Dot-Com Survivors - Industry Trend or Event

Industry Standard, The, July 9, 2001 by Miguel Helft

INTERNET RETAILERS AREN'T DEAD. AT LEAST NOT ALL OF THEM. A STUDY BY THE STANDARD SHOWS THAT HALF OF ALL DOT-COMS ARE STILL ALIVE -- AND ANOTHER 16 PERCENT REMAIN IN BUSINESS AFTER BEING ACQUIRED.

From time to time, they meet quietly and informally. They share tales of woe and tales of success; they commiserate and cheer. But this is not a support group, not in the usual sense. It's a gathering of an eclectic bunch of Internet retailers who over the past year have seen dozens of colleagues and rivals driven out of business. And still, these four -- the peddler of consumer electronics, the purveyor of expensive gifts, the diamond dealer and the seller of briefcases and backpacks -- struggle on. "It's got some therapeutic benefit," says Martin McClanan, CEO of gift site RedEnvelope. "Understanding what is working for noncompetitive colleagues is key."

McClanan, along with executives at 800.com, Blue Nile and eBags are survivors of the e-commerce bloodbath. As hopes for an Internet retailing revolution unraveled, they adapted, downsized ambitions and learned to be frugal and opportunistic. Now their companies are growing, and profits are nigh - well, just a few quarters away. If they remain on track, they'll become a permanent feature of the retailing establishment -- a world the Internet has shaken up but failed to turn on its head.

These four aren't alone, of course, but sometimes it can seem that way. The Standard surveyed a total of 123 companies that were born as pure-play Internet retailers, including all of the 43 firms that went public and 80 private dot-coins that raised at least $10 million in funding. The mission: to assess the post-bubble conventional wisdom that only one in 20 dot-coms would survive.

Among the private companies surveyed, 35, or 44 percent, have died, while 45 survive either as standalone firms or through an acquisition. The survival rate is better for public companies: Only seven, or 16 percent, have gone out of business, while 11, or 26 percent, were acquired and 25 are still around. [See charts, pages 33 and 34.] All told, 34 percent of the online retailers studied have perished so far.

Given the reports of the death of the dot-com, the shakeout looks less dramatic than expected. But the raw numbers understate the dismal performance of the e-commerce sector. Several of the public companies, including Buy.com, HealthCentral.com and Webvan, are struggling for their lives, desperately trying to stem their losses while pleading with the Nasdaq not to be delisted. Some companies that managed to pull off an IPO during the bubble period now show unimpressive numbers. Consider eGreetings, which had quarterly sales of only $2.3 million before American Greetings acquired it in February, or E-Stamp, which recorded a mere $320,000 in sales for its most recent quarter.

Eighteen of the public companies that are still alive are valued at less -- many of them much less -- than $500 million. That makes them "small cap" stocks that are irrelevant to all but the smallest investors. Only six are worth more than $1 billion; eBay is the runaway leader of the pack. Then there are the public companies, including Beyond.com and eStamp, that have survived only by fleeing the retail business altogether and morphing into technology or service firms.

The health of the surviving private companies is more difficult to assess. But there's no indication they are faring better as a group than their public counterparts. A handful, including Zing Networks, have announced plans to shut down in the weeks since The Standard began its survey. Others are alive in spirit only. Ehobbies.com, for example, announced it was going to a skeleton crew while it sought a buyer. But The Standard was unable to make purchases there or contact the company.

Surprisingly, some of the most recognizable private dot-coms are among those that have died: Boo.com, Kozmo.com, MVP.com. By raising huge war chests they were able to build a brand -- but not a business.

The news is not entirely grim: Some companies are actually growing. A few might even turn into tomorrow's marquee names. Which is no surprise, given that e-commerce as a whole continues to expand at a healthy, if slower, rate. Online sales surged 66 percent in 2000 and are expected to rise by another 46 percent this year to $65 billion, according a recent survey conducted by Shop.org and the Boston Consulting Group. Moreover, while brick-and-click retailers have been grabbing a growing share of online sales and may walk away with most of the spoils, some born-on-the-Web retailers are holding their own.

The undisputed star of the e-commerce boom is eBay. With a market cap of $18.5 billion, the Net auctioneer is bigger than all other public e-commerce companies combined. The only consistently profitable company, eBay has helped turn millions of individuals and small businesses into e-commerce merchants who generate about $8 billion in annual sales. The key to its success: It collects fees from other people's transactions without holding inventory, building a distribution network or dealing with the complex logistics of retailing. Not surprisingly, some of the other dot-corn standouts -- Expedia, Tickets.com, Travelocity and a resurgent (though diminished) Priceline -- share some of eBay's advantages.