Shakeout looms for Indian Internet portals

Like their counterparts in the United States, Indian portals are discovering the hard lessons of the Internet boom. They provide a great service. They are doorways to the Internet, full of news, chat and links to other sites. The problem is: the service is free.

To earn money, they have to sell advertising space on their sites, through banner ads. But even in the United States, the cradle of the Internet, portal sites have difficulties meeting costs through ads alone.

While India’s population, at one billion, is four times that of the United States, just 1.5 million Indians are wired up, against 81 million Americans. Indian numbers are expected to more than double to 3.6 million by 2002, but until then, the pickings promise to be slim.

India’s annual advertising spending on the Net is estimated at no more than Rs 35 crore ($7.6 million), hardly sufficient to support a crowd of portals.

ONLY THE STRONG: Analysts say the only portals which will survive are those strong enough and cash-rich enough to wait until Internet connections reach critical mass.

"The defining characteristic of winners will be those with history, existing market position, financial and operating leverage and clear path to profitability," said Rajeev Gupta, head of Internet research at Goldman Sachs in Hong Kong.

Sector leader Rediff.com is acutely aware of this and has used a listing on the US Nasdaq exchange to arm itself with $64 million in cash — enough to see it through several years at its current cash burn of about $1 million per month.

Rediff’s frantic spending on advertising and operations clocked up operating costs of $8.4 million in the year to March 31, against sales of just $1.8 million. "Having cash in the bank is absolutely necessary… we are extremely careful about cash. Cash is gold," Rediff CEO Ajit Balakrishnan told a magazine last week.

INCREASING COMPETITION: But tougher conditions don’t seem to faze the hopeful, as more and more start-ups crowd into the market. Besides Rediff, which boasted registered page views of 109 million in June, there is Satyam Infoway, whose sify.com site had 80 million pages views in the same period.

Other players include Indiainfo.com with page views of 60 million per month, 123India.com, indiaworld.com, Hungama.com and mantraonline.com. To make matters worse, foreign competition has arrived, lured by India’s enormous potential and rapid growth.

Global portals such as Yahoo Inc!, Lycos and Altavista which offer material geared to draw Indians on their sites, are fishing in the same shallow pool. Cash reserves apart, the other keys to survival will be to crack E-commerce — selling via the Internet — and to offer "vertical" portal services.

In contrast to horizontal portals, which try to offer something for everyone, vertical portals offer highly specialised content, aimed mainly at the business world.

Setting up a vertical portal could be easy, but E-commerce will take a while to develop. Besides transport woes and difficulties with electronic payment, India must update its laws if E-commerce is to take off.

Only in May, it introduced a law to facilitate E-commerce by legalising electronic transactions. The National Association of Software and Service Companies has estimated business-to-consumer transactions at Rs 1,800 crore in the year to March 2002, against Rs 13,200 crore from business-to-business transactions.

Portals unable to win a slice of this pie will be forced out. "Across Asia, the consolidation will progress in three phases, first domestic firms amalgamating, then listed firms buying up unlisted ones and then international firms buying up both listed and unlisted domestic firms," said Gupta.