Avendus india goes digital

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Avendus india goes digital

  1. 1. India goes Digital A Birdseye View of the Indian Digital Consumer Industry .comAVENDUS
  2. 2. November 2011 AVENDUS Dear Reader,Aashish Bhinde The Digital Consumer industry in India has made a surprise rebound into the public eye.aashish.bhinde@avendus.com Over the last 6 months, reports of internet and mobile start-ups have become a regularKaran Sharma feature in all forms of media. Deal activity has been growing at a frantic pace. There iskaran.sharma@avendus.com 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,Sanchit Suneja e-tailing seems to be hogging the limelight this time around. Inevitably, valuations havesanchit.suneja@avendus.com become the subject of cocktail party conversations.Anshul Agrawal When we started talking to investors and entrepreneurs in the industry, a few commonanshul.agrawal@avendus.com 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 itKanchan Mishra to? What about payment systems - how do we get people to actually spend money onkanchan.mishra@avendus.com the net? And so on…the 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 it’s 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 haven’t 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 we’ve written (or missed out) offends anyone’s sensitivities. We trust you’ll 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. Aashish Bhinde Executive Director, Avendus Capital 1
  3. 3. 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.com Investment Activity 140 :: 154 Annexure 155 :: 158
  4. 4. Acknowledgements | Disclaimer AVENDUS 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 2
  5. 5. Prologue Ÿ A Global Megatrend Ÿ Online India
  6. 6. Prologue AVENDUS A Global Megatrend For those who came in late :: Ÿ 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 Ÿ Taobao has over 400 million registered users, more than the population of United Ÿ States Ÿ 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 Ÿ Zynga’s valuation is now believed to be higher than that of offline games veteran Ÿ Electronic Arts m-Pesa processes more transactions than Western Union all around the world Ÿ Internet is now the single largest channel for advertising in the UK Ÿ 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 world’s 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 don’t 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 it’s 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 don’t even notice it anymore. 3
  7. 7. Prologue AVENDUS 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 1,000 Value $ bn 915 928 Number of deals 857 796 8 800 729 7.4 Investments in $ billion 669 616 6 600 No of deals 530 5.1 5.1 452 441 4.4 4.4 4 3.5 400 3.4 3.1 2.7 2.2 2 200 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. Amazon’s market value has increased 230 times from its IPO value, an annualized gain of 47% over 14 years. Google’s 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 $700 million public offering this month - the largest since Google. And the pre-IPO valuations attracted by Facebook and Zynga have only heightened investor interest. 4
  8. 8. Prologue AVENDUS Exhibit 2 IPOs in 2011 Company Valuation Category ($ billion) Groupon 12.80 Group buying Yandex 8.00 Russian search engine RenRen 5.50 Social network LinkedIn 4.30 Professional networking Pandora 2.80 Internet radio Qihoo 360 1.68 Browser and portal Phoenix New Media 0.83 Online news portal Jiayuan 0.35 Dating social network Source: Press articles, Bloomberg 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 Ÿ 10 million 3G connections within 6 months of launch, almost equal to the base of Ÿ wireline broadband connections Ÿ 2nd largest user base for Google+ and Orkut in the world The Ÿ of travel gets booked online; 117 million transactions on IRCTC alone 28% Ÿ of the classifieds business is online 47% Ÿof bank users in India access their accounts online 7% Ÿ of IT returns were filed online in 2010-11 25% Ÿ to 50% of music revenues in India comes from mobile downloads Close 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 India’s most tech-savvy acreage - companies 5
  9. 9. Prologue AVENDUS 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 :: Ÿ quality of Internet connectivity good enough to drive consumption online? Is the Ÿ payment infrastructure ready to support large scale e-commerce growth? Is the ŸIndian consumers really ready to embrace e-tailing? How many are actually Are transacting? Ÿ ready is the supply chain infrastructure to handle direct consumer deliveries? How Ÿ have the right talent and environment available within the industry? Do we Ÿ is the path to profitability? What We start by taking a look at the ecosystem. 6
  10. 10. Prologue Exhibit 3 A day in the life of the digital consumer Buy a Diwali gift online for mom Pay electricity bills online Look for a lunch deal 12 11 1 Choose Tweet about location for the meeting next months 10 2 holiday Locate route to clients office through Google maps 9 3 Book tickets for a holiday Check days 8 4 meetings on Google Calendar Check score 7 5 at Cricinfo 6 Check Search for Facebook a job online Wake up with an iPod alarm app 7
  11. 11. Is the EcosystemKeeping Pace? Ÿ Access Ÿ Demographics Ÿ E-governance Ÿ capital and Risk Entrepreneurship Ÿ Advertising Ÿ Payments Ÿ Supply chain
  12. 12. Is the Ecosystem Keeping Pace? AVENDUS 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. 8
  13. 13. Is the Ecosystem Keeping Pace? | Access AVENDUS 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% 78% World Avg. = 31% 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% Unique users (million) 600 Penetration (%) 29.5% 30% 500 25% 21.7% 400 20% 15.3% 300 15% 9.8% 200 10% 6.6% 5.0% 3.1% 3.9% 100 5% 2.5% 60 80 120 190 273 376 29 36 46 0% 0 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E Source: Avendus estimates 1 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. 9
  14. 14. Is the Ecosystem Keeping Pace? | Access AVENDUS 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% 90% 78% 76% 74% 70% 71% 4.0% Internet/ broadband penetration (%) 4% 66% 63% 3.6% 60% 3.4% E-tailng penetration (%) 64% 60% 62% 2.9% 3% 50% 44% 2.5% 51% 2.1% 45% 37% 2% 31% 1.8% 36% 1.4% 30% 28% 1.1% 0.9% 1% 20% 0.5% 14% 0.2% 9% 1% 4% 0% 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 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 28.2% 30% Penetration (%) 24.0% Internet/ broadband penetration (%) 20.0% E-tailing penetration (%) 4% 20% 3.3% 16.1% 12.5% 9.1% 2.0% 2% 10% 1.4% 0.7% 0.3% 0.4% 0% 0% 2005 2006 2007 2008 2009 2010 *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
  15. 15. Is the Ecosystem Keeping Pace? | Access AVENDUS 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 India’s 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 2 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 11
  16. 16. Is the Ecosystem Keeping Pace? | Access AVENDUS 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 doesn’t 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 Cable 35 Wireless fixed 32 4G - PC 9 30 Dongles 26 4 DSL 25 1 20 13 20 12 15 9 15 6 11 4 10 6 2 4 5 2 5 8 10 12 14 15 15 2 3 0 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E Source: Avendus estimates 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 12
  17. 17. Is the Ecosystem Keeping Pace? | Access AVENDUS 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 ($55 billion), similar to China). We expect operators to continue their marketing push on 3G services and drive innovation on pricing - resulting in 279 million connections by 2015. This is in line with global penetration trends. (Exhibit 10) 3G pe busy! Exhibit 10 3G penetration growth India Japan 86% 78% 69% 58% 22% 45% 28% 13% 2% 2003 2004 2005 2006 2007 2008 2009 2010 15% China 30% 18.8% 11.3% 1% 3.8% 10% 2009 2010 2011 2012 2013 US 40% 4% 27% 18% 7% 1% 3% 2012 2013 2014 2015 2004 2005 2006 2007 2008 2009 Source: Avendus estimates, Morgan Stanley Research – Internet trends 2010 3 “Can India lead the mobile-Internet revolution,” McKinsey Quarterly, February 2011 13
  18. 18. Is the Ecosystem Keeping Pace? | Access AVENDUS Exhibit 11 Internet connections by type (in million) 0.6 2 1.6 2.2 3.4 13 51 120 196 288 3.8 6.3 7.0 10.7 10.5 15.5 14.8 20.0 19.2 21.1 25.6 6.6 6.7 6.4 5.7 5.6 32.4 39.3 5.1 4.7 4.3 4.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 PC narrow band connections (million) Mobile narrow band (million) PC broadband connections (million) Mobile broadband (million) Numbers represent the number of connections and not the number of Internet users Source: TRAI – telecom industry quarterly performance reports, Avendus estimates While talk about the promise of mobile Internet is all good, the on-the-ground impact it would have on advertising and commerce is yet to be fully understood. This remains a nascent market globally, as can be seen from the size of m-commerce industries in different countries. Exhibit 12 3G as % of broadband vs. m-commerce as % of total e-commerce Mobile commerce as % of total e-commerce 202 Mobile connections as % of total broadband connections 155 145 61% 123 126 74% 93 78 32% 50 49 12.1% 20.3% 9.4 0.8% 10.0 1.2 China US Japan E-commerce revenue ($B) m-commerce revenue ($B) Total broadband connections (mn) 3g connections (mn) China numbers are for the year 2010; US and Japan numbers correspond to the year 2009 14
  19. 19. Is the Ecosystem Keeping Pace? | Access AVENDUS 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% 9% 24% 7% 34% 38% 40% 29% 32% 19% 16% 14% 14% 10% 8% 6% 2007 2008 2009 2010 2011 2012 2013 2014 2015 Work (%) Home (%) Cybercafe (%) Mobile (%) 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 e- commerce industry as well. Exhibit 14 Time spent online by Indian users Average time spent online per person Average time spent online per per day (Hrs) internet user per day (Hrs) - 2010 0.70 0.67 0.64 Japan 2.87 0.61 0.58 0.55 0.53 0.49 China 2.74 0.46 0.43 US 2.27 Brazil 1.07 India 0.55 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: BCG – The Internet’s 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 15
  20. 20. Is the Ecosystem Keeping Pace? | Access AVENDUS 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 9 7 3 5 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E Source: Avendus estimates Access in 2015 :: The facts that matter 80 million online users today, 376 million by 2015 Ÿ Ÿ 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 Ÿ penetration Conventional wireline broadband likely to be eclipsed by the introduction of 4G and Ÿ the growth of CDMA dongles Ÿ 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 Ÿ Internet access Ÿ 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 Ÿ 16
  21. 21. Is the Ecosystem Keeping Pace? | Demographics AVENDUS 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% 11% 12% 20% 21% 21% 18% 18% 41% 38% 37% 34% 37% 2006 2007 2008 2009 2011 Top 8 metros* Other Metros 0.5 - 1 Million 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. ITC’s 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. 17
  22. 22. Is the Ecosystem Keeping Pace? | Demographics AVENDUS 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 2015 Total users = 80 million Population (mn) Total users = 376 million Population (mn) 55+ 145 158 1% 9% 45-54 96 121 4% 28% 35-44 177 170 6% 37% 25-34 203 231 12% 45% 15-24 245 252 9% 40% 0-15 346 345 5% 17% Internet Penetration (%) Source: Comscore – State of the Internet with a focus on India (June 2011), Avendus estimates 18
  23. 23. Is the Ecosystem Keeping Pace? | E-governance AVENDUS 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 9 5 2009-10 2010-11 2015-16 P Offline Online Source: SNK E-tax, Economic Times (21 June 2011) 19
  24. 24. Is the Ecosystem Keeping Pace? | E-governance AVENDUS 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 Central MMPs State MMPs Integrated MMPs Banking Ÿ Agriculture Ÿ CSC Ÿ Central Excise & Ÿ Commercial Taxes Ÿ e-Biz Ÿ Customs e−District Ÿ e-Courts Ÿ Income Tax (IT) Ÿ Employment Ÿ e-Procurement Ÿ Insurance Ÿ Exchange ŸFor eTrade EDI MCA21 Ÿ Ÿ Records Land National e-governance Ÿ National Citizen Ÿ Municipalities Ÿ Service Delivery Database Ÿ Panchayats Gram Gateway Passport Ÿ Police Ÿ Ÿ Portal India Immigration, Visa & Ÿ Ÿ Transport Road Foreigners Registration Treasuries Ÿ & Tracking Pension Ÿ e-Office Ÿ Prominent state government initiatives Ÿ 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 Ÿ 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 Ÿ Spice Digital, which was to be followed by 6 more services 20
  25. 25. Is the Ecosystem Keeping Pace? | E-governance AVENDUS 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. 4 Also see “Digital India: The Rush to Mobile Money,” BCG, 13 July 2011 21
  26. 26. 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) 900 100 800 80 700 80 66 Value in $ million Number of deals 600 60 500 400 37 40 33 300 21 20 200 15 19 19 20 100 7 5 147 213 3 103 102 242 105 111 829 46 35 62 0 2 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* *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 14 12 200 12 200 10 9 9 150 140 7 8 7 6 108 94 6 100 5 4 57 4 3 56 50 42 39 41 31 22 2 2 2 0 Jan Feb Mar Apr May June July Aug Sep Oct Nov Value (in $ mn) Number of Deals Source: Press articles, Mergermarket, VC Circle, Venture Intelligence, Avendus Estimates 22

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