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PROFITABLE E-BUSINESS?

Posted on February 12, 2002

      Amazon.com stockholders got to put a shiny gold star on their stock certificates last month when the online retailer posted its first-ever net profit. Pundits and the press declared it a bellwether day for the bellwether Internet company. But compared with many other online firms, Amazon was late to the profit party.

      "If anything, Amazon has been the laggard," says Andrew Bartels, vice president at Giga Information Group, a research company based in Cambridge, Mass. "Many other surviving dotcoms have moved to profitability more quickly."

      Truth is, amid all the Internet bubble-bursting gloom and doom, some companies are actually starting to make money -- and a few have been doing so for some time. Here are three winners, and what they did to get into the black.

Expedia.com

      This still-young year has already been big for Expedia. On Jan. 28 the company announced its first quarter ever with a net profit (of $5.22 million). Meanwhile, Expedia also overcame Travelocity to become the number one online travel site in terms of revenues and total trips booked. And on Feb. 4, USA Networks bought Microsoft's 65 percent share in the company. "Profitability came faster than we expected," says Marj Charlier, Expedia's director of investor relations. Charlier credits the company's success to three factors:

      First, Expedia invested heavily -- about $120 million -- in technology to produce its Expert Searching and Pricing system. Introduced a year ago, the technology allows customers to bundle airfares, car rentals, hotel reservations, and other travel arrangements. "The product increased our reach and our conversion rates, and it helped us cross-sell," Charlier says.

      Second, in early 2000, Expedia shifted to a merchant-based sales model from an agent model. Under the merchant model, Expedia reserves hotel rooms and airline seats on consignment -- so there's no debt load -- and earns much higher profits per transaction as a result. Previously the company essentially functioned as an online travel agent, selling on behalf of airlines and hotels and securing a small commission on each sale. Finally, Charlier says that Expedia decided not to stake its growth too heavily on portal deals. Money not targeted for such deals was instead spent marketing the Expedia brand as a stand-alone destination.

      Giga's Bartels isn't surprised that Expedia is now in the black. "The nice thing about the travel category is that the fulfillment can be done online, very cheaply," he says. "The medium really fits the premise."

New York Times Digital

      Amid an otherwise grim Q4 2001 report for the New York Times Co. as a whole, the New York Times Digital division (NYTD) had something to cheer about: its second consecutive net-profitable quarter. Last year NYTD accounted for 2 percent of the company's overall advertising revenue; Martin Nisenholtz, CEO of the division, intends to increase that percentage this year. He credits his division's success to the early realization that the bull market was becoming bearish. "Sometimes when you go through that kind of strategic change, the cure is worse than the disease," he says. "That happened to a lot of companies. Just because you cut expenses doesn't mean you've created a viable business."

      Early on, NYTD cut 40 percent of its staff and reduced cash expenses by $44 million. These cuts were paired with selective investments and content-development initiatives that proved prescient. "We invested a lot of money in infrastructure during this time," Nisenholtz says. "We also invested a lot to have people reporting during the day -- there isn't a single wire story at the top of our homepage right now." To economize, the company strengthened its ties to the print side of the business, coordinating classified sales staffs and support.

      Although the advertising market remains soft in 2002, Nisenholtz is bullish on the media sector's prospects for the rest of the year. "Some of my media compatriots are going to turn the corner into profitability this year," he predicts.

eUniverse.com

      Remember "network effects"? Where every additional node on a network increased its value exponentially? eUniverse -- a network of entertainment and game websites that includes CupidJunction.com, GotLaughs.com, and FlowGo -- has taken that concept all the way to the bank, reporting three consecutive quarters of net profit. It also ranks 12th on the Nielsen//NetRatings weekly list of the top Internet destinations. Even if you haven't heard of it, chances are that your daughter or son has. eUniverse boasts a vast reach in the much-coveted 18- to 34-year-old demographic.

      eUniverse chairman and CEO Brad Greenspan says that reporting a profit was a singular goal ever since the company was formed in April 1999. "We didn't have a lot of money to start out with, so we were thinking profit while other companies were spending to grow. That was a big advantage."

      There was plenty of trial and error before eUniverse finally settled on its current business formula, and flexibility allowed the company to navigate the tough road to profitability. "We weren't afraid to change our strategy midstream, and eventually we found our niche: forming long-term, paying relationships with our users," Greenspan says. "And we're not reliant on advertising. All that helped us."

      eUniverse's revenues aren't enormous -- $10.1 million during Q3 2001 -- but its properties get the job done. CupidJunction, a site that allows members to send love messages, is free for women, but men pay $1.60 to $3.33 for each message they send. Greenspan says the site generates about $300,000 per month in revenue, along with truly enviable 80 percent profit margins.

      Obviously these aren't the only companies making money online. eBay, for example, has usurped Amazon as the Internet Golden Child -- in no small part because of eBay's consistently positive earnings reports. Overstock.com, a Utah-based company that sells manufacturers' overstock items online, achieved profitability using only $35 million in capital. And FTD.com has reported six straight quarters of net profit, increasing its earnings 86 percent year-over-year.

      None of this is rocket science, folks. Successful online companies aren't trying to implement radical business plans, nor have they concocted revolutionary new techniques for profit extraction. Rather, they've focused on the fundamentals that the moneymen (ironically) told them to abandon in the salad days of 1997 to 2000. It has been difficult for some firms to adapt to the changed environment. But that's what makes the profitable online companies all the more impressive. They've pulled off the most revolutionary feat of all: They've become real businesses.

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