India goes Digital A Birdseye View of the Indian Digital Consumer Industry .com AVENDUS November 2011 AVENDUS Dear Reader, Aashish Bhinde The Digital Consumer industry in India has made a surprise rebound into the public eye. [email protected] Over the last 6 months, reports of internet and mobile start-ups have become a regular Karan Sharma feature in all forms of media. Deal activity has been growing at a frantic pace. There is [email protected] 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 have [email protected] become the subject of cocktail party conversations. Anshul Agrawal When we started talking to investors and entrepreneurs in the industry, a few common [email protected] 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 Kanchan Mishra to? What about payment systems - how do we get people to actually spend money on [email protected] 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 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 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. 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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 Prologue A Global Megatrend India Online Prologue AVENDUS A Global Megatrend For those who came in late :: There are over 2 billion Internet users in the world (almost 1/3rd of the world 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 iTunes has become the biggest music vendor in the world within 6 years from its launch Pandora (an Internet radio website) is the largest radio station in the world today Zynga’s 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 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 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 n o 669 i l l i 616 b 6 600 s l $ 530 a n 5.1 5.1 e i d s f t 452 441 4.4 4.4 o n e 4 400 o m 3.5 N t 3.4 s 3.1 e v 2.7 n I 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.