Friday, February 23, 2007

Internet India

In the early days, the Internet industry in India lagged the U.S. due to government control on access. Videsh Sanchar Nigam Limited, which was state-owned at that time, launched Access Services in India in August 1995. For the first four years VSNL had the monopoly on access in the country providing mostly dial-up service. The limited bandwidth and slow speed restricted the quality of content that was available. During the first three years of VSNL's monopoly, the Internet subscriber base grew very slowly reaching 140,000 subscribers by the end of March 1998. Companies such as Rediff.com and Sify emerged and were able to provide quality localized content and service, but growth in Internet penetration was slow. In November 1998, the government ended VSNL's monopoly and allowed the entry of private companies into the access business. The entry of these players provided much needed competition and the resulting drop in prices spurred a surge in subscriber growth. Between March 1999 and March 2001 the subscriber base grew from 280,000 to 3 million (mostly dial up). The dot com bust happened in India as well and many Internet-based companies went under, reducing the quantity and quality of content/application available online. The classic chicken and egg situation emerged, whereby consumers had little motivation to go online since content/services were not available and hence business models could not be created on the back of low Internet penetration and critical mass of users. Surprisingly, a country known for its tech prowess is highly underdeveloped in its own infrastructure and adoption levels, PC penetration in India was in the low-single-digit per 1,000 people and currently stands at approximately 6 PCs per 1,000 people. The lack of compelling applications kept PC penetration at these abysmally low levels. Email/chat had been the primary reason for Internet access (and continues to be), but lack of ubiquitous access curbed the growth of this killer application. In the meantime, the mobile revolution was overtaking India with intense competition among carriers driving down plan prices. Lower prices and difficulty in obtaining landlines (which were still controlled by the government), significantly augmented the value proposition of mobile phones. This trend still continues, in the April-July 2006 time frame, mobile gross ads were 18.2 million while fixed line gross adds were only 0.58 million. The total number of mobile subs in India as of July 2006 was 111 million or 10% penetration of the total population. The ubiquity of cell phones drove the use of SMS as the leading method of communication and this still continues for both business and personal purposes.

Currently, the number of Internet users in India is pegged at approximately 45 million. The government has loosened its restrictions on access and private companies have entered the Internet market, thereby, driving growth. Of the 45 million online users, only approximately 10 million would be considered power users, i.e., someone who regularly uses the web for research and ecommerce. Approximately 70% of the population accesses the web from cafes. Most Internet subscribers in India continue to use dial up, although broadband is growing slowly. There are currently only 1.7 million broadband subscribers in the country versus approximately 40 million in China. The primary use of the web is for communication, and even then it lags the mobile phone. There are more than 100 million mobile phone users in India, and most of them use SMS as their primary means of communication. The current communications game seems to have been won by mobile, but the Internet has a natural advantage in the research/ecommerce function and can very well win round 2. Online advertising is expected to grow at a CAGR of 50% from 2005 to 2010; however, the absolute numbers are still small (expected to be around $57 million for fiscal year ending March 2007). We believe the actual growth could be much higher than anticipated, due to investments from global companies such as Yahoo! and Google, the emergence of ecommerce companies, significant venture funding over the last year, and additional monies being allocated to advertising and marketing. Ecommerce is expected to grow at a CAGR of 72% from 2005 to 2010; though as the absolute numbers are still small (expected to be about $500 million for fiscal year ending March 2007). Initial ecommerce companies had faltered on execution but the new entrants appear to have well thought out business plans, especially, online travel, matrimonial and jobs-based companies. Currently, credit cards are estimated at about 25 million in a country with a total population of more than one billion. According to PhoCusWright, online travel gross bookings in India totaled $295 million in 2005 and this should grow to approximately $2 billion by 2008. Companies such as Makemytrip.com (the largest travel portal in the country), InfoEdge (which owns naukri.com, the largest job portal) and Shaadi.com & Bharatmatromony.com (matrimonials) have paved the way with simple value propositions, that have resonated with Indian audiences. Due to the limited online population and the smaller subset of researchers and purchasers on the web, the concept of assisted Internet has taken root in India. This involves Internet-based companies opening retail storefronts throughout the country. Companies involved with jobs, matromonials and online discount brokerages have gained significant traction with this "clicks and bricks" strategy and continue to grow their physical presence. The Indian constitution recognizes 25 languages, while the total number of languages in the country exceed 1,600, causing significant fragmentation. Depending on the source, the number of English-speaking people in India ranges from 150 million-300 million. According to the 2006 National Readership Survey, the top-10 dailies in terms of readership were not in English. Most Internet companies have made efforts to offer content and services in other languages as well. Both Sify and Rediff offer their content and email in various languages (Rediff offers its email in 11 languages). The Internet behemoths - Yahoo!, Google and MSN also recognize this opportunity and are now offering search capabilities in Hindi. Service companies, especially the matrimonial companies, are expanding aggressively into different languages. What is really needed in India is a killer application that drives consumers not only to the web, but to obtain a broadband connection. The next killer application could be in education, ecommerce, entertainment or gaming. Companies such as Educomp are pioneering the use of digitized content in schools, although the current model works within the school network only. It has also developed an online strategy and recently launched Mathguru.com, which saw 2,500 registrations in two weeks of the launch. Once students (and parents) see the benefits of eLearning in their schools, there will be an increased motivation to have a PC at home. Through Sifymax.com, Sify is attempting to create an entertainment portal relying heavily on multimedia content. The site features a combination of exclusive and non-exclusive content for music, movies, lifestyle, business, sports, etc., and has given it the early mover advantage. Already the company is seeing about 130,000 clips viewed/downloaded everyday. The company has also created city-specific content for Bangalore and Mumbai. The government in India is emerging as the fourth largest buyer of information technology (after the telecom, manufacturing and banking and finance industries). It is estimated that the government accounts for approximately 15% of the IT spend in India. The maximum benefit will be from projects that drive Internet penetration deep into India's smaller towns and villages where 70% of India's population lives. The Indian Internet advertising and ecommerce industry is still small. There are several gating factors including broadband penetration, PC penetration and lack of compelling content/applications. The industry still has a way to go before it reaches critical mass. Yahoo! and Google are investing in and evangelizing the industry, but it will require a concerted effort from corporates and government to pave the way for strong, sustainable growth.
Thanks KAUFMAN BROS. RESEARCH, 2006.

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