India Goes Digital

India goes Digital
A Birdseye View of the Indian Digital Consumer Industry

AVENDUS
.com
Aashish Bhinde
Karan Sharma
Sanchit Suneja
Anshul Agrawal
Kanchan Mishra
aashish.bhinde@avendus.com
karan.sharma@avendus.com
sanchit.suneja@avendus.com
anshul.agrawal@avendus.com
kanchan.mishra@avendus.com
1
Dear Reader,
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.
Aashish Bhinde
Executive Director, Avendus Capital
AVENDUS
November 2011
Prologue
Is the Ecosystem Keeping Pace?
Consumer-facing Business Models
Global Models, Desi Adaptations
How to Spot the Winners?
Investment Activity
Annexure
.com
3 :: 7
8 :: 39
40 :: 119
120 :: 135
136 :: 139
140 :: 154
155 :: 158
Acknowledgements
Disclaimer
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.
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
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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
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AVENDUS
Acknowledgements | Disclaimer
Prologue
India Online
A Global Megatrend
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
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.

3
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Prologue
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)
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.
Exhibit 1 VC investments in the US digital consumer industry
Note: 2011 value annualized based on H1 investments
Source: Moneytree VC Investments Q2 11 national data (National Venture Capital
Association)
4
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3.4
2.2
2.7
3.1
4.4
5.1 5.1
3.5
4.4
7.4
616
452
441
530
729
857
915
669
796
928
200
400
600
800
1,000
0
2
4
6
8
10
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E
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Value $ bn
Number of deals
Prologue
5
AVENDUS
Exhibit 2 IPOs in 2011
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
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
Category
Group buying
Russian search engine
Social network
Professional networking
Internet radio
Browser and portal
Online news portal
Dating social network
Company
Groupon
Yandex
RenRen
LinkedIn
Pandora
Qihoo 360
Phoenix New Media
Jiayuan
Valuation
($ billion)
12.80
8.00
5.50
4.30
2.80
1.68
0.83
0.35
Prologue
6
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.
But still, several questions remain ::
Is the quality of Internet connectivity good enough to drive consumption online?
Is the payment infrastructure ready to support large scale e-commerce growth?
Are Indian consumers really ready to embrace e-tailing? How many are actually
transacting?
How ready is the supply chain infrastructure to handle direct consumer deliveries?
Do we have the right talent and environment available within the industry?
What is the path to profitability?
We start by taking a look at the ecosystem.
The new poster boys Blazing the trail
AVENDUS
Prologue
Exhibit 3 A day in the life of the digital consumer
12
6
3 9
10
4
1
7
8
2
11
5
Wake up with
an iPod
alarm app
Check
Facebook
Check day's
meetings
on Google
Calendar
Locate route
to client's
office through
Google maps
Tweet about
the meeting
Look for a
lunch deal
Buy a Diwali
gift online
for mom
Pay electricity
bills online
Choose
location for
next month's
holiday
Book tickets
for a holiday
Search for
a job online
Check score
at Cricinfo
Prologue
7
Is the Ecosystem
Keeping Pace?
Access
Demographics
E-governance
Risk capital and
Entrepreneurship
Advertising
Payments
Supply chain
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.
We have tried to capture the current status of each of these components and how they
are expected to evolve going forward.
Exhibit 4 Components of the ecosystem
8
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Is the Ecosystem Keeping Pace?
Govt.
initiatives
Access Demographics
Risk capital/
Entrepreneurs
Advertising
Payments
Supply chain
Access :: The big story
80 million users, a long way to go
1
There are an estimated 80 million Internet users 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).
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 5 Internet penetration (%) 2011
Source: Internet world stats, Comscore
Exhibit 6 Unique Internet users in India (in million)
Source: Avendus estimates
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Is the Ecosystem Keeping Pace? | Access
29 36 46
60 80 120 190 273 376
2.5%
3.1%
3.9%
5.0%
6.6%
9.8%
15.3%
21.7%
29.5%
0%
5%
10%
15%
20%
25%
30%
35%
2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E
0
100
200
300
400
500
600
Unique users (million)
Penetration (%)
7%
36%
37%
78% 78%
82%
India China Brazil US Japan UK
World Avg. = 31%
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.
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.
*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
Exhibit 7 PC broadband penetration vs. online retail penetration (%) - US*
* 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*
31%
37%
44%
50%
60%
63%
66%
70%
71%
74%
76%
78%
1%
4%
9%
14%
20%
28%
36%
45%
51%
62%
64%
0.2%
0.5%
0.9%
1.1%
1.4%
1.8%
2.1%
2.5%
2.9%
3.4%
3.6%
4.0%
0%
1%
2%
3%
4%
5%
0%
30%
60%
90%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
E
-
t
a
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n
g

p
e
n
e
t
r
a
t
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(
%
)
I
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/

b
r
o
a
d
b
a
n
d

p
e
n
e
t
r
a
t
i
o
n

(
%
)
Internet penetration (%) E-tailing penetration (%)
PC broadband penetration (% households)
9.1%
12.5%
16.1%
20.0%
24.0%
28.2%
0.3%
0.4%
0.7%
1.4%
2.0%
3.3%
0%
2%
4%
6%
0%
10%
20%
30%
E
-
t
a
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l
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g

p
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t
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(
%
)
2005
2006
2007
2008
2009
2010
I
n
t
e
r
n
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t
/

b
r
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a
d
b
a
n
d

p
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t
r
a
t
i
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(
%
)
e-tailing
Penetration (%)
10
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 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.
2
The introduction of 4G in the Indian markets is expected to be the next game changer .
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
11
AVENDUS
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
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.
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
Exhibit 9 PC broadband connections in India (in million)
2
3
5
8 10 12 14 15 15
2
4
6
9
12
13
1
4
2
4
6
11
15
20
26
32
39
0
5
10
15
20
25
30
35
40
45
2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E
Cable
Wireless fixed
4G - PC
Dongles
DSL
9
12
AVENDUS
3
smartphones in India at 450 million in 2015 .
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 ($55 billion), similar to China). We expect operators to continue their
marketing push on 3G services and drive innovation on pricing - resulting in 279 million
connections by 2015. This is in line with global penetration trends. (Exhibit 10)
3G pe busy!
Exhibit 10 3G penetration growth
Source: Avendus estimates, Morgan Stanley Research Internet trends 2010
13
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3
Can India lead the mobile-Internet revolution, McKinsey Quarterly, February 2011
2%
13%
28%
45%
58%
69%
78%
86%
2003 2004 2005 2006 2007 2008 2009 2010
Japan
1%
3.8%
11.3%
18.8%
30%
2009 2010 2011 2012 2013
China
4%
10%
15%
22%
2012 2013 2014 2015
India
1%
3%
7%
18%
27%
40%
2004 2005 2006 2007 2008 2009
US
Exhibit 11 Internet connections by type (in million)
Numbers represent the number of connections and not the number of Internet users
Source: TRAI telecom industry quarterly performance reports, Avendus estimates
Exhibit 12 3G as % of broadband vs. m-commerce as % of total e-commerce
China numbers are for the year 2010; US and Japan numbers correspond to the year 2009
While talk about the promise of mobile Internet is all good, the on-the-ground impact it
would have on advertising and commerce is yet to be fully understood. This remains a
nascent market globally, as can be seen from the size of m-commerce industries in
different countries.
14
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6.6 6.7 6.4 5.7 5.6
5.1 4.7 4.3 4.0
2.2
3.8
6.3
10.7
15.5
20.0
25.6
32.4
39.3
0.6
1.6
3.4
7.0
10.5
14.8
19.2
21.1
2
13 51 120
196 288
2007 2008 2009 2010 2011 2012 2013 2014 2015
PC narrow band connections (million)
PC broadband connections (million)
Mobile narrow band (million)
Mobile broadband ( ) million
78
145
49
9.4
1.2
10.0
155
202
126
50
123
93
China US Japan
E-commerce revenue ($B)
Total broadband connections (mn)
m-commerce revenue ($B)
3g connections (mn)
12.1%
32%
0.8%
61%
20.3%
74%
Mobile connections as
% of total broadband
connections
Mobile commerce
as % of total
e-commerce
Exhibit 13 Users by point of primary access of internet (%)
Source: IAMAI I-cube report 2010-2011
Exhibit 14 Time spent online by Indian users
Source: BCG The Internets New Billion (September 2010)
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.
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
34% 38% 40% 29% 32%
14%
10% 8% 6%
30% 26% 23% 37% 32%
24%
19% 16% 14%
36% 36% 37% 34% 27%
19%
13%
9%
7%
9%
42% 59% 67% 72%
2007 2008 2009 2010 2011 2012 2013 2014 2015
Work (%) Home (%) Cybercafe (%) Mobile (%)
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0.43
0.46
0.49
0.53
0.55
0.58
0.61
0.64
0.67
0.70
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Average time spent online per person
per day (Hrs)
0.55
1.07
2.27
2.74
2.87
India
Brazil
US
China
Japan
Average time spent online per
internet user per day (Hrs) - 2010
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.
Access in 2015 :: The facts that matter
80 million online users today, 376 million by 2015
Device costs - PCs or smartphones are not going to be limiters to growth. Access and
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
3G will change the face of Internet access - creating access for 22% of the population
Shared, or public access will reduce in proportion as more people get personal
Internet access
The time spent online will grow by 27% per user - driving advertising and commerce
Number of transacting users to grow from 9 million at present to 38 million
Exhibit 15 No. of users transacting online (in million)
16
AVENDUS
3
5
7
9
11
15
21
28
38
2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E
Users transacting online (million)
CAGR = 36%
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.
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.
Exhibit 16 Geographic distribution of users
Source: IAMAI I Cube report 2011
17
AVENDUS
Is the Ecosystem Keeping Pace? | Demographics
41% 38% 37% 34% 37%
20% 21% 21% 18% 18%
10% 12% 12%
12%
11%
29% 29% 30% 36% 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
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
Source: Comscore State of the Internet with a focus on India (June 2011), Avendus
estimates
18
AVENDUS
Is the Ecosystem Keeping Pace? | Demographics
Age group
55+
45-54
35-44
25-34
15-24
0-15
2011 2015
Population (mn)
145
96
177
203
245
346
Total users = 80 million Total users = 376 million
158
121
170
231
252
345
1%
4%
6%
12%
9%
5%
Internet Penetration (%)
9%
28%
37%
45%
40%
17%
Population (mn)
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)
Source: SNK E-tax, Economic Times (21 June 2011)
19
AVENDUS
Is the Ecosystem Keeping Pace? | E-governance
Offline Online
2009-10 2010-11
2015-16 P
5
9
75
29
32
25
Prominent state government initiatives
Kerala state government initiated 21 m-governance pilot projects in end 2009,
including services like electricity and water bill alerts, filing policy complaints
through mobile and audio guides for tourists at hotspots
Kerala government has also just launched a service called Em-power 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
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
20
AVENDUS
Integrated MMPs
CSC
e-Biz
e-Courts
e-Procurement
EDI For eTrade
National e-governance
Service Delivery
Gateway
India Portal
Central MMPs
Banking
Central Excise &
Customs
Income Tax (IT)
Insurance
MCA21
National Citizen
Database
Passport
Immigration, Visa &
Foreigners Registration
& Tracking
Pension
e-Office
State MMPs
Agriculture
Commercial Taxes
eDistrict
Employment
Exchange
Land Records
Municipalities
Gram Panchayats
Police
Road Transport
Treasuries

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.
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,
4
thereby making the process more efficient and effective .

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.
Will a bank account follow?
21
AVENDUS
4
Also see Digital India: The Rush to Mobile Money, BCG, 13 July 2011
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)
*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)
Source: Press articles, Mergermarket, VC Circle, Venture Intelligence, Avendus Estimates
22
AVENDUS
Is the Ecosystem Keeping Pace? | Risk capital & Entrepreneurship
94
22
42
108
39
41
140
31
200
56
57
7
4
9
7
5
9
12
3
2
6
2
0
2
4
6
8
10
12
14
50
100
150
200
250
Jan Feb Mar Apr May June July Aug Sep Oct Nov
Value (in $ mn) Number of Deals
15
0
20
40
60
80
100
0
100
200
300
400
500
600
700
800
900
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*
V
a
l
u
e

i
n

$

m
i
l
l
i
o
n
N
u
m
b
e
r

o
f

d
e
a
l
s
80
19
7
3
5
21
19
37
20
33
66
147 213
46 35
2
62
103
102
242 105
111 829
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
5
venture creation. Incubation centers at various prestigious educational institutes 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.
23
AVENDUS
Is the Ecosystem Keeping Pace? | Risk capital & Entrepreneurship
5
Most IITs and IIMs have incubation centers
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.
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 22 World advertising revenue break-up 2011 (in $ billion)
Source: Zenith optimedia Adspend forecast (April 2011)
Exhibit 23 World advertising spends by media
Source: Zenith Optimedia adspend forecasts
24
AVENDUS
Is the Ecosystem Keeping Pace? | Advertising
Others ::
35
Internet :: 37
Print :: 139
TV/Radio :: 225
41%
39%
37%
34%
31%
29%
46%
45%
46%
46%
47%
48%
6%
9%
10%
13%
14%
15.5%
7% 7% 7% 7%
7%
7%
Print Tv/ Radio Internet Others
2006 2007 2008 2009 2010 2011
Exhibit 24 Online Advertising spends in Japan
Source: Dentsu Advertising expenditures in Japan (2010)
Exhibit 25 Online advertising spends in the US
* 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
Advertising is leading consumption
In the US, online advertising has traditionally lagged the time spent online. But that gap
is now narrowing.
25
AVENDUS
Print :: 22%
I
n
t
e
r
n
e
t

:
:

6
%
Others :: 39% TV/Radio :: 33%
TV/Radio :: 33%
Others :: 38%
Print :: 16%
Internet :: 13%
2005 2010
2005 2010
TV/Radio :: 51%
I
n
t
e
r
n
e
t

:
:

8
%
Print :: 41%
Internet :: 17%
Print :: 27% TV/Radio :: 56%
Exhibit 26 Time spent vs. Ad spends - US
Source: Time spent from e-Marketer, Ad spends from IAB Internet advertising revenue
reports 2008 and 2010
Exhibit 27 Time spent vs. Ad spends - India (2010)
Source: Indian Readership Survey 2010, KPMG-FICCI Media and Entertainment Report 2011
The Indian story has been different - with growth of online advertising leading the time
spent by Indian internet users online.
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.
26
AVENDUS
10.7%
17.3%
43.2%
28.7%
34.4%
10.4%
41.1%
14.1%
Print Radio TV Online
2008
8.1%
15.6%
42.9%
33.3%
26.9%
10.2%
45.7%
17.3%
2010
Time spent (%) Ad spend (%)
10.2%
13.8%
74.3%
1.7%
49%
4%
40%
7.2%
2010
Time spent (%) Ad spend (%)
Exhibit 28 Time spent - India (2015)
Exhibit 29 Composition of Indian advertising market (% share of total revenues)
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
6
spends . 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).
27
AVENDUS
Time spent (%)
8%
12%
71%
9%
2015
100%
29%
22%
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
Includes:
Yahoo!
Rediff
Web 18
Times group
Cricinfo
MSN
HT Media
Available
advertising
pie
for rest
of the
players
Includes:
Naukri
Shaadi
Jeevansathi
Carwale
Motorexchange
Justdial
Sulekha
Bharatmatrimony
6
Google also controls a significant part of the advertising market on third party sites through its Adwords platform
The dominance of these players seems to suggest that the opportunity for advertising-
based 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.
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 mid-
sized 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.
Exhibit 30 Advertising value chain
28
AVENDUS
Ad Agency Advertiser
Technology
Platform /
Advertiser Tools
Ad networks
Technology
Platform /
Publisher Tools
Publisher
ROLE
Global Players
Producing Ads Managing Ad
campaigns
Sending Ads to
publishers
Matching
Advertisements
to inventory &
Selling prices
Managing
publisher
inventory, serving
ads into ad space
Attracting
eyeballs
Ominicom, WPP,
Interpublic,
Publicis
DoubleClick,
Google,
aQuantive
Speigels sales
force, ValueClick,
Google, Right
Media,
DoubleClick
DoubleClick,
Google,
aQuantive, 24/7
Real Media
Liberto.it,
Speigel.de,
FT.com,
engadget.com
Date
Jun 2011
Aug 2010
Aug 2009
May 2009
Jan 2008
Feb 2007
Apr 2007
Nov 2006
Country/Region
Israel
USA
Australia
Argentina
Israel, Europe
USA
Serbia, USA
USA
Name
Web 3.0
Lycos
Max Interactive
Dream ad
Oridian
AdDynamix
VoloMP
MediosOne
Services Offered
Performance based marketing
and application development
Search, Social Media, Affiliate
Marketing
Display, SEM
Display, SEM
Display
Display
Email Marketing/Software
SEM, Display
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 Ybrant Digitals global acquisitions
Source: Wikipedia
29
AVENDUS
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
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.
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 32 Number of payment cards per person
Source: The Nilson report, RBI Bulletin Retail electronic payment systems (August 2011)
Exhibit 33 No. of outstanding cards in India (in million)
Source: RBI Bulletin Retail electronic payment systems (August 2011)
31
AVENDUS
Is the Ecosystem Keeping Pace? | Payments
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
17
23
28
25
18 18
50
75
102
137
182
228
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 P
Debit cards
Credit cards
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:
Long checkout process, which requires the user to re-enter most details every time
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
Many e-commerce sites have not addressed integration issues with their payment
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
7
continues to have low penetration of pure online payments. Cash-on-Delivery (COD) still
32
AVENDUS
7
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?
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.
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.

Exhibit 34 Benefits of Cash on Delivery
The first British postal service required cash-on-delivery - there were

no such things as stamps!
Artist: Peter Jackson
33
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
8
bank account holders 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.
34
AVENDUS
8
McKinsey India personal financial services survey 2011
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 ::
Our analysis shows that 80% of leading Chinese e-commerce players offer 5 or more
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
Mobile wallets and prepaid instruments hold immense potential, but it is still early to
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
COD will continue to be a prominent payment mode in India in the near future, but e-
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
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.
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%
9
over the next five years . 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
Exhibit 35 E-commerce supply chain
36
AVENDUS
Is the Ecosystem Keeping Pace? | Supply chain
9
Chinas E-commerce Market: The Logistics Challenge, AT Kearney, 2011, Avendus Estimates
* for a 0.5 Kg parcel
Principal 1
Principal 2
Principal X
Tracking & Monitoring Reconciliation
Zonal warehouse 1
Zonal warehouse 2
Zonal warehouse X
Transit warehouse 1
Transit warehouse 2
Transit warehouse X
Long haul
Customer 1
Customer 2
Customer X
Last mile
Returns COD
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 self-
fulfillment - shows that self-fulfillment has several advantages.
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
Exhibit 36 Comparison of different supply options
Parameter
Reach
Reliability
Time to Deliver
Cost
Cash on delivery
charge
Reverse logistics
charges
Control over
customer
experience
VPP
High, covers Tier II
and rural areas as
well
Medium
5-7 Days
6% of Value
NA
No extra charge
Low
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
Rs 40-55
Low
Self-fulfillment
Low
High
1-5 Days
Local: Rs 25-35
at high volumes
Low incremental
costs
Low incremental
costs
High
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)
-10
10
30
50
70
90
110
130
150
0 100 200 300 400 500 600 700 800
Last mile delivery costs - Own Vs Outsourced - Books
Own supply chain Outsourced
Number of deliveries per day per city
C
o
s
t

p
e
r

d
e
l
i
v
e
r
y

(
R
s
)
Break even point 450 deliveries a day
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
38
AVENDUS
Exhibit 38 Comparison of the cost of forward logistics - own vs. outsourced
(apparel)
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.
39
AVENDUS
(10)
10
30
50
70
90
110
130
150
0
200 400 600 800 1000 1200
C
o
s
t

p
e
r

d
e
l
i
v
e
r
y

(
R
s
)
Number of deliveries per day per city
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
Last mile delivery costs - Own Vs Outsourced - Apparel
Break even point 110 deliveries a day
Own supply chain Outsourced
*
* 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 *
Consumer-facing
Business Models
Information
Community
E-commerce
Online consumer services
Entertainment
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. E-
commerce 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, e-
learning, 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)
40
AVENDUS
Consumer-facing Business Models
INFORMATION
Search (450)
Portals (500)
Classifieds (1,000)
Comparision sites
Consumer spends
and advertising
COMMUNITY
Social networks
(80)
Advertising
E-COMMERCE
Travel (19,600)
E-tailing (2,100)
Consumer spends
CONSUMER
SERVICES
Financial services
(2,000)
Healthcare
Education
Government
Consumer spends
ENTERTAINMENT
Gaming (660)
Music (420)
Videos (800)
Consumer spends
and advertising
Consumer Facing Models
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
10
corporate productivity and consumer savings .
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
41
AVENDUS
Consumer-facing Business Models | Information
10
Measuring the Value of Search, McKinsey Quarterly, Aug 2011
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
11
seen by the next biggest pure-play search player Ask .
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.
42
AVENDUS
11
Comscore data
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.
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.
Exhibit 40 Top portals in India by unique visitors September 2011 (in 000)
Source: Comscore
632
1,438
1,672
2,988
5,922
10,176
15,494
17,522
24,823
36,592
WebIndia123
Lycos Global
Webduniya
Sify Sites
AOL Inc.
IN.com
Rediff.com
Times Internet
Microsoft Sites
Yahoo!
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.
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,
Exhibit 41 Total time spent on top websites in India - September 2011 (million
minutes)
Source: Comscore
7,981
7,112
2,585
573
438 420
297
233
Facebook Google Yahoo! Microsoft Rediff Network 18 Times
Internet
Indian
Railways
44
AVENDUS
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.
Globally, the transition of Classifieds online has coincided with the declining role of print
12
media . In India, though, print media is still growing. Notwithstanding that, classifieds
13
have moved online at a healthy pace and, at Rs 1,000 Crore ($225 million) , 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
13
2,300 Crore ($510 million) by 2015 .
Classifieds
45
AVENDUS
12

especially in real estate, automobiles and employment ads
13
Source: KPMG FICCI report on Media and Entertainment - 2011
In the US, classifieds advertising for newspapers has been dropping by about 90% in the last decade
There has been good investor interest in the classifieds space; some of the recent
investments are listed below.
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 42 Recent investments in the online classifieds space
Exhibit 43A Top players in the jobs search space by number of unique visitors -
September 2011 (in 000)
Exhibit 43B Top players in the personal search space by number of unique visitors
- September 2011 (in 000)
Source: Comscore
*Bharatmatrimony numbers are only for Bharatmatrimony.com and does not include
numbers for its community specific marriage websites
Year
2011
2011
2011
2011
2010
2010
2009
2009
2009
Company
Hungryzone
Motorexchange
Justdial
Quikr
Quikr
Getit
Quikr
Justdial
Getit
Investment
(Rs Crore)
34
23
45
36
27
100
20
37
20
Investors
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
1,315
1,667
4,468
5,182
6,004
Indeed
Shine
Monster, Inc.
Timesjobs
Naukri
46
AVENDUS
603
629
897
Bhratmatrimony*
Jeevansaathi
Shaadi
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.
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.
13
Real estate and Auto are relatively new categories and provide significant opportunities
for growth, especially given the unorganized status of the offline players in these
segments.
14
These four categories remain the most prominent ones in US as well as UK , 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)).
The iconic Hari Sadu ad
47
AVENDUS
13
category has shown 72% y-o-y growth in H1 2011 for the company
14
In these countries, Matrimony is normally a part of the broader Personals space
According to a Google report, 65% of Indians use the Internet to narrow down their choice of vehicle. The
Exhibit 43C Top players in the classifieds/local search space by number of unique
visitors September 2011 (in 000)
Source: Comscore
Exhibit 44 Composition of investments in the online classifieds space in India
(2006-11)
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.
188
197
278
659
735
1,702
3,226
4,015
5,546
Khiojle
Sulekha
Indialist
Locanto
Click
ClickIndia
OLX Inc
JustDial
Quikr
100% 55%
18%
27%
Total Local Horizontal Vertical
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
AVENDUS
Exhibit 45 Cost structure evolution of Dice holdings (as % of net sales)
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
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.
Comparison sites
9
.
8
3
.
6
4
8
.
2
2
8
.
6
9
.
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7
.
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1
6
.
1
3
7
.
0
Cost of Revenues Product Development Sales/Marketing General/Admin Net Profit
2003 2004 2005 2006 2007 2008 2009 2010
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
AVENDUS
Community
Blogs
Social networks
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.
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
15
Engadget, are among the most credible news sources . 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.
He even has a movie made on him!
52
AVENDUS
Consumer-facing Business Models | Community
15
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!
In 2007, Engadget posted a story that the iPhone and Leopard OS would be seriously delayed. The story was
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
15a
global average (73%).
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.
Exhibit 46 Indian social networking users (as % of total users in the world) -
August 2011 (in million)
Source: Comscore
Facebook
Linkedin
4%
4%
8%
14%
32%
Internet
Google+
Orkut
Indian
users
(in million)
21
4
10
33
80
53
AVENDUS
15a
Comscore report on State of Internet in India, June 2011
Exhibit 47 Traffic statistics of social media websites - September 2011 (in 000)
Source: Comscore
Exhibit 48 Facebook vs. Orkut
Source: Comscore - State of the Internet with a focus on India (June 2011)
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.
2,570
3,435
3,641
3,709
5,269
5,777
6,215
7,192
10,761
19,130
36,668
Yahoo! Pulse
Ibibo.com
Twitter
Zedge
Bharatstudent
Technorati Media
LinkedIn
Wordpress
Orkut
Blogger
Facebook
15
16
18
19
21
23
24
26
27
28
29
30
32
18
19
20
20
20
19
18
18 17
16 16
15
15
0
5
10
15
20
25
30
35
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
Facebook Orkut
U
n
i
q
u
e

u
s
e
r
s

(
i
n

m
i
l
l
i
o
n
s
)
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
16
education .
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
17
messaging, music, videos and games . 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.
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.
Exhibit 49 Increasing time share of Facebook in US
Source: Citi investment research and analysis
0%
2%
4%
6%
8%
10%
12%
14%
16%
Facebook
Google Sites
Microsoft Sites
AOL
Yahoo Sites
Q
3
:
0
6
Q
4
:
0
6
Q
1
:
0
7
Q
2
:
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3
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4
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55
AVENDUS
16
17
Zyngas ability to leverage Facebook has made it the most valued gaming company on the planet
Medianama, 30 August 2011
Exhibit 50 Revenues of social networking sites - 2010 (in $ million)
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.
1,860
243
77 45
Facebook LinkedIn Renren Twitter
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
18
Facebook ). All three have benefitted from their users preference for vernacular
language content.
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.
Exhibit 51 Global number of users for social networking sites (June 2011) (in
million)
*Twitter users are as of March 2011'
711
200 195
124 118
66
58
Facebook Twitter* Weibo Renren LinkedIn Orkut Vkontakte
57
AVENDUS
18
The Vkontakte logo even looks similar to the Facebook logo
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 sub-
segments - Online Travel and E-tailing (Mass merchants, Niche, and Deals)
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.
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.
Exhibit 52 Number of Internet users transacting online - US (in million)
Source: JP Morgan Nothing but Net 2011; World Bank; ITU
58
AVENDUS
Consumer-facing Business Models | E-commerce
Online Travel e-tailing e-commerce + =
107
117
130
143
153
160
170
55%
57%
62%
64%
66% 67%
69%
0
50
100
150
200
250
0%
20%
40%
60%
80%
2004 2005 2006 2007 2008 2009 2010E
Users transacting online (mn) % of broadband connections
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.
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.
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).
Exhibit 53 Number of Internet users transacting online - China (in million)
Exhibit 54 Revenue per online shopper - China (in $)
55
80
109
145
26%
27%
28%
32%
0
50
100
150
200
250
0%
20%
40%
2007 2008 2009 2010
Users transacting online (mn) % of broadband connections
260
332
451
624
0
100
200
300
400
500
600
700
2007 2008 2009 2010E
Revenue per user ($)
59
AVENDUS
98
126
158
194
225
237 235
263
41%
42% 42%
41%
39%
40%
38%
37%
35%
37%
39%
41%
43%
45%
0
50
100
150
200
250
300
2003 2004 2005 2006 2007 2008 2009 2010
Total e-commerce($B) Share of travel (%)
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.
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 55 Number of Internet users transacting online - India (in million)
Exhibit 56 Total e-commerce revenues (in $ billion) and share of travel (%) - US
Source: JP Morgan Nothing but Net 2011; Phocuswright; Jupiter research
3
5
7
9
11
15
21
28
38
2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E
Users transacting online (mn)
CAGR = 35%
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 e-
commerce market in that year.
Exhibit 57 Total online consumer revenues (Rs Crore)
Source: IAMAI digital commerce 2011; Avendus estimates
Exhibit 58 Share of online travel and e-tailing (%) - India
16,600
21,700
28,500
40,300
55,600
77,100
1,07,800
0
20000
40000
60000
80000
100000
120000
2009 2010 2011E 2012E 2013E 2014E 2015E
90% 87% 78% 69% 60% 51%
10% 13%
22%
31%
40%
49%
2010 2011E 2012E 2013E 2014E 2015E
Online Travel E-tailing
E-Commerce Market Segmentation
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.
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 ($5.5 billion) in 2011. This makes India one of the most
lucrative markets for online travel.
Exhibit 59 Penetration of online travel in US (as % of total travel)
Source: Phocuswright U.S. travel overview; JP Morgan Nothing but Net 2011
203
228
233
256
269
274
233
256
20%
23%
28%
31%
33%
35%
39% 38%
-10%
0%
10%
20%
30%
40%
50%
60%
0
50
100
150
200
250
300
2003 2004 2005 2006 2007 2008 2009 2010
Total travel ($bn) Penetration of online travel (%)
62
AVENDUS
Exhibit 60 Reach of travel websites March 2011 (% of Internet users)
Source: Comscore State of the Internet with a focus on India (June 2011)
Exhibit 61 Indian online travel market size (Rs Crore)
Source: Phocuswright Asia Pacific Travel Overview; Avendus estimates
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%).
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.
45%
42%
31%
25%
22%
40%
27%
23%
15%
Europe World Latin
America
Asia
Pacific
India Russia Brazil China North
America
% of Internet users
6250
10500
15000
19600
24900
31600
38300
45900
54800
10%
15%
21%
25%
28%
31%
33%
35%
37%
0%
10%
20%
30%
40%
0
20000
40000
60000
80000
2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E
Online travel (Rs Cr) Penetration of online travel (%)
63
AVENDUS
Exhibit 62 Marketshare of OTAs by revenues
Source: Phocuswright March 2010 (from MMYT investor presentation June 2011)
Exhibit 63 Total unique visitors to travel sites in India September 2011 (in 000)
Source: Comscore
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.
Makemytrip Yatra Cleartrip Others
48%
24%
18%
10%
444
695
815
880
1,140
2,216
3,453
3,813
4,080
8,806
Indigo
Spicejet
Jet Airways
Redbus
MustseeIndia
Expedia Inc
Cleartrip
Yatra
MakeMyTrip
Indian Railways
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
19
when it comes to air travel - since most bookings are still offline .
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.
65
AVENDUS
19

top Chinese OTAs overall bookings in Q3 2010. In contrast, 96% of MMTs transactions are online
Only 10% Chinese booked their travel online in 2009 and online bookings accounted for just 37% of Ctrip, the
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
20
Services International 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 e-
commerce. 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.
66
AVENDUS
20
TSI provides companies with features to maintain their entire travel itinerary online
Exhibit 64 Split of online travel revenue by category in India - 2010-11 (%)
Source: IRCTC; MMYT SEC filings; Avendus estimates
Exhibit 65 Split of US travel revenues by category in US - 2010 (%)
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.
Air travel :: 57%
Train :: 37%
Hotels & Packages :: 5% Bus :: 1%
Air travel :: 44%
Hotels :: 40%
C
a
r

:
:

6
%
C
r
u
i
s
e

:
:

5
%
Packaging :: 4% Train :: 1%
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
21
comparisons across sites - iXigo , 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
22
planning support to holiday-makers. Reverse auctioning sites 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 sub-
segments 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
23
activity on three fronts .
68
AVENDUS
21

22
These sites offer discounts of 20-60% on ticket prices through a reverse auction process
23
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)
Acquired by MMT and SAIF partners earlier this year
1. 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
2. Foreign players will try to gain a stronger foothold in the domestic market
3. Offline players in the Indian travel market may try to develop a stronger position
online
Exhibit 66 Acquisitions in the Indian online travel space

Year
2011
2011
2011
2011
2010
2010
2010
2009
2007
Acquirer
MakeMyTrip
Via
Makemytrip
Yatra
Holiday IQ
Yatra
Makemytrip
Travelocity
Travelguru
Target
My Guest House
Accomodations
TSC Travel Services
Luxury Tours &
Travels
Magic Rooms
Wego Pte
Travel Services
Ticketvala
Travelguru
Desiya
Target Business
Aggregation, sales and
distribution of budget hotel
rooms/serviced apartments
Travel consolidator in North India
Online hotel reservations & tour
packages
Internet enabled GDS for hotel
rooms
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
24
has meant that, as connectivity improved , 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 (%)
Data corresponds to years 1998 to 2009
Source: US Census bureau E-stats; Worldbank
70
AVENDUS
24

correlation with the e-tailing market size
We look at PC-broadband penetration of households as the primary measure of connectivity, due to its close
0%
1%
2%
3%
4%
5%
0% 20% 40% 60% 80%
Broadband penetration (% of households)
E
-
t
a
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l
i
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g
/

T
o
t
a
l

r
e
t
a
i
l

(
%
)
2009
2008
2007
2006
2005
2004
2003
2002
2001
1998
1999
2000
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 e-
tailing 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.
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 e-
tailing. 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 e-
tailing in India catches up with online travel.
Exhibit 68 Penetration of broadband vs. e-tailing in China (%)
Data corresponds to years 2005 to 2010. Source: CNNIC; Worldbank; China e-commerce
market statistical report January 2011
71
AVENDUS
0%
1%
2%
3%
4%
5%
0% 5% 10% 15% 20% 25% 30%
E
-
t
a
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i
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g
/

T
o
t
a
l

r
e
t
a
i
l

(
%
)
2005
2006
2007
2008
2009
2010
Exhibit 69 Penetration of broadband vs. e-tailing in India (%)
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
0.07%
0.12%
0.20%
0.37%
0.58%
0.90%
1.41%
0%
1%
1%
2%
2%
0% 5% 10% 15% 20%

E
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t
a
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l
i
n
g
/

T
o
t
a
l

r
e
t
a
i
l

(
%
)
2007 2008
2009
2010
2011
2012
2013
2014
2015
Exhibit 70 Assumptions for market size estimattion
Exhibit 71 Indian e-tailing market size projections (Rs Crore)
Source: IAMAI digital commerce 2011; Avendus estimates
Based on our estimates, the e-tailing market will grow to Rs 53,000 Crore ($11.8 billion)
in 2015.
To gain further confidence around these estimates, we tried to validate them through an
alternate approach as well. As outlined previously in this section, we estimate online
penetration of the overall retail industry to reach 1.4% by 2015 - this is reasonably
conservative when compared to China which is at more than 4% online penetration of e-
tailing in 2011. As per BCG estimates, the overall retail market in India is estimated to
grow to Rs 36 lakh Crore (US$ 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.
Parameter
Monthly run-rate of top-40 e-tailers
Top-40 e-tailers share of market
Growth assumptions
2011
2012
2013
2014
2015
Estimate
Rs 300 crore
75%
10% month-on-month
6% month-on-month
100% for the full year
1,600
2,100
3,600
8,700
17,300
31,200
53,000
2009 2010 2011E 2012E 2013E 2014E 2015E
83% CAGR
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
Limited access
Poor quality
of access
Lack of touch
and feel
Long/complex
buying process
Unreliable
payment solutions
Reduced market
size
Lack of clarity on
warranty terms
Complex/expensive
return process
Issues with
timeliness and
quality of delivery
Penetration = 0.5% PC Broadband ~ 0% Global issue Higher clicks to buy Payment problems
Penetration = 30% PC Broadband = 15.6%
(2015)
Std. categories, Value Analytics/Personalization Cash on Delivery
Past status
What has
changed?
Customer delight Awareness being created Customer-focused Complete ownership
of supply chain
Customer
disgruntlement
Customer
perception issues
Customer
unfriendly
Supply
unreliability
Past status
Exhibit 72 What has changed in the ecosystem?
Exhibit 73 Business models in e-tailing
E-tailing vs. Marketplaces
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.
76
AVENDUS
Mass Merchant
Niche Merchant
I
n
v
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n
t
o
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y

M
o
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C
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s
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n
m
e
n
t

B
a
s
i
s
Exhibit 74 e-tailing vs. market place
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 e-
tailers 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 e-
tailers 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.
Parameter
Business model
Listing
Transaction
Complaint handling
responsibility
Sourcing from
Inventory risk
e-tailing
Buy from suppliers and
sell to customers
Products
Between the business
and the customer
Full
Highest level in the
value chain
(manufacturers or
distributors)
Yes
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
Retailers
No
77
AVENDUS
Exhibit 75 Cost structure of Amazon and e-bay - 2010 (as % of gross revenues)
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 e-
commerce players - Rakuten, Yahoo! and Amazon, work on marketplace models.
Marketplace models were more prevalent than e-tailing models in the Indian e-
commerce 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
25
$ 23 million in private equity funding . It now has 1,200 dealers using its website and
26
claims to assist 7000-8000 sales every month .
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
22.3%
18.2%
4.1%
9.3%
6.7%*
2.5%
Gross margin Total costs Net margin
Amazon e-bay
78
AVENDUS
25

26
Outlook Business, 12 November 2011
VC Circle, 30 August 2011
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
Based on analysis of top 500 e-tailers in US/Canada
Source: Internet retailer
Mass Merchant :: 38%
Computer/Electronics :: 20%
A
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A
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s
s
o
r
i
e
s

:
:

1
2
%
Books/Music/Video :: 3%
Office Supplies :: 10%
Housewares/Home Furnishings :: 3%
Health/Beauty :: 3%
Others :: 11%
79
AVENDUS
52%
45%
32%
26%
23%
23%
53%
53%
38%
33%
29%
25%
Books, music
and videos
Apparel and
accessories
Computer and
video games
Health and
beauty
Electronics
Toys
2007
2010
Exhibit 77 Share of revenues in Europe - 2010
Based on analysis of top 300 e-tailers in Europe
Source: Internet retailer
Exhibit 78 % of respondents who purchased online, by category in US
Source: JP Morgan Internet user surveys
The preferences of US consumers show that books, apparel and electronics/computers
remain the favorite categories for online shopping.
Mass Merchant :: 52%
C
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m
p
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t
e
r
/
E
l
e
c
t
r
o
n
i
c
s

:
:

1
6
%
Apparel/Accessories :: 14%
Office
Supplies :: 6%
Books/Music/Video:: 3%
Food/Drugs :: 3%
O
t
h
e
r
s

:
:

6
%
80
AVENDUS
Exhibit 79 Share of Indian e-tailing market by segments in 2011 (%)
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
27
service in that category . 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
Mass :: 49%
Niche :: 41%
Deals :: 10%
81
AVENDUS
27
Even Amazon found it difficult to compete with Diapers.com and Zappos acquiring both companies eventually
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.

Caratlane had revenues of Rs 50 Crores from online jewellery sales
Gili entered the online business in 2006 and is reporting double-digit
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
Agni Jewels expects 25% of their sales to come from the online
segment this year
Diamonds are forever
Source: Economic Times (June 2011)

82
AVENDUS
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
GMV
COGS (% of GMV)
Gross Margin
Gross Margin %
Delivery Charges
Collection Charges
Net Contribution
CAC
Customer becomes Profitable
at "Nth Repeat Transaction"
Electronics
4,000
88%
480
12%
150
50
280
700
2.5
Apparel
1,500
65%
525
35%
50
50
425
900
2.1
83
AVENDUS
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
-30%
-27%
-24%
-19% -19%
-17% -17%
-15%
-9% -9%
2%
2% 3%
4%
6%
7%
9%
31%
1 2 3 4 5
6
7
8
9 10 11 12 13 14 15
16
17
18
Books
Product
Average = -7%
84
AVENDUS
Source: Avendus research
-10%
-7%
-5%
3%
4%
5% 5%
13%
19%
1 2 3 4 5 6 7 8 9
Apparel
Product
Average = 3%
-42%
-21%
-13%
-10% -10%
-8% -8%
-6%
-4% -4% -4% -4% -3%
-2%
18%
1 2 3 4 5
6
7
8
9 10 11 12 13 14 15
Cameras
Product
Average = -8%
-42%
-37%
-30%
-29%
-29%
-24%
-21%
-16%
-13%
-5%
-4% -4%
5%
25%
1 2 3 4 5
6
7
8
9 10 11 12 13 14 15
16
Mobile phones
Product
Average = -15%
-12% -11%
85
AVENDUS
This indicates that discounting is here to stay. Multiple research studies on the e-
commerce 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
28
Britain has fallen by 15% since 2003 .
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.
86
AVENDUS
28
BML Bowker, quoted in The Economist (10 Sep 2011)
Exhibit 82 Number of searches* in Google by category India (in 000)
*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 re-
targeting 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.
4,380
8,295
Aug-10 Jul-11
Books
1,440
2,578
Aug-10 Jul-11
Apparel
19,607
25,445
Aug-10 Jul-11
Mobile phones
89%
79%
89%
87
AVENDUS
Exhibit 83 Cost structure evolution of Amazon
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
1996 2000 2003 2007 2010
78%
76% 76% 77% 78%
0%
50%
100%
COGS
25%
15%
9% 9% 8%
0%
50%
100%
Fulfillment
13%
7%
2% 2% 3%
0%
50%
100%
Marketing
1996 2000 2003 2007 2010
-36%
-12%
7%
4% 4%
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20%
30%
40%
Net profit
88
AVENDUS
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.
There is ample reason for this strategy. Across geographies, the top player has enjoyed
a significantly higher market share over the other players.
The race for leadership is on
Exhibit 84 Revenues of top mass merchants in North America 2010 (in $
million)
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)
Others comprises revenues of the next 36 players
Source: Internet retailer top 300 e-tailers Europe
18,700
4,095
3,107 3,040
1,700 1,605 1,530 1,330 1,175 1,090
3,790

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89
AVENDUS
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.
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 86 Comparison of cost structure of Amazon and Overstock - 2010 (% of
net revenues)
Source: Company annual reports
Exhibit 87 Top Retail sites by visitors - August 2011 (in 000)
Source: Comscore
78%
3%
15%
4%
83%
6%
10%
1%
COGS Marketing costs Other costs Net profit
Amazon Overstock
1,663
1,995
2,017
2,070
2,334
2,572
2,654
3,337
6,322
Flipkart
PriceIndia
Bookmyshow
Bagittoday
Homeshop18
Myntra
Samsung
Apple
Amazon
90
AVENDUS
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.
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.
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.
Exhibit 88A Top mass e-tailing / marketplace sites by visitors August 2011 (in
000)
Source: Players have been categorized as per Avendus classifications used in this report.
Unique visitors data as per Comscore
Exhibit 88B Top niche e-tailers by visitors August 2011 (in 000)
Source: Players have been categorized as per Avendus classifications used in this report.
Unique visitors data as per Comscore
292
311
399
725
726
937
949
1,106
1,416
1,663
2,334
3,153
6,322
Sevetymm
ShoppersStop
IndiaPlaza
FutureBazaar
Indiatimes shopping
Tradus
Yebhi
Infibeam
Naaptol
Flipkart
Homeshop18
eBay
Amazon
152
214
233
270
373
963
2,572
BabyOye
Timtara
Firstcry
Inkfruit
BeStylish
Letsbuy
Myntra
91
AVENDUS
Exhibit 88C Top flash sales sites by visitors - August 2011 (in 000)
Source: Comscore
Exhibit 88D Top entertainment ticketing sites by visitors - August 2011 (in 000)
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.
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.
82
138
681
1,140
2,070
Brandmile
theprivatesales
99Labels
Fashionandyou
Bagittoday
49
160
217
716
2,017
Kyazoonga
Famecinemas
Bigcinemas
PVRcinemas
Bookmyshow
92
AVENDUS
Exhibit 89 Market share of different business models in apparel e-tailing in US/
Canada (2010)
Source: Internet retailer top 500 e-tailers US/Canada
Exhibit 90 Market share of different business models in apparel e-tailing in Europe
(2010)
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
29
US. But the success of the model in China (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.
Multi-brand
74%
Private sales
13%
Single brand
13%
Single brand
49%
Multi-brand
34%
Private
sales
9%
Private
label
8%
93
AVENDUS
29
Almost all the top companies in Chinas apparel e-tailing market have private labels as their primary products
Exhibit 91 Market share of top B2C apparel e-tailers in China (2009)
Source: iResearch
Exhibit 92 Growth in revenues of Vancl (in $ million)
Source: Vancl press releases/ interviews, 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.
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
2009 Market share
Vancl :: 28.4%
Mecox Lane :: 16.6%
Menglu :: 10.6%
Masa Maso :: 3.5%
Shishanggiyi :: 3.0%
Togi :: 2.8%
Zoshou :: 1.2%
HANY :: 0.6%
Others :: 33.3%
2007
2008
2009 2011E 2010
0.2
47.0
94.0
313.3
1,253.2
CAGR = 819%
94
AVENDUS
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 10-
12 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%.
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.
Deals (Group Buying, Couponing)
95
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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
96
AVENDUS
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.
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.
Exhibit 93 Top deals / couponing sites in India by unique visitors (August 2011)
(in 000)
Source: Comscore
64
65
67
138
184
277
347
349
809
1,091
3,294
Couponsduniya
Retailmenot
Upto75
Sosasta
Goat
Koovs
Getadiscount
Khojguru
Mydala
Dealsandyou
Snapdeal
97
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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
31
feature of the mobile could enable such a model .
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.
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31
One could also develop Bluetooth models for this, but the efficacy of those models remains unclear
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
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.
Immovable object?
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Consumer-facing Business Models | Online Consumer Services
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
Fulfill through offline assistance - call center or an agent
Fulfill online with offline exception handling
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.
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.
Last performance?
John T. Raymond as the insurance agent in Bartley Campbell's comedy, Risks
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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
31
The Indian e-learning market was estimated to be around Rs 176 Crore ($40 million) 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
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31
Source : Industry discussions
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 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.

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
32
some action with players like Instahealth solutions getting in. Other models like
33
Healthcaremagic , 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.
Healthcare
Exhibit 94 Top health portals in India by unique visitors - September 2011 (in
000)
Source: Comscore
254
271
624
689
763
1,326
Your Total health
Caring.com Alliance
About.com Health
Everyday Health
Livestrong
WebMD Health
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32
Instahealth attracted investments from Inventus Capital Partners in 2009
33
Invested in by Accel Partners
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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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.
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.
Exhibit 95 Gaming market composition
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Consumer-facing Business Models | Entertainment
Gaming
Offline
Console PC
Online
MMORPG
PC/Console
Casual
Mobile/PC
Social
Mobile/PC
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.
108
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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
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.
Exhibit 96 Indian Mobile and Online Gaming market size (Rs Crore)
Source: Netscribes report, Avendus Estimates
530 710 950
1280
1710 2290
130
160
200
250
320
400
2010 2011E 2012E 2013E 2014E 2015E
CAGR = 32%
Mobile Games Online Games
109
AVENDUS
Music
Struggling in a digital world
Exhibit 97 Number of days vs. total downloads (billion) in iTunes store
Source: iTunes
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.
0
2
4
6
8
10
12
0 500 1000 1500 2000 2500 3000
Number of days since launch
N
u
m
b
e
r

o
f

s
o
n
g
s

d
o
w
n
l
o
a
d
e
d

(
B
n
)
110
AVENDUS
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 micro-
payments, 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.
111
AVENDUS
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
Work with the ISPs and other players in the ecosystem like Google and Paypal to bring
down the sites promoting piracy
Adopt a Graduated Response model, where a person involved in copyright
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
36
Indian music market estimated to grow to Rs 1,866 Crore ($415 million) with digital
contributing majority portion of the same
36
Indian music market overall is currently estimated at Rs 850 Crore ($190 million) ,
34
growing at a CAGR of 5% over the last 3 years . 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
36
2015 at Rs 1475 Crore ($330 million) .
Exhibit 99 Indian digital music industry size (Rs Crore)

Source: KPMG-FICCI media and entertainment report 2011
188
264
415
518
726
908
1180
1475
2008 2009 2010 2011E 2012E 2013E 2014E 2015E
112
AVENDUS
34
India is one of the few markets globally where the overall music industry is still growing
36
Source : KPMG-FICCI media and entertainment report 2011
Piracy rampant in PC-internet; some renewed activity in the space
Almost all of digital revenues are today coming from the mobile environment, as PC-
internet 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.
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
35
and that is due to the stupendous success of Caller Ringback Tones (CRBT) . 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.
Exhibit 100 Top music websites in India by unique visitors September 2011 (in
000)
Source: Comscore
829
1,046
1,184
1,451
1,451
1,553
1,917
1,965
3,955
5,903
Djmazas.com
Bearshare.com
Djmaza.com
Mp3skull.com
ToneFuse Music
123Musiq.com
MOGMusicNetwork
Raaga.com
Beemp3.com
Songs.pk
113
AVENDUS
35
Not to mention the cumbersome exit procedures for users (Easy to get in, tough to get out)
Exhibit 101 Share of CRBT revenues to different stakeholders
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.
Revenue from
consumers
Mobile service
providers
Platform
enablers
Content
aggregators
Publisher
share
Share of Revenue Obtained from Mobile Consumers
100%
70 - 75%
10 - 15%
10 - 15%
5 - 10%
114
AVENDUS
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.
Even though video advertising has been relatively slow to pick up, it seems to be
catching up over the last few years.
Exhibit 102 Time share of videos (as % of overall time spent online) - US
Source: E-marketer, Comscore video metrics
Exhibit 103 Online video advertising in US
Source: IAB internet advertising revenue report 2010
4.6%
5.6%
6.8%
0%
1%
2%
3%
4%
5%
6%
7%
8%
2008 2009 2010
25
35
48 65
88
120
190
324
734
1,017
1,400
0.3%
0.5%
0.9%
0.9% 0.9%
1.0%
1.1%
1.5%
3.1%
4.5%
5.4%
$0
$1,000
$2,000
$3,000
0%
3%
6%
2000 2001 2002 2003 2004 2005
2006
2007
2008
2009 2010
Video ads (in $ million)
Video ads (as % of total ads)
115
AVENDUS
Exhibit 104 Total time spent watching online videos in US (billion minutes)
Source: Comscore video metrics
Exhibit 105 Youtube facts
The primary drivers of this growth have been the improving connectivity options (3G) and
the newer business models being witnessed in the space.
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
36
$7.99, as against its offline model which attracts higher subscription fees . 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.
149
195
0
50
100
150
200
250
January 2011 August 2011
30%
116
AVENDUS
36
Despite some recent PR disasters, Netflix remains the formidable player in this segment
And like many others, we anxiously await more details on the iTV.
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).
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.
Exhibit 106 Time share of top video platforms in US (as % of total time spent
watching videos) - August 2011
Source: Comscore video metrix
Exhibit 107 Reach of videos (million users) and video advertising revenues (in RMB
billion) - China
Source: iResearch
28.6%
2.6%
1.7% 1.9%
1.1% 1.1% 1.1%
0.5% 0.5% 0.2%
0%
10%
20%
30%
40%
Share of total time (%)
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2006* 2007 2008 2009 2010
Reach (mn users) Total video ad revenues (Rmb Bn)
117
AVENDUS
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.
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.
Exhibit 108 Reach of online videos (as % of total internet users) - January 2011
Source: Comscore - State of the internet with a focus on India (June 2011)
Exhibit 109 Time spent watching videos online - January (Hours per month)
Source: Comscore State of the internet with a focus on India (January 2011)
84%
81%
80%
78%
71%
US UK China Australia India
Reach of online videos (%)
18.3
15.8
10.7
9.3
7.7 7.7
5.1
UK US Singapore Russia Brazil Australia India
118
AVENDUS
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.
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.
Exhibit 110 Time share of top video websites (as % of total time spent watching
videos) - January 2011
Source: Comscore The rise of online video in India
26.1%
1.7%
1.5% 1.5%
0.9%
0.5% 0.4% 0.2% 0.0%
0%
10%
20%
30%
Share of total time (%)
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119
AVENDUS
Global Models,
Desi Adaptation
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.
120
AVENDUS
Exhibit 111 A perfect solution is not an overnight affair - A journey filled with
innovations
Building a strong business model is not an overnight affair
This approach meant that the company had to innovate continuously to mask the less-
than-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 e-
commerce companies spend on mass-media marketing today. Though competition has
driven the marketing spends up of late, it remains completely driven by RoI.
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
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
2006 2007 2008 2009 2010 2011
121
AVENDUS
Exhibit 112 Redbus gross revenues (Rs Crore)
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 air-
conditioning 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.
1 5
25
60
116
350
700
2006-07 2007-08 2009-09 2009-10 2010-11 2011-12P 2013-14P
Revenues (Rs Cr)
122
AVENDUS
FlipKart :: Leaders behave differently
While online travel saw steady customer adoption and revenue growth since 2000, e-
tailing 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.
123
AVENDUS
Flipkart home page - October 2007
124
AVENDUS
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
38
kept them ahead of the pack in the Indian e-commerce space .
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
125
AVENDUS
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.
126
AVENDUS
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
Exhibit 114 Revenue from lead generation model (% of total revenues)
Source: Policybazaar
Sell leads
to principals
Close the sale online,
with offline support
(agent / call center)
Close the sale online,
with offline
exception handling
2009-10 2010-11 2011-12E 2012-13P
80%
65%
35%
0%
127
AVENDUS
Exhibit 115 Policybazaar net revenues (Rs Crore)
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
6
12
25
50
100
200
2009-10 2010-11 2011-12P 2012-13P 2013-14P 2014-15P
128
AVENDUS
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.
129
AVENDUS
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.
130
AVENDUS
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
Internet
Classified
Publishers /
Offline
aggregators
Content Free
Rev Share of
operator ARPU
SMS / USSD
Mobile
Operator
Verse
Aggregation
Engine
Classified
Lister
Subscription
fee
C2C USSD / Voice

Voluntary sign-up
Preferences specified
Renewal weekly /
fortnightly / monthly
Flow of Money Operational Pilot
131
AVENDUS
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.
132
AVENDUS
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 e-
commerce 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.
133
AVENDUS
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.
134
AVENDUS
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.
135
AVENDUS
How to Spot
the Winners?
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.
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
Exhibit 117 Projected segment sizes in 2015 (Rs Crore)
136
AVENDUS
INFORMATION
Search (1,950)
Portals (800)
Classifieds (2,300)
Comparision sites
Consumer spends
and advertising
COMMUNITY
Social networks
(1,250)
Advertising
E-COMMERCE
Travel (54,800)
E-tailing (53,000)
Consumer spends
CONSUMER
SERVICES
Financial services
(7,150)
Healthcare
Education (500)
Governance
Consumer spends
ENTERTAINMENT
Gaming (2,690)
Music (1,475)
Videos (800)
Consumer spends
and advertising
Consumer Facing Models
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.
137
AVENDUS
Exhibit 118 Indian digital consumer market - category analysis
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.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Extent of localization
L
e
v
e
l

o
f

c
o
n
c
e
n
t
r
a
t
i
o
n
Localized/Oligopolistic models
Local/Fragmented
models
Search
Social networks
Videos
Gaming
Portals
(Advertising)
Deals
Classifieds
Music
Mass
merchants
Travel
Financial
services
Healthcare
Niche
merchants
Global/Concentrated models
Content delivery
Online retail
Online service delivery
138
AVENDUS
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.
139
AVENDUS
.com
Investment
Activity
No Cap on Capital
Value lies in the
eye of the beholder
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 dot-
com 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 $80 billion currently.
Some major IPOs in digital media industry have been mentioned in the introduction and
going by ones in the pipeline, the next 12 months also promise to be quite exciting.
Social media giant Facebook, social game developer Zynga, Chinese private label player
Vancl and online grocery seller FreshDirect are amongst several digital media companies
that are rumoured to be preparing to launch their public offerings in 2012.
Investment trends in global market
In 2009, there was a major dip in investor interest in the Digital Media sector. The revival
started in 2010 and consolidated in 2011. There was increased confidence across a
plethora of business models - be it professional networking, regional search engines,
global and regional social networks, group buying, flash sales or general e-tailing, they
all have received their fair share of investments. This demonstrates both, the breadth of
investor interest as well as depth of each of these categories to absorb large sums of
capital.
Exhibit 119 Major PE investments in 2011
Source: Press articles
140
AVENDUS
Investment Activity | No Cap on Capital
Company
Alibaba
Facebook
Groupon
Twitter
PP live
Vancl
InMobi
PE funding
($ billion)
1.60
1.50
0.95
0.80
0.25
0.25
0.20
Category
B2B marketplace
Social network
Group deals
Social network
Digital downloads
Private label apparel
Mobile advertising
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-the-
ground 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).
Investments happening across business models, indication of strong confidence in
growth of the sector
Exhibit 120 Investment in digital media sector in India (in $ million)
*Investments from January till November
Source: Press articles, Venture intelligence, VC Vircle, Mergermarket, Avendus Estimates
Exhibit 121 2011 Investments breakup by segments
242
105 111
829
250
0
200
400
600
800
1000
1200
2008 2009 2010 2011*
Investments announced Estimated value of transactions underway
Payments :: 0%
Advertising :: 35%
E-tailing :: 25%
Travel :: 15%
ICP :: 13%
Deals :: 9%
Services :: 3%
141
AVENDUS
A lions share of the investment in the sector went to e-commerce (which includes E-
tailing, 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.
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
Exhibit122 Investments flow (in $ million)
29 9 5 2
34
35
28 27
36
18
287
39
46
20
112
105
16 41
401
2008 2009 2010 2011-till Nov
Payments
Services
Advertising
ICP
E-commerce
142
AVENDUS
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
Source: Avendus analysis
67 58 50
115
79
18
47
163
42
8
14
202
54
21
350
2008 2009 2010 2011-till Nov
2nd Round
4th Round and beyond
1st Round
3rd Round
143
AVENDUS
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)
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.
Exhibit 124 Average deal size (in $ million)
1st Round
2nd Round
3rd Round
4th Round & beyond
2009
5.8
6.0
8.2
10.6
2010
4.2
5.2
4.8
-
2011-Nov
4.8
12.5
20.2
43.7
144
AVENDUS
Exhibit 125 Concentration of investors
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
Letsbuy
(Electronics)
Fashion and You
(Private Sales)
Quikr
(Classifieds)
Myntra
(Apparel e-tailing)
MakemyTrip
(Online Travel)
Omidyar
Network
Helion
Ventures
Sequoia
Capital
Norwest Venture
Partners
Tiger Global
Tiger Global
Accel
Partners
Norwest Venture
Partners
Nokia Growth
Partners
Indo-US Venture
Partners
Helion Ventures
Tiger
Global
Intel Capital
eBay
IDG Ventures
Sierra Capital
145
AVENDUS
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 e-
commerce 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 Jun-
2011 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.
146
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
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
Exhibit 126 Segment wise valuation benchmarks
Source: Bloomberg, Thomson Reuters, Data as of Nov-2011
For information regarding the segment wise companies, please refer to Annexure C
147
AVENDUS
Investment Activity | "Value" lies in the eye of the beholder
TTM

16.1
15.3
16.4
35.8
30.0
15.8
8.6
10.0
48.8
21.9
40.3
FY +1

12.6
12.6
14.6
31.3
19.3
9.8
6.8
11.3
38.5
17.4
28.3
P/E Segments
Online Classifieds
Niche E-tailing
Marketplace
Mass E-tailing
Online Travel
Diversified Players
Online Services
Online Gaming
Networking and Portals
Digital Consumer Industry
Emerging Markets
FY +1

5.1
1.8
4.6
1.0
3.8
3.8
2.1
3.5
8.6
3.8
7.0
TTM
5.8
2.1
5.0
1.1
4.5
4.5
2.3
4.0
10.1
4.4
8.6
Current

27.8
46.4
32.0
60.8
42.5
34.0
23.7
25.2
26.3
35.4
37.8
EV/Sales EV/EBITDA
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.
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.
Exhibit 127 MOPS Valuation Framework
Market size of total
retail category in 2015
Online penetration for
that category in 2015
Market share of
leading player
Accepted projections from third
party sources
Estimate based on global benchmarks
(combined with individual sensibility)
Level of fragmentation in the
industry
Estimated revenue of
market leader
EBITDA Margins Valuation multiples
Existing global benchmarks Existing global benchmarks
Exit Valuation in 2015 IRR expectation Entry valuation today
Discount based on internal IRR
benchmark (based on perceived risk
reward ratio)
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).
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.
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 e-
tail 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.
Exhibit 128 Apparel market size estimates
Source: Technopak report Indian Textile & Apparel Compendium 2010
Exhibit 129 Online apparel market size (Rs Crore)
Source: Industry Estimates, Avendus analysis
Rs Crore
Apparel e-tailing market size
Share of total e-tailing market

2015
10,500
20%
2020
47,000
N/A
150
AVENDUS
Rs Crore
Apparel market size

2011
189,699
2015
288,880
2020
470,000
Valuation multiple
Metrics
Estimated Enterprise value (2015)
Sales
1.7x
351
582
EBITDA
10.8x
53
569
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)
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 130 Valuation based on industry trading multiples (in $ million)
Source: Bloomberg, Thomson Reuters, Avendus analysis
Exhibit 131 Market share of the leader and online penetration in the segment
151
AVENDUS
2.6%
$248
$330
$413
$495
$578
3.6%
$341
$455
$569
$683
$796
4.6%
$435
$580
$725
$870
$1,015
4.1%
$388
$518
$647
$776
$906
3.1%
$294
$393
$491
$589
$687 S
h
a
r
e

o
f

m
a
r
k
e
t

l
e
a
d
e
r
9%
12%
15%
18%
21%
Online penetration
2015 Estimated value
Improvement scenario
Value in
$ million
Exhibit 132 EBITDA margin and valuation multiples
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.
152
AVENDUS
10%
$308
$343
$378
$413
$448
14%
$463
$516
$569
$622
$674
18%
$554
$617
$680
$743
$806
16%
$492
$548
$604
$660
$716
12%
$369
$411
$453
$495
$537 E
V
/
E
B
I
T
D
A

m
u
l
t
i
p
l
e
8.8x
9.8x
10.8x
11.8x
12.8x
EBITDA margin
2015 Estimated value
Improvement scenario
Value in
$ million
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
AVENDUS
End Note
154
AVENDUS
End Note
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.
Annexure
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
The time it came alive, again:
Recent Indian start-ups start
making waves, lead by
Flipkart and Snapdeal
3G connections see traction
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
Talks about the first $ billion
internet company in India
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
Indian middle-class starts
transacting online:
IRCTC launches online train
ticket booking, which goes on
to gain large-scale adoption
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
Internet comes to India:

VSNL launches Indias first full
internet service for public
access
AVENDUS
155
Play our part in the boom, and the bust
1995 1996 1999 2000 2003 2005 2009 2010 2011
The decade of travel Time for others!
Annexure A :: The evolution of the Indian digital consumer market
Annexure | A
156
AVENDUS
Annexure | B
Annexure B :: Investments in Indian Digital Consumer Industry (2011)
Company
Name
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)
Sub-Sector
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
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
Number
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
Amount
($ millions)
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
Investment
Stage
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
Investors
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
Company Name 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)
Sub-Sector 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
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 Number 32221 411 422311 22221 3311 211 21 311 411 211 43111 441 2331 411 2111111 311 431 2
Investment Amount ($ millions) 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
Investment Stage 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 158
AVENDUS
Annexure | D
Annexure B :: Investments in Indian Digital Consumer Industry (2011)
n/a: not available
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
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
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
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
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
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

0
On
2,141
557
1,666
2,334
1,179
348
1,095
273
744
448
168
1,543
453
1,265
86
754
196
197
182
673
5,352
3,760
40,600
14,830
1,036
5,769
99,059
423
341
120
474
764
3,957
499
322
7,525
94
27,223
262
987
2,275
1,462
2,280
5,233
436
3,437
6,572
232
386
1,068
176
46
585
957
2,070
4,530
116
551
1,371
942
510
5,755
6,647
1,299
272
1,810
2,312
7,206
8,014
296
386
49,122
1,99,566
36,849
19,758
4,840
2,197
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

n
0
0
0
0
0
0
0
0
On
2,603
498
1,522
2,317
1,146
68
996
179
658
459
242
1,507
414
1,260
3
674
134
140
169
661
15,107
3,638
39,131
11,654
1,761
4,475
94,630
200
375
95
442
628
3,341
220
653
7,305
82
25,470
277
958
2,022
1,131
2,024
4,454
423
2,781
6,244
185
340
1,021
124
80
506
768
1,970
4,399
n/m
451
946
642
317
4,012
6,141
1,300
77
1,412
1,682
6,821
7,698
204
328
47,383
1,61,210
34,914
17,822
4,105
1,658
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
0
0
0
0
0
0
0
0
0
On
341
170
237
142
151
236
1,045
356
71
291
702
670
350
641
226
882
1,089
228
252
374
1,290
275
10,767
4,334
2,552
925
43,594
425
307
133
142
133
518
80
772
3,795
52
4,096
187
61
222
2,221
1,478
1,618
646
1,914
394
103
255
378
59
135
314
1,116
241
2,925
16
73
413
257
144
954
562
438
79
106
90
436
607
39
107
1,915
35,761
3,992
5,185
459
779
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
0
0
0
0
0
0
0
0
0
On
425
179
284
154
177
225
1,051
378
77
340
727
815
359
644
213
1,200
1,112
226
264
385
1,600
298
11,595
4,906
2,497
1,031
48,804
546
481
n/a
152
148
556
91
765
3,904
56
4,331
193
89
265
2,195
1,762
1,895
764
2,022
489
106
259
399
n/a
110
323
1,210
272
3,189
22
107
445
279
169
1,096
567
608
100
120
141
501
670
51
140
2,249
36,466
4,451
4,405
474
845
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
0
0
0
0
0
0
0
0
0
On
134
68
101
91
83
20
121
(0)
18
(5)
34
64
23
77
(5)
45
16
29
(12)
33
(204)
98
3,071
1,079
265
306
1,970
5
19
3
36
73
170
8
116
1,024
3
1,338
35
6
109
376
210
809
120
249
105
16
55
125
19
6
56
147
n/m
433
(41)
32
209
125
54
475
233
114
18
15
(6)
59
269
4
n/a
650
12,946
1,534
1,514
57
325
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
0
0
0
0
0
0
0
0
0
On
191
76
126
106
97
34
175
14
24
(5)
39
78
28
71
(33)
82
12
26
(3)
41
(126)
108
3,777
1,241
272
348
2,191
(31)
19
n/a
40
84
209
10
125
1,007
4
1,484
32
12
134
367
269
897
128
368
232
24
56
144
n/a
13
85
169
(4)
459
(58)
18
265
179
69
535
181
141
38
16
(6)
81
299
14
12
1,299
19,393
2,103
1,631
40
317
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
0
0
0
0
0
0
0
0
0
AVENDUS Annexure C :: Valuation benchmarks by segments
FY +1 TTM FY +1 TTM Current FY +1 TTM FY +1 TTM
EBITDA Sales EV Mkt Cap P/E EV/EBITDA EV/Sales
157 Annexure | C
n/a: not available, n/m: not meaningful as the values are too high or low or the underlying metric is negative
All values in $ million,
except multiples
Current Current
EV/Sales
(2012)
1.7
n/a
1.9
n/m
1.7
1.8
2.6
2.5
0.7
1.5
0.9
1.5
1.6
Overall
Pure-play Online Apparel Players
Bluefly
ASOS
Mecox Lane
Yoox SpA
Average
Apparel Players with Online & Offline Presence
Inditex
Hennes & Mauritz AB (H&M)
GAP
Limited Brands
Abercrombie & Fitch
Next Plc
Average
Market Cap
65
1543
91
653
53654
49674
9571
12189
4112
7329
Sales
94
670
226
374
18184
16665
14630
10304
4203
5483
EV/EBITDA
(2012)
10.8
n/a
19.3
n/m
18.6
19.0

11.0
11.3
5.3
7.9
5.8
7.0
8.1
EV/EBITDA
(TTM)
13.2
n/m
24.0
n/m
28.7
26.4
12.2
13.4
4.5
8.5
6.7
7.4
8.8
EV/Sales
(TTM)
1.7
0.7
2.3
n/m
1.9
1.6
2.8
3.0
0.7
1.5
0.9
1.6
1.7
EBITDA margins
(TTM)
15%
-1%
10%
4%
9%
8%
24%
22%
13%
18%
15%
21%
19%
AVENDUS
158 Annexure | D
Annexure D :: Online apparel players valuation benchmarks
Source: Bloomberg, Thomson Reuters, Avendus analysis n/a: not available, n/m: not meaningful as the values are too high or low or the underlying metric is negative
All values in $ million,
except multiples
About Avendus
Avendus Capital Pvt. Ltd. (Avendus Capital)
Our offices
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 best-
in-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 top-
five 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
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
www.avendus.com
Avendus Capital, Inc and Avendus Capital (UK) Private Limited are authorized and regulated by the FINRA and FSA
respectively.
159
AVENDUS
About Avendus

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