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Monday, Sep 23, 2002

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Surviving the dotcom blues

Vivek Mukherji

The 2000s have witnessed the dotcom bubble burst. However, a few have come out of the cold. How did these dotcoms manage to succeed where others failed — by implementing the concepts of the `old economy' and quickly re-jigging their business plans to suit the new economy. A strategy that seems to have paid off.

In November 1999, a gentleman named Rajesh Jain grabbed the attention of the business media across the country. The reason: He hived off his Internet venture, India, to Satyam Infoway for a staggering Rs 499 crore and laughed his way to the nearest bank. It was a deal that defied conventional business logic. Why would anyone pay such a gargantuan sum to buy out a business that hadn't earned any substantial revenue nor had any visible scope of making money in the future?

Logic be damned, those were the heady days of the dotcom mania. `Valuation' was the name of the game. All that mattered was intangible gobbledygook like eyeballs, hits, page views, et al.

With easy access to VC money, anybody and everybody with a smart idea could fire up an online venture, profits and revenues remaining proverbial pots of gold at the end of the rainbow. Sabeer Bhatia, Rajesh Jain and others of their ilk were knights-in-shining-armour for desi `new economy' upstarts.

At one end of the spectrum were e-commerce Web sites selling a bizarre range of products — from lingerie to grocery, from trucks to pets. At the other end were pure content-driven sites while in the middle were huge cash-guzzling sites known as `horizontal portals'. The underlying common theme: each held out the promise of changing consumer behaviour. With less than two per cent of clients' advertising spends accounting for online advertising, the projected ad revenues that were supposed to drive horizontal portals remained a pipe dream, while millions of rupees were sunk in huge ads in the name of brand-building. Does anybody remember a dotcom that decided one fine morning that India should be spelt as "indya"!

The Zeitgeist is best summed up by George Day, professor of marketing at Wharton Business School, in a paper titled "Shakeouts in the New Economy." "Far too many players came in, there was lots of excitement, high visibility, low barriers to entry — all those conditions applied. It was like every other shakeout we studied, just a lot faster, magnified by free-flowing capital, incubators and a tendency for everyone to converge in the same business model."

Finally, in March 2000, the Nasdaq — the holy grail of tech stocks — slipped off the ceiling. The longest bull-run in the history of corporate America had come to an end. Naturally, the heat of the implosion singed Indian dotcoms too. The party ended abruptly. By March 2001, the bloodbath was complete, 90 per cent of the companies were just about surviving after the pipeline bringing in that crucial VC funding simply ran dry. The message was simple — socket error 404: website not found.

"It was incredible madness those days. We used to receive at least 15 to 20 business plans everyday," says an investment analyst with one of the leading funds in India, which had invested in 10 upstarts and saw their precious millions disappearing without a trace in nine, while the tenth is yet to yield any decent returns. "No one realised that, in terms of realistic business proposition, there is limited space. For example, in India, one horizontal portal is more than enough. Anyone deciding to float another horizontal will invariably be a `me too' because the business plan is essentially the same. After all, how many portals can survive by selling the same standardised products like music, books, airline tickets etc?"

Some of the pure-play dotcoms had the foresight to realise pretty early that the success of a new economy venture lay in implementing the concepts of the `old economy.' They quickly re-jigged their business plans — offering realistic and tangible products or services to consumers, building barriers in terms of technology, providing value-added services or having a strong and sustainable niche in terms of content. Of course, cost-cutting became a major tool for reducing operating expenses, which essentially meant sacking white elephants. These are the companies that are surviving today.

Savvy survivor

The case of is illuminating. Though its valuation today is a fraction of what it used to be in the days of what was famously described by the US Federal Reserve Chairman, Alan Greenspan, as "irrational exuberance," it managed to get a toehold in the world of physical media through the acquisition of India Abroad newspaper in March 2001. Sources in the company reveal that the ad revenue of approximately $8 million brought in by India Abroad has added meat both to the top and bottom lines. The first quarter results announced this June reflect a 10 per cent growth in revenue to $6.3 million compared to the same quarter last year while operating expenses declined 24 per cent to $2.9 million, compared to $3.8 million in the same quarter last year.

Over the last two years, it has transformed itself from a pure dotcom to an integrated media, Internet, and communications company, with presence in both online and offline domain. This has enabled Rediff to create a revenue grid of diversified revenue streams.

Commenting on the scenario, Ajit Balakrishnan, Chairman and CEO of, says, "The environment in which we operated was certainly a volatile one, creating both opportunities and challenges. Our response has been two-fold. The first being `product innovation' to make all our products and services more attractive and relevant to our users. Improvements to India Abroad, launch of rediffmail mobile, introduction of new payment methods, improved offerings in India eCommerce and better targeting technology for online advertisers are some examples. The second is tighter integration of our businesses to enable cross-selling, save administrative overheads and thus improve profitability." The launch of premium value-added services like rediffmail mobile is an indicator of the global trend of moving from free to fee-based premium services.

Mobile service to the rescue

"One survival strategy for Internet companies could be to move to the mobile domain. That means certain services that they were offering be modelled for the mobile world. This solves some revenue problems because on mobile nothing is free. And the interesting point is that consumers are ready to pay for a service if it can be offered on the mobile for which they were not ready to pay on the Internet," says Sanjay Goyal, Chief Executive Officer of ACL Wireless Ltd, provider of application software for Internet-to-wireless protocol. The convergence of wireless with the Internet opens up other revenue-earning opportunities for bleeding dotcoms. "Essentially, a mobile service is a faceless service. The Internet can provide it with a face and the subscriber base that the mobile service brings to the Internet creates a separate marketing channel. This opens up an entire new set of revenue-earning opportunities for both services," points out Goyal.

But riders are aplenty. For one, most of the mobile networks are not ready to support this kind of service. Secondly, there are only a few services like instant messaging or chat where this convergence can take place. With m-commerce — mobile commerce — some years away, most of these services have more mystique appeal than as viable business propositions.

Chugging along, funded by Chrysalis Capital, World Bank and Star TV, is another Internet venture that's chugging along. The concept of distance education has a better strategic fit with the nature of the Net. It offers quality education support for students from Class IX onwards to aspirants for pre-entrance medical and engineering exams through online as well as offline programmes. Due to the low penetration levels of the Net across the country, its online programme's reach has been largely confined to major urban areas.

As the dotcom ride became rockier, it went on to build offline capabilities. By early August 2000, it stepped into the physical world with the `Smart Study' programme with the objective of making it the main revenue driver. It built up partnerships across the country to distribute study material and established learning centres in cities such as Nasik, Kanpur, Jabalpur and so on, where Internet accessibility is relatively lower.

At the learning centres the students can also communicate with experts through e-mail and chat, thus offering a new kind of learning experience. Very early in its learning curve, eGurucool moved from the free to fee-based content delivery. The robustness of the business model underscores the importance of fusing online and offline capabilities in the new economy for survival.

Lesson learnt too late

Anytime, anywhere and easy accessibility of content, which made the Internet an exciting phenomenon, proved to be the biggest stumbling block for pure content-driven sites as nobody was interested in paying a dime for content. No wonder pure content-driven sites dominate the debris of destroyed dreams that litter the dotcom landscape. These sites depended solely on ad revenue to keep the home fires burning. But is content really free? A surfer using a dial-up connection pays almost Rs 25 for every hour spent on the Net for the connection. In such a scenario, the good old newspaper is a far more economically viable option, unless there is a compelling reason to log onto the Net to read news.

Among pure content-driven sites, only managed to create a niche with its own brand of journalism. Eschewing the costly advertising-led brand-building route, it focussed on putting out investigative stories to slip into the space that was vacated by the conventional media, thereby building a brand identity for itself.

After the `Operation Westend' story, the brand became even bigger. However, is just building a mega Internet brand, like, enough to sustain a pure content-driven site? The answer is clearly no.

Another player who made it

While the going was good, one also saw many pure e-commerce ventures diving into the pool. We had auction sites and reverse auction sites bring a mind-boggling array of products under the hammer. Once again, it was a case of too many players in too small a pool. The only notable survivor of the lot is, that too after Star acquired the venture. Backed by aggressive testimonial advertising featuring people who have actually brought or sold products through the site on the Star bouquet of channels, the venture is somewhat resurrected.

Today, the Web site claims to have around 2.4 million registered users, over 63,000 sellers hawking their merchandise and 32,000 unique visitors to the site everyday.

The main revenue driver is the transaction fee. The cash-on-delivery mode of payment, which the site has implemented successfully till now, has enabled it to establish its credibility with customers. As the medium matures, other payment options like payment through credit cards and bank transfer facilities appear to be a possibility, provided hackers are kept at bay.

Also, better customer service like no-questions-asked return policy will go a long way in ramping up customer confidence and thereby business.

Away from the hype and hoopla of mega brand building-exercise through multi-crore ad spends, a relatively unknown is the unsung survivor in the business-to-business segment, where a lot of high-profile entrants bit the dust.

Launched in the spring of 2000, backed by Tea Board and Centurion Bank — which gave the venture the much-needed credibility — the world's first `digital tea exchange' has enabled hundreds of bulk buyers and sellers to cut down transaction time from eight weeks to under four weeks, thereby reducing the transaction cost substantially.

This is yet another example that to survive in cyber space, the virtual has to deliver realistic benefits. In the real world, there is an old business axiom — innovate to survive. One company that has innovatively adopted this age-old wisdom to beat the dotcom bust is

The site uses the ancient premise of barter to bring together buyer and suppliers by trading in excess stocks and capacities. Net4barter optimises cash flows by purchasing business needs — be it advertising, equipment, office products, et al — even when cash reserves are low.

Members simply pay through their products and services — excess inventory or capacities. For every product or service sold by any member to another, one earns equivalent value of net4barter credits and uses them to buy whatever business needs from the ever-expanding list of purchase options.

On the financial services front, the adoption of Web services is finally taking off. But the home trade scam has dented consumer confidence to a certain extent. Here too, the remaining players are trying to sharpen their customer focus by offering more relevant products and shifting from free to fee-based services.

After all, "It's all about money, honey," as the famous punch-line of one of the most visible dotcoms that went bust summed it up!

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