Bengaluru: Flipkart and Snapdeal are building large advertisement sales teams and improving their technology to serve ads based on data collated on the shopping habits of millions of Indians, potentially putting the country’s top Internet retailers in direct competition with Google Inc. and Facebook Inc. in India.

After splurging a big chunk of their massive cash hoards on advertising campaigns on Google and Facebook as well as traditional media companies, Flipkart and Snapdeal, run by Jasper Infotech Pvt. Ltd, started generating ad revenues last year and are building large ad monetization teams to boost this business, according to four people familiar with the matter.

Sachin Bansal, co-founder of Flipkart, is spearheading the ad business after the company reorganized its structure earlier this month, they said on condition of anonymity as these plans are private.

Flipkart is improving its ad platform by buying mobile advertising technology firm AdIQuity Technologies and the company plans to compete with the likes of Google and Facebook in India for a share of online ad spending, the people quoted above said. AdIQuity’s technology will help Flipkart tap its fast-growing user base and analyse consumer data and shopping patterns for generating ad revenue. Mint reported on 29 December that Flipkart was in advanced discussions to buy AdIQuity.

Flipkart declined to comment. Snapdeal and AdIQuity didn’t respond to emails seeking comment.

Flipkart and Snapdeal generate ad revenue mostly in three ways: by selling so-called banner ads; by getting brand partners such as Xiaomi to spend on marketing on their sites; and by charging extra fees for promoting third-party sellers. For instance, a third-party seller can pay extra to have its products shown first when a shopper uses certain keywords to search for goods on the two sites; if a user searches for “casual shoes", a seller can ensure its products are shown prominently by paying extra.

As Flipkart and Snapdeal add thousands of sellers this year, these marketplaces are hoping that competition among sellers will prompt some of them to pay lucrative rates for prominent positioning. Flipkart has set itself a target of drawing 100,000 sellers this year to its site from 12,000-13,000 currently. And with a large user base that is growing fast, Flipkart and Snapdeal are also betting that retail brands, consumer goods makers and electronics brands will increasingly use their platforms to place advertisements. In India, a majority of online ad spending goes to Google and Facebook currently as there are few other sites with large traffic numbers.

If successful, these moves can provide a much-needed boost to margins at Flipkart and Snapdeal and create an additional, large revenue stream for them. Both Flipkart and Snapdeal are trying to model themselves on Alibaba, which listed in the US last year in a record initial public offering. Alibaba generates more than 55% of its sales from ads, according to data by iResearch Consulting Group, and the company even bought a controlling stake in online ad firm AdChina in January to increase ad revenues. Alibaba’s consumer marketplace site Taobao is China’s second-largest online ad generator after the local search engine Baidu, according to iResearch.

Amazon.com Inc. is also working on an ad platform that will battle with Google for online ad spending. Amazon generated roughly $1 billion in online ad sales in 2014, according to estimates by eMarketer. That number is insignificant compared with the $55 billion-plus that Google likely generated from ad sales, according to published numbers.

Investors have pumped in about $3 billion in Flipkart and Snapdeal over the past year, betting that these companies can maintain their flying sales growth. While sales growth isn’t a concern, Flipkart and Snapdeal are nowhere close to generating profits, and many analysts say it will take several years for these companies to make money because of their cost structures, deep discounting and intense competition from Amazon India.

“Ad revenues are very lucrative as this goes straight to the bottom line, and Alibaba has shown the way for making ads a core part of the marketplace business," said Abhishek Goyal, founder of Tracxn, which sells data on start-ups. “In India, the online ad business is nascent so it’s up for grabs. Flipkart and Snapdeal account for a large part of the online traffic and they have rich consumer shopping data so there is clear potential to build sizeable ad businesses."

Flipkart co-founders Sachin Bansal and Binny Bansal own small stakes in Tracxn.

To be sure, some analysts say it would be tough for Flipkart and Snapdeal to replicate Alibaba’s success in ads.

“The marketplace business in India is much, much smaller and less evolved than China’s. I think it’ll be years before e-commerce firms generate a large percentage of their revenues from ads because there aren’t that many sellers who can afford to pay for ad slots and ad words," said an analyst who works with Flipkart and Snapdeal. He spoke on the condition of anonymity.

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