How Naspers does deals, why broadband in SA is improving, and the performance of its units.

ALEC HOGG:  In this special podcast we speak with Koos Bekker, the chief executive of Naspers.  Financial results for the half-year to the end of September were released today - your shareholders are going to be very happy when they see the bottom line but there are a few areas of the business that will be giving some concern.  Let's start off with the top part of the operations and clearly, your investment in China in Tencent is now really kicking in in a big way.

KOOS BEKKER:  Yes, we were quite lucky.  China is seeing out this recession in very good shape.

ALEC HOGG:  As far as Tencent is concerned there are still a lot of people who are worried that it is a bit of a bubble that it's unlikely to be able to continue with these growth rates.  Can you give us some insight into what's really going on?

KOOS BEKKER:  You see when we invested almost 10 years ago, Tencent had 30 people and no income, just costs and today it employs 11,000 people.  It's quite profitable and the margins are holding.  What's interesting about China is that about 27% of the population are online and that can go as high as 80% which has already been achieved in Korea and Japan.  So we think there's growth in the number of warm bodies on the Internet - this is still possible, but also the RPU - the average revenue per subscriber - that's going up because people use more services and they're more prepared to pay for it.  So, you put these two trends together and Tencent still has quite a way to go.

ALEC HOGG:  How does it actually make money?

KOOS BEKKER:  It persuaded people to pay and it's a very hard thing to do.  For example, Rupert Murdoch at the moment is saying that he'll encrypt his new site and he'll get people to pay for it.  I wish him well because we would like to copy that if he succeeds - but it's a hard thing to do - before people take up that credit card or spend on their phone account.  For some reason, there's a great reluctance.  What Tencent succeeded in doing is actually breaking through that reluctance and getting people to pay.  The very first service they paid for was - you know instant messaging was Tencent's origin - that was free PC to PC.  So, when people went PC to mobile phone they had to pay - some income started flowing in.  Then Tencent added a portal and got some advertising income and then they added things like games, e-commerce - call it ego-services where they give you a nice EBITDA and give you a face and a personality, then social connections, for example in Qq Dance - boy would meet girl and both of them would pay a little bit for the privilege of doing so.  Tencent is very good at monetising the services.

ALEC HOGG:  And obviously charging small transaction fees but having a huge number of people transacting...

KOOS BEKKER:  Exactly, and at the peak on a given day like we're talking now which is plus six hours in China, I would imagine there may be 50 million people concurrently on the line at this moment - there's a huge audience and if you simply collect a small amount from them efficiently with a low level of friction, then the figures pack up.  The problem is when you have in other markets like South Africa where monetisation is almost non-existent is - what do people pay with and before I can persuade you to take out your credit card you're going to think five times - you're scared about fraud on the net, and about whether I'll double charge you and all sorts of things.  If we want to bill you on your mobile account, the mobile company takes 50% - we haven't solved the method of payment.  Tencent is very good at that.

ALEC HOGG:  These new ideas that were coming in - South Africa - I think one is called Mibly, there's one that's been launched by Standard Bank - the one from Standard Bank and the other one from Blue Label - which are trying to bring wallets into the online space.  Are they the kind of things that could work?

KOOS BEKKER:  I think it's very promising.  Are you aware of M-Pesa - the system in Kenya?

ALEC HOGG:  No...

KOOS BEKKER:  You know how that works - they've got almost seven million customers.  Let's say you're in need of cash - you go to your barber and you send him an SMS, moving R10 from your account to his account and he pays you the R10 in cash.  So he acts as your banker.  Or you want to transfer money to your mother in a different city - it's immensely efficient and is run by the cell phone company there called Safaricom that's where we need to head.  The problem is that bankers all over the world are going to resist this and tell the governments it leads to illegal activities and constitutes banking and so on, so I think many people will oppose it.  That's the future - to find a frictionless way of transferring money so that you don't lose half the money in the transaction...

ALEC HOGG:  And you've got it working in China so you have the models that you know can be implemented when you do have that frictionless opportunity...

KOOS BEKKER:  Yes.  For example a completely different system operates in Poland, but equally effectively.  If Poland has a transfer from bank account to bank account - if I buy a pair of sneakers from you I transfer it from my account to your account - almost frictionless.  That's what we need to achieve here.

ALEC HOGG:  The whole base of Naspers is still pretty much on the pay-TV side.  This set of results shows that over a quarter of your profit is now being generated from the Internet, but pay-TV is still being terribly important.  I guess though, from listening to the way that you're focusing the operations, is that in time the Internet side will probably exceed that of pay-TV.

KOOS BEKKER:  Without a doubt - regrettably - I like pay-TV and that's where the electronic side of our business started - but the problem is all the good countries in pay-TV are taken.  We operate in 50 countries in Africa and we can't go anywhere else in the world - every country that should have it, has it and you can't buy anything because it's highly valued.  So we will grow the Internet and because the growth rate of the Internet far exceeds pay-TV, over time, Internet will become the heart of the company, and pay-TV more the attachment.  But for the moment it's a good business - it's quite sticky in a recession - what the Americans call the mother-in-law factor - like if you say "I have a limited budget, my mother-in-law is coming to visit for the weekend, how can I survive this in the most economical fashion".  Well let's hope pay-TV - because it gives me lots of hours of entertainment at a relatively low cost per hour...

ALEC HOGG:  They say people are trading in their fridges before they trade in their DSTV nowadays...

KOOS BEKKER:  It's interesting - chocolates, CDs, pay-TV - these things are sticky.  Incidentally also media - radio - your show will probably do better in a recession than not because people are more tied to their media whether in a car or at home, than they are when they're drifting all over the world on holiday and have more options.

ALEC HOGG:  That's good news for us, thank you very much... but having a look at that strategy, is it similar to what's happened at Naspers from the print side.  In years gone by print was by far the dominant part of the business, now I see in these results, it's only 8% of operating profit.

KOOS BEKKER:  The problem in print is not readership - that's holding up quite well.  For example the typical magazine in the country, whether ours or somebody else's, is actually at the same level of circulation today that it was at the height of the boom two years ago.  So your problem is not circulation - even paid circulation, but because your income mix is about half advertising, half circulation, the advertising side is punished and it knocks a hole in your bottom line.  So the print businesses worldwide are struggling at the moment and all the damage is coming from the advertising side.  Now when the economy recovers, advertising will bounce back.  There may be some long term damage inflicted by the internet which takes away mainly young readers, so there'll be some bounce back but maybe not to the level where we started off.

ALEC HOGG:  It's interesting on that point that you've given some support to your BEE shareholders in the transaction that you did in Media24 - that's about R300million worth of support there.  Would you explain what your thinking was.

KOOS BEKKER:  Alec what the truth is, when you do an internet deal, you take on a certain responsibility - not legally but morally - we have 107,000 people in the scheme... we actually have two schemes - one in MultiChoice which is doing splendidly well, and one in Media24, the print side, which is feeling the global winds against print.  So the latter scheme got into difficulties and we have 107,000 people there and it always strikes me that when I lose money for loan prime capital or some US fund, you feel bad about it but they're in you, they buy in, they sell out - there's no great long-term loyalty.  But when you lose money for a widow who is saving to send her son to university - that's a different level and we just said we can't allow this to go down.  What we did was to write-off a debt that the BEE scheme had to the company and put it on a sound footing.  We extended the scheme somewhat - it now matures in 2013 and by the looks of it, we can make it work.  We've had five schemes in the past and one of them halfway through its duration got into difficulties - we extended it and in the end all five paid out.  BEE - when you get into it, you better deliver.

ALEC HOGG:  But how important - you had five schemes as you said - but how important is it from a business perspective, leave alone the moral side?

KOOS BEKKER:  We have to do it - in broadcasting it's actually a legal requirement.  To have 30% empowerment is higher than the normal for the economy - you have to have it - without it you cannot do business.  On the print side we can duck it, but print is such - it's like radio - like your business.  It's so in the public eye and so engaged with communities that if we don't have adequate empowerment, we'll feel it in public support - we have 25% in black hands - 24% at the moment - and we hope we can make it stick and turn them into long term shareholders.

ALEC HOGG:  So it's not just morally good, there's very good business sense behind it as well.

KOOS BEKKER:  We hope so, but provided we can deliver.  If we don't deliver you have 107,000 very unhappy families who will come after you.

ALEC HOGG:  But you are delivering incredibly well - 36% growth in what you call your core headline earnings.  This is only for the first six months of the year but you seem to have a solid base - from which perhaps a similar performance in the second half?

KOOS BEKKER:  We don't yet see an improvement in advertising.  Our visibility is only about three months, we don't know what's happening beyond that but there's no improvement for Christmas.  On the pay-TV side it's going well, the Internet is expanding and certain economies are lifting.  My impression is that the US and UK are really basket cases.  They are in for some severe problems, but Brazil is flying, Poland is doing well, Russia is benefiting from a higher oil price - lots of markets outside of South Africa are actually bouncing back.  This market will probably come back sometime next year, but you're going to be a better judge than I about when - or what's your own view...

ALEC HOGG:  Of the South African market?

KOOS BEKKER:  Yes.

ALEC HOGG:  Well I hope that it will be sooner rather than later, but we did lag going into the downturn, so it seems like we probably will be lagging coming out of it as well.  But it's interesting - the point you've made now because perhaps it was two years ago when we discussed the valuation at the time, of the New York Times which you could quite comfortably have bought within Naspers, and even more easily buy today.  But you stayed away from the US and you've stayed away from the UK specifically by targeting the emerging markets and that is a strategy that's worked for you - it's so different to what so many other people have done - what shaped your thoughts.

KOOS BEKKER:  It is mainly also choosing your competition - if we face up to Silicon Valley - there are companies there like Google and eBay and Yahoo that are many times our size and frankly they'd just clobber us over the head and just demolish us.  They are probably better managed, better financed - so we try to fight fields where we have a better chance of success.  Where they feel uncomfortable is dealing with foreign languages and foreign cultures and cities that operate slightly differently to New York City and that's where we're at our best.  We'll go into Moscow long before they'll go in there.  We go to Kazakhstan and psychologically South Africans underestimate how flexible we've become.  We're actually multi-cultural.  Kids grow up in a city and they're used to Muslim people, black people and white people intermingling and it's not the case elsewhere in the world.  When we send people abroad they're much more sensitive to local culture and more easily able to adapt than the typical American and that's a slight advantage.

ALEC HOGG:  It is inspiring I guess in many ways for South Africans who want to - well the Naspers story certainly is inspiring to South Africans who want to expand internationally, but the way that you've described it now is that we do have an advantage.

KOOS BEKKER:  I believe we do - traditionally South Africans are quite good managers.  Certainly when we've employed them abroad, they've done as well, better than most other nationalities and since 1994 at least, we've become culturally quite tolerant.  So in many countries of the world people are scared of other people who are different to them.  Your wife doesn't want to live in a city where things don't run along certain paths and she can't shop at a certain supermarket.  South Africans are not like that - we're used to a robust environment, and quite adaptable.

ALEC HOGG:  I haven't done an update in the past year and I intend doing that in the near future, but you were in the top 15 media companies around the world.  I'm sure you've gone up the league table - does that mean anything to you?

KOOS BEKKER:  Not really.  If you compare us to the rest of the world, we're smaller than the biggest guys in the US, we are bigger than any internet-based company in Europe.  Europe is simply a bit of a desert in terms of the Internet.  In Asia there are a couple of strong companies - Japan, Korea and China - so at the moment we're definitely part of the top 10.  and where you fit in exactly doesn't matter so much.  Where we try to distinguish slightly is to be - lets say you're an investor or a young entrepreneur in an Asian country and you're looking for investors in your internet company to  take it to the next phase, you get two types of approaches.  One is the American company that says ‘I'll buy 100% - here's the dollar".  Maybe you want to sell or maybe not.  The next one is a venture capital fund - you'll walk in and say ‘give me 5%' and they don't hassle you very much except they look for every opportunity to cash out.  They want a full share of ibo and so on - they don't contribute that much - when they run, they run.  We're trying to be between them so when we come in at less than control often, but above 20% - we sit on the board and the audit committee and help where we can, but we're there for the long-term and the investor knows that if they're going to fail, we'll fail with them and lose our money which we've often done.  If we succeed, we succeed together and stay there for the next 10 years.  So the last couple of year's opportunities have opened for us, that aren't perhaps open for all companies - especially American companies - and we try to use that to develop a reputation as a good partner that sticks with them and patiently helps you build a business.

ALEC HOGG:  But if you are conditioned like that and you've been with Tencent since they were a 30-person company to an 11,000-person company is there a cashing in option on the horizon?

KOOS BEKKER:  We frankly don't want to cash in - we've had the advice for many people - when Tencent was trading at $10 (Hong Kong) - people said why did you cash in half your stake and when they hit $50 - the same story.  It still has a lot of upside.  It's now trading at $140 to $150 Hong Kong - that's the one part.  The second part is that we'd like to be a stable partner and we wont dip out simply because we think we can buy back the shares next month at a cheaper price.  Tencent also teaches us quite a lot - we are quite good.  Outside there's an e-commerce, but it feels like instant messaging and games - they're well ahead of any of our other operations so we often learned from them and on the other side, we try to convey what little knowledge we have - it feels like eCommerce to them.

ALEC HOGG:  South Africa, just to close off with, is a market which has been hampered in its opportunity of growth by the broadband scarcity.  That does seem to be changing now.  Are you feeling a little more optimistic about what can be done here?

KOOS BEKKER:  Yes, we have a new minister and new Director General (DG) in the Department of Communications - that's quite important.  You will recall in the year 2000 we had half the Internet connections on the whole content of Africa.  We're now below 25% and falling so we've been surpassed by Nigeria and Egypt in terms of Internet users.  It's a disgrace and the reason was basically neglect and poor policy at the Department of Communications.  The government doesn't have to subsidise anything - it's simply creating an environment which allows people to invest, but now we have a new Minister and a new Director General and they look energetic - I think things will start moving.

ALEC HOGG:  Do they listen to you - do they talk with you?

KOOS BEKKER:  Yes we recently spoke with them - I found them very open to ideas so I'm quite confident that South Africa will start moving.  You know broadband is not simply an adjunct to the economy like jewellery manufacture - it's at the heart of the economy.  You can't be a good geologist if you can't pull maps from all over the world.  You can't be an eye surgeon if you can't pull that eye clip from the MIT Library in Boston.  So broadband pervades the economy and it determines how all of us do our daily jobs.  If a country falls behind in broadband, it falls behind in the whole economy - it's like the road system in the 20th century - you couldn't have an advanced country that just happens to have no roads.  The point is, you can't operate if you don't have roads, and in the new century, a company will not operate unless it has broadband.  We can see in Korea 80% of homes now have broadband.  The Koreans are only about 30 million people.  The world champions in games, are Koreans - worldwide - why is that?  Because the kids grow up with this enormous broadband - they play games from birth.  You'll find those effects but you wont have engineering students really up to world standards unless you have broadband.  Hopefully the new minister will provide us with a set of urgency saying - lets catch up,.  Lets resume our proper position...

ALEC HOGG:  Koos Bekker the chief executive of Naspers.

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Koos is impressive What insight! by whips excite me on November 30 2009, 10:23 Find this comment inappropriate? Report it

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