SAN FRANCISCO (CNN/Money) -
Between the Columbia shuttle tragedy and the ongoing confrontation with Iraq, 2003 is already off to a notable start. But beyond such headline-grabbing events, a significant bit of news may be of interest to tech investors. Over the past two weeks, four Internet companies reported their first-ever profits.
These aren't pro forma smoke jobs either. We're talking legitimate numbers, based on generally accepted accounting principles. The four horsemen in question? Ask Jeeves, Autobytel, LookSmart, and MarketWatch.
This crew now joins a steadily growing club of profitable Internet companies that already includes such stalwarts as eBay, Expedia, and Yahoo, as well as lesser known firms like eUniverse, FindWhat.com, and Overture.
More to come
I suspect we'll see more dotcoms joining the profit club soon, and here's why: Three years after the collapse of the tech bubble, the market has worked its magic by weeding out weaker players.
Granted, many profit club members, both old and new, appear in emaciated form -- as literal shells of their former selves.
At its height, for example, Ask Jeeves employed 850 people and its stock hit $186. Today it employs 347 and its stock price hovers near $6 (up from approximately $1.70 in late November). "We've been cutting costs and developing our technological capabilities for the last two years," says Ask Jeeves CEO Skip Battle. "Those lines finally crossed in the fourth quarter."
Drastic cost-cutting and revised business models are among the main methods these companies used during the past three years to finally attain profitability. Readily available funding and Wall Street market mania don't create the kinds of conditions that instill sound business practices in fledgling startups.
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MarketWatch CEO Larry Kramer recently described the current environment for InformationWeek: "We used to be up against a lot of stupid money that invested in bad ideas. Now that most of the bad businesses have disappeared, the remaining companies are getting down to doing some real business."
Besides all the cost-cutting, funding shakedowns, and intensified focus on core competencies, however, other factors are also helping online businesses turn the corner into profitability.
One trend is that consumers are warming to the notion of paying for content. Yahoo paved the way here, and the company is starting to see some adoption of fee-based offerings such as increased e-mail storage space.
What's more, content businesses are following Overture's lead by adopting the lucrative pay-for-placement model.
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Lastly, many startups that were originally created as pure consumer plays are now actively courting the corporate market. "There have been a lot of improvements in the ways to monetize search," says Battle from Ask Jeeves. "We're in a place that's warm and dry while the storm goes through the market."
One concern is these companies may now fall victim to the Cisco effect. Cisco reported record profits in its last quarter, but the company's stock has been driven down by shrinking revenues. As it turns out, much of Cisco's profit was acquired through the use of one-time tactics -- like cutting costs and squeezing suppliers.
So, are the new members of the dotcom profit club also reporting ephemeral gains? Many say no, countering the downturn forced companies to fundamentally restructure how they do business.
Says Rob Lancaster, a senior analyst with the Yankee Group, "These companies are in a far better position than they were in the past."
Eric Hellweg is a contributing writer at Business 2.0.
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