iLeher » Is India ready for Web 2.0 ? Catching the Internet Wave in India

Is India ready for Web 2.0 ?

Written by: Madhur

On Oct 30th, 2006

Depending on who you ask, you will get a lot of cool sounding definitions full of buzz words for Web 2.0. In simple terms it is a combination of two things:
1. It is about user generated content. Majority of the content on these sites is not from publishers but from users themselves using wikis, blogs, profiles, etc.
2. From technology standpoint, it is about the use of AJAX, which is a combination of Javascript and XML to interact with web server asynchronously, so every time something new needs to be displayed, the whole page does not need to be refreshed. As a result, pages get reloaded quickly and they don’t look clunky like traditional web pages.

Turns out that in India we have a bunch of Web 2.0 sites related to social networking, social bookmarking and such. You can find a partial list here. So when you have a Web 2.0 service focused for consumers, where does the money come from? It is all about advertisements. Look at any of the signature Web 2.0 companies in the US like MySpace, YouTube, Digg, flickr, etc, for most of them there is no other source of money other than ads. And how do you maximize revenues from ads? Get more eyeballs. So the bottomline is try to attract huge number of users visiting your site for long long times, serve ads on the side and embedded in the content (the more relevant ads, the better) and make money. Clearly this model works when the user base is large and online ad market is as big to support it.

Now let’s take a look at some of the market statistics in India

Internet usage numbers:
We still have very less number of Internet users compared to say US and even China. The latest report from IAMAI says that 38% of the users are “heavy” (usage of around 8.5 hours per week) users of Internet in India. If you take the total user base of 35 million, this translates to around 13.5 million users. Now most Web 2.0 sites (esp. social networking, social bookmarking, media sharing) are targeted towards college going students and youth which comprises of 60% of the total number of Internet users according to the report, which reduces the target customers to around 8 million users.

Total available online ad dollars:
Another report from IAMAI says that the online ad market will cross $57 million in 2006-07 and will be around $150 million in 2010. Compare this with the current number of the US market that is $12.5 billion and Chinese market that is $500 million today.

Competition:
There is a good number of existing well established players of the Indian online industry who are already behind these dollars. Just to quote some figures from a recent issue of Business Today magazine, here are the ad revenues of the top 5 players.
1. Rediff = $13.21 million
2. Google = $10.44 million
3. Indiatimes = $8.88 million
4. Yahoo = $7 million
5. MSN = $4 million

Its not even worth calculating how much money is left over if you subtract these dollars from available dollars. Of course I do not mean to say that small players cannot come up and give the big players a run for their money (the perfect example is YouTube and Google in video market and in general that’s how companies evolve), but this is just to give a picture of the current market.

How much people care?
The latest report from AC Nielsen survey says that in India Internet advertising is still not as effective as other parts of the world. They have found various reasons for that and you can read the details here, but the point is that this is not a good report from the point of view of promoting online advertising to new players.

Bottomline
So if you put the above pieces together in today’s situation, you have at least 20 players in a market of 8 million users, who are using Internet for less than 10 hours per week vying for a few million dollars of revenues? You can extrapolate the above numbers to 2010 and still the picture won’t look any prettier. I would love to hear any catches in the above analysis, but given this data I would not invest or start something that relies completely on ad for revenues from Indian markets, unless there is a killer app in mind that will acquire a really massive number of users quickly and probably get acquired by a big company. I think in India it still makes more sense to start web services with alternative sources of revenues - more like traditional ecommerce services . Not surprising that most of the VC money is going to such services. Of course there is need for sites where youth generation hangs out or where people share bookmarks or latest stories, but the market is small and it will be very interesting who emerges out as the winner. More interesting to see will be what innovations come out considering these facts about the Indian market, both in terms of type/quality of service and in terms of business models.

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Entry Filed under: web2.0

30 Responses Add your own

1. IndianPad said on October 30th, 2006 at 8:19 am

Is India ready for Web 2.0 ?…

Is India ready for Web 2.0 ? posted at IndianPad.com…
2. Rajiv Dingra said on October 30th, 2006 at 11:27 am

I agree with you.. I think niche sites in web 1.0 would do better in the next 5 years. Sectors like jobs matrimony travel and ecommerce is where the money and opportunity is and inspite of the big players i still see a huge potentil in these markets.
3. newsmotto! » Blog Archive » India & Web 2.0 readiness said on October 30th, 2006 at 11:34 am

[...] Madhur(iLeher) discusses is India ready for web 2.0. He has some detailed stats on Indian internet usage, trends and online advertisement. I agree with him when he says that web 2.0 will really succed if there is some very killer application in this space. Most of the upcoming web 2.0 startups don’t have that and are mostly the clones of the western success stories. [...]
4. Dogbert said on October 30th, 2006 at 11:48 am

Excellent analysis. Two things that you could be missing are:
1. Growth rates are exponential so in five years things could look very different. See mobile phone penetration as an example.
2. Value of web users - simply put, all 1.0B Indians are not equally valuable. The first single digit percentage (you can pick a number) are where all the value lies. So combined with point 1 above, the internet advertising market could become very valuable very fast.

PS: Do note the use of “could” in the above para!
5. DesiPundit » Archives » Is India Ready For Web 2.0? said on October 30th, 2006 at 12:50 pm

[...] Madhur at iLeher asks an important question. [...]
6. Vaibhav Domkundwar - india 2.0 said on October 30th, 2006 at 6:20 pm

Madhur, this is right on and very much the discussion I had with a VC here at an alumni event. As we were talking of cleartrip, I asked him if there was a TripAdvisor equivalent for India, just like cleartrip (and its brothers) are the equivalent of expedia. He said they really saw money with transactions only and content was not as exciting.

So I totally agree with your point but there is another side to it. How much is the revenue potential and *profitability* of such transaction oriented busineses? What are the margins?

Exponential growth cannont come from building the next Amazon. So content plays could definitely work as the online usage dynamics change in the coming year. Another model we really like is the “middleman model” in transaction business. Think ebay etc. These do depend on an already well established and large online user base though.

Its a tough problem and we will have to see whose bets come through. It will be a LONG road though - I dont see the Indian online market/usage growing rapidly for the next 2-3 years.
7. Vivek Garg said on October 30th, 2006 at 9:21 pm

I would also like to answer the question of total cost of running business in India and the profitability when we compare it to USA and China and how if it does change anything.

As Vaibhav noted in his questions about margin and revenue potential in transaction based model, I would also want to know how much profit rediff is making out of $13.21 million ad revenue.

http://finance.google.com/finance?q=REDF
8. Madhur said on October 30th, 2006 at 9:54 pm

I can’t point out the profit from the ad revenue per se, but their total annual profit last year was around $1.3 million. That sounds quite minuscule to me considering that they are the leading portal in India and if you compare them with Yahoo in US and Sina in China.
http://finance.yahoo.com/q/is?s=redf&annual

Vaibhav, I know you run a company that focuses on content aggregation/organization in India. What is your strategy there?
9. Madhur said on October 30th, 2006 at 10:03 pm

Rajiv,

I agree that there is not a clear winner yet in online shopping/marketplace, but do you really think there is room for more players in travel/matrimony/job portals?

Dogbert,

Comparing mobile growth with Internet is not fair because of various reasons including but not limited to computer literacy, language barrier, demographics and utility of the medium in immediate term. The IAMAI report does include the forecast for 2010 which stands at a paltry $150 million of advertising revenue!
10. Mayur said on October 31st, 2006 at 7:04 am

Another interesting thing to think about:

VCs in India are backing the traditional e-commerce sites (as Rajiv mentioned - Matrimonails, Jobs, online tickets, retail, etc). If these sites grow at a fast pace and are reasonably successful, they will add to the online ad spending.

Advertising, in general, is a function of the buying power of the customers. As the buying power (and habits) of the Indian consumer change (in a positive manner) and the buying decisions made online increase, we may see the Indian online ad market grow much bigger than $150 million in the next 4 years.

P.S. Another thing to note, there are a lot of Indians who live outside India (the NRI community) who are frequent visitors to Indian web sites (1.0 and 2.0). These people have strong buying power and make a lot of buying decisions online, making them lucrative to advertisers I am not sure the IAMAI report counted this factor in making their predictions.
11. Madhur said on November 1st, 2006 at 2:40 am

Mayur,

Your points are well taken, but I would imagine that these factors would have been taken into consideration by IAMAI when they did the research for making that report. More so because IAMAI is a consortium of a bunch of major Internet companies in India and I think they will generally try to paint a more positive picture of the Internet usage and business and other stats.
12. 743948 Blog Verification said on November 1st, 2006 at 6:13 am

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13. itsyourstage said on November 3rd, 2006 at 7:02 am

Interesting Analysis. Lets see how you answer these questions:

1. “You can extrapolate the above numbers to 2010 and still the picture won’t look any prettier” - Based on what vasriables will you extrapolate? Or, you are saying Past Performance is indicative of future? Lets play numbers. What do you think is going to be the Internet Population in India in 2010? 150 million? 200 million?

2. This one is for Vaibhav. “Exponential growth cannont come from building the next Amazon. ” How do you know? India is one of the most price conscious markets in the world. Remove a middleman, cut the price and prove it to junta that you actually are saving money, the Amazon model will scale. ppl have played it safe and so this has not caught up. Dont you agree?

3. “It is all about advertisements.” - thats an amazing point. u think sequoia would have funded guruji if they thot the indian ad market will not grow substantially from the numbers u have quoted? 7 million is what they have committed, definitely, they are seeing big growth in, well, context based ads. Wrong?

4. lets do a time machine thing. goto 2030. do u see indians living the net life? no? okay. move to 2040. now? who will build all these apps? the US firms for their lifetime cannot understand how to crack the indian mindset, online or offline. Wrong?
14. Neo said on November 3rd, 2006 at 7:26 am

Gud analysis
15. Madhur said on November 4th, 2006 at 11:52 am

itsyourstage,

All good points. you can find the numbers in the IAMAI reports. I think they project around $150 mn in ad revenues and around 100 mn Internet “ever” users (which means much less “real” users) in 2010.

As I wrote in the last couple of lines in the post, we definitely need web services like local search, maps, online transactions, social networking hang out places etc. And like you said mostly likely one of the Indian companies will do it. What I am questioning is if India is ready for Web 2.0 in the near term (right now and in next 2-3 years). The reason being the lack of online ad market and Internet penetration that support other web services.
16. Sushil said on November 5th, 2006 at 7:56 pm

So is there a implied inference here that
1) Ad based funding to Indian websites is a long shot ?
2) There is a bigger opportunity for web services like maps, money transactions, bill payment servies, shopping services [ services those provide some kind of utility ] in India and they have higher potential than Web 2.0 ish companies
3) A more suitable exit strategy for an Indian web 2.0 company would be to be acquired by bigger players ?
17. iLeher » India Strategy Series: Experiment with different services and steadily build a loyal user base- All about Internet industry in India said on November 6th, 2006 at 7:35 am

[...] I asked a question last week that generated a lot of discussion. In that post, I had concluded that market is hot and there is definitely a need for some of the Web 2.0 services like online social networking joint, India specific news/media sharing etc. Now how to take these needs and turn them to viable business models with the constraints of operating in Indian market (less Internet penetration, small online ad market) is the interesting aspect of it. There are a lot of players and they are applying different strategies to work through these constraints and make their model more appealing than others. I am talking to some of the players in the market and getting their views on the strategy that they are using and why do they think their model will succeed. In this series, I present one strategy in each post as quoted by these players to me. I do not know how well these strategies are going to work, just bringing them to fore to have discussion around them and see where they go. [...]
18. Madhur said on November 7th, 2006 at 7:07 am

Sushil, your points are correct. Purely relying on ad model may not work well in the short term unless you really have a HUGE number of eyeballs. Traditional transaction oriented services are definitely in a better situation to monetize their traffic. And yes, some of the players are actually following the strategy of building up a good user base and getting acquired.

-Madhur
19. iLeher » $1.5 million funding for Meravideo - joke or sign of boom?- All about Internet industry in India said on November 12th, 2006 at 10:48 pm

[...] Reality check I tried to contact Meravideo to get the real scoop, but there has not been a response so far (rather I did get a response that they would love to chat about this, but haven’t heard back since then). Personally, I think India is not really ready for video right now (I might be wrong, but I would not invest my time/money in doing this type of thing considering the Internet and more importantly broadband penetration and the online ad market, more details here). I know that a simple strategy is to build up a large user base and get acquired by a big company, but then again, would any big company be interested in acquiring such a site that is full of mostly sleazy bollywood videos? [...]
20. pavan said on November 23rd, 2006 at 6:30 am

excellently done research based on analysed future in online marketing. the success can be looked into recent IPO of infoedge in stock market. the company given guidlines where the growth of company for next three year will be 103%. that’s itself tell E-markting is at it inital stage.
21. iLeher » No money for early stage ?- All about Internet industry in India said on November 30th, 2006 at 2:54 am

[...] We have asked if India is ready for web2.0 here. Also we raised our concerns about our booming internet industry here. Although we have our doubts about the industry, we are seeing a lot of money flowing into India recently. We saw guruji.com grabbing $7 million and then we saw sulekha getting $10 million and more recently we see that travelguru, the leading travel portal got $15 million. See a comprehensive list of investments here. We have stats and reports of VC firms raising billions of dollars to invest in India. New funds are coming into existence every day raising even more money. But the point to note here is that most of the investments we have seen till date are either late stage in nature or in the companies that mimic proven business models elsewhere. Some of the companies we recently interviewed like redbus here, onyomo here and picsquare here are all still working on angel funding. These companies are more or less in early stage now. The feeling we got after talking to them was that the VCs are queued up on the sidelines. VCs don’t want to miss the opportunity when the time comes but they don’t want to move in unless they see some traction in these markets. Is it the traction or is the risk of investing in early stage Indian startups way too high? [...]
22. kamal said on January 10th, 2007 at 7:36 am

Hi,

Did you see Rediff Q&A ?

http://qna.rediff.com

kamal
23. Ro said on February 1st, 2007 at 3:26 am

Hi Lads….am very impressed to find this community and also by the quality of discussions. I am in the funding side of business and quite active in TMT in Asia.

My opinion is that India is not yet ready for Web 2.0. Why??

1. The net penetration is poor. Speed needed for some successful models are yet to be acheived in India.
2. Online transactions are yet to be accepted by the general masses.
3. Most of the net users on the networking scene want quantity rather than quality. They want to see a bunch of chicks on the network. Local startups cannot acheive this critical mass. Orkut has it already.
4. Ad spending will increase only when the right customer segment could be targetted and thats not happening.

Mobile content is the one to look out for. Its not as strictly regulated as in other countries. Still open for quality. You will see some new ventures coming in very soon. One that I know of is preparing its launch after success in Europe.

All the best !
24. Sanjay Mehta said on February 1st, 2007 at 9:19 am

Madhur,

Good analysis. A few alternate thoughts on this:
1. Maybe our web 2.0 sites do not generate the kind of numbers that attract the mass media advertiser. But if there is a well defined demography which promises to be a very targetted market, relevant advertisers will still pay larger money to reach out to this (smaller) market.

2. 8 million users of a target profile is pretty interesting, I would believe. There are many postings here and at other places that have talked about making a 1 mn x Rs. 500 (give or take a few) marketplace (and how that could be a great business idea). If you have a target profile of 8 mn from which you need to get this 1 mn, its not a bad place to start at.

3. Current sites that take up the ad dollars, are doing so, mostly, for want of good competition. Where is the real value offering to an Internet user in India?? No, seriously, most times, all I am seeing is an easy replication of an internationally accepted model, without a serious effort to understand how India is different. I cannot over emphasise the need to give true value to your user.
That does not come, I am afraid, by simply replicating a netflix or a youtube or a facebook, here.
- ours is not such an isolated society model, where we spend weekends alone at home, making our microwave popcorn and seeing a rental video. We have our karwa chauths and our thread ceremonies to attend, and our religious discourses to go to, or our cousin’s brother-in-law’s wedding to attend, or of course, our joint families are there to keep us busy. Is video rental a really great model for India?
- when the amateur home video concept never came to India (I have not heard of an Indian TV equivalent of the best home videos show here), how many of us will have our videos to feed to a youtube equivalent??
- our kids are not looking for virtual support systems (usually). They are free to go around and mingle with their friends, call the friends over home, visit their friends, hang out at Cafe Coffee Day, etc. Is there a serious need for a Facebook equivalent? Will it get rampant usage, if it happened here?

Ok, things are changing, and our social and cultural context will be different in a few years. But my point is that we need to think out of the box, and see what can and will work here in India, instead of just looking outside and trying to adapt a model here.

And I have no doubt whatsoever, that if we focus differently, we will find many (not one, but many) applications that we can fit into the specific context of India. And THOSE will fly.

Being in the e-commerce field, I recognise, for example, that in our society, catalog shopping never really happened. Due to which reason, we are not quite accustomed to shopping for a product by just looking at its picture. That makes the challenge for e-commerce harder. Does that stop me from thinking about e-retail? No, but when we enter the Indian market now, we have a different strategy in place, which (hopefully) will be relevant to the context here.

I guess, newer models will emerge and some of what we extrapolate right now, may not quite pan out that way, because of new factors that we do not even know or see today, coming into the equation, over the next 1-3 years.

- Sanjay
25. Madhur said on February 2nd, 2007 at 8:19 am

Rohit and Sanjay,

Thanks for your insights here. I think we all agree that copying idea from Western market is not going to work in India. We need to invent our own models to make interesting offering for Indian audience - mobile play definitely being one of them.

Madhur
26. Saurabh Jain said on February 14th, 2007 at 7:00 pm

I’d like to keep the business model completely out of the picture for a second (and yes, for the record, I don’t believe running an adsense program on your web app will make you enough money to sustain it for long)

The reason I feel, why we are not seeing a burst of activity in the Web 2 point o’ sphere at the moment in India, is because we don’t have the base services which others in the U.S build off of.
You can’t get directions of Google Maps here (though mapmyindia is a very refreshing sight), hardly anyone is familiar with sites like flickr, reddit, digg, google calendar, etc.

With hardly anyone, I mean the general masses and not the early adopters …

If you compare India, with a place like Silicon Valley, where you can expect everyone to know what digg or flickr is, you start thinking on the lines of - “what can I do next”.

Back here, by the time you come to a “next” idea, its already been implemented elsewhere …

Once the general mass comes to accept and use such other 2.0 services, it will become easier building off them and making cooler apps.
So, I’m guessing, we’ll have to either wait till the masses get a touch savvier or we’ll have to do something to push it ourselves …

Please pardon me if I am talking gibberish, just in my twilight zone right now …
Just wanted to get these random musings off my chest …

- Saurabh
27. Vivek Garg said on February 15th, 2007 at 8:57 pm

Saurabh, You are talking about innovator’s dilemma and you are dead on. In markets like india, you need inventors and these people will not necessary the ones who make money. They will educate people and create market opportunities. Then, comes the services you talk about. who will find it easier to make money as they will not have to educate anyone.

for an interesting read about this general idea. look at our analysis on madhouse.

http://ileher.com/2007/01/09/online-dvd-rental-behind-the-curtains-with-madhouse/
28. Rajesh said on April 12th, 2007 at 10:08 am

Ad revenue figues quoted above.
“Yahoo = $7 million
MSN = $4 million”
Very questionable ad revenue numbers. If these are indeed from Business Today, let them hire a new IT editor.
29. Sandip Maiti said on April 18th, 2007 at 5:08 am

Indian users adapt very fast. That has been our experience at zimoz.com (a web 2.0 property started out of Mumbai) over past 3 months.
30. Web 2.0 in India said on September 10th, 2007 at 5:36 pm

150 million USD in ad revenues may sound big or even worth competing to some, but when you compare it to the more matured markets like UK and USA, it’s peanuts. Google UK’s daily online ad revenue is 4 million GBP PER DAY. Yearly Google UK is looking at 1.8 Billion US Dollars.

I definitely agree with the above sentiment, that if you’re looking to make it big on the internet, content based advertising targetted to Indian audiences is not what you’re looking for. No wonder VCs are financing only retail orientated online businesses.

Regards
Arjun Sandhu

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