I just read today that http://www.toysmart.com is shutting down. Amazon.com has never turned a profit, despite the zillions of orders they get. Countless other internet-based companies have appeared only to fall by the wayside. Why? what is so damned expensive about doing business on-line that even apparently successfull companies like Amazon can’t pay the bills?
The concept is that you need to build customer base, and that revenue is more important than profit.
Sooner or later, profit will be important, but when that point comes, some players will own the customer base and the others will die (or be acquired.) Those that own the customers will be the long term winners.
In this area (called the B2C (Business to Consumer) space) real profits are starting to become important, especially with the market effects of the last 8 weeks.
Oh, about “damned expensive”: You can always spend more money.
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- Many dot-coms don’t actually do anything non-related to the net. That is, they only provide net-related services to other companies that want to be on the net. All many sell is essentially a brand name. What does Netscape do?
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- Many other on-line ventures are optimistic at best: for many storefront retailers, location is a primary factor in what they carry. Net businesses found out quick that they are always considered “far away”, so they often attempt to carry huge selections and operate on thin profit margins. Even if they can sell something for a bit less, many people are still willing to drive to a (usually) nearby store and shop: surfing isn’t quite the same as cruising the mall. In many cases, lots of people want to actually see what they’re paying for before they lay their money down. -And if you need it right now, the net isn’t much help at all.
- A pal of mine got paid $150 once for putting together a vanilla-HTML website for a local stable/stud service. Last time I asked him, they hadn’t said they had found one customer through that site. They wanted a website, so they got one, but that didn’t turn out to have much to do with finding customers. This example is not uncommon, and it’s why older big-name investors don’t “get” the whole dot-com hype. If you have a unique product with a geographically widspread customer base, the net is great. If you have a business that distributes unprinted text or graphics-related content (porn sites) the net is just about perfect. Otherwise, it’s hard to tell if it’s worth the trouble.
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- And as a final note, I liked the Dunesbury’s kids dot-com idea: “MyVulture.com”, a company for liquidating the assets of net company failures. - MC
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There has also been a wild speculation with the new technology, people willing to invest in various dot-com enterprises without having any clear knowledge of what the company may do in the future. No one had a clear vision of what the internet and e-businesses will DO in terms of society, business, etc… but everyone thinks they will have a HUGE impact. Hence, wild speculation.
Such is true of any new technology – imagine you just got news of the invention of the airplane, but you don’t know what the commercial impact will be.
The wild speculation meant that some companies stock prices went sky-high, and that great fortunes were available… but as the technology shakes out, investors are going to be looking for companies that can actually perform.
Amazon has done impossible things like selling new books for $1 each just to keep Barnes down. That costs Amazon a lot of money…
Didn’t a lot of people recently cash in their dotcom stocks? There seems to be a lot of money in California recently.
Amazon has really high advertising costs. They pay out a lot of money to their ‘associates’. An associate is someone that puts a link to a book on their web site. If someone clicks that link, the associate gets paid. If the customer buys the book, the associate gets paid some more. Apparently, this costs Amazon a lot.
They also have low margins, and fairly high transaction costs. In a standard retail store, perhaps 3/4 of the transactions are cash or cheque. At Amazon, 100% are credit cards, and they probably pay a 2-4% transaction fee for each one of them.
The average order at Amazon is probably pretty small. If someone orders a CD for $15, it costs Amazon the same in transaction costs (processing the order, preparing for shipping, etc) as for a $100 order. Get a lot of small orders, and lose money.
The notion that the companies with all the ‘eyeball share’ will be the big winners seems really strange to me. That’s old-world thinking. Consumer loyalty on the net is fleeting. The day Amazon tries to capitalize on their huge market share by cranking up their prices a dozen new competitors will undercut them and steal those expensively-gained eyeballs. In the old brick-and-mortar days, there was a definite competitive advantage to being very large. I’m not sure that’s the case on the internet.
A lot of these stocks have been way overpriced because everyone wants to get in on the next Microsoft. The assumption is that some of these companies will become huge. But that may not happen at all. The internet may turn out to be more like a big open-air mall - ease of entry into the marketplace makes everyone pretty much equal, and there will be no retail giants on the net.
Sam Stone, what does it mean on the stock pages that Amazon has a P/E ratio of N/A ?
Aw, even I can answer that one. The “P” in “P/E” stands for profits. Amazon doesn’t have any (Bezos is promising them any day now…), so the ratio of P/E is literally incalculable.
As to the original question, dot-coms are spending lots of money on a) advertising (all those TV spots don’t come cheap), b) employees (high salaries, generous stock options, etc.), c) infrastructure (building warehouses both physical and data, not to mention all of the other technical infrastructure) and d) “image” (fancy offices in some cases, advertising that doesn’t actually sell the product, etc.). That’s all on the expenses side of the ledger. On the revenue side, well, they’re mostly still in a start-up phase, so they’re not taking many orders compared to established companies.
High costs + low revenue = a sea of red ink. And Wall Street seems to be finally taking notice that most of these companies will never turn a profit, or even pay back the money invested in them. There’s a whole lot of very overvalued paper out there (even after the downturn), and once some of these companies start failing, there’s going to be blood on the trading floor.
Do I know what companies will fail? No. If I did, I’d be richer than Bill Gates. But most Internet companies (Amazon being one major example) have rotten fundamentals. The volume required to make their economies of scale profitable is, quite frankly, impossible.
Actually, the “P” stands for “price,” As in dollars per share. It’s the “E,” as in “earnings” (also expressed in dollars per share) that is a negative number in Amazon’s case. Rather than report a meaningless negative number in the stock tables, most new sources simply report N/A, “not applicable.”
The argument of whether PE is “applicable” for companies with positive earnings in these times of huge valuations is a subject for another (Great Debates) thread.
My wife has turned into the queen of Internet shopping. She finds web sites that offer incredible deals, so that we get good merchandise for very cheap or sometimes free. There’s a site called DealCatcher.com which collects different good deals for you. We now get 40-pound bags of dog food delivered to our door by the UPS man, and we often pay only $5 or so for it, including delivery charges. We recently got about $250 in merchandise delivered to our door for only a $5 delivery charge, and it’s good stuff - quality presents for children in our extended family.
The deals are so good that it violated my sense of what’s possible, and it took me a while to figure out how it happens. The money to pay for the merchandise and delivery charges comes indirectly from the fools who are investing outrageous sums of money in them. My wife and I are not going to give the money back, and neither are the other people who get the deals. And we don’t have any loyalty to the sites providing the deals, either. When Wall Street figures this out, the dot-coms are gonna crash hard.
My wife has turned into the queen of Internet shopping. She finds web sites that offer incredible deals, so that we get good merchandise for very cheap or sometimes free. There’s a site called DealCatcher.com which collects different good deals for you. We now get 40-pound bags of dog food delivered to our door by the UPS man, and we often pay only $5 or so for it, including delivery charges. We recently got about $250 in merchandise delivered to our door for only a $5 delivery charge, and it’s good stuff - quality presents for children in our extended family.
The deals are so good that it violated my sense of what’s possible, and it took me a while to figure out how it happens. The money to pay for the merchandise and delivery charges comes indirectly from the fools who are investing outrageous sums of money in them. My wife and I are not going to give the money back, and neither are the other people who get the deals. And we don’t have any loyalty to the sites providing the deals, either. When Wall Street figures this out, the dot-coms are gonna crash hard.
My wife has turned into the queen of Internet shopping. She finds web sites that offer incredible deals, so that we get good merchandise for very cheap or sometimes free. There’s a site called DealCatcher.com which collects different good deals for you. We now get 40-pound bags of dog food delivered to our door by the UPS man, and we often pay only $5 or so for it, including delivery charges. We recently got about $250 in merchandise delivered to our door for only a $5 delivery charge, and it’s good stuff - quality presents for children in our extended family.
The deals are so good that it violated my sense of what’s possible, and it took me a while to figure out how it happens. The money to pay for the merchandise and delivery charges comes indirectly from the fools who are investing outrageous sums of money in them. My wife and I are not going to give the money back, and neither are the other people who get the deals. And we don’t have any loyalty to the sites providing the deals, either. When Wall Street figures this out, the dot-coms are gonna crash hard.
My wife has turned into the queen of Internet shopping. She finds web sites that offer incredible deals, so that we get good merchandise for very cheap or sometimes free. There’s a site called DealCatcher.com which collects different good deals for you. We now get 40-pound bags of dog food delivered to our door by the UPS man, and we often pay only $5 or so for it, including delivery charges. We recently got about $250 in merchandise delivered to our door for only a $5 delivery charge, and it’s good stuff - quality presents for children in our extended family.
The deals are so good that it violated my sense of what’s possible, and it took me a while to figure out how it happens. The money to pay for the merchandise and delivery charges comes indirectly from the fools who are investing outrageous sums of money in them. My wife and I are not going to give the money back, and neither are the other people who get the deals. And we don’t have any loyalty to the sites providing the deals, either. When Wall Street figures this out, the dot-coms are gonna crash hard.
You only need to hit submit once, it may take 5 minutes for it to complete, but believe it, its completed as soon as you hit submit 
USA Today has a Internet 100 [companies] score each day. I can’t find it on their web site, just on their newspaper, odd. Its around 129 now. Used to be much higher.
So, not even I could answer that question. Kind of makes my lofty pronouncements later in that post look dubious, huh? Never mind, I’m still mostly omniscent.