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CyberCash's Revenue Hunt</A>
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CyberCash's Revenue Hunt
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By Neil Irwin,
Washington Post Staff Writer
Thursday, November 30, 2000
As James Condon, the chief executive of the beleaguered Reston-based company
CyberCash Inc., leans back in his chair, a screen saver starts up on his
computer monitor. Red block letters start scrolling across a black background.
They read, "It's the Revenue, Stupid."
In Internet time, CyberCash is downright geriatric. The company emerged right
at the cusp of the Internet's growth as a consumer medium in 1994 and went
public in 1996, with the ambitious goal of transforming how people buy things
online. Its stock traded at more than $60 a share. At the time, many of the
cognoscenti thought it had a brighter future than the Washington area's other
Internet powerhouse, America Online Inc.
Things changed.
Year after year, CyberCash failed to turn innovative technologies into
something people would pay for. At CyberCash, many analysts say, for too long
it wasn't about the revenue.
Now, CyberCash stock trades at less than $2 a share, and many Wall Street
analysts think the company is doomed. But CyberCash officials think they have
finally settled into a business that, while less revolutionary than
originally envisioned, will become profitable next year if the company
doesn't run out of money or get acquired first.
Whichever happens, the history of CyberCash mirrors that of the Internet
economy as a whole. Company executives have discovered—possibly too late—that
the best businesses don't always have to change the world.
In the past two years, CyberCash has quietly become a leader in the
not-so-glamorous field of electronic-payment processing for both online
businesses and regular stores.
When you make a credit-card purchase from H&R Block, Microsoft Gaming Zone,
Cellular One or Kozmo.com, CyberCash's bank of servers in Reston communicates
with financial institutions and moves the money from your credit-card company
into the accounts of the businesses. CyberCash receives a fee for each
transaction—typically 20 cents. The company also offers businesses fraud
protection and other services aimed at online commerce.
If past trends hold, the company will process well over 25 million
credit-card transactions worth billions of dollars this holiday season—a
make-or-break period as CyberCash attempts to reach that elusive goal of
positive cash flow.
CyberCash is getting substantial revenue now for the first time in its
history—$17 million in the first nine months of the year. And the company is
losing less money than it once did, posting a $24 million loss for the first
nine months of 2000 compared with $33 million for the same period in 1999.
Still, analysts consider CyberCash to be a company on the brink. On a
quarterly list of technology companies closest to running out of cash that is
published by financial weekly Barron's, CyberCash is a mainstay (although
Condon, the CEO, points out that in the past three quarters the company has
moved progressively further down the list).
Wall Street analysts are intensely skeptical about the company's prospects.
"Compared to two years ago, it's a very bleak situation," said Ulric Weil, an
analyst with Friedman, Billings, Ramsey Group Inc. "They just made too many
mistakes. When you're not making any money and promise big revenue growth and
don't deliver that, the stock gets punished no matter what."
"CyberCash has been in a period in which they have been striving to regain
investor confidence," said Adam Holt, a senior analyst for Chase H&Q in San
Francisco.
Condon is defiant. "We'll win back the market's respect," he said.
The original idea behind the company was simple in concept, complex in
execution. The founders reasoned that if the Internet were really to
transform the way people shop, communicate and entertain themselves, it would
need a more efficient way for money to change hands.
Instead of clunky credit-card transactions, founder William N. Melton
figured, Internet commerce would work better with an intermediary such as
CyberCash between buyers and sellers of all things online.
At the time, many people assumed that some form of micro-payments, or a
system for people to pay small amounts of money—even just a few cents—to
access individual pages on the Web, would be key to the development of
content on the Internet.
CyberCash seemed poised to be at the center of that trend with its CyberCoin
product. Its underlying technology, most observers said, was first-rate. If
things had gone according to plan, the company would have stood as an
intermediary in billions of dollars in online transactions per year. Just one
problem. No one wanted—or seemed able—to use it.
"If you were a consumer trying to use CyberCoin in 1997, you could do it. But
it helped to have a master's degree in computer science," Condon said.
As Condon describes it, the company at the time was dominated by very
talented technology people. And he said, technology people often aren't the
best businesspeople.
"It's never, absolutely never, technology that wins. We've been able to
change from a technology to a business focus."
(Melton, who was CEO at the time and is now the company's chairman, was not
available to be interviewed for this article, according to a spokesman.)
Condon, who was chief financial officer at the time and then chief operating
officer, believes there were flaws in the company's strategy of distributing
its product to consumers. In 1997 CyberCash reported a loss of $24.7 million
on revenue of just $4.5 million.
In 1998, "we were trying to figure out what business we were really in,"
Condon said. The conclusion that he and Melton, who was still CEO, reached:
Maybe they could make a viable business out of simplifying the process by
which retailers process credit-card payments. Not a sexy business, nor one
with high profit margins. But it was one in which real revenue was to be had.
Thus the reference to "It's the revenue, stupid."
For top managers, that became the company's primary purpose. "We set out to
solve a business problem, and we have," Condon said. The rest of the staff
wasn't so sure.
Through 1998 and 1999 many of the highly skilled technical staff hired during
the early days didn't think the mundane business of payment-processing should
be the company's main mission. They wanted to be involved with more
innovative technologies, Condon said, and CyberCash wanted to replace them
with employees who had better business instincts.
"We were replacing very bright people, the very brightest in the business,"
he said. "It was a very difficult process. It left me with a lot less hair,
and a lot more gray."
Just because the men at the top said the company's mission had changed didn't
mean it had. The company survived thanks to a series of cash infusions from
Melton, who turned over the CEO reins to Condon in November 1999. Melton
purchased $3.5 million in CyberCash stock in 1998, and his foundation bought
$5.5 million more this summer. Private placements of stock over the past two
years added millions of dollars more to the company's coffers.
"By February 2000, everybody at the company knew what CyberCash's business
was. In February 1998, no one knew," Condon said.
While Wall Street analysts generally applaud CyberCash's shift to a business
with real revenue, many of them think it came too late. Moreover, the
payment-processing business is one in which profit margins are being squeezed
by competition.
"The most basic payment-processing services will trend toward becoming
commodity businesses," said Holt, the Chase H&Q analyst. "Where companies
like CyberCash have an opportunity to stabilize or increase price is by
differentiating their products," through such bells and whistles as the
fraud-control capabilities, international-currency conversion services, and
digital check payments.
CyberCash had $10.4 million cash in the bank as of Sept. 30—but posted a loss
of $7.6 million in the third-quarter alone. It's numbers like that that leave
many analysts thinking that CyberCash shareholders would be best off if a
competitor bought the company.
But that is precisely Condon's greatest fear. "At $3 a share, we're awfully
tempting," he worries—though there are "poison pills" in the company's
ownership structure that would stand in the way of such a deal.
"Until recently, Cybercash has not recognized the error of its ways," said
Weil, the Friedman, Billings, Ramsey analyst. "They've recognized that now
and are trying to catch up. But they may be too late."
Said Condon: "I've heard that we've gone bankrupt about six times now. But
we're long-term players."
© 2000 The Washington Post Company
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