WORKING DRAFTLast Modified 8/6/2010 2:10:55 PM India Standard TimePrinted 07/22/2010 9:01:08 AM India Standard Time

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

Asia’s Digital LivesAsia’s Digital LivesNal GollaguntaMithun SundarVikram Vaidyanathan

Practice Olympics 2010 IN#3

McKinsey & Company 2

Wo

rking D

raft - Last M

odified

8/6

/2010

2:1

0:55 P

MP

rinte

d 07/22

/201

0 9:0

1:08 A

M

|

Already ~500 million online digital consumers across India and China, but even larger potential exists due to low penetration

17

37

43

47

54

81

96

China

U.S.

Japan

Germany

India

France

384

U.K.

Korea

228

Australia 4

29

17

20

22

76

73

17++

233

▪ Already the ‘Top 3-4’ markets in terms of access

▪ Yet, significant room to grow further given low penetrations

29

80

77

69

76

66

7

76

74

18

20

60

27

33

26

2

60

26

1 CNNIC, 2009, for overall China population >=62 Based on strategy analytics, but including CNNIC China user numbers

SOURCE: CNNIC 2009, Strategy Analytics (2008); World development Indicators (World bank)

McKinsey & Company 3

Wo

rking D

raft - Last M

odified

8/6

/2010

2:1

0:55 P

MP

rinte

d 07/22

/201

0 9:0

1:08 A

M

|

Historically, primary consumption has centered around first gen. services and applications supplemented by offline acquisition

Online DC&S

Offline DC&S

2nd gen.

2nd gen.

1st gen.

3rd gen.

Mobile

94

13

17

16

17

15

5

46

50

25

32

63

36.3

Talking 299.0

Total time spent on mobile 494.0

Radio/FM on mobile phone 132.0

Playing video games 50.6

Watching offline videos 33.7

Taking photos/videos 33.4

Listening to downloaded music 74.3

Doing online mobile transactions 26.7

Streaming/watching online videos 33.7

Reading/writing e-mail 43.4

Social networking 42.7

Browsing websites 40.2

Instant messaging/webchat

7.3

6.3

6.6

4.6

297.4

85.9

17.4

9.1

17.6

35.9

1.3

4.9

Actual usageMinutes/week

Average usageMinutes/week

PenetrationPercent

SOURCE: McKinsey Digital Consumer Research (N=5006,1028)

Digital Clock (Mobile)

McKinsey & Company 4

Wo

rking D

raft - Last M

odified

8/6

/2010

2:1

0:55 P

MP

rinte

d 07/22

/201

0 9:0

1:08 A

M

|

Barriers to adoption are slowly being addresses and uptake for 2nd generation content set to rise dramatically

India

China

172331

5242

5264

76

X0.85

X0.74

X0.81

X0.74

X0.80

X0.85

Accesbs: Have internet enabled phone & aware

Interest:Have tried/likely to try

Trial: Infrequent +frequent users

Continuous usage:Frequent users

▪ Falling handset prices– Already street price of a touch

screen phone reduced by 70% to Rs. 5500 in 2 years

– 170m mobile subscribers able to buy a 3G enabled touch-screen based phone

Not enough handsets

Too expensive / Bad experience

Percent of internet users

▪ Transparent & affordable pricing– Competitive landscape (3 different operators in each

circle, Reliance broadband) likely to force prices down similar to voice

– Sachet pricing already a phenomenon in the market

SOURCE: McKinsey Digital Consumer Research (N=5006,1028)

▪ Quality internet access– Advent of BWA and 3G-based data services expect

to resolve last-mile issues

McKinsey & Company 5

Wo

rking D

raft - Last M

odified

8/6

/2010

2:1

0:55 P

MP

rinte

d 07/22

/201

0 9:0

1:08 A

M

|

With steep decline in hand-set prices ~170m+ subscribers can afford 3G enabled handsets

SOURCE: Interviews; team analysis

Street price of a touch-screen 3G phoneINR

▪ Already, 170m mobile subscribers are able to buy a

3G enabled touch-screen based phone

INDIA EXAMPLE

As the cost of the full-feature touch-screen 3G phone has plummeted …

… the potential addressable market among the digital consumers has exploded

5,499

8,000

19,500

0

5,000

10,000

15,000

20,000

H1’09H2’08 H2’09 H1’10

13,000 46

24

63

37

16

5

0

10

20

30

40

50

60

70

12

16500 12500 9500 6500

2

Expected purchase price of next hand-set% of consumers likely to buy

Non-users

Users

Street price of a touch-screen 3G phoneINR

McKinsey & Company 6

Wo

rking D

raft - Last M

odified

8/6

/2010

2:1

0:55 P

MP

rinte

d 07/22

/201

0 9:0

1:08 A

M

| 6

▪ Introduced unlimited internet browsing “pocket internet cards” in two variations– Rs 14: 3 days – Rs 98: 30 days

▪ Pay per use services : Wallpaper, Ringtones, MP3 tones, True tones, Videos, Themes and Mobile games downloads

Rationale▪ Differentiate from the

competition through innovative pricing - unlimited browsing without a monthly commitment

▪ Target the Indian youth segment which forms 80% of mobile internet users

Product Details

SOURCE: Company website; Press

▪ Aircel later on launched INQ Mobile device promoting mobile browsing with strong focus on social networking

Related Products

Similarly, transparent pricing proving to be a big market disruptionAircel Pocket Internet – Case example

Impact on the mobile internet browsingAircel launched its Pocket Internet cards in June 2009

“The mobile web traffic from India on AdMob's platform stood at 1.2 billion in Mar’10 growing ~100% yoy…..with Aircel subscribers contributing the most, mainly owing to the launch of unlimited data plans”

“Soon after Aircel introduced pocket Internet card in May 2009, Google saw a 50X increase in Internet usage on Google Mobile by Aircel customers”

0

50

100

150

200

250

300

Apr’09 Oct’09

AdMob Impression requestsMillions

Aug’09

Jun’09 Dec’09

Airtel

Aircel

Launch of promotion

McKinsey & Company 7

Wo

rking D

raft - Last M

odified

8/6

/2010

2:1

0:55 P

MP

rinte

d 07/22

/201

0 9:0

1:08 A

M

| 7 SOURCE: Company website; Press

Early indications that such an evolution to 2nd generation services already underway in India, but with little pro-active shaping by the players

# of unique usersOpera mini® - Top 10 sites in India

Jan’09 Jun’09 Dec’09 Jun’10

1

10

2

1

.

.

.

9

McKinsey & Company 8

Wo

rking D

raft - Last M

odified

8/6

/2010

2:1

0:55 P

MP

rinte

d 07/22

/201

0 9:0

1:08 A

M

|

As infrastructure barriers are further addressed, we expect the market to evolve further to “Generation 3” content/services

50%

19%

20%

10%

8%

7%

8%

8%

12%

11%

100% =

Ringtones /

CRBT / Graphics

Infotainment (including SN)

Gaming

Video/TV

Music/Audio

Advertising

Financial

services

Healthcare

Education

M-commerce

2015 (estimate)

5.7

12%

7%

7%

10%

8%

2010

13%

MOBILE MEDIA MARKET

Gen 1 (basic entertainment)

Gen 2 (higher end experience)

Gen 3 (utility / services)Estimated revenue potential USD Billion

SOURCE: Team analysis; Press search

McKinsey & Company 9

Wo

rking D

raft - Last M

odified

8/6

/2010

2:1

0:55 P

MP

rinte

d 07/22

/201

0 9:0

1:08 A

M

|

Specifically, we believe there will be a significant appetite for third gen. services which address fundamental latent needs in the market

Potential third gen. offeringKey drivers

Picture

A▪ Very low banking penetration in Tier-3/4 and rural

▪ High unbanked/undocumented population

▪ High transaction cost for traditional remittances

Domestic m-remittance platform▪ …▪ …▪ …

… remittance options for the unbanked

Picture

BTech. enabled e-education platform▪ …▪ …▪ …

▪ Little choice/supply of quality instructors outside the Metros

▪ High appetite for prep/coaching classes for entrance exams

▪ Highly fragmented demand base across XXX towns for a franchise model

… high-quality supplementary educational channels in Tier-2/3

Picture

CMobile-based local advertisement▪ …▪ …▪ …

▪ High costs for traditional advertisement (overkill for local advertisers)

▪ …▪ …

… channels for localized and affordable advertising for SMEs

Need for …

McKinsey & Company 10

Wo

rking D

raft - Last M

odified

8/6

/2010

2:1

0:55 P

MP

rinte

d 07/22

/201

0 9:0

1:08 A

M

|

But with this evolution, existing value-chains will be completely reshaped which has serious implications for incumbents

SOURCE: Soundbuzz (Motorola), PwC

With mobile operators cornering the lion’s share of the revenues, content publishers are seeing a 50% reduction in their share of the value chain with operators picking up most of it

MUSIC INDUSTRY EXAMPLE

… which is fundamentally shifting the value across the value from the content owners to the operators and aggregators

1 Publisher – Saregama, T-series, Yash Raj ; Aggregator – OnMobile, Hungama2 Assumption : Physical Retail – Publisher - 70% ; Mobile – Publisher - 10%, Aggregator - 20%, Operator - 70%3 Primarily through street-side retail purchases, direct mobile uploads in retail stores etc.

Music industry revenues, India$millions

160168

+30% p.a.

Physical

Mobile

2010

1,125

125

1,000

07

610

450

2006

396

228

Value Chain

Content publishers1

Operator

Content aggregator1

35%

12%

40%

26%

15%

52%

17%

18%

62%

+64%

-9%

Increased digitization of content▪ Close to 50% of unconnected digital consumers

have listened to MP3 either on their PC or mobile phones

Increased mobile phone penetration▪ More than 50% of urban population listen to FM

radio on a regular basis

High Cable/DTH penetration▪ With over 95% penetration of Cable/Satellite TV

connections, 15% of the respondents are watching more TV than a year ago

Several drivers which are changing the music consumption patterns …

Consumers are spending another $1bn or more in

illegal media3

McKinsey & Company 11

Wo

rking D

raft - Last M

odified

8/6

/2010

2:1

0:55 P

MP

rinte

d 07/22

/201

0 9:0

1:08 A

M

|

To avoid being left out, 3 types of actions need to be taken by the incumbents

SOURCE: Team analysis

How do we do that ?

▪ Relentless focus on means and ease of discovery by consumers

▪ Stay in tune with consumer consumption trends and technology shifts

▪ Pursue partners now or art (esp. where current assets have little relevance)

Examples

▪ Netflix ever-evolving delivery model –Postal Mail (2002) Roku STB (2007) iPad App (2010)

▪ Dell customer support through social networking websites

Stay relevantStay relevant

Avoid disintermediationAvoid disintermediation

Offer better “value”Offer better “value”

▪ Maintain direct customer relationship as much as possible (esp. billing relationships)

▪ Bring all assets (digital & non-digital) to bear (e.g., device maker leverage existing retail touch-points to make content sales)

Netflix ever-evolving delivery model▪ Postal Mail (2002) Roku STB (2007)

iPad App (2010)

▪ Approach all alternative choices (incl. free apps, pirated content) as competing product categories for pricing

▪ Expand the concept of value beyond pricing to recency, exclusivity and quality

▪ Moser Baer DVDs at Rs. 35 per movie, now competes for shelf-space with pirated material at corner kirana stores