Feature

Dotcoms bounce back

The dotcom bubble may have burst some time ago, but don't make the mistake of writing off all dotcom businesses. Philip Hunter draws some business model lessons from online ventures that have survived.

The "Gartner dip", described by the analyst firm a couple of years ago, claimed many dotcom victims. But some of the survivors are thriving again, proving Gartner's "second bounce" theory, albeit without the unrealistic expectations or business models of the late 1990s. Even before the Baghdad bounce, signs of recovery were visible, and by April the Dow Jones internet index had gained 75% from what now looks like its low point in October 2002, easily outperforming most other sectors.

"There is a revival in the dotcom business, especially in the e-travel space, spurred on by the success of the US players," says Brent Hoberman, chief executive officer and founder of LastMinute.com, which is benefiting from this revival.

The cost of investing heavily in the IT that now differentiates LastMinute from its rivals had brought the company close to collapse. "People thought our early business plan - involving a significant investment in technology - was stupid, but if you want to build a large dotcom business, you have to invest for the future and have some guts," he says.

In truth LastMinute was probably sustained through the dark days of the past two years by its over-inflated rating, which saw the company valued at $1bn (£622m) at the time of its flotation in spring 2001.

Such valuations, subsequently exposed as being totally unrelated to real business prospects, enabled dotcom ventures to raise money that in some cases saw them through the bad times, according to Jonathan Robinson, director of business development at web management and hosting company NetBenefit. "Even some of the perceived 'survivors' would not be around now had it not been for piles of very cheap cash raised at the height of the boom," he says.

NetBenefit survived largely for this reason. Like LastMinute, its survival has been based partly on being in a position to offer services for which there was a genuine demand. NetBenefit saw a sharp decline in one of its main markets, domain name registration, during 2001. However, the market has since stabilised and is now enjoying slow but more sustainable growth.

Online service providers are thriving in the main consumer markets of travel, books, music, financial services, and gambling. But these fields are competitive and, according to Hoberman, continued success will depend on staying at the leading edge of internet technology. So even though supply now exceeds demand in the IT jobs market, there is great competition for the best internet developers, he says.

"Technology is very hard, and needs a strong focus with the very best people. We use very advanced software tools partly because the best people want to work with the best tools," he says.

Such leading-edge tools include the Jboss open source software for web server development; the W3C Xforms standard for deploying XML forms; and Java architecture for XML binding, which maps between Java code and XML data. And in web development, security skills - although perhaps a less sexy area than Java or XML - are highly sought after and therefore prized by programmers.

Indeed IT underpins the crucial function of rapid order fulfilment. The ability to fulfil orders and requirements online with minimal delay is essential for online success, even if this involves consolidating products or services from multiple suppliers into a single transaction. "Next year's big growth area will be dynamic packaging which, from the technology point of view is the most challenging," says Hoberman.

In the case of travel, this means being able to book all aspects of a trip, including insurance, car hire, excursions, flights and accommodation, in just a single transaction, for the best price - just like an old-fashioned package holiday but assembled online in real time from multiple providers all over the world. This requires a flexible IT platform, capable of integrating new content and connecting to different web sites quickly.

Dynamic packaging of this sort is already supported by the leading online travel company Expedia. According to its online marketing manager Lawrence Merit, Expedia's launch of dynamic packaging and the ability to support customised package holidays as early as July 2002 was only possible because of earlier technology choices. "Our user interface, front- and back-end are all proprietary based on in-built technology," he says. "Dynamic packaging is a tangible example of what this technology allows and we will continue with in-house development. It is the basis of our competitive advantage."

Expedia also wants to be among the pioneers of multimedia features such as video clips of holiday destinations that require broadband, but significantly does not consider that the time is yet ripe. Merit is coy about what market penetration would constitute the critical mass - Expedia is waiting for the signal to start rolling out multimedia features. But he points out that the company is already testing the field within its current site optimised for narrowband dial-up modem access. "We can already give access to 360û tours of rooms and hotel lobbies just on 56kilobit per second narrowband services," says Merit.

Currently about 12.5% of UK internet users have some sort of broadband connection. According to Ovum, at the end of 2002 there were 10.4 million narrowband internet subscribers, and 1.3 million broadband subscribers, of which 550,000 had ADSL and 750,000 cable modems.

This penetration is generally deemed insufficient to warrant substantial investment in e-commerce sites optimised for broadband running in parallel with narrowband versions. But Ovum's broadband analyst Michael Philpott says there is mounting evidence that broadband access generates increased online sales. "Because things work better and faster, people don't get as irritated and are more likely to stay online longer." In fact there is a double hit because broadband also speeds up navigation and allows users to conduct more transactions in a given time.

A further benefit for e-commerce providers, according to Dennis Wijsmuller, managing director of web hosting company TDM, is that broadband, by being faster, encourages more people to switch from the telephone to the internet. This saves money, because the cost of selling is considerably less over the internet than telephone, which requires the assistance of a human call centre agent.

On the other hand the most successful e-commerce sites, particularly within traditional retail markets involving delivery of goods rather than services such as travel, are those that are well integrated with the other selling channels, says Gartner's online retail analyst Gill Mander.

To be able to make a phone call to check the status of an order or seek additional information makes people more likely to purchase online, Mander says. "The big trend in UK online retail is in offering integrated multi-channel support, and this is why companies like Next and Argos are having fast online sales growth."

The ability to browse through a hard copy catalogue, extract an order code and use that to place an online order is valued by consumers, as is the ability to return goods to a physical store if they are faulty. Another attractive feature, offered by the Carphone Warehouse, is the ability to place the order online and receive the delivery at home, but make the payment at the customer's leisure in a nearby store. This overcomes reluctance to submit online credit card details.

All these facilities involve integration both at the IT and business process level, Mander points out. At present it is this integration, more than provision of fancy broadband features, that will entice most customers to an e-commerce site and keep them coming back.

Five dotcom survivors   

  • LastMinute.com had enough cash to survive and strong commitment to technology bore fruit in the end. Branding also played a vital role in becoming the best-known purveyor of late deals across Europe. The main cloud on the horizon is that some of its main competitors have a strong US presence to build on whereas LastMinute.com has none 
  • NetBenefit is a UK web hosting and management company. It enthusiastically embraced the dotcom fever, expanding rapidly and acquiring domain name company NetNames in early 2000. Despite being the archetypal dotcom, NetBenefit has survived because its business is allied to actual use of the internet, which has continued to grow 
  • Amazon.com is the best known survivor of them all and owes its continued existence to the strength of its brand and size of its market share. But it has also been innovative in its use of technology, as with its e-books service, downloading book content in a form that can be read on screen only and not printed 
  • Actinic boomed during the late 1990s as a UK provider of e-commerce catalogue software and went public in May 2000, but then went into a spectacular reverse, losing £15m in 2001 leading to a shareholder revolt in 2002. Delisting from the stock exchange followed in July 2002. But against the odds a management buy-out was followed by a renaissance, and the company is now in profit 
  • SSA Global Technologies, a supplier of enterprise resource planning software, filed for Chapter 11 (bankruptcy) in the US in 2000, but some of its staff refused to lie down and the company re-emerged after a rebranding. It is in profit, turned over $275m (£170m) in 2002, and is busy acquiring other dotcom businesses while they are still cheap.


Five new dotcom ventures   

  • Talking Websites was set up by actor Marcus Hutton, ex-star of TV soap Brookside. It incorporates audio functionality into other web sites. It is too early to say whether it will prove successful, but Hutton hopes to exploit growing acceptance and enthusiasm for sound, as an extension of his voice-over work 
  • MGM Mirage Online, established late 2002, is a new dotcom in the older dotcom market of online gaming. Despite there being more than 300 other gaming web sites to chose from, the company believes it can succeed through superior technology and by avoiding the mistakes of others 
  • Schuh is a bricks-and-mortar rather than dotcom company, but its online shoe shop launched last year is growing far more quickly than any of its conventional outlets. The online store can offer a wider range of stock  and is well suited for a business exposed to fashion whims 
  • MeetingZone.com has entered a market that largely flopped during its first showing, offering virtual audio and web conferencing. It is taking advantage of improved audio and e-billing technologies and has amassed a respectable customer list including Inmarsat, Cadbury-Schweppes and Pearson 
  • Sequence, formerly Royal Alliance Property Services, is again not purely a dotcom, but unlike its rival estate agency groups has completely re-engineered its business around the internet. Customers use the web site not just for searching property lists but also for services associated with moving house, such as local authority searches and registry reports.


Five dotcom terms that have lost their appeal    

  • Asset-lite - the idea that a dotcom could defy the laws of economic gravity and base its valuation on logic as flawed as the promise of riches made in a chain letter, was blown away early in 2001 
  • B2B exchange - only a few B2B exchanges still exist, most business-to-business e-commerce is happening on a one-to-one basis or via a dominant player in a supply chain, rather than through a third party that none of the participants controls. Yet at one time B2B exchanges were spectacularly overvalued: the US B2B Steel Exchange was once worth more than the entire US steel industry that it was supposed to be connecting 
  • First-mover advantage - being the first to move proved to be a disadvantage: so much so that first-mover disadvantage has taken its place in the dotcom lexicon. Being first is usually not good when there are so many mistakes to be made 
  • Internet incubator - a company that helped dotcoms to get started, but ended up more often committing infanticide than providing incubation 
  • Portal - though they do exist, they are not much talked about now. This is partly because the term was overused, and partly because in their pure form portals never made any money.   

Guest editor comment:   Jonathan Mitchell

Following all the excesses and hype of the dotcom years, the subsequent hangover has been protracted and gloomy. This is has made people avoid exploiting the genuine opportunities afforded by new technology.

Confidence, the growth driver in most economies, appears to be a scarce commodity in this area. However, things may be changing. Seasoned campaigners such as Amazon and LastMinute.com have soldiered on and we are seeing the glimmers of profitability on the horizon.  

Consumer behaviour is also changing. Internet shopping for groceries and airline tickets is fast becoming a way of life for many people. These factors, together with the massive increase in broadband subscribers, suggest that the corner has been turned. 

The second chapter of the dotcom story may be about to begin.


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This was first published in May 2003

 

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