The Bright Side of the Dot-Com Shakeout

The bells tolling in the e-commerce distance seem to be growing louder, but whether the ringing bodes ill is a matter of perception. For some dot-coms, the sound is surely a death knell, but for others, it is the tinkling of a carol.

In all the news reports about struggling and failing e-tailers, the same message is often buried somewhere toward the bottom of the page, if not hidden between the lines. The message says that the loss of the weak members of the e-commerce community — while devastating for them — is a good thing for the industry as a whole.

Through consolidation, e-commerce is strengthening its core and building credibility. The venture capital and investment funding that once flowed so liberally to so many spindly little branches is being re-routed to feed the roots and the trunk of the e-commerce tree.

Giants Are Vulnerable Too

Many of the companies that are falling to the wayside are so small, they do not even make the news. Some have been viewed as highly speculative right from the start. But even industry giants such as Amazon are not immune to finding themselves under a cloud of doubt.

Analysts who used to speculate on when the company would turn the profit corner have lately been asking how long Amazon will be able to maintain a negative cash flow. The hard-ball questions greatly contributed to a sell-off of Amazon stock and evoked an angry rebuttal from the company’s founder, Jeff Bezos.

Bezos declined to offer any estimate as to when the company might turn a profit, but he said that the company’s largest segment — U.S. books, compact discs, DVDs and videos — is expected to show a profit for 2000. “We have a billion dollars in cash,” Bezos said. “If people think we’re in the middle of a capital crunch, they are crazy.”

Job Loss Jitters

Alarming headlines have bemoaned the loss of jobs due to the shakeout. Companies that sell goods and services over the Internet are responsible for almost 5,400 lost jobs since December 1999, according to a report from Chicago, Illinois-based employment company Challenger, Gray & Christmas, Inc.

According to the survey, 1,263 of the jobs were lost from a total of 17 dot-coms during June, 2000. The jobs lost since December come from 59 companies, one-third of which have ceased operations.

Nevertheless, the firm’s chief executive, John Challenger, cautioned against panic. “Dot-coms are merely taking the next evolutionary step where the companies that do not produce are sorted out,” he said. “It seems as if this sector may have reached this stage faster than any other in recent memory.”

Challenger’s survival of the fittest scenario is consistent with findings by industry trade group Shop.org, which projects $61 billion (US$) in e-commerce revenues this year, compared with $33.1 billion in 1999. With the U.S. economy booming and the national unemployment rate hovering around four percent, the group sees the string of job losses in e-commerce-related businesses as natural attrition.

Unlike layoffs in the 1980s and 1990s among “offline” workers, Stephen Levy of the Palo Alto, California-based Center for Continuing Study of the California Economy believes the recent cuts are a natural part of the market “sorting out which companies have the better products or services.” Added Levy, “In any major niche, if you get several companies trying to do the same thing, not all will succeed.”

Better Place on the Pyramid

Venture capitalists have fallen out of love with the dot-coms who were the first objects of their affection. Perhaps they have not yet jilted them completely — but they are definitely feeling nervous.

After all, the market capitalization of many e-commerce firms has dropped dramatically, and the number of IPOs has plummeted in the wake of that turbulence. The National Venture Capital Association says there were 75 venture-backed IPOs during the first quarter, down from 91 in the last quarter of 1999. Big names such as AltaVista are among those choosing to wait for calmer times.

An IPO is what all venture capitalists want, of course, but given the speed of the new economy, it is possible that by the time the stock market throws the IPO window wide open again, investors’ tastes will have changed. Dot-com stocks may no longer be the flavors of the month — they may not even be on the menu.

The silver lining for the e-tailers who survive the storm is that they may soon find themselves in a much better position on the investment pyramid. Rather than occupying the tip that is reserved for the most highly speculative ventures, they may be able to relax into the wider segment that is reserved for less risky operations. Such a legitimizing move down the pyramid would enable stronger dot-coms to attract many more dollars from institutional investors.