On the Internet, bigger is much better. In a study of the market valuations of US business-to-consumer (B2C) Internet companies, McKinsey found confirmation of ever-increasing returns to scale in their share prices. Visitors to the 19 content sites (in the McKinsey sample1) with fewer than five million visitors have an average market value of $130, for instance. But visitors to sites with from five million to ten million visitors have an average value of $170, and visitors to sites with more than ten million visitors are worth $460 (Exhibit 1).2 Whatever the absolute value of the Internet companies studied, their relative valuations have maintained the same relationships to one another and to the underlying metric—the number of visitors at each site—even amid NASDAQ’s recent gyrations.
Our regression analysis of 21 electronic retailers shows that they too manifest this phenomenon. Analysis also shows that the valuations of e-tailers that have smaller market shares than their competitors do are lower than their revenues and the number of their visitors would otherwise suggest. The market’s expectation of increasing returns to scale is reflected as well in the concentration of capital on the World Wide Web: just 5 of the...