REMEMBER THE INTERNET? Silicon Valleyís dream project collided with Wall Streetís fund raising
machine and created possibly the greatest financial bubble of our time. It was a spectacular show,
but now itís over. Every day brings another obituary of a once darling canít lose Internet company.
Itís the end of this giant ticker tape parade ó somebodyís going to have a lot of clean up to do.
The implications for the ISO business and the payment processing industry are profound and may
determine the players in a new generation of market leaders.
Internet business (e-retailing, ecommerce, etc.) took off with a spurt. And why not? After all,
when Amazon.com or America On Line can develop customer bases in the 20 million range in only
three to four years, there has to be value there somewhere, right?
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Of course there is value there, but how much? When everyone focused on the top line of these
businesses and the gross measurement statistics (revenues, customer count, etc.) they missed the
point ó gross margin and profitability. If you can sell more stuff, you can figure out how to make
money on it somehow someday, or so the thinking goes. But, the realities of business arenít so glib.
What Amazon.com saves in not having stores, they pay in shipping and handling costs. Chalk up one
for the accountants.
In many cases, hyper growth of this magnitude causes more problems than it solves. Growth can often
cover up a lot of mistakes, but when things spin out of control, a bad situation can go to worse fast.
Take the 1999 Christmas selling season for example: some analysts report that as many as 6% of e-retail
shipments went awry or were late. Late doesnít count when it comes to toys under the Christmas tree and
consumers didnít easily forget that kind of disappointment ó they took their revenge by staying away
from Internet retailers in 2000. Sales grew only an average of 50% from 1999, a rate that will probably
knock many weaker players, like eToys, completely out of business.
Stock prices reflect this weakness: The Goldman Sachs Internet retail index has fallen 85% since
March 4, 2000. Thereís not much farther to go.