The Lesson: Eye popping revenue growth numbers aside, profits count in the end.


Under Financed is Underwater

   Most dotcom companies were able to score huge fund raising coups in 1999, and even into 2000. But it quickly became clear that the cost of creating a serious business in the Internet space was far beyond what anyone had imagined.
   The early buzz in the Internet world held that on-line stores saved a bundle on bricks and mortar stores. Itís easy to imagine the savings a business might realize from closing a huge store location, but harder to understand what will be required to replace it. Amazon.com spends 25% to 30% of gross revenues on marketing and advertising, according to Gartner Group analyst, Kevin Murphy. That compares to the 1% of revenues Barnes & Noble spends. So, where is the efficiency?
   To pay for all that ad money, Amazon.com raised millions in equity funds and then billions in debt, which it has yet to pay off. Most likely, it canít. Analysts are still debating when Amazon.com turns profitable and the best guesses are at around $5 billion in sales in 2003, a far cry from 2000ís estimate of $2.7 billion. Even then, itís just a small profit, nowhere near enough to service the companyís debt load. Look for Amazon.com and others to be investment write-offs for years to come.

The Lesson: It takes more money and time to get a business off the ground than anyone ever thinks. Take your best business plan estimates for time and costs and double them.


Itís the Last Share that Counts

   Donít forget that stocks are priced at the margin ó that means the last share sold dictates the overall market capitalization of the company. Take the last share trade price and multiply by the number of shares outstanding and that is the market cap. In 1999, market cap was all the rage ó a high market valuation meant forward momentum, aggressive acquisition strategies, and the ability to attract top talent for share bonuses. But the reality behind market cap is that itís only as good as the last guy who bought the stock ó not every shareholder was willing to pay that price, in fact, only the last buyer was willing to pay it. That means that the notorious day traders so active last year determined what the CEO of an Internet company could do because they determined the market cap of the stock.
   It will take another surge of enthusiasm and a lot of loose capital to get back to where Internet stocks were in 1999.

The Lesson: Buy low, sell high. Itís never a bad idea to leave the party early before the bad news shows up.













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Whatís the Internet Good For?

   Well, a lot actually, but profitable mass e-retailing isnít one of them. The Internet experiences the most financial success when it saves people time and companies money in the course of their normal business activity. The problem is squeezing some of that savings out of the customer to make up the Internet companyís revenues. Cost saving measures are the stock in trade of companies everywhere ó companies of all sizes have been trying to do things better-faster-cheaper since the mercantile economy was invented. Why? Because they are under pressure to keep their prices down. So itís no surprise that companies would want to increase productivity through use of the Internet in their businesses.
   But who remembers to factor in the cost savings a telephone provides to todayís businesses? Once, the telephone was the cost saving improvement for any business ó why write a letter or go on a personal visit when a phone call will do. And phone companies priced accordingly ó you save $1.00 on a letter and the phone company gets half ó everyone is better off. But today, no business would dream of opening up without a phone, and calls cost a fraction of what they are really worth. The same laws of financial gravity apply to cost saving Internet tools. Once those tools are in place, Internet innovators will have to create something else better or face strong downward price pressure from customers.

The Weirder the Better

   Another thing the Internet is good for is making the obscure accessible. One of the secrets to eBayís success has been that it makes odd things accessible to a huge audience. Suppose your 5 year old daughter became fascinated by whales as a result of a story. You can go to eBay and buy whale baleen for her show and tell project. That is something that would never have happened without eBay or would at least have taken a trip to Alaska or 3 monthsí writing back and forth with translations into Inuit. Instead, it can all be done in less than a week using eBay, credit cards and FedEx. Incredible. The bad news is you probably wonít buy a lot of baleen ó itís a once in a lifetime purchase. But the seller is in touch with a much larger marginal market than had ever existed in his lifetime, and that is a good thing.

The Lesson: The Internet will not replace the corner shopping center, but it will make the collectible store with a small local audience into a national player.


What does all this mean for an ISO?

   The Internetís ability to increase sales may have been the rage a year ago, but now retailers everywhere will be wiser to its prospects. E-retailing is a great idea for merchants selling unusual or unique items such as watches, collectibles, antiques or art. It does nothing for the corner cleaners or the local food store. If you are selling web services, look for retailers with a special niche.
   Moreover, Internet-only retailers are a thing of the past. A merchant processing portfolio based on Internet-only merchants is a dead end.
   Internet processing has special risk issues as well. Processors and ISOís handling merchants with more than 50% of total sales derived from the Internet know that they are at risk for up to 30 daysí sales in the case of non-delivery.
   The Internet can be a significant aid to your own business methods, improving efficiency and process flow. It will take significant investment, learning and diligence, but just like the telephone, everyone will be using the efficiencies the Internet has to offer within the coming years.
   The first wave of experimentation is over and we are entering a new phase. Companies who adopt Internet based tools faster than the competition will temporarily leap ahead of the field. If they can keep up the pace of technological change, they may achieve a position of permanent market leadership. The challenge to innovate information flow is an obvious one for the ISO business and the processing industry. Who rises to the challenge remains to be seen.