To: V$gas.Com who wrote (37574 ) 1/9/2000 1:20:00 PM From: ztect Respond to of 44908
Interesting read from Redherring.com... (an oldie but goodie)relevance : compare to tsig's b-model redherring.com CAN INTERNET COMPANIES MAKE MONEY? By David Simons Red Herring Online November 16, 1998 Will Internet companies ever make money? That's the question of the '90s, and one that cuts to the issue of how much it costs to buy branding and customer loyalty. ..... But holiday shopping alone does not automatically guarantee a happy bottom line. In fact, according to our research, aggressive spending on marketing -- and we mean big money -- could make the Internet stocks more ho-hum than ho-ho-ho. Mega-marketing trend It's not news that many Internet companies' lack of profit is due to marketing spending. However, the trends of spending in search of branding reveal that the hole has been getting deeper. The table below shows marketing spending as a percentage of gross margin for prominent electronic retailers, or e-tailers, over the past four quarters. (Gross margin is revenue less cost of goods sold -- such as payments to wholesalers for books, CDs, software, etc.) MARKETING EXPENSE AS % OF GROSS PROFIT quarter ending.. 9/98 ..6/98... 3/98... 12/97 Amazon......... 107% ...101%... 101%... 125% Beyond.... .....533%... 350% ...210% ...135% CDNow......... 448%... 450% ...587% ...527% OnSale......... 105%... 102%... 128% ....70% As any good MBA should know, these numbers suggest a classic blunder of over-expansion in name of market share. Yet the stock market has elevated such spending to the essential business model of the Internet -- and the more headlong, the better. Indeed, Amazon (AMZN) and others have said they will increase marketing spending beyond levels of the September quarter. CDNow (CDNW) [is]raising spending to not only keep up with their own branding efforts, but to also help stave off competition from Amazon in the music space. The stock market, however, has chosen to view this as investment. So what if profit is delayed? What's a year or so, or a few cents a share less in earnings, compared to eventual tidal waves of profit? Market share, mindshare, and top-line growth are the primary concerns. And until the July-October market meltdown, investors eagerly funded outsized marketing plans, whether they even realized it. Not only was mega-marketing a necessary cost of doing business, but if one Internet company was doing it, they all had to do it, financially safe or not.... ...In fact, implicit in today's notion of establishing an Internet brand and gaining market share is that, once gained, the branding and customer loyalty have permanence, as if bought off the shelf. BUT nobody's proven that consumer behavior on the Internet won't require perpetual nurturing and nourishment, and therefore, perpetually outsized marketing budgets as a percentage of gross margins."