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The Failure of the "New Economy"

By fossilcode in Op-Ed
Fri Jan 26, 2001 at 03:06:40 PM EST
Tags: Internet (all tags)
Internet

The years 1998 through early 2000 saw an explosion of new companies founded with little more than an idea and ready access to cash. Now many of those companies are dust. Is there a future for the dot-com economy?


In a copyrighted column in the January 25th edition of The Wall Street Journal (paid subscription required), Thomas Weber examined the struggle the remaining "dot-com" companies are facing in trying to succeed. The popular premise as company after company folded was that the consolidation would lead to big profits for the survivors. So far, with the exception of Ebay, that hasn't been the case. Weber's column profiles three companies: Bluefly, Priceline, and Webvan, comparing sales, stock price and number of customers.

As I read this article one paragraph jumped out at me, because it reflected what I have been telling people privately since the beginning of the dot-com boom.

"...they are facing off against traditional companies and established business models that have evolved over decades. And, underneath it all, they are clashing with the fundamentals of economics -- supply and demand, income and expenses."

I missed the opportunity to make big money investing in dot-com IPO's because many of the companies had one or more of the following problems:

  • I couldn't see how the company was going to make a profit.
  • I couldn't see how an "internet-only" company could compete against an established company with the IT resources to deploy its own internet presence.
  • I couldn't see what value the company's product or service provided.

In retrospect, everyone is saying now that these ventures were doomed from the beginning. These are the same people that were touting the "new economy" philosophy of market share being more important than profit. As I watched established companies adapt their businesses so they could compete in the internet arena, I was telling anyone who would listen that for many of the start-ups, the end was near. Companies exist for two reasons: to provide a needed product or service, and to make money at it. If you can't make money, it means that the product or service you're offering isn't really needed.

Instead of insuring success for the surviving "pure-play" internet companies, the technology melt-down has allowed "old economy" businesses time to realign strategy to compete more effectively. In their heyday, most of the newcomers were bragging that because they were small and nimble, they could respond quickly to a changing business climate. It's true that you can turn a speed-boat around more quickly than you can an destroyer, but once the big ship has turned, it's a force to be reckoned with. The same holds true for "old economy" companies. The demise of so many of the upstarts has made for dangerous waters for those who remain.

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The Failure of the "New Economy" | 25 comments (14 topical, 11 editorial, 0 hidden)
Climate for startups. (3.63 / 11) (#2)
by ucblockhead on Thu Jan 25, 2001 at 03:44:23 PM EST

When I left college in 1987, I immediately went to work for a hot young startup that was out to change the world. It was a depressing experience. For all the "collapse of the dotcoms", it is still, today, a much better climate for a startup today then it was fifteen years ago.

The "dangerous waters for those who remain" are only dangerous in contrast. Dotcoms are merely being forced to face the sort of reality that all businesses face when trying to start from scratch.
-----------------------
This is k5. We're all tools - duxup
Baby-bummers (3.85 / 14) (#5)
by Signal 11 on Thu Jan 25, 2001 at 03:47:07 PM EST

You know, the new economy looks suspiciously similar to the old economy. Even stranger, it still functions under the same "laws" of economics established circal 1930. Stranger still, when undereducated people pour lots of money into the system without understanding it they get unanticipated results.

Very, very strange. Why not tell the baby boomers, who will shortly be whining about their losses in the stock market, that their mistakes are not our problem. You make a risky investment and lose your cash, don't ask for handouts. That, afterall will be the conclusion in the drama that is the "burst tech bubble". Everyone here who worked in the industry - every one of them, knew those stocks were overvalued. It doesn't take a genius to realize VA Linux does not have a greater ability to produce than Cisco, but if you looked at the stocks and read the hyped articles, you'da never known it. Not that I'm picking on VA Linux - they're a good bunch. But really, what we're seeing isn't a matter of money, it's a matter of people.

Didn't we know? We saw the tech market explode, and of course we rode it to the crest but we all knew it would come back down and we said as much publicly. None of the pundits listened and now, well, suprise. Now with all that money lost in the stock market, it was only natural for christmas shopping to slump, excess inventory to pile up, and the beginnings of a recession. So when they turn around to say "Why didn't you warn us?" and try to pass the bill and the blame on to us, push it back on the table and say:

Practice what you preach.

Hey, on the plus side though, I hear biotechnology is hot. Anyone got a few bucks they could loan me?


--
Society needs therapy. It's having
trouble accepting itself.

Need (4.45 / 11) (#7)
by Khedak on Thu Jan 25, 2001 at 04:21:17 PM EST

Companies exist for two reasons: to provide a needed product or service, and to make money at it. If you can't make money, it means that the product or service you're offering isn't really needed.

Well for that to be true than companies would have to exist for the reason of providing a needed service, as you describe. But unless you take "need" to be extremely distorted, then I think your analogy fails. If I go into business tomorrow making cars, I will fail, but not because I'm producing something that's not needed. You seem to equate 'need' with economic 'demand', so I'll adopt that convention for the moment. There is certainly demand for cars, but I will fail for several reasons: There are better cars than I can make, there are cheaper cars than I can make, there are companies that can use their influence to undercut me in non-competitive ways, my own business acumen may be deficient. So to expand your axiom to make it true, it would have to be "Companies provide a needed product or service of sufficient quality at a reasonable price and sufficient business savvy." And that was not an exhaustive list. This new axiom may be true, but seems more like a description than a basic axiom explaining why companies exist.

I think you can simply reduce it to one reason: to make profit. That said, your piece fits in neatly. A company makes profit. The reason they make services or products in demand is to make profit, not the other way around. And you can create demand too, then create a product, and still make profit. Although you did successfully point out that companies are driven by profit (and not by market share like "new economy" businesses), you didn't really prove that companies fail because they don't provide a needed service. If x then y is the same as y because x. Certainly, if there were sufficient demand they would have succeeded, but that's correlation, not causation.

If I win a million dollars, I'd be able to pay my rent, but that doesn't mean that if I pay my rent, I must have won a million dollars. But it does mean that if I don't pay my rent, I didn't win a million dollars. The point is that if I don't pay my rent, it would be an asinine comment to say "If you can't pay your rent then you didn't win a mllion dollars." True, but trite, uninformative. Cf. your statement "If you can't make money, it means that the product or service you're offering isn't really needed." True, but it doesn't really say much about why the business failed.

I agree completely (3.00 / 1) (#8)
by fossilcode on Thu Jan 25, 2001 at 04:26:54 PM EST

In this context, "needed" was synonymous with "wanted." The marketplace "needs" your product, allowing you the possibility of making a profit (e.g. nobody seems to "need" buggy whips anymore). Most companies would say they exist to produce something at a profit. And they would always include both in the same sentence, just as I have.
--
"...half the world blows and half the world sucks." Uh, which half were you again?
[ Parent ]
Needs and wants... (none / 0) (#25)
by Mr Tom on Mon Jan 29, 2001 at 11:13:59 AM EST

> In this context, "needed" was synonymous with "wanted."

Sort of. In yer common-or-garden marketroid-speak (the profusion of which has led to hyper-inflation of dot.com stock), a need is a want, backed up with sufficient funds.

I may /want/ a Lamborghini, but in my state of impecuniousness (impecuniosity?) I create no need.

And this is where so many dot.coms went wrong, they recognised the /size/ of a potential market, but not the fluidity of it. There may be X million people online, but I doubt that any of them will pay significantly over the odds for clothes (Boo) or CDs (Boxman)

(Especially when geeks are scruffy and use Napster!) ;-)


-- Mr_Tom<at>gmx.co.uk

I am a consultant. My job is to make your job redundant.
[ Parent ]

I told you so (4.00 / 10) (#10)
by GreenCrackBaby on Thu Jan 25, 2001 at 04:28:40 PM EST

Actually, I didn't. But I did warn all my friends and family to avoid investing in anything non-ebay like the plague. People were throwing common sense out the window like the new economy was made of magic.

My favorite example of sheer stupidity was when eToys.com had a valuation equal to 20 times what Toys R Us is worth. It doesn't take an economics genious to tell you that you can expect that stock to "correct" itself, and it won't be pretty (it wasn't). I still wonder how people could pour their hard-earned money into eToys without first asking themselves if they believe a company that has a staff of 50 and one small warehouse really should be worth 20 times more than a massive toy chain with hundreds of stores and thousands of employees.

Another great example of human stupidity is (or more correctly was) pets.com . How anyone can make money selling pet stuff over the net is beyond me. Can you imagine buying a 30 kg bag of dog food over the net? Apparently many companies conveniently left out the part about shipping costs in their business plans. I'm not saying there's no market for pet junk over the net, but when your competition doesn't have to pay the $20 shipping charge on every order (because people are walking into the store and buying it in person) you are in a very bad spot!

The other thing that never made sense to me was the advertising money being spent by these companies. $50 million a year for a company that sells specialty sweaters isn't unheard of. Apparently dot coms are spending between $200-$400 to attract each customer!!

There are some business ideas that lend themselves perfectly to an online model: auctions, CDs, movies, books. Generaly small stuff that's cheap to ship, or intangibles like services. Ebay is a great example of a perfect online company. They have no inventory (not counting the stuff at half.com) -- all they have are some beastly servers and some good IT staff.

pets.com (4.00 / 4) (#19)
by chuqui on Thu Jan 25, 2001 at 11:34:41 PM EST

If I were stupid enough to work for pets.com, where they tried to build an on-line store to sell items with fairly small margins to people over the net despite the high shipping costs (really -- you save $3 on a 40 pound bag of dog food that costs $10 to ship to you?) -- I'd have left the minute I found out that the top selling item on the web site was (and I'm not kidding here) the plush toy puppet of the company mascot...

Amazon.com would be nicely profitable today if it had decided to be good at what it was good at -- and not decided to try to be good at everything, everywhere. long term, I *still* like Amazon, but I wouldn't be at all suprised to see it shut down some of the more incidental product lines and get back to focussing on what it's good at.


-- Chuq Von Rospach, Internet Gnome <http://www.chuqui.com> <kuro@chuqui.com> "The first rule of holes: If you are in one, stop digging"
[ Parent ]
Maybe now they'll stick to .com with a point... (4.22 / 9) (#13)
by Mantrid on Thu Jan 25, 2001 at 04:53:19 PM EST

The Internet will definitely be around business wise for some time to come. The problem with the .com's seemed to be that they thought they were just going with the Internet for the sake of being an Internet company. It really did seem to be a bandwagon type affair.

I think the real use of the Internet business wise is simply in providing information. For example the company I work for is just starting to offer our customers MSDS information on the web. It's easy to use and fairly universally acceptable. New information can be added easily and updated.

This is what I am beginning to expect more and more from companies as a consumer: that they provide all the basic information, easily over the net. I don't want to have to worry about keeping stacks of user manuals, they should have everything I need, easily accessible from their website. Message boards, FAQs, and knowledge bases are also an excellent way to keep customers informed; it also saves the companies money because they can solve a problem once, and post it. Then if it happens to answer another customer's question, that's one less person waiting on the phone or whose email they have to pay someone to read.

In terms of shopping I think the Internet is really only useful as a way to get in contact with small niche shops and catalog shopping. I haven't found buying things that can easily be acquired at traditional stores to be any better over the Internet; it's often quite a pain. The Internet is great for finding very specific items though, and most stores should have some sort of Internet order taking available (or at least a product list and concise contact info).

Catalogs, parts lists, Movie Listings and other types of show times, product manuals, and customer support; these are the types of things I expect companies to provide, if I'm going to be their customer. The Internet is a wonderful way to do this. I think that very few businesses can be sustainable as pure Internet entities.



The King is dead Long Live the King (4.28 / 7) (#14)
by cezarg on Thu Jan 25, 2001 at 05:20:09 PM EST

...or something like that. Let's all open our champagne bottles and celebrate! Why celebrate? Because It is a disaster only for the fools that believe every bullshit they hear on TV without engaging their braincells in any basic king of analysis. I for one won't shed a tear for any of those "internet startups".

The good news here is that we are about to enter a recession time. This is a good thing because I believe that the coolest startups grew when going was tough. Those companies operated on realistic market principles and built their businesses on deliverables rather than hype. When venture capital is easy to obtain people get lazy and stupid and the net result is a multitude of businesses like balls.com. Of course the sheer number of jobs available in the dotcom sector is overwhelming but the quality of those positions is often as questionable as the value of those that fill them. Almost every dotcom out there has an overgrown management and marketing structure that often consists of BA graduates with no commercial experience whatsoever.

On the other hand during recession days (such as the one in the UK in the early 1980s) really cool startups spring up. There was a bunch of game companies that grew in the Midlands back in '82-83 partially because lots of young people couldn't find steady jobs that would pay the rent. Many of those companies no longer exist but when they were around (some for 10 years or more) they did release many great titles and became fairly successful at least on the British market.

Thomas Frank's "One Market Under God" (4.25 / 8) (#15)
by Simian on Thu Jan 25, 2001 at 05:35:09 PM EST

I'm not done reading it yet, but if you're interested in the historical roots of the <quote>New</quote> Economy, "One Market Under God" by Thomas Frank is great.

Thomas Frank's thesis in this book is that the Internet-enabled "New Economy" is just a small slice of a phenomenon Frank calls "Market Populism". In a nutshell, this is the ideology that free markets are more democratic and essentially legitimate than all forms of government.

This is an extension of the thesis of his previous book, "The Conquest of Cool" which does quite a number on the subterranean relationship between the so-called "counter-" culture of the sixties with an earlier "revolution" in management philosophy and corporate culture. Because I've already read it, I can recommend it very highly. Really original perspective and deftly, caustically written. I think he's put his finger on one of the slipperiest facets of contemporary culture. He also has as advanced a sense of irony as any historical critic I've ever read. So far, "One Market..." is even better. I think Frank is, as a historian, spot on.

That having been said, I also think he suffers from history. If you stare too long into the abyss, it begins to stare back at you. To play with another cliche, I think that those who study history *too much* are doomed to be powerless to change it. Frank is a bit of a doomsayer and paints himself into a corner.

Plus, as a more-or-less anarchist (not "libertarian", grr...) myself, I think he misses the correlation between the so-called "private" capitalist property regime and the violence of the nation-state. I.e. although it's true that the "free" market is hardly democratic, neither is any form of government under the sun. It's an easy to miss, though, especially when immersed in business literature that likes to pretend that it owes nothing to government. Frank does a remarkable job seeing through so much of the "market populist" ideology, but stumbles by accepting the market populist's most basic presumption.

Sorry, I wanted this to be shorter. :)

jb


"As I would not be a slave, so would I not be a master. This expresses my idea of democracy. Whatever differs from this, to the extent of the difference, is no democracy." Abraham Lincoln
perfectly free markets and democracies... (5.00 / 1) (#20)
by sayke on Fri Jan 26, 2001 at 03:27:55 AM EST

have a lot in common, and i really think it would be good if people thought about them in the same light. for example, i wish people would realize that, by spending their dollars on a company's product, they're in essence voting for that company, and endorsing everything that company has done and stood for. hopefully that would make people take their dollars more seriously... but noooo...

errrm, what's the correlation between the so-called (why only so-called?) private capitalist property system and the violence of the nation-state? i consider myself just on the pragmatic side of anarchism, and i don't see much of a correlation between private property and the violence of the nation-state. hell, i'd go so far as to say that the violence of the nation-state is everything private property stands against. the violence of the nation-state (coercion) almost always directly impinges upon private property! they are at war; i don't see how they can be in cahoots, as you seem to imply...

to paraphrase sadie plant, i see capitalism not as a coherent system but as a pluralistic battleground organized around a perpetual tension between centralizing entities (wannabe-monopoly corporations, government agencies) and bottom-up, grass-roots activity (plucky entrepreneurs, street markets). you can guess which side i'm on.

oh yea, here's a review of "one market under god", in which the reviewer basically responds to tom frank by saying "yes, capitalism, as it is currently, has problems, but what do you intend to replace it with?" the reviewer finds the book powerful and well-written, but finally hollow and devoid of cures better then the disease. i'm curious about your opinion of the review, and, while i acknowledge problems in current implementions of capitalism, i wonder what you would replace it with.


sayke, v2.3.1 /* i am the middle finger of the invisible hand */
[ Parent ]

perfectly free markets and democracies... (4.00 / 3) (#21)
by sayke on Fri Jan 26, 2001 at 03:28:02 AM EST

have a lot in common, and i really think it would be good if people thought about them in the same light. for example, i wish people would realize that, by spending their dollars on a company's product, they're in essence voting for that company, and endorsing everything that company has done and stood for. hopefully that would make people take their dollars more seriously... but noooo...

errrm, what's the correlation between the so-called (why only so-called?) private capitalist property system and the violence of the nation-state? i consider myself just on the pragmatic side of anarchism, and i don't see much of a correlation between private property and the violence of the nation-state. hell, i'd go so far as to say that the violence of the nation-state is everything private property stands against. the violence of the nation-state (coercion) almost always directly impinges upon private property! they are at war; i don't see how they can be in cahoots, as you seem to imply...

to paraphrase sadie plant, i see capitalism not as a coherent system but as a pluralistic battleground organized around a perpetual tension between centralizing entities (wannabe-monopoly corporations, government agencies) and bottom-up, grass-roots activity (plucky entrepreneurs, street markets). you can guess which side i'm on.

oh yea, here's a review of "one market under god", in which the reviewer basically responds to tom frank by saying "yes, capitalism, as it is currently, has problems, but what do you intend to replace it with?" the reviewer finds the book powerful and well-written, but finally hollow and devoid of cures better then the disease. i'm curious about your opinion of the review, and, while i acknowledge problems in current implementions of capitalism, i wonder what you would replace it with.


sayke, v2.3.1 /* i am the middle finger of the invisible hand */
[ Parent ]

Violence & the New Economy (4.33 / 3) (#22)
by Simian on Fri Jan 26, 2001 at 04:22:20 AM EST

Hmm... Coupla things stick out here.

First, "one dollar, one vote", is as Frank notes the very definition of plutocracy, not democracy.

I happen to like democracy a great deal, even though (or perhaps because) it is so inherently messy (hence, interesting!). While it is important to boycott the most flagrant corporate abuse, consumer-side 'voting' is not a terribly effective way of influencing corporate behavior. Nor is shareholding, unless you're a fund manager or extremely wealthy.

As far as the relationship between violence and capitalism, I think it's important to distinguish between markets per se (which are really quite amorphous, ephemeral things) and the capitalist "Free Market", which is just one kind of market that, by pure chance of course, views capital as the sole legitimate source of value-creation.

Of course, where there are markets, there is property of one sort or another. And I think it could easily be argued that the number one primary ultimate purpose of the nation-state (and almost all other forms of government) is the defense of a particular regime of property--capitalism (incidentally, I view the Soviet abomination as an exercise in state capitalism--eek!). This covers both internal theft and external aggression.

A telling example of this sort of relationship is the way the music and movie industries have been crying so loudly for the 'legal' persecution of the dotcommunist Napsterites. The fact is that a very significant portion of the capitalist regime of property (intellectual property) has been thrown into deep flux by the technologies of digital reproduction. When property is threatened on any kind of basic, extra-market force like technology (or unions, or riots for that matter) it's remarkable how quickly the Liberation Management gurus advocate turning to the state (and the National Guard).

Frankly, its an illusion that the advocates of Market Populism have promulgated for over a decade, that there is some inherent difference or antagonism between the state and the capitalist free market. They are just two sides of the same coin. The state sets certain rules, and the marketplace victors dictate certain concessions.

Capitalism is a game by which the otherwise socially contentious elites work out their differences, or rather simply vie for the mantles of power. The genius of capitalist organization is its fusion of both bread and circuses. It does permit a lot of social mobility, but it is quite remarkable at keeping the basic ratios of haves and have-nots the same. It doesn't matter who has or hasn't, what matters is that they are all more or less playing the right role.

You can see that I think you're right that capitalism is a pluralistic battleground, but I don't think that prevents it from being a coherent system, too. The monolithic corporations of today *were* the upstart "corporate rebels" of yesterday. Thomas Frank's books illustrate this pattern very well. And none of it has anything to do with real politics, real democracy, other than to squeeze these things out of most people's experience. IMHO :)

It's very true that, although Frank is a very astute observer, he offers no solutions. Well, there are no solutions. I think the current system is a solid three hundred years old at this point, with roots that extend even further. That's the minimum timeframe I'm willing to think about or discuss future politics.

The incredible myopiea of present-day 'politics' will be a real proving ground for whether humans are even capable of truly taking responsibility for their place in society by being able to endure countless failures in exchange for real change.

I'm willing to bet that the next turn of the screw will revolve around the politicization of the corporation. The democratic process will/must infiltrate the corporate form, break it apart slowly, and re-network its social relations. The antibodies of the nation-state are very clever; only a form of organization that mimics corporations at first will survive long enough to be viable.

Anyway, that's the starting point of my own politics. I'm in the middle of starting a worker-owned technology cooperative to experiment with a few of these ideas. Perhaps two hundred years from now something will come of it...<g>

That having been said, I need to sleep now. Can't solve the world's problems tonight. ;)

jb




"As I would not be a slave, so would I not be a master. This expresses my idea of democracy. Whatever differs from this, to the extent of the difference, is no democracy." Abraham Lincoln
[ Parent ]
Exactly why I am a contractor (3.66 / 3) (#24)
by kostya on Fri Jan 26, 2001 at 12:40:14 PM EST

After several dot coms falling out from beneath me, I decided I might as well be a contractor with the length of my jobs.

Several clients of mine were your typical dot com. I'd ask, "So how are you going to make money?" And I'd get some crazy answer that even I, non-business guy that I am, knew was crap. I'd then say, "You the boss. Now about my late fees and collection schedule." I didn't care too much. As long as they paid me on time, it was their dime and their funeral.

That may paint me as a "cold bastard" or a mercenary, but you have to protect yourself. These dot com managers cannot magically save your job when the company tanks. I had some great friends as managers, and they did their best, but company after company failed.

Dot coms remind me of the Underpants Gnomes from South Park (offensive US cartoon show). My friend pointed it out to me one time, and I have never forgotten it. Quick summary for those who don't watch South Park.

The underpants gnomes would steal peoples underpants at night, amassing them in a large underground cavern. When asked why they did it, they responded, "It is according to our business plan!" And they pointed to their business plan, big and huge on the wall:

  • Phase One: Collect Underpants
  • Phase Two:
  • Phase Three: Profit

When asked about the "blank space" under phase two, they would just scratch their heads and recite the business plan again and again: "Phase one, collect underpants. Phase Two, [long pause]. Phase Three, profit."

If you worked for a dot com, you can fill in you own business plan. Remember: if you can't figure out how they are going to make money, without a 30 minute long presentation from their marketing staff, they aren't going to make money.



----
Veritas otium parit. --Terence
The Failure of the "New Economy" | 25 comments (14 topical, 11 editorial, 0 hidden)
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