European companies providing internet 'portal' services are market favourites, but the nature of thei...
The primary revenue sources of companies such as Terra Networks (recently spun off from Telefonica) in Spain and Tiscali in Italy are advertising revenue and a share of the cost of line rental from telecom companies.
Commission from e-commerce sales has the potential to outstrip all these sources, and many companies have based their long-term earnings growth on running a successful e-commerce strategy. However, e-commerce revenues cannot be guaranteed.
Freeserve is a good UK example. Dixons and Energis started the service together but the way the deal was structured meant that Energis took the revenue from calls while Dixons took the e-commerce side. As Dixons' part of the deal is e-commerce based, it needs people to buy online in sufficient quantities and to go via the Freeserve web site for it to make money.
Leon Howard-Spink, fund manager at Jupiter says: "Dixons are betting they will make money from each of their subscribers. That is a big bet."
The profit and loss account of these companies shows they are making money primarily through advertising, although they are starting to get revenue from e-commerce. But there is a universal obsession with 'first mover advantage', which makes all these companies plough everything they earn back into expanding their client base.
People can change their favoured portal, or even their service provider, with ease. Howard-Spink thinks, therefore, that consolidation is the only way web portal providers will be able to guarantee a reasonable income from e-commerce.
He says: "The US has a large, homogeneous market, while Europe has 15 different markets. Whether we end up with one big provider in each country remains to be seen. These companies have got a lot to prove."
Howard-Spink still invests in these companies but on the assumption of a fast turnaround and a quick profit.
He says: "Traditional ways of judging companies such as management, trade record, barriers to entry and predictability do not apply. You cannot look at it in terms of cash flow and margins as few of the companies are making any money. You have got to just like the story and go with it and almost turn a blind eye to the valuation of the stock.
"For companies providing internet portals, there is little to refer to apart from guessing the penetration rate and market share and then guessing how much will be spent through the portal."
Paul Bruns and Elaine Parkes
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