Doom Stalks the DotComs : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread

Doom Stalks the DotComs

A market recovery won't help a passel of sinking e-tailers and other once-hot sites


When the stock market careened out of control last Tuesday, Rick Neely could only hold on tight. Neely, the interim chief executive officer of, a struggling software seller, had 200,000 options priced at $7 a share riding on every lurch. Last April, when stock hit $37, such options would have been worth $6 million--small by dotcom standards but far better than last week's figure. With Beyond. com down to $3.75, his options were "under water"--worthless. "The drop this week was so dramatic, you can't even comprehend it," says Neely, who took over in January after the previous CEO quit. "Everyone is dealing with the same problem."

Indeed, everyone is. The violent swings of the NASDAQ over the past month have overshadowed the virtual collapse of many battered online companies--e-tailers such as grocer Peapod and music seller CDNow and information-and-advice sites like a year ago were among Wall Street's highflyers but now may be down for the count. Stock prices of these hemorrhaging havenot.coms have plunged 50% to 75% below their 12-month highs, and many trade below their initial offering price. Case in point: shares of TheStreet. com, a financial-news-and-advice site, peaked at $71.25 on the day it went public last May but closed at $7.63 last week.

It's not that Americans don't love surfing the Internet and shopping online. Consultant Forrester Research predicts that Web spending will soar from $20 billion in 1999 to $184 billion by 2004. But superheated competition in everything from apparel to videos--e-shoppers can choose from 100 look-alike pet-supply sites and more than 200 toy stores, for example--virtually guarantees mass extinction. "The reality is that many of these companies are simply running out of cash," says Tom Wyman, who watches online shopping for J.P. Morgan. "They are losing anywhere from $10 million to $30 million a quarter." By year's end, Wyman says, "a majority of the owners will be forced to turn out their lights and go home."

The collapse of these new-economy stocks is both a predictable and rational phase of economic development--though it may not feel so rational if you've been burned by them. Launching a dotcom company in recent years has been a bit like getting a license to collect money. Venture capitalists showered you with cash, and Wall Street snapped up your stock at five or 10 times the offering price--sometimes all in the same day--in the hope that you would soon become the next Intel or Microsoft. That money was a magnet for executives of boring old-economy companies, who joined dotcom start-ups for the thrill of working 20-hour days in return for wheelbarrowfuls of options. And certainly, lots of people got filthy rich.

But with many dotcoms declining, neither venture capitalists nor Wall Street is eager to give them a dime, prompting a flurry of initial public offering postponements. "You'd be a fool to invest in an e-tailer that sells books today or wants to go into any other well-recognized market," says Michael Moritz, a general partner at Sequoia Capital in Silicon Valley, which launched the popular Internet portal Yahoo. "The large waterfront properties have not only been purchased but developed."

The plight of the e-tailers and information providers sharply separates them from their more resilient Internet and technology brethren that have been able to show actual profits. Companies like Cisco, whose routers switch bits and bytes around the Internet, and Yahoo have seen their stocks rebound after each recent tumble. Shares of Cisco, a company with $12 billion in 1999 revenues, fell to $64 during the worst of Tuesday's carnage but at week's end rallied to $74.94, about 10% off their peak of $82 for the past 12 months.

But the failure of most e-tailers to generate anything resembling income has exposed their strategy as essentially hollow. That's because their game plan has called for spending whatever it takes to attract the millions of eyeballs--and open wallets--that any site must have to turn a profit. And "whatever it takes" has too often meant shelling out more for marketing ploys like Super Bowl TV spots than typical customers spend on online products. Wyman estimates that it costs a company like music retailer CDNow more than $70 to win a customer who may spend less than half that amount before departing forever.

Many companies are only now wising up. "We've had the opportunity to learn the lessons of the Internet," says Glenda Dorchak, CEO of Value America, a discounter that once sold everything from crackers to computers but has narrowed its selection to electronic equipment for home and office. Lesson No. 1, Dorchak says, is that "spending tens of millions of dollars on ads on national TV" doesn't make any sense. In fact, Value America is still trying to recover from its overzealousness. The company laid off nearly half its work force in January and has been scrambling for funds. Its share price has fallen from a high of $74.25 a year ago to just $3.13 last week.

Worse yet, many e-tailers depend solely on cheap prices to lure and hold fickle customers. That just deepens red ink without preventing shoppers from hopping to other sites with deeper discounts--to say nothing of auction venues like eBay. Online retailing "is not about the lowest price anymore," says Josh Goldman, the CEO of mySimon, a comparison-shopping site that describes more than 2,000 e-stores. What customers prize more, he says, are bells and whistles such as instant messaging, access to product specialists, and e-mail alerts of upcoming deals.

It was CEO Jeff Bezos who preached the gospel of getting big at all costs in order to dominate an online sector. And he may emerge as the biggest beneficiary, even though Amazon, which attracts more than 17 million customers a month, has yet to earn a penny of profit (one reason its shares closed at $67.56 last week, down from their peak of $113 in December).

All those eyeballs, however, have enabled Bezos to turn Amazon into an online bazaar full of links to myriad other e-tailers, who each pay a fee to be listed. "If you really want to be the place where people can find anything," Bezos says, "you have to partner with other companies." Meanwhile, he fondly compares the profusion of e-tailers today with the explosion of new life in the Cambrian era--a period, he says, that witnessed "the greatest rate of speciation ever seen but also the greatest rate of extinction." That fate is what countless Amazon wannabes now find themselves facing. "A lot of companies looked at Amazon and saw the market forgive its losses," says Lise Buyer, who tracks Internet companies for Credit Suisse First Boston. "The difference is that Amazon has transformed its traffic into revenue while some of the others have not been as successful."

Nor have many companies that rushed online found that being first conferred a sustainable advantage. Last month auditors for CDNow, the pioneering online music shop, reported "substantial doubt" that it could continue after the collapse of its deal to merge with the Columbia House record club, itself a joint venture of Sony and Time Warner. Although CDNow had a head start, it was quickly challenged by rivals, from to websites that let users download virtually any song.

One company that seemed to have it all was, which last July became the first online pharmacy to go public. Along with high-profile backers that included and venture capitalist John Doerr of Silicon Valley, the start-up boasted partnerships that enabled customers to pick up orders at Rite Aid pharmacies and buy GNC nutritional products online. even lured its CEO, Peter Neupert, from Microsoft, where he had been running the MSNBC cable channel and website. Small wonder that commenced trading at $65 a share. But the stock closed at $10.88 last week, with Neupert having lost some $75 million on paper.

What happened? "We've been moving as fast as we possibly can at every stage to be ahead of our competition," Neupert explains. "We are spending a lot of money, so our losses are large." The outlays included $30 million in equipment to set up the company's own distribution center in Bridgeport, N.J., and a $105 million deal to become the sole health-and-beauty retailer on for the next three years. And to help replenish its coffers, last month raised $108 million in private-equity funds. Says Neupert: "I've tried to alert people from the very beginning that this is about building a long-term business and not about a quick hit."

At software vendor, CEO Neely has taken the opposite tack and shifted the company from consumer retailing to business-to-business selling. The move to B2B involved more than $11 million in special charges to cover the layoff of a fifth of the company's workers plus the removal of buttons from such sites as America Online and Yahoo. Neely hopes the resulting savings will help his company turn a profit by the end of 2002.

That could make it one of the few survivors of a massive shakeout whose onset drew closer with the events of last week. "This is the start of a serious consolidation," says Joe Sawyer, an analyst at Forrester Research, who predicts that a handful of companies will dominate each major e-tail sector. The likely winners, he says, are the very same brick-and-mortar retailers, such as Wal-Mart and K Mart, that the Internet was supposed to make obsolete. But instead of this happening, such behemoths are rapidly bringing their deep pockets, brand recognition and nationwide customer bases online.

"It's really their game to lose," Sawyer says. If that forecast proves accurate, the Brave New World of retailing could soon look a lot like the old one. For many investors, it's one shopping trip they could have done without.

--With reporting by Julie Rawe and Anamaria Wilson/New York

-- Carl Jenkins (, April 10, 2000

Moderation questions? read the FAQ