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Summary:

January should have served as a wake-up call to most Internet-related companies. But it didn’t! When E-Bay missed its quarter, many saw it as a one time event. I saw it as the network getting a financial reality check. For now, my POV is in minority, […]

January should have served as a wake-up call to most Internet-related companies. But it didn’t! When E-Bay missed its quarter, many saw it as a one time event. I saw it as the network getting a financial reality check. For now, my POV is in minority, but if you look closely enough patterns emerge, which predict a big event – slow times for US centric Internet business models. After years of high double digit growth, the “US” sales of many large Internet companies are showing a gradual plateau.

Amazon’s fourth quarter financials show that despite boosting its revenues, the company is having hard time making money, and that is spending much more dollars on marketing that ever before. American Technology Research analyst Mark Mahaney in his research note writes that Amazon’s marketing expenses were up 44% year-over-year versus 26% year-over-year revenue growth. “This was a cross-over quarter — the first time in years that AMZN’s marketing expenses grew faster than its revenue,” says Mahaney. I read the numbers and I see that Amazon’s growth story is turning into business as usual – intense competition and single digit profit margins – something offline retailers learn to live with.

I also see this as a sign that the Internet is morphing from a mostly US-centric phenomenon to a truly global phenomenon. EBay and Amazon’s examples show that there is a momentum shift happening – the power of the Internet is moving away from US to the new comers – China, South Korea and soon India. In case of Amazon, international segment sales accounted for 44% of worldwide net sales in 2004, up from 38% in 2003.

EBay for instance has realized that and has moved quickly to snap up overseas auction sites. My colleague, Erick Schonfeld in his excellent piece, The World According to EBay points out that soon global sales will outpace US sales. No wonder the company spent $1.6 billion and bought its way into large and fast growing markets.

The company has 31 sites straddling the globe, from Brazil to Germany to China. They generated an estimated $1.1 billion in 2004 sales — 46 percent of eBay’s overall trading revenues — and are growing twice as fast as the company’s domestic operations. International trading revenues are likely to surpass domestic in 2005

What does this really mean for future opportunities? For starters, analysts need to figure out the outer threshold of growth and need to start questioning the valuations being put on Internet companies. Among other issues one has to worry about is if the US centric models translate into opportunities worldwide. Lastly, I think there is going to be a new resurgence in the local entrepreneurship in those high-Internet growth countries. Matt Marshall, recently wrote on his blog that VC money is going overseas, albeit in stealth mode.

Battery Ventures, which has offices in San Mateo, raised a $450 million fund in September, and recently led it’s first investment in India: $15 million in Bangalore’s Tejas Networks, which is developing optical networking products in the Indian market for a fraction of what American companies do, says partner Thomas Crotty. Battery hopes to help it expand into the U.S market with the help of a partnership with Nortel, he said. Matrix Partners, another big-name firm with offices in Menlo Park, also recently opened an office Bangalore to start investing there. They plan on about one or two a year.

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  1. Is there a possibility of consolidation among Borders, Barnes and Nobles etc.?

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