Classic mistakes in understanding the Next Billion Internet Users

This note was meant to be a comment on Ishaan Preet Singh article, since this topic is a passionate area for interest me, an attempt at a lengthy comment to clarify things were soon met by LinkedIn's word count restrictions. So here we go, a full fledged article on Pulse to broaden the discussion. So bring those comment on!

Ishaan's article is promising, to such an extent, that we at Agrahyah Technologies are betting our careers in this much touted next billion internet users market which aims to explore the potential, a blue ocean territory called, India 2 and 3 markets. (aka NBU)

Ishaan's article is not considering many parameters about India 2 and 3 and he's not alone, everyone at Sand Hill road to Softbank are high on India right now and there's no framework available to segment these audience into a pre-defined cohorts like baby boomer, millennial, etc., The existing players (startups including ecomm, OTT) are saturated at 50 to 60 million users (average transacting MAU) and maybe another 40 million who are somewhat active online with potential to transact soon (or they already do very sporadically).

Together they are about 100 million people, who are English literates, first movers online, find Narcos compelling and Naagin repelling. For now, just retain this persona in mind about India 1 audience.

Startups (at least the VC funded ones) are all about J curve or hockey stick growth, they prioritise growth over profits; so what are incumbent online brands doing to keep the J curve growing after saturating with India 1 audience? They are after the next billion users NBU.

Out of the 400 million people online (definition is dicey. anyone who accessed internet in last 30 days is considered internet user) the first 100 million is what I described above as India 1. But from here on, the flux begins, the next 300 or so are deemed to be in rural. Incorrect. They are deemed to not know any English. Incorrect. They are not spending online just because of language divide. Incorrect. Because they watch cable TV, and buy FMCG products, they will also buy stuff like cosmetics and grocery online...hmmm you get the drift.

Here's why I'm refuting a leading institutional investor at the risk of sounding like a pompous idiot; but hey, why not?

We are an offline first country with DIFM mindset: Stuff needs to be sold to us. Myntra, AI-powered-fashion-powerhouse-with-rock solid-store brands is opening physical stores to increase sales. Byju's is adding offline field force to increase sales in India and is going after other 'ENGLISH' Speaking market (not India 2 or 3) to expand customer base. Paytm to 'Inbox' live TV, news & cricket. India's first internet success story, Naukri.com's 70% of 4800 employees are in (field) sales. All of the above brands are India 1 focused, yet they are either peddling content or increasing thrust in offline sales; The is phenomenon is because of our culture. Do it for me (DIFM), and not DIY like US.

Extrapolating US data to India seldom works: This mistake is as classic as it can get. My opinion aside, let’s look at numbers. Ishaan starts off with comparing US newspaper business which has a revenue of $200 per user per year through ads and estimates that Facebook already makes half of that per monthly active user. First, India’s per capita income is ~$1950 per year, whereas US has ~$59,000.  So purchasing power is way different in these two countries. Which means a FMCG or car brand is willing to pay higher ad dollars to reach an average reader via a newspaper in USA than in India.

Second, comparing newspaper ad dollars to digital ad dollars in unknown model of benchmarking in the industry (Can vouch for this with my last 15 years in both ATL and digital advertising) and it is an anti-thesis of what tech startups believe in – Scale through technology with low marginally cost. Besides, newspaper ads are limited and premium-limited-inventory sold by sales team, digital ads are infinitely large cookies & impressions and sold programmatically through bids in increments of cents. In short, they are chalk and cheese. 

India is Facebook’s second-largest market, after the US, with ~220 million monthly active users, but despite such high number of users, the revenue they made in 2017 is a puny $49 million from India. Which is a about ONE Percent contribution to the $40 billion revenue they made that year globally. So this comparison in his article is void.

There’s a reason why Facebook revenue is so low in India, the bulk of revenue Facebook makes in US comes from SME’s who have a culture of DIY to run ads by themselves, this is true for Google AdWords as well. But in India, it is a market that needs selling, don’t expect your neighbourhood saloon to pull out credit card and start running ad campaigns online. 

Third, there’s some kind of Discounted Cash Flow (DCF) model used here which magically promises an astronomically high revenue potential of $400 million in revenues by 2022 just by addressing a quarter of the 400 million online Indians. 

Are any of the Indian companies earning so much right now? No. Then how will future be so drastically different? What specific macro and micro economic factors will drive this spike? There’s excess of optimism in the article, we need hard evidence. 

Also, i’m unable to work the DCF backward to further scrutinize it, but quoting from Ishaan article the numbers are as follows and my rebuttal thereof:

“Offline Ad Value of vernacular users: ~$6 conservatively”

Rebuttal:  Facebook, globally has a ARPU of ~$5 per user (per quarter). There’s no way an average Indian with per capita income that’s thirty times lower than US can be higher than the US figures of any estimates. 

“Offline ad value will grow to ~$8 along with GDP.”

Rebuttal: The only thing that’s going to grow in India is cost of living due to rapid urbanization, so this number is way out of proportion. (140 year old The Hindu is bleeding)

If UGC is so low on marginal cost, why 'Sharechat Talkies' Classic mistake two is build a UGC only product for India market, my favourite in this season actually. Look at 9gag, Twitch, SoundCloud…let’s make an UGC platform for Indian users seems to be the prevailing opinion among content startups. And then poof, our culture strikes again. We want to be entertained, not make efforts to entertain the world. Aka show me stuff, don’t ask mine. 

From  America’s Funniest Videos to NatGeo’s  Science of Stupid, the UGC based montage shows we see are from the west. Nothing desi about it.

Ishaan says “UGC content platform can provide hours of entertainment to a user at an annual cost of less than 50 cents per user” Since Sharechat is a portfolio of Lightspeed, they may know the cost of keeping the lights on for it. But im curious if UGC was so simple why was a original content production house named ‘Sharechat Talkies’ started by them?

It is the same reason as why YouTube is promoting ‘What the Duck’ and other original productions despite having billions of hours of UGC content. Content platform including UGC led models need to pump in original content for ensuring quality; and high quality content is made by professional studios, which helps attract content platforms and products to attract and retain users.

A UGC only strategy alone cant drive product usage and engagement this India. Besides, what Indians make as UGC is crap, fills up the web like a drain, and that gets insignificant engagement. 

I don’t want to sound pessimistic and keep on ranting here, in fact, starting Sharechat Talkies is a brilliant move; but being in content business myself, the 1-9-90 rule applies.

One percent of people create content, nine percent spreads and shares them, 90 percent consumes them. This means, UGC alone won’t propel the ship, we need to get a high horsepower engine called original content. 

The 1-9-90 rule must be applied in content business.

A big bad barrier for all us in digital ad/content business. TV vs Mobile internet is an ongoing debate which competes for people's share of time (and wallet). Jio or any other lower tariff data plans has increased video consumption, but doesn’t  mean ad revenue will grow in digital at the same rate as data consumption.

Circling back to the offline ad value from the start of the article, a newspaper is a community property, people can read it at a chai tapri or if placed in a living room, a single newspaper serves a whole family, same with TV; but mobile is a personal screen and paying separately for a single mini screen will be an expensive affair for the India 2 & 3.

A week ago, ET reported "Television remains the choice of the masses even in digital times" 

eCPMs are being compressed like no-one's business. For example, a YouTube video with a million view will get maximum of ?120,000 through ads monetisation. If the video was that good enough to get a million views, it surely costs more that earning to produce it.

So the question remains. Let alone UGC, where’s the money for an indie content producer? 

And if the likes of Sharechat has to monetise with only ads, then for every million impression they may earn less $1000 in revenue (since the TG is India 2 & 3). At this rate there isn't even a operational breakeven. Let alone a positive PAT.

Some of the top monetisers in India are movie studios, who anyways produced a feature film and treat digital medium like YouTube primarily as a marketing platform, and then as an ancillary revenue platform.

Except for a dozen lucky souls, YouTube or the likes is not as a bread winner; and all the Instagram models snd influencers now have to declare if they are being paid. So there goes 'native ads'. So where's the incentive for anyone to produce high quality UGC?

Final notes about NBU or India 2 & 3

Rural ≠ NBU. Assuming NBU are same as rural India is distorting the ecosystem’s views and actions on digital’s future. Consider this, an Uber driver, a barista at coffee shop next door, a hair dresser, an office peon, they all were raised and live in urban, they manages to speak and understand reasonable English, yet they don't behave the same as anyone of us reading this. You and I are probably consuming this content on a smartphone or laptop that’s worth at least 3 month’s of an NBU user's salary.

So ask yourself, If you have Rs.15,000 a month to survive, how will you spend it? Can you afford to pay Rs. 500 for Netflix per month? Will you pay for TV / Cable and also buy premium subscriptions on mobile?

According to The Economist, in India, over 90% of workers are employed in the informal sector; most firms are not large or productive enough to pay anything approaching middle-class wages. In my opinion and several years of observation, these very people may have an entry level smartphones and access to internet, but having access doen’t mean it is useful for them. 

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Let’s continue the debate @sreeraman or here on comments section.