Wednesday, February 02, 2005

Dot.com gold rush ends

Dot.com gold rush ends
By BBC NewsOnline's Kevin Anderson
http://news.bbc.co.uk/1/hi/business/766098.stm

The long predicted shake out in the super-heated dot.com sector has begun, and few e-tailers will be left standing when the dust settles.
Several high-profile sites including Boo.com, DEN, online grocer Peapod and CDNow have fallen on hard times.

"This is the end of the dot.com gold rush," said David Cooperstein with IT consultancy Forrester Research. He is the author of the firm's recent report "The Demise of Dot Com Retailers."

Market research predicts that the dot.com carnage will be dramatic:
One in four UK internet companies will burn through their cash reserves in the next six months, according to a report by PricewaterhouseCoopers, and a majority of them will have run out of money in 15 months.
Of the hundreds of e-tailers now in some market segments, at most only three will be left in each niche after the shakeout, Mr Cooperstein said.
A similar shake out will occur in business-to-business sites, according to e-commerce executives. They point to the precipitous drop in B2B stock values such as the 89% plunge in the price of FreeMarkets share price.
Burn rate

Predictions of the dot.com's demise began ahead the last Christmas shopping season as hundreds of sites rushed to take advantage of the online frenzy.

Venture capital fuelled an advertising battle as sites spent millions of dollars to rise above the fray.

Conventional wisdom was that if they were first to grab a substantial market share that like net pioneers Yahoo! and Amazon.com, they would win and retain their position as market leaders.
The spending spree could only be sustained by continuing to secure venture funding. Some firms secured a second round of VC money explicitly to fuel their advertising campaigns.

But e-tailers could not sustain this "burn rate," the term analysts gave to the furious pace that firms spent money.

Ourbeginning.com paid 400% of its 1999 revenues for the ads during the Super Bowl, the championship game of American football.

But as more and more sites opened in the already crowded market, "they were unable to gain consumers attention," Mr Cooperstein said. "They all sounded alike."

Consumers could not differentiate between sites such as Petopia.com Pets.com, he said.

Growth above all else
The advertising blitz was part of the growth obsession exhibited by dot.coms, Mr Cooperstein found.

Of those companies Forrester polled, 86% of e-tailers pursued growth above all else, even profits.

"It 's too soon for profits - they 're just not important," one dot.com told Forrester.

But investors looking for returns might see that differently in the jittery stock market.

Razor thin margins, competition from big name clicks and mortar retailers and investor flight will drive most of today's dot.coms out of business by 2001, according to Forrester.

Return to rationality

This will set off a wave of sites being bought or going bankrupt.

To survive, the sites will have to stop the lavish spending on ad campaigns and plunge the money back into the business, the study says.

They will have to be focused on scaling up to meet demand, satisfying their customers and staying agile in the rapidly changing marketplace.

The shake out will not be a complete bust but rather a return to rationality, said Mr Cooperstein.

Executives who left traditional retailers for white-hot start-ups will return to former employers with hat in hand, he said.

It might even help alleviate wage pressures that the Federal Reserve fears might drive up inflation.

"This will be a stabilisation of an already booming economy," he said, adding that it will become not only a wealthier but also healthier economy.

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