On this point the trackers agree. Dot-com layoffs and failures plateaued in recent months, and most major start-ups are still standing. Depending on who is counting, as many as 10,000 start-ups attracted major funding worldwide in the late 1990s, and somewhere between 243 (Flop Tracker’s latest count) and 555 (webmergers.com) of those have gone out of business. Most of the rest are not only still out there, they’re still online.
What are all those survivors doing in dot-com land? Hard to say, exactly, but it’s clear that many, if not most, are up to new dot-com tricks, stringing out what’s left of their funding or reinventing themselves in order to forestall a still inevitable demise. Many are morphing, with new names, new business plans, even new management every few months. A few are shedding identities until they actually solve the great riddle: how to make money on the Net. To survive, they are dumping the radical early ideal of the Internet as a new medium, open, egalitarian and free–but at least they are still alive. This is not creative destruction at all. As webmergers.com puts it in a new report called “Startup.com (The Sequel),” it is “creative reconstruction,” and we are entering a period of business repositioning “that is historic in its scale and speed.”
Many survivors are dropping the dot-com label, and trying to disassociate themselves from the giddy era. Internet.com, which had one of the most sought after domain names in the world, recently changed its moniker to INT Media Group and bought a conference company. First Tuesday, a drinks club that morphed into an online networking business and launched European tech poster girl Julie Meyer, is also entering the conference business. Tom.com, Asia’s highest-profile start-up, has bought a magazine, a sports marketing firm and two outdoor advertising companies. Britannica.com has decided to stop calling itself a “knowledge portal,” and the old media end of the company is printing a new version of its encyclopedia, the first since the Internet gold rush of 1998.
Though they may not want the dot-com label, surprisingly few have lost their fundamental faith in the Internet. The value of mergers and buyouts of Internet companies has plunged, but the number of deals is holding steady, mainly because of interest from other Internet companies. According to webmergers.com, 80 percent of the money spent on Internet acquisitions last year was spent by dot-coms. But with most Internet companies morphing rapidly, most marriages are fundamentally unstable. Witness the recent merger of Europe’s top two homegrown Internet auction sites, qxl.com and ricardo.de. Both have been trying out one business model after another: first buying and auctioning goods, then becoming an online shopping mall. Now, both are starting to act as auction sites for the general public. The problem: they’ll end up with the same model as eBay, the U.S. giant now in a position to dominate Europe. Thus QXL and ricardo may have figured it all out only in time to be swallowed.
The age-old personality clash between glib pitchmen and geeky engineers is now a matter of corporate life and death. The tale of two glamorous European start-ups shows why. Boo.com sold sportswear. Lastminute.com sold travel. Both attracted tremendous media hype, and had company founders with great looks but relatively little business experience. They were both well funded, too: boo.com reportedly had around $125 million, and lastminute.com raised about $200 million. How they dispersed those funds was a different matter. Boo spent lavishly on advertising in glossy magazines, in-office champagne parties and first-class air fare, and ended up with a great-looking site that simply didn’t work. Meanwhile, Lastminute.com bought cheap advertising on London cabs and the tube, acquired the No. 1 online travel site in France and carefully developed a technologically nifty back office that taps directly into airline reservations systems. “We’ve changed our technology completely since the IPO,” says cofounder Brent Hoberman. “The site is 10 times faster, and the underlying architecture is much stronger.” Bottom line: boo.com died, lastminute.com didn’t.
But technology is not enough. In many cases, innovative Web-site software is outliving the dot-coms built on it. Value America wanted to be the WalMart of the Net, with a site that sold everything from skin cream to satellite dishes. In the end, it simply couldn’t cope with that many suppliers. But its technology, which had been built to handle billions of transactions, could. Value America’s assets–mainly technology infrastructure–were sold to the offline distributor Merisel for a reported $2.4 million.
The next step is an even more radical reinvention. Some dot-coms are going into the complex business of developing their own software. Some businesses–financial services, auctions, travel–now seem made to sell on the Internet. It’s a route fraught with peril, but some appear to be managing. Asiatravelmart.com, based in Malaysia, now offers customized software for the travel industry as well as trips for consumers. In London, eZoka began life brokering online office equipment and technology. As hard times hit, the company changed its business model, offering customized management of supply chains. This switch helped eZoka raise an additional $3 million in venture money. The new business model, says cofounder Jeff Orenstein, “is about creating real efficiencies for companies, rather than just conducting a transaction online.”
By now, pretty much everyone realizes that if you sell it online, customers won’t necessarily buy it. E-commerce ventures represent by far the largest proportion of known dot-com flops, according to webmergers.com. But there are also clear patterns among the survivors. Some businesses seem born to sell online. In Europe, discount airlines like easyJet and Ryanair are doing as much as two thirds of their business on the Net, and the reasons are pretty simple. Customers don’t care whether they can touch, see or smell an airline ticket. For other types of e-commerce, like groceries or clothes, having a retail store is a major advantage.
There is also a new race to land upscale customers, as dot-coms abandon the democratic vision of the Net as an egalitarian free-for-all. No one just counts “eyeballs” anymore without checking to see whose eyes they are. Germany’s No. 1 comparison-shopping site, guenstiger.de, has 30,000 daily users, but revenues didn’t really take off until it began tracking what people buy and how much they pay for it. Now, Guenstiger sells that information to retailers, wholesalers and manufacturers. Those offline companies then use it to help fine-tune inventories.
Everywhere, dot-coms are desperately climbing the corporate ladder of the Old Economy. They tend to shun each other as customers, battling instead to do business with Fortune 1000 companies and corporate elites. According to webmergers.com, the most popular survival strategy, favored by 40 percent of dot-coms, is going upmarket, targeting richer companies or consumers. Dooyoo.de, the German portal, makes the majority of its money selling consumer data to companies like Ford and BMW. The hot New York dot-com ScreamingMedia sells 70 percent of its syndicated content to big businesses. “For a lot of Internet companies, getting blue chips as customers is the only way to build the track record they need,” says JPMorgan HQ Internet analyst Van Wishard. “Otherwise, they are DOA.”
They may be anyway. It is a struggle to squeeze money out of consumers who were thrilled to surf the Net for free, and are angry to get a bill. But it can work. The Italian music site Vitaminic eschewed the Napster free-music model, entering instead into profit-sharing agreements with the five big music companies and charging customers a subscription fee. Vitaminic has recently enjoyed a 150 percent spike in its stock. It’s been tougher for britannica.com, which has tried three ways to make money on its online encyclopedia: first subscribers, then advertisers and (now that advertising has dried up) subscribers again. Britannica hopes to make money by selling “premium” services, but this general strategy has been tried by many others, mostly without success.
The true history of the dot-com era will show that the crash is peaking only now. Most fall unheard and unreported, but look closely and you will see their operatic death throes. In Britain, letsbuyit.com is on its last legs for a second time. Well known from its prime-time TV ads, this group buying site (on which prices drop as more people bid for a product) expanded into 14 countries within 12 months before running out of money last December. After severe cutbacks, it raised new money as recently as April. But management issues and technological glitches continued to plague the company. New links with a German department store don’t seem to have helped. In June a lead investor pulled out, and at least some former insiders wouldn’t mourn the company. “I just remember all these endless meetings, with catered Pret A Manger sandwiches, in which dozens of marketing people talked about nothing,” says one.
There is still some hope in the gloomy dot-com landscape. Not only are the majority of major Internet companies still standing, but their struggles are starting to point out the few clear paths to profitability. Webmerger.com president Tim Miller predicts that the new cadres of battle-scarred consultants, infrastructure engineers, even the much maligned marketers, “will all uncover opportunities within evolving companies.” Now that the shock of last year’s market crash has warn off, the dot-comers are at least ready to get back to work. “2001 has been a kind of gap year,” says Alex Drubik, business manager for the Internet research firm Gartner Europe. “We’re still in the trough of disillusionment, but those who’ve survived have caught their breath, and are really starting to reassess their businesses.”
Some brave souls are even starting to comb through the dot-com graveyards for new opportunity. Steve Shah of DotComDoom is already cashing in on it. He and several friends in the tech business started the site just for fun. At first, it was mainly a way to ease the pain of the market crash with black humor, like an online version of “Survivor” where users can vote off dot-coms. Now, however, when they post stories about new companies that have bitten the dust, venture capitalists call to find out how they can buy up the companies’ assets. “In a few months, we’re going to start charging a transaction fee for this,” says Shah. And so another dot-com dream is born.
