On the Rediff conference call held last week, Rediff Chairman and CEO Ajit Balakrishnan twice told Rajeev Arora, an investor, that he’s free to sell his shares and move on. Balakrishnan was responding to a desperate query from Arora regarding Rediff’s cash situation: the company has $12.5 million in cash and has reported losses of over $3 million in its last three quarters. Arora, who said he had been invested in Rediff for five years, pointed out that addressing the cash situation is a current (and) immediate need, questioned Rediff’s ethical responsibility to shareholders, and whether a 10 year period isn’t enough for the company to increase revenues.

This was the third time on the conference call that the Rediff management was being asked about its cash situation: the first two times, MediaNama had asked the company about its plans, and how it intends to reduce operational expenditure and increase revenue, apart from questions about why its advertising revenues have declined year on year to $1.46 million from $1.88 million for the same quarter. Note that Rediff’s fee based revenues, via its e-commerce marketplace Rediff Shopping, increased to $1.71 million, up from $1.31 million for the same quarter last year.

The Q&A with MediaNama, followed by the Q&A with Rajiv Arora:

MediaNama: You’ve got $12.5 million in cash, and your net loss is $3 million, so you’ve got about four quarters of money left. How does this play out? Would you need to raise funds again?
Ajit Balakrishnan: We can’t discuss future plans on this call. I think our OpEx numbers are relatively…they will decline soon. We are hopeful that our revenue will rise. We cannot say anything beyond that at this stage.

MediaNama: What are you doing to reduce OpEx?
Ajit Balakrishnan: Well, I think some of these, I think this quarter we had some accounting changes which increased the OpEx a little bit. For example, we’re writing off, I think, a portion of overhead allocated to CapEx…we capitalised R&D… so things of that kind have made the difference…Accounting changes, rather than any increase in expenses.

ajit-balakrishnanMediaNama: Even if, hypothetically, you have two years of cash left, do you see the situation improving because Rediff has been struggling for a while, and this is in a market where, at least in the last couple of quarters, from what I have understood, advertising spends are increasing. So I don’t quite understand why you’re showing a decline in advertising (Editor: read GroupM revises ad spend growth estimate from 11.6% to 12.5%)
Ajit Balakrishnan: I think it’s an incorrect… I think display advertising is declining all over the world and including in India. So I do not believe it is increasing. I have no evidence that it is increasing.

MediaNama: Okay. In that context, are your page views increasing?
Ajit Balakrishnan: Well, you see, we don’t count page views. Page views are an abstract. I think our unique users have increased 17%. I think this is from comScore, (which) counts only Home and office on (a) PC. We don’t have an accurate measure of mobile usage from comScore, so I can’t even, on this call, quote that. But we believe the user base is increasing in the 15%-17% range.

MediaNama: Right. But advertisers spend on you on a CPM (cost per milli) basis, so page views matter from that perspective, right?
Ajit Balakrishnan: No, I would not think that. I think there are two segments – the display advertising segment is definitely very challenged. There’s no question. And the portion which is performance-based – they pay you on clicks or form filled or even ultimate product sold – I think that’s…(inaudible).

You know, we are very clearly transitioning our business away from dependence on display advertising. My view is that a future successful Internet media company – we see ourselves as a media company incidentally – we are not an e-commerce company…on one side, users, and the other side, instead of monetizing those users through selling ads, our increasing focus is to have a marketplace where multiple small merchants can sell to them, and we have done quite well there in this last quarter – in the past two or three quarters.

rediff-revenues-q2-fy15

So I think we’ve never called ourselves an e-commerce company. We’re a media company. The business model – the users are attracted to news and information and related things. And we monetize it by providing a connect for these users to 2000-3000 small merchants who come and list on our site. I think that’s the direction we are going.

MediaNama: So essentially what you are saying is from a media business you’re becoming an e-commerce business?
Ajit Balakrishnan: Not at all. Nikhil, no, no, not at all, not at all. I think – imagine the period when newspapers had readers on the one hand and classified listings on the other. I think that – I especially believe that’s the future for Internet media companies like ours. On the one hand, you’ve users; on the other side you have an online marketplace where there are listings. Very small merchants who are listing and transacting. And then we are able to make a healthy margin out of that. I think we’ll have to – I think shareholders have to be patient for one or two quarters when that scale comes up.

MediaNama: Okay. So there’s no plan essentially to hive off the eCommerce marketplace business?
Ajit Balakrishnan: No, it is – It is wrong to call it e-commerce. I think that some day…like 50 years ago every business was a manufacturing business. Today, every business will be in some ways, whether you’re in insurance or media, will have…transactions will be online. So I think the future will be definitely a media company which has an online marketplace. Which doesn’t make you an e-commerce (company). Every company is going to be an e-commerce company.

MediaNama: So from that perspective, have you considered incorporating some of the classic newspaper verticals like jobs, real estate classifieds? Info Edge* has just raised about $165 million (correction: it’s $120 million) for 99Acres. So if you’re looking at yourself as effectively a classifieds or a transactions marketplace, have you considered getting into some of these areas? And also, user based classifieds similar to Quikr?
Ajit Balakrishnan: No, I think in the Internet area, those have already been occupied long ago, 10-12 years ago. I think that they tend to be – if you take the Info Edge model or the Monster model, essentially their customers are – they earn fees from small headhunters who pay them X amount a year or for three months. And they’ve served that market. I think one side for them are these small headhunters and the other side are people who come and post resumes. Ours is a media business where one side are users who come to read news and information, and watch videos. And the other side is small merchants who like to make sales to these. And I think we have managed to do that quite effectively. We don’t think of…we think of ourselves as e-commerce only in the sense that every company will be an e-commerce company in the next 10 years.

Take insurance for example, the next five years, 90% of insurance is going to be sold online, but that doesn’t make them an e-commerce company. It’s a natural course of events. And in your own business, you will see that your monetization is going to come from some kind of marketplace that you will have on one side in the future. It cannot be based on display ads.

MediaNama: Just from a display advertising perspective, have you considered opening up your inventory to ad exchanges for additional monetization. If that market is on a decline for you through direct sales?
Ajit Balakrishnan: Ad exchanges are bottom fishers. I think they give you the price of one-tenth or one-fifteenth of what we’re able to sell. We’ve been never open to such exchanges. We have high quality inventory, we get much of the higher margins by exposing it to our own online marketplace than to any external party.

MediaNama: But at an absolute level, you’ve got a 22% decline in ad revenues. So what are you doing to address that decline?
Ajit Balakrishnan: We’ll see what we can do. I think the decline in ad revenues is partially because some key advertisers for display – the automotive sector, the online trading sector, the PC makers etc, the mobile phone operators have in India in the last six months to nine months have drastically cut their ad spends. And they are very drastic. The lower amounts are going to few select outlets. So I think one portion of the decline is the recession which every media company in India is affected by. And the other portion is a secular decline in display ads worldwide. You can see the Yahoo results or even the Google results that have come out, and you can see the decline in display ads.

MediaNama: Right, and they’re moving to mobile, and…
Ajit Balakrishnan: Display (advertising) is a kind of hoarding…outdoor hoardings which were brought on to the web. But it’s not native to the web. And native advertising is small. We have a small portion of it, but it’s going to take some time to come up. It will take one or two years.

MediaNama: How is VuBites doing, Ajit? We didn’t see any data related to that.
Ajit Balakrishnan: We have not separately disclosed it. It’s making good progress. I think it will take a couple of quarters for them to achieve scale. I’d say this past quarter was the first quarter where all their moving parts were working together, and a seamless experience was provided. It’s a kind of marketplace itself. On the one side, there are advertisers, small advertisers. On the other side, television channels. I think the product piece is getting together well. You may see some numbers, and exciting numbers in the upcoming quarter.

MediaNama: Just going back to advertising, I’m still a little confused about one thing: has there been a decline in fill rate, or has there been a decline in terms of ad rates in the market?
Ajit Balakrishnan: If you’re speaking of the overall market, I think fill rates have declined substantially. And, the prices depends on, people like us choose to hold our prices and let fill rates decline. Others are choosing to let the prices go down and increase the fill rate. Both choices are being exercised. And this is not unique to just the India Internet industry. I think it is generally true of television, and it’s had a really bad quarter, last quarter. And certainly for magazines and print, I think they had an awful quarter, last quarter, financially.

MediaNama: Okay, but that’s in context of the (correspondingly) previous quarter where there was a buffer provided by the election results.
Ajit Balakrishnan: So I think the election results is a mirage in the sense that election spending will come and go. That is not a sustainable expenditure. We didn’t do – we did almost no election…it’s very, very complicated. The election, the money came with a lot of strings attached to it. So we chose to take an ethical position, and all that. . We hardly had any election ads on our site. Not even one percent of our…

MediaNama: So, you’re one of the few sites that have been empanelled by the DAVP. Has that contributed any revenues over the last year for Rediff?
Ajit Balakrishnan: I don’t know whether we’re one of the few, but I think after a long period of struggle we got ourselves empanelled. I think DAVP is not what it used to be, at one time 15 years ago. DAVP, to explain to our international audience, is the government’s own expenditure. You have government ads come through Directorate of Audio Visual Publicity, that is DAVP. They’re not what they used to be. I think today they are in the shadow of their former self. Their contribution is very minimal in our case. So many of the public sector companies are directly advertised. They don’t go through DAVP.

MediaNama: Okay. Any indication you can give us of how long the cash that you have left is going to last, Ajit?
Ajit Balakrishnan: I don’t share any worry about the cash. But Nikhil what you can do is, I’d like you to understand that there is a new Internet media model emerging which is marketplace on one side and users on the other. That’s the most important message that we’d like to give you. So do not worry about the cash.

MediaNama: But in case of the marketplace, you’re still competing with the likes of Amazon which is investing $2 billion in India. You’re competing with Flipkart which has raised $1 billion. They’re both marketplaces.
Ajit Balakrishnan: No. They are the equivalent of Walmart or they are the equivalent of, Kishore Biyani’s company (Future Bazaar). They’re stores. We are not a store. And that’s an important distinction to make. We’ve held the margins and prices quite well. In the coming…everyone’s going to be e-commerce.

MediaNama: But Amazon is quite clearly a marketplace. They don’t have the equivalent of a WS Retail selling products on their site.
Ajit Balakrishnan: Okay, I think time will tell. I think somewhat like 1995, (when) we were trying to explain to people what the Internet is, now I’m struggling hard to explain what an Internet media model is.

*
Q&A with Rajiv Arora

Rajiv Arora: If you continue to lose about $3 million every quarter, you’ll be out of cash in about one year. So what’s the management plan to address this cash flow? So as an investor, I need to know this. It’s not the future plan. It’s the current immediate need. So what’s the management plan to address this cash flow issue?
Ajit Balakrishnan: Mr. Arora, you have the perfect liberty to sell our shares and move on from tomorrow, right? You are perfectly at liberty to sell your shares and move on. So let me worry about what we will do in the next four quarters. I cannot give you a cash raising plan today.

Rajiv Arora: (inaudible)…the Management’s plan. You know it’s not the future thing. It’s the immediate need. I know I can – you don’t have to teach me – I can sell. I know that. But what’s the management…Is there any responsibility, any ethical responsibility?
Ajit Balakrishnan: Our ethical responsibility to increase our revenue, to keep our cost low, and we are doing our best working 24 hours a day.

Rajiv Arora: Is a 10 year period not enough to increase the revenue?
Ajit Balakrishnan: That’s fair enough Sir. We are a public company. You can make your decision if you want to stay with us or go.

Rajiv Arora: Yes, but what – is there any ethics from the management?
Ajit Balakrishnan: There is. You have seen us work extremely hard over this period and we’re continuing to build an alternative and a more viable business model as I was explaining to Mr Pahwa. On the one side, we are growing our users. On the other side, we are growing our marketplace revenues from these users in an era where online display advertising is kind of disappearing from the scene. That is what we’re doing. And we’re very patiently building that.

Rajiv Arora: And when do you see the company coming in profitability?
Ajit Balakrishnan: I cannot make a forward-looking statement. You know that.

Rajiv Arora: Anything new or any material thing that’s coming up? My concern is I’m an investor for the last five years. I have the right to know about this.
Ajit Balakrishnan: You have the right. We have no secrets from you. As I said, again, restated, we think that the era where Internet media companies could survive on display advertising, I believe that era is over, and we are moving faster than any other company which is an Internet media company. They exist in the United States and elsewhere, and we’re moving faster than others to build an alternative model, which is a marketplace where small merchants are listed and we do not keep any stock. The merchants can make their own pricing. They’re able to increase the number of those interactions. In the upcoming quarters, we’d like to increase the transaction numbers several-fold, four times or five times.

We are doing it in a way that merchants suffer only very minimal return percent. At 14% percent, it is substantially lower than any other marketplace players have. We have a positive margin and we are continuing to increase the positive margins in a market where people are selling products below cost. We had a take rate of nearly 25% this last quarter. These are the things we are doing to serve our shareholders, our employees, our vendors, all of them together.

Rajiv Arora: I know. But the time period left to meet the cash flow need is very little, very low.
Ajit Balakrishnan: Mr. Arora, we understand your concern. We are doing our best and at the time we come back for the next quarter we’ll have things to report that are substantially brighter than today.

Rajiv Arora: Okay.
Ajit Balakrishnan: Thank you very much for your patience.