Business sense, not miracles, are needed to boost the Internet industry. The last few months have seen constant industry and media browbeating over the bursting of the dotcom bubble. Just look at the acres of column inches devoted to Lastminute.com, and not long ago in the supposed significance of its gross profit figures.
The truth is that Lastminute.com is an irrelevance to the Internet industry. It is unlikely to survive in its current form and is a poor barometer for the future of the industry. Sadly the industry's reputation is still subject to a plethora of new trends, among which are WAP, ASPs and business-to-business (B2B).
However, the reality is much more prosaic. Some companies have sound business models, based on real strategies and achievable profits; others haven't. The industry consists broadly of three types of company: the good, the bad and the ugly. The good are profitable, the bad are unlikely to be profitable and the ugly never had any hope at all. Too often, the industry triumphs the case of the bad and the ugly; infrequently does it analyse why the good succeed.
Money, money, money
Any company trading in the Internet space should be making profitability the key success criterion and should be using measurement as a key business driver. Analysts of business-to-consumer (B2C) companies should stop focusing on page views or the numbers of unique visitors. More critical is the ability to value individual visitors.
He says that if companies cannot understand and measure the value of their unique customers, then they clearly have no real ability to focus on their most important customers and so have no control over their potential to be profitable in the future.
Similarly, he says, it is as absurd to view visitors or page view numbers in isolation from a competitors' performance, as it is to analyse Nielsen data on one company alone.
Analysts should also stop looking at sectors as a whole and concentrate on individual companies. Profitable companies which can also demonstrate more rapid revenue growth than those of traditional industries should continue to be valued at a premium. They will clearly deliver more long-term shareholder value than others.
Managements of customer-driven businesses should be evaluating their own effectiveness in terms of customer profitability rather than the traditional growth-based techniques used to value Internet companies. He believes this would help encourage more realistic valuations and stem some of the bad press that the industry is attracting.
It is this bad press, he says, which has turned investor sentiment away from the sector with the result that many companies are currently trading far below their March highs and often substantially lower than their offer prices.
Financial markets have been using anachronistic valuation techniques that take account of growth prospects and little else besides. Many investors have either been burned or learned to resist the overtures of the 'new economy' prophets - an easier task in recent days. Cliche now and out of date?
The majority of dotcoms came to market under very different circumstances and with very different preoccupations than their 'old economy' predecessors. Until very recently, phrases such as 'first-mover advantage' predominated as start-ups battled it out to build their brands and acquire market share.
By the same token, he explains, the early (and often blind) acceptance that a company's potential was more important than its short-term profitability has given way to something much more rigorous: a demand for profits, driven by a return to common sense. Now, in a more sober investment climate, chief executives and chief financial officers are coming back down to earth with a bump. Where there were once plentiful funds, today they are limited - and everyone is chasing the same pot of gold.
He explains that no longer will the money be used solely to acquire unique visitors or expand geographically. For 2001, the metric of our industry will become P/E to growth. This will capture good old-fashioned earnings ratios as well as the ability of companies to grow at speed while maintaining profitability.
There is still too much focus on the Internet as a sales and marketing channel and not as a tool to root out inefficiencies and increase productivity. As everyone knows but few appear to follow, the Internet impacts the whole value chain.
One of our clients is Fleurop [Interflora in Germany]. We can demonstrate how the use of an integrated e-business solution has increased Fleurop's profit per transaction by 500%, while driving substantial year-on-year sales increases. This is meaningful data.
So service businesses should be looking more aggressively at whether their solutions really make any difference to their clients' businesses. "And if in the cold light of day they are seen to be providing a service that reduces their customers' costs and increases efficiencies in the long term, then they will no doubt reap the rewards in terms of repeat business."
For client companies, it is time to pay more attention to measurement, based on clearly defined goals. Many companies fail to focus on this enough, but clients need to demand it from their partners as well as suppliers.
As a minimum, clients should invest 10% of their budget into research and evaluation. Companies may also have to jettison some basic assumptions about Web-based trading, for instance, that e-business always leads to lower costs.
Although this assumption holds true for the value chain as a whole, it will be the case for some companies that costs may actually rise when doing business electronically.
Why? Because the corollary of being able to do more is that more is expected of you. This may be in greater customer service demands, for example.
However, if the overall business benefits, then fine. The bottom line is: "Will your actions create any value?"
[Last] Christmas, we saw that the promise of e-commerce was not realised. This should not sound the death march for the Internet. Instead, it should force those inside the industry to focus on the key issue - how to generate value.
It may also prompt the media to lead the way in focusing on the very real issues of profitability, which investors are also switching on to. It is now time to look to common sense for solutions rather than miracles.
Chris Robson is chief executive of Syzygy AG, which recently listed on Frankfurt's Neuer Market