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Reliance Jio Impact: Online Advertising rates decline in India in November

kpmg-online

4G operator Reliance Jio’s trial services, which started in earnest about three months ago, has disrupted the online ad industry by massively increasing the total inventory without a commensurate increase in ad budgets.

INTERNET EXPLODES

Today, Reliance Jio has 50 mln users who, on average use about 1 GB of data per day. This creates 50 mln GB of traffic per day — increasing the size of the Internet in India by several fold compared to what it was before September.

For example, before Jio’s trials, there used to be around 150 mln wireless data users who on average used to consume about 23 MB of data per day — amounting to a total Internet traffic of about 3.5 mln GB per day.

In addition to these wireless users, there were be an estimated 20 mln users who access the Internet using landlines, cable Internet and so on. Assuming an average of 500 MB per day for these users, they would have been generating another 10 mln GB per day of traffic.

In other words, with the entry of Jio, the total Internet in India exploded from around 13.5 mln GB per day to 63.5 mln GB per day — a growth of almost 500% — in a matter of three months. In comparison, digital advertising budgets are growing at 38% a year, or about 10% every three months.

However, given that the October-December period also happens to have several sales and promotions, advertising budget for the October-December period is likely to have grown by around 100% compared to the previous three months.

But the story doesn’t end there.

The real bad news for some publishers is that most of this increased budget was largely spent in October — targeting Diwali shoppers — leaving very little in terms of increased spending for November and December.

As a result, online ad rates held up in October despite higher inventory, but crashed in November. And going by the looks of it, rates are likely to remain very subdued in December.

VARIED IMPACT

The impact of this Internet explosion due to Jio is not the same across all genres and categories of online advertising.

The biggest difference has been felt in video advertising, since this is where most of the extra data consumption is happening. Many of the people who have got access to free Internet use it for watching videos, primarily on Youtube.

The actual impact on the advertising rate — and consequently the decline in revenue generated per video or per minute — is difficult to get as neither publishers nor platforms like Youtube share their numbers.

Data for text-based websites are easier to obtain. According to our evidence, there has been a halving of bid rates (also known as cost-per-click) for both search and display advertising in India in November.

However, this is not to say that publishers are generating less amount of revenue.

In fact, many publishers — especially those who generate content that will appeal to the free users — are seeing strong growth in their overall revenue generation. This includes creators of film-based content, social media networks and of course, Youtube itself.

However, niche content producers — or those who create content that is unlikely to appeal to the free users — are likely to see a decline in overall revenue for two reasons.

First, the sudden influx of new Internet users (and the consequent spike in total page-view inventory) has depressed the average revenue that these publishers get on each ad.

Secondly, this decline in ad revenue is not compensated by an increased number of page views as these producers create content that are unlikely to appeal to the new consumers, who are opportunistic and first-time Internet users.

kpmgFUTURE

Future trends on online advertising in India depends on two factors: How sustainable the present spurt in consumption is, and second, how responsive advertisers are in tapping the increased opportunity.

The first question — whether the current spurt in Internet traffic is sustainable or not — depends primarily on how final the tariff rates announced by Reliance Jio for its Internet services are.

For example, under the tariffs announced in September, Jio’s Internet plans cost Rs 66.66 per GB to Rs 125 per GB, and averages around Rs 100 per GB.

This would imply a cost of Rs 3,000 per month per user for current levels of usage — something that is clearly unaffordable for the masses.

The best case scenario from a tariffs perspective is that Jio will price its data at around Rs 33 per GB, which would result in consumption on its network falling to about 5 GB per month per user from about 30 GB per month at present — a reduction of over 80%.

This will again lift average advertising rates — most notably for Youtube and other video content — while depressing total revenue generated per video due to lower number of views.

However, it remains to be seen whether this will have much of an impact on text-based content monetization as textual consumption will continue to remain high due to the high affordability of the new tariffs.

If consumption remains at elevated levels, it could call for a tweaking of online ad algorithms in India.

Faced with an influx of millions of new consumers with low purchasing power, advertisers will have to start giving higher weightage to the profile of the consumer rather than the nature of the content when bidding for ad slots.

This would raise rates for niche content producers.

So far, most of the bids are based purely on the behavioural and content criteria and not the socio-economic background of the consumer, as Internet users in India have so far tended to be drawn almost uniformly from middle and upper levels of the society.

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