From the ashes of the 2001-2002 crash there emerged four horsemen of the dot-com apocalypse: Amazon.com, Yahoo!, eBay, and AOL. This quartet of iconic companies, wounded but not destroyed in the crash, survived the plague years and flourished when the market recovered. But in recent weeks, at a time when online advertising and e-commerce are enjoying strong growth, all four have pulled up lame. The group that once led the Nasdaq's resurgence has generally lagged the tech-heavy index over the past year.
You can't blame it all on Google. Each of the horsemen is still a leader in its core business, Google or no Google. But each derives the lion's share of its revenues from a maturing U.S. market, each is finding profit margins slipping as it tries to diversify, and each has foolishly reached back to tried-and-failed ideas of the dot-com era for salvation.
On Tuesday afternoon, Amazon, the leading e-tailer, announced its quarterly earnings. The top line was good: Revenues rose 22 percent from the year before. The bottom line? Not so much. Operating income fell 55 percent to $47 million from $104 million in the year-earlier quarter. Why? Amazon ramped up spending on technology and content, slashed prices, and offered more free and reduced-rate shipping. In other words, it had to work a lot harder for the money, especially in its mature and massive U.S. market. Amazon announced that operating income would at best rise 2 percent for all of 2006, and at worst, fall 28 percent. Meanwhile, investors haven't been enthused by the back-to-the-future efforts Amazon launched this month to diversify and boost margins: an online grocery store and new online baby and toy stores. (Because it worked so well for Webvan and eToys?) Investors bolted for the exits. By midday, Amazon's stock was off more than 20 percent, and it stands at a three-year low.
eBay also took some lumps when it reported earnings last week. (The release can be seen here.) Net revenues at the auction giant were up 30 percent year over year. The core auction business, which accounts for about three-quarters of revenues, was up 22 percent, while the payments unit (PayPal) was up sharply too. (Good!) But the amount of money eBay spent on administration, sales and marketing, and product development was up by a much larger amount. The result: Operating income fell 18 percent in the quarter. (Bad!) eBay's stock fell after the earnings announcement and sits at a three-year low. And, like Amazon, eBay, faced with competition and a maturing U.S. market, has reached back to the 1990s playbook, spending a ton of cash and valuable stock to buy an Internet-based business that gives away its product for free. That would be Skype, the Internet telephony company eBay bought last fall for $2.5 billion. This quarter, eBay's communications unit (aka Skype) reported $44 million in sales. It's possible that Skype could one day be a huge contributor to eBay's bottom line. But for now, it looks like an enormously expensive way to add a small amount of revenue.
eBay's earnings announcement came a day after Yahoo! reported a similar story. Revenues, 88 percent of which came from advertising, rose a very healthy 27 percent. But operating income fell 12 percent, in part because of a significant charge for employee stock compensation. At the same time, as Bambi Francisco noted on MarketWatch, Yahoo! dampened expectations for the rest of the year and "delayed the release of a new search-advertising technology" that investors thought would help it catch up to Google. The stock fell in response to the report and has lost more than a third of its value since the beginning of the year. In addition to competing head-to-head with Google by pushing engineers to build a better search engine, Yahoo! has been pursuing growth by developing more proprietary content. Like too many 1990s-era content players—Inside.com, Salon,and, yes, Slate—Yahoo! has found it difficult to turn excellent content into short-term profits, and the effort has been scaled back.
Finally, take AOL. Please. AOL's parent company, Time Warner, won't announce its second-quarter earnings until next week. But the first quarter was pretty lame. Unlike its fellow horsemen, AOL saw revenues fall by about 7 percent, as 3.1 million Americans stopped subscribing. Like its fellow horsemen, AOL saw operating income fall—by about 14 percent, from $314 million to $269 million. And on July 11, the Wall Street Journal reported that AOL might soon adopt a new business strategy: It will morph from a subscription-powered Internet-access provider to an advertising-supported portal. The subscription business is declining anyway. So, the prospective plan goes, AOL should stop charging subscription fees to AOL users who have high-speed Internet access from cable or telephone companies, thus forgoing up to $1 billion in operating profit through 2009. But if it can keep people using AOL for e-mail (and hence as a launching pad for the Internet), it might be able to capture more of the Internet-ad-sales market, which is growing at a rate of 25 percent a year. AOL's 1990s flashback? Its plan rests on the assumption that recent trends in ad-spending growth will continue unabated for several years into the future!