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November 2011,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,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,Acknowledgements Disclaimer. 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. A Global Megatrend,India Online,A Global Megatrend. For those who came in late, There are over 2 billion Internet users in the world almost 1 3rd of the world. population, If Facebook were a country it would be the third most populous in the world. Taobao has over 400 million registered users more than the population of United. iTunes has become the biggest music vendor in the world within 6 years from its. Pandora an Internet radio website is the largest radio station in the world today. Zynga s valuation is now believed to be higher than that of offline games veteran. Electronic Arts, m Pesa processes more transactions than Western Union all around the world.
Internet is now the single largest channel for advertising in the UK. 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. 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. Value bn 915 928,Number of deals 857,Investments in billion. No of deals,530 5 1 5 1,452 441 4 4 4 4, 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,Exhibit 2 IPOs in 2011. Company Valuation Category,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.
10 million 3G connections within 6 months of launch almost equal to the base of. wireline broadband connections, The 2nd largest user base for Google and Orkut in the world. 28 of travel gets booked online 117 million transactions on IRCTC alone. 47 of the classifieds business is online, 7 of bank users in India access their accounts online. 25 of IT returns were filed online in 2010 11, Close to 50 of music revenues in India comes from mobile downloads. 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. 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. Is the quality of Internet connectivity good enough to drive consumption online. Is the payment infrastructure ready to support large scale e commerce growth. Are Indian consumers really ready to embrace e tailing How many are actually. transacting, How ready is the supply chain infrastructure to handle direct consumer deliveries.
Do we have the right talent and environment available within the industry. What is the path to profitability,We start by taking a look at the ecosystem. Exhibit 3 A day in the life of the digital consumer. Buy a Diwali,gift online,Pay electricity,bills online. Look for a,lunch deal,Tweet about location for,the meeting next month s. Locate route,to client s,office through,Google maps. 9 3 Book tickets,for a holiday,Check day s,Calendar Check score.
7 5 at Cricinfo,Check Search for,Facebook a job online. Wake up with,Is the Ecosystem,Keeping Pace,Demographics. E governance,Risk capital and,Entrepreneurship,Advertising. Supply chain,Is the Ecosystem Keeping Pace, 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.
initiatives,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,Is the Ecosystem Keeping Pace Access. 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,World Avg 31,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 5,3 1 3 9 100. 60 80 120 190 273 376,2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E.
Source Avendus estimates, 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,Is the Ecosystem Keeping Pace Access. 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. Internet broadband penetration,E tailng penetration. 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,Internet broadband penetration. E tailing penetration,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,Is the Ecosystem Keeping Pace Access,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. 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. 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. 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.

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