Caution in Cyber Space- Guest Lecturer
June 22, 2000
"Internet Work Force Has Its First Brush With Downsizing"
By MATT RICHTEL
AN FRANCISCO, June
21 -- Laura Schmidt took
an Internet job 10 months ago
packed with promise: a big raise,
stocks she figured could some
day be worth $5 million and the
chance at early retirement.
Unfortunately, her leisure time
came way too soon.
Three weeks ago, Ms. Schmidt
received a pink slip from
ThirdAge Media, a Web site for
baby boomers, laid off in the
Internet industry's first significant
shakeout. As quickly and
aggressively as they filled their
cubicles last year, dozens of
dot-coms across the country are
unloading employees in an effort
to meet a seemingly obvious goal heretofore put on indefinite hold: make
a profit.
The layoffs signal an end to the unbounded optimism of some dot-com
employees who flocked to start-ups in hopes of developing sudden
wealth, but who now say they are approaching new job offers with more
caution. And the very stock market that once held the keys to new
wealth may now be equally responsible not just for lowered expectations,
but for lost jobs.
Indeed, analysts say the reversal of fortune for many companies, and
their employees, can be traced in part to the stock market turmoil on
April 14. When the Nasdaq plunged that day, investors signaled they no
longer would finance dot-coms that sought to grow at all costs, ignoring,
at least temporarily, the concept that successful businesses take in more
than they spend.
While lots of Internet businesses with sound strategies and healthy
finances are continuing to thrive, the challenge these days for a number of
e-commerce companies is simply to keep from going broke.
"Call it old fashioned, but at some point, these companies had to start
making money," said Douglas Henton, president of Collaborative
Economics, an economic advisory group in Palo Alto, Calif., who called
the phenomenon a healthy shakeout in which some companies fail and
others refine themselves. "At some point, they run out of money and they
have to start laying off."
Companies that have had to lay off workers include lesser-known and
big-name Web sites, like the health care site drkoop.com Inc. (50
employees laid off, or 35 percent), carOrder.com Inc. (100 layoffs, or
33 percent), an insurance site called InsWeb (100 planned, or 40
percent), the home-furnishing site living.com (50, or 13 percent), the
search engine Alta Vista (50, about 6 percent) and more than two
dozens other sites for a total of more than 2,000 employees.
And that does not include a growing number of dot-coms that have been
subsumed in mergers or simply gone broke, including DEN.com, an
entertainment site in Los Angeles that employed 200; APBnews.com, a
New York-based crime news site with 140 workers; and toysmart.com,
a Disney-backed toy retailer in Waltham, Mass., with 170 employees
that shut down in May.
Earlier this year, even Amazon.com made layoffs, but the 150 people
involved represented just 2 percent of its work force and that move
preceded the market downturn that seems to be driving the latest layoff
trend.
Executives at many of the companies still in business say that layoffs do
not suggest they are desperately low on cash, but that they must plan for
a future in which new infusions of capital are not as easily obtained as
they have been in the two previous years. They say they are rewriting
business models that had been predicated on obtaining quick public
offerings, meaning that some are being forced to cut costs by terminating
employees, who are the chief expense of many Internet enterprises.
"It was really hard," said T. Paul Thomas, president and chief executive
of TurboLinux, a Linux operating system vendor in San Francisco, which
cut roughly 50 of 300 employees last month.
"The people we had to let go had been here an average of two or three
months. But investors, public and private, are saying you can't just spend
and spend. You have to get to profitability."
The good news, economists say, is that the human toll appears limited to
individual dot-coms, that the number of employees laid off represents a
small fraction of the hundreds of thousands of people of the Internet
work force, and that nearly all of those who lost their jobs have skills that
should help them easily obtain jobs with other technology companies.
"There aren't any signals the economy is in trouble," said Stephen Levy,
director of the Center for Continuing Study of the California Economy.
"The industry is doing well by any economic measure. This is a company
phenomenon, not an industry-wide or economy-wide phenomenon."
Indeed, most dot-com employees seem surprisingly sanguine.
"This is an auspicious time," said Ms. Schmidt, 33, who spent 10 months
as director of brand design for Third-Age Media, which cut 35 of its 140
jobs. "I live in San Francisco. I'm just glad it happened now rather than in
two months when a lot more people will be looking for jobs."
She said she saw the layoff as an
opportunity for an extended vacation
before she starts her next job. But
she also said she was looking at
prospective employers with new
scrutiny to make sure their business
plan seemed viable.
"I would imagine that if I want a job by the end of next week, I'd have
one," she said. But, she added, "I'm doing a lot more research than I did
before."
Many others who have been laid off say that no sooner did they receive
the news than they began interviewing again, sifting through offers, taking
new jobs.
But not all of those receiving a pink slip are feeling rosy about the
experience. One 26-year-old woman hired in February by an
entertainment dot-com said she felt the company had misled her by
suggesting she could "be retired by age 30." Instead, she was out of a job
three months later, having lost all her stock options because she was not
yet vested.
In retrospect, she said the company had used her, then quickly dismissed
her when it came to its financial senses, and she said she was concerned
that other entrepreneurs would make similar mistakes.
"People are very hopeful -- investors, employees -- and married with
greed, you've got a perfect formula for a lot of shady companies," she
said, requesting anonymity because she said she had signed an agreement
not to discuss the circumstances of her departure from the company.
The woman said she was being very cautious when considering new
offers, hoping to avoid a repeat of the situation. And that is a theme
echoed not just by others who have been laid off, but also by recruiters
who are placing dot-com employees in new jobs.
Jodi M. Milam, who owns Career Wave, a human resources consulting
company in Chandler, Ariz., that focuses on placing Internet employees
around the country, said the layoff phenomenon had become "epidemic"
because so many companies were started without sound business plans.
Ms. Milam said the companies
recruited employees with the
promise that the companies
would soon attract a next round
of private financing, or even go
public. But, Ms. Milam said, the
entrepreneurs either were na‹ve
about their own prospects, or
misleading the hires. They also
seemed, she said, to lay off
employees -- even those who
pulled up stakes or were lured
from other good jobs -- with
little compunction.
"Business ethics have gone
down the toilet," she said,
adding that she wakes up with a
stomachache every day because
"I'm afraid of sending people to
companies" that will go under.
But the companies say the
layoffs represent a bona fide
realization that they must be
mindful of the bottom line and of
what it takes to succeed in a
harsher business climate. A
number of the companies said
the layoffs signaled an effort to
shift directions, typically away from Internet businesses that focus on
selling to consumers and into ventures that sell to other businesses.
An example is Alta Vista, a search engine company in Palo Alto, Calif.,
that in early May reduced its staff by 50 people, or about 6 percent.
Though the site processes a remarkable 50 million search queries a day,
the company decided that its long-term survivability rested not just on
being a destination site but also in licensing its technology to businesses.
"We have done a slight shift in strategic positioning following the market
turmoil," said David Emanuel, a company spokesman.
In other cases, businesses are shedding ambitious plans and renewing the
narrow focus with which they began operations. InsWeb, in Redwood
City, Calif., in announcing plans to lay off 40 percent of its 240 workers
in the next six months, said it would return to its roots, becoming a
marketplace for consumers seeking insurance, and scrap a number of
other projects, according to Greg Jones, company spokesman.
The new focus means the end of the line at InsWeb for Steve Foster, 43,
who quit a job in Los Angeles and moved north to take a job in
November as InsWeb's vice president for marketing research. At the
time, he said, it was "literally the zenith of dot-com times" and he
negotiated a healthy raise and 19,000 shares of stock.
In the short term, it looked as if his gamble would pay off in a big way.
The company's stock, $14 when he was recruited, jumped to $36 in
January, giving him a gain in personal value "worth a quarter of a million
right off the bat."
But Mr. Foster was laid off with 30 colleagues two weeks ago. The
company's stock, meanwhile, has fallen to $3, making his options
worthless.
Still, he says he bears no ill will toward the company, which he said had
treated employees well and had never misled anyone about the
prospects. And as to his lost fortune -- the few brief shining moments
when his stock options ballooned in value -- he seems philosophical
about that, too.
"I've been thinking I'll keep a single share and frame it," he said. "Just to
keep the memory alive."
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