The internet is changing the way businesses are structured. For many, where you do not need retail outlets, offices or trade counters, then less fixed assets and capital are needed. Margins are higher and the resulting cash flows can completely exceed the money spent by the business acquiring fixed assets, so the excess money is returned to shareholders or the owners.
However, while the barriers to entry for enterprises on the internet are very low, the barriers to success are very high, especially when you have a company that comes to dominate its market.
Rightmove is an example of a company that has prospered as an online-only business model. It offers customers the chance to search more than a million properties for sale or to rent from 19,304 registered estate agents and new house developers.
This means it has 78pc market share of pages viewed, making it one of the most popular websites in the UK. But page impressions alone are not profitable. The estate agents pay to have their properties on the site, generating £167m of revenue for Rightmove last year, and pre-tax profits of £122m. With margins of over 70pc, Rightmove generates a lot of cash and, with annual capital expenditure averaging £1.2m, returned more than £103m to shareholders via a share buy-back of £74m and dividends of £29m last year.
Since Rightmove became a public company in 2006, it has returned more money to shareholders than the total market value of its shares at the time of their initial public offering: £482m compared to the capitalisation at flotation of £424m.
My confidence in Rightmove’s business model, even with competition from Zoopla, Prime Location and new entrant Onthemarket.com, is not built on its large market share, but the fact that estate agents now generate 90pc of their house searches online, yet only spend 27pc of their marketing and advertising budgets online.
John Wanamaker, the pioneer US marketeer and retailer, once remarked that “half the money I spend on advertising is wasted; the trouble is I don’t know which half”. We do now. If estate agents are spending 73pc of their budget for 10pc of searches or leads, then even they will wise up.
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The internet has facilitated the emergence of this new breed of businesses that are characterised by their different corporate architecture, which in addition are not necessarily always competing with traditional models. Rightmove, for example, does not compete with traditional estate agents, rather, it is a consolidator of estate agents and housing advertising. It is offering traditional companies the opportunity to take advantage of the benefits of new technology and its low overhead operating model.
Another company that is taking advantage of being able to structure its business in a different way is Betfair.
It does not have the overheads of bricks and mortar betting shops, so can funnel these savings into innovative products and better odds offered to its clients. It can cross-sell into gaming and keep investing in products, taking market share where, due to changes in betting tax, market supply is now shrinking.
With revenue growth and high operational gearing, Betfair is also a cash-rich business. The company has just returned £200m to shareholders via a special dividend.
Nigel Thomas manages the Axa Framlington UK Select Opportunities fund, a £4.6bn portfolio which has beaten its average rival portfolio in three of the past five years. Over years it has returned a total 102pc, compared to rivals’ 75pc.