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That revenue was generated by transactions to the value of £4.3m, indicating that the company took an average commission of 9.5%. A figure of just under 10% sounds about right for what seems to be essentially a "middleman" business, but the rate of growth of this business is truly astonishing. Monthly turnover has increased from just £3,000 in January last year to £191,000 in December, an increase of 6,267%. At that rate of growth sales should be close to £12m by the end of this year. That's not bad by any measure.
Now of course that increase in sales did not just materialise. It had to be won by a major marketing campaign. In the 15 months since the company started it has spent £3.63m on sales and marketing, which has been the largest drain on the company's cash flow after product development. In that last quarter of last year the company suffered a cash outflow of £4.4m, i.e. slightly more than the total value of its transactions. However the IPO, raising £144.2m, will solve that problem, although the company will only see about £133m of that after it has paid fees to all its advisors.
So, in a nutshell, the company has spent a pound to get a pound's worth of transaction of which it takes a small cut. For that the market judges the correct valuation is £750m. For the moment let's leave aside such issues as the fact that some argue the strength of the Internet is its ability to remove the middleman, and move on to look at another Internet business.
In all the noise about lastminute.com it is easy to overlook the press release from Freeserve (LSE: FRE) yesterday. This company really started the Internet boom in the UK when it floated last summer. After a wobbly start the shares have performed very well and now stand at 600p putting a value of £6.5bn on the company. Freeserve broke the mould by offering free access to the Internet; it generates most of its revenue from kickbacks from the telephone companies. Even so the company lost £9m and suffered a £3m negative cash flow in the six months to the 13th November.
But in the rapidly changing world of the Internet the business environment has changed again. In the last few months two telephone companies and one ISP have announced what they call free, and others might call unmetered, access to the Internet. That is a problem for Freeserve and hence its statement yesterday.
Freeserve's response is a flat fee of £6.99 per month for umetered off-peak access for British Telecom (LSE: BT.A) users. BT's closest alternative would seem to be its second level aimed at occasional users at the evening and weekend offers unlimited Internet access for £15.25 a month, but does include 80 minutes of inclusive calls. But the access to the Internet is charged at the rate of 1p a minute if the call is made during the day. Like all things to do with telephone charges it seems to be beyond the wit of anyone at BT or anyone else to come up with a simple pricing structure.
Nevertheless, on the face of it seems therefore that Freeserve will be subsidising its service to the tune of around £8 per subscriber per month. Of course we don't know how many people will use this service and whether or not Freeserve has been able to get a special rate from BT for the service. That may well reduce the cost to Freeserve, but my guess is that the company will still be putting cash in. So its losses, and cash drain, will continue for some time yet.
In that respect the business model is not dissimilar to lastminute.com. The idea is to buy market share in the early days and establish a commanding position through branding. Lastminute.com are doing their land grab by marketing, but the effect is the same. Buy business to get market share and establish the company as the leading brand in that space. Then, at some unspecified time in the future, the plan is to raise prices at the same time as volumes go critical and, hey presto, the business is profitable.
But, as many Fools have pointed out on a variety of boards, branding on the Internet is going to be a much harder proposition than branding clothes, drinks or other consumer items off-line. Much of the magic of branding is association. The consumer wants to be seen as smart, savvy and street-wise. To be seen eating, drinking or wearing the "in" brands demonstrates to the world that you are up to speed.
Somehow that doesn't quite work in the solitary confines of the spare bedroom. Who can you impress with the ISP you are using, or where you are buying your tickets from? OK, you could tell people afterwards. But the whole point of branding is that you don't tell people you are rich. They just know from the discrete little crocodile, tick, pointed star, blue & white propeller, or any assortment of jumbled up letters that you have paid more than you needed to buy that shirt, track suit, motor car or handbag.
However, that philosophy goes against the whole grain of the Internet. The message of the new media is simple: cut out the middleman and pay less. The idea that you can protect your business on the Internet by branding it, and therefore charge more, doesn't seem right. Sure volumes may well rise, but if you loose money on each transaction then all that higher volumes mean is larger losses. These businesses desperately need to raise their unit profitability, and I can't see how they can do it. Every time they try some other dotcom entrepreneur comes along and undercuts them with even more venture capital.
So I admit it. Some of these Internet business models just don't make sense to me. But that hasn't stopped them raising a boatload of money, and best of British luck to 'em I say.
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