Internet in India 2006

INTERNET BUSINESS SURVEY
20th February 2006

Internet Industry Comes of Age


Forget dotcoms. The Internet today is about real business. And real companies.


The first steam engine, invented in 1705, was a simple vertical piston and cylinder at the end of the pump handle. In 1873, a dynamo was created to produce electricity, allowing steam engines to be ‘always on’. Soon, the railways emerged, allowing ‘communities’ to do ‘commerce’.

Just in case you were wondering why we took you through this ‘industrial revolution’ crash course, the point is that several inter-connected innovations had to happen for 300 years for you to sit at your desktop and click ‘buy’. The parallels between the industrial revolution and the Internet one are strong. The Internet began as an idea in research labs in the mid-1960s. The mainframe, PC, the Internet and then the browser all came within a span of 30 years. What started out as a US military experiment has been plugged in irrevocably into our daily lives. The dots connecting reality to sci-fi flicks (remember Minority Report?) are falling into place as we live digitally. Three hundred years down, the steam engine story sounds very similar to the search engine one.

Our last cover story on the Indian Internet saga was way back in 2001 (see ‘They Survived!’, BW, 14 May 2001) in the aftermath of the hysteria over the 5,000-odd Indian ‘dotcoms’ that got on and off the headlines just as quickly. While the bust was totally warranted, it was evident even then that there was nothing fundamentally wrong with the Internet. Its power transcended 5,000 failures. Fifty-six months later, we’ve put the Internet back on the cover once again. Our guess is that you are going to hear more about it from now on. And there is a difference this time: You are not hearing it as much as you’re living it.

The total Internet business is big — worth over Rs 2,200 crore. About Rs 500 crore comes from advertising, ecommerce (not including billings) and other revenues. Add in access charges at a minimum of Rs 200 per month, and multiply it with the 7 million-odd subscriber base. What you get is over Rs 1,700 crore being spent just to get on to the Internet. The revenues for the four big classified sites is Rs 200 crore. But nobody has an inkling about the numbers for several other categories such as mobile content or broking.

And it is even bigger if we add what the business-to-business (B2B) companies make. According to investors, they remain among the most profitable Internet companies. However, this survey will focus more on business-to-consumer (B2C) companies, since the numbers for B2B companies are almost impossible to access.



Second Coming

The 1995 Netscape IPO kicked off Web 1.0, creating billion-dollar startups in the West. It sowed the seeds of the madness that followed. In 1999, the madness reached India . Back then, Indian entrepreneurs were a bunch of get-rich-quick wannabes trying to join the bandwagon.

The same madness then created rock-star companies like Google, Yahoo!, Amazon and eBay, which have a collective market capitalisation of $227 billion (as on 8 February 2006). The 2004 listing of Google, six years after its launch, showed the pace at which one of the world’s most valuable ‘media’ companies could be created. That set the tone for Web 2.0. And now, Web 2.0 is showing its first traces in India.

In the next few pages, you will get a peek at the quiet revolution that has been brewing behind the scenes in India for the last 6-12 months. ‘Quiet’ is the operative word here. Notice that nobody uses the word ‘dotcom’ any more. These are online businesses or Internet companies. Several get a chunk of their revenues from a hybrid of online and offline products and services. Rediff, Indiatimes or Indiabulls are all referred to as matter-of-factly as ITC or HLL. They are just Indian companies that happen to be online. Even the approach of investors who did not touch Indian Internet companies earlier, such as Kleiner Perkins Caufield & Byers, has not created any frenzy or hype. Almost every major Internet company globally from Yahoo! to Google, has stated that China and India is where they will be making their next round of bets. Yet, sedate is what describes the Internet industry here even now.

Two things have changed. One, our size and look, and two, our connect with the rest of the world.

First, a look at the market. Five years ago, ISPs (Internet service providers) had just taken off. There was no usage, no broadband, no content. People were simply trying to re-create successful online businesses of the West. We were at 38.5 million users (54 per cent growth last year) in June 2005, according to IAMAI (Internet and Mobile Association of India). More importantly, the linkages of the Internet with the offline world are much clearer. It offers utilitarian services that people use in their everyday lives — mail, information, news, shopping, telephony, etc.

Global investors and Internet giants have India on their radar because they know that 65 per cent of Indians will be 15-35 years of age a decade from now. The youngest population translates into the largest Web space (research shows that younger people are more likely to be online). That India has the lowest broadband prices worldwide ($4-$5 monthly) and is seeing one of the world’s fastest growing mobile revolutions tells them that the ‘always on Indian’ is inevitable. They have seen that happening to China. Over the next 3-5 years, they expect to see it in India.

It’s not about just the Internet or India, though. It’s about every consumer-facing business in Asia. China, with 100 million Internet users, has been the biggest success story outside the US. The venture capital interest we see in India right now shadows what the Chinese Internet already saw 3-5 years back.

Two, Indians are innovating to keep pace with the digital wave that’s sweeping the world. For instance, there aren’t enough PCs (18 million). But that’s all right. We have enough mobile phones (80 million, increasing by 5 million monthly), so we will adapt to the mobile Internet as the Chinese have done so successfully. Then, there aren’t enough credit cards (12 million). No problem. We’ll create alternative digital payment systems like mobile micro-payments. Both mobile Internet and online payment systems are just two of the areas where the entrepreneurial attitude of not submitting to infrastructure bottlenecks is alive.

This entrepreneurial attitude will surely come in handy to deal with the challenges ahead.

The Challenges

One, there is no vernacular content, so all the 40 million users are English-speaking. That brings us dangerously close to saturating the universe of Indians speaking English. To add the next 40 million users, the Internet has to turn vernacular. “Until that happens, the industry will grow depending on the rate at which we learn English,” jokes Sanjeev Bikhchandani, Naukri’s founder-CEO. Last week, Jeevansaathi, a matrimony portal also owned by Bikhchandani, launched its Hindi version, hoping to work around precisely this.

Two, Indians still live in the all-information-is-free world. We log on for information and entertainment, but aren’t ready to pay for it. Converting information-seeking into monetisable revenues will be the key challenge. Part of the problem is that currently the Internet largely offers commodity services. So, there isn’t much difference between the mobile ringtones that you download from Indiatimes or Rediff. There may be some difference in the quality of information and news, but by and large the Internet is synonymous with free or cheap information. The magic will happen when people start going to the Net for premium content. That is when they will pay to access a website.

To be fair, the Internet business has blended very well with the mainstream economy. It is as much a part of everyday lives now as the PC. It is simply a matter of time before it capitalises on this. The Industrial Revolution took about a century before we realised how much it had changed our lives. This one is just over a decade old