Jim Cramer's composite story of every dot-com failure. (For fun, see if you can pick out which pieces of the story refer to TSCM!)
State of the Web: The Tale of the Dying Dot-Com
By James J. Cramer
It can't get any worse. Those five words have defined the State of the Web for two quarters now, and, with each passing week, things do get worse. Stocks get delisted. Quarters get missed. Advertising declines further. Options go deeper underwater. Management teams quit. Cash runs low. Companies close up.
What is the endgame? I think I have some clues. But what I want to do is make up a composite dot-com -- that way I'll hurt fewer feelings than if I tell the truth. Why resort to fiction? Because the facts are too painful and my friends in the business deserve better than to be trashed for things and trends that might not be their fault. I'll trace the lifecycle of pretty much every commerce dot-com I know, and it's a sickening spiral. It's why things could get worse still.
This dot-com writes about and sells health care products, primarily for women, through a site that uses an exchange and a name-your-own-price methodology, and is available on your Palm Pilot or personal computer. It had its sites set on the U.S. and Latino markets because one of the founders lived in Chile one summer. Let's call it $$$$.com because, well, names have to be changed to protect the innocent.
I'm going to give you the lifecycle of this dot-com, from start to where it is right now. That way you'll come to understand the true and desperate state of the Web as I see it.
First, $$$$.com was created in 1998 to meet the growing demand for online medical and drug products, a market that Forest-Through-The-Trees and UrAnus.com, two nitwit consulting companies, said couldn't miss because it was a $47.3 billion marketplace growing at 37.8% a year, currently serviced only by mom and pop stores that had no real traction or support in a fractioned market.
The genesis of the dot-com was as follows: Two smart kids out of Wharton read about how Jeff Bezos made a ton of revenue selling books online and decided, what the heck, come up with a dot-com and get rich. They then went to Belchmark, which was so flush with capital it didn't know what to do with it all, and immediately got $15 million. Because Belchmark checked off on it, a guy who used to work on the Net at Disney and a couple of guys out of incineration experts from Philadelphia decided to give $10 million each, the former to be able to get the content stuff rolling and the latter to get the exchange site going.
Once they got that capital, the Wharton jokers plucked some unhappy number 7 guy from Microsoft who was never going to run the place, and then picked the number 12 guy from FedEx to take care of the brains and the brawn of the dot-com. They were all given hefty dollops of stock. The Wharton guys then paid some slicksters from MarchorDie, a Web consulting firm, which designed a seriously great site with lots of bells and whistles and streaming video about its products, and testimonials.
Almost immediately a deal was reached with a major online portal, Likus, and serious discussions occurred with Yoohoo and On-Line America. At the same time, the Wharton folk connected with Remarc Newspapers Inc., a chain of newspapers with its flagship in New York, and with Pill Co., the largest maker of health care products in America. Each agreed to buy 5% of the company in return for various obligations, to be worked out later.
The money could go only so far, after all those consulting fees and real estate leases and hirings, so the company contacted Cramer Brothers, an elite investment bank in New York, with famed analyst Nan Cramer, who wrote up reports about Internet stocks using wild price targets and often bragged to others that she was too busy to return Bob Pittman's phone calls.
In the interim, the company raised a second round of financing from the likes of Intel and Microsoft, both of which sent 24-year-old representatives also from Wharton to be sure that the company existed before they handed over checks. A bunch of hedge funds that hadn't owned stocks for more than two minutes also came in on the round -- one of them even led it -- and promised they would never sell the shares, that they would be classic long-term investors.
The company also contacted the All Health News All The Time cable channel of Westinghouse, which quickly bought 5% of the company, giving $20 million in advertising credits that had to be spent on its channel in return for the equity. $$$$ agreed to the terms, because the CEO, the fellow from Microsoft, Ishka Bibble, said the tie-in was such a natural.
Cramer Brothers, anxious to bring as many dot-coms public as possible, pressed $$$$.com to pull the trigger in the second quarter of 1999 after the company had phenomenal sales in Q1 owing to a promotion in which they gave away a trip to Las Vegas with every order of $25 or more. Nan Cramer, the crackerjack "Queen of the Internet," said it would name $$$$.com the category killer if Cramer Brothers got the deal, and Ishka Bibble quickly acceded because all of Cramer Brothers' deals went to a premium.
Bibble didn't think he needed the money, but the negotiations with On-Line America had hit a snag. On-Line America wanted to make $$$$.com one of the exclusive tenants in the health care products channel, but the price would be $40 million over three years and there wouldn't be enough money in the budget to run commercials and banners if they also wanted to sew up that exclusive piece of On-Line America real estate.
So the deal got done.
Nan Cramer convinced $$$$'s Bibble to sell only 3 million shares to keep the deal tight as a drum. She also coerced a dozen hedge funds and 50 mutual funds into buying stock in the aftermarket in order to get sweet allocations, and some of the brokers at Cramer Brothers even asked that the bigger funds buy and sell 100,000 shares of the same stock, with a 10 cent per share commission, to be sure to get enough $$$$. Nan assured Bibble, who knew nothing about the process, that nine months after $$$$ came public he could do a secondary deal, after blowing away the numbers, at a much higher price. Bibble accepted the logic. He awarded millions and millions of options to his hires, all struck at $19. They'd be able to sell on the secondary in the $50s or $60s, he figured, because the market was hot hot hot.
The day the deal got done was a huge branding event and $$$$ threw a $2 million party at which Tom Jones sang "It's not Unusual" and David Copperfield pulled rabbits out of microchips. Bibble got on CNBC and the only unpleasant moment came when Mark Haines asked how sales would have been if $$$$ hadn't offered those Vegas trip tie-ins. Bibble took umbrage, evaded the question with a discussion about the UrAnus market figures, and went over to CNNFN where they fawned all over him and threw softballs about the love affair between the site's users and the company itself.
$$$$'s stock, which was priced at $19, came public at $63 and finished the day at $70. All of the favored institutions got big allocations, bought stock in the aftermarket to please the underwriters, then dumped the stock via Instinet for a very nifty trade. Only individuals and a couple of Net funds were left holding $$$$ at the end of the day.
Almost immediately there were problems. Now that $$$$ had the On-Line America deal it no longer believed it had to give free trips to Vegas with every $25 purchase. However, On-Line America had several health channels and each one had four "exclusive" tenants, so it was awfully hard to find $$$$'s site. The contract with Likus, which gave Likus $100,000 a month in return for traffic, turned out to generate a ton of traffic, but it was all from one server that used many different proxy servers and was traced back to a Russian page view generation machine with software to disguise the source.
The huge amount of advertising that $$$$ had to do with Remarc Newspapers generated almost no traffic whatsoever. Pill Co., the exclusive sponsor of all the content written for the site, demanded that its medical products be pushed above those of all others. The dot-com's staff agreed to do a program for the All Health News All The Time channel, which took a huge amount of time and money because the company had never done TV before, and nobody saw the show anyway because the network had carriage in a limited number of homes.
Thirty days after the company came public Nan Cramer issued a glowing report in which she revealed that the company would have $50 million in sales in year one, 1999, jumping to $100 million in year two as the online health care business and exchanges really took off. Because of the huge promotional events and the initial-public-offering-as-branding, the company had no problems making the numbers a few days later (it had come public in the middle of its first quarter) and, like clockwork, Cramer raised the revenue forecasts to $60 million and $120 million.
The stock, however, was in free fall. The dot-com selloff had started and $$$$.com was being pulled down with it. By the second month of being public, $$$$ was back to its offering price, not having had a single up day since its IPO.
Three months after its public offering the CFO, who had been handpicked from Lucent, resigned, citing personal reasons. The stock got cut in half.
Four months later, the company reported its second quarter. It equaled the numbers Cramer was using, but guided numbers lower, citing higher expenses and less page views, coupled with a shortfall related to advertising. Pill Co. had pulled out because $$$$ had received numerous complaints from readers about its content being biased and it had started sending people to the cheapest medical equipment, which wasn't Pill Co.'s. The On-Line America traffic was anemic and the company got only 200 page views a day from Likus.
The stock got cut in half again. Cramer reiterated her buy. The stock traded at slightly more than the cash on hand.
Meanwhile, $$$$'s site went down repeatedly because it used a mixture of ArtG and Vignette that weren't working with each other and its homegrown commerce system wasn't able to take credit cards for four straight weeks. The customer experience, without those free trips to Vegas, was awful. The company was burning $5 million a month, and still had $35 million in the bank, but the prospect of a secondary looked grim now that the stock was trading below $5.
In month five, the fellow from FedEx moved back to Memphis. He was homesick and his options were way underwater. The warehouse system and logistics software was all set up by him before he left. Of course, though, no one else was quite sure how to run it. The company skipped its payment to MarchorDie and the exchange part of the site couldn't get off the ground.
In month six, with the show taking up all the CEO's time and all the top writer's energy, $$$$ moved to kill it. The company was promptly sued by All Health News All The Time and the press turned nasty. It was settled out of court but this distracted the company and made it look bad even though it was simply trying to break even at something!
In month seven, the CEO was ousted and a fellow from Incinerator Group, the Philadelphia venture capitalist, was named to run the company. He knew nothing about the business but had once worked at Goldman Sachs and had gone to a real good business school.
The new CEO quickly moved to undo the Remarc Newspapers contract, but that was etched in stone and Remarc said it would sue if $$$$ tried to subcontract out the ridiculous amount of newspaper advertising it had agreed to in return for the investment. The hedge funds, now free to register their stock, blew it to kingdom come the day the lockup expired, trading a block at $3. All options were underwater and there was only $25 million in the bank. All of the other investors, who thought they would get on the secondary, now started registering their shares and dribbled them out mercilessly, putting a lid on the market.
In month eight page views declined precipitously and online advertisers that had been guaranteed a certain number of page views either threatened to sue or not make goods that used up all of the available advertising space. The new CEO tried to renegotiate the On-Line America contract, but OLA told him to take a hike because the company had met its performance targets.
In month nine the stock traded at $1 when the company announced an intraquarter shortfall of huge proportions, a miss of $10 million in sales and ratcheted down sales expectations for year two to $30 million. It also announced severe marketing cutbacks and laid off 20% of its staff to save cash. Nan Cramer downgraded $$$$ to hold, and David Faber made fun of the call on CNBC. Three other analysts downgraded it, so the penguins got trotted out.
In month 10, the Nasdaq delisted the company.
Of course, that's a compressed cycle, but it is happening to every dot-com with the exception of those with a revenue stream away from advertising. If a dot-com is strictly advertising supported then it can't be supported. It is simply uneconomic. The average dot-com is spending about $2 for every $1 of revenue it brings in. Without a public equity market to replenish it, that's a killer ratio that will wipe out almost everyone.
But it doesn't matter. Most of these companies were wiped out from the beginning because they had no business model, no sales, no reason for being other than that Amazon had a big market capitalization and, most important, a pathetic set of entangling alliances with New and Old World companies that were set up strictly to generate an IPO pop that turned out to be worthless anyway. These alliances and contracts, all of them uneconomic for everybody, choked the young companies to death even though they seemed to have a lot of capital. I think they played more of a starring role and less of a supporting role than any of the dot-com obituaries let on. Those were the secret killers.
There's only one good thing about this whole winnowing process. Whoever is left definitely has a business. But my question is, if that's so obvious to the insiders, they'd be nuts not to take their company private and start all over again. Otherwise, there was nothing there at all.
Oh, and let's not forget the fitting conclusion: At the start of the New Year, UrAnus.com and Forest-Through-The-Trees issued reports saying that $$$$ substantially overestimated the size of the online health care markets, and that it was really just a $30 million market opportunity. Both consultants blamed managements at the now defunct $$$$ for ratcheting up expectations far higher than they should have been. |
