Lessons From 2007 E-Commerce Debacles

About 50 percent of all new businesses survive for at least five years, according to estimates by the Small Business Administration. On the flip side, that means that half of all new ventures fail in that time frame. While the e-commerce market has been growing at a rapid clip, a number of companies have not been able to take advantage of this trend and found themselves in precarious positions for a variety of reasons this year.

The ripple effect from problems in the home mortgage market — which saw more than 200 companies go out business in 2007, according to the Mortgage Lender Implode-o-Meter — has impacted several online suppliers.

Meanwhile, a few firms jumped into the arms of willing buyers; changing regulations about offshore betting caused problems for companies in that market; and other firms misunderstood market directions and invested in areas that delivered little to no returns.

Notable Missteps

In November, E*Trade felt the impact of the mortgage industry meltdown. The online brokerage lost more than half its market value after it forecast a decline in fourth-quarter earnings — and some analysts even predicted that the company would eventually go bankrupt. The problems arose when chief executive Mitchell Caplan’s strategy of building E*Trade’s bank by tripling loans outstanding backfired as borrowers fell behind on their payments and U.S. home prices declined.

To shore up its position, the financial services company announced a cash infusion of US$2.5 billion, led by affiliates of Citadel Investment Group. The firm designed the investment to fortify E*Trade’s balance sheet, allow the company to focus on its core retail business and provide additional capital to manage credit risks.

E*Trade also shook up its management team, with R. Jarrett Lilien succeeding Mitchell Caplan as chief executive officer. Lilien has served as director, president and chief operating officer for the e-commerce supplier. The company is conducting an executive search for the CEO position, and will considering Lilien and external candidates.

Pay By Touch, which supplies biometric authentication systems to retailers, is another company that made a misstep in 2007. “The company thought that businesses could use its products for business-to-business exchanges, but there was not as much interest in that capability as they expected,” Russ Jones, an analyst with Glenbrook Partners, told the E-Commerce Times.

Holding Friends Close and Enemies Closer

Meanwhile, as the e-commerce market has been expanding, size has become a more important factor in a company’s success or failure. Consequently, a number of companies that at the beginning of the year were competing became teammates by the end of the year.

GSI Commerce built its business by buying distressed online retailers such as Fogdog.com and Ashford.com and running the operations more efficiently than the retailers could themselves. The company did so well that it ended up acquiring Accretive Commerce for $97.5 million in cash. “The acquisition was a good move for GSI, which found a way to get rid of one of its big competitors,” Gene Alvarez, research vice president at Gartner, told the E-Commerce Times.

ChannelAdvisor also acquired a competing e-commerce services company — Marketworks. Although both ChannelAdvisor and Marketworks offer similar e-commerce channel/marketplace products and services, they serve different customers. ChannelAdvisor mainly services larger merchants while Marketworks specializes in selling products and services for small to medium-sized merchants.

Regulating Gambling Sites

Online gambling was an e-commerce area that took a major hit in 2007, and Neteller was in the news quite a bit. Stephen Lawrence, a director of the UK-based online payments firm, entered a guilty plea to a charge of conspiracy in connection with his role in the company’s handling of financial transactions among gambling customers in the U.S. and offshore Internet gambling businesses. Another director of the company, John Lefebvre, admitted to allegations of misappropriating funds that required him to forfeit more than $100 million.

In addition, the U.S. government stepped up its efforts to regulate these sites. Internet gambling is essentially illegal in the U.S. under decades-old laws, and President Bush signed a bill in late 2006 that made it a crime for banks and credit card companies to make payments to online gambling sites. In this effort, the government wanted to curtail Internet gambling, which critics say is rife for abuse and can be easily accessed by minors who would not be able to place bets in other settings.

Under the new law, major gambling companies faced significant problems since a significant portion of their revenue — estimates are up to 60 percent — and profits came from U.S. gamblers. Armed with the new rules, prosecutors set their sights on several Internet gambling sites. During the year, former BetOnSports CEO David Carruthers was arrested and later, Sportingbet Chairman Peter Dicks was detained when he flew to New York. Meanwhile, PartyPoker.com and 888 Casino-on-Net — a few of the largest and most successful online gambling sites in the world — withdrew from the U.S. market, and Sportingbet and Leisure and Gambling sold their U.S. operations for $1 in moves that were seen limiting their exposure to legal risk.

Missing the Boat

The social networking phenomenon was another area where e-commerce vendors missed the boat. “Social networks help companies build awareness about their brands, but vendors have not been able to leverage them to generate more e-commerce sales,” said Rachel Happe, research manager at IDC.

E-commerce vendors spent a lot of money advertising on social networking sites, but these investments did not generate much of a return.

“It does not make a lot of sense to promote your products to a MyFace Web site focused on a person’s dog. After all, the dog is not going to buy any products,” Gartner’s Alvarez told the E-Commerce Times.