As technology share prices start to fall and the first Internet
casualties begin to emerge, is the future so bright for
e-commerce?
Things can change a great deal in the space of a few weeks. Just
three months ago everything was rosy in the dotcom garden. Internet
companies were the media darlings, every other advert on the
television was for a new website or technology company, and the new
economy had venture capital funding coming out of its ears. It
didn't matter that very few of these new companies were breaking
even, the old rules of business just didn't seem to apply anymore.
"Get yourself established with a strong brand name first and worry
about profits later" seemed to be the new mantra.
This situation, however, changed almost overnight. In March,
technology stocks started to drop rapidly as many investors
realised that not only were many of the new markets overcrowded,
but it would be a long time, if ever, before they started to see a
return for their outlay. Listings such as the Nasdaq started to
tumble, taking established and profitable technology companies down
as well as the newer dotcoms. Venture capital funding started to
dry up, and many of the proposed IPOs by Internet companies were
put on hold until market conditions improved. May saw the
inevitable result of investor reluctance to continue funding these
somewhat risky ventures, as many high profile websites closed their
doors, most notably fashion retailer boo.com.What we are seeing
now, many believe, is a shakedown in the market. Too many companies
have sprung up overnight and received massive backing without a
concrete business plan or a time-scale to break even. Consolidation
in certain sectors needs to happen before the market can reach its
full potential. But what has happened for the market to suddenly
turn sour, and why have some Internet companies failed while others
survive? More importantly, when will things start to turn around
again?Almost since e-commerce was initially established as a
concept, the Internet market has been riding on a wave of optimism
and excitement. Many believed, as many still do, that soon enough
the Web would be the only way to do business. Consumers were
expected to flood onto the Internet to purchase the goods they
would normally buy in shops, encouraged by the potentially large
cost savings this could provide. Similarly, business-to-business
e-commerce was expected to flourish due to the enormous reduction
in administration costs that could be achieved.Market investors
were gripped by this fever and rushed headfirst into the market in
order to get a piece of the action before it really exploded. Of
course, this kind of action en masse caused the impending explosion
in Internet stock value. While those companies that had floated
were achieving incredibly high market values - sometimes much
higher than comparable bricks-and-mortar companies turning in large
profits - Internet start-ups were attracting huge interest from
venture capital firms across the globe. Millions upon millions were
pumped into these infant firms to help them gain a foothold in an
increasingly competitive market. This money was spent at an
extortionate rate, causing the companies to look for additional
rounds of funding or perhaps an IPO if the time was right. All of
this time, there were only a handful of dotcom companies that
looked capable of making a profit in foreseeable future.Almost
every company that came under the bracket "dotcom" was caught up in
this unprecedented move to invest. Investors' desperation not to be
left out of the new markets, with a little help from those who knew
there was a quick buck to be made from the dotcom phenomenon, drove
share prices sky high. This, in turn, drove the stocks of
established technology companies up too. Such was the desire to be
involved in this market, it seemed to matter little what kind of
company was involved, as long as it was Internet technology.The
"hysteria" that drove all tech stocks up almost unilaterally was
reflected by the following crash, which hit almost every technology
company listed and many that were planning to list. But while
almost all were affected, the cause of the unbelievable highs and
depressing lows can be traced back almost entirely to one
particular segment, business-to-consumer e-commerce.While the
business-to-business sector is awash with potential customers keen
on making savings and more willing to adapt to new technology to
carry it out, the consumer sector is very different. Those entering
the business-to-business area are often moving into a space between
partners, enabling them to trade electronically. While many of
these new companies will be in competition with each other, there
is very little established competition already there. Online
retailers, however, not only have to compete with a large number of
new companies entering this market, but are also in direct
competition with the vast ranks of established bricks-and-mortar
firms. Many of these traditional companies, having seen the promise
of the Internet themselves, are now carrying out their own web
operations, leveraging their incredibly strong brand names to
attract custom.Further problems arose due to fact that consumers
are also far more reluctant to use the Internet to do their
purchasing due to fears regarding security and a wider ignorance on
how to use the Web for shopping. Despite some significant cost
savings at some sites, the benefits from shopping online were also
perceived as marginal compared to just going to a store.Building up
a large and loyal customer base was always going to take a long
time, but the costs involved in running such a business meant that
online retailers were losing money, hand over fist, every day.
Nevertheless, investors had been more than willing to pour money
into these ventures, until recently. Finally, it clicked with
investors than many of the dotcoms were never going to make the
money originally expected of them, and that serious consolidation
would have to take place before the market could get back on
track.Perhaps one of the best examples of the Internet boom and
bust was Lastminute.com, which went public around the time that
prices collapsed. Lastminute, which acts as a booking agent for
holidays and other leisure activities, received huge publicity
through co-founders Brent Hoberman and Martha Lane Fox. Demand for
shares was so high that, at one stage, the company was valued at
almost £900m and investors were severely restricted in the number
of initial shares they could purchase. The story caught the
attention of the media and with Fox and Hoberman happy to play the
parts of media darlings, the company received an inordinate amount
of attention.Fairly soon, people began to question why the company
was worth as much as it was estimated to be, a line which the media
also took.Sir Alan Sugar, chairman of Amstrad and Tottenham
Hotspur, commenting in The Mirror at the time of the float said,
"It doesn't take a brain surgeon to work out that if they book
every single flight in and out of England for all of next year, the
commission they would make would not generate profits worthy of the
rating the stock market gave them."When the company went public,
shares skyrocketed in pre-market trading, but quickly fell soon
afterwards. It is now trading well below its initial float price,
but has at least managed to stay afloat, unlike some of its dotcom
companions.Not so lucky was boo.com, the fashion sportswear site,
which was liquidated in May. Despite starting with a capital outlay
of $125m, the company folded six months after launch with $25m
worth of debts, mainly owed to advertising agencies and courier
companies. The technology behind the website, which displayed items
for sale in 3D, was sold to UK firm Bright Station for just
£250,000. US Fashion portal, Fashionmail.com, bought the boo.com
brand name in an attempt to enter the UK market. One criticism
levied at the company was that its founders, who, like Lastminute,
attracted a high profile, were not good businessmen yet both ran
the company. Many analysts are advising dotcoms to get experienced
chief executives in as soon as possible so that the business
receives a proper structure that is capable of being sustained.The
Disney-owned Toysmart.com and upmarket shopping site Foofoo.com
have also fallen victim to the markets new pessimism in recent
weeks and shut up shop. Unfortunately, it is not just those
companies that are perceived as badly run or unable to break even
that are folding. Violet.com, a web boutique for unusual items in
the US, was seen as having a promising future. Unfortunately, the
downturn in the dotcom market happened just as the firm was looking
for a new round of funding. Investors stepped back and allowed the
company to fold.Cash flow looks like being a big problem for
Internet firms in the next few months. Companies such as CDNow and
Peapod are predicted to be the next to fall due to lack of cash and
unwillingness from investors to stump up what is needed. Several
firms, such as Petstore.com, have seen the signs and are cutting
staff in a desperate bid to reduce costs. Others, such as
Letsbuyit.com, are delaying their IPO until market conditions
improve, with investors unwilling to buy into new tech companies
currently. Unfortunately, some analysts predict that the market
conditions may not change until well into the New Year, which will
surely see the collapse of many more dotcoms.The next few months
will sort the wheat from the chaff. Those that had a tenuous idea
for a site and a shaky business plan are likely to disappear, while
the more established companies, such as Amazon.com and those that
are properly structured, should survive and go on to
prosper.
Paul Grant