The Ajit Balakrishnan Interview

Mr Balakrishnan, thank you for taking the time to speak to BT. You recently got back from the US. What's the mood there?

BALAKRISHNAN: You mean, how is Wall Street looking at the whole sector? The general trend right now is that Wall Street particularly is looking very deeply at the business models underlying the Net sector, particularly the business-to-consumer sector. No longer are questions like ''what are your page views'', ''what are your registered users'' and all that stuff (asked). Today, the clear view is ''please show us your business model and a clear path to profitability''. That is being asked from the sector.

For the historical context you have to look at when this dot.com boom started, which was really about two years ago. It is important to understand why it started-the arrival of the Net as a major force coincided with one of the biggest bull markets in the history of the US. Both happened together. The result: there was plenty of money. And the public market started to perform the role of a venture capitalist. And that really meant that they thought that by going and investing in a company very early in a cycle they stand to make huge gains.

The fundamental change that has happened is that today the bull market is really shaky. People are wondering if it is really heated and there is a view that the best way to solve it is by increasing the interest rates. And this (potential) increase is bringing the mood of the whole Wall Street down.

Including the Net economy...

When that happens, every sector is affected. We tend to look at it from the Net sector. Every sector is sensitive to that. Housing, credit cards, companies, consumer finance companies, cars, retail-all are extremely affected. We tend to view it partially as an Net problem. It's not.

That's because, I guess, the media itself has been such a part and parcel of the hype...

Yes. So what has happened is that all of Wall Street is asking us, the Net sector, that they would like to see who are the leaders, and there is a general shift towards quality. They are saying that they only want to invest in certain Net companies: you must be a leader of a large enough market. And are you addressing a market that you are capable of catering to if you become a winner?

The second question is, are you currently No 1, 2, or 3 in the market? If you're not, bye-bye! You must be a leader. Third, your gross margin should be at least 50 per cent...if the gross margin is not high, it means the consumer has not got your value proposition. So, gross margin is a very big number today to watch out for. Rediff's gross margins are 61 per cent. Then, your sales must grow sequentially, quarter to quarter, by 50 per cent. And the consumer acquisition cost must be on the decline. If all of these are right, then it doesn't matter if you make a loss. ''We extrapolate you will make a profit some time and we are comfortable with that.''

But this is reflected in some form in Rediff's valuation...

This is the black-and-white dividing line. If you are not any of the above, you are gone. Basically, Wall Street is stepping back and saying ''We will go back to our normal financial analysis''...they are stepping back more towards the traditional model. Now, this is a big change.

What does this mean for Rediff's valuation on the NASDAQ?

First of all it means that if we had not gone out then, we never would have gone out. That is the sobering truth.

So, in the 2-3 months since Rediff's listing, perceptions have changed...

Dramatically! The NASDAQ still looks at your current quarter and, then, the next two-three quarters.

But your projections for this year and the next would have been open information. So why the reaction now?

That is a promise, the reality is...

So this is a reality check?

Life after an IPO is quarter to quarter... questions are being raised about good and bad revenue streams. Good revenue is seen to be relevant when in acquiring of that revenue you are furthering your strategy. For example, advertising and e-Commerce revenue streams are seen to be good revenue in our context. But (if) we acquire a software services company and add $10 million...for the same revenue stream, Infosys will get 20-25 per cent (market appreciation). What might be good revenue for them many be bad revenue for us.

Rediff says that it will break-even by 2001...does that stand?

We have not made such projections.

The Goldman Sachs Report says that...

They have made the projection and we have said to Wall Street that we are comfortable with that. And we still can say that we are comfortable with that....

Is Rediff's stock price right now a reflection of the market's feeling about the Net in India? After all, Rediff is the gold standard.

The price... we listed at $12, today it's a shade below that.

Around $10...

$10 something. By international standards, we are doing very well.......

By international standards you mean equivalent Asian portals, or...?

There are three-four comparables here. The top-most comparable is emerging market portals. One is sina.com, the other is china.com-these are two Chinese portals they are constantly watching with interest. Then, there is Satyam; then they look at Indian infotech companies, like Infosys. So, first is emerging market portals, (then ) all other Asian portals, and then come to infotech companies in India. And then the small and medium cap Net companies in the US...

Should we take emerging market portals as the point of comparison?

I think that is the most important. Yes. They believe that Indian companies have better corporate governance than other emerging market companies. We have to thank Infosys for that.

Some have questions about the size of the market. If it is seen to be small, we get penalised. Any news item that says the Indian marketsize is huge, our stock jumps. People look at them as positive developments. And generally, it is true. So, they are very sensitive to perceptions about India and Indian marketsize evolution...it's a constant peril. The other factor is the Indian currency price.

Do you think that pure-play horizontal portals are facing flak?

Pure-play portals are not under a crystal dome. The market says if you are a leader, you are a winner.

Irrespective of the market?

Absolutely. By and large, they are clear. Leave aside the mysteries of the Indian markets, it is one of the biggest Net consumer markets.

We have 4 million users right now?

At the current rate, it is attainable. So, that part is OK.

OK. Do you think the market is not looking favourably at pure-play horizontal portals, without access, with e-tailing in its infancy?

It's an old model, and is exactly that of Yahoo!'s. The revenue streams are two: advertising and fees-based e-Commerce. Some 93 per cent of our revenues came from advertising and 7 per cent from e-Commerce. In the previous quarter, it was 95 per cent and 5 per cent (respectively). So, the e-Commerce element is creeping up by 1-2 per cent...everybody expects that in the long run, at least half of the revenues will come from e-Commerce...Yahoo!'s April-June quarter shows 70 per cent of its revenues from advertising, and 30 per cent from e-Commerce.

But e-tailing is in doubt, elsewhere and in India. What is your perception about B2C e-Commerce?

E-tailing sites, I really believe, will attract a horde of customers at very little cost and very efficiently disintermediate all other middlemen and companies. In e-tailing, you have to go to the customer. So, the added cost of delivery. The customer is waiting to pay at brick companies; on the Net, she may say I will not pay. So that's the first setback. Then, e-tailers are not able to make more than 10-20 per cent gross margins. That's because they do not, yet, have the volumes that Walmart has. Consumer expectations of delivery are so high that unless you have your own logistical and warehousing system, you can't cope. So you have all the costs and then some more!

Do you feel additional pressure as a pure-click company?

Additional pressure will come from other competition, international portals... It's not because of the model.

So the model works?

The model is believed to be the only successful way to do it. A model that the market doesn't know is when you have this and you have Net (access). They say, hey, this is one animal we don't know. I have people who say to me, Ajit, we'll give you money, but don't go and fund access companies. They are terrified of access. Sure, access works for some people. If MTNL does not have access, it will die. But from a pure portal's point of view, it's suicide.

The economies are against you. Sure, we would like to partner for increasing access. But bigger guys seem to think that they can create their own portals. However, the moment ISPs set themselves up to compete with the world wide web in terms of content, they are gone. The customer doesn't buy that.

The second flavour, at least in Mumbai, is the opening up of data centres. VSNL has a basic data centre. The other extreme is the Exodus Data Center facility in Santa Clara. In the early stages of the market, like in India, only VSNL will think of a data centre. In the early stages of a market, it is very tempting to play this, and play that, everything looks possible. It is terrifyingly tempting. We know all these businesses. But having seen Exodus, do I want to compete? No. I will compete for nine months and die out.

What about other forms of partnerships? You are very gung-ho about cyber cafes. And free ISPs. Are you looking at alliances here?

Definitely. With whoever will ally with us.

Back to e-tailing. What's the Rediff experience?

We have about 145 merchants on the site. We believe it is a great platform for international companies to enter India. It is a great place for small companies that are making speciality products to access the national market. It is also a great place for certain ethnic product manufacturers to access the world market as we have a worldwide user base.

But you don't intend at any point to have a stock or to maintain a warehouse?

Last year, we were experimenting. We did not want to let our customers down. Now we have zero inventory. We will introduce you to a courier company, help you connect the computer systems, we get the consolidated rate we have negotiated for all. After that, you are on your own.

What about comparative pricing tools?

Our vision on this is that two years from now, every merchant, e-tailer, manufacturer will have a web-site. They will all be XML-enabled. They will not be written for the human eye to see, but they will be for robots to go and collect the information. This is not a forecast, this is a dream. Rediff will have 25 million users-again, this is not a forecast, this is a dream-and, we will know everything about those users. So when you come to our site, we know what your interests are, so we present to you information and options for shopping tailored to what you like. We ally ourselves with the consumers. We try to anticipate and we build infotech connections accordingly. And a big trend there is XML.

How are you on WAP?

Very hot. All of Europe and Asia is for WAP. All America is not for WAP.

And there's Japan too.

DoCoMo is by itself a standard in Japan. The jury is still out. The thing about standards is that Europeans like to sit in committees and derive what is rationally the best standard. The US has always taken the view that the standard is what the market dictates. For example, in the early '90s, the Europeans had come out with X400, and the US had come out with TCP/IP. If you give it to a technical jury, X400 has better functionality, better features. But TCP/IP won because it took off in America. The moment it became a standard in the US, it became a de facto standard elsewhere. The US is 80 per cent of the market for most of these things. So, again, Europe came out with WAP, but in US everybody says Palm.

Rediff is already the No 1 site in the Indian Net space. It has the first-mover advantage, which means you don't have to spend so much on branding. So what's the strategy, particularly in the face of competition?

The competition. Yahoo! has been around for five years. Lycos and others do not have the same traction here.

How about other Indian companies?

Satyam is a fine company, but it's an ISP. Among the Indian sites, we have many competitors. Broadly you can classify them into NRI-inspired sites; and newspaper- and media-company inspired sites. All others have fallen by the wayside. Software-inspired sites are all gone. There are NRI-inspired sites such as Indya.com, indiainfo.com, eIndia.com. Newspaper-inspired sites are still making an effort like indiatimes, go4i.com. Then there's media-inspired sites like zeenext.com.

So who's the competition?

The competition is Yahoo!...there's nobody else. They are localising content. It's a good company. As for Lycos, Alta Vista, if you are not in the top 20, you are a nobody.

So will Rediff's branding be more intensive now?

No, no. Internationally, we have a decent footprint. In the US, we will be acquiring a site or two.

You have been talking about that for some time now...

We now have the currency...we have the cash. They are companies that have sites; that have good people.

By when?

Next two to three weeks. It is big plus, internationally.

Internationally, or only in the US?

The US first. The UK next.

And they are pure-play companies?

Yeah, we don't like the complicated story. My dream is really lean, intelligent and good staff...and smart guys who stay focussed on one thing for 7-8 years.

Are you looking at vertical portals in the US? Satyam, for instance, is focussing on B2B?

I think they are seeing something we are not seeing. Their eyeglasses are different from ours.

Could you explain?

B2B exchanges are supposed to disintermediate all sorts of people. The question in this circumstance is, when does an exchange work. B2B can get organised as pure plays if the industry is fragmented. So, one must avoid industries that are oligopolistic. Let us look at some of the successful exchanges of the world. For example, NYSE and NASDAQ-they end up becoming quasi-cooporatives for members and they have huge turnovers. It would be in millions of dollars.

And then, if you look at the bottomline, it will be some $50-60 million. A corporate structure soon emerges as fragmented members get together. Quickly, they move to a stage where they say ''Let us move to a democratic way of functioning''. So, soon it becomes a BSE kind of structure. I think the key issue is that in the industries that are fragmented, intelligent players do not have the technological power to put these things together. Some outside entrepreneurs may take a big stake and set up a vertical. To succeed in an exchange, you need extensive domain expertise, you need to have relationships.

What's your take on all the numbers being thrown around about the potential of the Net in India?

The essential difference between the numbers is where the people will access the Net from. According to the Golman Sachs report, more than half will access from cyber cafes. In high growth cities like Bangalore and Hyderabad this number is 50-60 per cent. The existing PC gets stretched to 10-15 people. Those who had forecast 10-15 million users had not taken into account the cyber cafes. So, the truth could lie in the middle somewhere.

BSES is offering fibre optic links to cyber cafes. Satyam and DSL in Chennai are giving direct DSL lines to cyber cafes. So, a lot of structural changes are promoting cyber cafes. Cyber cafes is a trend, not a fad. The one other thing that will have an impact is school and colleges getting cheap connectivity. US universities and colleges were first to use the Net. Second, when offices buy leased lines-however, the prices in leased lines have not dropped. When they do, office connectivity will jump. The third leg is homes. I think it is a function of prices, pressure from children, and time. All of these must happen for numbers to take off. Most importantly, there must be engaging content.

Not being a media house and generating your content, do you feel the need to ally with content generators?

People don't go to the Net for content. They go for communication. Net portals are communication hubs. Content is free. All I need to do is to make a link to Business Standard or the Times of India.

But do I need a Rediff to go to Business Standard or the Times of India?

You do, because you come to Rediff to check your e-mail everyday, you may go to chat, or search and venture out to other places thereafter.

But won't entertainment content become important with the emergence of broadband?

The story of broadband is funded on farce in the US. Of the 100 homes, only 6 are buying it. No content has so far emerged compelling enough at the speeds that broadband offers. It is not 6 kbps, it is not television quality-it is somewhere in between. At that level, no content has so far emerged-we are waiting for something dramatic.

Can we look at some of your revenue streams. Let's start with advertising-how big is the pie?

Advertising is for us 95 per cent of the revenue. But everything in advertising that looks the same isn't the same. You take the advertising band of business. At one extreme you have a high-risk revenue stream, and the other extreme you have stable contract advertising. The highest risk extreme that you can have is banners contracted one month at a time by an unfunded dot.com companies. The other extreme is one year contracts and sponsorships that lead to CPM, for example, with big established financially-sound brick-and-mortar companies.

In between, you can have every shade. The art of managing the revenue, managing this portfolio is not to say, I don't want to do this, I don't want to do that. You will get all this, and you will also get the one-year contract, but it will take you two years of effort to do that. The focus of managing the risk and the returns should be on managing risk here. The art of being successful is to have the portfolio you deserve and manage it. This is a complex thing-media companies know how to do that.

Are the big advertisers moving in?

Yes, but slowly.

What are they saying? What are there perceptions at this stage?

They all want to do something, they have all set aside Rs 1-2 crore budgets.

Media companies have the advantage of relationships, like Indiatimes would have. Look at the second part: there are 100 advertisers in the country who account for 95 per cent of the spending. And if you know how to deal with these 100, you must have begun. It's not that there are 10,000. As for Rediff, we have been running this business for 25 years.

Three years down the line, how much advertising can a single portal hope to attract.

The winners take up 85 per cent of the total spend.

And are you confident that you will be next to Yahoo!?

We are trying very hard, we are never confident of anything.

So, how many players we are looking at finally? Two, three, four....?

Tough to say. In terms of horizontal portals, maybe three...maybe two.

Who will be the third one?

It's tough to say. It's too early.

Are web development revenues a part of advertising revenues?

We don't do that any more. We are totally out of that business.

Totally out?

Yeah, it was useful in the beginning. It helped us get the 100 relationships.

Relationships that extended to advertising?

Relationships extended to sponsorships, direct marketing, week after week.

What do you feel about the projections for e-Commerce?

Are you surprised?

No...

People are surprised by the numbers, but when it happens, you won't be surprised. I won't be surprised, if those numbers are ...

$2 billion in a couple of years?

I won't be surprised...Look at it from last year's viewpoint.

So, in the short term, advertising and content arrangements with other sites are your sources of revenue?

On-line shopping is there-7 per cent is not something to be frowned on.

Do you look at co-branding as part of your advertising revenues?

All the advertising revenue streams-there are about 8-10 of them-is focussed on around 5 per cent. Each of them has a different margin, some of them require intensive selling-brick-and-mortar guys who have signed two year contracts may not give big margins. On the other hand, new dot.coms give very high margins. So, each is a different product line, not advertising. Each is them is about a 5-7 per cent contributor to revenues.

How about co-branding or alliances? How much of your revenue comes from them?

This would be too strategic.

And the partner sites?

We have seven partner channels...

Do they pay you?

Yeah!

That must be a decent stream of revenues...

It is one of the streams-one of the six-seven...

Are you looking at more such sites, partner sites?

Sure. We are going to be announcing soon.

Is this space infinite? Can I keep on thinking of new channels?

It is driven by consumer needs. Part of it is also that you may not have the focus to do a particular task.

What about buying stocks on-line?

For online trading, we will announce certain partnerships. We want to give our user certain choice in brokerage. Due diligence exercises are underway.

Will that happen soon? Is that also a part of the announcement?

No, that will happen a little later. We are trying to tie up with winners in that area. It is not clear.

How is your localisation strategy?

People who get on to the Net have functional knowledge of English. But for really intimate things, they switch over to their language.

A couple of years ago, you had hired journalists from Columbia Univ. What is the workforce situation like now?

We don't hire anybody permanently as of yet. All of them are stringers. We want the management.. After the acquisition, we are getting people.

What concerns do you keep in mind?

You need to manage the cost. Of cost of goods, cost of content is a big component. You have to be extremely careful of content cost-how many people you hire. Every cost must be constantly managed...must be a number-conscious organisation. It is a constant study.

And cash?

We are spending up to $800,000-900,000 per month. Having cash in the bank is absolutely necessary. If you look at dot.coms trying to get second and third rounds of funding, then...we are extremely careful about cash. Cash is gold.

And so is time. Thank you, Mr Balakrishnan.

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