£750m QXL tag fuels Net debate

It is now established that online auction house QXL is planning a stock market flotation in September, valuing the two-year-old venture at up to &£750m.

This may represent a hum-drum figure in the global online investment arena these days, yet compared with Rupert Murdoch’s unsuccessful &£623m bid for Manchester United it looks like a high risk investment.

Man Utd is a property which enjoys brand loyalty on a worldwide scale and enviable cashflow. And the bid would have given Murdoch a major trump card in the renegotiation of pay-TV rights.

So how exactly can QXL be judged to be as valuable as Man Utd or, to cite another example, a fair fraction of the well-established car making business of Volvo, which was sold to Ford for just over &£4bn earlier this year?

Proponents of Internet “hot stocks” would argue that the trend towards gravity-defying valuations of Internet stocks in the US – a trend now spreading to the UK – is justifiable in that they anticipate a real pattern of exponential growth of revenues and profits on the Internet.

But such an approach demands nerves of steel for QXL’s potential investors. A statement announcing the appointment of Jim Rose as the company’s chief executive in April (first revealed in Marketing Week May 6) which followed a more modest $12m (&£7.5m) refinancing of QXL in February, confirmed annualised sales of &£10m (not profits) and a 20 per cent growth in its business.

Beyond that, there lies much excitement – perhaps well justified – but little that is concrete or certain about QXL’s future earning potential.

At least Freeserve, the other UK-based online business which has just had a jaw-dropping valuation placed on it – has its software physically installed on the computers of more than 1.25 million UK consumers.

The only thing that many other highly-valued online businesses, including QXL, enjoy is a bookmarked domain name on the Net browsers of an audience whose future loyalty or fickleness remains unclear.

First-mover advantage – which QXL clearly enjoys in the UK and other European online auction markets – is often viewed as a guarantee of future market leadership.

No doubt QXL, like many other online businesses which have launched share offers, will use part of its funds to raise brand awareness, and secure exclusive promotional deals with high-traffic portal sites.

But attempts to construct barriers to rivals entering the market may be ineffectual for many Net start-ups. QXL already has a handful of rivals, including eBay, Yahoo!, and lastminute.com, vying for a share of the UK market for auctioned or “bucket-shop” sales of goods, such as last-minute travel and entertainment tickets.

In this sector, particularly, neither the suppliers nor buyers of such goods are likely to remain loyal to one particular online intermediary.

This, combined with the growing technical ease of setting up online auction and bargain basement shops for a wide category of goods, is likely to put the squeeze on margins.

In essence, investing in QXL looks more like a gamble than a bargain.

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