When the Web grows up, measure it against bricks and mortar

The Wall Street Journal today explains that analysts are no longer able to use "established Web standards" to assess the value of eBay and Amazon.com. Instead, the companies are being compared to brick-and-mortar competitors on old-fashioned metrics, like revenue per customer. The problem with this transition, which is pushing the valuations of the online retailer and auctioneer higher, is that they had to be measured by different standards in the first place.

Here's the simple fact: Amazon.com and eBay added customers faster than any other retailers in history, because they were not geographically constrained. All stores begin with customers who spend relatively little and, as trust increases, grow revenue per customer. But analysts have consistently focused on the number of new customers in online retailing, because it was more dramatic to talk about the 100-percent growth in traffic or merchandise volume than to talk about the five-, 10- and 20-percent increases in revenue per customer each year.

Investors who looked at eBay's most recent earnings by the traditional Web measurements, for instance, might have been disappointed. For its second quarter, the San Jose, Calif., company posted a 6% decline in listings of goods -- the first time it has shown a drop. The 12% increase in gross merchandise volume, or the total value of all goods sold, was the slowest growth rate over the past year.

But by emphasizing some of the new metrics, prospects for eBay and Seattle-based Amazon look rosier. EBay's second-quarter revenue rose 30%, its strongest performance since the third quarter of 2006, and its revenue per listing rose 32%, according to some estimates. Meanwhile, Amazon's free cash flow -- which is operating cash flow minus capital expenditures and which acts as a proxy for operating profit -- rose 87% in the second quarter from a year earlier.

However, had Wall Street recognized this second element in online retailing, the inevitability of increased revenue per customer when things are being sold, Amazon.com and eBay would have remained highly valued stocks throughout their lives rather than being seen as having "stumbled" in the early part of this decade, when customer growth slowed to "normal" levels for any retailer.

Investors have actually lost value in these companies because analysts insisted on metrics they believed made the Web retailers more attractive.

The lesson is that Web business should be measured against its off-line competition at every stage in its life, even if it means acknowledging lower revenue per customer.

If you are old in Net years, like me, you'll remember that folks used to say "Nobody will ever buy a big-ticket item on the Web." In fact, the Web retailers merely needed to gain consumer confidence to start selling more expensive items.

Quit treating Web business as a special case and the value of real winners, as well as the hollowness of so many badly conceived Web startups, becomes crystal clear. Business is, increasingly, just business. No miracles, no magical transformations. Just hard work and luck.