The Indian Online Advertising Enigma

by Santosh

Should Innovation-focused online Indian Startups look to Advertising for Revenue?

2007’s most common refrain I hear is that the online advertising is not lucrative. This I have heard from Investors, Founders, including those with Media industry experience. The obvious deduction that one would draw from it is that it is not probable for most startups to attain profitability the advertising model.

Let’s talk about Google’s AdSense publisher program. The entire idea behind the publisher program is to make it lucrative for the small and medium online publisher to reach out to an online community. AdSense will need to deliver monthly revenues starting from Rs. 25,000/- a month or greater to the publisher to keep him in the game. Similarly, I know several startups that are looking to do a 10 to 100 times that at the top end.

The Investors obviously believe that AdSense won’t deliver those numbers and Startups will have to get innovative when finding that elusive media dollar. But wait, Google’s own Orkut.com is powered by AdSense. Are they finding that the Indian Internet audience is averse to clicking those helpful text Ads that generate rokda for Google India?

Google easily achieves Rs. 100 crore ($25 Million) annually from it’s own AdWords program for Advertisers. Mahesh Murthy estimates this number to be closer to Rs. 200 crore and he also suggests that this is 1/3rd of the total ad spend online in India. I am willing to bet that a majority of the revenues are from Search and not Content Advertising.

Sure, search based advertising is where the money is today. It’s success in India lies in a crucial differentiator from mainstream advertising on Print, TV and Radio. This is a little bit like city or local Cable advertising channels where you know to a certain degree the audience you are reaching, not just a broad demographic. In fact, search advertising is better than that. Advertisers can identify the intent on the part of the search by analyzing his query and pay only if he clicks on the ad. So, while lead generation and cost per click for search is making the cash registers ring for Google, banner and text ads around content aren’t that hot. This isn’t really a big secret and several search startups are nipping Google’s heels for that money. This includes JustDial, Guruji, AskLaila and the human-powered Antya.

On the other hand, the money dedicated to brand awareness, seems to have drifted to TV, Print and Radio. Segments here are growing like nobody’s business and the online cousin is left wanting – or is it?

We still have Rediff, the largest Indian online community that I can think off. Revenues from Indian online advertising from the last quarter (Jul – Sep ’07) were $4.2 Million and has 193 advertisers compared to 159 same time last year in Jul – Sep ’06. Zapak already reaches 100 brands for advertising on their portal. Even Google is smart enough to buy into banner ads provider DoubleClick and Microsoft will have none of it. Google and DoubleClick combined will provide publishers with greater options from the same platform and threatens to lower the overall competition AdSense has.

AdSense may not be the smartest monetization tool out there, thankfully there are plenty of other options available. Startups relying on advertising online may not necessarily be the biggest bets in the near term. In the long term, a startup will still need to bet that the marketing dollar will come online. Innovating with revenue streams from the beginning allows you take a bigger risk, but might distract from what is important. Dave Winer suggests that you should focus on reach and stabilization first before profitability.

To me its really simple. You can’t monetize web services very well until you have an audience of scale. Jason Calacanis suggests that 10mm monthly uniques is where you have scale. I think it can be less in some cases (highly targeted services) and more in some cases (social nets). But every ounce of time, energy, money, and brainpower you spend on thinking about how to monetize will take you away from the goal of getting to scale. Because if you don’t get to scale, you don’t have a business anyway.

Fred Wilson on Twitters Business Model.

So, my advice to any startup is to strive towards generating revenue so you can sustain the business. Only then can you afford to change, adapt and modify your business strategy based on a changing market or new competitors coming to market. Only then will you last long enough to gain scale.

It might be that investors will only be interested in your company after you have achieved scale. But you’ll never get the opportunity to have that conversation if you go bust, or continue to sell a dead horse because you can’t afford to change direction. Generating revenue to help build a better strategy will probably help you gain greater scale in the end.

Why scale does not come before revenue? – Paul Walsh.

~ Santosh