Have you ever seen the rain
Comin' down on a sunny day?
--Credence Clearwater Revival
With each passing day, a new Internet company emerges with a model that is more aggressive than those that passed before. First, Buy.com attacked Amazon.com with a low- to no-margin online retailing business. Then NetZero and others attacked EarthLink and America Online with free Internet access. Even eBay had its business model challenged when Yahoo launched its auction service with no fees.
In each instance, the argument was made that the fees from online advertising would be enough to make up for the loss in revenue. And although the jury is still out in terms of the long-term viability of these models, their presence raises questions about the long-term economics of Internet businesses.
With pricing in book sales, Internet access and auctions all under question, it should be only natural that someone would find a way to threaten the portal business. After all, Yahoo just reported fourth-quarter net income of $55 million on sales of $201 million. In addition, cash and cash equivalents ballooned by $170 million, and its total cash position is fast approaching a cool billion dollars.
As the Motley Fool stated, "If you want to see what a cash-generating machine in overdrive looks like, Yahoo is currently one of the best examples out there." Of course, success invites arbitrage, and on the Internet, that means someone is selling what you sell for cheaper.
Because portal services are already free, the only way to offer customers a better price is to pay them money. And while there are several versions of this model out there, I think the most interesting is a CBS-backed company in Irvington, New York, called iWon.com.
The iWon proposition is simple. The more you use the iWon portal, the more entries you get in each of three iWon sweepstakes. Each day iWon gives away $10,000; each month iWon gives away $1 million; and each year iWon plans to give away $10 million. Other than the offering the opportunity to make big bucks, the site is basically just like all other portals--which is pretty much the point.
Does giving away $25,650,000 a year ensure success? Well, the initial signs look promising. The site launched in October, and in the first month of operations it became the 87th leading site on the Internet, according to PC Data. In November this ranking jumped to 44th, and in December iWon was the 28th leading site on the Web, with more than 8.2 million unique users and a 12.3 percent reach.
Americans have always been suckers for a lottery, and this lottery has no entry fee other than your time. Certainly one could question the absolute numbers or PC Data's methodology, but the relative jump here in such a short time is too amazing to ignore. For now, the dogs are eating the dog food.
Driving traffic is only part of the puzzle; the site must also make economic sense. This analysis gets a little tricky, but let's do some back-of-the-envelope calculations. According to PC Data, iWon has about one-fourth of the unique users of Yahoo. If we assume (1) that iWon has the same number of page views per user as Yahoo, (2) that iWon has the same value per page view as Yahoo (are these real portal users or just people gaming the system?), and (3) that iWon has the same ability to turn each page view into money as Yahoo does (a big assumption), we arrive at a potential revenue opportunity of one-fourth that of Yahoo.
Yahoo generated $89 million pretax in net income in the fourth quarter, which should equal the high-end potential full-year profits for iWon based on its current traffic. With its $40 million marketing campaign and $25.65 million sweepstakes payoff, iWon could theoretically be profitable assuming it is as efficient as Yahoo.
Of course, the immediate question is how long iWon can continue its experiment as opposed to when it will actually report a profit. This is where iWon's implementation is particularly clever; cash flow needs are likely to be much less than accounting losses.
Rather than expose itself to immediate cash needs, the company's monthly and yearly sweepstakes payments are divided into monthly payments and spread across 25 years with no interest. This reduces the first-year actual cash payout from over $25 million to just under $7 million. In addition, a large part of the marketing budget has been donated "in kind" from CBS in exchange for equity in the company. Lastly, most advertising programs pay in advance of running, which typically means that cash flow runs ahead of revenue recognition.
These three realities significantly reduce iWon's near-term cash burn rate and significantly increase the chance that we will be watching the site for many years to come.
Yet iWon's early traffic success raises two deep fundamental and interrelated questions about portals and potentially all Internet businesses: Are portals potentially a commodity? And what are the fundamental barriers to entry in portals?
The iWon site was built by Sapient, a third-party developer, and most of its content and features are delivered by partners such as InfoSpace, Mail.com, Jfax, Realtor.com and Inktomi. Deep in the company information section of the iWon Web site, you can find a complete list of these vendors that reads like a blueprint for a ready-to-bake portal--just call these vendors and add water. The good news is that you can build a portal overnight; the bad news is that so can everyone else.
Where is this likely to lead? The portal bear would suggest that iWon's increasing success will force more portals to share the fruits of their labor with their user base. Portals are not distinguishable enough to overcome the cash value of the sweepstakes, so all future advertisers may have to put out or get shut out. Moreover, this game will continue until the marginal portal fails to make money, i.e., all the profits are paid to the users.
The portal bull would argue that iWon's traffic is "false" or "misleading" and that its users are opportunists who make poor advertising targets. Based on Yahoo's recent results, its loyal customer base, and its phenomenal brand, I wouldn't sound the alarms just yet. However, I guarantee that the second through 10th portals are watching closely and praying that iWon's seemingly crazy giveaway doesn't become the next required feature of a standard year 2000 portal.
J. William Gurley 2000. All rights reserved. Above the Crowd is a monthly publication focusing on the evolution and economics of high-technology business and strategy. This column can be found on CNET online and in Fortune magazine. To be placed on the email distribution list, please send an email to email@example.com. To be removed from the email distribution list, please send an email to firstname.lastname@example.org. 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. The author is a general partner of Benchmark Capital, a venture capital firm in Menlo Park, Calif. Benchmark Capital and its affiliated companies and/or individuals may, from time to time, have positions in the securities discussed herein. In particular, Benchmark Capital is an investor in eBay. ABOVE THE CROWD is a service mark of J. William Gurley.