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How Many Web Sites Are Making Money?

Editorial Department

Several years ago nobody care too much about Web sites making money in the short term. For sure the management and its team would come up with impressive business plans, but everybody reckoned a Web site shouldn't be able or expected to make money until it had been up and running at least five years. But the atmosphere has changed of late. The stock markets, both in the UK and in the States, have lost their unquestioning faith in the future profitability of dot coms. Investors are reaching the point where they expect their Internet businesses to make money, if not now at least in the near future. All of which begs the question, which Web sites are actually making money?

A recent article in the influential US business magazine Barron's (http://www.barrons.com/) painted a bleak picture. The report looked at 210 Internet companies and predicted that a quarter of them would run out of cash within twelve months. These companies included many of the big Web site names in the US such as the online grocery store Peapod (www.peapod.com) and the music retailer CD Now (http://www.cdnow.com/).

The CD Now tale is a strange one and it just goes to show that you can be one of the most popular online stores in the world (in February CD Now logged over a million unique buyers which is more than any other online store during that period) and still be horribly close to financial disaster. The company called in auditors in March of this year and they reported that CD Now had suffered "recurring losses from operations, had a working capital deficiency and significant payments were due in 2000 related to marketing deals." Rumours in the press stated that the company had just one month's worth of cash remaining. CD Now retaliated saying it had enough money to trade until October - wow, that's a whole six months. You'd have thought that an experienced online retailer like CD Now would have had the market sussed wouldn't you?

Of course the big boy in online retailing has to be Amazon (http://www.amazon.com/), but it's publicly stated that it won't begin to make money until 2002. Investment bank Goldman Sachs reckons Amazon could be making money right now though, if it concentrated on its core business of selling books and cut down on its expansion plans (into areas such as toy and CD retailing). Anthony Noto an analyst at Goldman Sachs told Reuters, "if Amazon focussed on books it could bring in over $10 million in revenue over the next five years."

Most of the popular Web sites in the UK don't make a profit, despite all the press coverage. You'd think Last Minute (http://www.lastminute.com/) might be more successful than most, given its recent £500 million flotation. But the share price dropped rapidly just days after the IPO and the company's sales figures don't make comforting reading - Last Minute made just £400,000 from sales in the last quarter of 1999. Last Minute only takes a relatively small cut from any transaction carried out on its site, as a result the company needs volume to generate enough transactions to make a profit.

The online auction house QXL(http://www.qxl.com/) is another high profile European company that you might think should be turning a profit by now, instead it lost £38 million in the third quarter of this year and its turnover fell from £1.9 million in quarter two to £1.5 million in quarter three. Then there's Freeserve (http://www.freeserve.net/), the UK's most popular ISP, shouldn't it be raking in the cash? Well no, according to Freeserve chairman John Pluthero the company is not expected to make a profit for the next two or three years, which is just as well when your last reported quarter losses were £3.5 million.

Given all those depressing facts and figures it seems the future for Web site profitability isn't too bright, but don't get too despondent, there is some light at the end of the tunnel. A recent survey by the Boston Consulting Group (http://www.bcg.com/) found that one in three e-commerce firms are making a profit. The survey looked at 412 Web retailers and found that 38 per cent of Internet-only companies, 72 per cent of catalogue companies and 50 per cent of bricks and mortar shops with an online presence were profitable.

So let's name names. Well one of the original dot coms is finally starting to turn in a profit. Yahoo! Europe (http://www.yahoo.co.uk/) made a profit on the £13.9 million worth of sales it generated in the fourth quarter of 1999.

Yahoo! was cagey about exactly how much money it made although it did admit that revenues had more than doubled compared to the same period last year and that profits had more than tripled. Yahoo! Europe is run by Fabiola Arrendondo and she told the Sunday Times "a media business should break even in the first two or three years, but a retail distribution business could take a lot longer because of the infrastructure investment."

One company that has bucked the trend and is managing to make a profit from retail distribution online is Tesco (http://www.tesco.co.uk/). The online arm of Tesco, Tesco Direct, is now the world's biggest grocery business with an estimated value of around £4 billion and its bosses claim it's already making money. Tesco's finance director Andrew Higginson reckons Tesco Direct is turning a profit on its annualised sales figures of £125 million and predicts sales of over £300 million for next year. Tesco Direct currently offers its services to around 40 per cent of the UK's population, but it plans to reach 90 per cent by the end of the year. In January this year the service had 250,000 registered customers and was taking around 4,000 orders a day with customers spending on average between £85 and £90 per order.

Much of Tesco's success can be put down to the fact that, unlike Sainsbury's (http://www.sainsburys.co.uk/), it doesn't use dedicated warehouses for online shopping. Instead trained pickers wander around Tesco stores collecting the goods for the online buyer. This has meant that the start-up costs of setting up an online business have been relatively low for Tesco. Pundits worry about the long-term feasibility of this approach though. Is it really cost effective to have Tesco staff wandering around their stores fulfilling online orders instead of serving real life customers. Terry Leahy, Tesco chief executive, remains bullish about the future of Tesco Direct: "we're at least two years ahead of the competition," he claims.

Tesco is one of the first bricks and mortar businesses to set up a profitable Web site, but we can expect to see lots of the big established names doing well in the online world over the next couple of years. Evan Neufield, the VP of international research at Jupiter Communications (http://www. jup.com/) thinks this is just the beginning of a powerful new trend, "dot coms are leaving the door open for traditional retailers to reverse the tide, " he explains. What's more these big corporates can survive the dot com shakeout, unlike CD Now they're not going to run out of cash within a month.

Of course Dell (http://www.dell.com/) is the online success story that every Web wannabe wants to emulate. The huge computer manufacturer has two big Web businesses; Gigabuys (http://www.gigabuys.com/) is an online computer store selling hardware, software and peripherals from a variety of manufacturers and then there's Dell.com where punters buy Dell kit. Dell gets around 2.5 million visitors to the Dell.com site a day and is raking in a whopping $35 million worth of Internet sales a day. The company's financial results bear testament to the success of its Web site business, which now brings in over 40 per cent of Dell's revenue; the company's first quarter results showed profits of $434 million on revenue of $5.54 billion.

One company that has certainly taken advantage of the bull market is online share dealer Charles Schwab (http://www.schwab.com/). The company recently reported that its net profits for the first quarter of 2000 had risen from $143 million last year to $284 million this year. Schwab's chairman told the Financial Times, "the sheer volume of customer activity during the first three months of this year pushed our profit margin above 18 per cent."

But has Schwab got the staying power to remain profitable? The online share dealing market is hugely competitive but at the end of 1999 Schwab still controlled 22 per cent of online trading volume. Schwab is a strong force amongst the active traders but it's thought it will have to broaden its appeal to online share dealing newbies if it's to retain its number one position. And of course you have to worry about this bull market, how long will it last? Many analysts believe that any share dealer can make money in a bull market, it's what happens to that dealer when the market falls that's important.

Where are the big growth areas?. The latest buzz is that business to business Web sites are where the big money lies. Industry pundits predict that the business to business market will be worth between $2.7 and $7.3 trillion by 2004, meanwhile the Boston Consulting Group estimates that one quarter of all business to business purchases will be made online by 2003. If you want to know which sectors to get into, the boom is expected to hit retail, the motor vehicle industry, shipping, industrial equipment, technological goods and government agencies and departments. In the UK the Government has already set up the Office of Government Commerce, which has set the ambitious target of carrying out 90 per cent of low-value Government procurement online by April 2001.

Although none of the travel Web sites seem to be raking in the cash just yet, this sector has long been touted as a huge growth area. According to research done by the Gartner Group (http://www.gartnerweb.com/) the value of the online global travel market should increase six fold by the end of 2001. During 1999 Net users spent around $5 billion at travel sites and that figure is expected to rise to $30 billion by 2001.

The healthcare area also looks to be hugely lucrative. Forrester Research (http://www.forrester.com/) estimates that the market will be worth a whopping $370 billion by 2004. However it's the business to business market that's expected to be the real driver behind this growth, Forrester predicts that just eight per cent of retail sales of healthcare items will be made online by 2004, although this still represents around $22 million worth of business.

And of course you can't ignore sex and gambling. Adult entertainment is one of the few online businesses that is making serious money from the Net, it's perhaps the only online service that people are prepared to pay a premium for. Take the Web site Sex.com, run by Stephen Cohen, Cohen claims the site pulls in over $225.5 million a year and has over nine million members, all paying a monthly registration fee of $25. Placing a banner ad on the site will reportedly set you back a cool $1 million for a month. A recent Sex.com press release claimed that "Sex.com does 86 per cent of the sex-related business on the Web. We make more than Penthouse, Hustler, Playboy and all the other major sex Web sites combined."

Meanwhile online gambling looks set to be one of the huge growth areas on the Web over the next two years. Research company Datamonitor (http://www.datamonitor.com/) estimates that online betting and gaming revenues will reach a staggering $10 billion by 2002. William Hill (http://www.willhill.com/), Ladbrokes (http://www.ladbrokes.com/) and Littlewoods (http://www.bet247.com/) have all set up big online gambling sites this year and are looking to rake in the profits quickly. Roger Withers, the chairman of Littlewoods Leisure, expects Bet247 to be making a profit within 18 months, he recently told the Financial Times, "this is not a mythical dotcom business, this is a business that is already turning over money and will continue to do so."

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