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published
2 May 2000
Fundamentals
lost and found
by Dylan Tweney
Far from casting a pall of gloom over the Internet
industry, April's tech stock tumble has infused the digerati with
a new sense of realism -- and even a dose of hopefulness. The executives
I've spoken with in the past few weeks have been completely unshaken
by the market's marked downturn. Granted, they're not about to show
fear to someone who is planning on writing about them online and
in print. But almost to a one, these Net execs are actually looking
forward to what comes next.
And what does come next? A new focus on business fundamentals,
they all agree. That translates to the bottom line: In a word, profits.
Feeding into the bottom line are critical metrics, for which every
Internet business will be called to account. Among these life-or-death
benchmarks:
- Conversion rates: What percentage of people visiting
a site actually make purchases or engage in some other relationship-building
transaction, such as becoming a registered user?
- Customer acquisition costs: How much do you have to
spend to attract one new customer? How are your overall marketing
and advertising expenditures translating into new customers?
- Customer loyalty: Do customers make one purchase and
then disappear for parts unknown? Do they stick around for a year
and then get disgusted with your poor customer service? Or are
you creating lifelong patrons of your business? A customer with
lots of loyalty to your business will have a very high lifetime
value. Lots of such customers, and you'll have a strong revenue
stream over the coming years. That's the foundation upon which
a sustainable business is built.
Of course, every dot com CEO is confident -- or appears to be --
that they're going to wind up on the right side of the shakeout.
And, the truth is, many companies with questionable financial prospects
are still enjoying inflated market values. Case in point: Amazon.com.
Despite this juggernaut's obvious and impressive power in the online
universe, a recent Fortune analysis casts doubt on its ability to
continue delivering reasonable returns to its investors, even with
the most optimistic business projections [1]. This analysis is not
without its flaws, but it's a welcome change from the alternating
boosterism and naysaying, most of it completely uncritical, that
characterizes most of the Internet business press.
One area where things do look gloomy is in the IPO market. Many
new IPOs have been canceled, in light of the poor returns from such
recently hyped startups as Pets.com, VarsityBooks.com, and others
[2]. But the slow period for IPOs is likely to last only a short
while. After all, VCs still have billions to invest, and since the
VCs buy stock for pennies a share, they make money even when
the post-IPO stock price falls off a cliff, as VC Steve Jurvetson
observed in a remarkably candid moment last month [3].
Another fallout effect from the tech stock shakeup: Portal profits
will take a hit. Big-name portals (namely, AOL, Yahoo, and Excite@Home)
make millions from "tenancy fees" -- payments made to
the portal by other companies in exchange for prime real estate
on the portal's site. Want top billing on an AOL channel or Yahoo
category? Better bring along your checkbook when you go talk to
the portal's business development folks. In the past, the portals
commanded fees as high as $2 to $5 million for prime placements
on their sites [4].
Maybe a $5 million tenancy fee for some prime real estate in the
world's biggest virtual mall makes sense when you're flush with
venture capital and looking to establish a big brand name. But when
companies start looking at the traffic these deals actually generate
and doing some cost-benefit analysis, they may feel a little ridiculous.
One company profiled in the NY Times story cited above, MobShop,
reports that they pulled out of a deal with Excite when they realized
it would translate into a customer acquisition cost of over $1000.
The high cost of portal deals is certainly part of Dr. Koop's
woes. Unable to make the cash payments it owed to AOL, the ailing
health portal was forced to pay the portal in stock instead. AOL
now holds 10% of DrKoop.com's stock [5]. "The lesson to be
learned is don't overpay for portal deals," a Jupiter analyst
in the story is quoted as saying. "They often don't deliver,
and they can bleed you dry."
[1] Amazon
so far has produced nothing but losses
[2] April
showers wash out IPO market
[3] Silicon
Valley Greeted Sell-Off With A We-Needed-That Sigh
(subscription required)
[4] Many
Analysts Think Expensive Portal Deals Deserve More Scrutiny
[5] The
Drkoop.com Deathwatch
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