Part 1 of 4: How are Internet-Reliant Firms Fairing So Far in 2009?

At 2i we read a wide range of financial resources, from the standard print media to the blogosphere to subscription databases. Depending on what you read and who you follow, there seems to be some consensus that the general economy may have bottomed, and although it may be a long tunnel, there could be some light at the end of it in Q4-2009 and Q1-2010. The Dow Jones Industrial Average, a leading economic indicator, is only down 3.5% since the beginning of the year. The unemployment rate, a lagging indicator, continues to rise to 8.9% currently. While the broad economy is a fundamental driver of the internet industry, we like to maintain our focus on the Internet-Reliant industry.

We’re posting four blogs over the next few days on the Q-1 State of the Internet Industry. Once all the blogs are posted, we’ll put them all into a PDF document and include it on our Reports page.

We start with a few statistics and some anecdotal evidence which keep us optimistic in this economy.

• Internet consumption is up as the online and offline worlds merge. Americans continue to increase their online purchases, consumption of media content, and use the internet for all kinds of activities from online banking to online training and learning.
• Although PC growth is flat, the consumer electronics market continues to evolve and drive internet usage. Mobile Internet adoption is increasing rapidly with 2% to 3% of cell phone users, but 20% to 30% of smart phone users, conducting mobile directions, email, and search. According to a survey conducted by Goldman Sachs, mobile users seek PC-equivalent usability to conduct e-commerce and access rich content/media sites. We follow the overall trend of mobility at the 2i website and feel strongly that this will be one area that drives internet usage and innovation.
• Corporations are slashing their overall marketing budgets, but digital advertising grows. ZenithOptimedia forecasts 2009 ad spending dropping 11% for magazines, 10% for radio, 5.5% for television, and on and on through the worldwide media spectrum. The one notable standout: Internet advertising around the world continues to grow, projected to be up 8.6% this year—to reach 12.1% of overall global ad spending. Moreover, the outlook only gets better for ad spending in the US:

Table 1

• Social media’s popularity and influence grow at an unbelievable rate. According to Nielsen Online, Twitter grew 1,382% year-over-year in February. Albeit the growth starts from a relatively low base, the raw numbers are still staggering. Twitter had 7 million unique visitors in the US for this past February. Moreover social media is not just for wired teenagers as many believe. From October 2008 to March 2009, people ages 26 to 44 made up the fastest-growing segment of the US Facebook population:

Table 2

One of our themes at Intangible Insights is to track and discuss how internet companies are dislocating the offline and “brick and mortar” worlds. The recession exposes business models that have not evolved to take advantage of the efficiencies created by the Internet. Here are some interesting comparisons.

A recent study by Forrester Research and Shop.org shows the following results for e-tailing.

• E-tailers experienced an overall increase in online sales of 11% for Q1. Roughly 58% of retailers (pure play e-tailers and multi-channel retailers) reported that their Web sales increased during Q1.
• Large retailers (>$100 million in annual Web sales) did particularly well – 87% reported increasing their Web sales.  However, approximately half of medium- ($10MM-$100MM in annual Web sales) and small-size – ($10MM and under) retailers also realized increases.
• Amazon outpaces expectations. Net sales increased 18% to $4.89 billion in Q1-2009, compared with $4.13 billion in Q1-2008. Net income increased 24% to $177 million in Q1-2009, or $0.41 per diluted share, compared with net income of $143 million, or $0.34 per diluted share, in Q1- 2008. 

Compare the above story with the brick-n-mortar results in Q1 2009:

• Based on the 2008 and 2009 Q1 results of 28 traditional retail companies, 22 reported revenue declines, the average change being -5.9%.
• The six positive performers included Wal-Mart (+2.9%), Ross (+1.0%), Freds (+.6%), Buckle, Inc. (16.8%), BJ’s Wholesale (+2.7%), and Aeropostale (+8.3%).
• The biggest revenue losers were Abercrombie & Fitch (-28%), Dillards (-14%), Neiman Marcus (-24.2%), Nordstrom (-15.6%), Zumiez (-15.2%).

Traditional media continues to reel as we compare the NY Times quarterly results to that of Yahoo. Both firms rely heavily on advertising as their main source of revenue.

• NY Times reported a Q1-2009 loss of $74.5M versus a Q1-2008 loss of $330,000.
• Yahoo reported a Q1-2009 profit of $118M versus a Q1-2008 profit of $537M.

One more easy comparison illustrates our point of online efficiencies vs. the offline business models

• Netflix’s base of recurring monthly revenue subscribers increased nearly 10% to 10.3 million in Q1-2009 from 9.35 million in Q1-2008. Meanwhile, Blockbuster’s stock fell 42% in Q1-2009.  At the end of March 2009, Blockbuster’s CEO blamed the movie industry as a key reason for the company’s poor performance. “We think the single biggest driver in the current marketplace the last few months has been title strength and this week is a classic example.”
• Interesting that with all those awful movies out there, Netflix added a net of 920,000 subscribers.  Does Netflix have access to a whole library of great movies that Blockbuster doesn’t? Or is Netflix’s model of leveraging the internet more appealing to consumers and analysts alike? 

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Filed Under Business Valuation, Internet Company, Internet Trends & Drivers, Merger & Acquisitions, Recession