Doom Stalks The Dotcoms

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

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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--ta-da!--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."

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