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Dot-Coms: Can They Climb Back?
They'll have to run leaner, adapt to change, and--above all--focus on making money sooner
A year ago, Ameritrade Holding Corp. (AMTD) was a conqueror. The online brokerage had zeroed in on America's
pre-millennial obsessions--the Internet and the stock market--then promoted the bejesus out of itself.
Result: The Omaha-based company placed No. 30 on Business
Week's last Info Tech 100 list. That was mostly because of
its staggering 1,200% return to shareholders, a category
where it finished on the top of the heap. This year,
Ameritrade is among the conquered. It didn't make the
top 200. Shareholder return has plummeted to -59%, and
the company's profits have evaporated due to costly
price and marketing wars against other online brokers.
That's the way it goes for Internet warriors. Because of
the collapse in stock valuations, the number of Net
companies on the IT 100 list was cut nearly in half,
shrinking from 27 a year ago to just 14 this time around.
Who's left standing?
The Net's steady, unglamorous carpenters: software
builders such as No. 34 BroadVision Inc. (BVSN) and
network-reliability firms such as No. 95 Micromuse (MUSE).
In fact, only three of the 14 could be counted as classic
dot-com companies--those megabrands Yahoo! (YHOO), Yahoo!
Japan, and America Online (AOL). ''The technology enablers
are fundamentally better businesses than the dot-coms,''
says David M. Alschuler, vice-president of e-business
and enterprise applications at Boston's Aberdeen Group Inc.
SKEPTICISM. Investors heartily agree. In fact, their whole
flight from Net stocks was what knocked some of the
highfliers off the list. Examples: online auctioneer
eBay (EBAY), which came in at No. 23 last year; Web portal
Excite@Home (ATHM), which was No. 68; and health site
Healtheon/WebMD (HLTH), which came in at No. 81. In addition, mergers claimed seven of last year's Internet
elite.
Have the fundamentals of these companies changed? Not
really. What has changed is investors' psychology, which
has hardened from a speculative ardor into a prickly skepticism. Now, if Net companies hope to climb back into the ranks of the elite, they're going to have to start
playing by a new set of rules. Out goes the grow-at-any-cost
mantra, with its break-the-bank advertising campaigns
and vast hiring sprees. The new guidelines seem to have
been crafted by accountants, not spend-happy visionaries.
Here they are:
-- New Rule No. 1: Get profitable sooner. Forget
B2B or B2C: The new catchphrase among dot-coms is P2P,
for path to profitability. Venture-capital investors once
tolerated profits forecasts three or four years in the
future. Now they're looking for business plans that target
profitability less than one year after an initial public offering, says Peter Y. Chung, general partner at Summit
Partners, a venture-capital firm in Palo Alto, Calif. Signs
of this shift abound: Since April, at least 25 IPOs have
been left in the holding pen. The median age of an IPO
company is increasing for the first time since 1998, up to
4.6 years from 4.1 through 2000.
To get into the black, companies have begun targeting
staffing and marketing expenses. In May, e-tailer
Living.com in Austin, Tex., laid off 50 of its 385 employees. And at government-transaction Web site
govWorks.com Inc. in New York, executives canceled most
of an anticipated $45 million marketing campaign.
''There's not the patience in the market to build a brand
over a couple of years,'' says CEO Kaleil D. Isaza Tuzman.
-- New Rule No. 2: Cozy up to private investors. As public
markets succumb to uncertainty, companies of all sizes
will have to retreat to private sources. This winter,
when Amazon.com (AMZN) needed some fresh cash, it didn't print new shares. Instead it issued $671 million in
convertible bonds to private investors in Europe.
For smaller players in the Net world, financing becomes
more dicey. To tide themselves over until they can go
public, a number of pre-IPO dot-coms are returning to
venture capitalists for late-stage financing. At Boston
venture firm Capital Resource Partners, for instance,
partner Jeffrey W. Potter has seen the number of
prospective deals double in just one month. ''We're seeing
later-stage companies who thought they would have gone
public, but they will no longer be able to,'' says Potter.
Companies that already have gone public will find it
difficult to tap traditional private capital, but some,
such as e-tailer Garden.com (GDEN) and grocery-delivery
service Streamline.com (SNLE), are searching for other
sources of private funding--like corporations or investment
banks. ''I don't think there's practically any e-tailing
company who can continue'' without new cash infusions,
says Tim A. DeMello, CEO of online grocer Streamline.com
Inc. in Westwood, Mass., whose stock has dropped 70% this
year. ''Every single one of them needs to raise additional
capital, ourselves included.'' Streamline still has $21
million in the bank, which should last until at least
October, but DeMello is looking for new investors to
keep the company's motor running until it can survive
on its own revenues--or return to the public marketplace.
-- New Rule No. 3: Tear up the dot-com business plan. If operating a Web site doesn't work, try selling
technology or services to other Web sites. That
arms-dealer strategy has helped put No. 100 InfoSpace
(INSF) on the Info Tech list for the second year in a
row. The profitable provider of information behind
online Yellow Pages, maps, and phone directories
grew revenues by 265% last year, fourth best overall.
Now others are taking the same path. GovWorks.com recently
moved away from its function as an information portal
for citizens interacting with local and federal government.
Now it focuses on installing technology for government
customers through alliances with Arthur Andersen consulting.
Onvia.com, a small-business portal whose stock soared
as high as $78 per share last year and has crashed to
around $5, has shifted its focus from selling commodity office products to acting as an auction site for
small businesses.
-- New Rule No. 4: Good technology trumps glitzy
marketing. It once was an article of faith: building
a brand on the Net was paramount--even if it meant years
of losses. Now, dot-coms are finding that useful technology
can be an important differentiator. That helps explain
why CNET Networks Inc. (CNET), which operates a handful
of Web sites dedicated to technology products and news,
paid $700 million in stock last January for mySimon,
a popular site that sorts and compares products and
prices on the Web. Leading online travel site Travelocity
recently installed a feature that lets users view seat
configurations on dozens of planes and pick where they
want to sit. "If a company has a unique technology,
investors will still pay for it," says Theresia G.
Ranzetta, partner at venture-capital fund Accel
Partners in Palo Alto.
-- New Rule No. 5: Cultivate your best customers. Many execs are thinking less about raw traffic numbers and more
about what people do when they're on the site. ''Six
months ago, sites were buying traffic no matter what the
cost,'' says John Keister, president of portal Go2Net Inc
(GNET). ''Now it's about profitability per user.''
Struggling e-tailer eToys Inc. (ETYS) in Santa Monica,
Calif., recently scrapped the 5% to 12% sales commissions
it was paying the network of sites that referred new
customers. Instead, it's giving 10% discounts to people
who sign up for a gift registry--encouraging repeat
visits. ''Companies are looking hard at
customer-acquisition costs,'' says Forrester
Research analyst Dan O'Brien. ''If you can't convert
them into a buyer or sticky visitor, than maybe it
doesn't make sense to spend a lot for them.''
The stock market has begun rewarding companies that help Web sites wring more value from each visit.
That helped propel a small, New York-based e-mail marketing
company, NetCreations Inc. (NTCR), to No. 78 on the IT 100
list. The company showed 615% revenue growth, top overall.
Another top company, Art Technology Group Inc.
(ARTG) of Cambridge, Mass., which came in at No. 90,
makes software that helps Web sites personalize their
interactions with online customers.
Over the long haul, analysts expect Wall Street investors
to sweeten on dot-coms again but say they'll only bid up
companies that are leaders in their fields with clear
paths to profitability. '' The next few quarters are
going to be turbulent times,'' says Accel's Ranzetta.
And what of Ameritrade? Its $54 million TV ad campaign
goes forward unabated. Unless the stock market has a total
change of heart about that kind of strategy, don't expect
this upstart's stock to soar anytime soon.
By Dennis K. Berman in New York
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