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And so it Goes

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By howardroark
October 9, 2003

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I don't have anything insightful about this either, except that I think the Internet is turning out exactly how these (not referring to Amazon) failed companies predicted. They were just off on the timing of when that would happen, and many of them were not very good with money besides.

I don't know if I agree with least insofar as they were predicting anything at all. That the Internet has become an integral part of life and commerce and did so on a hockey stick curve was already obvious by the time any public company was predicting it. In fact, I don't even think they were that far off with the timing. That some businesses are able to generate profits via the Internet was never debatable enough to be a prediction by anyone. The rate of adoption has turned out to be steep, but still much slower than the loudest voices (David Wetherell and Jupiter Communications come to mind) predicted. Amazon has actually grown slower, for example, than many of even the most bearish analysts were estimating in 1999 and certainly slower than the Wit Capital's of the world were predicting.

But the prediction implicit in their business plans -- the only important prediction I'm willing to credit to most of the failed public e-commerce companies -- that the growth of the Internet would somewhat permit companies making massive resource expenditures in a land grab for scale and market leadership to generate adequate returns on their capital, just hasn't seen the light of day yet. And it never will for the IPETs and ETYS and ASFDs and COOLs and and and WBVNs and Kozmos and BUYXs and NXCDs and PlanetRxs of the world. Even many of the success stories haven't come close to making that one true, and the failures outnumber the success stories by a staggering margin. Amazon, clearly among the extreme top tier of first generation e-commerce companies, has accumulated a deficit of $3b or so in the last six years or so and needs to generate a lot of profits before it can claim that it has been a net wealth creator as a business concept from inception on a time value basis. But if it eventually does so, which wouldn't surprise me at all, it still won't affirm to the prescience of the swath of e-commerce would-be category killers buying Super Bowl ad time in January of 2000.

To make money all you have to do is offer users what they want without bankrupting yourself. Amazon does that. eBay does that. Yahoo does that. Google does that. Heck, even the Motley Fool does that. Their success is a result of not being too stupid in a wonderful market. I can name plenty of mistakes every successful online company has made.

And I can name plenty of mistakes every successful offline company has made. Capitalism is difficult regardless of how fast a market is growing, and while it can be nice to be in a growing market, it can be thorny to be throttled with the number of competitors attracted by the same. A huge chunk of the first generation of online businesses have been laid to rest, with incredibly cheap capital in my view being the most proximate cause. That cheap capital, to me, reflected the biggest prediction of the investors and operators of the bulk of the failed e-businesses and the biggest failure of that prediction -- even in foresight -- was that it wouldn't necessarily be validated even if the remarkable Internet penetration people were expecting came to be. It was, in essence, a prediction that a good way to win the online jewelry category would be to spend tens of millions of dollars more than you were bringing in and corner the market. I think it's still very early too know what internet economics are going to look like over the next 20-30 years, and I think the market is still infected with lingering effects from heady capital markets of the late 1990s. The same cheap capital that destroyed so many companies allowed other firms (like Amazon, for example) to invest extraordinary resources not afforded to most startup business in normal times exactly when most of its competitors were fading out of the picture. It might take some time for those lagging effects to ease. But I think what was always obvious is still obvious. Some companies will make a lot of money on the Internet, and the Internet will continue to become a more important part of the economy. It remains to be seen whether low switching costs and price transparency will work to lower online returns on capital relative to other businesses on balance, or whether "network effects" and scale economies will raise them relatively higher. But either way, it still doesn't look all that different this time, and the sock puppet will still always be a punch line to me.

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