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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That fate is what countless Amazon wannabes now find themselves facing. "A lot of companies looked at Amazon and saw the market forgive its losses," says Lise Buyer, who tracks Internet companies for Credit Suisse First Boston. "The difference is that Amazon has transformed its traffic into revenue while some of the others have not been as successful."

Nor have many companies that rushed online found that being first conferred a sustainable advantage. Last month auditors for CDNow, the pioneering online music shop, reported "substantial doubt" that it could continue after the collapse of its deal to merge with the Columbia House record club, itself a joint venture of Sony and Time Warner. Although CDNow had a head start, it was quickly challenged by rivals, from to websites that let users download virtually any song.

One company that seemed to have it all was which last July became the first online pharmacy to go public. Along with high-profile backers that included and venture capitalist John Doerr of Silicon Valley, the start-up boasted partnerships that enabled customers to pick up orders at Rite Aid pharmacies and buy GNC nutritional products online. even lured its CEO, Peter Neupert, from Microsoft, where he had been running the MSNBC cable channel and website. Small wonder that commenced trading at $65 a share. But the stock closed at $10.88 last week, with Neupert having lost some $75 million on paper.

What happened? "We've been moving as fast as we possibly can at every stage to be ahead of our competition," Neupert explains. "We are spending a lot of money, so our losses are large." The outlays included $30 million in equipment to set up the company's own distribution center in Bridgeport, N.J., and a $105 million deal to become the sole health-and-beauty retailer on for the next three years. And to help replenish its coffers, last month raised $108 million in private-equity funds. Says Neupert: "I've tried to alert people from the very beginning that this is about building a long-term business and not about a quick hit."

At software vendor CEO Neely has taken the opposite tack and shifted the company from consumer retailing to business-to-business selling. The move to B2B involved more than $11 million in special charges to cover the layoff of a fifth of the company's workers plus the removal of buttons from such sites as America Online and Yahoo. Neely hopes the resulting savings will help his company turn a profit by the end of 2002.

That could make it one of the few survivors of a massive shakeout whose onset drew closer with the events of last week. "This is the start of a serious consolidation," says Joe Sawyer, an analyst at Forrester Research, who predicts that a handful of companies will dominate each major e-tail sector. The likely winners, he says, are the very same brick-and-mortar retailers, such as Wal-Mart and K Mart, that the Internet was supposed to make obsolete. But instead of this happening, such behemoths are rapidly bringing their deep pockets, brand recognition and nationwide customer bases online.

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