The E-volution of E-commerce Part VI:
The Fundamentals

All the turmoil has financial analysts almost cheerful, because it signals the return to market common-sense, investor fundamentals and the stabilizing equity valuation which measures a company’s market value by its ability to post profits and not simply rely on virtual potential. In turn, the death of the dot-coms is also leading to a moratorium on the less-than-metric measures including advertising counters like Web page “hits,” “page-views,” and marketing costs-per-subscribers, which have been used to guess-timate value. It is almost as if the sudden flood of bad tidings is the result of a conspiracy of bean-counters charging a revolt against the Silicon Valley-Alley venture capitalists, many which are guilty of suggesting that the new economy can be accounted for with ballyhoo-metrics measuring future cash-flow and untested potential.

In their July expose revealing endemic lack-luster dot-com accounting and revenue reporting, Internet industry magazine Business 2.0 discusses wide-spread abuses stemming from the SEC’s (Securities and Exchange Commission) on-going investigation of Internet companies taking advantage of rules which have not kept up with the new economy. The Commission recently settled its case with one of its more notable targets, America Online, fining AOL $3.5 million for improper advertising accounting. As a result, after restating earnings, AOL showed losses for six of the eight quarters previously reported having earnings.

Such scrutiny of shady practices has focused particularly on Internet companies which distribute or resell third-party products and services. For instance, Priceline.com reports gross revenues, giving investors the impression that earnings included the total value of its airline, hotel, and rental cars sales, when in reality its role as merely a middleman allows the company to only skim off the top of deals made between consumers and the companies providing the actual services. For a B2B facilitator like Ventro, which serves as a catalyst for industry online exchanges, the difference between reporting gross revenues of $26 million (as it did 2Q 2000) and a net of $1million is highly significant and some argue —misleading. This should strike an alarm for those looking to invest in a company which Red Herring Magazine rated as one of the “100 Most Important Companies in the World.”

Forrester further supported its warnings with its finding that less than 40% of those interviewed expected to make a profit before 2002. During the same time period, the weekly business publication Baron’s released the results of its own survey of the financial position of 207 Internet companies, concluding that 25% of them would exhaust their cash reserves by April next year and that many more would finish the year 2000 without finding further funding or a prospective buyer. Baron’s later updated the March 20th article in mid-June citing several companies as potential loss-leaders running out of cash by summer’s end, these include Netzee, Bluefly, RoweCom, Claimsnet.com, Pilot Network Services, US Search.com, Streamline.com, Netivation.com, and Mortgage.com, amongst others already mentioned in this article.

If there’s any truth to any of the doomsday talk— the toll on the market should be astronomical. With reportedly hundreds of millions being exhausted primarily by marketing efforts, dot-com business strategy becomes evermore perplexing. Recently bankrupt high-end sportswear e-tailer Boo.com reportedly ran through $135 million in funding before closing its doors. EMarketer estimates that spending by internet companies on offline advertising reached $2.7 billion in 1999 and will climb to nearly $6 billion by year-end 2000.

Reacting to the fact that many dot-coms employ a majority of their millions for marketing purposes, Jeremy Siegel, a professor at Wharton Business School and an expert on stock valuation techniques stated to Reuters in mid-June that “this idea that you just have to grab a customer base and it will turn into profits is no longer seen as viable.”

And dot-com activity continues to be wilder. Pets.com announced in early June that it would take over competitor Petstore.com, at the same time Pets.com’s stock has dropped about 80% since its February IPO, and it has cumulatively run through $59.6 million in marketing the first quarter of this year and the last of 1999. Its no small wonder that it declared a first quarter loss of $39.1 million.

Part VII: The Light at the End of the Tunnel

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