Reply-to: indiaentrepreneurs@egroups.com Subject: Re: [IndiaEntrepreneurs] future of portals in India

At the cost of sounding heretical, I humbly submit some points divergent to those pronounced by Mahesh $.02 Murthy. I am fully armed to fend off hurled valium bottles.

In question is the fundamental statement that a sound business is one that earns more than it spends. Did it take one remark of mark mobius and the consequent market crash for people to suddenly start asking this basic question ? Let's pause a minute and look at the leading internet companies in the US (we'll come to whether this is a good benchmark for Indian portals later).

All of us internet believers (investors, entrepreneurs, armchair theorists, employees) have to this day believed in an economy with the following leading lights

1) Yahoo! (leading traffic aggregator and most successful proponent of ad revenue model)

2) Amazon (top exponent of e-commerce revenue model)

3) MP3 (great product, viral marketing champion)

There are many more, but let's look at these for a start

1) Yahoo! earned $225m in ad revenues in Q1 2000 (with profit of $75m); its $600m revenues in FY1999, were against an average daily page views of 450 mill. It went into the black only in FY 1999, having lost money even with 200 mill page views/day in FY1998.

2) Amazon had revenues of $1.6 bn in FY 1999, losses of $700 mill and cumulative losses of $1.2 bn to date. While it earns gross margins of 22%, its cumulative marketing spend of some $500 mill has mainly contributed to the losses…

3) MP3 has created a great product, and marketed it virally to become a household name etc, but is struggling financially – it has a pure ad revenue model and earned barely $17m in Q1 2000, while spending over $35m on marketing and other expenses.

One can attempt some sweeping generalizations about the internet economy:

1) The pure ad revenue model is questionable – only yahoo! has succeeded in making it a viable business model (at a 0.5 bill daily page view level!) -- all other portals internationally are still losing money heavily, and advertisers are questioning the efficacy of net advertising

2) E-tailing has been more successful in attracting online spenders (consumers vs advertisers); however, amazon lost far more money in attracting consumers than yahoo earned in ad dollars in 1999 (700m loss vs 585m revenues). And remember, amazon is far and away the leading e-tailer in terms of number of customers and revenues.

3) Excellent technology products like MP3 can attract a huge user base quickly, but have a future primarily as acquisition targets, not as stand-alone businesses

Before we start hypothesizing on the future of Indian portals, one should question the fundamental basis on which even the most successful US internet companies (based on market cap)have been considered winners, and why we all believe that the internet economy is all the hype it is made out to be.

Here's my take on why the above companies are winners, and how we can apply these parameters to judge the performance of Indian portals (and their future, however bleak!)

1) yahoo! operates on huge gross margins (some 80%), has a well- diversified advertiser base (some 5000 advertisers for $1b forecast revenues), has a positive cash cycle and has crossed critical mass ($350m in ad revenues), something no other internet company has even come close to, despite the efforts of top management teams and lots of public money. Those who kept the faith in initial years have been vindicated.

2) Amazon may have lost pots of money – but note that it will probably turn over $5bn in FY2000 which is more than that of Barnes&Noble's offline business. Its success stems from the fact that it has truly threatened the brick&mortar world by actually becoming earth's largest bookstore in 6-7 years. More importantly, it has 20 million customers (of which 75% are repeat customers)- so, if it has spent $500m on marketing to date (and lost $1.2 bn to date), its average customer acquisition cost is between $25 -$50 depending on which metric you feel comfortable with. Against an average customer revenue of $125m ($2.5 bn of revenues/20 mill). While nobody is sure when they will make money (least of all Jeff Bezos), there is no gainsaying that they will own a major share of global internet shoppers, once that number crosses 300-400 mill in the near future.

3) MP3 has a user base of severalmillions;however just like hotmail and ICQ they will struggle to survive on their own – if the multi-billion lawsuit does not kill them, they will probably get acquired at a decent price for their user base.

I guess most people back these leaders (on whom rests the future of the internet economy according to most), as they stand a real chance of making a fundamental change in the way the world works – never mind, if their ROCEs are laughable. I think it is only fair to look at Indian portals with this background.

Let us now look at Rediff, who has had the misfortune of displaying its parlous financial position to the public gaze. Forget the ad revenue model (as it has not really worked in the US, it is quite academic to look at in India). What is more worrying is the e-commerce side – a princely revenue figure of $440,000 or Rs 1.8 crore for the year ! (One is not even sure, if there is a 15% margin out here as Mahesh quite charitably assumed, ie, 27 lakh, if one takes into account the several discounts, losses on shipping, sales returns and other forms of accounting jugglery).

Rediff sells products across some 10 categories – if one assumes a unit purchase value of between $5-$15, $440,000 works out to some 40,000 transactions; again assuming a reasonable number of loyal shoppers (one hopes), we have a maximum of 8000-10000 repeat shoppers, probably even less. Now, losing $7m to acquire 10,000 customers works out to an acquisition cost of some $700 per customer - -- I know of several off-line businessmen who could create a loyal- for-life 10,000 strong customer base with a $7m spend (including my round-the-corner kirana shop who does instant and free home delivery of almost all my everyday needs over the telephone). Yes, there is a serious problem here, if the above analysis is anywhere near accurate. Even if Rediff acquires a total 100,000 loyal customers with its balance $11m cash, that is still $180 per Indian customer, a huge sum for a market leader with FMA (first mover advantage (sic!)).

If Rediff, with its 3 year lead, top-quality investors, huge range of shopping options, global reach, and a war-chest of cash etc etc is unable to sell more than an average departmental store in Bombay, it raises some questions on the viability of e-commerce in India (or at least the way it is done today). I'd be happy to hear the views of the group on this one…

So what is the future for portals in India ?

My view (which is open to challenge) is that it is the focused verticals, with a strong off-line presence (yes, c lick'n'mortar) which will click in India. It is nobody's case that by being the largest Indian horizontal, one will necessarily survive – poor financials will one day catch up, if not Yahoo, MSN and AOL who have the money, muscle, inclination (and the page views!) to own the Indian market.

Hey, valium doesn't taste that bad!

Cheers

-Arun Pai