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Dot-com double take

Don't look now, says J. William Gurley, but many dot-coms are doing quite nicely. Is there a second act in the making, or is this yet another Internet sucker's play?

"You may be right, I may be crazy, but it just may be a lunatic you're looking for" --"You May Be Right," Billy Joel

It seems like just yesterday that the Internet bubble burst, and we all came to terms with the fact that our Internet dreams may have been a wee bit optimistic. Why did we all think it is possible for two MBAs with no work experience to change entire industries? We must have all been loony.

Of course, the poster children for the Internet crash were those crazy consumer Internet deals. Those were the infamous "dot-coms," a term so endearing, it eventually became a direct euphemism for "bad business."

Don't look now, but many dot-coms are working. While most industries struggle to swallow the overwhelming effect of a prolonged lethargic economy, consumer Internet companies are just now hitting their stride. While telephone companies are still reducing capital expenditures, and enterprise CIOs have cut their budget "another" 10 percent, consumers are spending more and more dollars online. If you are convinced that there is no growth in this pathetically slow economy, perhaps it's because you turned your back on these remarkably silly dot-com businesses.

The stock market has certainly awakened. Amazon's market capitalization has climbed 79 percent in the past year to $9.7 billion. Yahoo, over the same time period, has climbed 63 percent to reach a corporate value of $15 billion. And eBay, the cream of the crop, is up 61 percent to reach a whopping $28.4 billion. Cumulatively, that is more than $50 billion in value for the top three players in this newbie industry, which seemed very un-business as we crashed to earth in late 2000.

Importantly, the rise in value does not stop with the top three. Barry Diller (who, by the way, never fell for that "consumer Internet deals are stupid" line) has been very busy stitching together a $15.8 billion consumer Internet dynasty. Although these companies will not be reported independently in the future, Expedia, and TicketMaster/CitySearch had respective market capitalizations of $6.5 billion, $3.9 billion and $3.1 billion as he paid premiums to bring them exclusively into the USA Interactive family. Last December, the company also snapped up Europe-based for $150 million. When combined with, USA Interactive has clearly claimed the lead position in the online dating space.

Other public Internet companies are seeing a resurgence, or at least are holding their ground. WebMD, Verisign, TMP Worldwide (, and DoubleClick all sport market capitalizations north of a billion dollars. Additionally, Overture, Earthlink and RealNetworks are hovering in the $700 million to $900 million range. Even newcomer NetFlix has seen its stock jump from a 52-week low of $5 up to a respectable $22 per share.

Private Internet companies are also fairing well. Google is clearly the most watched private company in America. Last Sunday, The New York Times reported that Google may earn as much as $750 million in revenue this year. Based on the revenue multiples at eBay, Yahoo and Amazon, it would not be surprising to see the search engine company's worth posted at $5 billion to $10 billion, should it ever decide to go public.

While not on the torrid pace of Google, other private consumer Internet companies are also gaining steam. and are both profitable and aggressively growing subscription revenue businesses. Blue Nile, an Internet jeweler in Seattle, is reported to have profitably recorded sales of $72 million last year.

Within our own portfolio at Benchmark Capital, we are seeing the same phenomenon. BetFair, the online gambling site based in Europe, processes more than 50 million pounds ($80 million) in bets per week. This represents 16,000 bets per minute.

If you are convinced that there is no growth in this pathetically slow economy, perhaps it's because you turned your back on these remarkably silly dot-com businesses.
Epinions and Dealtime, two profitable companies that recently merged, are providing a half-million e-commerce leads per day to thousands and thousands of the United States' top retailers. With just 50 employees, eBags, also profitable, turns inventory 29 times per year and has a negative 27-day cash conversion cycle (like Dell's) while shipping upwards of 50,000 bags per month., a platform for enabling commerce-based information exchanges, is enabling $1 million per week in commerce, and completed 750,000 paid transactions last quarter. Over the past 12 months, WorldWinner, the leader in online skills competition, has acquired 4.2 million new registered users who have played 69 million games resulting in more than $47 million in tournament entry fees. OpenTable, the restaurant reservation network, delivered its one-millionth diner to its restaurant partners list last September. Number two million will likely come next month, just eight months later.

Why are these companies working out, especially in an environment where many high-tech companies are struggling?

They weren't bad ideas
In fact, many were good ideas. Were there too many consumer start-ups? Yes! But there were also too many software companies, semiconductor companies, telecom equipment companies--the list goes on and on. As we later learned, over-funding (i.e., too many startups with too much capital) was the key issue, not the particular investment category. Low-cost, high-scale marketplaces do in fact exhibit increasing returns. And these marketplaces have incredible "moats" (to borrow a Buffetism), that represent unprecedented barriers to entry.

Rationality set in first
As the first to fall, consumer Internet companies were the first that were forced to recognize that money is not in fact cheap, but expensive, and that profitability is the real goal to the game. As such, these companies adjusted and learned lessons earlier than most. The results are apparent.

Quick capacity reduction
Unlike many other sectors, capacity adjustments come quite quickly in the consumer Internet space. There is no such thing as a Web site that is selling ads at a discount just to help offset fixed costs. There is also no heavy "infrastructure" that negatively affects the industry dynamics.

Internet growth is systematic, not cyclical
Consumer spending may be down 5 percent, but online spending is still such a small percentage of overall consumer spending that growth results from the continued increase in online usage. With IT expenditures already at 50 percent of corporate capital expenditures, the opposite is true for traditional information technology spending.

Things are so good that last week Barron's dusted off its charming fondness for everything Internet with a newly negative article titled "Bubble Redux."

Things are so good that last week Barron's dusted off its charming fondness for everything Internet with a newly negative article titled "Bubble Redux."
It turns out that Barron's is quite unhappy that consumer Internet stocks have risen in value and suggests that the "real" value of eBay, Yahoo and Amazon are actually far below what their current stock prices indicate.

Much to Barron's disappointment, Amazon's Jeff Bezos has not only survived, but he has recently convinced Barron's own constituency, the institutional investor, that he is right. And there is one other thing that might be on their mind: Much to Madison Avenue's chagrin, it turns out that performance-based online advertising is the hottest sector in the overall advertising industry. Maybe advertising executives are concerned that their traditional "old-media," impression-based advertisements will one day need to be accountable, too?

Perhaps being a dot-com isn't so bad after all.

To join Gurley's "Above the Crowd" distribution list, visit Benchmark Capital's Web site. Benchmark has investments in BetFair, Epinions, eBags,, WorldWinner and OpenTable.

The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete, and its accuracy cannot be guaranteed. Any opinions expressed herein are subject to change without notice.