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

Will all these Indian portals succeed? Let's look at what it will take. (Readers are warned that what follows is an exceedingly boring exercise. Please keep your Valium handy.)

1. One usually sound rule of thumb in business is to try to make more money than you spend

2. There are some temporary exceptions to this rule - like when you need to spend a little more initially to be able to make a lot more later

3. In all cases referred to in (2), though, there should be a close track between expenses and income - and a clear picture to any observer why revenues will soon be greater than expenses

Against this background, lets look at the broad Indian market:

a. The advertising market is around Rs 9,000 crores (US$ 2 bn), growing at about 12% to 15% annually in these boom years

b. Even if one were to assume that net advertising as a share of the pie will grow rapidly to approximate the US' 4% share (and there may not be good reasons to assume so), the market for net ads will at most be about Rs 350 crores by the next year or two

c. Looking at the US experience - and, again, that needn't be a guide - in the first year or two, 90% of the revenue went to 10% of the sites - actually to only about 10 or 15 sites. This might mean that, were all to work to history, about Rs 250 - 300 crores or so will be split among about 15 sites - indicating an average revenue of about Rs 20 crores per site, aggressively speaking for the 'big' ones - and the other 500 sites or so will scramble to share about Rs 50 crores - at about Rs 10 lakhs per year per 'small' site

d. Averages lie - some 'big' sites could make as much as Rs 40 crores, some just Rs 5 crores. Some 'small' sites could make Rs 40 lakhs, some about Rs. 2 lakhs. Guess what this does for valuations, even at 50x sales.:-)

e. This number isn't likely to go up exponentially - as the overall ad spend isn't going up exponentially. A growth rate of 50% year over year would be a sign of success for any single site

f. Now, if you have an eyeball-driven business - Rs 40 crores (US$ 9 million) is about all the biggest of the big can hope to make by 2001- assuming you had a phenomenal sales team and advertisers welcomed you with open arms. (From what one notices - nobody has a great team yet - and, boy, are advertisers still wary. But still.)

g. Against this background, one is curious how sites like rediff.com (purported ad budget Rs 35 crores, purported ad sales last year Rs 2 - 3 crores) or indiainfo.com (similar spend to rediff, purportedly lower sales) or 123india.com (ditto) or Indya.com (purported ad budget of Rs 100 crores, no ad sales team, outsourced function) will _ever_ get to make even one-half of the money that they currently say they will spend

h. Unless they drastically curtail their ad spends - and try instead to - surprise, surprise - build a site that is differentiated and desirable in the eyes of the user so the product can sell itself (can anyone differentiate between these sites if you covered up the logo? More importantly, does any user think there's anything different between them?)

i. Now lets go from idealism to a reality filter. Looking at rediff's public figures, they averaged about 25 - 30 million pageviews monthly over their last financial year - about 300 to 360 million over the year. This they converted to about Rs 1.5 crores to Rs 3 crores in ad sales. Their average realisation was 5 paise to 10 paise a pageview. If they sold at their quoted 65 paisa a pageview, they sold only 10% of their inventory. If they sold even at half the rate to do a deal, they sold only 20% of their inventory - assuming only one ad per page - though even that's not true.

j. What do you need to do, at these realisation figures (assuming the supposed market leader in India is any sort of benchmark) to make your Rs 40 crores? You need 4 _billion_ pageviews. Or, even if you got to twice rediff's efficiency, 2 _billion_ pageviews a year - or over 150 million pageviews a month, on average.

k. Only one site does that today from India - and it doesnt even have an Indian edition. That's Yahoo. And I'm not sure they write any discernible revenue from here. Moreover, will India have the users and connectivity to support 5 or 6 multi-billion pageview sites? That should be another interesting calculation:-)

l. With Yahoo India launching next month with a dedicated site, MSN.co.in linking up to all Indian Hotmail accounts and AOL coming in someday with its own brand, where does that leave the large Indian portals? Your guess is as good as anyone else's.

But, wait, could retail e-commerce save the day for these broad portals? Let's look here too:

i. All retail commerce in India is about US$ 180 billion

ii. It's estimated - again I'm not sure how - that about US$ 180 million to US$ 300 million of this will be the e-commerce part (yes - about 0.1%) by 2001

iii. How much of this will go to broad portals and how much to specialised e-shops is anybody's guess. Again going by the possibly unreliable US reference, almost all of it went to specialised retailers. (A small portion of Yahoo's revenue is e-com - an overwhelming majority of it is ad sales)

iv. So perhaps about US$ 20 or 40 million might be what broad portals will pull against speciality etailers? What will be the share of any one of those portals? US$ 5 million at 15% earnings if they're lucky? Will the US$ 750k/Rs 3 crore earnings bring them any closer to profitability?

v. Probably not.

vi.. Rediff's SEC filing says it did all of US$440,000 in e-commerce revenues last year. Subtract cost of goods from that. That was their e-com earnings. Perhaps about US$ 60,000? Maybe it does ten times as well next year. Or even forty times as well in the next two years (it'll have to move completely away from being a portal to being a retailer to even think of doing that). There's just a couple of million dollars in margin there.

vii. Will that put them in the black? At current spend levels, one doesn't believe so.

Does this mean there isn't room for any Indian net brand to succeed? One thinks that isn't true either. One would recommend a four part strategy: stay stingy, build a better product, market by word of mouth and sell like hell. Then there's a decent chance one can make it.

As a side note to everybody who's making the Times of India, HT and Citibank's Selvel richer with their humongous ad spends: have you ever seen a Yahoo or Hotmail or Amazon or Napster or ICQ ad? They spent their money instead on building a better product or service. Net users did the rest. Perhaps one should end now - those snores in the audience are getting deafening :-)

My $0.03,

Mahesh

mahesh@passionfund.com