Whither Internet Advertising in India?

This is déjà vu all over again. Once again, the Indian Internet industry, like in the early years of this decade, is convulsed by less-than-spectacular consumer growth and depressed advertising revenues. But character and good businesses are built through times of tumult and tribulation, not ease and quiet.

The Internet space in India can be categorized into four categories:

* Content and Basic Service Providers: This include horizontal and vertical portals that focus on providing manufactured content across multiple interest areas such as news, movies, finance and travel and basic services such as email, stock quotes. (e.g., Yahoo, Rediff, Sify, Indiatimes) This also includes social sites such as Facebook, Orkut and others. The revenue model for these sites is almost entirely through display advertising by large brands.

* Search Providers: This include general purpose and niche service providers (e.g., Google, Yahoo, Live and Ask.) These sites earn revenues mostly through cost-per-click adwords.

* Local Commerce Providers: These are sites that focus on enabling chiefly two functions: enabling users to transact amongst themselves, and enabling users to find local businesses (e.g., Sulekha, Naukri, Shaadi) These sites earn their revenues through user fees and response advertising of small to medium businesses (SMBs).

* Ecommerce Providers: These are the sites that sell specific goods, hard and soft, in different domains such as general purpose ecommerce, airline travel, bus travel and more. (e.g., Indiaplaza, Yatra, eBay) These sites earn revenues through transaction commission.

The problems with large corporate display advertising are as follows:

* Marketing heads of big brands do not believe brands can be built online and therefore do not allocate large spends for online advertising.

* Supply of inventory outstrips demand for online advertising, keeping the CPMs depressed; in fact, the CPMs in India for online advertising have barely budged over the last 10 years.

* Since online advertising can precisely be tracked, marketers hold online advertising to a more rigorous, and less profitable, metrics of cost per click, cost per lead/action.

This is a mindset that will not change quickly. It will change when marketers become sufficiently analytical – which requires a mindset different from popping champagne at creative award functions mesmerized by TV – to measure how brand equity is enhanced by different media and figure that brand equity, especially among the consumers segments of influence and affluence, is enhanced through online advertising. This will also change when the numbers of online users is respectable when compared to that of TV and is too big to ignore. Until then, only the biggest players, such as Rediff, Yahoo and Indiatimes, can make sizable revenues off display advertising and for them also growth will be extremely difficult to come by as recent earnings reports have demonstrated.

Especially handicapped are smaller general purpose content and social networking sites that have neither the huge inventory as the majors (like Yahoo) or highly targeted demographic (like LinkedIn). The general disinclination of marketers to advertise on general social networking/media sites is understandable given the unpredictable, personal, untargeted nature of the content that is typically of lower quality than professionaly produced sites with manufactured content. Of course, such professional sites are extremely expensive to maintain (see Salon, Slate and others in US) and are unable to be turn a profit. The problem is that most blogs or other user-generated content posted by users is of poor quality and is of interest only to a small set of close friends and the family dog. However, user feedback and comments create a highly viral loop and make for extremely user experience. The key, as we have found at Sulekha after significant experimentation, is to integrate good quality member generated content (through system- and user-driven filters) with syndicated and mashable content into highly targeted verticals. For example, Sulekha integrates a sub-section of high quality travelogues, pictures, videos and advice from members with syndicated travel content from online travel sites, mashed content and highly pertinent travel offers from ecommerce providers. This created a highly compelling travel destination that a site with purely user-generated content cannot produce. We have done the same for Movies, News, Food, Mobiles and Cars…creating high quality, targeted verticals with user participation that brands in those respective domains are readily advertising in with high CPMs.

While SMB advertising in India has enormous potential given there are roughly 70 lakh SMBs of which only about 2 lakh advertise in some fashion, this customer base needs sustained education of the benefits of advertising online and reaching to a vast, local and affluent audience. This translates into the need for a large, very expensive sales force and highly sophisticated backend systems to manage tens of thousands of customers. In response to this, at Sulekha we introduced an innovation that allows SMBs to pay only when they get a call/SMS/email from a ready customer. This assured response advertising model has removed the risk of advertising for most SMBs and made it easier for them to experiment. Cultivating a large SMB customer base also reduces the risk many Internet companies have of being dependent on a few major clients and agencies which whose spends are extremely sensitive to economic downturns.

The problem that plagues all of us in the new media space is that Internet usage is not growing at a searing pace and Internet usage through mobile phones is non-existent. There are two trends, however, that offer high promise: large screen mobile phones and small screen light-weight laptops. What will spur widespread, intense use of the Net in India is portability coupled with ubiquitous net connectivity at a reasonable cost. My view is that this will happen in the next 18 months. Within the next six months, we will see the sales of sub-Rs. 10,000, 2-pound feather-weight netbooks with sufficient primary and secondary storage and constant connectivity. And the sale of sub-Rs. 10,000 large display phones. These two devices will usher in astonishing explosion of Internet use and the companies that will benefit are those that toiled to build their brands over the last 10 years.

Sound immodest I may, but I predicted Obama will win by a landslide of 370 electoral votes (he ended up with 365) 2.5 months before the election. So listen to me. The active Internet users will cross 100 million in India by 2010 end. And Jigar Moradabadi will smile from where he is.

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