Making money on the net

By BBC News Online internet reporter Mark Ward

Some dot.coms are starting to do the unthinkable: make money.

Separate surveys show that the numbers of dot.coms posting profits is rising.

The research reveals that some types of net businesses, such as retailers, are doing better than others, and that the web operations of traditional high street stores are doing best of all.

But analysts warn that the good news about profits does not mean that the bad times are over for dot.coms, and some are expecting many more closures.

From dot.com to dot.doom

Ever since the stock market and the venture capital community turned against technology companies, dot.coms that do business only via the net have been hit hard.

Figures collected by WebMergers, which monitors dot.com fortunes, reveal that closures of net firms were up sharply, with 369 going bust since January 2000. Almost half of that total shut their virtual shops between January and March 2001. WebMergers expects twice as many dot.coms to go bust this year than closed in 2000.

But separate surveys by McKinsey and PriceWaterhouseCoopers show that life could be getting easier for some of the net businesses that remain.

Research by PricewaterhouseCoopers (PwC) for its quarterly Internet 150 report, that looks at the fortunes of dot.coms that sell only via the net, found that almost 40% recorded a profit at the end of 2000. This compared to a mere 28% at the end of September 2000.

Burning money

The rolling research also found that dot.coms are gradually spending less money to stay in business. The rate at which dot.coms are burning through start-up capital had stabilised, and the rate at which spending growth was outstripping sales growth narrowed from 11% to just 1%.

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Nick Drewett, a director at PwC and one of the authors of the research, said although the figures revealed some good news they did not signal the end of the bad news.

"We're definitely going to continue to see failures of internet companies because you have got polarisation between good performers and bad performers," he said, "the poor performers have not yet managed to become financially self-sufficient."

The research revealed that 18% of companies are burning money too fast to stay in business for more than 12 months. Mr Drewett said investment capital was hard to come by now that the markets have become disillusioned with dot.coms.

Sacked staff

"But," said Mr Drewett, "the top quarter are getting it right and will go from strength to strength." The shake out of failing firms will mean more customers for those that have managed to survive.

The most profitable dot.coms are the net service providers, many of whom who have a ready source of income from subscriptions or call charge revenue.

At the same time, many high-profile dot.coms such as Expedia, Lastminute, Amazon, and Priceline have said they are close to posting profits for the first time. Some such as Loudcloud have sacked staff to cap growth and show the stock markets that they are running a viable business.

The McKinsey study looked at 200 companies across 4 continents during the first 9 months of 2000, and found wide variations in profitability across different types of business.

Good and bad business

On average e-tailers had operating margins of -82%, meaning they are still losing a lot of money on every sale. However this was substantially better than the -210% margins enjoyed by the average media, news and content site struggling to make people pay for information.

Within e-tailers, only the dot.coms selling clothes managed to record positive margins, with the average company making margins of 21%. The McKinsey report found that e-tailers managed to significantly reduce the cost of acquiring customers which was down from £170 ($234) in late 1999 to £80 ($114) by the end of September 2000.

By contrast, customer costs rose for content companies over the same time period, and few had success in generating money with anything other than advertising.

But most profitable of all are the web outlets of established high street stores. The majority of the 20% of profitable retailers identified by McKinsey had links to offline stores.