Boom, bust – and insight

It was only 18 months ago that having a dot-com appendage to your company was seen as chic and admirable. Today, the world is a very different place. The euphoria died down as quickly as it came, and many of the dot-coms that rose to prominence went with it. The most recent victim was Webvan, a much-publicized Internet grocery retailer. After spending $830 million on rapid expansion, the company simply ran out of cash. As an article in the June 30 issue of The Economist says, a year-and-a-half ago, the mantra was, 'E-business or out of business.' Now, the saying is, 'E-business and out of business.'

In part one of this two-part series, Michael Shostak reveals three insights from the recent dot-com euphoria. Watch for part two next month, when Shostak explores how businesses and consumers are better off as a result of the legacy that dot-com mania has left behind.

It was only 18 months ago that having a dot-com appendage to your company was seen as chic and admirable. Today, the world is a very different place. The euphoria died down as quickly as it came, and many of the dot-coms that rose to prominence went with it. The most recent victim was Webvan, a much-publicized Internet grocery retailer. After spending $830 million on rapid expansion, the company simply ran out of cash. As an article in the June 30 issue of The Economist says, a year-and-a-half ago, the mantra was, ‘E-business or out of business.’ Now, the saying is, ‘E-business and out of business.’

What went wrong is complicated. You can cite the economy, capital markets, foreign markets, technology and a host of other factors. In the simplest of terms, however, the bubble burst because it was a bubble.

But regardless of the cause, there are lessons to be learned. Allow me to share three of them.

1. The misconceptions of first to market.

Much of the Internet hype was driven by a belief that there are advantages to being first to market in a category. The first Internet portal. The first Internet bookstore. The first Internet toy store. Every venture capitalist was looking to invest in the next first. And once that first was discovered, the game became speed to market. The faster you could launch your e-idea, the less likely you were to be beaten to the finish line.

But this notion is flawed. The strategy of first to market is based on the ‘first mover advantage,’ which says a first mover will gain advantages the competition cannot easily replicate either in terms of learning or market momentum. This theory assumes there are barriers to market entry, but on the Internet, the classic barriers of capital, technology and regulatory limitations are nearly non-existent, so being first to market offered few advantages.

But what about companies like Amazon and Yahoo!? Weren’t they first to market and as a result, are heralded e-survivors?

I recall going to a venture capital event where one of the speakers, Vernon Lobo, managing director at Mosaic Venture Partners, was asked how he felt about non-disclosure agreements when looking at business plans. ‘We typically don’t sign them,’ he was quick to say, and added that ideas about the Internet were a dime a dozen. The difference between a good idea and a successful idea, he said, was all in the people behind the idea. A mediocre idea with an excellent management team trumps a great idea with a mediocre team – always.

Amazon and Yahoo! are successful because they built a strong management team with experience that was relevant to their business. In the case of Amazon, the concept of selling books online was not revolutionary, but the company hand-picked executives from the likes of Wal-Mart and FedEx, both market leaders in logistics and retailing, giving it a clear advantage over other start-ups. And Yahoo! wasn’t even first to market in its category.

I often tell clients it’s not about being first to market – it’s about being first to market leadership.

2. A bad idea offline is usually still a bad idea online.

Many Internet failures have simply been the result of poorly researched, bad ideas. In the rush to dot-com riches, many entrepreneurs forgot to stop and ask if anyone actually wanted the online product or service they were looking to launch. Quite often an idea, not a market demand, drove the business plan. And because first to market was perceived as a strategic advantage, many ideas went to market without the proper market testing. ‘Market share now’ was the goal for many (which in most cases meant site traffic, not sales) – ‘profitability, well, we’ll figure that out later.’

And what about Webvan?

In response to Webvan’s collapse and its statements that it was an idea ahead of its time, Roger Blackwell, a professor of marketing at Ohio State University recently wrote in the Wall Street Journal: ‘Webvan was about 40 years behind its time.’ According to Blackwell, the ‘pick-pack-ship model of home delivery,’ first introduced in the ’50s, had disappeared because of changing consumer lifestyles and the economic reality of distribution systems. In other words, as Blackwell stated, ‘home delivery was an old business strategy and migrating it to the Web’ did not all of a sudden make it a good new idea.

3. Consumers don’t change as fast as technology.

Perhaps the most significant underpinning of the burst bubble was the misperception that new technologies, venture capital and Super Bowl ads could somehow change human behaviour overnight. Many Internet businesses assumed that consumers would change shopping and lifestyle habits fast enough to turn an e-business into a profitable venture in a short time span. For example, I’m a fairly savvy Internet user and I have a somewhat hectic lifestyle. By those accounts, I should be an ideal candidate for e-services like online grocery shopping, but I still mostly gravitate to the local supermarket to do my shopping. Why? Because it’s a familiar and comfortable experience. I am not suggesting that online versions of those services will never succeed – but they take time. My neighbour’s teenage nephew grew up with e-mail, buying software online and listening to CDs he creates from songs downloaded off the Internet. For him, e-services are comfortable and familiar – music stores are not.

There is hope for Internet advocates. While the bubble did burst, it does not mean that the Internet and anything Internet-related is dead. The article I quoted from earlier in The Economist goes on to make the point that the gloom hype of today is just as exaggerated as the boom hype of 18 months ago. And that is reality.

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Michael Shostak is president of Wideframe, a Toronto-based Internet professional services firm that specializes in helping organizations make better use of technology to build more profitable customer relationships. He can be reached at mshostak@wideframe.com or at (416) 480-3760.