Cash eaters. Bottomless pits. Loss centers. The black epithets that hang over Internet startups these days have tainted the notion of putting "dot-com" on a company's name; an idea that a year ago was emblematic of the promise of the Internet Economy.
Many dot-coms have turned from grand pronouncements of world domination to solemn vows of keeping their feet on the path to profitability. And sure enough, even as old-economy companies quietly tap their online divisions as a steady source of profits, the ranks of profitable Internet pure-plays are growing with each quarter.
Online broker Ameritrade, for example, posted profits in the first and second quarters of 2000, surprising Wall Street analysts who had forecast losses. Others are expected to break a chain of losses soon. According to consensus estimates by First Call/Thomson Financial, online-advertising firm DoubleClick, financial Web site Multex and real estate site Homestore.com will each go from losses to profits by the end of the year.
Looking at the companies that were among the earliest to reach the land of profits, some common elements emerge: Many were the first to establish a beachhead in their markets, and some resisted the temptation to spend lavishly on marketing in the name of brand building.
In content, companies like Yahoo and Lycos wrung out profits by avoiding the cost of developing content themselves. Portals that came later to the game didn't fare as well: The leads that Yahoo and Lycos established early on helped them build market share without major advertising.
"In the online media space it is not that difficult to make a profit," says Safa Rashtchy, an analyst at U.S. Bancorp Piper Jaffray. "You write once, publish many times. So the model itself is highly profitable." Still, of the major content portals, only Yahoo, Lycos and CNET are currently in the black.
CNET, which has shown steady profits for years, does develop content but its content was directed early on toward the technology professionals that were the first to the Internet.
Still others latched on to a good idea and simply refused to let others have a chance. EBay, the bully in the online-auction neighborhood, enjoys an 85 percent share of the market. "It's infrastructure costs are so low," says Piper Jaffray analyst Greg Konezny. "There are no plants, manufacturing facilities or real estate; just sales."
Indeed, it's the dot-com corner of the Internet world; businesses built in large part, if not entirely, on the Net; that is missing out on the promise of profits. Among companies involved in building the Internet's infrastructure or creating its software, the list of profitable companies is longer.
Cisco, Ciena and Sycamore; to name a few; are among the most profitable Internet companies. Cisco earns $2.67 billion and has a 14.1 percent profit margin; Ciena has $60.1 million net income and an 8.4 percent profit margin; and Sycamore earned $20.4 million on a 10.3 percent profit margin. In software, Network Associates and Checkpoint Software are also both familiar with profits.
But unlike eBay's formula of high revenues with low costs, the majority of dot-coms' expenses are too high and sales too low. Those with an early lead in their markets have a leg up. For the others, it comes down to business sense that is old-fashioned; if not old-economy.