FOR IMMEDIATE RELEASE
FROM: Steven Goldsmith
(206) 543-2580
[email protected]
With technology stocks doing dizzying gyrations, investors are desperate to know which to keep and which to ditch.
A new study by three business professors offers one hint: To survive Wall Street jitters, they say, an Internet company doesn't need to make a profit or even sell goods. But it had better attract eyeballs -- lots of them.
The number of Web visitors can be more crucial than sales or profits in making a stock sink or float, according to the analysis of 86 publicly traded Internet companies, and those with the most-visited Web sites commanded higher sales prices and stock values even if their businesses operated at a loss.
"With Internet companies, it's very hard to use traditional accounting methods," said Suresh Kotha, University of Washington associate professor of management and organization and one of the authors. "So it's been a whole black box, and we're trying to explore that box."
For companies in the study, titled "The Relevance of Web Traffic for Internet Stock Prices," the key to boosting market value was finding a way -- any way -- to bring Web visitors through the virtual door.
So crucial are visitor counts that Kotha and his co-authors -- Shiva Rajgopal, assistant professor of accounting at UW, and Mohan Venkatachalam, associate professor of accounting at Stanford University -- calculated that traffic accounted for 77 percent of the price of a sampling of e-trade companies that got sold last year.
Thus, electronic greetings maker Bluemountainarts.com fetched $780 million when it was bought last October by Excite.com. Bluemountainarts had virtually no profits, or even revenue.
What Bluemountainarts did have was popularity; it was the world's third-most-visited e-commerce site, with 9.2 million monthly visitors, behind only America Online and Amazon.com.
If popularity's so important, how do you get it? The researchers reviewed strategies like teaming up with AOL, arranging referrals from other sites, drawing news media coverage, and, of course, buying ads. Media exposure was most effective.
One reason popularity pays, the authors said, is a phenomenon known as network effects. That means the value of a site to one user increases with the number of others rating products, offering feedback or generating content.
"We conjecture that the capital market participants value potential network effects and customer relationships that traffic brings," Rajgopal said, "even though such traffic does not necessarily result in current sales."
Rajgopal cautioned, however, that unless companies can eventually monetize these visitors, either by selling goods or collecting rents from others who want to sell to the firm's customer base, market values will drop.
The recent debacle at CDNow.com is a case in point. The firm had high traffic but very poor conversion to sales, quarter after quarter. The stock has dropped by two-thirds this year. Such firms, however, can still be tempting takeover targets -- with their traffic counts pumping up the sales price.
Companies like Amazon.com with better track records at converting eyeballs to customers have suffered far less in the recent Nasdaq collapse.
"To get to be the winner," Rajgopal said, "you have acquire as much traffic as possible as fast as possible. Traffic is still very relevant."
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For questions, contact Kotha at (206) 543-4466 or [email protected], Rajgopal at (206) 543-7525 or [email protected], or Venkatachalam at (650) 725-9461 or [email protected]. The paper is available at http://us.badm.washington.edu/kotha/personal/pdf%20files/Internet%20paper.pdf
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