Monetising Bharat: The law of large (and small) numbers

Monetising large user bases through ads (and some other thoughts)

Here’s the thing about India - It’s a massive and diverse country (yes, I’ve made this point before). Whichever way you look at a population of 1.4 billion, there is a market for something out there, that is large and untapped.

I’ve always been fascinated by how different consumer behaviour is in Tier 2+ India, and how FMCG marketers, and the film and entertainment industry has successfully monetised the audience (from the previous edition of this newsletter - FMCG sachets for the mass audience).

This line of thinking provides the fundamental framework to think about monetisation for the Bharat audience - large user bases & small ticket sizes (or micropayments if you are neck deep in tech).

Here’s the equation: Revenue = Users * Average Revenue Per User (ARPU)

So one way to think about monetising the Bharat user is to create a product with a large user base and then monetise the user base with micropayments. This does happen across sectors today, both offline and online. Some examples (not exhaustive) are chit funds (finance), content (Pocket FM), devotion (Sri Mandir, Astrotalk), gaming (MPL, LudoKing), and social (ads in ShareChat).

All of these are interesting, but none of them are really proven at scale in terms of monetising Bharat. What has worked though is ads. Mass media platforms like print, radio, TV have proven monetisation of the large user base, and now the focus is on digital platforms as the industry transitions.

So let’s talk about ads. (And hopefully at the end of all this, we can say ‘haan ads se paisa to ban sakta hai’)

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Over the last 5 years working on social media (/content/engagement) products, I've seen that there is a lack of understanding in the ecosystem around how these products will make money.

The thought process for any engagement app has been that if you have a product that has high retention and active users, you will eventually be able to find creative ways to monetise them. Facebook is the best example, scaling massively and delivering revenue at high margins because of their massive active user base. Their largest business (by far) remains ads (~100b USD), though over the years there has been a focus on de-risking the business by adding multiple revenue streams.

Facebook/Meta consistently knocking it out of the park by monetising our attention.

When VCs try to value Indian companies in the content and social space with the same context (number of users * average ad revenue per user) the math starts looking dodgy. Why?

It’s common knowledge that ad revenue per user in India is low (potentially 10x lower) compared to the US, specially for new social media (ShareChat, Moj, DailyHunt, Josh) where the average user is not from the 50m Tier 1 transactors. This is the dominant narrative surrounding revenue streams for large consumer platforms which propose to monetise via ads - with this low ARPU, is there ever going to be a sustainable ads business?

Aside: For now we will not talk about new revenue streams eg: virtual gifting, live commerce which could materially change the ARPU from the Bharat user. These are all interesting and potentially game-changing products, but left for another day.

In the context of ad revenue, here are some questions that we can try to work through.

• What are some structural changes in the digital advertising market that are likely over the next few years?

• Is the digital ads market in India deep enough to sustain a non Google/Meta entity? And as a corollary, can digital ads ever become a serious revenue contributor for platforms targeting the next 400m+ consumers in India?

Let’s dive in.

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This excerpt is from a recent article in The Ken.

..domestic short-video apps are facing a slowdown in advertising revenue—their main source of income—as advertisers are trimming their budgets and retreating to tried-and-tested avenues like Google and Meta. With a predominantly tier-2-and-beyond audience, the shape these platforms take to survive the downturn will impact not just the fate of the Indian content-creator ecosystem but also the digital-advertising approach to attract non-urban audiences.

The common narrative is this - India is a DAU farm, and it is almost impossible to monetise customers outside the top 50m at any serious scale, even via ads. As evidence the comparison that is often made is with Facebooks earnings from the average Indian user vs the average American user (FB US is 20 times more revenue at roughly 0.5x the user scale, see table below)

If we use these numbers as the basis for evaluating platforms serving non Tier 1 users, it's easy to reach the conclusion that today India is an DAU farm, without serious ad monetisation potential.

The keyword is today. But what about projecting forward? What trends could make this math work out better for a new platform? Let's talk about that next.

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What are some structural changes in the digital advertising market that are likely over the next few years?

Here’s my hypothesis: The total amount of ad spends in digital media targeted at Bharat users is set to increase, and a large share of this increase will go to new platforms.

Why? Three reasons outlined below

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1. As existing large digital advertisers learn about the mechanics of the next 400m transactors, they will start spending more on new platforms which target this user base.

Marketing teams in todays large digital advertisers (FMCG, E-commerce) are not native users of platforms like Moj, which target an audience very different from themselves. Typical marketing teams in these large advertisers will be people who likely 'think in English', and would find it tough to understand what content works on Moj, how to generate the right marketing message, and how to measure ROI. It's a learning process for the advertisers that will take time to find its own PMF.

From the Ken article quoted above "On the advertising side of things, according to five of the industry executives mentioned above, some of the blame also lies with the advertisers. “Often the marketers would not be native to these platforms; they’d just use it for a day or two and decide what funds to allocate. Naturally, they would have no idea what to expect in return,” said the second former Moj executive."

But, in the long term, the audience size will likely make such platforms too large to be ignored.

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2. There is large headroom for new advertisers, largely SMBs, to move into the digital fold

Who are these potential new advertisers? They’re the long tail of small business owners serving a local/hyperlocal regional language audience, and who today advertise on local/regional language print and TV.

Some context setting - The only truly mass medium (reaching the maximum possible consumers with a generic message in the shortest time) in India is still TV. In TV, there is a very strong regional language bias, forming hyperlocal networks of publishers and advertisers across each language/state, and even in each district of a state.

For example, in Kerala, two of the large media groups are Asianet and Malayala Manorama, which operate a set of channels across news, entertainment, movies and more. The advertisers on these channels are mostly state level brands (Kalyan Silks, Malabar Gold, Meriiboy ice cream) with mass appeal, so largely consumer brands, who don’t advertise on any English channels.

Large TV channel networks in Kerala

In addition to this, districts and towns have their own independent local/hyperlocal channels with their network of district level advertisers. These channels air on local cable, supplemented by a strong presence on Facebook and Youtube, and also have organic virality driven by self managed WhatsApp groups. They serve news with a distinctly hyperlocal bias and earn ad revenue from smaller local businesses who don't need state level reach - for example a chain of electronics or furniture retailers in the district. These advertisers are less sophisticated and have lower buying power.

I’d wager that this hyperlocal publisher advertiser network replicates across Indias districts and villages - in that sense media is very decentralised. In the digital space, Lokal is an app that is trying to digitise these hyperlocal information networks, they started with news, but are now focusing specifically on classifieds for monetisation.

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Aside: My mother runs a small salon chain in a town in Northern Kerala, and she is very aware that a lot of the inbound to her comes from Google search (Business listing) and Facebook (organic). However for her to figure out how to actually advertise on these channels on her own is a big barrier. She has used a couple of digital marketing agencies based locally, with poor results. (The digital agencies themselves are not evolved yet). She eventually approached a hyperlocal news channel runnig in our tehsil/town which took a video of her salons inauguration, put in on FB and on local cable, and sent her a watermarked longer version which she could share on WhatsApp! Talk about customer service.

What has got to change here to add efficiencies? Maybe there is a play to set up an education program for small town agencies on how to do small scale advertising for local businesses (likely driven by FB/Google?). The agencies can then work with business owners to run campaigns which demonstrate clear ROI.

An interesting thing to note that as a small business owner in a Tier 2 town, advertising in mass media is as much about pride ("meri company ka naam aaya hai akhbaar mein") as it is about ROI. India is a massively status seeking society (more on this in later editions)

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Ok, now back to the main storyline - What does all this mean for digital advertising in Bharat?

My hypothesis is that current spend on digital (FB/YT/Google) is likely driven by large advertisers who are mature enough to understand the mechanics of digital in India (I couldn’t find any solid data around this, so do let me know in the comments if you have evidence to the contrary).

In the US, SMBs who have are more ‘digitally native’ have figured out the complex ecosystem of advertising on digital, and drive the long tail of advertising dollars (hence the noise around Apple's app tracking transparency killing small businesses). In India, internet literacy for the current generation of SMB owners is still low, and they still prefer to advertise on local print/TV. It will take time for the small and medium advertisers targeting the next 400m customers (who are regional language first) to get their heads around advertising on digital platforms, and when they do, they will likely look for platforms which can serve their unique local needs.

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3. (and this one is a little more product idea-ish): New Indian advertisers will have unique needs which can be served by new platforms.

New advertising channels unlock new behaviours on both the advertiser and the consumer side. Can platforms like Dailyhunt & ShareChat experiment with new ad formats which have SMB - Bharat consumer fit? What would these formats look like in terms of content or creatives? (personally I think ad formats are an area ripe for innovation). One though experiment below.

Imagine ‘shareable ads’ (and I’m just spitballing here) - where a product is shown to the user in an ad, with the promise of a larger discount if she gets more people to sign up for the product. The ad can be shared natively on WhatsApp, with a one-click integration to express interest, adding a layer of trust and driving more discovery for the ad price point? (and extending this, almost an alternative GTM for the social buying phenomena pioneered by Pinduoduo).

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Is the digital ads market in India deep enough to sustain a non Google/Meta entity?

Let's try to understand this with some rough math on the current and projected digital ads market. (I’ll use bullets while working through the math which hopefully makes it easier to follow)

• The total advertising market in India is 10b USD today.

• Of this, digital ads today is 4b USD of which 50% is Meta, the rest is mostly Google.

• Digital is expected to grow to ~20b USD in the next 5 years (Link). SMBs are expected to account for 40% of this spend.

• 5% of this is 1b USD revenue potential, which makes the market really attractive. If you factor in SMB contribution, and their target audience, and the fact that these will be first time digital advertisers, the opportunity for a new player to build products from the ground up becomes even more obvious.

Let’s look at this from another angle.

• Today FB in India earns ~1.8b USD yearly (150m monthly) from 410m active monthly users. That means revenue per user per month for FB is 0.4 USD.

• In 5 years, revenue per user because of the trends I stated above could be 2.5x = 1 USD (assumption).

• An ads platform that targets Tier 2+ users could make 5% of this = ~0.0.05 USD, assuming a 20x difference in CPM (this is the current difference between the US and India CPMs).

• If the ads platform has 200m monthly active users, thats 10m USD revenue monthly, and 120m USD yearly, still not a bad number.

Net-net it does look like a large platform targeting regional language users could become a serious business on the basis of ads revenue alone, and fits into the “Law or Large/Small numbers” for Bharat.

If you add on non advertising revenues on top of this (live, virtual gifting and more that a horizontal content platform could potentially enable) the proposition becomes more attractive, and you begin to see the logic behind the astronomical sums raised by these players (even accounting for the post Covid-Tik-Tok-ban hype).

And that’s it about ads in the context of the law of large/small numbers!

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So what’s next? Well that’s what I have been thinking about as well. I have a bunch of ideas floating around in my head, including sector deep dives (some interesting thesis around delivering differentiated commerce, devotion, finance, and more), user behaviour patterns (single player vs multiplayer and more), and the importance of brand in the age of generative AI (yes, I’m late to latch on to the ‘hype cycle’). I hope to get these out to you soon! Thanks for reading and do tell your friends!

PS: Would you like me to write about something specific? Do let me know in the comments or on my email (hit reply to this message)