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Mahendra Swarup, chief mentor, Smile Interactive Group

Mahendra Swarup, chief mentor at Smile Interactive Group and former managing director of Times Internet Ltd (Indiatimes.com), has over 29 years of business experience and has held corporate responsibilities in blue-chip companies like ACC, Nestle India, Sun Breweries–Moscow and PepsiCo India at the senior-most functional levels.

Mahendra Swarup, chief mentor at Smile Interactive Group and former managing director of Times Internet Ltd (Indiatimes.com), has over 29 years of business experience and has held corporate responsibilities in blue-chip companies like ACC, Nestle India, Sun Breweries–Moscow and PepsiCo India at the senior-most functional levels.

In an interview with AlooTechie, Mahendra Swarup, who joined Smile Interactive as chief mentor in July 2006, has talked about his experience in setting and scaling up businesses at Smile, his take on business models of various social networking sites and when a startup should go for funding. He has also explained why Google should charge its users for every single search, and why online entrepreneurs should focus on consolidation and not inventing new technology. Read on…

Why the shift from offline to online? What triggered it?

In 1999, when Bennett & Coleman (The Times of India group) approached me for their internet business, they were looking for a mature manager from outside the media space to give it an impetus. Bennett Coleman thought someone from outside with fresh thoughts can trigger a startup. Although I have worked in large multinationals, my experience has always been with their startup teams. Across 30 years, my experience has been with startups and new challenges, be it my time in Pepsi, Nestle and even a brewing operation in Russia.

During my time at Times Internet (Indiatimes.com), I had crystallized the value of the company. We were able to get a valuation of Rs 1400-1500 crore for Indiatimes which in my view started and triggered the rejuvenation and interest of VCs in the internet space in India again. Rediff also started moving up in NASDAQ after the deal. After I had crystallized value at Indiatimes, my contract with the company was coming to an end and I decided to venture out on my own.

What has your experience been of setting up and scaling up businesses at Smile Interactive?

At this stage of my career, I thought it’s better to associate with people who have been in the internet business for 7-10 years and I did find this team at Smile Interactive. My experience with Smile has been extraordinary. The youngsters at Smile were looking for venture capital and I told them that when you have reached a certain stage, look for strategic partners. They have a much longer horizon, they will help you grow, they have no exit in mind and they will look at India in a very multidimensional perspective and not only in the financial perspective.

The India story doesn’t need to be told all over again. I believe over the next five years, there is huge potential in the internet space in India. But someone should have the long term perspective and that’s the reason I pushed Harish Bahl (Founder and CEO of Smile Interactive) and Manish Vij (chief business officer, Smile Interactive) to forget venture capital. To be honest we did try but the ridiculous valuations being offered did not reflect the true value of the businesses they have put up. They bought into my idea and we succeeded in getting two blue chip strategic partners.

How satisfied are you with the WPP-Quasar and Yahoo-Tyroo partnerships?

I am extremely satisfied but also thrilled by the association because the model I wanted to test of getting good people and guiding them to strategic partnerships has succeeded in a very short period of my joining Smile Interactive. WPP is extremely supportive of Quasar, much more than I had expected. They are looking at Quasar as not just an agency but also for other things they are looking to do out of India. We are extremely grateful to WPP for considering us and they are giving disproportionate attention to this joint venture because they believe in the digital media.

WPP wants to expand into marketing services in India and they plan to use Quasar as a base for growing. With their global experience, their deep pockets and their roots in the traditional media, it’s an excellent bridge that we have created for ourselves.

We need to create this bridge to enable traditional media to cross over. Let’s not get ourselves so involved with technology that we make it difficult for the real world to cross over to us. I also firmly believe that we should stop innovating. While everyone believes innovation is the way to grow internet, actually that’s hampering its growth. The real world is not able to cope up with our innovation. I am not saying let’s stop innovation, I’m saying let us innovate when there is a trigger.

Look at TV. Innovation happens there only once in 15 years. After colour happened, the device has improved from normal TV to plasma to LCD but essentially the TV broadcast technology still remains the same. So for 20 years no innovation happened.

But in the internet space, every entrepreneur believes that he has to innovate to get funding. It is easy for people to adopt new technology but you have to let them live with that technology for a while so that they don’t leave it at the first instance. Why bother with what internet can do to change users’ lives ten years down the line, what you can do for them today is more important.

If the focus shouldn’t be on innovation, then what should we focus on?

Consolidation. Whatever you have, believe in it. Don’t look at technology just because it excites you. The user is not excited by technology, he wants content. TOI (The Times of India) and HT (Hindustan Times) looked the same for so many years, has anyone said he will stop reading it? Let a user first get used to your navigation, your masthead and your colours instead of bombarding him with technology. Because then the user becomes loyal to your look and feel. If you keep changing everyday he will wonder if he can trust you. A user or a surfer has to be comfortable with the environment he is consuming your content in. We, in the internet industry, need to sit back and not change things for three to five years, what may come. Change and continuous change in internet is driving consumers away.

Do you suggest that entrepreneurs should first focus on getting more users with the same service?

Yes, you got that right. Don’t deviate from the service you are providing and get more people onto that service. Horizontals (horizontal portals) introduce something new every day and then they look at their unique users, but how sticky are these visitors?

What’s your take on the performance based advertising vs brand building on the internet?

By going and teaching advertisers performance based advertising we have showed them how ineffective we are. Look at the click through rates. If they cross 1% there is rejoicing all around. It is us who have gone and told the world we are a very ineffective medium to advertise in. Any advertiser who has Rs 20 crore to spend tells us that the internet is a waste of time.

Advertising is not meant for immediate action. When you need a product, your mind recalls its ad. The ad builds an aspiration. And in a developing economy like India, what we need is aspirational advertising. Advertising which motivates people to start thinking triggers entrepreneurship and wealth creation. In western markets, internet advertising could catch on faster because it called for action, not aspiration. For them buying an Audi 4 is just a change of car. In India we are wage earners. Users do not click through on the web and decide that this is what I will buy today. The click through performance based model is not going to work in India.

For the internet medium, why don’t we have standardized measurement metrics like we have for print, radio and TV?

We have discussed this at IAMAI (Internet and Mobile Association of India). When IAMAI was formed a couple of years ago (Editor: IAMAI was founded in January 2004), one of the ideas was to develop these kind of parameters and try to educate the advertiser on the reach of this medium rather than show the sophisticated parameters developed in the west. We instead blindly copied these parameters without realizing the nature and motivation for advertising in this country. We are paying for our mistake of not designing these parameters really early. We went and propagated an alien measurement tool which we ourselves are not comfortable enough with. And to recover from this mistake, I’m still struggling to find a way.

One of the ways I have been reading about to correct this mistake is the concept of dividing advertising into involved buying and not so involved buying. Involved buying is the decision of buying a car or a phone or a television where you will spend a considerable amount of time on researching the product. While uninvolved buying will include things that comprise your daily needs. I believe the internet is a great medium for products that see involved buying. We need to attract those brands online that sell involved buying products like electronics, automobiles, financial services, medical assistance… these are involved decisions. For example, one can create a network of people who have gone through a cataract operation and when your father has to go through a cataract operation you can join that community and find out all you need to know about a cataract operation. The same is true for a car, a plasma system or a music system. And the respective online community can tell you all about it.

How should these involved buying brands advertise online?

It’s a question of creating our own parameters. We need to find out what kind of advertising has the best click through rates. Say if the click through rates are good for involved buying products that means the web is a good medium for such products. Then you sell only those products on the internet. Why go to HLL or P&G to sell shampoos? Why not focus on big spenders and brands that see involved buying like automobiles, insurance providers and finance services. We should educate them about the internet.

I would guess that some products are not saleable online. It’s too much of a hassle for anyone to worry about which shampoo is being sold online. A user will continue to experiment and change his shampoo. He doesn’t want to hear a commentary about it whereas he would like to know about a LCD television on which he will invest a lakh of rupees and which is going to last him for three to five years at least.

After Jobs, Matrimony, Finance and Travel which is the next vertical that may attract the most internet users and has the most potential?

The verticals which have succeeded so far are those for which the need existed but the market was unorganized. There was imperfect system of matching needs versus desire, be it matrimony, jobs or travel. Internet was the perfect medium to match needs and desire. But these main verticals are not going to be the growth triggers of the future as these are restrictive growth sectors. Once a user gets married, he or she is out of the system so the churn in these millions of users will continue.

The trigger for growth will come only by 24/7 content as you have to learn to compete with Print, radio and TV. Internet has the ability to give you the latest. We have to find verticals of content and then give users updates by the second. We are the only media which doesn’t have a lag time. Earlier, the device to access this information was not there. Today, everyone has a mobile, hence a device in their pocket. I firmly believe that the way to increase internet access in this country is through mobile. For a household to buy a desktop for Rs 20,000 is still far out. A family will perhaps look at buying a second television for their home or upgrade an appliance instead of buying a PC. There are no societal pressure points to invest in a PC.

However, the need to communicate is there. It is only a matter of time before low end phones enable access to internet. I am not talking about 3G here. If a rickshaw-wala or an auto-guy has a mobile phone that allows him to access internet, why won’t he subscribe to the traffic update or access a navigation tool to take his passenger to the right destination.

Could you tell us a little bit about the Smile Incubation Fund? How many startups have you incubated?

My belief is that Smile has always been an incubation fund. There is nothing new about the fund per se. Quasar was incubated in Smile by Harish Bahl funding Manish Vij and then WPP invested in the agency, Zoomtra was also incubated in-house. We also incubated Tyroo and then got Yahoo to scale it up. We think we should incubate more ideas and people and then look for strategic partners. We have the ability to adopt entrepreneurs, invite them into our ecosystem and then scale up their ideas. We have a very good pipeline in healthcare and digital distribution of services. I believe that all the verticals we talked about, their next wave of growth will come from digital distribution. We will create a point of access for these services where you can come, transact and go away.

How an incubation fund like Smile is different from venture capital fund?

A VC will give you the capital and good insights but those insights will be given to you once in every quarterly board meeting. Once you have a VC on board, the meeting will start with financials. A VC has to show value increase in his own books after every quarter. He is driven by a totally different motivation. But an incubation programme is driven differently. We are not looking at short term financial returns. Although we all like money, I am not insisting on a 25 to 30 per cent internal rate of return which a VC is betting on. For me, growth of the business, in terms of physical parameters, is more important. I am interested more in quality metrics like the number of viewers, unique visitors, transactions and the kind of organization one has been able to build. In an incubation ecosystem, an entrepreneur feels more secure to deliver.

What is the progress on the kiosks project that Smile had announced last year?

We have progressed considerably; our back-ends are ready. As you can realize, it’s a very capital intensive exercise. The cost of Rs 60,000 to 1 lakh per kiosk means we are talking about an investment of Rs 1,000 crore over time. One also has to perfect the technology and have enough services to be put through. We are sort of ready for it now because the one of the biggest chunks of revenue we had foreseen for it was actually in the mobile space in the form of downloading mobile VAS (value added service) from these points. Why we believe this is going to be a big chunk is it will cut out the (mobile) operator’s share which is 70 per cent. And out of the 30 per cent that goes to the VAS provider, he ends up giving 80 per cent to the content provider. But if you are downloading content from a POA (point of access) which is outside the system, through a mobile phone which is Bluetooth enabled or through a cable… there are many ways of doing this.

We are looking at rolling the kiosks in the next six to nine months. The kiosks are ready, the pilot is also ready. We are putting together a management team now. We are looking around for capital for this project as we don’t want to run out of money. We will launch the Kiosks project under the Smile group as it is easy to raise money through an already present company.

What is your view on the horizontal versus vertical portals? As verticals fill niches for the consumer in terms of content and services, what is going to be the next move of the horizontals?

Horizontals have a tough time ahead. Search has replaced the horizontals in some ways. A user who wants to read up on Sania Mirza can now just go to Google and read everything about her instead of having to go to a Sify or an Indiatimes. The way media is going to be consumed is changing and horizontals were not able to figure out this. Unfortunately, they became too focused on email and related services. If a user is expected to look at pictures or transact on a portal which he uses for email, then it’s not going to happen. While email will continue to be the first destination for users, it will reduce some horizontals to email service providers.

What do you think about the business models of the various Indian social networking portals?

I don’t think social networking sites have a business model yet. It will take a while for us to monetize social networking. Taking this from your question on verticals, networking has to get verticalized. A Facebook or an Orkut attracts diverse people with diverse needs. A general social network fulfils your social needs, not your economic needs. To be able to fulfil economic needs, networks have to get verticalized on economic models.

The major players in the successful online verticals like travel and jobs have to innovate to create a social networking environment around their product. A job portal would do extremely well to create wide network of job seekers. For example, you can create a community of job seekers and give them a reference point to tell each other what’s happening in the job market. In the future, when we aggregate on the net, it will be need based. Facebook is fulfilling a social need, not an economic need. If you want to get married, you won’t go to Facebook but a Jeevansathi. Having a network of prospective grooms will see prospective brides logging in as well and that’s how the network will grow. That’s how social networking will evolve.

Another model that social networking sites can follow is the subscription model. Once a network has created critical mass and all your friends are on the same network, tons of data is being uploaded every day on the network and in fact every picture of yours is up there and the network asks for a dollar a month, people will pay a dollar a month. Paying for services is the way for internet to grow. Why can’t Google charge 10 cents for every search you perform?

But online businesses make money from advertising. If a business starts charging subscription, there is always another one offering the same service for free. How will this work?

Charging subscription will work when you have a critical mass of stable users. That’s why I’m saying don’t change too often. Let people get used to who you are. Then they will start paying. We need to learn to build brands on the net. And brands have a value. Just like Colgate is a part of our life, AlooTechie is a part of my professional life for the last three years, I can’t live without it. I agree no one will start paying tomorrow but another five years down the road when you have lakhs of users, you can ask for Rs 30 a month, users will give you the money.

We pay for everything, why shouldn’t we pay on the net? Isn’t it strange that while Airtel is making money for the broadband connection and the hardware manufacturer is making money for the computer, the content provider such as you for whose content I actually go online is not making money? The reason I go online is for the content and the content provider says, “I’m free.”! Collectively, to grow the wealth of this medium, we have to learn how to pay for the services and content we consume online.

The internet will remain a medium of 30 million users until there is a compelling reason for the user to buy a PC and to subscribe to broadband. That reason is only good content. When a user upgrades a television from a flat screen to a Plasma, it is only to consume the better quality of content available to him or her. Similarly, we have to take the lead to charge for the content we provide, to grow our medium. Paid media attract better advertising rates, not the free medium. It’s about the credibility and how the target audience is defined.

The first people who will pay for the content are the users who consume content in English. So, the focus should be on the English language content, at least for the time being. Only when you have started making money on the English language content, you should look at vernacular content; otherwise you would be extending the life of free content.

The responsibility of growing the online industry is on the telecom providers first; they are making money, let them provide broadband to every town. But unfortunately, the cost of growing this market is on people like us who do not have any cash flows. It is premature to create content for those who cannot pay for it. We should first concentrate on those users, like English speaking people, who have the ability to pay.

When should a startup go for funding?

I don’t consider funding to be the ultimate challenge. First, you should struggle a little bit and get your model right, and see if it’s working. Then only you should go for funding to scale it up. Don’t go for funding to seed an idea. About 80 to 85 per cent of startups don’t succeed and there is no point in getting a fund to fail with you. There can be plenty of ideas but whether an idea will work, you will know only in 18 to 24 months. It’s two to two and a half years of struggle and then if you don’t have money, you could go for VC funding.

VCs have a time-frame in mind; they are more interested in exiting than making sure you survive on a long term basis. A business should survive beyond you so it’s always better to take baby steps. Taking VC funding is like forcing the baby to have calcium shots. What startups in this country lack are grey hair and mature insights. My decision to move on my own (and join Smile) was to genuinely support young entrepreneurs with mature insights, to help them mold their ideas and scale up. Testing your model with the consumer and not your peer group is important.

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