BUSINESSWEEK ONLINE: JUNE 21, 1999 ISSUE

Readers Report

All Internet Companies Are Not Alike

''Who's getting more bang for the marketing buck'' (Finance, May 31) was a brilliant look into what will drive success in the Internet economy. In launching an Internet business, we have tracked our marketing effort using the exact metric you chose. Our target ratio of revenue to marketing expense is 10. Put simply, 10% of every sale is spent attracting customers. This is not an unusual number, considering the markup in our industry hovers at 25%. This leaves 15% of revenue to pay the rent, the salaries, and some return to the shareholder (me).

Before we ever spent large amounts of money on this venture, we carefully spent small amounts. If our test marketing showed a ratio of 1.27 (like CD-Now), I would still be working as a business-planning analyst.

I would like to see the ''back of the napkin'' calculation that says you can profitably sell CDs while spending 79% of each order on marketing. We sell items that are similar in size to CDs and we spend 15% of revenue on shipping costs. Put those two together, and you will have 6% left for the CD, the rent, salaries, expenses, and let us not forget return on sales. Well, with those results, maybe we can forget return on sales.

Tom Nardone
President
Shopinprivate.com
Livonia, Mich.

Your ranking of the Net's savviest spenders is misleading. The companies listed have very different business models (e.g., ad-based vs. retailing vs. Internet service provider). Using gross revenue generated to measure the effectiveness of ad spending is like comparing apples with oranges. It would be more precise to use gross-margin dollars as the relevant measure. Why treat revenue from retailers like Amazon.com and Onsale, with gross margins below 25%, the same as revenue from portal destinations like eBay and Yahoo!, with gross margins above 80%? If you make these adjustments, and rank the companies by gross-margin dollars divided by marketing expenses, you'll find that eBay and Yahoo! rank as more effective spenders than Amazon and Onsale.

Incidentally, eBay and Yahoo! are both profitable, whereas Onsale and Amazon are losing money. Based on your analysis, a reader might conclude otherwise.

Paul Weiskopf
Belmont, Calif.



Give eBay's Founder His Due

I was disappointed that ''eBay vs. Amazon.com'' (Cover Story, May 31) did not make greater mention of Pierre M. Omidyar, who was eBay's founding genius and its largest individual shareholder. To put it succinctly, if it were not for Omidyar, there would be no eBay. Omidyar is one of the finest examples of the success of my Iranian compatriots in this country despite nearly two decades of vilification, prejudice, and obstacles.

Hamid Boroumand
San Juan Capistrano, Calif.



Productivity Is No Panacea for Inflation

It is erroneous that faster productivity insures against a pickup in inflation (''Inflation: Smoke, but no fire,'' Editorials, May 31). Productivity determines how fast living standards can improve. If productivity increases 2% per year, material well-being will improve because wages will tend to grow 2% faster per year than inflation. There is an infinite number of inflation rates under which this can occur (0% inflation and 2% wage growth, 10% inflation and 12% wage growth, etc.). What ultimately pins down the inflation rate is not productivity growth, but monetary policy. If the Fed provides too much liquidity, the economy will overheat, and inflation will tend to rise, regardless of what productivity is doing.

Historically, the U.S. has experienced periods of accelerating inflation when productivity growth was quite strong (mid- to late 1960s) and decelerating inflation when productivity was lackluster (early 1980s). Around the globe, there are many cases of developing countries enjoying rapid productivity growth while suffering much higher inflation than in the developed world.

Joshua Feinman
Bankers Trust Corp.
New York



The Fed Must Do More Than Jawbone

I am at once amazed and dismayed to read that many economists promote the specious argument that the Federal Reserve need only talk tough on monetary policy (with no actual change), and be content to allow the bond market to ''do the work for them'' by raising rates in response (''Why the Fed's open-mouth policy works,'' News: Analysis & Commentary, May 31).

This reasoning is shortsighted, and a policy based on it can have unintended inflationary consequences. Only the Federal Reserve, through the banking system, controls the supply of high-powered reserves, and, consequently, money creation. If the Fed leaves the short-term nominal interest rate below the level that is required to satisfy the demand for real cash balances that support a sustainable pace of economic growth, the short-run impact will be lower nominal interest rates.

But, as that high-powered money finds its way into the real economy, it will have the undesirable long-run consequence of driving up prices (for instance, financial and real estate assets), and ultimately steepening the yield curve as inflationary expectations return and real rates rise.

This steepening of the yield curve, without Federal Open Market Committee (FOMC) tightening, can actually be stimulative. Lending institutions have more of an incentive to make new loans as their cost of funds remains stable while the return on new assets increases, leading to more profitable lending opportunities.

Only the Federal Reserve can stop this process by allowing the short-term rate to rise and bring the supply of reserves back in line with demand. That will allow the economy to grow on a steady, noninflationary path. If this were not the case, the FOMC would be an unnecessary entity. The federal funds rate could be set at some low level, say 3%, and the markets could ''do the work'' through volatile and rising long-term rates and sharp yield curve shifts.

Clearly, this would not be the certain, stable economic environment that is desired. If the Federal Reserve's threats ultimately lack sincerity, it is not unimaginable.

Richard M. Shelton
New York



Al Gore Needs to Be a Green Giant

''Tug-of-Gore'' (Government, May 24) distorts my view of the challenge Vice-President Al Gore faces. My view is that, like any other Vice-President, Gore's challenge is to appear Presidential. He can't afford to seem timid. Whatever issues Gore pursues, he must be bold. Since he is green, he must be a green giant.

Inside-the-Beltway thinking discourages boldness. In the environmental arena, however, many policy initiatives dismissed as crazy by the conventional Washington ''wisdom'' enjoy overwhelming support from the American electorate. An example is the public's desire for the auto industry to produce sport-utility vehicles that pollute neither our cities nor the world's atmosphere. Inside the Beltway, that may be considered radical; outside, it is common sense.

Finally, it's no doubt true that boldness will turn off some campaign contributors, but certainly not enough of them to jeopardize the Vice-President's ability to run an effective campaign. And those who would be alienated are outnumbered by donors his boldness would energize.

Carl Pope
Executive Director
Sierra Club
Washington



Please, Vouchers for Nonsectarian Schools Only

''What vouchers can--and can't--solve,'' (Editorials, May 10) was thoughtful, informative, and important. You had much to say that needed to be said about vouchers. Unfortunately, you unintentionally misstated my view on vouchers in an important way. I have always made it clear that I do not support aid to parochial schools through any voucher system. I truly regret that ''or parochial schools'' appeared in the editorial.

My experience leads me to believe that advocates will more likely pick up what is printed by an authoritative publication such as yours and the distortion will continue ad infinitum.

Arthur E. Levine
President
Teachers College
Columbia University
New York



College Can't Be All Things to All People

In ''What can K.O. inequality? College'' (Social Issues, May 31), it seems that you're on the same bandwagon as so many others--saying college is the answer for every young person. What about the trades? As a writer about the plastics industry, I see firsthand the dilemma of many in the moldmaking industry as they try to find and hire plastic parts designers, moldmakers, specialty machinists, etc. Although demand for skilled people in these positions is high, few people are available. Knowledge about the excellent opportunities in such trades as moldmaking and machines is sorely lacking in our public high schools.

We need to take some lessons from Germany. Those young people who don't have the aptitude for college should be directed into the trades. A high-school-educated 24-year-old who goes through an apprenticeship program to become a journeyman moldmaker can earn upwards of $50,000 annually.

My father is a tool-and-die maker who spent 35 years at General Electric Co., then took early retirement and opened his own company 20 years ago. Today, he employs 50 people, including my two brothers and my oldest son. Not bad for someone with no college.

America is becoming a nation of lawyers and hamburger flippers, with little in between. Let's make the trades a priority when directing young people into higher education and careers. You'll find industry more than willing to help with internships and apprenticeships, as well as hard investments for technical training schools.

Clare Goldsberry
Contributing Editor
Injection Molding
Phoenix





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LETTERS:
All Internet Companies Are Not Alike

Give eBay's Founder His Due

Productivity Is No Panacea for Inflation

The Fed Must Do More Than Jawbone

Al Gore Needs to Be a Green Giant

Please, Vouchers for Nonsectarian Schools Only

College Can't Be All Things to All People

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