Or Is It Bubble.Co.In?

WHERE can I find information regarding the 'tulip crisis' in 17th century Holland?' is an innocent, little question that an innocent, little youngster asked his teacher at an American university via e-mail. 'Jack, I don't believe 'crisis' accurately describes what happened,' replied his professor. 'In 1637, 'tulip mania' swept Holland. It was a classic bubble. Tulip prices were bid up in a speculative frenzy such that some tulip bulbs were selling for the same prices as some tulip farms. The market collapsed with huge losses.'

You would have thought there is nothing flowery about the worldwide web except the adjectives in the pink papers. But when little start-ups begin selling for hundreds of crores, when the price of a single stock of little infotech companies inch towards half its paid-up capital, it's a good time to ask if something on the scale of 'tulip mania' is being reached in the Internet backwaters of the India that is Bharat. And, more important, is it heading towards an 'Internet crisis'?

On the face of it, nothing that is happening here has not happened before. As Don Morrison, editor of the Asian edition of Time, told a gathering in New Delhi last week, upstarts like the online bookshop amazon.com and the auction house e-Bay.com are now valued at more than General Motors and ibm put together. So, the high price Satyam paid to buy Indiaworld would seem one of a piece. But the question begs: can anything so young, accessed by so few, be worth so much when the returns are so little?

The logical answer in the Indian context is, no. Advertising on the Net (the only source of income since nobody will pay to subscribe as Microsoft's experience with its e-zine slate.com shows) is negligible. And that, when it comes, will go only to the heavyweights who can establish that they have grabbed so many eyeballs. In the absence of independent, reliable audits, it is likely to remain so for some time to come. So what accounts for the frenzy to buy if not start e-businesses?

Again, the logical answer is time, and time as they taught us (especially them) in school, is money. 'The early movers will reap the maximum out of the situation,' say Sanjay Mehta and Hareesh Tibrewala. 'What we are doing in valuing companies today is essentially a discounting of what they can achieve in, say, 'x' years.' So, the question is not whether Indiaworld is worth Rs 499 crore or Rediff $125 million today but whether it will be worth so much in so many years' time from now.

Is that a wise way to evaluate? Don't count your chickens before they're hatched was another lesson they taught us (especially them) in school, but it's one investors, speculators and entrepreneurs are willing to ignore for now. 'I think recent valuations like Indiaworld are absurd since no one knows when the whole thing will really take off,' says Nitin Sawant. 'Companies like e-Bay are buying firms every day in anticipation. But things are changing so fast that very soon the Indiaworld deal may not sound as absurd after all.'

In other words, it would have taken a firm at least six months to attain the reach of an Indiaworld. Six months on the Net is like three years in the real world. Ergo: a big company would prefer to buy out instead. So like Microsoft bought up Hotmail, Satyam buys up Indiaworld. But still, is it worth all the sweat, especially when there's nothing 'concrete' about Internet companies? They don't own large plots of land, huge pieces of machinery or tonnes of infrastructure. So what is being bought?

'The valuation that a store like amazon.com commands might seem skewed from a traditional perspective,' admits V.S. Sudhakar. 'But Internet companies have to invest in customer acquisition in the early stages, which is why it cannot show profits. But even if 10 per cent of brick-and-mortar retailing moves to the Web, the pay-off for online retailers will be spectacular.' Moral of the story: the Internet valuation model is revolutionary but it is based on the future projection of growth.