Dot-coms turning into moneymakers

Internet businesses becoming profitable with better ideas, cutbacks in costs

? It’s not quite the economic revolution once envisioned by brash entrepreneurs, but a handful of Internet businesses are actually making money.

In breakthroughs that show the promise of e-commerce wasn’t all smoke and mirrors, four dot-coms recently reported their first quarterly profits.

The modest achievements of Inc., Ask Jeeves Inc., LookSmart Ltd. and Autobytel Inc. reflect the more serious dot-com approach that emerged after the nonsense of Internet mania a few years ago. Remember the days when sock puppets sold pet food on the Internet?

“We used to be up against a lot of stupid money that invested in bad ideas,” said Larry Kramer, chief executive of San Francisco-based “Now that most of the bad businesses have disappeared, the remaining companies are getting down to doing some real business.”

With their profitable quarters, MarketWatch, Ask Jeeves and LookSmart join other prominent Internet companies that are already in the black.

Making money

The list of the Internet’s publicly held moneymakers include eBay Inc., Inc., Yahoo! Inc., Overture Services Inc., Expedia Inc., Inc. and E-Trade Group Inc. Several privately owned dot-coms, including search engines Google and DealTime, say they have been making money, too.

Even more dot-coms are expected to become profitable this year.

Internet analyst Safa Rashtchy of U.S. Bancorp Piper Jaffray believes InfoSpace Inc., Netflix Inc. and Inc. will be among the online companies to register their first quarterly profits during 2003.

Meanwhile, Ask Jeeves, MarketWatch and LookSmart are all projecting more operating profits this year.

“Shame on us if we don’t keep making money,” said Ask Jeeves CEO Skip Battle.

Ask Jeeves CEO Skip Battle, leans on a cardboard cutout of the company namesake, Jeeves, at company headquarters in Emeryville, Calif. Ask Jeeves is among four dot-coms that recently posted their first-ever quarterly profits.

Previous shakeouts in other high-tech fields, such as the personal computer industry, have proven that the early missteps of pioneers point the way to later success for managers who learn from the mistakes.

“Some of these companies are going to survive and become powerhouses,” said Internet analyst David Kathman of Morningstar. “Others are going to survive and just become niche players.”

The path to prosperity hasn’t been smooth.

Online search engine Ask Jeeves lost $699 million in six years before recording a fourth-quarter profit of $2 million, its first from ongoing business operations although the final quarter of 2001 saw a profit from a one-time windfall.

Financial news site MarketWatch lost $252 million in five years before recording a fourth-quarter profit of $854,000.

Search engine LookSmart lost $217 million in six years before posting its fourth-quarter profit of $34.6 million. If not for a one-time gain, LookSmart’s earnings would have been $3.4 million.

Online car buying service Autobytel lost $162 million over seven years before recording a fourth-quarter profit of $462,000.

Cutting costs

To climb out of their financial holes, these companies have had to make painful cuts.

Ask Jeeves has trimmed its payroll from 850 employees in 2000 to 350 workers today. MarketWatch pruned its annual expenses from $70 million in 2000 to $38.5 million in 2002.

In a sign of the sobering times, Ask Jeeves’ remaining workers reacted to the news of the company’s first profit with restraint that would have been uncharacteristic just a couple years ago.

“People were smiling about it, but they kept working at their desks,” Battle said. “There were no keg parties. We all know there is still a ton of work to be done.”

Cost-cutting isn’t the only reason behind the recent earnings. Sales are also rising, sometimes at a rapid clip that’s particularly impressive considering the overall economy’s lethargy.

Emeryville, Calif.-based Ask Jeeves and San Francisco-based LookSmart are profiting from rising demand for a service that ranks online search results based on how much an advertiser will pay for the spot.

This specialty was just developing at the height of the Internet boom. Last year, ad-driven search results generated industrywide revenue of nearly $1.5 billion, helping to enrich Yahoo, Google, Overture and FindWhat, as well as Ask Jeeves and LookSmart.

Paid search listings propelled a 16 percent increase in LookSmart’s 2002 revenue to $96 million, and the company believes sales will climb as high as $150 million this year.

“People are very excited again because we have become a growing company,” said Jason Kellerman, LookSmart’s chief executive. “There is definitely a feeling that we are in the right space at the right time.”

Other dot-coms are cashing in on technology licensing agreements, as well as consumers’ willingness to buy more services and merchandise online.

The newly profitable Internet companies still have a long way to get their stocks back to prices set in their much-hyped initial public offerings.

Marketwatch’s shares went public in January 1999 and peaked at $130; they ended January 2002 trading in the $5 range. Ask Jeeves’ shares went public at $14 in July 1999 and peaked at $190.50; more recently, they have been hovering around $5. LookSmart’s shares went public in August 1999 at $12 and peaked at $72; they are stuck around $3.

“These are all still risky stocks,” analyst Rashtchy said. “But I was skeptical about whether these companies would make money, and they have delivered.”