Commentary: Portals of no return

When Singapore Telecommuciations Ltd and US-based Terra Lycos formed a US$50 million joint venture 14 months ago, it was heralded as a great Internet moment for the big state-controlled Southeast Asian telecommunications company.

When Singapore Telecommuciations Ltd and US-based Terra Lycos formed a US$50 million joint venture 14 months ago, it was heralded as a great Internet moment for the big state-controlled Southeast Asian telecommunications company.

"SingTel and Lycos are focused on leading the burgeoning Asian Internet market," said SingTel president and CEO Lee Hsien Yang. Lycos Asia, the 50-50 joint venture, would be "the Internet front runner" in Asia by setting up top-notch portals throughout the region, he predicted.

Word from SingTel at the end of last week that it would delay the listings of Lycos Asia and another Internet company, Sesami.com Pte Ltd, confirms the bad news that's been flowing out of Hong Kong of late: Asia's dotcoms as a group aren't earning any better returns for investors these days than those in the US.

To be sure, there's a lot of Internet business in Asia's future. E-commerce in the region, excluding Japan, is expected to reach US$910 billion in 2004--a growth of 157 percent annually, according to the Gartner Group, a US IT market research company.

The question, though, is who will make money from it. For now, it's not Lycos Asia.

The company hopes to break even in three to four years with most of its revenues coming from online ads, says Bernard Chan, Lycos Asia marketing vice president. Yet as many a failed US dotcom can tell you, relying on online ads is risky. The price of online ads is declining due to an increasing number of websites seeking online ads for revenue, said Lane Leskela, a research director with the Gartner Group.

And Lycos Asia not only has to stay afloat, it has to keep pushing because only the top five portals in each Asian market will grab most of the online ad revenues, says M Raghuram, CEO of brinjal.com, a Singapore web-based information resource on New Economy companies. In September, Lycos Asia was the third most visited portal in Singapore but it ranked a woeful ninth in Hong Kong, according to Nielsen NetRatings.

Seeking to reassure investors, Lycos Asia says it still has a large chunk of the original US$50 million fund from SingTel and Terra Lycos, and will likely survive, said Lycos Asia CEO Mary Ong. But what's the point of having a large chunk of cash if you’re running investing in a business that isn't generating profit? That's the same question investors in Hong Kong were asking themselves after Hongkong.com last week reported an increase in third-quarter profit that mostly came from interest paid on cash it raised in a stock sale.

The profit outlook isn't much better at Sesami.com, an Internet platform for business-to-business transactions. Sesami.com makes money from taking a cut from each transaction over its network. It also charges subscription fees for companies using the system, and charges to integrate companies onto its system. Sesami.com currently processes S$550 million worth of business a month, says Sesami.com managing director Poh Mui Hoon, who hopes to double this figure over the next 12 months. Sesami.com's revenues could reach S$10 million this year, said Poh.

Yet that's just a sliver of SingTel's total S$4 billion in annual revenue. And where’s the payout for investors? B2B companies like Sesami.com function like stock exchanges, where products are traded over the Internet like shares traded electronically. Last year, the New York Stock Exchange processed US$8.9 trillion of transactions but its profits were only US$75 million. Based on that kind of performance, Edmund Lin, a consultant with Bain, predicts thin profit margins for all B2B companies. A more optimistic Poh sees Sesami.com breaking even in two years.

To be sure, SingTel was right to delay its listings. Imagine the embarrassment to the staid company if the issues flopped. Yet don't expect SingTel's share price to get much help from these two e-commerce ventures in the next two years. A more realistic hope: minimal losses.

AsiaWise is a Web site that promises independent financial commentary.

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