Aug, 2019      |     By Abishek Chauhan, Ujjwal Chaudhry, Abhijit Routray, and Shashank Subramaniam

Vernacular is NOW, not the future – A $300 Bn Opportunity Today

India’s internet adoption reached 530 Mn at a run rate of 65 Mn users per year in the last 2 years – ~8x of 8 Mn users added per year from 2000 to 2009


Abhishek Chauhan

Abhishek Chauhan

Associate Partner

Ujjwal Chaudhry

Ujjwal Chaudhry

Director

Abhijit Routray

Abhijit Routray

Associate Consultant

Shashank Subramaniam

Shashank Subramaniam

Business Analyst

India's internet adoption reached 530 Mn at a run rate of 65 Mn users per year in the last 2 years - ~8x of 8 Mn users added per year from 2000 to 2009

Internet adoption started in India at the onset of the new millennium. Early adopters received low-speed internet (56 kbit/s) on dial-up modems. Desktop computers were the devices used to access the internet. The average rate of adoption was 8 Mn users per year. The story started to change as low cost 2G enabled phones started flooding the market and websites became mobile friendly. On an average, 36Mn people per year got access to the internet. Soon after, a seismic shift was witnessed on two fronts– in internet technology with the introduction of 3G and in internet-enabled devices with the introduction of affordable Android smartphones.

The faster 3G speeds and the affordability of smartphones increased the adoption rate to 45 Mn users per year. But the biggest disruption was yet to come. In Sept 2016, internet was essentially commoditized with the entry of Reliance Jio in the market. Data costs fell by 93% from pre-Jio rates. A phenomenal 65 Mn users on an average adopted internet every year from 2016 onwards. With close to 530 Mn internet users, India has the world's second largest internet user base, presenting a huge opportunity in terms of digital market size.

Digital Users

Out of 530 Mn, 57% people are Active internet users (rest have intermittent access), 20% shop for products online…

Although India's internet population is about 530 Mn, ~57% of them (~300 Mn) access internet regularly. The rest are intermittent users who lack continuous access to the internet for reasons such as insufficient data plans, unreliable network connection, etc. Of the 300 Mn active internet users, about 2/3rd are online service transactors – the ones who use the internet for booking tickets, recharging phones/DTH, paying for utilities, and making payments via UPI, mobile wallets, mobile banking, and others. More than half of the online service transactors are product shoppers who make at least 1 transaction on any e-tailing platform in a year.

Hyperlocal users are the ones who utilize smartphone based applications for food, grocery, medicinal and commute solutions. They are concentrated in the top cities but service providers, especially food tech companies and cab aggregators, are aggressively expanding into non Tier 1 cities. This set of users is expected to see the maximum growth going forward. A deep understanding of the online transaction behaviour of users would enable companies to advertise on relevant online platforms basis the type of user and traffic volume on the platform.

India’s Digital Funnel

Description of a Typical User

Note(s):

1. Access to the internet includes users who use the internet on a shared device
2. Assuming only 7% of people below 14 years of age have uninterrupted access to internets reported by the company

…, and 260 Mn users are 'monetizable' (NCCS A/B/C), who drive almost all online transactions

All active internet users may not be monetizable as some of them may have limited spending ability. Hence, a socio-economic segmentation of all internet users paints a clearer picture about the monetizability of the users. Such a segmentation shows that ~260 Mn internet users are NCCS A/B/C classified – the ones who have higher spending ability – and are monetizable. Also, almost all of the online service transactors are NCCS A/B/C classified.

When it comes to geography, we observe that there's a 60%-40% urban-rural split in people having access to internet. A significant bulk of the online transactors belong to urban areas. We expect this picture to evolve as businesses expand to reach more of the rural
population.

Socio-Economic Segmentation of Internet Users

Note(s):

1. The population below the age of 14 years (~30 Mn) has not been considered under monetizable population

On the other hand, there are ~400Mn non internet users who face different barriers to adoption…

Currently, there are ~400 Mn adults who do not have access to the internet. While there are a variety of reasons
for the same, all of them can be broadly characterized by 3 barriers:

Access: This is the biggest barrier in terms of number
of people affected by it – people living in regions where infrastructure hasn't developed enough for internet access or people who belong to the marginalized sections of the society.

Affordability: There are people who may be living in areas where there is adequate infrastructure, but they lack the financial means to purchase and maintain an internet supported device.

Aspirations: There is a certain section of people who


»» either do not know about the benefits of internet or

»» do know about the benefits of internet but don't
perceive those to be beneficial enough to them
This is the segment of non-internet users who are most
likely to become users as the value proposition for
internet usage grows due to wider use-cases.

Barriers to Internet Usage

…and as the barriers are lowered, ~320 Mn are likely to adopt internet by 2023, out of which a significant number is likely to be of active internet users

As the barriers are lowered, the internet penetration will gradually grow. Most of the people who may not currently, perceive benefits from the internet will eventually, become users as essential systems (like banking, insurance, passports, utilities, etc.) gain mass online adoption. Recent trends in the market show that certain telecom players like Jio are adopting novel customer adoption mechanisms. Jio is essentially cross-subsidizing low priced devices by engaging customers through data or content.

This phenomenon is expected to pan out sufficiently in the next 5 years such that affordability of internet devices may not be a barrier anymore. But inclusion is a more complex barrier that will take a longer time to overcome as it needs to be solved at a policy level. India, along with assistance from large corporates, is making progress in developing infrastructure.

New Users Added to Digital User Base​

Therefore, number of active internet users will double in the next 5 years, with growth down the funnel expected to increase even faster (2 to 3X)

With the growth of internet penetration, the number of active internet users is expected to double in the next 5 years. However, the growth down the funnel is
expected to be higher; with online service transactors growing at 2.1X, product shoppers growing at 2.5X and hyperlocal users growing at 3X. A high proportion of the growth in active internet users can be attributed to the first time users in Tier2+ cities and rural areas.

As the active internet user base increases, users are understandably keen to explore the enhanced efficiency and convenience that various online services such as shopping, banking, utility payments, hyperlocal services offer to them. This explains the higher growth rate down the funnel. The affordability of smartphones and deeper internet penetration will also act as enablers for onboarding the
new users.

India's Digital User Base

Growth in online shoppers will be driven by Tier 2+ & Rural/ vernacular users – they are expected to grow by 3.5 X to become ~1.6 times of Tier 1 users by 2023

Owing to increased internet penetration and the advent of affordable internet-enabled smartphones which support various E-tailing applications, the growth in the number of online shoppers in Tier 2/3 cities and rural areas is expected to outpace that of urban areas.
According to estimates, almost 70% of E-tailing GMV would come from Tier 2+ and rural areas by 2023, compared to 40% in 2018. The rise in disposable income and increased penetration of smartphones and internet access in

these areas are expected to be the primary growth driver for the advent of online shopping. User preferences are also expected to evolve, especially with the younger population in Tier 2+ cities, who are open to experimenting with the enhanced options that online shopping provides them. E-tailers are also trying to capture this growing market by improving last mile connectivity and offering deep discounts to onboard new users, with the expectation of converting a high proportion into repeat customers.

Number of Annual Unique Online Product Shoppers

E-Tailing GMV by Customer Type

All in all, India will add ~140Mn monetizable users to reach ~400Mn by 2023, as more people adopt internet, and transition from NCCS D/E to NCCS A/B/C

The number of monetizable internet users will grow by ~140 Mn to reach ~400 Mn by 2023 owing to high internet adoption amongst the non-internet users and the transition of several users from NCCS D/E to NCCS A/B/C. Out of 140 Mn, 100 Mn (~70%) will come from non Tier 1 cities. This translates to a large spending
power.

Presence on digital platforms will give the brands ability to micro-target these users, which is difficult on traditional advertising platforms such as TV, Print, etc. Also, the growth in non-monetizable users during the same period is expected to be 70%. This makes it important for advertisers to understand the platform's reach in a more nuanced manner, to ensure efficient targeting.

Socio-Economic Classification of Digital Users​

We conducted 3000 surveys in 121 cities across India, with the samples spread across geographies, and internet usage patterns

A Pan-India survey was conducted by Redseer, spread across demographics and internet usage patterns to determine the importance of the vernacular user in the present-day digital space. This was one of the largest
surveys designed to try and understand the impact

of monetizable internet users. An important aspect of this wide-reaching survey was understanding the preferences and consumption patterns of English-first Vs. Vernacular-first users.

Areas Covered

Research Coverage

Note:

This map is intended only as an indicative representation of the country and may not have been prepared for or suitable from a legal/geo political standpoint

There are ~210Mn internet users who prefer consuming content in vernacular languages, and are monetizable

Vernacular users can be classified into three broad segments:


Vernacular Pure: These users have a strong preference for their vernacular language and their basic phone usage (phone settings, keyboard), social engagement via phone(social media, communication, etc.) and online content consumption is in their vernacular language. They comprise 20% of all monetizable users.

Vernacular Intermediate: These users prefer English as the basic phone usage language, while social engagement and online content consumption are in the vernacular language. They comprise 30% of all monetizable users.


Vernacular First: These users prefer English for basic phone usage and social engagement, whilst preferring to consume online content in their vernacular language. They comprise 30% of all monetizable users.

Classification of Users (CY18)

These vernacular-monetizable internet users have a total spending power of ~USD 300 Bn i.e. ~2x when compared to English Internet Users

Vernacular monetizable internet users have a 3X total spending power when compared to monetizable English internet users. With approximately 210 Mn monetizable users in India, with a per capita average annual spend of $1400-$1500, the total annual spending power of this segment translates to ~$300Bn. In comparison, the total annual spending power of monetizable English users is $155 Bn.

This highlights the importance of the vernacular user in the evolving digital space. While advertisers are reaching English users, it is only 25% of the total spend capacity. Almost 75% of the spending capacity is still
untouched as Vernacular-first users are less likely to engage with English ads.

Segment-wise Total Annual Consumption

Note(s) and Assumption(s):

1. Children below 14 yrs of age are excluded in this analysis
2. Income inflation 2015-18 is 6%
3. Average Savings rate of 30%
4. Effective tax rate of 25%,15% and 5% for relevant income bracket
5. 1 USD = INR 65

Growth in number of vernacular monetizable users will make vernacular digital ad spends grow ~10x, translating into a $3 Bn opportunity in 2023

The projected growth in the vernacular monetizable user base would create a sizeable monetizable population, boosting vernacular digital ad spends.

Vernacular platforms offer higher engagement as compared to English platforms. This, in combination with maturing vernacular platforms, translates into a $3 Bn opportunity for vernacular digital ad spend.

a) Monetizable Digital Population 2018-23

b) Digital Ad Spend – Vernacular vs English

These users are spending more time spent on the internet (esp. on smartphones) as compared to other media (TV, Print and Radio)…

The media consumption pattern of these users highlights their viability as a target segment for digital advertising. It was abundantly clear that the internet was the main mode of media consumption in 2018, with users spending 56% (189 mins) of the time. This translates to a 19% growth in the time spent on the internet for media consumption over 2015. Smartphones have enjoyed rapid growth in the Indian
the market in recent years and this is highlighted by the fact that smartphones emerged as the preferred medium of consumption for most internet-based activities such as  social media and content, OTT Platforms and online
shopping.

The growth in internet consumption at the expense of TV and Print can be attributed to a combination of content and convenience-based factors.


• Ability to view more personalized content
• Convenient availability of a larger assortment of content
• Better control over viewing time
• Higher mobility
• Real time news and updates


Television viewing could be increasing on overall base
owing to the low-income population spending more time on the same.

Internet has surpassed all other media consumption modes…

…with Smartphones emerging as the preferred consumption medium.

…, and most of the share of their time spent on internet is on Social media and Content, with rural consumption higher than that of urban

While music streaming, gaming and OTT platforms together accounted for 31% of the time spent on the internet (across both rural and urban areas), social media and content took up a staggering 69% of the daily time spent browsing the internet by vernacular users.


Rural consumption of social media and content is ~18% greater than that in urban areas, fueled by a markedly high non-video consumption. Approximately 30% of India's internet has been online for less than 3 years. This new user base is increasingly addicted to consume content online. The sheer amount of time spent daily on these platforms gives advertisers an opportunity to target these users. The higher video consumption in urban areas is due to higher internet speeds and a more evolved user base.

Average Daily Time Spent on Internet

Segment-wise Total Annual Consumption

Note(s):

1. Non-video means content browsing, news and photos on platforms like Facebook, Instagram, Dailyhunt etc.
2. Short format videos are defined as videos with duration <10mins – could be on the above platforms or different.

Vernacular users are spending significantly lower time on FB, which is being replaced by mostly vernacular platforms

Vernacular users are spending a significantly lower time on Facebook. From spending 80% of the time spent on social media and content on Facebook in 2015, users were allocating only 43% of their time on Facebook in 2018. Another issue is the negative perception of vernacular content quality. This has forced almost 80% of the vernacular monetizable users to use Facebook in English. Facebook was one of the first popular social media platform,

and a lot of newly on-boarded internet users started their online journey with Facebook. As users are evolving, they are looking for more personalized and engaging content. Users still perceive Facebook to be an English-first platform and hence, find other avenues for vernacular content and social media needs. This represents a huge opportunity for other social/content platforms to attract the vernacular user
base.

Share of FB is going down as most of the vernacular users are moving to vernacular platforms.

80% of vernacular monetizable users use FB in English driven by negative perception of vernacular content quality.

Vernacular users are bulk of the monetizable users and will drive the growth of Consumer Internet with USD 300 Bn annual spending power

Note(s) and Assumption(s):

1. Income inflation 2015-18 is 6%
2. Average Savings rate of 30%
3. Effective tax rate of 15% and 5% for relevant income bracket
4. 1 USD = INR 65

Also, digital ad spend is significantly expected to increase for non FB / Google internet platforms (6X), and video ads across platforms (7X) by 2023

Non-Google/FB internet platforms are expected to see a high rate of growth in the next five years. Owing to the English-first perception attached to Google/FB, other platforms with a focus on the vernacular-first user base are poised to fill this gap. Additionally, these platforms already have a sizeable existing user base (100 Mn+ MAU for certain platforms),

thereby having a strong base for scaling up. Another important enabler for the growth of these platforms is highly engaging and personalized content such as hyperlocal content, news, etc., enhancing the relatability of the platform for the vernacular user.

Digital Ad. Market (Google+ FB v Others)

Digital ad spend (Video v Non-Video)

This is also driven by growth of Digital media, which is growing at 2X as compared to conventional media, and is likely to reach USD ~10Bn in 2023

Digital media has a current reach of 530 Mn users, in only 18 years of existence (computing from 2000). In comparison to ad spends on traditional forms of media such as TV, Radio, and Print, digital ad spends are projected to grow at almost double the rate in the next 5 years to reach ~$10 Bn.

The faster growth in digital ad spend can be attributed to the following broad factors:


Consumer Internet, which is a large contributor to digital media ads, has witnessed a steep growth curve
in recent years.

The time spent on digital media is higher than in other media forms.


Compared to other media forms, digital has witnessed the fastest growth in reach, thereby improving its efficacy targeting a larger set of the population

With 530 Mn users reach already, Digital media is expected to grow the fastest…

… and is expected to grow at ~2X when compared to other media (27% vs. 14%)

As internet becomes the most preferred medium, specifically with significant rise in vernacular users, digital ad spends on vernacular platforms will rise significantly

1) Internet Users

2) Digital Ad Spends

Note(s):

1. $650 Bn in CY23 = 340 Mn Vernacular monetizable users (CY23) x ~$1900 per capita annual spend ($1450 annual spend in CY19, increased at 6% yearly inflation until CY23);
2. For both English and Vernac content / ads;

Some have already taken the first steps in the vernacular route and others will follow – Vernacular opportunity isn't in the future, it's NOW

A number of new age businesses have already taken the first steps towards incorporating vernacular users and tap into this high potential digital advertisement market. A few use-cases being implemented are as follows:


• Growing transactions from customer
• Growing engagement with partner
• Engaging users through vernacular content assortment

Source(s): RedSeer Analysis
* As reported in media