FOOL ON THE HILL
An Investment OpinionBy
Online Customers Don't Come Cheap Yi-Hsin Chang (TMF Puck)
December 29, 1999
Today I'd like to expand on something I mentioned in a column last month when I wrote about inflated revenues at various dot-com operations. I'd like to really drive home the point that Internet companies have much higher customer acquisition costs than your typical traditional business.
Just take a look around you, and you'll see that Internet companies are dropping mucho bucks on advertising, whether it's TV, radio, billboards, or people on the street handing out company propaganda. It's impossible to miss if you live or work in a city like New York, San Francisco, Seattle, Boston, Denver, Dallas, or Chicago. Indeed, that's one of the primary reasons Internet companies turn to venture capitalists and the public markets for funding.
If we take a look at Amazon.com's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> latest 10-Q, for the quarter ended September 30, we see a gross profit of $70.5 million but marketing and sales expenses of $86.6 million. Total operating expenses came to $260.9 million, resulting in a loss from operations of $190.5 million. This compares with the year-ago quarter's gross profit of $34.8 million, marketing and sales expenses totaling $37.5 million, and an operating loss of $41.5 million.
In the 10-Q, the company said it "intends to continue pursuing its branding and marketing campaign and plans to significantly increase marketing spending in the fourth quarter of 1999 in relation to third-quarter spending levels." Think about the singing Amazon commercials you've seen on TV lately.
It seems that the favored Internet strategy these days is to get your name out there any way you can. (Sometimes I wonder why certain Internet companies don't invest in building a good, sustainable business instead of just relying on hype, but that's another story for another day.) According to an article in the November issue of Business 2.0, CarsDirect.com planned to spend $20 million on advertising and marketing in the fourth quarter. Similarly, 800.com, a site dedicated to selling consumer electronics and home entertainment products, was slated to blow $25 million in the same period.
That same issue of Business 2.0 offers some interesting charts and numbers on all this. Online businesses are spending roughly twice as much on customer acquisition costs as catalog retailers. In addition, pure-play Internet retailers spend an average of $42 per customer in terms of customer acquisition costs versus $22 per customer for multichannel retailers.
To be sure, this is still fairly early in the game as far as Internet companies are concerned. As long as Internet companies such as Amazon can withstand the continuing flow of red ink, they may very well be in good position to compete in a mature Internet environment. Trouble is that most Internet companies aren't in as good a position to survive the bloodshed as Amazon is.
What's more, we've been talking purely about advertising and marketing. I'm sure I'm not alone when I say that I've been amused by many an Internet TV commercial only to realize that I can't remember the name of the dot-com being advertised. And then there are many not-at-all-funny and totally forgettable TV commercials out there -- you can almost hear the millions being flushed down the toilet.
Despite the millions being spent to "get the name out," very few Internet players have succeeded in actually building a distinctive brand. Sure, there's Amazon, Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %>, America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %>, eBay <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EBAY)") else Response.Write("(Nasdaq: EBAY)") end if %>, Priceline.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PCLN)") else Response.Write("(Nasdaq: PCLN)") end if %>, and some others, but very few of the thousands and thousands of Internet contenders out there have any loyal following to speak of.
More likely than not, Internet shoppers will switch online shopping habits at a drop of a hat to enjoy the deepest discounts and the cheapest shipping costs. In short, much of the money now being spent on advertising and marketing will be for naught.