Markets & Finance

The E-Commerce Winners


By Scott Kessler I'm not going to rehash the depressing state of (and past year in) the Internet economy, as losses, layoffs and delistings have become the norm. To stay competitive (and in some cases viable), companies are now feverishly prioritizing profitability instead of growth.

However, a select few dot-coms are confounding critics by continuing to post impressive revenue increases, while at the same time delivering healthy profits. These Internet survivors have two things in common: They operate in consumer-oriented markets that have actually benefited from the sluggish economy, and they have profitable business models that are uniquely suited to achieving success on the Internet.

THE STAR OF E-COMMERCE. Amazon.com (AMZN) might have a more recognized brand, but eBay (EBAY

; ranked 4 STARS, accumulate) has more registered users and transacted triple the amount of business in the second quarter. EBay, which started off trading Pez dispensers and was propelled by the Beanie Baby craze, is now the world's most popular consumer e-commerce platform, offering millions of items for sale from collectibles to housewares. Specialty categories include cars, fine art, and services.

According to Nielsen//NetRatings and Harris Interactive, online auctions account for some 10% of all e-commerce spending, making it the third-largest category behind books and apparel. EBay is by far the leader in this segment with market share estimated at 64%.

The company has clearly benefited from the global economic slowdown that has prompted buyers to pursue bargains and sellers to raise cash in the U.S. and around the world. In fact, revenue growth has been accelerating recently and the company has been one of the few across the dot-com landscape to raise revenue and earnings guidance. Growth should be increasingly driven by eBay's rapidly-expanding international operations, which accounted for 14% of second quarter revenues.

EBay estimates its huge addressable market at approximately $1.7 trillion (yes, that's trillion), but the key to the company's financial success is its business model. Unlike many other consumer-oriented e-commerce companies, eBay is not a retailer and does not have to concern itself with expenses related to back-end functions such as order processing, fulfillment and shipping. Perhaps most importantly, the company has absolutely no inventory costs or risk.

As a result, the company boasts robust margins and significant profits that enable it to re-invest in existing operations and pursue new growth initiatives. In turn, eBay's growth attracts both additional buyers wanting to peruse a larger selection of goods and more sellers that gravitate to the forum offering the greatest selling potential. Regardless of location, language and currency, eBay will facilitate billions of dollars in transactions this year. No other company offers this type of trusted global platform, and this reality is at the heart of eBay's current success and future opportunities.

FLYING HIGH. EBay is not the only profitable dot-com with an improving financial outlook. Three of the most popular online travel service providers will generate operating profits in 2001 -- unlike both Yahoo! (YHOO) and BroadVision (BVSN), which are the only Internet companies in the S&P 500 index. Expedia (EXPE), Travelocity (TVLY) and Priceline.com (PCLN

, ranked 3 STARS, hold) have all recently impressed with outstanding financial results, indicating that the market for the online sale of airline tickets, hotel reservations and car rentals is quite healthy despite the economy.

According to Jupiter Media Metrix, the online travel market will rise from $18 billion in 2000 to $63 billion in 2006. And S&P believes that the sector has benefited from the economic downturn that has prompted business and leisure travelers to seek out the best available prices online. We think that Priceline.com has capitalized the most from the sluggish economy because its "Name Your Own Price" system offers consumers and travel companies the best values.

Travel has become a vibrant e-commerce category not only because of the unique and compelling convenience, selection and value offered to buyers, but also due to relatively low operating cost and expense requirements. Traditional travel agents, despite their personal touch, can in most cases be easily replaced by their always available and extremely efficient online competitors.

Like eBay, Expedia, Travelocity and Priceline have been benefiting from the "network effect," where the addition of new affiliations with airlines, hotels and rental car companies attracts more potential customers to an online travel service provider's website. The increased traffic and transaction activity leads to greater and deeper travel partnerships. And the cycle continues accordingly.

THE URGE TO MERGE. EBay has been buying companies in related segments and geographies to maintain and extend its lead. Last summer, eBay bought Half.com, a little-known fixed-price marketplace offering discounts on used goods. Today, Half.com is the third most popular consumer e-commerce destination on the Internet. In addition, EBay has bought a majority stake in South Korea's largest Internet auctioneer and also acquired iBazar, a leading European online auction company. Interestingly, one of eBay's top U.S.-based competitors, Amazon.com, has quietly been scaling back its online auction business.

In the online travel segment, several companies are vying for the top position, including Expedia, Travelocity and Priceline, as well as Cheap Tickets (CTIX) and the recently-launched Orbitz (which is jointly-owned by five major airlines). With an attractive market and a number of aggressive competitors, consolidation has already begun. In July, USA Networks (USAI) announced it would purchase a controlling stake in Expedia and align that company with its other travel-related properties such as Hotel Reservations Network (ROOM) and CitySearch. Last year, Travelocity bought Preview Travel.

Many of the companies mentioned above are proving to be the best survivors of the dot-com crash because they are pursuing the right markets and executing a successful business model in the consumer area. And merging or becoming partners with other successful competitors will only make them stronger. Kessler is an Internet industry analyst for Standard & Poor's


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