Info Edge India ltd and Network 18 media & Investments Ltd: Dotcom Bubble was Created not Happened!!

American Netflix deals in online streaming of movies and video content. Is it a very complex business? No, it is as simple as watching movies. But Netflix is a Giant. Its market value is $49 billion (around 3 lac crore), Revenue is $ 5.5 billion with NP of $ 267 Million. It is trading at a massive PE ratio of 250. Its NP is lower mainly because of huge investments being made for global expansion and acquiring licensing rights for new data which will only add to the bottom line once it is over with its investment phase. It is having subscribers base for its streaming business of 62 million worldwide, with around 40 million in USA and 23 Million global. Apart from licensed content, it creates exclusive content which only add to its brand image. As per latest estimates it will cross around 180 million subscribers worldwide by 2020.

Just imagine, its profit growth with this kind of numbers. Even if I take its minimum plan of $7 pm (around 500 per month), total revenue will be around $17 billion. I cannot count its net profit due to lack of data regarding its cost structure, but taking maximum costs as fixed costs for licensing and data delivery costs which are not huge and offer around 10 times profit as compared to price paid to service provider. So I can take 20% NP margins and we’ll have a net profit of $ 4 billion in 2020, which is based on its lowest subscription model NOW, it will of course raise the prices also. And any price increase will mostly transferred into net profit only. So we can take this net profit of $ 4 billion to 7-8 billion and comparing this $ 4 b and $ 7 b with current market cap of $ 49 b does not make current market price too expensive.

It is also in DVD rental business via mail and it developed a patented process to look after this complex business. I will entail more details about Netflix’s technological expertise and edge in delivering the content in some other time.

Welcome to the 2^nd round of DOTCOM! And this time it is not floating like bubble, in fact seriously huge data is flowing through this. Netflix alone account for almost 1/3^rd of total peak network data in USA.

Our previous Dotcom era was destined to be a bubble, huge investments just made it huge. At that time E-commerce growth model was based on slow internet speeds, too high internet data costs, very low numbers of PC leave alone laptops and please don’t talk about smart phones, poor design of websites with little security, online payments system were very doubtful. These were all related to infrastructure which was indeed a big hurdle. But still successful business plans can be built with lowest possible infrastructure if they are planned sensibly and within limits and calculated risks.

But along with irrational money and over enthusiasm of investors, the main culprit was poor business models of those companies, which raised millions-billions of dollars for businesses which were based on unreal astronomical visitors/users of their online services. Every software company was touted as next Microsoft and every college dropout was starting a software company in garages and issuing shares to its employees as salaries who thought they would get millions after selling them. I am enlisting few of them:

Webvan: launched in June 1999, where users can order their groceries online and have them delivered to their homes. Webvan raised around $ 1billion. However its idea was good but it did not pay any heed to slow internet speed, high cost and very low penetration levels. It was dealing in getting goods and storing them in warehouses. Hence it needed huge staff, massive amounts for warehouses, cutting-edge automation and servers to handle orders. Rather than going for slow growth, Webvan invested $1 billion in state-of-the-art warehouses.

So no doubt, it did not witness any such growth and went bankrupt and shut down in July 2001.

Boo.com: founded in 1998, was meant for showing fashion trends and deliver fashion and sports clothing and accessories to customers all over the globe. It spent $42 million on an ad .The site featured an animated assistant called Miss Boo, and the ability to drag clothing onto models, zoom in on items and see them from all angles. Indeed that was a good technological stuff, but in that time of slow internet, less powerful computers…it provided a very bad user experience also because users had to download its software which was not compatible to most of the computers. Costs were way too much, photographing the goods cost $ 200 per item. The site had to maintain versions in multiple languages, and deal with currencies, taxes and shipping for regions all over the world. Clearly the model was unviable and it went bankrupt in 2000.

I have listed these two cases, because we can find similarities of businesses of these with today’s Flipkarts. But as we can see, the main fallacy was not the lack of infrastructure but their business plan which was based on unreal forecasts.  That type of growth is very much possible today with the support of technology. Amazon.com also belongs to the same era…but it survived as it was rational in its spending and dealt mainly with books. This low cost model helped it in building brand strength and when everybody was out of the E-commerce arena after small bouts…it relished and flourished.

You will be amazed to know that during Dotcom bubble, Google was up for sale for $ 1 million but nobody was interested. Today its market value is $ 434 billion!!! You see, people became over fearful and failed to realize that internet and computers were going to change our life just as oil and telephone did.

Info Edge India ltd and Network 18 media and Investments Ltd: I am looking to find any such opportunity in india where underlying idea is scalable. I have shortlisted Info Edge India ltd and Network 18 media and Investments Ltd.

Info edge is the house for Naukri.com, Zomato, 99acres.com, Policybazaar.com, Meritnation.com, Canvera.com.

Network 18 is having whole TV 18 broadcasting business, Investments in BookmyShow, Homeshop18, some of the best portals in india like Moneycontrol.com, its business portal and Firstpost.com, its very unique view based news portal.

I have already invested in Info Edge at 700/- recently. Network 18 I am still studying. But all these are very complex businesses and analyzing these require huge time. So I feel this blog post will take more than one post to cover at least most valuable businesses of both.

E-commerce start ups are unique in many ways from traditional startups; hence it has its own set of rules to value these startups. The most unique fact is the capacity to leverage and grow the business many fold with existing infrastructure setup. With every layer of business growth, most of the incremental revenue goes to the bottom line. So scale is the most important metric and hence these should be valued on the basis of forecast of scale which should be realistic. This realistic forecast is the most difficult part.

But Indian E-commerce startups have one benefit which was not available to their western counterpart and that is experience and data available from western world. Indians can build their business model on the basis of them and chances of failure become very low. Just like our Flipkart which based its business model on Amazon and played a relatively safer game.

But most important test for E-commerce businesses is entry barrier, existence of moat or threat of competition. Moats enjoyed by E-commerce businesses are of different types so as are entry barriers. People say that anybody can build a website and start an E-commerce venture.

Let’s take the example of a Newspaper shop in a small city. It is there for years, giving good service selling plain newspaper. There opens a new shop to sell the same paper with same set of service. How many of us will switch to new shop? Perhaps none. We don’t want to take the risk of taking the experience of a new set of environment, processing it over a long time and then having a conclusion which at best will be equal to our current experience. So why should we take so much pain to have the set of experience. This is the moat.

Take Naukri.com…it is having the 70% share in online job market in india since it was the first of its kind in india when it started. So it is having the largest store of resumes, Job seekers and largest number of employers listed. So every new job seeker will go to it thinking that as it is having the largest number of employers so chances of getting job are high and similarly new employers will go for it to hire new employees thinking that it is having the largest depository of job seekers. This will become a circle, a loop which will absorb more business.

Zomato also enjoys the same…as it was the first of its kind in the world because its huge army go to each restaurant in a city and get the most possible data and pictures regarding menu, prices, location etc. so it has built a huge inventory of data of restaurants which is very difficult to replicate. Because as we know that Zomato is the biggest, so whenever we want to search for a nearby restaurant we’ll go for it as we know that chances of getting a listing is higher with it thanks to its huge inventory of restaurants. That thing will make more restaurants willing to list their data on Zomato.

However good service and strong backend infrastructure is equally important. Just having an online portal will not suffice. Like Flipkart, displaying items and getting order is the easiest part. But order processing, inventory management, stock return management are the most critical parts. Although Flipkart does not follow classical inventory based model in india mainly to counter the FDI in retail norms. So it is operating marketplace model where it works as an agent between a buyer and a seller and it charges for its service.

But this model makes Flipkart having little control over quality, availability, problem solving…and as it provides very little value addition in this process so any big competitor can set a shop against it. Just like Amazon is doing it, it is following inventory based model in india as it is having its own cash. Just remember the crash of Big Bang sale by Flipkart on Oct 6, 2014, a case of having lesser control over the process. We’ll cover this later on.

The important thing is, if Flipkart aims at surviving marketplace model then it should raise its technological expertise to very high standards. It should incorporate unthinkable technological aspects for the shoppers like third party evaluation of the products of different brands and their value for money index. It just cannot be a order processing software…it should make shopping at its portal a memorable experience. It is a technology company.

So an E-commerce venture first of all should add value to a process; either by lowering costs or by substantially reducing/saving the time required or by helping choosing a better product. Unless it pass this first test, the survival is a passé.  Just like Moneycontrol.com, which stands miles above the other financial portals in india. The quality of data, presentation, relevant news, analytic tools, user interface etc is just unmatchable which provides it huge brand equity. I am using it for last ten years and have not even thought of trying/using something else.

In the next part (probably by Tomorrow) we will cover the Zomato and BookMyShow as these are the most important parts which can contribute maximum to a future windfall.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)