Dot-Com Dominoes
For many online commerce and content companies, the end is
near. With relief nowhere in sight, shutdowns and job cuts will
continue.
Many of the new new things are now dead dead things.
The list of dot-com companies that have
announced layoffs or closures in the past six
months is staggering, standing in sharp relief to
the giddy enthusiasm of the previous several
years.
Start-up companies fail all the time, of course, but what is new about such
deaths as entertainment site Pop.com, retailer Value America Inc. or
discounter Priceline WebHouse Club Inc. is how fast they rose and how
abruptly they fell.
Pop.com was backed by directors Steven Spielberg and Ron Howard and
billionaire Paul Allen; it shut down in September before even launching its
site. Value America raised more than $100 million in a 1998 IPO and had
$47.2 million in first-quarter revenue; it filed for Chapter 11 bankruptcy in
August. WebHouse, the most dramatic flameout so far, burned through
most of the $363 million in funding it raised in the past two years and
closed its gas and groceries service last month.
By WSJ.com reporters Timothy Hanrahan and Danielle Sessa in New York, Jason
Anders in Washington, Connie Ling in Hong Kong and Cecile Gutscher in London
Notable, of course, is how little effect the alphabet soup of daily dot-com
dramas has had on the day-to-day lives of most people. Despite the
world-wide thinning of the dot-com ranks, the Internet economy is still
humming along, and is projected to reach $1.4 trillion in the U.S. by 2004.
That's because dot-coms, with their catchy names, consumer-oriented
offerings and splashy marketing, are the Internet economy's bark. The
companies that put businesses and consumers online -- giants such as
Cisco Systems Inc., Oracle Corp. and America Online Inc. -- are its bite.
For instance, attendance
growth at New York's Fall
Internet World trade show last
month was dented by the
dot-com slowdown -- but not
much, says Thomas Kemp,
chief executive of organizer
Penton Media Inc. Attendance
rose 20% to 60,000. That's
because dot-com workers
typically make up only about
one-fifth of attendees and are
overshadowed by
representatives of larger,
traditional companies.
"What happens to drkoop.com
or thestreet.com doesn't affect
us very much," says Mr. Kemp,
adding, "The amount that
General Electric will spend on
Internet products is probably
bigger than all of the Silicon
Alley firms combined."
For this report, we focus on the
pure dot-coms -- the segment of the Internet economy that delivers
products, services, news and entertainment to consumers. It is these
companies, whose corporate names typically end in ".com", that have done
most of the firing and the failing, and face more trouble ahead.
Connect the Dots
The recent wave of bad news has been dramatic but not necessarily
surprising.
Beginning earlier this year, investors turned their backs on many Internet
companies -- particularly consumer-oriented sectors such as publishing
and retailing. A glut of new e-commerce offerings, increased competition
from brick-and-mortar chains and a return to a traditional form of stock
analysis helped turn the tide against e-tailers. Momentum stock-investors
that flocked to the space for short-term gains and growth opportunities --
but not necessarily profits -- jumped ship and took with them the wind
beneath the lofty stock prices of many issues.
"Folks were investing in anything that had 'dot-com' or an exclamation
mark at the end of their name," says Steven Appledorn, senior portfolio
manager at Munder Capital Management. Now, he says, "the pendulum
has swung the other way."
For many of the young firms, this swing dealt a crippling blow. Most were
running deep losses as they spent heavily on personnel and marketing, and
had come to rely on regular cash infusions to fund operations.
With the Nasdaq's slump -- it peaked intraday at 5132.52 in March and
closed Monday at 3416.24 -- it became much harder for underwriters to
bring companies public; in turn, venture capitalists who'd grown
accustomed to quick dot-com IPOs looked for other sectors to invest in,
such as optical networking. With the cash spigot turned off, mass
shutdowns and layoffs were sure to come.
And come they did. First were high-profile sites such as Value America
and Boo.com, which had been troubled for some time -- Value America
had cut its work force and product offerings well before other online
retailers took such measures, and Boo had become a poster child for the
free-spending dot-com. Other failures involved companies that were
fighting stiff odds to build new forms of entertainment, firms including
Pop.com as well as Digital Entertainment Network and Pseudo Networks.
Soon, however, it seemed every week brought deep staffing cuts,
last-ditch buyouts and outright closures. Indeed, whole sectors --
pet-supply retailers, jewelers, grocers and Web broadcasters -- appear in
danger of disappearing. Prudent rivals embraced: Pets.com Inc. bought
Petstore.com; Webvan Group Inc. acquired Homegrocer; Quokka Sports
Inc. snapped up Total Sports. Kozmo.com Inc. even considered acquiring
bitter nemesis Urbanfetch Inc.
First hit by this dot-com downturn
were laid-off employees,
disappointed investors and anxious
consumers. But the impact has also
extended to the companies that had
come to rely on strong spending by
dot-coms to fatten up their
revenues. Well-established
advertising, media and
Web-consulting firms felt the pinch
in the third quarter, which trimmed
their financial results, and in some
cases, work forces.
Shares of portal Yahoo! Inc.,
multimedia provider RealNetworks
Inc. and advertising company
DoubleClick Inc. took licks from nervous investors worried about ad
spending by dot-coms. Worse off were a slew of Web consultants --
Viant Corp., Razorfish Inc., Xpedior Inc., iXL Enterprises Inc. and U.S.
Interactive Inc. -- that issued earnings warnings due to a dropoff in
dot-com spending.
Things for Web commerce and content companies, and the companies
they do business with, may get worse before they get better. The Nasdaq
has shown little sign of rebounding, and few dot-coms have had success on
the public or private markets. Outplacement firm Challenger, Gray &
Christmas Inc. put the number of dot-com layoffs for the month ended
Oct. 20 at 5,677, up 18% from the prior month.
Still, Challenger Chief Executive John Challenger cautions that the cuts
shouldn't be interpreted as the beginning of the end. "The power of
e-commerce hasn't changed. This is just an evolution," he says.
Global Chill
This evolution isn't limited to the U.S.: European and Asian firms have been
bloodied as well. In Asia, most Internet companies saw their share prices
reached all-time highs in February. By May, however, the depressed
global environment for dot-coms already forced several Internet
companies around the region to abandon, delay or reduce their IPO plans
(see related article).
Once highflying portal tom.com Ltd. and publisher NextMedia Ltd. set
layoffs. But the true wake-up call for many dot-commers and investors
came with the collapse of Chinese Books Cyberstore Ltd. in early August.
"There's simply not that much space for all the players" to survive, says
Scott Ohman, a manager at Boston Consulting Group in Hong Kong.
In Europe, popular music site Boxman shut down, as did ClickMango,
which was backed by "Absolutely Fabulous" television star Joanna
Lumley. Retailing has been tougher to lick than many companies thought:
High delivery costs, cross-border complications and
weaker-than-expected demand for online services all hit e-tailers on the
Continent (see related article).
As the year begins to wind down, however, the U.S.'s risk-taking
traditions and rich capital markets mean it has the failure crown securely in
hand -- and keeps adding to its lead. In just the past few weeks,
Priceline.com Inc., Urban Box Office Network Inc. and Beautyjungle.com
announced layoffs, while Mortgage.com Inc. and Furniture.com Inc. said
they plan to close. |
