1. India goes Digital
A Birdseye View of the Indian Digital Consumer Industry
.com
AVENDUS

2. November 2011
AVENDUS
Dear Reader,
Aashish Bhinde
The Digital Consumer industry in India has made a surprise rebound into the public eye.
aashish.bhinde@avendus.com
Over the last 6 months, reports of internet and mobile start-ups have become a regular
Karan Sharma feature in all forms of media. Deal activity has been growing at a frantic pace. There is
karan.sharma@avendus.com excitement in the entrepreneur and investment community, and most importantly, among
consumers. If online travel and classifieds were the star performers of the last decade,
Sanchit Suneja e-tailing seems to be hogging the limelight this time around. Inevitably, valuations have
sanchit.suneja@avendus.com become the subject of cocktail party conversations.
Anshul Agrawal When we started talking to investors and entrepreneurs in the industry, a few common
anshul.agrawal@avendus.com themes kept coming up. Despite the overall excitement, a tinge of scepticism remains.
Have we really crossed the chasm? Is connectivity actually growing the way we need it
Kanchan Mishra to? What about payment systems - how do we get people to actually spend money on
kanchan.mishra@avendus.com the net? And so on…the ghosts of 2000 seem to be very much around and kicking.
For every bear, there is a bull out there. “Winner takes all”, say some. “The defining
trend of our times”, say others. Investors have pumped in money in a host of digital
start-ups this year. And the business traction seems to be growing.
But how far will this go? Or more pertinently, at what pace will the potential unfold?
In this report, we have attempted to construct a factual perspective of the Digital
Consumer industry as it stands today. We start with a detailed look at the Indian
ecosystem to identify growth drivers, pain points and emerging solutions. Next, we
break-up the digital consumer market into it’s underlying sub-segments and provide you
with an in-depth perspective on each of them. In addition to data and views on the
Indian Digital Consumer market, we have tried to provide extensive benchmarks with
global markets to enable each of you to apply our own filters and form a well-informed
and personal view of the potential this industry holds.
We confess to having started on this report as sceptics ourselves - concerned as we
were by the nature of the ecosystem and the depth of the industry. As we progressed
through this study - capturing data, speaking to more than 50 leading industry
participants and looking at global benchmarks - we found ourselves gradually shifting to
the other side. We hope the data & analysis helps you, the reader, to form your own
perspectives on the industry.
This report, as the name suggests, is focused on consumer facing (B2C) businesses.
Even though we are big believers in the value digital media holds for B2B businesses, we
haven’t covered those in this report.
We felt the dynamics in that segment are different and better dealt with separately.
Finally, this report is an attempt to collate as much secondary data we could gather from
disparate sources and combine that with perspectives and insights lent by industry
practioners we spoke with. We welcome feedback from each of you and apologize if
anything we’ve written (or missed out) offends anyone’s sensitivities.
We trust you’ll find this report useful as you formulate your own thoughts, and look
forward to a continued, meaningful dialogue with you as this exciting industry evolves.
Aashish Bhinde
Executive Director, Avendus Capital
1

3. Prologue 3 :: 7
Is the Ecosystem Keeping Pace? 8 :: 39
Consumer-facing Business Models 40 :: 119
Global Models, Desi Adaptations 120 :: 135
How to Spot the Winners? 136 :: 139
.com Investment Activity 140 :: 154
Annexure 155 :: 158

4. Acknowledgements | Disclaimer
AVENDUS
Acknowledgements
This report is the culmination of efforts of several people who contributed their views and
others who worked tirelessly to compile secondary data and conduct interviews of
industry practitioners.
Firstly, we are grateful to each of the entrepreneurs, investors and industry professionals
who lent their insights which helped enrich the perspectives we have been able to
articulate in this report. We would also like to thank Amit Garg and K. Valliappan of MXV
Consulting who provided outstanding support to our team for compiling data and
conducting the analyses. We would like to thank Comscore India for providing data that
facilitated our analysis.
Disclaimer
This report is not an advice/offer/solicitation for an offer to buy and/or sell any securities in any jurisdiction. We are not
soliciting any action based on this material. Recipients of this report should conduct their own investigation and
analysis including that of the information provided. This report is intended to provide general information on a particular
subject or subjects and is not an exhaustive treatment of such subject(s). This report has been prepared on the basis
of information obtained from publicly available, accessible resources. Company has not independently verified all the
information given in this report. Accordingly, no representation or warranty, express, implied or statutory, is made as to
accuracy, completeness or fairness of the information and opinion contained in this report. The information given in this
report is as of the date of this report and there can be no assurance that future results or events will be consistent with
this information. Any decision or action taken by the recipient based on this report shall be solely and entirely at the risk
of the recipient. The distribution of this report in some jurisdictions may be restricted and/or prohibited by law, and
persons into whose possession this report comes should inform themselves about such restriction and/or prohibition,
and observe any such restrictions and/or prohibition. Company will not treat recipient/user as customer by virtue of
their receiving/using this report. Neither Company nor its affiliates, directors, employees, agents or representatives,
shall be responsible or liable in any manner, directly or indirectly, for the contents or any errors or discrepancies herein
or for any decisions or actions taken in reliance on the report.
*Comscore data is for 46 million Internet audience above 15 years of age accessing Internet from Home or Work
2

5. Prologue
Ÿ
A Global Megatrend
Ÿ Online
India

6. Prologue
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A Global Megatrend
For those who came in late ::
Ÿ are over 2 billion Internet users in the world (almost 1/3rd of the world
There
population)
If Facebook were a country, it would be the third most populous in the world
Ÿ
Taobao has over 400 million registered users, more than the population of United
Ÿ
States
Ÿ has become the biggest music vendor in the world within 6 years from its
iTunes
launch
Pandora (an Internet radio website) is the largest radio station in the world today
Ÿ
Zynga’s valuation is now believed to be higher than that of offline games veteran
Ÿ
Electronic Arts
m-Pesa processes more transactions than Western Union all around the world
Ÿ
Internet is now the single largest channel for advertising in the UK
Ÿ
Today, there are over 2 billion Internet users across the world, spending over 23 hours a
month online. In the US, the Internet accounts for one-third of all media consumption.
6% of the world’s retail sales and 14% of advertising are now over the Internet. In the
UK, the Internet is the single largest advertising channel.
The UK, US and Japan have traditionally been the front-runners in online adoption.
Inevitably, China has come to the party - doubling its online market size every year over
the last 3 years, with 4% of retail sales having moved online in China by 2010.
Besides the obvious significance of the numbers, the Internet has also brought
significant changes to the way businesses are being conceptualized and run. Zynga, for
instance, combines gaming and social networks. Streaming services from Netflix and
Hulu are disrupting the TV business in the US (and we don’t even know the real story on
iTV as yet).
Social media is assuming center stage in how businesses are engaging with customers.
Most companies have a social media strategy in place. Coca-Cola expects to spend as
much as 20% of it’s advertising on social media this year. Cloud based technologies are
becoming a reality with high levels of adoption across enterprises and consumers.
Salesforce is a leading CRM solution in the enterprise space, while newer players like
Dropbox and Sugarsync are witnessing increased traction among SMEs and consumers.
Location and mobility based services are also beginning to evolve, with players like
Zipcar, Foursquare and Zagat getting significant traction. Adding to the excitement is the
growth of smartphones and tablets. In 2012, cumulative sales of such devices shall
overtake those of PCs. 1 in 4 persons in the world shall be accessing Internet on a smart
phone. In Japan, over 20% of online advertising spends have already moved to the
“mobile Internet”.
The impact of the Internet is everywhere - to the point where we don’t even notice it
anymore.
3

7. Prologue
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An investment rush
The digital consumer industry can probably lay claim to being the first mega-industry
built around VC and PE investments. Start-ups have provided the innovation and
investors have enabled them to create scale. And the trend continues. In the first half of
2011 itself, VC investments in the US were estimated at $3.7 billion, close to the total
investments in the sector in all of 2010. (Exhibit 1)
Exhibit 1 VC investments in the US digital consumer industry
10 1,000
Value $ bn 915 928
Number of deals 857
796
8 800
729 7.4
Investments in $ billion
669
616
6 600
No of deals
530 5.1 5.1
452 441 4.4 4.4
4 3.5 400
3.4
3.1
2.7
2.2
2 200
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E
Note: 2011 value annualized based on H1 investments
Source: Moneytree VC Investments Q2 ’11 – national data (National Venture Capital
Association)
The rewards have been high for those who have believed in the potential of this sector.
Amazon’s market value has increased 230 times from its IPO value, an annualized gain
of 47% over 14 years. Google’s market capitalization has increased 7-fold since its IPO
in 2004 - and most people thought it was overvalued at the time.
The digital consumer industry has demonstrated superior performance compared to the
overall market. The Internet index of NASDAQ (QNET) outperformed the NASDAQ
composite index from the beginning of 2007 till October 2011. While the NASDAQ
composite index delivered annualized returns of a mere 1.3%, QNET clocked 8.8%
annualized returns during the same period.
More recently, LinkedIn, the professional networking site, doubled its market
capitalisation on IPO. Despite its travails, Groupon had a $700 million public offering this
month - the largest since Google. And the pre-IPO valuations attracted by Facebook and
Zynga have only heightened investor interest.
4

8. Prologue
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Exhibit 2 IPOs in 2011
Company Valuation Category
($ billion)
Groupon 12.80 Group buying
Yandex 8.00 Russian search engine
RenRen 5.50 Social network
LinkedIn 4.30 Professional networking
Pandora 2.80 Internet radio
Qihoo 360 1.68 Browser and portal
Phoenix New Media 0.83 Online news portal
Jiayuan 0.35 Dating social network
Source: Press articles, Bloomberg
India Online
For many of us, the Internet is now an indispensable part of our lives and we hardly even
notice the touch points (Exhibit 3). Annexure A captures some of the important
milestones in the evolution of the digital consumer industry in India.
Till last year, however, the Indian Internet story was limited to virtual goods and services
– tickets, classifieds and ringtones - physical retail had been stubbornly slow to take off.
Issues around connectivity, consumer trust, supply chain capabilities and payment
solutions were generally cited as insurmountable dampeners.
India :: A country going digital
80 million Internet users
Ÿ
10 million 3G connections within 6 months of launch, almost equal to the base of
Ÿ
wireline broadband connections
Ÿ 2nd largest user base for Google+ and Orkut in the world
The
Ÿ of travel gets booked online; 117 million transactions on IRCTC alone
28%
Ÿ of the classifieds business is online
47%
Ÿof bank users in India access their accounts online
7%
Ÿ of IT returns were filed online in 2010-11
25%
Ÿ to 50% of music revenues in India comes from mobile downloads
Close
Over the last few months, e-commerce has become mainstream news. E-commerce
companies are reporting double digit growths on a month-on-month basis. Some are
recording revenues in the region of a Crore a day - rivaling retail brands that have been
around for more than 10 years. A leading e-tailer expects to increase its revenues 5X
this year. In South Bangalore - arguably India’s most tech-savvy acreage - companies
5

9. Prologue
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are deploying dozens of courier boys to provide personalized delivery services. Cricket
matches are interspersed with ads of Internet companies. Site traffic statistics have gone
up by 150-200% between May and September this year itself. And the pace is only
increasing.
The new poster boys Blazing the trail
But still, several questions remain ::
Ÿ quality of Internet connectivity good enough to drive consumption online?
Is the
Ÿ payment infrastructure ready to support large scale e-commerce growth?
Is the
ŸIndian consumers really ready to embrace e-tailing? How many are actually
Are
transacting?
Ÿ ready is the supply chain infrastructure to handle direct consumer deliveries?
How
Ÿ have the right talent and environment available within the industry?
Do we
Ÿ is the path to profitability?
What
We start by taking a look at the ecosystem.
6

10. Prologue
Exhibit 3 A day in the life of the digital consumer
Buy a Diwali
gift online
for mom
Pay electricity
bills online
Look for a
lunch deal
12
11 1
Choose
Tweet about location for
the meeting next month's
10 2
holiday
Locate route
to client's
office through
Google maps
9 3 Book tickets
for a holiday
Check day's
8 4
meetings
on Google
Calendar Check score
7 5 at Cricinfo
6
Check Search for
Facebook a job online
Wake up with
an iPod
alarm app
7

11. Is the Ecosystem
Keeping Pace?
Ÿ
Access
Ÿ
Demographics
Ÿ
E-governance
Ÿ capital and
Risk
Entrepreneurship
Ÿ
Advertising
Ÿ
Payments
Ÿ
Supply chain

12. Is the Ecosystem Keeping Pace?
AVENDUS
As we understand it, the digital consumer ecosystem comprises several external and
internal components, summarized in Exhibit 4. While internal components can be
controlled by the industry, external components mostly remain outside their direct
influence. External components often have a higher level of influence over the growth of
the industry.
Exhibit 4 Components of the ecosystem
Govt.
initiatives
Payments
Access Advertising Demographics
Supply chain
Risk capital/
Entrepreneurs
We have tried to capture the current status of each of these components and how they
are expected to evolve going forward.
8

13. Is the Ecosystem Keeping Pace? | Access
AVENDUS
Access :: The big story
80 million users, a long way to go
There are an estimated 80 million Internet users1 in India today, which represents a
penetration of 7% of the population (17% of urban population). This is significantly lower
than global benchmarks (average 31% of total population).
Exhibit 5 Internet penetration (%) – 2011
82%
78% 78%
World Avg. = 31%
36% 37%
7%
India China Brazil US Japan UK
Source: Internet world stats, Comscore
Fortunately, this is an aspect of the ecosystem that is witnessing heightened activity on
various counts. This includes the commercial launch of 3G mobile services in early 2011
and the launch of 4G broadband recently by one player (with others slated to launch in
early 2012). There is also the National Broadband Plan 2010 conceived by the
government, which envisages government investments of Rs 20,000 Crore ($4.5 billion)
to build a National Fiber Optic Network.
We have conducted a detailed analysis of the growth trends of various technologies, and
expect the number of unique Internet users in India to reach 376 million by 2015 – close
to 5 times the current number.
Exhibit 6 Unique Internet users in India (in million)
35% Unique users (million) 600
Penetration (%) 29.5%
30% 500
25%
21.7% 400
20%
15.3% 300
15%
9.8% 200
10%
6.6%
5.0%
3.1% 3.9% 100
5% 2.5%
60 80 120 190 273 376
29 36 46
0% 0
2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E
Source: Avendus estimates
1
The number of Internet users is itself a matter of great speculation. One report has suggested 70 million. Google put out a number
of a 100 million sometime back. Another report suggests that the number is now closer to 120 million. An industry expert pegs the
number closer to 150 million. 9

14. Is the Ecosystem Keeping Pace? | Access
AVENDUS
PC-broadband is an important factor for driving growth in e-commerce
Among the multiple parameters that determine status of Internet access/connectivity in a
country, PC broadband is perhaps the most significant. This is because, at least from a
rear view mirror perspective, there has been a high level of correlation between
penetration of e-tailing and penetration levels of PC broadband across countries.
(Exhibits 7 and 8)
This is understandable, considering that broadband plays a vital role in improving the
online experience of users. That results in increasing the time spent by users online,
which in turn leads to an increase in online spends.
Exhibit 7 PC broadband penetration vs. online retail penetration (%) - US*
5% 90%
78%
76%
74%
70% 71% 4.0%
Internet/ broadband penetration (%)
4%
66%
63% 3.6%
60% 3.4%
E-tailng penetration (%)
64% 60%
62%
2.9%
3% 50%
44% 2.5% 51%
2.1% 45%
37%
2% 31% 1.8%
36%
1.4% 30%
28%
1.1%
0.9%
1% 20%
0.5% 14%
0.2% 9%
1%
4%
0% 0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Internet penetration (%) E-tailing penetration (%)
PC broadband penetration (% households)
* E-tailing and broadband penetrations are shown on different scales
Source: US Census Bureau E-stats
Exhibit 8 PC broadband penetration vs. online retail penetration (%) - China*
6% e-tailing 28.2% 30%
Penetration (%)
24.0%
Internet/ broadband penetration (%)
20.0%
E-tailing penetration (%)
4% 20%
3.3%
16.1%
12.5%
9.1% 2.0%
2% 10%
1.4%
0.7%
0.3% 0.4%
0% 0%
2005 2006 2007 2008 2009 2010
*E-tailing and broadband penetrations are shown on different scales
Source: JP Morgan Nothing but Net 2011, China e-commerce market statistical report
January 2011
10

15. Is the Ecosystem Keeping Pace? | Access
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Number of PCs is not a constraint
Availability and costs (device and usage charges) are the two key factors determining
Internet adoption.
Currently, there are 55 million PCs in India as against 15 million PC broadband
connections. PC penetration, though low, has not been the constraining factor. A BCG
estimate suggests that the number of PCs in India will reach 216 million by 2015, making
it a non-constraining factor.
Broadband availability and cost are the major constraints
Prices of broadband connections as well as availability have been the bigger constraints
to the growth of broadband in India. Broadband prices in India remain among the
highest in the world. Unfortunately, the expectation that the success of India’s telecom
sector in driving mobile penetration would be leveraged to drive broadband penetration
has not been realized this far.
Availability has also been a sore issue, as the infrastructure to reach homes through
DSL, digital cable or fiber was just not present across a major portion of the country.
The problem is being faced even in the metros, with several areas still facing service
gaps.
Competition between different technologies is likely to fuel growth
Currently, the number of PC broadband connections is estimated to be 15 million. DSL
has been the primary driver of this - accounting for 10 million connections. While cable
and wireless fixed connections have struggled to gain significant traction, CDMA dongles
have grown very rapidly to become the second biggest contributor at 4 million
connections.
The introduction of 4G in the Indian markets is expected to be the next game changer2.
We expect the growth in PC broadband to be driven by Dongles and 4G Broadband.
Dongles have gained significant traction through attractive pricing, and the quality of
connections offered. This has been possible due to the declining voice usage on the
CDMA space, freeing bandwidth for data usage. There have also been significant
investments in moving towards next generation technologies, which help in reaching
speeds close to 10 Mbps.
4G is projected to achieve a 9% penetration globally by 2015, and is likely to translate
into 28 million connections in India by 2015. However, we remain cautious on our
estimates for 4G since the technology is new and no country has seen mass adoption as
yet. We estimate around 17 million 4G connections with half of them catering to PCs by
2015
Cable broadband, though a significant contributor to broadband Internet access in other
countries, has seen lukewarm performance in India. This is because the Indian cable
industry is highly fragmented and unorganized. Large parts of the cable network still
work on analog technology. Local cable operators (who control last mile connectivity to
the consumer) have been resisting adoption of digital technology to protect their turf. We
2
We also have the National Broadband Plan 2010, under which the government is planning to invest Rs 20,000 Crore in building a
National Fiber Optic Network. However, implementation issues with the previous plan cause us to be cautious about factoring in a
dramatic impact of the current plan 11

16. Is the Ecosystem Keeping Pace? | Access
AVENDUS
therefore remain guarded in our projections of cable broadband as well. Having said
that, there could be a significant upside to our projections of cable broadband
subscribers, because several factors (including government regulations and demand
from consumers) could fall in place leading to mass digitization of cable networks in
India. Once that happens, the industry could attract the much needed investment from
institutional players to drive cable broadband penetration.
We also expect the growth of DSL to slow down due to the continuous decline seen in
wireline phones over the last decade. Having said that, if the National Broadband Plan
even partly succeeds in what it intends to do - provide 10 Mbps connections to all
homes in top 63 cities through Fiber-to-Home connections, and Fiber-to-Kerb in all other
cities - we may have a significant fiber optic upside as well.
PC broadband penetration to reach 15.6% of households by 2015
Summing up, we estimate India will have 39.3 million broadband connections, a
penetration of 15.6% of households, by 2015. We believe this is a reasonably
conservative estimate that doesn’t factor in the upside of various initiatives that are
underway translating into hypergrowth.
Exhibit 9 PC broadband connections in India (in million)
45
39
40
Cable
35 Wireless fixed
32
4G - PC 9
30 Dongles
26 4
DSL
25
1
20 13
20 12
15 9
15 6
11 4
10
6 2
4
5 2
5 8 10 12 14 15 15
2 3
0
2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E
Source: Avendus estimates
Mobile broadband to be the primary driver of overall Internet penetration - 3G to reach
22% of the population by 2015
Besides PC broadband, there is a massive mobile broadband phenomenon underway.
3G services have acquired 9 million connections within 3 months of launch. We expect
this number to improve significantly in the coming years.
Smartphones are becoming more and more prevalent, with the lowest priced
smartphone being available at Rs 3,000 (~$65) already. This number is expected to
further go down to reach Rs 2,000 (~$45) in early 2012, potentially opening the
floodgates for smartphone adoption. A McKinsey estimate puts the number of
12

17. Is the Ecosystem Keeping Pace? | Access
AVENDUS
smartphones in India at 450 million in 20153.
The declining voice ARPUs of Indian mobile operators and the need for increased data
revenues is a well-documented story. Mobile operators are under immense pressure to
make 3G work in India due to the investments (Rs 67,719 Crore - $15 billion - in license
fees) which they have made and the cost of infrastructure building (estimated at Rs
248,000 Crore ($55 billion), similar to China). We expect operators to continue their
marketing push on 3G services and drive innovation on pricing - resulting in 279 million
connections by 2015. This is in line with global penetration trends. (Exhibit 10)
3G pe busy!
Exhibit 10 3G penetration growth
India Japan 86%
78%
69%
58%
22% 45%
28%
13%
2%
2003 2004 2005 2006 2007 2008 2009 2010
15%
China 30%
18.8%
11.3%
1% 3.8%
10%
2009 2010 2011 2012 2013
US 40%
4% 27%
18%
7%
1% 3%
2012 2013 2014 2015 2004 2005 2006 2007 2008 2009
Source: Avendus estimates, Morgan Stanley Research – Internet trends 2010
3
“Can India lead the mobile-Internet revolution,” McKinsey Quarterly, February 2011 13

18. Is the Ecosystem Keeping Pace? | Access
AVENDUS
Exhibit 11 Internet connections by type (in million)
0.6 2
1.6
2.2
3.4 13 51 120 196 288
3.8
6.3
7.0
10.7
10.5
15.5
14.8
20.0 19.2
21.1
25.6
6.6 6.7 6.4 5.7 5.6 32.4 39.3
5.1 4.7 4.3 4.0
2007 2008 2009 2010 2011 2012 2013 2014 2015
PC narrow band connections (million) Mobile narrow band (million)
PC broadband connections (million) Mobile broadband (million)
Numbers represent the number of connections and not the number of Internet users
Source: TRAI – telecom industry quarterly performance reports, Avendus estimates
While talk about the promise of mobile Internet is all good, the on-the-ground impact it
would have on advertising and commerce is yet to be fully understood. This remains a
nascent market globally, as can be seen from the size of m-commerce industries in
different countries.
Exhibit 12 3G as % of broadband vs. m-commerce as % of total e-commerce
Mobile commerce
as % of total
e-commerce
202 Mobile connections as
% of total broadband
connections
155
145
61%
123 126
74%
93
78
32%
50 49
12.1% 20.3%
9.4 0.8% 10.0
1.2
China US Japan
E-commerce revenue ($B) m-commerce revenue ($B)
Total broadband connections (mn) 3g connections (mn)
China numbers are for the year 2010; US and Japan numbers correspond to the year 2009
14

19. Is the Ecosystem Keeping Pace? | Access
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Exhibit 13 Users by point of primary access of internet (%)
9%
36% 36% 37% 34% 27% 42% 59% 67% 72%
30% 26% 23% 37% 32% 19%
13%
9%
24% 7%
34% 38% 40% 29% 32% 19% 16% 14%
14%
10% 8% 6%
2007 2008 2009 2010 2011 2012 2013 2014 2015
Work (%) Home (%) Cybercafe (%) Mobile (%)
Source: IAMAI I-cube report 2010-2011
Time spent online by Indian users at 16.5 hours per month low compared to global
benchmarks, projected to reach 21 hours by 2015
Time spent online has a significant relationship with ad spends on Internet and hence is
expected to aid the growth of online advertising. Higher time spent online also increases
the chances of online spending by the consumers, thus aiding the growth of the e-
commerce industry as well.
Exhibit 14 Time spent online by Indian users
Average time spent online per person Average time spent online per
per day (Hrs) internet user per day (Hrs) - 2010
0.70
0.67
0.64 Japan 2.87
0.61
0.58
0.55
0.53
0.49 China 2.74
0.46
0.43
US 2.27
Brazil 1.07
India 0.55
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: BCG – The Internet’s New Billion (September 2010)
Total number of users transacting online in India at 8-10 million, expected to increase
to 38 million by 2015
The number which matters most to e-commerce players is the number of users actually
transacting online. At present, the total number of such users is estimated at 8-10 million
- about 11% of the online universe in India - a large part of this universe are users
15

20. Is the Ecosystem Keeping Pace? | Access
AVENDUS
transacting on Travel sites.
Number of unique users transacting on travel sites (only) are estimated to be around 6-7
million and for non-travel e-commerce sites is around 2-3 million today.
The total number of unique transacting users is expected to reach 38 million by 2015.
Exhibit 15 No. of users transacting online (in million)
Users transacting online (million)
38
CAGR = 36%
28
21
15
11
9
7
3 5
2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E
Source: Avendus estimates
Access in 2015 :: The facts that matter
80 million online users today, 376 million by 2015
Ÿ
Ÿ costs - PCs or smartphones are not going to be limiters to growth. Access and
Device
pricing will play the major role
PC broadband - the key driver for e-commerce growth - to have 15.6% household
Ÿ
penetration
Conventional wireline broadband likely to be eclipsed by the introduction of 4G and
Ÿ
the growth of CDMA dongles
Ÿ change the face of Internet access - creating access for 22% of the population
3G will
Shared, or public access will reduce in proportion as more people get personal
Ÿ
Internet access
Ÿ time spent online will grow by 27% per user - driving advertising and commerce
The
Number of transacting users to grow from 9 million at present to 38 million
Ÿ
16

21. Is the Ecosystem Keeping Pace? | Demographics
AVENDUS
Demographics :: Beyond metros
Tier I cities dominate, but penetration increasing fast across tier II/III cities and towns
The geographic distribution of Internet users has been skewed towards tier I cities till
date. However, the number of users in other cities and towns has been increasing
steadily, and this trend is expected to accelerate as the next 100 million users get
added.
This augurs well for the e-tailing industry as 30-40% of their total sales already come
from tier II/III cities. The penetration of modern retail in tier II/III cities is much lower than
that in tier I cities. The Internet has the potential to solve the availability issue faced in
these places.
Exhibit 16 Geographic distribution of users
29% 29% 30% 36% 37%
10% 12% 12%
11%
12%
20% 21% 21% 18% 18%
41% 38% 37% 34% 37%
2006 2007 2008 2009 2011
Top 8 metros* Other Metros 0.5 - 1 Million Less than 0.5 million
*8 metros : Mumbai , Delhi , Kolkata , Chennai , Bangalore, Pune , Hyderabad , Ahmedabad
** Excluding the 8 metros
Source: IAMAI I Cube report 2011
The digital-divide is reducing
The National Broadband Plan 2010 envisages Internet in every village by 2014, by
utilizing the Universal Service Obligation (USO) fund to build infrastructure. Private
players have also been playing their part in reducing the digital divide.
ITC’s e-choupal, for instance, is involved in building connectivity infrastructure across
villages to provide real-time market price information of crops to farmers. There are over
6,500 e-choupals in operation today, covering 40,000 villages across 10 states.
Similarly, Nokia lifetools, is a mobile subscription service, where one of the primary
services is the delivery of weather forecasts for the region through periodic SMS
updates. There are currently over 17 million subscribers to the service, making it one of
the largest mediums of information dissemination to the rural populace.
eFarm is another initiative that utilizes technology to create an efficient low cost supply
chain mechanism connecting farmers with the end markets.
17

22. Is the Ecosystem Keeping Pace? | Demographics
AVENDUS
Younger consumers driving growth
There is, expectedly, a bias towards a younger demographic online. We expect this trend
to accelerate, since technology adoption rates tend to be higher among younger people.
At the same time, the number of Internet savvy people in higher age groups will continue
to rise - improving the potential for commerce.
Exhibit 17 Age distribution of Internet users
Age group 2011 2015
Total users = 80 million Population (mn) Total users = 376 million Population (mn)
55+ 145 158
1% 9%
45-54 96 121
4% 28%
35-44 177 170
6% 37%
25-34 203 231
12% 45%
15-24 245 252
9% 40%
0-15 346 345
5% 17%
Internet Penetration (%)
Source: Comscore – State of the Internet with a focus on India (June 2011), Avendus
estimates
18

23. Is the Ecosystem Keeping Pace? | E-governance
AVENDUS
The e-governance imperative
The Indian government is also playing its part in promoting digitalization of everyday life.
While the primary role of the government is to ensure the right infrastructure and policy
framework in any industry, the Government of India is playing an important secondary
role too, by driving wide-scale usage of Internet technologies. E-governance is a key
focus area of the government, as technology adoption can help bridge the vast
infrastructure gaps that exist between urban and rural India. With inclusive development
being the key theme in India over the last decade, this assumes increased significance.
25% of income tax filings are now online
A case in point would be the movement towards e-filing of income tax returns, which was
made mandatory for companies and firms requiring statutory audit from assessment year
2007-08. In this case, the chances of voluntary consumer adoption are high - since
there are still multiple pain points in most of the services delivered by the government.
For the government, there is the advantage of improving the efficiency and transparency
of the government machinery. While refunds from the government took an eternity to
reach an assessee in the past, e-filing has helped accelerate the process significantly -
with refunds being processed even within a week of filing in some cases. The process of
filing income tax returns has also become much easier, with multiple websites offering
do-it-yourself services for filing returns. Consumer adoption rates show that the
consumers are more than happy with the movement towards e-filing of income tax
returns. Almost 25% of the returns filed last year were in the electronic form and it is
estimated that nearly three-fourths of all tax filings in assessment year 2015-16 will be
done online.
Exhibit 18 Number of tax returns filed (in millions)
25
75
32
29
9
5
2009-10 2010-11 2015-16 P
Offline Online
Source: SNK E-tax, Economic Times (21 June 2011)
19

24. Is the Ecosystem Keeping Pace? | E-governance
AVENDUS
The National e-Governance Plan
Adoption of technology in income tax processing though is just one of the several
initiatives being pursued by the government, under the National e-Governance Plan
(NeGP). The vision of NeGP is to:
"Make all government services accessible to the common man in his locality, through
common service delivery outlets, and ensure efficiency, transparency, and reliability of such
services at affordable costs to realise the basic needs of the common man”.
The plan comprises of 27 Mission Mode Projects (MMPs) - with clearly defined
objectives and timelines - which are being implemented by the central government
and/or the state governments. It involves a massive build-up of infrastructure such as
Common Service Centers (CSC) being established at every village in the country, and
large-scale digitalization of government records. The plan outlay is around $7 billion and
the targeted completion is by 2014. 15% of the plan outlay is being utilized for building
infrastructure that will get utilized across projects.
Apart from this, most state governments also have taken initiatives in the
e-governance/m-governance space.
Exhibit 19 List of projects under NeGP, and other state government initiatives
Central MMPs State MMPs Integrated MMPs
Banking
Ÿ Agriculture
Ÿ CSC
Ÿ
Central Excise &
Ÿ Commercial Taxes
Ÿ e-Biz
Ÿ
Customs e−District
Ÿ e-Courts
Ÿ
Income Tax (IT)
Ÿ Employment
Ÿ e-Procurement
Ÿ
Insurance
Ÿ Exchange ŸFor eTrade
EDI
MCA21
Ÿ Ÿ Records
Land National e-governance
Ÿ
National Citizen
Ÿ Municipalities
Ÿ Service Delivery
Database Ÿ Panchayats
Gram Gateway
Passport
Ÿ Police
Ÿ Ÿ Portal
India
Immigration, Visa &
Ÿ Ÿ Transport
Road
Foreigners Registration Treasuries
Ÿ
& Tracking
Pension
Ÿ
e-Office
Ÿ
Prominent state government initiatives
Ÿ state government initiated 21 m-governance pilot projects in end 2009,
Kerala
including services like electricity and water bill alerts, filing policy complaints
through mobile and audio guides for tourists at hotspots
Ÿ government has also just launched a service called ‘Em-power Kerala’,
Kerala
which enables delivery of all e-governance services on mobile
Himachal Pradesh had awarded contracts for 6 m-governance services to
Ÿ
Spice Digital, which was to be followed by 6 more services
20

25. Is the Ecosystem Keeping Pace? | E-governance
AVENDUS
UIDs and the impact on electronic payments
The government initiative to issue Unique Identification numbers (UIDs) to residents
through the UID authority of India (UIDAI) is also a significant step towards inclusive
development through the adoption of technology and digital media. The project aims to
distribute UIDs to all residents of India, which would be easily verifiable through
biometrics in a cost-effective manner. It eliminates the problem of lack of identity and
address proofs which is the biggest hurdle for availability of banking and financial
services for the underprivileged sections of society.
Will a bank account follow?
UIDAI has also tied up with more than 50 banks to provide the option of opening a bank
account at the time of getting a UID. Banks are also building a Business Correspondent
(BC) network-based micro-payments infrastructure to ensure the accounts getting
opened are utilized effectively. The technology backbone is expected to play a significant
role in keeping the transaction costs low, which is of critical importance because the
banks would not enjoy benefits of a significant float in the low-value accounts opened.
The Government also recently launched the Government e-Payment Gateway (GePG) to
provide a mechanism to handle all Government payment transactions by the Pay and
Accounts Offices of the Government of India. It is envisioned that GePG would also be
used down the road to make direct electronic transfers of subsidies to the beneficiaries,
thereby making the process more efficient and effective4.
While Government initiatives are typically looked upon with a certain degree of
skepticism, the initiatives outlined above are a clear indication of the recognition and
determination within Government circles to leverage e-governance to drive cost savings
and inclusive growth.
4
Also see “Digital India: The Rush to Mobile Money,” BCG, 13 July 2011 21

26. Is the Ecosystem Keeping Pace? | Risk capital & Entrepreneurship
AVENDUS
Risk capital and Entrepreneurship :: Let
a thousand flowers bloom
A whole lot of money
Availability of risk capital in the digital consumer market has been on the rise with newer
VCs entering the market, and many PE investors turning towards early stage deals. The
trend has got more pronounced in 2011 (Exhibit 20).
Exhibit 20 Investment activity (in $ million)
900 100
800
80
700 80
66
Value in $ million
Number of deals
600
60
500
400 37 40
33
300
21 20
200 15 19 19
20
100 7 5
147 213 3 103 102 242 105 111 829
46 35 62
0 2 0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*
*Note: 2011 numbers are till Nov, 2011
Source: Press articles, Mergermarket, VC Circle, Venture Intelligence, Avendus Estimates
(For a comprehensive list of deals in 2011 please refer to Annexure B)
Exhibit 21 Investment activity in 2011 (in $ million)
250 14
12 200 12
200
10
9
9
150 140
7 8
7 6
108
94 6
100
5
4 57 4
3 56
50 42 39 41
31
22 2
2 2
0
Jan Feb Mar Apr May June July Aug Sep Oct Nov
Value (in $ mn) Number of Deals
Source: Press articles, Mergermarket, VC Circle, Venture Intelligence, Avendus Estimates
22

27. Is the Ecosystem Keeping Pace? | Risk capital & Entrepreneurship
AVENDUS
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 20’s and early 30’s) 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
venture creation. Incubation centers at various prestigious educational institutes5 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.
5
Most IITs and IIMs have incubation centers 23