STATS Spotlight

No Free Dot-Com Lunch

by Howard Fienberg
December 15, 2000

Until recently, investors were imbibing dot-coms like light beer. Having reached what alcoholics call a ‘moment of clarity,’ investors are now checking into rehab and swearing off the Internet. But high technology is not a passing fad. Intelligent investing rather than ‘abstinence’ may be the key to long-term fiscal success.

True, things look bleak right now. and, two publicly traded dot-coms, recently shut down. A new study from Webmergers, Inc. found at least 135 e-commerce sites have done the same. Shares in the once popular stock Yahoo! Inc. fell from $140 in January to just over $30 on December 11. The Economist recently reported that almost 60 of the biggest publicly traded dot-coms have fallen as much as 90 percent from their peak price with hundreds more falling by as much as half.

The previously high valuations of e-businesses were predicated on the belief in the Internet as a realm of boundless profitability. Ad dollars and creative marketing might compensate for money-losing products and services, but it takes a mixture of planning and luck to bring success. In this stage of market consolidation, dot-coms without the former are running out of the latter.

Consider the “freebie-dot-coms.” Some were obviously based on popular ideas, like free email, free faxing, free ISPs, etc, but mostly just on the theory of a free lunch. Profitability was tied to advertising revenues which failed to materialize. Since most Internet statistics on “hits” and “visits” are dubious at best, it is impossible to accurately measure how many people view a given site. Because of this, advertisers have usually insisted on payment based on ‘click-throughs’ – the number of people actually clicking on a site’s ads. Unfortunately, consumers failed to cooperate, by mostly looking but rarely clicking. Or, on web sites all but wallpapered in ads, consumers could not even see them. Funnily enough, many magazines about Internet business, like Wired and Red Herring, also belong to the wallpaper school of ad placement. Their long-term viability may also be in doubt, as business people could soon tire of carrying periodicals the size of the Oxford English Dictionary.

Some of the “something for nothing” sites that have not simply disappeared have been bought out. For instance,, the e-commerce site of Kmart, just bought Spinway, a free ISP provider. Creative connections, like offering a free ISP which steers users to your company’s web sites, may yet win the day.

Sites that do not charge fees can still survive on their own, as long as they can sell something; if not ads, how about marketing information? In a world wide web with billions of sites, in-depth marketing data is invaluable. They will of course have to deal with concerns of privacy, but while consumers express these concerns regularly, they do not necessarily act on them.

In the field of e-publishing, the premature death of Stephen King’s e-serial, “The Plant,”caused a minor panic this week. The eulogies for King’s book have been rooted in the assumption that people feel no compulsion to ‘curl up with a good e-book,’ but the idea is far from dead on arrival. Technological progression, such as the experimental concept of electronic paper, could eventually bring us e-books in a more reader-friendly format.

Overall, the so-called ‘dot-com crash’ seems like the fluctuation common to all new industries. Market consolidation is a normal process and businesses with no relation to the Internet shut down on a regular basis.

So let the brick-and-mortar CEOs snigger away. Sure, e-commerce got carried away in a giddy rush of money and excitement. Once it has regrouped, it should emerge stronger and better. We always overestimate the impact of technology in the short run and underestimate it in the long run; investors are foolish to do the same.

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