Digital River Branches Out

The company looks beyond the software industry to enhance its revenue stream.
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SAN FRANCISCO -- The software industry just isn't big enough anymore for Digital River (DRIV) - Get Report.

Until now, Digital River has focused on electronic software delivery, helping software publishers and e-commerce companies set up shop to sell downloadable products. The niche worked well for the company for a while. In the five months after its August 1998 IPO, its stock rose from 8 to 61. In the past six weeks, the stock has headed downstream, losing 38% of its market value.

Now Digital River is planning to sell its back-end payment processing system and e-commerce solution to businesses across all industries, not just those in software.

"Companies outside of software are very interested in using our technology as their back-end," Perry Steiner, company president, told

TSC

in an interview at the

BancBoston Robertson Stephens Technology '99 Conference

. "It wasn't

originally one of our grand plans, but it has turned into a very large business opportunity for us."

Some analysts feel that just offering solutions for downloadable software is restrictive, and are pleased that the company is branching out.

"Just offering ESD didn't solve a lot of problems," says Steve Weinstein, an analyst at

Pacific Crest Securities

, who rates the stock market perform. "Now

companies can outsource the whole bill-payment processing system. That market has massive potential." Pacific Crest has no underwriting relationship with the company.

For now, nearly all of Digital River's revenue is coming from customers such as

Corel

,

K-Mart

(KM)

,

Wal-Mart Stores

(WMT) - Get Report

and

CompUSA

(CPU)

. That has made them, in the words of BancBoston analyst Keith Benjamin, "the quintessential e-business company."

"They have a very real business," says Bob Herwick, a fund manager for

Herwick Capital Management

, who's been watching the stock. "Some Internet companies, you wonder if they have a viable business model or barriers to entry. ...

Digital River is on both ends of the transaction." It works with the software publishers that want to sell their products directly from their sites, and with the resellers who sell the software products from their sites.

For now, Digital River gets a tiny portion -- about 2% -- of its revenues from hosting the sites, and the rest from a percentage -- about 20% -- of sales generated through its partners' sites.

Jupiter Communications

expects $2.3 billion in consumer online software sales in 2002. Of that figure, the research firm expects as much as 35% to come from downloaded software sales. "Our own viewpoint," says Steiner, "is that it will be more like 70% to 80%." That would put Digital River's core business in a $1.84 billion market.

But as e-commerce becomes more mainstream, one analyst expects companies, especially the big software publishers, to bring the back end of e-commerce in-house.

"You could build

the technology in-house for a trivial amount compared to what they charge," says one analyst who asked not to be named, and whose firm has no underwriting relationship with Digital River.

"It's not worth what they charge and the economics don't work." The analyst believes that the software publishers will be able to easily develop the means on their own.