• by Masha Geller , June 28, 2001

Dot-coms seeking to become profitable should focus on cutting operating costs instead of sales and marketing costs, according to a new study released today by Getzler & Company Inc., a New York-based firm specializing in turnarounds and corporate restructuring.

The study, which included 190 tech companies, compared the second and third quarter performance of 46 firms that cut marketing costs with 25 firms that cut operations costs. "While sales growth among the two groups remained approximately the same, there was a dramatic difference in profitability," said Brian Mittman, VP at Getzler & Company.

From the second to the third quarter, losses remained constant at firms that cut operations costs, but losses more than doubled at firms that cut marketing costs. "These results indicate that marketing costs remain a far greater driver of profitability for dot-coms than operations costs," said Mittman.

Operations costs included general and administrative expenses, overhead, and the costs of technology, product and content development for websites.

The study also revealed some positive trends regarding restructuring in the dot-com sector. On the whole, more firms are restructuring. Roughly 40% of the tech firms in the study underwent restructuring during the third quarter, compared to only 27% during the second quarter. During the third quarter the industry maintained healthy revenue growth (more than 50% annually) while making some progress in reducing operating losses.

However, the study's results were not all positive. "The bottom line is that virtually all dot-coms are still losing money," Mittman said. "The ratio of their losses to sales remains high, and though losses are narrowing, it's not happening fast enough."

Of the 190 firms in the study, only three were profitable on a cash basis. The average firm lost $13.4 million on $22 million in sales during the second quarter, compared to losses of $12.8 million on $25 million in sales during the third quarter. Mittman said that at that rate of improvement in the current market environment, most firms won't be around long enough to become profitable.