and Rakuten (Buy.com) have launched market place portals in the US. Leading Chinese e-tailers like Dangdang and Vancl have become hybrid models by welcoming third party sellers on to their platforms. We expect the Indian e-commerce space to be dominated by e-tailers in the short to medium term, before the (offline) retail market gets more organized and supply chain efficiencies reach a level where market place models can offer a similar fulfillment experience that e-tailers are offering today. Also, we are witnessing a trend of offline retailers such as ShoppersStop, Croma, eZone, Westside, Bombay Stores, etc. perking up their online presence. In the US, offline
25 26
VC Circle, 30 August 2011 Outlook Business, 12 November 2011
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players have built a robust presence online. BestBuy, Walmart, Sears, GAP, etc. are a few examples of offline players who have had good success online as well. In our opinion, the biggest challenge offline players need to overcome to gain success online is their own mindset orientation. While pure play offline players carry no baggage, offline players fight with their hands tied behind because they are forced to avoid channel conflict (between their online and offline presence). In our view, the only way for offline retailers to build a successful online business is to develop an online business plan based on where the market opportunity lies rather than trying to tailor a plan that seeks to leverage the strength of their offline assets. The fall back option of course is to adopt an incremental approach of focusing on e-commerce as one of the several channels through which they sell their merchandise (as opposed to building a leading e-tailing business). Categories going online Not every category is suitable for online adoption. While some categories see rapid adoption of the online medium (e.g. books), others take time to warm up to it (e.g. furniture), and there are some other categories where the Internets role is limited to collecting leads (e.g. premium real estate). We analysed the top 500 e-tailers in the US and Canada, and the top 300 e-tailers in Europe to see what has worked in those regions. Exhibit 76 Share of revenues in US and Canada - 2010
Health/Beauty :: 3% Housewares/Home Furnishings :: 3%
Books/Music/Video :: 3%
Others :: 11%
Mass Merchant :: 38% Office Supplies :: 10%
p Ap
e ar
c Ac l/
es
so
2% :1 s: rie
Computer/Electronics :: 20%
Based on analysis of top 500 e-tailers in US/Canada Source: Internet retailer
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Exhibit 77
Share of revenues in Europe - 2010

Food/Drugs :: 3% Books/Music/Video:: 3%
Others :: 6%
Office Supplies :: 6%
Apparel/Accessories :: 14%
:: 16 %
Mass Merchant :: 52%
Based on analysis of top 300 e-tailers in Europe Source: Internet retailer
The preferences of US consumers show that books, apparel and electronics/computers remain the favorite categories for online shopping. Exhibit 78 % of respondents who purchased online, by category in US
Co
m pu
te
r/ El
ec
tro ni cs
Books, music and videos
52% 53%
Apparel and accessories
45% 53%
Computer and video games
32% 38%
Health and beauty
26% 33%
23% Electronics 29%
23% Toys 25%
2007 2010
Source: JP Morgan Internet user surveys
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Exhibit 79
Share of Indian e-tailing market by segments in 2011 (%)
Deals :: 10%
Mass :: 49% Niche :: 41%
The adoption cycle may differ in India. As an example, office-supplies is a category which has worked online in both US and Europe, but remains under penetrated in India. Home furnishings, hardware, health and beauty, and food and drugs are other categories which have worked in developed countries - but are yet to gain traction in India. Mass vs. Niche merchants We have classified category-specific plays such as apparel, electronics, baby products, etc as niche merchants, while websites which deal with multiple categories/segments are termed as mass merchants. A mass merchant site has the obvious advantage of a higher lifetime value of the customer, due to the multiplicity of products which it can sell to the same person. By virtue of this, a mass merchant would always be able to spend more to get a customer than a niche merchant. Despite the trend towards mass merchandising, we believe that niche merchant can hold their own very well. To do so, they must find ways to differentiate through high quality merchandise, deeper product catalogues or exceptional service in that category27. Apparel and baby products, for instance, are categories where a specialist has several advantages over a generalist. Front end differentiation is emerging as a critical factor In the mass merchant segment, there are around 10 serious players in the fray. Even though mass merchandising helps improve customer lifetime value and scale, there are certain challenges in this model as well. Going wide across categories, dilutes the focus on each of the categories. As a result of being very horizontal, the depth in each category reduces: number of SKUs, products belonging to different life-cycles, benefits of scale for a particular category, consumers association with the brand for that category - all comes under pressure. When each mass merchant has more or less the same fast moving products, popular brands and a similar price band, the front end differentiation is diluted. Besides building the brand, a lot needs to be done to build a platform and create the back-end or what we could call service lead differentiation. This could be through fast delivery, a good
27
Even Amazon found it difficult to compete with Diapers.com and Zappos acquiring both companies eventually
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customer touch-point experience, rewards and retention programs, hassle free returns, etc. Increased impetus on building an online retail platform for a mass merchant shall drive the need to scale-up fast, really fast and stay on top. Heavy investments in the back-end infrastructure for service lead differentiation need to be compensated through more buyers, higher repeat ratios and lower customer acquisition costs. It is our belief that the battle amongst mass-merchants will be fought amongst the Top 3-4 players and the Top 3 players will account for a lions share of the revenues (and more importantly, margins) down the line. Deep pockets will be needed to fuel premium customer acquisition and high speed delivery infrastructure. Some positions are getting established and the arrival of international giant Amazon could spell the end of the road for some of the laggards/late entrants. In focus: Niche categories Even though niche categories dont offer the scale of mass merchandising, they do have some advantages. A strong focus helps create a strong brand-pull and a more differentiated positioning in the consumer mind-share. Also, it helps save from the highly competitive race to acquire customers in a mass set-up, which can be an expensive proposition. Further, a few categories such as apparels, accessories, jewelry and home decor have high margins inherently. Deep focus also helps in scale, sourcing and pricing even in competitive categories like consumer electronics and branded lifestyle products. Operating in a niche could also help engage better with the consumers because the focus helps define the target group more precisely. The result of this is the high repeat rates of 25-40% that leading players in some of the categories are witnessing. Despite these benefits, one needs to be careful while focusing on a niche category. It is important to understand the depth of the market opportunity and the potential online penetration levels that are achievable. Even though gross margins may be healthy, a certain critical mass in volumes will be necessary to offset high customer acquisition cost. Diamonds are forever Caratlane had revenues of Rs 50 Crores from online jewellery sales entered the online business in 2006 and is reporting double-digit Gili growth in diamond sales Suratdiamond.com claims to receive more than 1 million visitors a month and expects to sell more than 5000 pieces of jewellery online every month Jewels expects 25% of their sales to come from the online Agni segment this year
Source: Economic Times (June 2011)
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Quick shift from niche to mass; could spell trouble One of the recent trends observed in the Indian e-tailing market, is the movement of several niche merchants to the mass merchant category. This seems to be due to the fact that there is demand across categories and there seems to be a gold rush to increase revenues at any cost. We feel this may be myopic. Mass-merchant strategies tend to be very different from niche plays. Some of the players moving into the mass merchant space may actually be diminishing their chances of success. Unit economics across the landscape The current race for leadership has led to a focus on revenues and number of customers. Profitability metrics are getting sidelined for the time being - but that is forgivable in a hyper-growth environment these players are operating in. At the same time, it is very important to understand the varied dynamics for each of the models and the categories. The core of the product offering is the cost of goods sold (COGS) that impacts the overall margins down the chain. Consumer electronics as a category tends to have lower gross margins in the range of 12-15% with mobile phones operating at high single digit margins (albeit higher average transaction size). On the other hand, apparels, accessories, shoes enjoy healthy gross margins to the tune of 30-35%. Margins in private label apparels and accessories are likely to go as high as 45-55%. Margins to some extent are driven by the penetration of products in the offline set-up, products life cycle, inventory holding and committed volumes. Customer acquisition has been at the forefront for e-tailing companies and customer acquisition cost (CAC) is a key cost driver. As per our estimates, CAC is currently in the range of Rs 650-850 for mass e-tailers. In the niche categories like baby care, apparels and fashion flash sales, CAC is operating in the range of Rs 800-1000. Increased use of mass media could drive up the CAC in the short term. Global studies indicate that if customer lifetime value (CLTV) is >2.5X of CAC, there is a strong upside potential down the road. Exhibit 80 Illustrative economics across two categories electronics and apparel
In Rupees
Electronics
Apparel
GMV COGS (% of GMV) Gross Margin Gross Margin % Delivery Charges Collection Charges Net Contribution CAC Customer becomes Profitable at "Nth Repeat Transaction"
4,000 88% 480 12% 150 50 280 700 2.5
1,500 65% 525 35% 50 50 425 900 2.1
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Gross margins dont present a complete picture unless seen in conjunction with average transaction size. While mass e-tailers and players in categories like electronics have lower gross margins to start with, their average transaction tends to be larger resulting in a higher absolute contribution per transaction which is probably the more important metric to keep a track of.
Indian e-commerce players not discounting more than international peers, discounting here to stay It is popular belief that the Indian e-commerce industry is growing on the back of deep discounting that may not be viable in the long run. On comparing discounts offered on some of the top-selling products in common categories (Books, Apparel, Cameras, Mobiles) across leading Indian versus international websites, we were surprised to find that discounts offered on Indian websites were lower (on average) than those offered on international websites, in most cases. Exhibit 84 alongside shows the difference between mean discounts offered for the same product across Indian websites and international websites. A positive value indicates that discounts offered for a particular product on Indian websites are higher than those offered on international ones. The average difference shown in each of the charts (through a dotted line) is a simple average of all the differences. The charts show that the average is a positive value (3%) only for apparels, while it remains negative across other categories. Exhibit 81 Difference between mean discounts offered across top Indian websites and top international websites, by product
31%
Books
Product 1 2 3 4 5 6 7 8 9 10
2%
2%
3%
4%
6%
7%
9%
11
12
13
14
15
16
17
18
-9% -9% -17% -17% -15%
Average = -7%
-19% -19% -24% -27% -30%
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19%
Apparel
13%
5% Average = 3% Product 1 2 3 4 5 6 3% 4%
5%
-5% -7% -10% 18%
Cameras
Product 3 4 5 7 -8% 9 -4% 13 -3% 14 -2% Average = -8% 15
6 -8%
8 -6%
10 -4%
11 -4%
12 -4%
-10% -13% -21%
-10%
-42% 25%
Mobile phones
5% Product 1 2 3 4 5 6 7 8 9 10 11 12 -5% -12% -11% -13% -16% -21% -24% -30% -37% -42% -29% -29% Average = -15% 13 -4% 14 -4% 15 16
Source: Avendus research
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This indicates that discounting is here to stay. Multiple research studies on the ecommerce space, suggest that value has remained the most important parameter for customers. The impact of e-tailing has been such that the average price of books in Britain has fallen by 15% since 200328. The success of deals sites, would also keep the pressure on e-tailers to maintain discount levels in the short term. But the average outgo through discounts would come down as companies work out better ways of managing discounts. The impact of discounting on profitability may be overblown There are two factors which are often being overlooked in the arguments on discounting levels. In case of new products, the principals (brand owners) ensure that e-tailers do not sell products below the Market Operating Price (MOP), to avoid conflict with their other sales channels. These brands have spent several years building their channels and brand, and are extremely sensitive about ensuring e-commerce players dont dilute that for their own personal gain. Realistically, items being sold at a deep discount are also being bought at a similar discount - often this is merchandise that has outlasted the clearance sales of brands or are exports surplus. There will, of course, be promotional offers that e-tailers will use to attract customers to their websites. Again, this is no different from everyday-low-sales pioneered by Walmart to increase footfalls into their retail stores offline. Overall, we believe that concerns over discounting are over-stated. With smart product sourcing, we believe companies can offer discounts and make money at the same time. Customer acquisition costs to remain high in the short to medium term Customer acquisition costs involve two parameters - cost of getting a visitor to the website and the chances of converting a visitor to a buyer. Cost of visitors. Paid search remains the most effective way of increasing traffic to a website. The cost of this is determined through auctions, which means that increased competition results in higher costs per click (CPC). CPC values have been skyrocketing in recent months. An indication of this is the rapid increase in the number of keyword specific searches in Google in all categories.
28
BML Bowker, quoted in The Economist (10 Sep 2011)
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Exhibit 82
Books
Number of searches* in Google by category India (in 000)

Apparel Mobile phones
8,295 2,578 89% 89% 79% 1,440 19,607 25,445
4,380
Aug -10
Jul-11
Aug -10
Jul-11
Aug -10
Jul-11
*Number of searches filtered based on same parameters for all categories Source: Google Adwords
There are multiple other means of getting visitors, including e-mail/SMS blasts, display ads, referrals, search engine optimization (SEO) and direct traffic. Unpaid search based traffic and direct traffic fall under organic means of generating traffic, and they do not involve any incremental cost per user added. Organic traffic remains the single most important lever in bringing down the cost per visitor. Establishing a brand among the consumers helps significantly. And that is the reason why most e-tailers in India are opting for mass-media advertisements. Already, some sites are reporting 55-60% of their traffic from organic means, indicating that this is possible. We therefore expect CAC of e-tailers to come down significantly in the medium to long term. In the short-term, however, high customer acquisition costs could be one of the triggers for consolidation in the industry. The second factor in customer acquisition cost is that of the conversion rate - which denotes the number of visitors who actually end up making a purchase at the website. This too varies widely across categories - but is typically between 1-5%. Books and travel feature at the higher end of that spectrum, while electronics is closer to the lower end. The global average for e-commerce sites is around 2.2%. Conversion rates are bound to improve as sites continue to understand their customers better. Most players in the market appreciate the importance of the conversion rates and are including retargeting in their advertising strategies. Longer term, companies with better analytics capabilities will have a significant advantage over others - customer analytics is becoming one of the most important functions for most e-commerce players. Profitability follows scale We expect both discounting and customer acquisition costs to remain high in the short to medium term (2 years), and moderate over the long-term as the market matures. This has been the case across geographies. Amazon is a perfect example of this - though there are others too.
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Exhibit 83
40%
Cost structure evolution of Amazon

Net profit
100% 78% 76% 76% 77% 78%
30%
50% COGS 0%
20%
10%
7% 4% 4%
100% Fulfillment 50%
0% -12%
25%
15%
9%
9%
8%
-10%
0% 100%
-20%
Marketing
-30%
-36%
50% 13% 7% 2000 2% 2003 2% 2007 3% 2010
-40%
1996
2000
2003
2007
2010
0%
1996
Source: Amazon annual reports
To be able to replicate the success of Amazon, players would have to continuously improve their business model and the customer experience. Amazons recommendation system, Prime and One-click check-out are some of the innovations that have improved the user experience and led to consumer loyalty for Amazon. Incumbents have a large opportunity - but will they take it? Multiple players from the offline space have ventured into online businesses. The main advantage they have over online players is the supplier relationships and the category expertise that they have developed over the years. They can start off with much higher gross margins than the pure-play e-commerce companies. These players start with a recognized brand and the opportunity to cross-promote their site through other channels. However, customer experience management is one challenge for the incumbents - the whole process needs to be redefined online. Secondly, they have to learn how to manage multi-channel pricing while staying competitive. In other markets, incumbents have been able to figure this out and garner market share in the online space. In the US, out of the top 100 e-tailers, 65 were offline players and they accounted for 66% of revenues of the top 100 players. So far, several domestic players have stated their intention to move online, but the traction has been limited. It is not yet clear if they will grab this opportunity whole-heartedly. But if they do, and more importantly, if they approach their online strategy with a fresh mind, one can expect them to become formidable players online. The race for leadership The strongest underlying trend being witnessed in the Indian market is the race for leadership among the leading mass merchant players. With close to 10 companies reaching meaningful revenues and significant capital reserves, this is increasingly
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becoming a battle of the heavyweights. With mass media coming into play, traffic to some of the leading sites has more than doubled in the last six months. The race for leadership is on
There is ample reason for this strategy. Across geographies, the top player has enjoyed a significantly higher market share over the other players. Exhibit 84 Revenues of top mass merchants in North America 2010 (in $ million)
18,700
4,095
3,107
3,040
3,790 1,700 1,605 1,530 1,330 Target Corp. 1,175 HSN Inc 1,090 Overstock Others 5,907 Others
Sears Holding Corp.
Liberty Media Corp.
Others comprises revenues of next 22 players Source: Internet retailer top 500 e-tailers US/ Canada
Exhibit 85
Revenues of top mass merchants in Europe 2010 (in $ million)

12,871
5,275
4,333 1,952 1,623 1,513 1,320 976 935 921
Tesco stores
J.C. Penny & Co.
Amazon
Walmart
Costco
Macys
Otto Group
Home Retail Group
Neckermann Gruppe
Carrefour Group
Sainsburys
Amazon
Cdiscount
Mediashopping.it
Others comprises revenues of the next 36 players Source: Internet retailer top 300 e-tailers Europe
NextPlc
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In Japan, Rakuten enjoys a very high market share. Taobao, the leading market place model in China has more than 80% market share in the segment. Even in niche categories, there is a disproportionate advantage from leadership. In the US, Netflix, Bluenile and Williams Sonoma Inc. account for 41%, 30% and 27% of the market in media, jewellery and home furnishings segments. Being the leader in a segment translates to an enviable scale benefit. And this scale leads to multiple economic benefits, helping the leader build the lead further. A comparison of the cost structures of Amazon, the leading mass merchant in the US and Overstock, one of the next level players, illustrates these benefits. Exhibit 86 Comparison of cost structure of Amazon and Overstock - 2010 (% of net revenues)
83% 78% Amazon Overstock
15% 10% 3% 6% 4% 1%
COGS
Marketing costs
Other costs
Net profit
Source: Company annual reports
Its still early days for Indian e-tailing - but Flipkart, Bagittoday and Infibeam have established themselves as early leaders in the field. Flipkart has found itself as the poster-company of this wave - and has provided the execution to back that up. As consensus estimates, the company is quite likely to cross Rs 300 Crore ($67 million) in FY 2011-12 - more than 4X its revenues in 2010-11. Exhibit 87 Top Retail sites by visitors - August 2011 (in 000)
Amazon Apple Samsung Myntra Homeshop18 Bagittoday Bookmyshow 3,337
6,322
2,654 2,572 2,334 2,070 2,017
PriceIndia Flipkart
1,995 1,663
Source: Comscore
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Surprisingly, Amazon is the top visited retail website in India, which should set the stage up nicely for the expected entry of Amazon into India in the not so distant future. Exhibit 88A Top mass e-tailing / marketplace sites by visitors August 2011 (in 000)
Amazon eBay Homeshop18 Flipkart Naaptol Infibeam Yebhi Tradus Indiatimes shopping FutureBazaar IndiaPlaza ShoppersStop Sevetymm 399 311 292 1,663 1,416 1,106 949 937 726 725 2,334 3,153 6,322
Source: Players have been categorized as per Avendus classifications used in this report. Unique visitors data as per Comscore
In Mass e-tailing, we expect significant competition among the top 3-5 players in the near future - as each of them tries to get into pole position and others attempt to increase customer traction. Marketplaces have not been able to gain significant traction, eBay India and Tradus lead the way amongst other fringe/regional players. Exhibit 88B Top niche e-tailers by visitors August 2011 (in 000)
Myntra Letsbuy BeStylish Inkfruit Firstcry Timtara BabyOye 373 270 233 214 152 963 2,572
Source: Players have been categorized as per Avendus classifications used in this report. Unique visitors data as per Comscore
In niche e-commerce, electronics, apparels and accessories and baby care have been able to gain significant traction as is evident in the traffic data for the top players. Recent mass media campaigns by few of these players have resulted in a spur in the number of visitors.
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Exhibit 88C
Top flash sales sites by visitors - August 2011 (in 000)

Bagittoday 2,070
Fashionandyou
1,140
99Labels
681
theprivatesales
138
Brandmile
82
Source: Comscore
Flash sales sites have generated a lot of buzz in the market. Market leader, Bagittoday has ventured across categories in the flash sales model, whereas the others have largely been focused on fashion and lifestyle brands. Exhibit 88D Top entertainment ticketing sites by visitors - August 2011 (in 000)
Bookmyshow
2,017
PVRcinemas
716
Bigcinemas
217
Famecinemas
160
Kyazoonga
49
Source: Comscore
Bookmyshow enjoys a clear market leadership in the online entertainment ticketing space, driving close to double the traffic than the next four players put together. The large opportunity in Apparel Apparel e-tailers can be classified into 3 different categories based on their product sourcing strategies - multi-brand retail, single brand retail and private labels. Private sales (also referred to as flash sales) are really a sub-category of multi-brand retail and are used to sell high end luxury products online. In private sales, products are deep discounted and targeted at a specific set of people. The time given for customers to make the purchase is limited in most cases. Deals websites tend to follow a similar model (though not necessarily for luxury items). Apparel is one of the categories which has all the models in play in India. We analyzed business models in the apparel industry in US and UK to understand global trends in the space.
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Exhibit 89
Market share of different business models in apparel e-tailing in US/ Canada (2010)
Private sales 9%
Private label 8%
Single brand 49% Multi-brand 34%
Source: Internet retailer top 500 e-tailers US/Canada
Exhibit 90
Market share of different business models in apparel e-tailing in Europe (2010)
Single brand 13%
Private sales 13% Multi-brand 74%
Source: Internet retailer top 300 e-tailers Europe
Private sales have a sizeable market in both Europe and US. In India, Fashionandyou, 99Labels, theprivatesales and are some of the emerging players in this space. Double digit market share of single brand retail indicates the potential which exists for incumbents in the online space. Many of these brands are beginning to put together their Internet strategy. Despite a slow start, the strength of their brands and control over merchandise will enable them to garner significant market share. The prevalence of multi-brand retail shows that pure-play apparel e-tailers like Myntra also have huge potential in this market. The share of private label brands have been relatively low in the online space in UK and US. But the success of the model in China29 (especially Vancl) has resulted in several such models coming up in India. We believe online private labels have a huge potential for markets like China and India given the relatively low penetration of organized retail in Tier 2/3 cities in these markets - accessibility to fast fashion merchandise at affordable prices delivered to your doorstep is a very compelling proposition that we believe will spawn a string of online fashion brands in the coming decade.
29
Almost all the top companies in Chinas apparel e-tailing market have private labels as their primary products
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Exhibit 91
Market share of top B2C apparel e-tailers in China (2009)

2009 Market share
Others :: 33.3%
Vancl :: 28.4%
Mecox Lane :: 16.6% HANY :: 0.6% Zoshou :: 1.2% Togi :: 2.8% Shishanggiyi :: 3.0% Masa Maso :: 3.5%
Menglu :: 10.6%
Source: iResearch
Though private labels could work in India, there are several issues that need to be addressed. A company trying to establish an online private label brand, would actually be establishing an apparel company - complete with designers, sourcers, brand managers, etc - and an e-tailing website at the same time. The complexity of this task can hardly be understated. The other challenge lies in the need to establish a brand from scratch, in a market with several existing players. Despite these risks, the rewards for cracking a private label model are huge - potential gross margins of up to 75% as against typical margins of 25-30%. And the fact that Chinese companies have been successful at this is encouraging Indian e-tailers to play this game. Exhibit 92 Growth in revenues of Vancl (in $ million)
1,253.2
CAGR = 819%
313.3 94.0 2009 2010
0.2 2007
47.0 2008
2011E
Source: Vancl press releases/ interviews, iResearch
Baby care: no kidding around The rapid evolution of the online baby care segment has taken everyone by surprise. This segment is a stark illustration of the latent opportunities that exist due to low penetration levels of offline retail. Compared to other segments, there are limited
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organized chains that carry baby care products. Parents are left shop hunting amongst chemists, departmental stores and lifestyle retailers. The last 12 months have seen 1012 online baby care stores being launched. At the forefront are FirstCry, BabyOye, Hoopos and HushBabies. In the pack, FirstCry has established itself strongly as a market leader. An outside view might not give much indication on the depth of this market. But when within the first year of its launch, in such a focused (read niche) category, the market leader crosses 1,000 transactions a day, it lends tremendous credibility to the potential online e-tailing holds. Strong focus on a category could help sustain differentiation despite the presence of mass e-tailers. To illustrate this, in the baby category alone, there is a scope to hold over 6,000 SKUs which a mass e-tailer would find difficult to match. Maintaining such depth helps gain a strong connect with the consumer. In this category, players have experienced repeat buyer rates of as high as 45%.
Deals (Group Buying, Couponing)

Couponing goes online Group buying has essentially moved the concept of coupons to the online medium, with some tweaks. Groupons model involves the negotiation of deep discounted deals with local businesses and making it available in a specific location for a short duration. The deal becomes active when a minimum number of customers subscribe to the same. This incentivizes consumers (who have subscribed to the deal) to promote it among their personal networks. Though there are some product deals, the main thrust of the industry has been in the service space, with restaurants and spas being the prime focus. It helps that both these categories have high gross margins and perishable inventories. Groupon and Living social rule the US market Despite the controversies in its accounting practices, Groupon is the dominant player in the deals space. Its rise in revenues has symbolized the rapid growth of the industry. Groupons net revenues in the first 3 quarters of 2011 were $1,118 million, up from $313 million for the year 2010 (less than $30 million for the year 2009). The gross merchandise value of the transactions facilitated by Groupon was $1.5 billion in the first half of 2011, making it one of the top e-tailers in the US. Groupon had 143 million members in September 2011, of which 29.5 million purchased a coupon during the third quarter of 2011. Living Social has also been making headway with gross revenues for 2011 expected to reach $1 billion. These two players accounted for more than 70% of the US market in H1 2011. The only other player with sizeable revenues was TravelZoo, a travel deals site. Looking at the success of Groupon and Living social, multiple clones have come up and even players like Google are getting into the space. Googles acquisition of Dailydeals and Amazons investment in Living Social are moves in this direction.
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But not all is hunky-dory Concerns over accounting practices have led to Groupon slashing its IPO valuation and the quantity of the float. They have lost 2 COOs in the last 6 months. The most worrying factor for the industry, however, is that even at such high volumes, Groupon has not shown signs of turning profitable. The Deals business model requires significant offline presence, due to the continuous need of sourcing deals from local players in the market. This prevents the company from getting non-linear e-commerce economics, and scale benefits have been elusive. Groupon had more than 7,000 employees with more than 3,500 of them working in sales in mid-2011. Facebook closed down its deals offering within 4 months of starting off with the same. There are both positive and negative spins given to it by the press. Some say it is not going to be easy for a big media company to just turn on deals when needed, others wonder about the sustainability of a business that Facebook has walked away from. The debate rages on. Group buying seeing large scale growth in China too but profitability is challenged Group buying in China accounted for transactions worth over $150 million in 2010, from almost nil in 2009. And there were around 1,700 group buying sites in China by the end of 2010. This mushrooming of group buying sites is due to the low entry barriers in the industry any person with a few contacts in the retail space in a city can start offering group buying deals through a basic website and promotional e-mails. Several of the Chinese group buying sites have had to close down due to unclear positioning and limited resources. The heavy competition in the space has meant that the hefty margins seen by the US counterparts, in the range of 40-50%, have been eroded massively. Unlike US, which has seen clear leaders, the deals space in China remains fragmented, with Tabao, Lashou and Mantan being the top players in the space in early 2011. Significant consolidation is being expected in the space within the next 2 years, almost a prerequisite for the segment to turn profitable. Group buying seeing significant traction in India too One in every 10 active Internet users in India visits a deals site, which pretty-much sums up the interest in the space. However, Indian players have approached the market differently. Unlike US and China, the Indian deals space has been dominated by individual deals rather than group buying deals. This has taken out the social impact as well as the bulk buying aspect from the model, which were common in other countries. Correspondingly, the average gross margins hover between 15 and 20% of the sale value, as against 40% for Groupon. Also, most sites offer multiple deals every day in each location, rather than sticking to a
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deal-a-day model, preferring to move away from the (anxiety creating) model of Groupon to one that gives more options to the consumer. These models have seen better traction in India. Snapdeal, the leader, but the segment is fragmented Snapdeal is the leader in the space, and reported gross revenues of Rs 100 Crore ($22 million) in 2010. Unlike US, the market looks fragmented with Dealsandyou and Mydala following Snapdeal closely, and multiple other players having reasonable market shares in terms of revenue. Existing Internet sites have also had more opportunity to be prepared. Rediff, for instance, has a deals section prominently displayed on its website. Field coverage (feet on street and telesales) and merchant on-boarding is the key in this segment. With low entry barriers to this segment, this could well be the differentiating factor for the players. There are few retail chains across the country and this increases the challenge of the deals sites to reach out to a more fragmented audience. Deep local coverage will help ensure repeat customers and better engagement. Leading deal sites boast of 20-30% repeat buyers. CAC in this segment tends to be on the lower side (sub Rs 500) as compared to traditional e-tailing categories. Exhibit 93 Top deals / couponing sites in India by unique visitors (August 2011) (in 000)
Snapdeal Dealsandyou Mydala Khojguru Getadiscount Koovs Goat Sosasta Upto75 Retailmenot Couponsduniya 349 347 277 184 138 67 65 64 809 1,091
3,294
Source: Comscore
Indian deal sites have also started getting into products, with Snapdeal offering deals on apparel, fashion accessories and electronics. 15% of Snapdeals revenues were from product deals in June 2011 and these deals have been doubling month on month. They also had 30% of their customers accessing deals from a mobile phone, which resembles the movement seen in markets like the US and UK. Location based deals and deal platforms the future Many businesses have been wary of getting onto a deals platform. A case in point would be a premium restaurant, whose positioning gets devalued if a deep discount deal is publicized heavily.
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But location based deals offer a possible solution. This would involve sending deals to consumers, based on where they are present at a particular point in time. This way, the deal reaches only the people in that locale at that point in time, who have a higher chance of turning up at the restaurant. It eliminates wide-ranging publicity of the deal, without compromising too much on its efficacy. Smartphone apps which use the GPS feature of the mobile could enable such a model31 . Deal platforms are the other opportunity area. Currently, deal sourcing has to be enabled by feet-on-the-street. But, if a marketplace model were to develop, the economics of the business could change dramatically. Considering the vast geographical spread of India, this model holds potential to ramp up coverage without increasing personnel costs at the same rate.
31
One could also develop Bluetooth models for this, but the efficacy of those models remains unclear
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Consumer-facing Business Models | Online Consumer Services
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Online Consumer Services

Financial services
Banking and financial services have been among the front runners in adoption of the online medium. ICICI Bank launched net banking way back in 1996. Today, 7% of all bank account holders in the country access their bank accounts online. As the internet helps in reducing the cost and time for a transaction, it provides significant value to both the consumer and the bank. Incumbents dominate Immovable object?
Online banking remains the realm of offline banks, as an offline banking license is a prerequisite for anyone to provide online banking services. Utility payments The days of standing in long queues to pay your electricity or telephone bills or walking up to the neighborhood store to recharge your mobile may be fast disappearing. One promise that digital media is increasingly delivering to the Indian consumer is convenience, making a real difference in their lifestyles. Online utility payments has today emerged as an industry with participation from a multitude of players - banks, card interchanges, online payment aggregators, independent convenience payment players and the billers/payees themselves. Besides the obvious advantages to consumers, it adds a lot of value to billers in terms of faster realizations, improved cash management, lower defaults and substantial decrease in operational costs in managing offline payments. This win-win proposition for both consumers and billers has been a key driver for the growth of this industry, which was estimated to be over Rs 550 Crore ($122 million) in Revenues in 2010. However, a substantial part of the market is captured by the principals (service providers) themselves or through tie-ups with banks.
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Online payments for home utilities (electricity, water, gas and taxes) is dominated by online merchant aggregators (BillDesk, TechProcess), service providers (Eg. Reliance Infra, Tata Power, etc.), bank websites and card association portals (Visa/MasterCard/Amex). Amongst independent online payment aggregators, BillDesk and TechProcess (formerly, BillJunction) have been able to establish themselves as market leaders. These players have been able to get most of the billers/payees on-board, cutting across categories like home utilities, insurance, mutual funds, ISPs, subscriptions and even charities. In parallel, they have got tie-ups with a large population of banks and thus, have covered a large portion of the eco-system for e-billing. Besides, online bill payments, they facilitate credit card payments, electronic clearing services (ECS), etc. India has a large mobile population, with most of the users being prepaid subscribers. This coupled with DTH subscriptions have opened up a large recharge market in the country. These recharges were being delivered through scratch cards, mobile or other such devices by the small retailers. A few players such as RechargeItNow, PayTm, FreeCharge, etc. have emerged to facilitate online top-ups or recharges. In the pack, RechargeItNow has been able to create a clear market leadership position and presently delivers over 100,000 online recharges daily. These portals are able to drive substantial traffic to their sites and thus, are ideal grounds to be leveraged for advertisements, lead generation, surveys, sampling, couponing, etc. In the offline space, some retail convenience players have emerged strongly that leverage technology to convert parts of the cash process to the electronic form. Players like ItzCash, Suvidhaa and Oxigen have set up extensive distribution reach through retail touch points. These players have also introduced their services through the online and mobile channel. There is large potential for growth in the e-billing market - considering the enormous size of the industries which are being catered to. Third party players shall need to continuously innovate and maintain a value proposition to deter the strong customer pull from principals and banks. Investments Online broking has also seen wide scale adoption, but, once again, incumbents have thrived in the market. ICICI Direct and Sharekhan are prominent players in this space. Mutual funds is an active category online, and was seeing some action with the launch of global players like fundsupermart.com. But, the removal of entry and exit loads in 2009 has significantly diminished the excitement in the space. Banks remain the primary players in this space too, with most offering the service free to the users (along with trading accounts). We see very little third-party activity coming up in this space.
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Loan products Online business models in both the loans and insurance segments are expected to evolve over a three step process: Generate leads online and sell to offline players through offline assistance - call center or an agent Fulfill online with offline exception handling Fulfill Players in the loans space, who have started as lead generators are biding their time for banks to automate complex offline processes involved in the sale of a loan before they can offer to close out a loan completely online. Banks normally work with agent networks, which assist consumers with these processes. And online players have also ended up working with the wide unorganized agent network. This has meant that the role of the online players remains limited to that of lead generation, and they lack control over the fulfillment process. Online players like Apnapaisa and Bankbazaar are adopting a hybrid (online plus offline) approach of generating leads online and taking them towards successful closure of the loan by handholding the customer through a combination of telesales and an offline field force of docboys (document delivery staff). Loans primarily comprise of unsecured loans and mortgages, and could go on to include credit cards. While activity in the credit cards space has been limited, the distribution industry for personal loans and home loans were estimated to be Rs 200 Crore ($44 million) and Rs 1,400 Crore ($310 million) in 2010. The same is expected to grow up to Rs 1,100 Crore ($244 million) and Rs 2,600 Crore ($580 million) by 2015. Auto loans also remain a significantly sized opportunity. While home loans require complex offline coordination and well-trained agents, there is potential for movement of simpler products like credit cards, personal loans and auto loans to the online medium, through the three step progression. Players who acquire capabilities to do this would not only improve their margins significantly, but also define the new age user experience, thus taking the lead in the space. Online availability of credit reports from CIBIL in the near future could drive this process immeasurably. Apnapaisa remains the top player in the loans space, while Bankbazaar, a newer player is looking to move the complete loan selling process online. RupeeZone seems to be taking a hybrid approach - leveraging their offline fulfillment capabilities with the web strategy. It is likely that multiple models will thrive in this space. Insurance The insurance distribution market is estimated to be around Rs 14,300 Crore ($3,180 million) in 2010, with Rs 11,300 Crore ($2,500 million) coming from life insurance and Rs 3,000 ($670 million) from general insurance. Industry estimates peg the online insurance industry at Rs 750 Crore ($170 million) in 2010. An online term plan is purchased every 18 minutes. Around 3% of the overall insurance sales is through the online medium now. The market is expected to more than double to Rs 36,700 Crore ($8.2 billion) by 2015, with life insurance accounting for Rs 26,000 Crore ($5.8 billion) and general insurance for 10,700 Crore ($2.4 billion).
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Historically, the insurance market was completely catered to by the nationalized players like LIC and GIC - till the market was opened up for private participation in 2001. Pitted against LICs widespread agent network, private players struggled to build their market share in the initial days. And that forced them to try out newer channels. Online medium benefited from that push as almost all private players looked at it as an opportunity to widen their reach. Last performance?
John T. Raymond as the insurance agent in Bartley Campbell's comedy, Risks
General insurance, especially motor insurance, was the first to see online traction in India; the nature of the product enabling direct price comparisons. Subsequently, Aegon Religare pioneered online life insurance policies which were much cheaper than the offline ones. The online policies were priced 40-60% cheaper than the offline ones. This was possible as the internet helped in by-passing the costly agent network and Aegon did not have an existing agent network to appease. In September 2011, 7 life insurance companies were offering term plans online and they had sold 14,500 policies worth a combined insurance cover of Rs 9,100 Crore ($2.0 billion) during the previous six months. LIC is also planning to launch online term policies. The future for insurance companies is clearly online and this has opened opportunities for third party players. Policybazaar is a leading third party insurance seller on the internet, with players like Apnapaisa following suit. Policybazaar sold around Rs 50 Crore ($11 million) worth of insurance in 2010 and is looking to double that in 2011. Unlike the loans segment, Policybazaar has been moving fulfillment online at a rapid pace, with around 20% of its sales currently happening completely online. With over 55% of its visitors coming through organic means, Policybazaar is developing an early edge in the online insurance segment.
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Education
The global e-learning industry is estimated to be around $32 billion in 2010, and expected to reach $50 billion by 2014. The US contributes a big chunk of that, with revenues of $18.2 billion in e-learning in 2010. The Korean market seems to be the next biggest with estimated revenues of around $2 billion in 2010. UK, Japan, Germany, France and China are other prominent contributors, with revenues ranging between $0.5 and $1 billion in 2010. A good portion of the US e-learning revenues comes from corporate e-learning, which accounted for $6.8 billion in revenues, 37% of the overall market. The other prominent categories were K-12 and higher education. Indian e-learning market still small The Indian e-learning market was estimated to be around Rs 176 Crore ($40 million)31 in 2010 and projected to grow at 30% CAGR over the next few years. Like other countries, the e-learning space in India too is dominated by the corporate segment. Early stage models (lead generation and hybrid teaching) are doing well, but pure online models are still struggling for scale. K-12 is a big opportunity, but remains a B2B2C play for now K-12 is one of the prominent sectors across the world, as can be seen from the success of Tutor.com and Khan Academy. K-12 remains the sector which has witnessed the most action in India too. Educomp and Everonn are the prominent players in the space. But the model itself remains B2G2C (Business to Government to Consumer) or B2B2C (Business to Business to Consumer), and does not involve direct customer acquisition. Also, these services still remain as technology-enabled learning, rather than e-learning per se. There are a few interesting companies like Heymath! which offers K-12 mathematics modules that can be accessed online. However, pure B2C business models have still to gain scale in the online education services segment. Supplementary education likely to be the first to move Supplementary education segments - tutoring, test preparation and distance education are the ones that have gained the most traction in the B2C e-learning segment so far. Utilization of online medium to generate leads has become a well accepted practice, with institutions like Sikkim Manipal University spending a significant portion of their advertising spends online. There are multiple other educational institutions which partner with sites like Shiksha to generate leads for their courses. Online content delivery is also on the rise, with distance education universities like SMU, and test preparation companies like Careerlauncher and IMS being early movers. Symbiosis, the other big player in the distance learning space has also started offering courses that can be accessed completely online. In the pure-play online space though, there have been several initiatives of late. Companies like Learning Hour, eTuitions, Lampsglow and Trivium have come up. Others like 24x7 Learning, who were catering to the corporate e-learning segment, have started offering courses targeted at consumers
31
Source : Industry discussions
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directly - and now have 20% of their revenues coming directly from customers. Ace Creative Learning, which targets both the K-12 and test preparation space online, has attracted investments from Accel Partners and Catamaran. At this stage, having an offline presence seems to be an important factor to facilitate adoption of e-learning. The differentiator for SMU still seems to be the wide offline content delivery infrastructure it possesses to deliver distance education courses. Similarly, iProf has created a hybrid model by offering its courses in tablet-friendly formats. Unlike other players, who were typically content owners, iProf has delinked content (though it creates some of it) from its platform. They have tied up with some of the top players in each of the targeted categories (IGNOU in distance education and Career Launcher in test preparation). The company attracted investments from Norwest and IDG earlier this year. The scale of pure-play online models is small today but holds tremendous promise given the large demand-supply gap the education sector suffers from. Companies in the online education services segment remain bullish based on the size of the overall industry and the fact that the consumer response has been encouraging in early days.
Healthcare
Healthcare is probably the most nascent of all online services. Even globally, the most prevalent model in the space involves the delivery of health related content. Exhibit 94 Top health portals in India by unique visitors - September 2011 (in 000)
WebMD Health Livestrong Everyday Health About.com Health Caring.com Alliance Your Total health 271 254 689 624 763 1,326
Source: Comscore
The global content providers dominate the health content delivery space in India too, with Webmdhealth and Everyday Health taking the top spots. Some interesting models emerging The hospital management and Electronic Medical Records (EMR) space has been seeing some action with players like Instahealth32 solutions getting in. Other models like Healthcaremagic33, involve the empanelment of popular doctors to advice patients online when needed. Healthcaremagic has been seeing some traction of late, but the model works primarily as a B2B2C model, enrolling the employees of a company through the company. B2C models as well as direct healthcare delivery models remain hard to find.
32 33
Instahealth attracted investments from Inventus Capital Partners in 2009 Invested in by Accel Partners
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Telemedicine remains the Holy Grail There have been several initiatives from the government to establish telemedicine in India. Multiple organizations, including the Indian Space Research Organization, Ministry of Health and Family Welfare, Ministry of External Affairs (for international telemedicine projects), Department of Information Technology and National Informatics Center work together to aid in mass adoption of telemedicine. The National e-Governance Plan also envisages the Village Resource Centers, which will reach 600,000 villages and Common Service Centers to act as nodal points for delivery of some of the basic health services through telemedicine. There have been several policy initiatives in this area - including the National Health Information Infrastructure and Standardization as well as the establishment of the National Telemedicine task force. There are also plans to launch a dedicated satellite for education and health - Healthsat. The central government has initiated several projects in this space - both domestic (Integrated Disease Surveillance Project, Tele-opthalmology project, National Telemedicine Grid, etc) and international (SAARC telemedicine network and Pan-African e-network project). There has been some action at the state level too with the Karnataka government tying up with Cisco to launch a pilot program to enable remote healthcare for two primary healthcare centers in the state. Several private players have been part of the telemedicine industry in India, including Apollo Telemedicine Network Foundation, Televital India, Vepro India, Prognosys Medical Systems, I-diagnosis technologies and Karishma software. With the level of government activity, telemedicine clearly has the flavor of healthcare inclusion. There is a lot of activity in the space, and considering the coverage of healthcare in India, any improvement would help.
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Consumer-facing Business Models | Entertainment
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Entertainment
Gaming
Market structure The gaming market can be divided broadly into offline and online gaming (See Exhibit 95). Offline games were products purchased by the user and utilized over a stand-alone machine (PCs, gaming consoles, tablets, etc.), while online gaming is in the form of a service offered to users through the internet or mobile phone on an ongoing basis. Exhibit 95 Gaming market composition
Gaming
Offline
Online
Console
PC
MMORPG PC/Console
Casual Mobile/PC
Social Mobile/PC
Massively Multi-player Online Role Playing Games (MMORPG) pioneered the growth of online games globally. MMORPG includes games which are similar to games played offline, but with the addition of multi-player and role-playing capabilities. They also have community features allowing the users to interact over digital medium. An example of this is World of Warcraft. Casual games are normally simple games, which do not require a lot of user involvement. They are straightforward and easy to play, without any requirements for prior familiarity or training. Casual games are targeted at those who wish to kill a few spare minutes. Angry Birds is an excellent example of this.
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Social games combine a bit of both casual games and MMORPG. They are simple games, but involve a multi-player environment and community activities, mostly by sitting on top of a social network. Zyngas Farmville, which sits on Facebook, is one of the most popular examples of social gaming. While MMORPGs were the front-runner in establishing the online gaming industry, casual games and social games have been leading the growth of the global online gaming industry. In 2011, the global gaming market revenue was projected to reach $65 billion, with $18 billion coming from online games. Projections are that online and mobile gaming market would reach 50% of the overall gaming market by 2014. Online gaming has three primary revenue streams - subscriptions, advertising and virtual goods. With the advent of social games, virtual goods have become a sizeable revenue stream with around $7 billion in revenue, with the remaining coming through subscriptions and advertising. Zynga and Tencents social games have grown rapidly Casual games are simple and easy to play, require low involvement and are much less expensive (the basic version is free in most cases). Social games add a few more dimensions to this, and there is the possibility of using viral marketing to establish the game quickly without spending huge amounts on marketing. There is the added benefit of increased stickiness due to the involvement of the users community in the game. Virtual goods has been the preferred revenue model for many social games, followed by advertising. Zynga, the leader in the US, and Tencent, the Chinese leader in the space have seen rapid scale-up in their users and revenues since launch; both depend on virtual goods as their primary source of revenues. Zyngas revenues reached $597 million in 2010, within 3 years of launch. And its valuation shot up with numbers in the range of $10 - $20 billion doing the rounds (which would interestingly make this gaming start-up more valuable than the long-standing offline gaming leader, Electronic Arts). The virtual goods market in US is expected to reach $2.1 billion in 2011. Online gaming in India: Low penetration compared to global benchmarks The Indian gaming market was estimated to be around Rs 810 Crore ($180 million) in 2010, with mobile and online gaming constituting around 80% of the market i.e Rs 660 Crore ($150 million). Mobile gaming in India was the largest segment with an estimated market size of Rs 530 Crore ($120 million). Online games in India are not simple replicas of the games being offered globally. Games with localized content such as cricket and bollywood games are being offered by players like Zapak, Indiagames, ibibo and Hungama, along with premium content from EA, Microsoft, Atari etc. However, penetration levels of online gaming still remains low. All the companies in the gaming space together accounted for less than 1% of the total user time spent online in May 2011. That is miniscule compared with the 22% time consumers spent on social networks, and over 25% time spent on portals.
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The online gaming space is affected by the same micro-payment problems that affect the entire e-commerce space. This has meant that companies have had to depend on advertising as the primary revenue stream. Top players have tried several means to solve the payment problem. Zapak has established a payment network across 50 cities and is offering COD based subscriptions for its portfolio of online games. Indiagames has a tie-up with Airtel (ISP), with Airtel collecting the subscription fees along with the connectivity charges. Establishing similar partnerships with 4G ISPs is also being looked at as an option by some of the players. Salvation lies in mobile gaming, or does it? With the growth of mobile Internet and the popularity of casual games, mobile gaming is expected to lead the growth of the gaming market in India. Also, as more and more consumers move from feature phones to smart phones, gaming consumption is expected to increase. Globally too, mobile has been the preferred medium for playing casual and social games. 95% of social Internet users in Japan are primarily interested in social games. When accessed through mobile phones, virtual goods account for 80% of the revenues made by Japanese social networking sites. In India, entertainment models on the mobile have been more successful than on Internet due to two primary reasons - they get around content piracy, and operator billing removes the headache on micro-payments. Of course, this has its own disadvantages. The mobile operator, being the customer owner, wields a disproportionate amount of power in the ecosystem. Operator share hovers around 60% of total revenues leaving the content providers too little to work with. Compare this with the Japanese market, which has a thriving mobile Internet space, and the operator share is just 10%. Even market place models have much lower margins, with 30% being the norm in the US. Added to this are frequent murmurings of opaque reporting processes, and the time taken for reconciliation of revenues between the operators and content providers. However, operator relationships would continue to remain critical for the success because of they being indispensable in the payment process. The growth in market places such as Nokia OVI store and Android app store should increase the pressure on operators to reduce their margins. But, these models still have the drawback of dependence on credit cards. Mobile payments like that of the Apple iTunes store, and mobile wallets similar to the one trialed by Airtel (Airtel money) could help, but they are yet to gain mass adoption. Partnership with handset OEMs to pre-load games on mobile phones is another distribution channel which is being explored by the leading players. Leading players: Innovating for success Leading players in the Indian gaming market have launched several initiatives to expand the overall market. Most of these activities have been focused around building proprietary gaming communities and promoting casual & social gaming.
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Nazara, with one of the largest catalogs of mobile games, has launched a social games site called G-City along with a G-cash card as a payment mechanism for transactions. They have also developed a gaming community - Games Club - which offers its users unlimited mobile gaming experience for Rs 5 per day or Rs 99 per month. Along with this they have also expanded overseas (to Middle East and Africa) to capitalize on the mobile gaming market there and monetize their content. Games on Demand (GoD) is Indiagames subscription based broadband gaming intitiative which has grown to 80,000 paid subscribers in 2011 from 30,000 paid subscribers in 2010. They have also entered the social gaming segment with the launch of a cricket game on Facebook in partnership with IPL in February, 2010. Some online gaming players are following global trends, with Hungama integrating its offerings with Facebook and Twitter, and Zapak launching games like Tambola completely on the Facebook platform, (complete with virtual cash and goods). Players like Zapak, Kreeda and ibibo are also trying get consumers to make micro-transactions using virtual money as part of their games. Future looks bright, mobile and online gaming market to reach Rs 2,600 Crore ($580 million) by 2015 Exhibit 96 Indian Mobile and Online Gaming market size (Rs Crore)
400
CAGR = 32% 250 200 160 130 530 2010 710 2011E Mobile Games 950 2012E Online Games 1280 2013E
320
1710 2014E
2290 2015E
Source: Netscribes report, Avendus Estimates
Despite the underlying issues, the mobile and online gaming market is expected to cross Rs 2,600 Crore ($580 million) in 2015 - mobile gaming is expected to grow to Rs 2,300 Crore ($510 million) and online gaming to Rs 400 Crore ($90 million). Rise of casual/social gaming, new monetization models, new distribution channels coupled with rising Internet and mobile penetration are all expected to provide the tailwind to help the Indian gaming industry grow to its full potential.
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Music
Struggling in a digital world
iTunes and Pandora Global music industry revenues stood at $15.9 billion in 2010, 29% ($4.6 billion) of which came from digital music services. Digital music revenues grew by 6% in 2010, and tenfold in the last six years. However, the global music industry has lost 31% of its value over the last 6 years (2004-2010). Piracy is rampant, and the single biggest issue facing the industry globally. In the midst of all the piracy mayhem, two types of business models have worked exceptionally well, which has enabled the survival of the music industry. Digital music downloads have seen large scale adoption across different countries, and are the primary revenue stream for the global music industry. The iTunes store from Apple is the leader - having sold more than 16 billion downloads from the year of its launch, and is now the biggest music vendor in the world. The growth of iTunes has only accelerated with time. Exhibit 97 Number of days vs. total downloads (billion) in iTunes store
12 Number of songs downloaded (Bn)
10
0 0 500 1000 1500 2000 2500 3000
Number of days since launch
Source: iTunes
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Exhibit 98
What made iTunes work? An exhaustive array of music tracks at one place, through an easy to-use interface Extremely low pricing compared to other options in the market at that time, starting from $0.69, which easily falls under the impulsive purchase bracket Express checkout and 1-click buying to ensure that the buying process remains impulsive Multiple payment options, including widely available Apple gift cards, eliminating the need for credit cards
Though iTunes dominates the market, there are multiple other players who have got a sizeable share. Amazon, 7digital, HMV, Tesco and Walmart are some of the other large players in the market. Digital downloads contribute the bulk of the industry revenues across the world, and is expected to remain so in the future. The other model which has started seeing traction is that of online subscriptions. There are two different models in use - online radio models where the users do not choose the track being played, and plain subscription models where the user chooses the tracks for playing. The online radio models involve high level of analytics to cater to users preferences. Though online subscription models have existed for a long time with services from Napster and Rhapsody, Pandora has revived interest in online music subscriptions. The main reason for this was the freemium model introduced by Pandora, where the basic subscriptions came with ads and did not cost anything to the user. Pandora had 100 million subscribers in mid-2011 (up from 20 million in 2008), and its users listened to 1.8 billion hours of music in the second quarter of 2011. Pandora is the leader in the space, with more than 50% of the market share in the US. Spotify, Deezer, We7 and Slacker are the other players who have witnessed rapid increase in user registrations. Pandoras revenues have been growing at more than 100% y-o-y. The companys Q2 2011 revenues of $67 million comprised of $58 million in advertising and the remaining from subscriptions. Half of the advertising revenues were from mobile advertising. Pandoras paying subscribers were estimated to be around 1 million, or 1 % of its total subscriber base. Pandoras mobile advertising numbers reflect the increasing usage of the service on mobile. The Pandora mobile app was downloaded more than 50 million times by 2010. Rhapsody, a well-liked $10 subscription service that has existed in the US for close to ten years has just around 800,000 users, showing that paid subscriptions are relatively difficult to crack. Payments remain a problem Players in most countries other than the US have struggled with the problem of micropayments, the biggest issue being that of keeping the payment process simple. Tie-ups with ISPs, mobile operators and bundling with smartphones are some of the most common work-arounds being attempted by the players in different countries.
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ISPs and Mobile operators are looked at the most logical partners across the world as there are mutual benefits. This can be a value added service which differentiates them from their competitors, as well as work towards increasing their ARPU. At the same time, the music content providers also gain, as the payment process gets simplified and targeted marketing gets cheaper. Markets taking a four-pronged approach to tackle piracy Piracy is a challenge around the world and countries around the world are battling to contain the menace. A four-pronged strategy is now emerging: Educate the consumer about the impact of piracy Improving availability and ease of access of legitimate digital content online with the ISPs and other players in the ecosystem like Google and Paypal to bring Work down the sites promoting piracy a Graduated Response model, where a person involved in copyright Adopt infringement gets warned twice and after which he gets punished through fines or temporary suspension of internet. Several countries in the world including UK and South Korea have implemented this and more are considering the same Indian music market estimated to grow to Rs 1,866 Crore ($415 million)36 with digital contributing majority portion of the same Indian music market overall is currently estimated at Rs 850 Crore ($190 million)36, growing at a CAGR of 5% over the last 3 years34. While physical distribution has declined at a rate of 17% in this period, digital music distribution has grown at a rate of 44%. Airtel is now the biggest music company in the country. By 2015, the entire music industry s expected to increase to Rs 1866 Crore ($415 million). Digital musics share in the overall music market in India is expected to grow from the current 49% to 79% by 2015 at Rs 1475 Crore ($330 million)36. Exhibit 99 Indian digital music industry size (Rs Crore)
1475
1180
908 726 518 415 264 188
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
Source: KPMG-FICCI media and entertainment report 2011
34 36
India is one of the few markets globally where the overall music industry is still growing Source : KPMG-FICCI media and entertainment report 2011
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Piracy rampant in PC-internet; some renewed activity in the space Almost all of digital revenues are today coming from the mobile environment, as PCinternet is widely affected by piracy. A list of top music websites in India by unique visitors confirms the same, with not many legitimate music publishers in it. Exhibit 100 Top music websites in India by unique visitors September 2011 (in 000)
5,903 3,955 1,965 1,917 1,553 1,451 1,451 1,184 1,046 829
Songs.pk Beemp3.com Raaga.com MOGMusicNetwork 123Musiq.com ToneFuse Music Mp3skull.com Djmaza.com Bearshare.com Djmazas.com
Source: Comscore
But there is some activity in the online music space of late though. Companies like Raaga, Gaana and Saavn are trying to go the Pandora way with freemium models. The emphasis till now though has been just on adding subscribers, and taking away the share of the illegitimate music sites. However, the advertising pie remains small to support such websites. It remains to seen if one of the websites providing legitimate content could break away from the pack and establish a significant user base. Mobile remains the savior of the music industry, courtesy CRBT Mobile remains the only medium which currently works for the music industry in India and that is due to the stupendous success of Caller Ringback Tones (CRBT)35. Mobile music was estimated to be a Rs 3,700 Crore ($820 million) market in 2010, with Rs 2,800 Crore ($620 million) coming from CRBT, Rs 600 Crore ($135 million) from mobile radio and the rest from digital downloads. Most of this success can be attributed to the business models - CRBT and online radio being designed around services and not products. This has limited piracy in the space and the involvement of operators has made the payments easier to handle. Of course, mobile operators continue to keep the lions share of the revenues, leaving very little for the aggregators, publishers and artistes.
35
Not to mention the cumbersome exit procedures for users (Easy to get in, tough to get out)
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Exhibit 101
Share of CRBT revenues to different stakeholders

100% 70 - 75% Share of Revenue Obtained from Mobile Consumers
10 - 15% 5 - 10% 10 - 15%
Revenue from consumers
Mobile service providers
Platform enablers
Content aggregators
Publisher share
Time for another disruption CRBT revenue growth has slowed down over the last few years and is expected to stagnate in the near future. This is due to high penetration levels among the target group. The segment which remains untapped is the low end users who maintain very low balances - less than Rs 10. It would be difficult for CRBT to reach them, at the current pricing of Rs 30 per month. On-demand music and music downloads are the other levers to drive the mobile music revenues. However, with the advent of freemium models like Raaga and Gaana (available on mobile internet), these models would also come under pricing pressures. That leaves digital downloads as the only option to drive the growth of the industry. There is an estimated $4 billion unorganized market led by pre-paid mobile recharge stores, which deals with loading of pirated content on to mobile phones, offline. And this $4 billion is dominated by music. With better interfaces and smarter pricing, mobile operators could start tapping into this market. Overall, the Indian music industry is still in search of that killer-app to change the industry dynamics. Flipkarts foray into this segment through the acquisition of Mime360 combined with efforts of incumbents (Gaana, Saavn, etc) could well lead to an explosion of digital downloads of music.
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Online videos
Time spent on videos increasing rapidly; advertising spends are keeping pace Online video viewing has been growing rapidly across countries. Videos remain one of the most preferred content categories online. Over the last two years, the overall time spent online in the US has grown at a rate of 2%, while the time spent on videos has grown at a rate of 24%. Though there are subscription models which exist across the world, advertising remains the primary source of revenue for video platforms. Exhibit 102 Time share of videos (as % of overall time spent online) - US
8% 6.8%
7% 5.6%
6% 4.6%
5%
4%
3%
2%
1%
0% 2008 2009 2010
Source: E-marketer, Comscore video metrics
Even though video advertising has been relatively slow to pick up, it seems to be catching up over the last few years. Exhibit 103 Online video advertising in US
6% Video ads (in $ million) Video ads (as % of total ads) 4.5% $2,000 3.1% 3% 1,017 1.5% 0.9% 0.3% 0% 25 2000 0.5% 35 2001 48 2002 65 2003 88 2004 120 0.9% 0.9% 1.0% 1.1% 324 190 $0 2005 2006 2007 2008 2009 2010 734 $1,000 1,400 $3,000 5.4%
Source: IAB internet advertising revenue report 2010
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Exhibit 104
Total time spent watching online videos in US (billion minutes)

250
200 30% 149 150
195
100
50
0 January 2011 August 2011
Source: Comscore video metrics
The primary drivers of this growth have been the improving connectivity options (3G) and the newer business models being witnessed in the space. Exhibit 105 Youtube facts 48 hours of video uploaded every minute, leading to 8 years of content uploaded every day More video is uploaded to Youtube in one month than what the 3 major US networks created in 60 years Over 3 billion videos viewed every day Over 3 billion videos monetized every week Has 20,000 plus partners in 22 countries Localized in 25 countries and 43 languages, 70% of the traffic comes from outside the US Google, through Youtube, remains the top player in the market - but some new models are emerging rapidly. Hulu and Netflix Hulu and Netflix offer freemium models, where most of the content could be viewed online for free interspersed with advertising, while some premium content could be viewed through a subscription. Netflix had launched its full streaming service in November 2010 and has been actively pushing it through a very low subscription fee of $7.99, as against its offline model which attracts higher subscription fees36. Hulu offers all episodes of some of the most popular TV shows in US through its $7.99 subscription service. Hulu had revenues of $263 million in 2010 and is well on course to hit $500 million in revenues and a million users by 2011. 20% of its revenues are expected from subscriptions, and 80% from advertising. Both these models work through revenue sharing partnerships with content providers, and are accessible across multiple devices including TV. These models are beginning to emerge as replacements for Pay TV in the US, with around 28% of people favoring these models over Pay TV, according to a JP Morgan survey.
36
Despite some recent PR disasters, Netflix remains the formidable player in this segment
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And like many others, we anxiously await more details on the iTV. Exhibit 106 Time share of top video platforms in US (as % of total time spent watching videos) - August 2011
40% 28.6% Share of total time (%)
30%
20%
10% 2.6% 0%
In c. ok .c om u s s VE VO s it a l it a l Ya ho o! S ni ve rs al BC N U si te ite H L si te ul AO gl D D ig e ig ft
1.7%
1.9%
1.1%
1.1%
1.1%
0.5%
0.5%
0.2%
ic ro so
Vi ac om
Tu rn er
oo
Source: Comscore video metrix
Video on the rise in China too The rise in online video viewing is not just a US phenomenon. The reach of online video has been increasing steadily in China too. More importantly, monetization of video content has been picking up of late with video advertising revenues more than doubling every year since 2006 (albeit over a small base). Exhibit 107 Reach of videos (million users) and video advertising revenues (in RMB billion) - China
4 400
Fa ce
bo
3 240 202 2 161 1.4 120 1 0.3 0.1 0 2006* 2007 2008 2009
290 2.9
300
200
0.6
100
0 2010
Reach (mn users)
Total video ad revenues (Rmb Bn)
Source: iResearch
India following suit in consumption trends As discussed earlier, penetration of broadband connections in India is amongst the lowest in the world. Rampant piracy offline and online in the movies and TV shows space has meant that there are not too many legitimate service providers in this space, Bigflix being an exception.
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Inspite of these limitations, the performance of Indian online video space has exceeded expectations. The reach of online videos is comparable to the global benchmarks. While the absolute time spent on online videos is lesser than other countries, the time share of online videos has been much higher than others. Exhibit 108 Reach of online videos (as % of total internet users) - January 2011
Reach of online videos (%) 84%
81%
80%
78% 71%
US
UK
China
Australia
India
Source: Comscore - State of the internet with a focus on India (June 2011)
Exhibit 109
Time spent watching videos online - January (Hours per month)

18.3 15.8
10.7 9.3 7.7 7.7 5.1
UK
US
Singapore
Russia
Brazil
Australia
India
Source: Comscore State of the internet with a focus on India (January 2011)
Though 5.1 hours per month is less compared to other countries, it is more than 25% of the overall time spent online by the Indian internet users, as against 7% for the US internet users. Video, is expected to remain as one of the primary drivers of content consumption online, as this is also one of the few areas where there is high vernacular content availability.
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Video advertising small, but expected to grow rapidly Inspite of the high reach and time share, video advertising has remained insignificant in the Indian online advertising space. We expect this to change in the near future, with videos sites acquiring better targeting capabilities. Also, video is being viewed as a medium to re-inforce brand messages delivered through TV advertisements, and would result in brand advertising getting directed towards video ads. Youtube remains the top video site in India too with over 25% share of the market. While most other players are multi-national players, prominent Indian portals Network18 and Rediff round off the top websites in the space. Exhibit 110 Time share of top video websites (as % of total time spent watching videos) - January 2011
30% 26.1% Share of total time (%)
20%
10%
1.7% 0%
n
1.5%
1.5%
0.9%
0.5%
VE VO
0.4%
o!
0.2%
t of
0.0%
if f Re d
ac af e
m ot io
bo ok
si te
18
Ya ho
or k
Fa ce
et
gl
D ai ly
oo
Source: Comscore The rise of online video in India
There has been further action in the online videos space, with Yahoo! launching its movieplex service in August 2011, which streams full length movies. This is still an evolving space and could lead to rapid growth opportunities for content aggregators in the near future. Also, with mobile internet expected to drive the growth of internet usage, mobile video is expected to be another growth opportunity. Apalya is an early mover in the space, and has created tie-ups with multiple video content owners.
et
ic
ro s
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Global Models, Desi Adaptation
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Redbus :: Opportunities are created, not gifted
A multi-billion dollar unorganized industry That, in a nutshell, is the Indian bus industry of 2005. Any technology company should have been licking its lips to get into the space, considering the success of online booking in air travel, and the huge adoption rates witnessed by IRCTC. What scared everyone away was that the industry had over 20,000 private buses plying on thousands of routes daily, run by over 2,000 operators. The industry was completely agent-driven, and the only means of coordination was over the phone. Not many people were using computers, let alone internet. And there were high levels of resistance to entertain anything new. The biggest loser out of this was the consumer, who was denied the convenience, which was possible with the usage of technology. Ironically, it was a disgruntled consumer, who went on to revolutionise the way the industry functioned. Great consumer experience helps Central to the revolution was a complete focus on the consumer. While many players were trying to sell software to the bus operators, Redbus went after the consumers. The assumption was that, as the consumer traction improves, operators will find incentives to join, a hypothesis which proved to be right. The consumer centricity of Redbus could be observed from the way they handled the introduction of consumer ratings for buses. What makes the ratings significant is that, they are not passive for the consumer to see and act, but are active and direct the consumers to avoid buses with lower ratings. Such a process does not exist even in the more mature air travel space, and was sure to have soured some operator relationships for Redbus.
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Exhibit 111
A perfect solution is not an overnight affair - A journey filled with innovations
Innovate not for the heck of it...but to solve the practical challenges faced by the industry, and to take it forward!
Seat layout for bus travellers: Noticed that bus travellers had clear preferences when it cam to seat selection. Was the first to introduce seat layout for buses
Web-BOSS: The online version of BOSS was introduced, wherein operators could manage their inventory on the cloud
Flexi pricing: Allows bus operators flexibility in pricing of their tickets - leading to improved profitability Seatseller: Creates a GDS for the bus industry, aiding industry expansion
2006
2007
2008
2009
2010
2011
Online to consumer, offline to operator: Customers request for tickets online, Redbus blocks the ticket with the operator over phone, and then contacts the customer and requests him to book online
Computerization of bus operators - BOSS: Not many operators were computerized, impacting the efficiency of the industry. Introduced Bus Operator Software Services, to help the operators become more efficient and more importantly online ready.
Seat Images and Rating system: Gets into the sensitive area of helping consumers gauge the quality of a bus before booking tickets. Handles it maturely to minimize any impact on the operator relationships. Introduced IVR based reviews to increase
Go Green: Introduced m-tickets, where an SMS served as the ticket - leapfrogging air and train ticketing industries
Building a strong business model is not an overnight affair This approach meant that the company had to innovate continuously to mask the lessthan-perfect back-end and provide a great consumer experience at the front-end. And so Redbus went through a journey full of innovations to reach a point, where they own the GDS for the bus industry (Exhibit 111). From the moment of getting the first integration in 2007, the number of integrations has grown rapidly to reach 700 by 2011. It is possible to build online businesses, the old fashioned way While most segments in the e-commerce industry preferred to go with discounts as the primary driver for customer acquisition, Redbus has stayed away from that path consistently since its launch. There were air travel OTAs selling tickets at Re 1, and there were even some funded bus ticket agents, who were trying to replicate the air travel industrys sales tactics. But, none of the other bus travel OTAs succeeded as much as Redbus in attracting customers, proving that discounts are not the only way to acquire customers. Redbus also has one of the best conversion rates at over 10% and a healthy repeat customer rates. Redbus has sold 5 million tickets to a million consumers by mid-2011, and commands over 70% market share in the bus travel OTA space. This, despite the fact that they are one of the most frugal organizations when it comes to spends on marketing. Their marketing spends till 2 years back were a fraction of what ecommerce companies spend on mass-media marketing today. Though competition has driven the marketing spends up of late, it remains completely driven by RoI.
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Exhibit 112
Redbus gross revenues (Rs Crore)

700 Revenues (Rs Cr)
350
116 1 2006-07 5 2007-08 25 2009-09 60
2009-10
2010-11
2011-12P
2013-14P
Source: Redbus
Even when Redbus introduced COD, they passed on the cost to the consumer. This has meant that COD was not used indiscriminately. Those who had no choice used it, while others remained with online payments. Over 60% of the overall bookings still come through the cheaper online payments. This single-minded focus on RoI at every juncture has meant that while revenues surged, profitably was never compromised. Legend has it that they didnt even turn on the airconditioning for their investor Kanwal Rekhi . Redbus has also been successful at pursuing a business model that organizes a highly fragmented industry without disenfranchising existing players. This will hopefully serve as a role model for those trying to address opportunities in other highly fragmented industries in India.
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FlipKart :: Leaders behave differently
While online travel saw steady customer adoption and revenue growth since 2000, etailing hardly made any noise until 2010. While online penetration of travel was at 25%, online penetration of retail stood at a meager 0.12%. This had been due to a multitude of ecosystem issues pertaining to access, payments and delivery infrastructure, as discussed in this report. Build the ecosystem While most other players waited for the ecosystem to develop, Flipkart set out to address the deficiencies and define a truly differentiating consumer experience, both online and offline. Even when they started off, Flipkart went for consumer experience over profitability, choosing the best delivery companies over the cheapest. And when the volumes increased, they took further hold of the consumer experience, by building their own forward logistics in major cities. They have been fine-tuning their delivery process all along, showing consistent improvement in service standards, with one-day deliveries becoming a reality in many cases. Also, by promoting COD and warranties through mass media campaigns, they have been effectively dealing with the issue of consumers lack of confidence in online payments, and the fear of damaged deliveries. Today, consumers are appreciating the excellent service they are being offered and lapping it up across India. Keep evolving While discussing the Indian digital consumer industry, sometimes, it is easy to neglect the online experience, as there are so many issues to grapple with offline. But, the importance of online experience can be understood from the fact that Amazon calls 200 to 300 services to construct a product page, which is personalized for every user. Flipkart may not be there yet, but nevertheless, they have continuously worked on the online experience. The changes in their home page tell a tale in itself.
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Flipkart home page - October 2007
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Even with all the new categories that they are added, Flipkart has one of the fastest loading home pages among its peers. And Flipkart has also continued to add newer features such as wishlist, recommendation engine and the mobile website, which has kept them ahead of the pack in the Indian e-commerce space38. Great consumer experience has been the biggest entry barrier in the e-commerce space across the world, and Flipkart has assumed early leadership in the Indian space by defining a truly differentiating consumer experience, through relentless focus on execution. Set the pace There is a race for leadership which is being played out in the Indian e-commerce industry currently, especially in the mass merchant space. And the race has only gotten fiercer, with the movement of more and more niche e-commerce players into the mass merchants space. Things are expected to heat up further with the imminent entry of Amazon, other MNCs and offline incumbents. In the midst of all this, Flipkart has behaved like a leader in many ways. They have set the pace for the industry in almost every aspect. The speed with which they have been able to raise funds has been astonishing - a first round in October 2009, followed by second round in June 2010 and a third round in June 2011. And there are already talks about a fourth round funding at a billion dollar valuation. The availability of capital has allowed them to not only take over the offline ecosystem, but also get on to mass-media advertising. Mass-media advertising remained a pipedream for the e-tailing companies till a few months back, but Flipkart changed that perception by going onto TV; predictably, other companies followed. The pace at which they have added categories is also setting them apart from a lot of other players. Flipkart has added new categories at a rapid pace to catch up with those who were ahead, and at the same time break away from those who were on par. And the latest of their moves, acquisition of Mime360 to get into digital media distribution, clearly sets them apart from the rest. All these moves have also ensured that they have been in the mainstream news for quite some time now, adding a high level of valuable PR. Flipkart has behaved like a leader on all fronts in the last few months, confirming its position as the early leader in the e-tailing space in India.
Also see Technology is Key, by Sachin Bansal in Dataquest, 15 April 2011

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Policybazaar :: Meteoric rise through methodic planning
Indias insurance industry was estimated at Rs 268,000 Crore in 2010 ($60 billion), and projected to double by 2015. Life insurance is the dominating category, followed by motor and health insurance. The single defining characteristic of the industry is the dominance of the nationalized players in the space - primarily due to the lead time they had before the segment was opened up for private players. LIC remains the most dominant player in the life insurance space with over 60% of the new policies even now. And the biggest barrier for success for the newer players who entered the market later was the agent network of LIC, which spread through the length and breadth of the nation. Even the general insurance space worked completely through the agent network. And this led to several inefficiencies into the system. Almost all the sales were through personal relationships. On an average, these agents sold just 2 policies per month. To make the profession viable, insurance commissions shot up and consumers paid a price for an inefficient network. There was definite scope for technology to improve the efficiency of the insurance selling process. Business models get dictated by current market dynamics, not the end point Any person looking at the industry would have liked to just go and start selling insurances online straight away. But, it not only involved getting licenses from the regulator, but also required the industry to move to the post-modern era, without going through the intermediate steps. Selling insurances online in 2007 could have meant a sales cost of Rs 50,000 per policy (Rs 100 per lead and a 0.2% conversion to customer). And at margins of 20% on a motor insurance policy worth Rs 10,000, that would have led to the company folding up soon. Instead of taking that route, Policybazaar consciously started as a lead generation engine, which sold leads to the partner principals. Though the margins in a lead sales business are low, that gave them the breathing space to build traffic without losing money in the process. And once the traffic started building up, the free traffic (organic) increased, and the cost of leads started going down.
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This allowed Policybazaar to move to the next level, wherein they started taking ownership of the sales process to the legally permissible extent, through their call centers. This has meant better conversion rates, as the agents are well-trained to assist/persuade the customer to complete a sale. Even the call center, which is a costlier channel than a pure-play online sale is expected to give way to pure-play online sales engine. This careful migration of the business model, within short spans of time, has allowed Policybazaar to build scale without breaking the bank. It has also become the runaway leader in the third party online insurance sales space. Exhibit 113 Business model evolution of Policybazaar
Sell leads to principals
Close the sale online, with offline support (agent / call center)
Close the sale online, with offline exception handling
Exhibit 114
Revenue from lead generation model (% of total revenues)

80%
65%
35%
0%
2009-10
2010-11
2011-12E
2012-13P
Source: Policybazaar
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Exhibit 115
Policybazaar net revenues (Rs Crore)

200
100
50 25 6 12
2009-10
2010-11
2011-12P
2012-13P
2013-14P
2014-15P
Source: Policybazaar
Policybazaar had also got two other critical things right. Opportunity in addressing information asymmetry The unorganized agent network led insurance sales process was strewn with discounts and kickbacks, as the margins were huge and the entire sales process was informal. There was no uniformity in the discounts and commissions provided. This meant that no one knew what was a good deal. And with the increase in the number of players in the market, there were also genuine differences between the offers of different players. Information asymmetry has become the biggest pain point for the consumer, and distrust with agents only grew every day. By laying out the offers for a customer requirement of the consumer from almost all the top insurance companies in a single screen, Policybazaar took the information asymmetry out of the picture. Even though a hard negotiation with an agent could sometimes get one a better deal, consumers were willing to pay a small price for the assurance that they would not be taken for a ride. Rewriting the rules to suit your strengths All that apart, the biggest differentiator for Policybazaar from the traditional insurance agent is the efficiency it brings to the table. A traditional agent used to sell 2 policies a month. Policybazaar set a target of 30 policies per agent, and is well on course to achieve that, with already over 20 policies currently being sold per agent. This improvement in efficiency allows them to work at a lesser margin with the principal as against the offline channel, pass a portion of the benefit to the consumer as a discount and get better quality agents. They are changing the insurance sales space into a volume game, where they can play to their biggest strength - operational efficiency. Continue to be ahead of the market: Policybazaar, continues to strive hard to be ahead of the market, even though it remains far ahead of its competition already. Its latest initiatives stand testimony to this. The
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three things which are holding back the online insurance industry in India today are the low availability of online products, weak online capabilities of traditional insurance companies and the lack of conviction about internets potential among the decision makers at these companies. To tackle these effectively, Policybazaar has embarked on a platform development initiative, where the companies pay on the go with no lock-ins, to tackle these problems. And this has seen large-scale interest with 5 companies already taking it up. As IRDA gears up to allow agents to sell multiple companies products, Policybazaar is also looking at developing a distribution platform for agents and brokers. These initiatives show that Policybazaar is rapidly redefining the online insurance space in India.
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Verse :: Leading the mobile classifieds revolution
If there is one constraining factor which has held back the growth of digital consumer industry in India, all along, it is access. Sixteen long years after the launch of the internet, less than 7% of Indian population has access to PC broadband, as against 30% in China and 70% in US. Even with the projected scale-up in penetration levels, we are looking at just around 15% of the overall population being covered by PC broadband in 2015. That leaves a good 85% of the population out of the mix. Not only does that shrink the potential market size, but also has a significant impact on one of the most important advantages of the digital consumer businesses - long tail economics. While many players are waiting for broadband penetration to improve, leaders have innovated to proactively expand the market. Given the young demographic profile of Indian population, there is a growing need for classifieds information, especially that related to jobs and matrimony. Historically, classifieds were delivered to consumers through newspapers and magazines. Over the last decade, players like Naukri, BharatMatrimony and Shaadi.com built strong businesses by offering classifieds information through the internet. However, with the reach of press at 20% and PC broadband at less than 2% of the total population in 2010, there was an inherent limitation to the extent of reach for most classifieds players. Given the phenomenal growth in the telecom industry over the last decade, mobile penetration today stands at more than 60% (of total population). This level of consumer access presents phenomenal access for delivery of information services to a larger universe of the population. Verse utilized this to its advantage by offering classifieds on mobile. Founded in 2007 by Virendra Gupta and Shailendra Sharma, Verse aggregates classifieds content by getting into tie-ups with multiple online and offline classifieds players, and delivers them via mobile operators on a fee for subscription basis. [Exhibit 116] Only 8% of the total mobile subscriber base in India use GPRS services, and about 80% of the wireless subscribers do not have access to browser based online classifieds. To address the needs of this under-served segment, Verse uses the simplest technology for delivery - USSD and SMS. USSD serves as a proxy for browser on simple handsets that may not support mobile internet. Given that 94% of mobile users in India are prepaid and use USSD regularly for account management, technological barriers to adoption of the product become quite low.
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Prepaid customers often have a recharge cycle and maintain a small balance for a major part of the cycle. Hence, it is important to tap into a customers prepaid balance at the right time in recharge cycle. Verse has developed advanced customer analytics to be able to do this. Also, to lure the price-sensitive prepaid customer into subscription, Verse has come up with sachet subscriptions at the rate of INR 1/daily alert. Within a short span of 4 years since its inception, Verse has emerged as a dominant player in the mobile classifieds space, has tie-ups with the top 8 operators in India, a subscriber base of 9.1 million mobile users and has expanded into jobs, matrimony, real estate and deals based classifieds. The desi model is witnessing early traction in other emerging markets that score high on mobile penetration but fare poorly in terms of internet penetration. Vodacom Global has chosen Verse as the classifieds partner for developing markets and there is a high probability of a similar partnership with Airtel. Verse has already gone live in South Africa (via Vodacom) and in Bangladesh (via Airtel Warid) and plans to expand to other countries in Africa, Middle-east and South-east Asia. As the pioneer in mobile classifieds, Verse has done its bit to develop a desi model and use it to bridge the digital divide in emerging markets.
Exhibit 116
Verses Business Model
Print Ads
Content Free
Rev Share of operator ARPU
Subscription fee
Internet Classified
Publishers / Offline aggregators Verse Aggregation Engine Mobile Operator SMS / USSD
Classified Lister
C2C USSD / Voice
Voluntary sign-up Preferences specified Renewal weekly / fortnightly / monthly
Flow of Money
Operational
Pilot
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Yepme :: Taking fast fashion to the masses
Indias apparel market is estimated at Rs 1,80,000 Crore ($40 billion) and is expected to reach Rs 4,50,000 Crore ($100 billion) by 2020. The industry, interestingly, continues to be largely unorganized with rural / semi-urban regions accounting for 45% of the market. Apparel retail is fraught with low brand penetration with the largest Indian Mens apparel brand Louis Philippe estimated to have a turnover of Rs 600 Crore ($135 million). Other leading brands like Peter England, Zodiac, BlackBerrys and Allen Solly are in the Rs 270 - 450 Crore ($60-100 million) range. Most of these brands have limited availability beyond the top 100 cities/towns. In a vast geography like India, the physical infrastructure factors will continue to be a limitation for growth of offline retail. Digital media (Internet/mobile) on the other hand, does not face the limitations of reach or the need to deploy large amounts of capital to create physical retail space to display your merchandise. It can therefore be leveraged to build an online brand more effectively and efficiently from a cost and distribution perspective. Globally, online fashion brands have redefined the rules of the online retail industry. Vancl, an online fashion brand based out of China, today holds a 28% market share of Chinas self operating B2C online apparel market. Fuelled by investments totaling over Rs 900 Crore ($200 million) in the last 4 years, it is expected to clock a turnover in excess of $1 billion in 2011 and is speculated to be valued at $3 billion. There have been similar success stories in the form of Asos.com (UK) and Mecox Lane (China) amongst others. Yepme, Indias first online fashion brand launched by Vas Data Services, is attempting to pioneer this concept in the country. The brand is positioned to cater to the Alpha male personality and offers a trendy collection of formal, casual and party wear, accessories and footwear. The company raised its first round of funding from Helion Venture Partners in April, 2011. The company officially launched its brand through a fashion show at the F-bar, New Delhi in August this year where leading models (Dino Morea, Rajneesh Duggal and Shawar Ali) walked the ramp wearing Yepme clothes. The brand has gained significant traction in a short span of time and today sells over 10,000 brand units each month.
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Creating a brand for the masses Yepme has been able to create a strong pull from Tier II/Tier III cities, with the consumers in these cities accounting for 60% of its orders today. Since its very recent launch, it has already serviced orders in more than 520 cities in the country. High gross margins, better sight of profitability Yepmes business model also demonstrates the potential of creating differentiated ecommerce businesses which enjoy high gross margins (>40%). This should give investors some comfort and confidence about the ability of these businesses to generate profits down the road. Leveraging social media to get closer to your customer, no matter where they are located Another interesting aspect of building the Yepme brand has been adoption of social media. Yepmes Facebook page has over 300,000 fans and over 55,000 people talking about it. The same has worked towards generating an interesting (and growing) buzz around the brand, highlighting strong customer engagement. This level of engagement has not been witnessed even amongst leading offline brands and online mass merchants.
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Bookmyshow :: A pioneer in the online entertainment ticketing ecosystem
Around a decade back, a usual scenario was that of people standing in long queues at the ticket counters or buying tickets in black for a blockbuster movie. The situation today is different. With the increase of internet users and multiplex chains in India, online entertainment ticket booking has gained popularity. Big Tree Entertainment (Bookmyshow) has been the pioneer in this field, with the company launching its first online ticket booking site - Go4ticketing.com - way back in 1999. However the idea was ahead of its time and the company focused on building an ecosystem. Entertainment ticketing is a highly regulated industry and it required significant effort with the government to allow automation of the box office. Once this was achieved, they started providing box office software to cinema halls, multiplex chains and theatre venues. Along the way, they developed a deep understanding of consumer behavior and how entertainment ticketing works in India. Bookmyshow.com was launched in August, 2007 with a view to capture the changing consumption pattern of the digital consumer. The key insight they had was that Bookmyshow only owns the online consumer experience as the rest of the experience happens at the cinema or event venue. The site and services were thus designed keeping a superior customer experience in mind. Bookmyshow was the first Indian website to offer ticket purchase without registration which made the purchase process extremely simple and fast. The ability to attract a large number of paying customers turned the site into an entertainment marketplace which allowed them to target event promoters for selling tickets. The events business in India is maturing rapidly and this is where the company has gained significant expertise. The Indian live event industry is estimated at Rs 1,800 Crore ($ 400 million)and is growing at 20% every year. Events of the nature of music festivals and concerts, sporting events like the IPL and Formula 1 are high margin businesses. Bookmyshow offers a turnkey solution for such events which includes ticket planning, sales and distribution across all channels, gate entry and financial management. In return, they charge a per ticket fee from the event organizer for every ticket sold, irrespective of the sales channel. Bookmyshow handled ticketing for 4 IPL teams and the prestigious Formula 1 event in India.
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An important aspect of Bookmyshow's growth has been that they have chased transactions and not just eyeballs. This is reflected in the way the company has managed its marketing spends which are closely linked to transaction conversion rates, as well as leveraged media relationships with studios, channels and print to get advertising at marginal cost. The company shall be amongst the first few internet ventures to turn profitable. It expects to close this fiscal with a net profit of a million dollars. With a host of new features and ideas in the pipeline, Bookymshow is constantly innovating to remain the undisputed leader in the online ticket booking space. Bookmyshow launched its mobile applications and mobile site and have seen a healthy percentage of transactions through these channels. As smart phones and data plans become cheaper, they expect mobile ticketing to take off. Bookmyshow also introduced features like pre-booking of tickets, F&B sales, Facebook integration which allows friends to view booking details of their friends and also buy tickets with them. BMS also launched merchandise retailing with IPL and saw enough traction to consider this as a new area of revenue generation. With over 3 billion cinema admits per annum in India, which is almost 3 times that of the US market, Bookmyshow has a long way to go with its current run-rate of selling 12 million tickets per annum.
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High growth expected across segments We project the industry to reach almost five times from its size of Rs 26,800 Crore ($6.0 billion) in 2010 to Rs 126,700 Crore ($28.2 billion) by 2015. E-tailing is expected to grow around 80% during the current year and would be one of the key pillars of growth. Travel, the backbone of the industry, has reached global benchmarks for online penetration and will continue to grow. Advertising is also expected to grow at a fast clip, with social networks, video and mobile driving the growth of the same. Exhibit 117 Projected segment sizes in 2015 (Rs Crore)
Consumer Facing Models
INFORMATION COMMUNITY E-COMMERCE CONSUMER SERVICES
Financial services
ENTERTAINMENT
Search (1,950) Portals (800) Classifieds (2,300) Comparision sites
Social networks
Travel (54,800) E-tailing (53,000)
Gaming (2,690) Music (1,475) Videos (800)
(1,250)
(7,150) Healthcare Education (500) Governance Consumer spends
Advertising
Consumer spends
Localisation and concentration levels While e-tailing is expected to lead the growth of the industry, most other segments are also expected to grow at a good pace. This suggests that there would be several investment opportunities across categories in the short to medium term. We believe that there are two important dynamics which characterize opportunities in different categories - the extent of localization necessary to succeed in the segment, and the expected level of concentration in the segment. Extent of localisation: While some categories require a high level of localization, business models in other categories are global in nature. Wherever local presence is not a necessity, global players tend to dominate on the basis of their technological capabilities. This becomes an important factor to consider in a category. The extent of localization necessary in a category can be gauged by the nature of the value proposition - whether it is the platform, content (information/entertainment) or fulfillment (product/service). Platform plays usually involve a technology that allows multiple parties to meet and fulfill their needs. Search (Google, Bing) and social networks (Facebook, LinkedIn, Twitter) are the primary examples of platform plays. Youtube (with its video sharing platform) is also a platform play. Content plays require a certain degree of localization. Portals are clear examples of content plays. Local players (Rediff, Network18, Indiatimes) have enjoyed a great level of success in this space. Over a period of time, global players (Yahoo!, MSN) have fought
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their way through, but only by localizing their content to suit the needs of the Indian audience. Music and gaming are two other categories, where tie-ups with local content publishers are essential to succeed. Fulfillment - delivery of a service or a product - is an altogether different game as it involves transactions with consumers in the country. This requires local merchandising, vendor management and physical delivery of the product or the service. Players with strong local set-ups stand a good chance to succeed in these categories - e-tailing, services, classifieds and deals all fall in this category. The examples above are meant to be illustrative in nature. To be sure, there are always counter examples - and that is what makes for innovative, great business models. However, thinking about the technology and localization requirements is a fairly effective way to analyse a business model - and the real opportunity for Indian players. Level of concentration: The other factor to consider is the potential level of concentration in a category. Will winner take all? Or, will it be a fragmented category? Will investments in building scale provide a decisive advantage? Or, is it better to wait out? From an economics standpoint, one looks at three categories of concentration monopolistic, oligopolistic and fragmented. The age of true monopolies is long gone, but there are emerging industries which certainly allow long periods of duopolistic or oligopoly-like situations. Think of Amazon in books, Google in search, Apple in music - all of these companies have been in dominant industry positions for extended periods of time. Closer home, we are beginning to see some similar trends. In travel, the top 3 players account for a major share of the online market - compared to a highly fragmented offline travel business. Similarly, the classifieds business also sees significant concentration among a few players. But (and this is the key issue) not every category will lend itself to such levels of concentration. Financial services are already a reasonably fragmented category - reflecting the size of the industry as well as the speed with which incumbents moved online. Similarly, education seems unlikely to end up as an overly concentrated industry - given the variety of consumer requirements and the likely need for offline/human support. Its important to develop a perspective on this issue. For categories that lend themselves to high levels of concentration, it is critical to be constantly ahead. Companies would need to invest ahead of the curve and build scale in operations and marketing generally at the cost of short to medium term profitability. Its a high-stakes game - and not necessarily for everyone. On the other hand, there are categories that do not lend themselves to such economics - and it is more important to build a strong differentiated business in those areas. Confusing one category for the other can be a strategic disaster. Given the state of the industry in India, and the evidence from other countries, we have plotted each of the digital market segments on these two variables - localization and concentration levels.
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Exhibit 118
100% Search 90%
Indian digital consumer market - category analysis
Social networks Localized/Oligopolistic models
80%
Global/Concentrated models
70% Level of concentration Videos 60%
Gaming
Mass merchants Music
Classifieds
Deals Travel Niche merchants
50% Portals (Advertising)
40%
Healthcare Financial services Local/Fragmented models
30% Content delivery 20% Online retail Online service delivery
10%
0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Extent of localization
Circle sizes indicate the relative sizes of the categories in 2015
The chart above shows some broad patterns. A lot of advertising driven businesses (barring classifieds) have become platform plays - and are increasingly dominated by global players. Even among the global players, a few players take a lions share of the market. E-commerce businesses require a high level of localization, and generally lend themselves to oligopoly-like situations - making them the most attractive category from an investment standpoint. Services tend to be the most local, but also tend to be the most fragmented - the need for localization working both for and against the model. It is quite likely that incumbents will be the ones to drive this segment. A categorization of this nature does involve a degree of subjectivity - and tends to ignore the impact of innovation. Many of the digital categories are themselves the results of breakthrough models. Also, there are local market dynamics that will come into play with the next 200 million internet users in India. While global players have dominated both search and social networks, Yandex remains the dominant search engine in Russia due to its vernacular capabilities. Same is the case with Baidu in China. Renren and Vkontakte remain prominent players in the social networking space in Japan and Russia, despite social networks being platform plays. Online travel, an oligopoly in most markets, remains fragmented in UK. It is important for us to clarify that our model is meant to merely serve as a directional guide to the underlying issues; it is not a claim on having a prescriptive formula for success in the sector.
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Capital, the big differentiator To succeed in todays e-commerce market, one needs to have the stomach for battle and access to capital. Rapid organisational build-outs, investments in supply chain infrastructure, mass media campaigns - bootstrapping is not even a realistic option - and so funding has become a critical differentiator among companies. Also, the number of funded players in the market in itself becomes a deterrent to newer players and investors, tilting the race in favor of the early movers. But do the valuations make sense? How should one think about investments from a financial standpoint? Its the billion dollar question - and something we try to lend a perspective on in our final section.
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Investment Activity
.com
No Cap on Capital Value lies in the eye of the beholder
Investment Activity | No Cap on Capital
AVENDUS
No Cap on Capital
Digital media arrives in style If there is one industry that has sidestepped the recessionary economic conditions across global markets, its been Digital Media. The entire universe of investors, from VCs, Institutional Funds, Hedge Funds, Mutual Funds, Pension Funds and general public have placed their bets across various digital media businesses. The shackles of the dotcom bust, have indeed broken now. 2011 saw the second largest Internet IPO in history when Groupon dispelled notions of a weak market and skepticism around its business model by raising $700 million at a valuation of $12.8 billion. The survivors of the 2000 market crash; Amazon, Google, eBay and Yahoo have also consolidated their positions. Besides them, new internet giants have been created; Facebook is rumoured to have been valued at over $65 billion during its last funding round and is estimated to be worth over $80 billion currently. Exhibit 119 Major PE investments in 2011
Company
PE funding ($ billion)
Category
Alibaba Facebook Groupon Twitter PP live Vancl InMobi

Source: Press articles
1.60 1.50 0.95 0.80 0.25 0.25 0.20
B2B marketplace Social network Group deals Social network Digital downloads Private label apparel Mobile advertising
Some major IPOs in digital media industry have been mentioned in the introduction and going by ones in the pipeline, the next 12 months also promise to be quite exciting. Social media giant Facebook, social game developer Zynga, Chinese private label player Vancl and online grocery seller FreshDirect are amongst several digital media companies that are rumoured to be preparing to launch their public offerings in 2012. Investment trends in global market In 2009, there was a major dip in investor interest in the Digital Media sector. The revival started in 2010 and consolidated in 2011. There was increased confidence across a plethora of business models - be it professional networking, regional search engines, global and regional social networks, group buying, flash sales or general e-tailing, they all have received their fair share of investments. This demonstrates both, the breadth of investor interest as well as depth of each of these categories to absorb large sums of capital.
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India joins the party; investments have grown rapidly and crossed Rs 3,600 Crore ($800 million) in 2011 In a complete contrast to most sectors of the Indian economy, Digital Media has grown in India on the backing of VC and PE investors. After lying low in 2008 and 2009, when most VCs took their smaller Series A bets, the year 2011 came as a year of strong confidence. Increased confidence on account of fine-tuned business models, on-theground customer traction and recession-proof Indian consumer market, led to capital to the tune of $829 million being invested between Jan-Nov 2011. Total number of deals has doubled from 33 in 2010 to 66 in 2011 till date. Further, as per our estimate, transactions totaling $250 million or so are likely to get announced in this sector before the end of this year. This is a strong vindication of investor interest in the sector as a whole (as opposed to a select few companies). Exhibit 120 Investment in digital media sector in India (in $ million)
1200 Investments announced Estimated value of transactions underway
1000
250
800 600 829
400
200 242 105 0 2008 2009 2010 2011* 111
*Investments from January till November Source: Press articles, Venture intelligence, VC Vircle, Mergermarket, Avendus Estimates (For a comprehensive list of deals in 2011 please refer to Annexure B)
Investments happening across business models, indication of strong confidence in growth of the sector Exhibit 121 2011 Investments breakup by segments
Services :: 3% Payments :: 0%
Deals :: 9%
ICP :: 13%
Advertising :: 35%
Travel :: 15%
E-tailing :: 25%
Source: Press articles, Venture intelligence, VC Vircle, Mergermarket, Avendus Estimates
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A lions share of the investment in the sector went to e-commerce (which includes Etailing, Travel and Deals) as it mopped up more than 48% of investments ($401 million) made in the digital consumer sector. Advertising followed e-commerce with investments to the tune of $287 million, a large portion of which ($200 million) was accounted for by Softbanks investment in InMobi. Information, classifieds and portals (ICP) witnessed 14 deals with $112 million invested in that segment. Exhibit122 Investments flow (in $ million)
Payments Services Advertising ICP E-commerce 401
112
105 39 36 34 29 2008 16 46 35 9 2009 41 20 18 28 5 2010
287
27 2 2011-till Nov
Source: Press articles, Venture intelligence, VC Vircle, Mergermarket, Avendus Estimates (For a comprehensive list of deals in 2011 please refer to Annexure B)
It has been encouraging to see that investments are being made across different categories, sub-categories and business models. In e-commerce, there were investments in mass e-tailers Flipkart, Yebhi, Homeshop18 and IndiaPlaza. At the same time niche players like electronics retailer Letsbuy, jewellery e-tailer Caratlane, baby care players FirstCry, BabyOye and Hoopos, apparel major Myntra and crowd-sourcing design company Inkfruit raised capital during the year. Besides the breadth of categories, investors put money behind different business models including deals, flash sales, private label apparels and marketplaces during the course of 2011. Digital advertising stole the show when mobile ad network company, InMobi raised $200 million from Softbank in what qualifies as the largest transaction in the digital media space in India. In addition to inMobi, there has been strong investor interest in online advertising, marketing services and ad networks. Key transactions in the space have been that of Ybrant Digital and Komli Media. In the ICP (Information, Classified & Portals) segment, investment activity revolved around follow on rounds of funding as very few new players emerged on the horizon. Classifieds players Consim, Suleka and Quikr raised additional capital to fuel their growth. Local search market leader, JustDial raised funds from PE players and has also filed its DRHP with the regulators for its public offering. Online services have been dominated by Financial services; BankBazaar and PolicyBazaar received investments to
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help them expand. Early stage start-ups in online education services are also attracting interest from the VC community. A comprehensive list of investments in the digital media sector have been provided in the Annexure. Companies are maturing fast; moving fairly quickly through the rounds An interesting trend that has emerged in the sector is the pace at which the companies are maturing and moving through their rounds of funding. The duration between consecutive rounds of funding for e-commerce companies has shrunk to almost half in 2011 as compared to that in 2010. Companies in e-tailing and deals segment have in a few cases raised consecutive rounds of capital with a gap of less than 6 months. Also, entrepreneurs have been alive to the fact that given the pace at which they are scaling, it may be prudent to restrict equity dilution and utilize funds raised to scale further and raise the next round of financing at higher valuations. They have ended up breaking up their 12-24 month fund requirement across 2-3 rounds. Deal sizes have increased; emergence of PE interest for later rounds is a positive sign Exhibit 123 Investments breakup by rounds
1st Round 3rd Round 2nd Round 4th Round and beyond 350
202
54 42 79 67 2008 18
163 21 58 2009 8 47 50 2010 14 115 2011-till Nov
Source: Avendus analysis (For a comprehensive list of deals in 2011 please refer to Annexure B)
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The pace of the growth of companies in the digital media space has resulted in increased deal sizes. The average deal size in each round has increased from 2010 to 2011. The average size of round 2 and 3 investments has seen more than 2X increase in size. (exhibit 124) Exhibit 124 Average deal size (in $ million)
2009
2010 4.2 5.2 4.8 -
2011-Nov 4.8 12.5 20.2 43.7
1st Round 2nd Round 3rd Round 4th Round & beyond
Source: Avendus analysis
5.8 6.0 8.2 10.6
InMobi raised its fourth round of funding form Softbank of $200 million in September 2011. Its preceding funding round was $8 million in July, 2010. Snapdeal raised $12 million from Nexus Ventures and Indo-US Ventures in January 2011 and followed that with a $40 million round led by Bessemer (with participation from existing investors) six months later. Flipkart is going through a similar pattern - it raised $20 million early in the year and is now expected to raise another large round. Online advertising player Ybrant raised funding of $25 million and $48 million earlier this year. Fashionandyou.com raised its 1st round in Dec-2010 and two more rounds this year in July and November. In its most recent round, Fashionandyou raised $ 40 million from a consortium of investors that include Norwest, Intel Capital, Nokia Venture Partners and Sequoia. With average size of financing transactions increasing, weve seen strong interest from growth stage Private Equity funds seeking to invest in Series C rounds (and beyond) of these companies. While venture capitalists and angel investors have played a crucial role in seeding the industry by backing entrepreneurs at very early stages of their business, deep pocketed private equity investors will play an equally important role in providing the capital businesses in this sector will require to scale to the next level. Concentration of investors: Rush to back category leaders who command a significant premium In categories and segments that have gained a certain critical mass, investors have made a beeline for the top 2-3 players in each of those segments. A phrase commonly heard from investors is winner takes all, which is meant to imply that segment leaders will command a disproportionate share of their respective markets. There are two fallouts because of this dynamic. Firstly, on the valuation front, segment leaders are enjoying a significant premium (more than a 100% in some cases) in their valuations as compared to the number 2/3 players. Secondly, companies are trying to get a consortium of investors on board to ensure deep pockets amongst incumbent investors for subsequent rounds of funding. Having a concentration of investors in the top 1 or 2 players in each segment also helps reduce the universe of investors that the rest of competition could approach for their financing needs - this creates a natural barrier to entry. As an illustration, Exhibit 125 illustrates the concentration of investors across leaders in various segments in India.
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Exhibit 125 Letsbuy (Electronics)
Concentration of investors Helion Ventures Sequoia Capital Norwest Venture Partners Tiger Global Accel Partners Norwest Venture Partners Nokia Growth Partners Indo-US Venture Partners Tiger Global Helion Ventures Sierra Capital IDG Ventures eBay Omidyar Network Tiger Global Intel Capital
Fashion and You (Private Sales)
Quikr (Classifieds)
Myntra (Apparel e-tailing)
MakemyTrip (Online Travel)
Source: Press articles, Venture intelligence, VC Circle
Capital is becoming a key differentiator Deep pockets, could well prove to be the recipe for success in this industry. Given the evolutionary stage of the market, players are bound to make mistakes and business models are likely to evolve. In such a scenario, players who are well capitalized are at an inherent advantage to those who need to watch every dollar they spend. In addition to increasing ones staying power, capital is also becoming an entry barrier because entrepreneurs are shying away from entering segments where early movers have already been funded. This is because the universe of investors who can invest in those segments would have shrunk. Also, well capitalized companies are leveraging the capital they raise to stay ahead of competition, long enough to get to their next round of financing. Profitability sounds retro! Unlike most other industries, profitability doesnt seem to figure on the agenda of entrepreneurs in this sector (at least not yet). The even more surprising bit is that one doesnt often hear investors broach the topic. While this may appear somewhat blase, it is characteristic of the stage of evolution of the Indian Internet industry. In most countries where the internet market is evolved, the industry has gone through three stages of evolutions - subscriber growth, monetization and profitability. India is clearly at the second stage today. Strategic Investments In addition to VC investors, existing internet companies have incubated or have made strategic investments across different internet properties. Listed internet company
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InfoEdge, which runs popular portals like Naukri.com, JeevanSaathi.com and 99acres.com has invested in food review site Zomato, flash sales site 99lables, daily deals site MyDala.com, education software company Meritnation and online insurance seller PolicyBazaar.com. Similarly, Smile Interactive Group (SITG) has investments in Letsbuy, Tyroo, Fashionandyou, Dealsandyou, BeStylish, Zoomtra, Zumtra, etc. These internet groups understand the eco-system well and can leverage their experience and expertise to incubate companies around budding entrepreneurs. Such knowledge capital is the key towards the development of the industry. Mergers and acquisitions (M&A) are starting to pick up pace M&A activity in the industry has picked up pace with companies acquiring businesses to enter new segments or to acquire technology. In the Travel segment, MakemyTrip acquired 79% stake in Luxury Tours & Travels (LTT) to strengthen its inventory of hotel rooms & packages. It also acquired ticketvala.com in 2010 to build out its bus-ticketing business and acquired a minority stake in travel metasearch engine iXiGo.com to leverage its technology platform. Another leading OTA, Yatra.com acquired MagicRooms.in, a B2B hotel aggregation and reservation company in July this year. E-tailers have also started leveraging M&A strategically to enhance their product offering and consumer franchise. Flipkart very recently acquired Mime-360 to launch its digital media distribution platform. It also purchased WeRead, the largest social network based book recommendation and review platform in Dec-2010. Homeshop18 acquired Coinjoos.com, an online bookstore, to supplement its books retail category. New-Delhi based e-commerce firm BenefitsPLUS Media Pvt. Ltd. has been snapping up ecommerce firms - first Snowball eRetail Services and then Koovs.com - to offer a combination of B2B and B2C e-com in the country. WanaMo.com, which was founded in November 2009, was bought by Smile Interactive group to enter the daily deals space and create what we better know today as dealsandyou.com. Ad networks are taking a slightly different approach. Given the relatively smaller size of the Indian advertising market today and the ability to leverage technology to expand their network in other markets, Adnetwork players are acquiring businesses overseas to gain market access. The most active of Indian Adnetworks, Komli Media acquired Singaporebased online advertising firm, Aktiv Digital in Jun-2011 and mobile ad network named ZestADZ in Jul-2011. It had also acquired Australia based PostClick in 2010 and UK based Indoor media in 2010. Similarly Ybrant acquired Israel based Web 3.0 in Jun2011 and US based Lycos for $36 million in 2010. We believe the stage is also set for global internet players to acquire Indian players to gain entry into India. In November 2010, Axel Springer acquired Indias leading automotive portal, Carwale.com to extend its local offline presence (AutoBild India, a B2C automobile focused magazine) online. Other transactions by global players in the Indian digital media space include Groupons acquisition of Sosasta.com in January this year and Travelocitys acquisition of Indian OTA Travelguru in August 2009. With rumours of Amazons entry into the Indian market growing with every passing day, the battle lines between aggressive local internet entrepreneurs and global majors are just getting drawn.
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Investment Activity | "Value" lies in the eye of the beholder
AVENDUS
Value lies in the eye of the beholder

Opportunities multiply as they are seized - Sun Tzu This ancient saying by the master strategist has truly been adopted in the digital media space. Entrepreneurs have grabbed the market opportunity with both hands and have been able to channelize institutional investment in this fairly new age industry. As it is commonly known, valuations are directly proportional to the interest in the opportunity. Going by the coverage that this industry has received in Global and Indian media, there isnt an iota of doubt on the interest. Despite some flashbacks of the dotcom bubble of 2000, investors have seen real on-the-ground traction in terms of eyeballs, clicks and transactions. There has always been a debate around Potential Vs Opportunity, and in the current market the opportunity seems to be moving in the direction of the potential. Digital media valuations have been like never before Exhibit 126 Segments Segment wise valuation benchmarks EV/Sales TTM Online Classifieds Niche E-tailing Marketplace Mass E-tailing Online Travel Diversified Players Online Services Online Gaming Networking and Portals Digital Consumer Industry 5.8 2.1 5.0 1.1 4.5 4.5 2.3 4.0 10.1 4.4 FY +1 5.1 1.8 4.6 1.0 3.8 3.8 2.1 3.5 8.6 3.8 EV/EBITDA TTM 16.1 15.3 16.4 35.8 30.0 15.8 8.6 10.0 48.8 21.9 FY +1 12.6 12.6 14.6 31.3 19.3 9.8 6.8 11.3 38.5 17.4 P/E Current 27.8 46.4 32.0 60.8 42.5 34.0 23.7 25.2 26.3 35.4
Emerging Markets
8.6
7.0
40.3
28.3
37.8
Source: Bloomberg, Thomson Reuters, Data as of Nov-2011 For information regarding the segment wise companies, please refer to Annexure C
Today, digital media companies are commanding astronomical valuations, relative to any other sector. One of the most talked about companies has been Facebook - it made news when Goldman Sachs invested $450 million at a valuation of $50 billion as per market reports. This resulted in a fivefold jump in value for DSTs investment in the company that was made at a $10 billion valuation. As per private exchange SharePost Inc., Facebook is valued at over $80 billion today. Based on revenue estimates of $1.86 billion in 2010 and $4 billion for 2011, this translates into revenue multiples of 43 times historical and 20 times forward. Another blockbuster IPO of couponing site Groupon valued the company at $12.7 billion. Based on H1 2011 revenues, annualized revenues are estimated to be $1,376 million for 2011. This translates into a 9x forward revenue
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multiple. The company continues to be loss making. Recently listed professional networking site LinkedIn is currently trading at 15 times TTM revenues and over 290 times forward P/E multiple. India has had its share of excitement in the digital media industry when it comes to valuations. E-tailing market leaders in mass e-tailing and deals have been believed to be valued at 8-10 times annualized revenue (or what is more commonly referred to as Gross Merchandise Value, GMV) run rates. Investors have valued niche e-tail category players in the broad range of 4-8X GMV, based on their relative market share. Categories that have lower gross margins have attracted lower GMV multiples, in the range of 2-3 X. Also, there is a clear demarcation in the way investors have valued market leaders as compared to the No.2/No. 3 players; a clear 1.5-2 times differential in the GMV multiples has been observed. Digital Media companies in the emerging markets are trading at a higher valuation than the overall global market. (Please refer to exhibit 126 and for a comprehensive list please refer to Annexure C) For example, in the online travel space, MakemyTrip is being rewarded for its growth expectation compares to its global peers. It is trading at ~11 times forward EV/Sales multiple, which is much higher than its western counterpart like Priceline.com and Expedia which are trading 5.9 times and 1.9 times forward EV/Sales multiple. The digital media space is still evolving in India. Most companies are at an early stage and operating at negative operating cash flows today. Given that the cash burn is likely to continue in the foreseeable future, it becomes difficult to apply traditional models to value these businesses. One can argue that there are sufficient global benchmarks for digital media businesses today. However, the infancy of the Indian market coupled with the hyper-growth these businesses are witnessing. We therefore find it difficult to prescribe any methodology to arrive at the appropriate valuations of digital media businesses in India today. Having said that, weve attempted to develop a framework (for the e-tailing industry) which can help do a sanity check on whether valuations being demanded by entrepreneurs leave any money on the table for investors or not.
148
AVENDUS
Valuation framework: MOPS

The valuation framework weve developed helps answer the question on what could be the future value of a company rather than what should be its value today. That can then help work backwards on what the value should be today, which is a factor of the quantum of risk we perceive in the business model today. The framework follows a MOPS approach: Market Size (M), Online Penetration (OP) and Share of the Market Player (S). (Exhibit 127). It essentially takes the size of the relevant retail market in 2015 and applies a certain level of online penetration that we are believe is achievable by then. We then assume that Indian e-tailing businesses would be at a similar stage of evolution in 2015 as their global peers are at today. This in turn implies that Indian businesses would have similar levels of profitability and be valued at similar EBITDA multiples as their global peers. Exhibit 127 MOPS Valuation Framework
Online penetration for that category in 2015
Estimate based on global benchmarks (combined with individual sensibility)
Market size of total retail category in 2015

Accepted projections from third party sources
Market share of leading player

Level of fragmentation in the industry
Estimated revenue of market leader
EBITDA Margins
Existing global benchmarks
Valuation multiples
Existing global benchmarks
Exit Valuation in 2015
IRR expectation
Discount based on internal IRR benchmark (based on perceived risk reward ratio)
Entry valuation today
We have tried to apply this to the online apparel segment to illustrate how one could use this framework to arrive at a valuation estimate for the market leader. The final output is a sensitivity analysis which can help us take individual calls on how much could the market leader in this segment be valued at down the road.
149
AVENDUS
Case: Retail Category Apparels Step 1: Market size estimation As per available estimates, the apparel market will be Rs 28,880 Crore ($6,420 million) in size by 2015 and Rs 4,70,000 Crore ($104,450 million) by 2020 (Exhibit 128). Exhibit 128 Apparel market size estimates
Rs Crore Apparel market size
2011
2015
2020
189,699
288,880
470,000
Source: Technopak report Indian Textile & Apparel Compendium 2010
Step 2: Estimation of online penetration in the sector Based on global benchmarks for online penetration in the apparels segment, we assumed that the Indian apparel market could reach an online penetration in 2015 which would be comparable to what the Chinese market was at in 2010. Hence, we assume that Indian apparel retail market could potentially reach Chinas 2010 penetration level (3.6%) by 2015 and USs penetration level (10%) by 2020. Based on this, the Indian apparel e-tailing market has been estimated in Exhibit 129. Exhibit 129 Online apparel market size (Rs Crore)
Rs Crore Apparel e-tailing market size Share of total e-tailing market

Source: Industry Estimates, Avendus analysis
2015
2020
10,500 20%
47,000 N/A
Step 3: Share of the market player & EBITDA estimates Having determined the future market size of the segment, we tried to form a view on the level of fragmentation the industry is likely to witness based on global benchmarks and an intuitive feel of the market dynamics in India. In western markets, the market leader commands anywhere between 8-20% market share. In China, in certain cases, players have gained market shares in excess of 40%. We have assumed a conservative estimate of 15% market share for the market leader . This translates into gross revenues (or GMV) of Rs 1600 crore (~$350 million) in the year 2015. We then compiled benchmarks for steady state EBITDA margins for the global apparel etail market and arrived at an assumption of 15% (Refer to Annexure D). Applying this would translate into an EBITDA of Rs 240 Crore ($53 million) for the company under consideration.
150
AVENDUS
Step 4: Valuation Multiples: Industry benchmarking We then considered the EV/Sales and EV/EBITDA multiples of pure play online apparel e-tailers and offline apparel retailers having an online presence. We arrived at 1 year forward EV/Sales multiple of ~1.7x and EV/EBITDA multiple of ~11x (Refer to Annexure D). Applying these multiples to the Revenue and EBITDA estimates arrived at in the previous step, we arrive at an enterprise value in the range of Rs 2,500 - 2,600 Crore ($570 - 580 million) for the player in 2015. (Exhibit 130) Exhibit 130 Valuation based on industry trading multiples (in $ million) Sales EBITDA 10.8x 53 569
Valuation multiple Metrics Estimated Enterprise value (2015)

Source: Bloomberg, Thomson Reuters, Avendus analysis
1.7x 351 582
Step 5: Discounting future EV to present value Based on an investors assessment of the risk reward ratio the business presents and their returns expectations commensurate with that, appropriate IRRs (absolute multiples) can be applied to arrive at the present value of the business. Assuming the business has a potential to achieve an EV of Rs 2,500 ($570 million) by 2015 and an internal returns expectation of 10x, we arrive at an indicative valuation guidance of Rs 250 Crore ($57 million) as the entry valuation of the business. Exhibits 131 and 132 provide a sensitivity analysis around some of the key valuation drivers to help arrive at a well considered view on valuation. Exhibit 131 Market share of the leader and online penetration in the segment
Value in $ million
Online penetration 2.6% 9% 12% 15% 18% 21% $248 $330 $413 $495 $578 3.1% $294 $393 $491 $589 $687 3.6% $341 $455 $569 $683 $796 4.1% $388 $518 $647 $776 $906 4.6% $435 $580 $725 $870 $1,015
Share of market leader
Improvement scenario
2015 Estimated value
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AVENDUS
Exhibit 132
EBITDA margin and valuation multiples

Value in $ million
EBITDA margin 10% 12% $369 $411 $453 $495 $537 14% $463 $516 $569 $622 $674 16% $492 $548 $604 $660 $716 18% $554 $617 $680 $743 $806
EV/EBITDA multiple
8.8x 9.8x 10.8x 11.8x 12.8x
$308 $343 $378 $413 $448
Improvement scenario
2015 Estimated value
Our purpose of developing the MOPS framework was not to present a scientific methodology for determining the valuation of a business. We fully well recognize that most factors that drive the framework are subjective in nature. For one, the investor needs to take a call on how the online penetration will increase until the time they exit the business. A view on how the enabling eco-system is developing in the country (and relevant segment) and risks associated with that should help arrive at a strong intuitive feel around the pace of online adoption. Probably the most important ingredient in this framework (or in any early stage investment being considered for that matter) is the execution capabilities of the core entrepreneurial team. This will drive everything from the extent to which they drive online penetration within the segment and how much market share they garner vis--vis competition. Strong execution will also drive the extent of profitability the business achieves in steady state. This section on valuation would not be complete without sharing our thoughts on the current valuations at which investments are happening in this industry. We do believe that in certain cases, valuations are ahead of on-the-ground performance of companies by a year or two (weve also had some entrepreneurs accept this behind closed doors). However, as we delved deeper into understanding the industry, we were convinced that the industry presented a once-in-a-decade opportunity for generating disproportionate investment returns (think about the Indian telecom industry in 2000). For the camp who is convinced of this, the most important objective is to get behind those whom they believe will lead the market, and at any cost. If their call on the entrepreneurial team proves correct, we will see them laugh their way to the bank.
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End Note
AVENDUS
End Note
A bollywood blockbuster in the making
Its bigger than we all thought The memories of 2000 have been hard to shake off. Many of us have viewed digital businesses as niche opportunities, aimed at the urban elite. But that view needs to change, and fast. The increase in consumer aspirations, improvements in access and the convenience provided by digital businesses have created a virtuous cycle that few people anticipated. As a result, perhaps, every forecast made in the last few years has been an underestimate (somewhat reminiscent of the IT wave in the 90s). By 2015, we shall be looking at a $24 billion e-commerce opportunity. The all-pervasiveness of the internet and the consumer adoption trends can no longer be ignored, nor denied. None of the old formulas work The established way of thinking is no longer valid. Historically, we have looked towards dial-ups and broadband infrastructure as the drivers of growth; that focus is now shifting to 3G and 4G. We looked at cyber-cafes as the solution to penetration; we now look at smartphones and tablets. We thought we could adopt modern models of outsourcing and focus on core-competences; we have moved towards vertically integrated structures and owning the supply chain. We worried about rich-text delivery capabilities online; now we work on video based models. We hoped to solve national problems of healthcare and education using remote delivery models; but find ourselves addressing consumption gaps instead. We expected offline businesses to muscle their way into the field; instead we find the arena dominated by start-ups. Like an NRI returning to India, one needs to revisit every assumption ever made about the country. Not for the faint hearted Some of the smartest start-ups have been created in garages. But to really scale up, everyone still needs money. As companies expand their product portfolio, ramp-up their organisations, develop their supply chain and build their brand, capital has become a big differentiator. As much as there is a race in the marketplace, there is a battle for investments. Those who get funded fastest could have a significant advantage over the others (but by no means is this an insurmountable barrier). In the last six months, investors have put more into the sector than in the previous three years. Early leaders have started commanding a steep valuation premium. One can argue either ways on the validity of these valuations. What is undeniable is that some large businesses are getting created, and that some people will win big. You aint seen nothing yet The next few years are going to be a period of intense activity. The roll-out of 3G and 4G services will give a massive boost to connectivity. Apps and location based services will become an integral part of all our lives. Streaming video services will become real. Global majors like Amazon will enter the country. E-commerce players will go to war in a
153
End Note
AVENDUS
bid for leadership. In fits and starts, offline retailers will join the battle. Not all of this will be about size. Hundreds of solution providers will emerge to provide the support cast that the industry will need. Some of them may cause the market itself to be redefined. Companies will be compelled to re-write their business models. There will be a rush of investments and M&A activity. As always, talent will speak for itself. A new set of poster boys will emerge. Happily, the biggest gainer will be the consumer. Cost, access and convenience - all of these will improve immeasurably. The times, as they say, are a changing. In our view, there is only one question we need to answer for ourselves - are we ready to embrace (and contribute to) the Indian digital consumer revolution or would we rather wait to hear others tell the tales of their success.
154
Annexure
Annexure A :: The evolution of the Indian digital consumer market
AVENDUS
Internet comes to India: VSNL launches Indias first full internet service for public access
The year it all started: Bookmyshow launched, with the intent of eliminating queues in Indian theatres Indiaplaza, pioneered online shopping in India Bharatmatrimony and Naukri start seeing traction
Indian middle-class starts transacting online: IRCTC launches online train ticket booking, which goes on to gain large-scale adoption
The rise of Facebook: Facebook overtakes Orkut to become the number one social network in India; Has over 30% of Indian surfers on its network
1995
1996
1999
2000
2003
2005
2009
2010
2011
Play our part in the boom, and the bust
The decade of travel
Time for others!
The time it came alive, again:

Recent Indian start-ups start
The first Indian website: Rediff.com, the first domain name registered in India, went on to become synonymous with a web-portal And the first online transaction: ICICI bank launched online banking More sites launched - some live to tell the tale: Makemytrip launched, targeting the India-US travel market
Time to sing along (2004): BPL Mobile launches CRBT in India And time to start networking (2005): Orkut sees wide-scale adoption; India goes on to become the 3rd biggest market for Orkut
making waves, lead by Flipkart and Snapdeal connections see traction 3G 9 mn users by mid-2011 Segment leaders start advertising on TV, making people to take notice Increased VC activity in the space with over Rs 1000 Cr going into the sector in 2011H1 about the first $ billion Talks internet company in India
Annexure | A
155
Annexure B :: Investments in Indian Digital Consumer Industry (2011)

Company Name Sub-Sector Investment Round Investment Amount ($ millions) Investment Stage Investors
AVENDUS
Date Number
Fashionandyou.com Dealsandyou Naaptol Online Shopping Pvt, Ltd. eshakti.com Craftsvilla.com (Kribha Handicrafts Pvt. Ltd,) Consim Info Pvt., Ltd. Hoopos.com Valyoo Inmobi enStage Ixigo.com (Le Travenues Tec Pvt Ltd) MXC Solutions India Pvt., Ltd.(MotorExchange.com) YourNextLeap.com Vortex Eko Fashionandyou.com Jasper Innovative Marketing Solutions Network 18 Media & Investments, Ltd. Vserv Digital Services Pvt., Ltd. TV18 Home Shopping Network, Ltd. Mapmyindia.com (CE Info Systems Pvt.,) GrOffr.com Indiaplaza.in Bigshoebazaar (Yebhi) Zovi.com Smile Sales Pvt., Ltd. (Dealsandyou.com) Ybrant Digital, Ltd. Caratlane Trading Pvt., Ltd. Flipkart Online Services Pvt., Ltd. VidTeq (India) Pvt., Ltd. Rupee Street Financial Services Pvt., Ltd. (Moneysights.com) Just Dial Pvt., Ltd. Play140 Adepto Exclusively.in 99labels.com theprivatesales.com Pilani Soft Labs Pvt., Ltd. (Redbus.in) Quikr Mauritius Holding Pvt., Ltd. Digital Age Retail Enterprise (Firstcry.com) PolicyBazaar.com iProf Learning Solutions India Pvt., Ltd. Yatra Online Pvt, Ltd. Cleartrip Travel Services Pvt., Ltd. Babyoye.com (Nest Childcare Services Pvt., Ltd.) Mydala.com (Kinobeo Software Pvt Ltd) Consim Info Pvt., Ltd. Yatra Online Pvt, Ltd. Bankbazaar.com (A & A Dukaan Financial Services Pvt., Ltd.) Myntra Designs Pvt., Ltd. Sokrati Funstar Studios Games2Win Healthkart Mericar Vizury Interactive Solutions Pvt., Ltd. Bigshoebazaar Kaltura Liqvid e-learning Sulekha.com Snapdeal.com (Jasper Innovative Marketing Solutions) Inkfruit.com (Fingerprints Fashions Pvt Ltd.) Komli Media Pvt., Ltd. Ybrant Digital, Ltd. Letsbuy.com (eTree Marketing Pvt., Ltd.) MXC Solutions India Pvt., Ltd.(MotorExchange.com)
Ecommerce Ecommerce Ecommerce Ecommerce Ecommerce ICP Ecommerce Ecommerce Advertising Payment platform Ecommerce ICP Services Payment platform Services Ecommerce Ecommerce ICP Advertising Ecommerce ICP Ecommerce Ecommerce Ecommerce Ecommerce Ecommerce Advertising Ecommerce Ecommerce ICP ICP ICP ICP Ecommerce Ecommerce Ecommerce Ecommerce Ecommerce ICP Ecommerce Services Services Ecommerce Ecommerce Ecommerce Ecommerce ICP Ecommerce Services Ecommerce Advertising ICP ICP Services Services Advertising Ecommerce Advertising Services ICP Ecommerce Ecommerce Advertising Advertising Ecommerce ICP
Nov-11 Nov-11 Oct-11 Oct-11 Oct-11 Oct-11 Oct-11 Oct-11 Sep-11 Sep-11 Aug-11 Aug-11 Aug-11 Jul-11 Jul-11 Jul-11 Jul-11 Jul-11 Jul-11 Jul-11 Jul-11 Jul-11 Jul-11 Jul-11 Jul-11 Jun-11 Jun-11 Jun-11 Jun-11 Jun-11 Jun-11 Jun-11 Jun-11 Jun-11 May-11 May-11 May-11 May-11 May-11 Apr-11 Apr-11 Apr-11 Apr-11 Apr-11 Apr-11 Apr-11 Mar-11 Mar-11 Mar-11 Mar-11 Mar-11 Mar-11 Mar-11 Mar-11 Mar-11 Feb-11 Feb-11 Feb-11 Feb-11 Jan-11 Jan-11 Jan-11 Jan-11 Jan-11 Jan-11 Jan-11
3 2 2 2 1 4 1 1 4 2 2 3 1 1 2 2 2 2 1 3 3 1 1 2 1 1 2 1 3 1 1 4 1 1 2 1 1 4 3 1 1 1 4 4 1 2 3 3 1 4 1 1 2 1 1 1 1 1 1 3 1 1 4 3 1 2
40.0 17.0 25.0 3.0 n/a 20.2 4.0 4.0 200.0 n/a 18.2 13.0 n/a 2.0 5.5 4.0 40.0 12.2 3.0 22.5 30.0 1.0 5.0 9.0 5.5 4.0 n/a 6.0 20.0 n/a 0.3 10.0 n/a 0.3 16.0 3.5 5.0 6.0 8.0 4.0 9.0 6.0 44.5 40.0 2.5 2.0 2.5 12.5 6.0 14.0 1.0 n/a 6.0 n/a n/a n/a 2.0 20.0 n/a 5.2 12.0 3.0 15.0 48.0 6.0 5.0
Expansion Expansion Expansion Expansion Early Stage Stake sale Early Stage Early Stage Later Stage Later Stage Acquisition Expansion Early Stage Early Stage Early Stage Expansion Expansion PIPE Expansion Expansion Expansion Expansion Later Stage Expansion Early Stage Expansion Acq. for Expansion Expansion Expansion Early Stage Early Stage Expansion Early Stage Early Stage Expansion Early Stage Early Stage Expansion Expansion Expansion Expansion Expansion Later Stage Acquisition Early Stage Early Stage Later Stage Expansion Expansion Expansion Early Stage Early Stage Growth Stage Early Stage Early Stage Expansion Early Stage Later Stage Later Stage Expansion Expansion Expansion Expansion Later Stage Early Stage Early Stage
Norwest Venture partners, Intel Capital Mayfield, Norwest Venture partners, Intel Capital, Nokia Growth partners NEA IDG ventures Nexus Venture partners , Lightspeed Venture partners Canaan partners, Mayfield Fund, Bessemer Venture partners Helion IDG ventures Softbank Intel Capital SAIF Partners, Makemytrip.com Tiger Global, Canaan partners n/a IFC Creation Investments Social Ventures Mangrove Capital partners Bessemer Indo-US Ventures partners, Nexus Ventures, Bessemer Venture partners IDG ventures SAIF Partners, Network18 and GS Shopping Zenrin Indian Angel network NEA, Indo-US Venture partners Catamaran and Nexus SAIF Partners n/a n/a Tiger Global Tiger Global KITVEN Blume Ventures SAP Ventures, Sequoia Capital n/a Blume Ventures Tiger Global, Accel India InfoEdge n/a Helion Ventures, Seedfund, Investus Capital partners Matrix partners, Norwest Venture partners, Nokia Growth partners, Omidyar Network SAIF Partners InfoEdge, Intel Capital Kaplan Ventures,Norwest Venture partners, IDG Ventures Norwest Venture partners, Valiant Capital partners, Intel Capital Concur Partners Tiger Global, Accel India Info Edge Mayfield Fund,Canaan partners, Bessemer Venture partners n/a Walden International Indo-US Venture partners, Tiger Global, Accel India, IDG Ventures Investus Capital Accel India Clearstone,SVB Sequoia,KAE Capital My First Cheque Investus Capital,Ojas Capital Nexus Venture partners Nexus Venture partners, Intel Capital Leapstart Norwest Venture partners Nexus Venture partners SAIF Partners Norwest Venture partners, Nexus Venture partners, Helion Ventures Oak investment partners, Asia Pacific capital Helion Ventures, Tiger Global, Accel India Canaan partners, Epiphany Ventures
Annexure B :: Investments in Indian Digital Consumer Industry (2011)
AVENDUS
Company Name
Sub-Sector
Investment Date Nov-11 Nov-11 Oct-11 Oct-11 Oct-11 Oct-11 Oct-11 Oct-11 Sep-11 Sep-11 Aug-11 Aug-11 Aug-11 Jul-11 Jul-11 Jul-11 Jul-11 Jul-11 Jul-11 Jul-11 Jul-11 Jul-11 Jul-11 Jul-11 Jul-11 Jun-11 Jun-11 Jun-11 Jun-11 Jun-11 Jun-11 Jun-11 Jun-11 Jun-11 May-11 May-11 May-11 May-11 May-11 Apr-11 Apr-11 Apr-11 Apr-11 Apr-11 Apr-11 Apr-11 Mar-11 Mar-11 Mar-11 Mar-11 Mar-11 Mar-11 Mar-11 Mar-11 Mar-11 Feb-11 Feb-11 Feb-11 Feb-11 Jan-11 Jan-11 Jan-11 Jan-11 Jan-11 Jan-11 Jan-11
Round Investment Amount Number ($ millions) 3 2 2 2 1 4 1 1 4 2 2 3 1 1 2 2 2 2 1 3 3 1 1 2 1 1 2 1 3 1 1 4 1 1 2 1 1 4 3 1 1 1 4 4 1 2 3 3 1 4 1 1 2 1 1 1 1 1 1 3 1 1 4 3 1 2
Investment Stage
Fashionandyou.com Dealsandyou Naaptol Online Shopping Pvt, Ltd. eshakti.com Craftsvilla.com (Kribha Handicrafts Pvt. Ltd,) Consim Info Pvt., Ltd. Hoopos.com Valyoo Inmobi enStage Ixigo.com (Le Travenues Tec Pvt Ltd) MXC Solutions India Pvt., Ltd.(MotorExchange.com) YourNextLeap.com Vortex Eko Fashionandyou.com Jasper Innovative Marketing Solutions Network 18 Media & Investments, Ltd. Vserv Digital Services Pvt., Ltd. TV18 Home Shopping Network, Ltd. Mapmyindia.com (CE Info Systems Pvt.,) GrOffr.com Indiaplaza.in Bigshoebazaar (Yebhi) Zovi.com Smile Sales Pvt., Ltd. (Dealsandyou.com) Ybrant Digital, Ltd. Caratlane Trading Pvt., Ltd. Flipkart Online Services Pvt., Ltd. VidTeq (India) Pvt., Ltd. Rupee Street Financial Services Pvt., Ltd. (Moneysights.com) Just Dial Pvt., Ltd. Play140 Adepto Exclusively.in 99labels.com theprivatesales.com Pilani Soft Labs Pvt., Ltd. (Redbus.in) Quikr Mauritius Holding Pvt., Ltd. Digital Age Retail Enterprise (Firstcry.com) PolicyBazaar.com iProf Learning Solutions India Pvt., Ltd. Yatra Online Pvt, Ltd. Cleartrip Travel Services Pvt., Ltd. Babyoye.com (Nest Childcare Services Pvt., Ltd.) Mydala.com (Kinobeo Software Pvt Ltd) Consim Info Pvt., Ltd. Yatra Online Pvt, Ltd. Bankbazaar.com (A & A Dukaan Financial Services Pvt., Ltd.) Myntra Designs Pvt., Ltd. Sokrati Funstar Studios Games2Win Healthkart Mericar Vizury Interactive Solutions Pvt., Ltd. Bigshoebazaar Kaltura Liqvid e-learning Sulekha.com Snapdeal.com (Jasper Innovative Marketing Solutions) Inkfruit.com (Fingerprints Fashions Pvt Ltd.) Komli Media Pvt., Ltd. Ybrant Digital, Ltd. Letsbuy.com (eTree Marketing Pvt., Ltd.) MXC Solutions India Pvt., Ltd.(MotorExchange.com)
Ecommerce Ecommerce Ecommerce Ecommerce Ecommerce ICP Ecommerce Ecommerce Advertising Payment platform Ecommerce ICP Services Payment platform Services Ecommerce Ecommerce ICP Advertising Ecommerce ICP Ecommerce Ecommerce Ecommerce Ecommerce Ecommerce Advertising Ecommerce Ecommerce ICP ICP ICP ICP Ecommerce Ecommerce Ecommerce Ecommerce Ecommerce ICP Ecommerce Services Services Ecommerce Ecommerce Ecommerce Ecommerce ICP Ecommerce Services Ecommerce Advertising ICP ICP Services Services Advertising Ecommerce Advertising Services ICP Ecommerce Ecommerce Advertising Advertising Ecommerce ICP
Expansion 40.0 Expansion 17.0 Expansion 25.0 Expansion 3.0 Early Stage n/a Stake sale 20.2 Early Stage 4.0 Early Stage 4.0 Later Stage 200.0 Later Stage n/a Acquisition 18.2 Expansion 13.0 Early Stage n/a Early Stage 2.0 Early Stage 5.5 Expansion 4.0 Expansion 40.0 PIPE 12.2 Expansion 3.0 Expansion 22.5 Expansion 30.0 Expansion 1.0 Later Stage 5.0 Expansion 9.0 Early Stage 5.5 Expansion 4.0 Acq. for Expansion n/a Expansion 6.0 Expansion 20.0 Early Stage n/a Early Stage 0.3 Expansion 10.0 Early Stage n/a Early Stage 0.3 Expansion 16.0 Early Stage 3.5 Early Stage 5.0 Expansion 6.0 Expansion 8.0 Expansion 4.0 Expansion 9.0 Expansion 6.0 Later Stage 44.5 Acquisition 40.0 Early Stage 2.5 Early Stage 2.0 Later Stage 2.5 Expansion 12.5 Expansion 6.0 Expansion 14.0 Early Stage 1.0 Early Stage n/a Growth Stage 6.0 Early Stage n/a Early Stage n/a Expansion n/a Early Stage 2.0 Later Stage 20.0 Later Stage n/a Expansion 5.2 Expansion 12.0 Expansion 3.0 Expansion 15.0 Later Stage 48.0 Early Stage 6.0 Early Stage 5.0
Annexure | D
158
n/a: not available
Annexure | B
156
Annexure C :: Valuation benchmarks by segments

All values in $ million, except multiples Online Classifieds Seek Dice Holdings REA Group Rightmove Plc Carsales.com Infospace Moster Worldwide ReachLocal Info Edge (Naukri Group) Average Niche Zooplus 1-800-Flowers ASOS.com BlueNile Delticom Mecox Lane Ocado Overstock.com PetMed Express Vitacoast.com Yoox Groupon Average Marketplace Mercadolibre eBay Inc. Rakuten B2W Alibaba.com (Taobao) Average Mass Amazon.com DangDang CDON Group Buch.de Average Online Travel Travelzoo Wotif.com Ctrip.com eLong.com Orbitz Worldwide Inc. Expedia.com Hotel.de Priceline.com Tomorrow Focus AG MakemyTrip.com Average Diversified Players Kakaku.com AOL Inc. Cyberagent Inc. Dena Co. GMO Internet, Inc. IAC/InterActiveCorp Mail.ru Average Online Services Techtarget.com Match.com Ancestry.com Aufeminin.com Dada.eu Demand Media So-Net Entertainment Pandora.com Netflix.com Average Online Gaming The9.com Wemade Entertainment ChangYou.com Giant Interactive Kingsoft.com Netease.com Ncsoft.net Neowiz Netdragon Average Networking, Search and Portals RenRen Youku.com Linkedin Yandex Jiayuan.com Phoenix New Media Baidu Inc. Google Inc Tencent Yahoo! Sina Corp. Sohu.com Average Emerging Market Players Info Edge (Naukri Group) The9.com Baidu Inc. MakemyTrip.com Ctrip.com Tencent eLong.com Mecox Lane B2W Mercadolibre Alibaba.com Sina Corp. Sohu.com SouFun Youku.com ChangYou.com Netease.com RenRen DangDang Yandex Jiayuan.com Phoenix New Media Youku.com Giant Interactive Mail.ru Average EV/Sales TTM On 7.6 2.9 6.4 16.3 7.6 0.3 1.0 0.5 9.3 5.8 1.6 0.3 2.3 1.2 2.0 n/m 0.8 0.1 0.6 0.7 1.9 11.7 2.1 13.2 3.6 2.7 0.7 4.8 5.0 2.2 0.5 1.2 0.7 1.1 3.1 4.7 6.5 2.8 0.8 1.9 1.6 6.2 1.5 15.7 4.5 9.1 0.5 1.4 2.8 0.7 1.5 15.9 4.5 1.8 1.3 2.7 2.1 0.6 1.6 0.7 8.2 1.5 2.3 n/a 6.2 2.3 2.5 2.2 4.2 10.9 3.0 1.0 4.0 13.3 18.7 15.6 12.7 5.2 3.1 24.7 4.5 8.7 3.4 8.9 2.1 10.1 9.3 n/a 24.7 15.7 6.5 8.7 2.8 n/m 0.7 13.2 4.8 8.9 2.1 3.0 18.7 2.3 4.2 13.3 0.5 12.7 5.2 3.1 18.7 2.5 15.9 8.6 FY +1 On 6.1 2.8 5.4 15.0 6.5 0.3 0.9 0.5 8.5 5.1 1.3 0.3 1.9 1.2 2.0 n/m 0.6 0.1 0.6 0.6 1.7 9.4 1.8 12.2 3.4 2.4 0.7 4.3 4.6 1.9 0.4 0.8 n/a 1.0 2.9 4.2 6.0 2.4 0.9 1.9 1.5 5.9 1.4 10.8 3.8 7.6 0.5 1.1 2.3 0.6 1.4 12.8 3.8 1.7 1.3 2.6 n/a 0.7 1.6 0.6 7.2 1.4 2.1 n/a 4.2 2.1 2.3 1.9 3.7 10.8 2.1 0.8 3.5 11.7 11.9 13.6 11.5 4.0 2.3 21.1 4.4 7.8 4.0 8.7 2.0 8.6 8.5 n/a 21.1 10.8 6.0 7.8 2.4 n/m 0.7 12.2 4.3 8.7 2.0 2.9 11.9 2.1 3.7 11.7 0.4 11.5 4.0 2.3 11.9 2.3 12.8 7.0 TTM On 19.4 7.4 15.1 25.5 13.8 3.4 8.2 n/m 36.2 16.1 n/m 7.0 24.0 17.8 16.4 n/m 15.1 8.4 4.9 n/m 28.7 n/m 15.3 37.0 12.7 10.8 6.6 14.6 16.4 48.0 37.7 19.7 37.5 35.8 12.2 8.6 19.7 28.4 5.6 7.1 31.7 19.0 7.9 159.6 30.0 18.5 3.0 9.6 5.5 3.5 11.1 59.5 15.8 11.3 6.2 8.1 6.5 12.4 9.1 5.2 n/a 10.2 8.6 n/a 14.1 4.5 5.1 5.9 8.4 26.4 11.4 4.4 10.0 96.7 n/m 116.1 28.6 49.6 n/a 72.9 12.5 22.8 11.8 71.8 5.1 48.8 36.2 n/a 72.9 159.6 19.7 22.8 28.4 n/m 6.6 37.0 14.6 71.8 5.1 n/a n/m 4.5 8.4 96.7 37.7 28.6 49.6 n/a n/m 5.1 59.5 40.3 EV/EBITDA FY +1 On 13.7 6.6 12.1 21.9 11.8 2.0 5.7 12.6 27.3 12.6 n/m 6.2 19.3 14.8 17.7 n/m 8.2 10.8 5.4 n/m 18.6 n/m 12.6 33.8 10.4 9.4 6.5 12.9 14.6 43.2 n/m 19.5 n/a 31.3 11.2 7.5 16.0 21.5 5.2 7.3 18.6 17.2 8.6 79.8 19.3 15.1 3.1 7.5 5.0 3.3 7.6 26.9 9.8 7.7 6.1 7.1 n/a 6.3 6.0 4.5 n/m 9.6 6.8 n/a 25.7 3.6 3.6 4.6 7.5 33.9 9.2 2.0 11.3 89.4 n/m 84.5 25.8 14.8 28.1 36.5 8.3 16.6 10.9 102.9 5.2 38.5 27.3 n/a 36.5 79.8 16.0 16.6 21.5 n/m 6.5 33.8 12.9 102.9 5.2 6.5 n/m 3.6 7.5 89.4 n/m 25.8 14.8 28.1 n/m 3.6 26.9 28.3 P/E Current On 21.8 19.0 23.3 34.4 20.0 29.4 14.7 n/a 59.6 27.8 n/a 29.1 119.6 37.6 26.3 n/a n/a n/a 12.1 n/a 54.0 n/a 46.4 52.6 21.1 n/a n/a 22.4 32.0 114.6 n/a 6.9 n/a 60.8 23.6 14.8 9.3 21.2 n/a 16.4 88.4 29.3 15.4 164.4 42.5 35.7 23.5 23.9 11.3 9.9 99.8 n/a 34.0 60.1 11.0 20.9 13.5 n/a n/a 17.2 n/a 19.6 23.7 n/a 2.6 6.8 2.9 8.2 13.5 41.0 76.3 50.6 25.2 n/a n/a n/m n/a n/a n/a 54.4 21.0 23.5 19.2 n/a 13.3 26.3 59.6 n/a 54.4 164.4 9.3 23.5 21.2 n/a n/a 52.6 22.4 n/a 13.3 12.8 n/a 6.8 13.5 n/a n/a n/a n/a n/a n/a n/m n/a 37.8 Mkt Cap Current On 2,141 557 1,666 2,334 1,179 348 1,095 273 744 0 448 168 1,543 453 1,265 86 754 196 197 182 673 5,352 0 3,760 40,600 14,830 n1,036 5,769 0 99,059 423 341 120 0 474 764 3,957 499 322 7,525 94 27,223 262 987 0 2,275 1,462 2,280 5,233 436 3,437 6,572 0 232 386 1,068 176 46 585 957 2,070 4,530 0 116 551 1,371 942 510 5,755 6,647 1,299 272 0 1,810 2,312 7,206 8,014 296 386 49,122 1,99,566 36,849 19,758 4,840 2,197 0 744 116 49,122 987 3,957 36,849 499 86 1,036 3,760 5,769 4,840 2,197 951 2,312 1,371 5,755 1,810 423 8,014 296 386 2,312 942 6,572 0 EV Current On 2,603 498 1,522 2,317 1,146 68 996 179 658 0 459 242 1,507 414 1,260 3 674 134 140 169 661 15,107 0 3,638 39,131 11,654 1,761 4,475 0 94,630 200 375 95 0 442 628 3,341 220 653 7,305 82 25,470 277 958 0 2,022 1,131 2,024 4,454 423 2,781 6,244 0 185 340 1,021 124 80 506 768 1,970 4,399 0 n/m 451 946 642 317 4,012 6,141 1,300 77 0 1,412 1,682 6,821 7,698 204 328 47,383 1,61,210 34,914 17,822 4,105 1,658 0 658 n/m 47,383 958 3,341 34,914 220 3 1,761 3,638 4,475 4,105 1,658 982 1,682 946 4,012 1,412 200 7,698 204 328 1,682 642 6,244 0 TTM On 341 170 237 142 151 236 1,045 356 71 0 291 702 670 350 641 226 882 1,089 228 252 374 1,290 0 275 10,767 4,334 2,552 925 0 43,594 425 307 133 0 142 133 518 80 772 3,795 52 4,096 187 61 0 222 2,221 1,478 1,618 646 1,914 394 0 103 255 378 59 135 314 1,116 241 2,925 0 16 73 413 257 144 954 562 438 79 0 106 90 436 607 39 107 1,915 35,761 3,992 5,185 459 779 0 71 16 1,915 61 518 3,992 80 226 2,552 275 925 459 779 329 90 413 954 106 425 607 39 107 90 257 394 0 Sales FY +1 On 425 179 284 154 177 225 1,051 378 77 0 340 727 815 359 644 213 1,200 1,112 226 264 385 1,600 0 298 11,595 4,906 2,497 1,031 0 48,804 546 481 n/a 0 152 148 556 91 765 3,904 56 4,331 193 89 0 265 2,195 1,762 1,895 764 2,022 489 0 106 259 399 n/a 110 323 1,210 272 3,189 0 22 107 445 279 169 1,096 567 608 100 0 120 141 501 670 51 140 2,249 36,466 4,451 4,405 474 845 0 77 22 2,249 89 556 4,451 91 213 2,497 298 1,031 474 845 342 141 445 1,096 120 546 670 51 140 141 279 489 0
AVENDUS
EBITDA TTM On 134 68 101 91 83 20 121 (0) 18 0 (5) 34 64 23 77 (5) 45 16 29 (12) 33 (204) 0 98 3,071 1,079 265 306 0 1,970 5 19 3 0 36 73 170 8 116 1,024 3 1,338 35 6 0 109 376 210 809 120 249 105 0 16 55 125 19 6 56 147 n/m 433 0 (41) 32 209 125 54 475 233 114 18 0 15 (6) 59 269 4 n/a 650 12,946 1,534 1,514 57 325 0 18 (41) 650 6 170 1,534 8 (5) 265 98 306 57 325 n/a (6) 209 475 15 5 269 4 n/a (6) 125 105 0 FY +1 On 191 76 126 106 97 34 175 14 24 0 (5) 39 78 28 71 (33) 82 12 26 (3) 41 (126) 0 108 3,777 1,241 272 348 0 2,191 (31) 19 n/a 0 40 84 209 10 125 1,007 4 1,484 32 12 0 134 367 269 897 128 368 232 0 24 56 144 n/a 13 85 169 (4) 459 0 (58) 18 265 179 69 535 181 141 38 0 16 (6) 81 299 14 12 1,299 19,393 2,103 1,631 40 317 0 24 (58) 1,299 12 209 2,103 10 (33) 272 108 348 40 317 151 (6) 265 535 16 (31) 299 14 12 (6) 179 232 0
n/a: not available, n/m: not meaningful as the values are too high or low or the underlying metric is negative Annexure | C
Source: Bloomberg, Thomson Reuters, Avendus analysis 157
Annexure D :: Online apparel players valuation benchmarks
AVENDUS
All values in $ million, except multiples
Market Cap
Sales
EV/EBITDA (2012)
EV/EBITDA (TTM)
EV/Sales (TTM)
EV/Sales (2012)
EBITDA margins (TTM)
Overall
10.8
13.2
1.7
1.7
15%
Pure-play Online Apparel Players Bluefly ASOS Mecox Lane Yoox SpA Average 65 1543 91 653 94 670 226 374 n/a 19.3 n/m 18.6 19.0
n/m 24.0 n/m 28.7 26.4
0.7 2.3 n/m 1.9 1.6
n/a 1.9 n/m 1.7 1.8
-1% 10% 4% 9% 8%
Apparel Players with Online & Offline Presence Inditex Hennes & Mauritz AB (H&M) GAP Limited Brands Abercrombie & Fitch Next Plc Average 53654 49674 9571 12189 4112 7329 18184 16665 14630 10304 4203 5483 11.0 11.3 5.3 7.9 5.8 7.0 8.1
12.2 13.4 4.5 8.5 6.7 7.4 8.8
2.8 3.0 0.7 1.5 0.9 1.6 1.7
2.6 2.5 0.7 1.5 0.9 1.5 1.6
24% 22% 13% 18% 15% 21% 19%
n/a: not available, n/m: not meaningful as the values are too high or low or the underlying metric is negative
Annexure | D
158
About Avendus
AVENDUS
About Avendus
Avendus Capital Pvt. Ltd. (Avendus Capital)
Avendus Capital is a leading financial services firm which provides customised solutions in the areas of financial advisory, equity capital markets and wealth management. Avendus Securities through its Institutional Equities practice is able to offer clients bestin-class research-driven advice to help them take investment decisions, while Avendus PE Advisors manages funds raised from its investors by investing in public markets and private equity. The Group relies on its extensive track record, in-depth domain understanding and knowledge of the economic and regulatory environment, to offer research based solutions to its clients that include institutional investors, corporates and high net worth families. Avendus Capital has consistently been ranked among the topfive corporate finance advisors in India and has emerged as the advisor of choice for cross-border M&A deals and has closed 35 cross-border transactions in the past 4 years. Headquartered in Mumbai, the firm has offices in New Delhi and Bangalore. Avendus Capital, Inc (US) and Avendus Capital (UK) Pvt. Ltd. located in New York and London, respectively, are wholly owned subsidiaries offering M&A and Private Equity syndication services to clients in the respective regions. For more information, please visit www.avendus.com
Our offices
Avendus Capital Pvt Ltd Mumbai :: IL&FS Financial Centre, B-Quadrant, 5th Floor, Bandra-Kurla Complex, Bandra (East), Mumbai 400 051 Tel :: +91 22 6648 0050 New Delhi :: Suite 22A/B, The Aman Resort, Lodhi Road, New Delhi - 110003, Tel :: +91 11 45357500 Bangalore :: The Millenia Tower, A-10th Floor, No. 1 & 2 Murphy Road, Ulsoor, Bangalore 560 008 Tel :: +91 80 6648 3600 Avendus Capital, Inc (Subsidiary) New York :: 100 Park Avenue, 16th Floor, New York 10017 Tel :: +1 212 351 5066 Avendus Capital (UK) Pvt Ltd (Subsidiary) London :: 4.01, 33 St. Jamess Square, London SW1Y 4JS Tel :: +44 203 159 4353
Avendus Capital, Inc and Avendus Capital (UK) Private Limited are authorized and regulated by the FINRA and FSA respectively.
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India Goes Digital

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India goes Digital

A Birdseye View of the Indian Digital Consumer Industry

Dear Reader, Aashish Bhinde

Aashish Bhinde Executive Director, Avendus Capital

Is the Ecosystem Keeping Pace?

Consumer-facing Business Models

Global Models, Desi Adaptations

How to Spot the Winners?

12.80 8.00 5.50 4.30 2.80 1.68 0.83 0.35

We start by taking a look at the ecosystem.

A day in the life of the digital consumer

Buy a Diwali gift online for mom

Look for a lunch deal

Pay electricity bills online

Locate route to client's office through Google maps

Book tickets for a holiday

Check day's meetings on Google Calendar

Check score at Cricinfo

Is the Ecosystem Keeping Pace?

Is the Ecosystem Keeping Pace?

Risk capital/ Entrepreneurs

Is the Ecosystem Keeping Pace? | Access

Access :: The big story

Source: Internet world stats, Comscore

Source: Avendus estimates

Is the Ecosystem Keeping Pace? | Access

4% E-tailng penetration (%) 60% 3% 44% 37% 2% 31% 50% 63%

Internet penetration (%)

E-tailing penetration (%)

PC broadband penetration (% households)

PC broadband penetration vs. online retail penetration (%) - China*

E-tailing penetration (%)

20.0% 4% 16.1% 3.3% 20%

Is the Ecosystem Keeping Pace? | Access

Is the Ecosystem Keeping Pace? | Access

Source: Avendus estimates

Is the Ecosystem Keeping Pace? | Access

Source: Avendus estimates, Morgan Stanley Research Internet trends 2010

Is the Ecosystem Keeping Pace? | Access

Internet connections by type (in million)

5.6 5.1 2011 2012 4.7 2013

PC narrow band connections (million) PC broadband connections (million)

Mobile narrow band (million) Mobile broadband (million)

China E-commerce revenue ($B) Total broadband connections (mn)

Japan m-commerce revenue ($B) 3g connections (mn)

Is the Ecosystem Keeping Pace? | Access

Users by point of primary access of internet (%)

2008 Work (%)

2009 Home (%)

2011 Cybercafe (%)

Source: IAMAI I-cube report 2010-2011

0.70 Japan 2.87

Source: BCG The Internets New Billion (September 2010)

Is the Ecosystem Keeping Pace? | Access

21 15 11 7 3 2007 5 2008 2009 2010 2011 2012E 2013E 2014E 2015E 9

Source: Avendus estimates

Is the Ecosystem Keeping Pace? | Demographics

Demographics :: Beyond metros

12% 12% 11% 18%

2006 Top 8 metros*

2007 Other Metros

2008 0.5 - 1 Million

Less than 0.5 million