Commentary: Dot Com Business Models From Mars

Welcome, class of 2020. Today our virtual MBA lesson is on what we now refer to as the annus horribilis of the E-commerce Age. True, the year 2000 was marked by many notable headlines, among them the revelation that the cast of Survivor really stayed at the Fiji Hilton and not on that island. But today we will talk about the year that marked the nadir of the dot-com demise. In 2000, e-commerce companies tanked in the stock market, the companies couldn't get desperately needed additional financing, newspaper headlines screamed layoff after layoff, and many of the companies eventually went bust.

According to a survey by Webmergers Inc., in the first seven months of that year, of 238 dot-com startups, 41 collapsed, 29 were sold in fire sales, and 83 withdrew their plans for initial public offerings.

The problem was that the business models stank--i.e., the companies just couldn't make money. Inc., the poster child of the New Economy, ran up losses totaling $1.5 billion from its inception in 1994 to July of that year, and its stock fell some 70% off its all-time high. "Venture capitalists and investment bankers were the first to dream up these business models. They were great at hyping stocks, but miserable when it came to delivering the goods," said David Ticoll, co-author of a best-selling business book in 2000 called Digital Capital: Harnessing the Power of Business Webs.

Let's review some of the great flawed business models of that period:

MODULUS TOILETUS PAPYRUS (The Toilet Paper Model): A model most often assigned to the online grocers such as Webvan Group Inc. and Peapod Inc. in which items such as toilet paper and Haagen-Dazs were purchased over the Internet, then packaged and delivered to the front doors of millions of Americans. No middlemen, no problem--right? But there was a problem. With grocery margins as thin as 2% and things like packaging and delivery so expensive, it could cost the companies as much as $40 an order, and they struggled to make money. What's more, they realized that the warehouses they set out to deal with weren't technologically up to snuff, so they built their own. Webvan, for instance, doled out some $1 billion to build 26 state-of-the-art automated warehouses. They also didn't factor in tomato-squeezers--those persnickety customers who insisted on actually seeing and touching produce and other perishables. Most of the online grocers were eventually bought out by offline competitors that already had warehouses and distribution centers intact. Peapod, for instance, was snatched up by the owner of the Stop & Shop Supermarket Co.

MODULUS OBSCURUS (The B or Not 2B Model): Sometimes called the B2B2B2C model or the "Whatever" model, this was designed to morph through various configurations until whoever was in charge got it right. Adopted by companies such as, which, after losing $11 million on revenue of $11 million in the second quarter of 2000, decided it would focus on building an online mortgage infrastructure for other lenders rather than providing mortgage services to consumers. Another one,, the consumer search-service tool that was not reaping its targeted share of advertising revenues, decided midstream to push its software as a corporate search tool.'s stock dropped as much as 94% off its all-time high; Ask Jeeves Inc. was down 92%. Some of these companies succeeded, others continued morphing into other letters of the alphabet.

MODULUS MALCONTENTUS (The Mal-Content Provider Model): Content sites like,, and were anything but content, as in happy. In 1999, Salon lost $18.3 million on sales of $8 million. Beaten down by a variety of bigger players like America Online Inc. and Yahoo! Inc., which mostly purchased and displayed the content of others, these sites barely had a chance. What's more, as stand-alone entities, they were at a huge disadvantage in the media biz, where economies of scale continue to be a big advantage. The ones that charged for subscriptions had the hardest time of all. With so much free content on the Web, why pay? But even free sites that relied on ad revenues struggled. Sure, by 2002, $13 billion was spent on Web advertising annually, but there was still too much competition for ads from print and television. By and large, only sites tied to larger media organizations--ones that could leverage content, workers, and advertising across different channels--succeeded. The deep pockets backing these sites didn't hurt.

MODULUS MESHUGGENUS (Just Plain Crazy Model): Exemplified by such companies as, which actually paid customers who would submit to filling out demographic information and be tracked as they surfed the Internet. AllAdvantage lost $102.7 million through the middle of 2000 and was forced to withdraw an IPO. Another company, Inc., originally planned to sell electronic goods at wholesale prices, hoping to profit from advertising because of the hordes of customers that would flock to its site. jettisoned its model and began to mimic traditional retailers, pricing some products cheaply as "loss leaders."

MODULUS CRITICUS SICKLUS (The Critically Ill Model): Health sites were odd hybrids of content companies, sometimes featuring advice and sometimes selling vitamins, prescriptions, and the like. This model needed intensive care from the start. Companies such as Inc., Healtheon/WebMD, and faced things like spiraling losses, layoffs, and defections of top-level execs. In 2000, drkoop's stock fell some 96% from its all-time high. Problems boiled down to limited advertising and too much competition from general-content sites and sites of hospitals and health foundations.

At the height of the annus horribilis 2000, the flawed logic behind the business models seemed of little consequence to the venture capitalists and investment bankers. They simply loaded up on cheap stock and excitedly awaited the company's IPO. When the stock skyrocketed and the lockup period ended, most of them quickly cashed out, looking for the next cash cow.

Spurring all this on were dot-com cheerleaders at brokerages and investment banks. As they enthusiastically cartwheeled from business model to business model, they assisted in drumming up short-lived exuberance for each among investors. "Buyer aggregators," "surf-and-turfs," and "metamediaries" were treated like flavors of the month. E-commerce sector plays were mercurial, too. B2C (business-to-commerce) was in one day, B2B (business-to-business) the next. There was even B2G (business-to-government) and B2E (business-to-employee); then B2B2B2C--for companies that decided they needed to swing the other way, or maybe both ways.

But what about the P2P Model--the path to profitability? Few dot-coms adopted that one. In hindsight, it's clear that it cost too much for those companies to acquire customers. It's not that folks didn't want to buy online--in 2000, customers spent some $40 billion online, and that continued to increase. The biggest problem was that most e-businesses were entering crowded fields. "Many seemed to have hid in basements and concocted business plans, totally unaware that six other teams were building the exact same model," said Michael May, a digital commerce analyst at Jupiter Communications. The Internet made competition worse because customer retention was elusive. Jupiter reported that 76% of customers visited two or more sites, comparing prices before making a purchase. Consider Internet department store It spent an eye-popping $10.05 on marketing and ad costs to reap only $1.43 in revenue per visitor in 1999. Also, profit margins at most of these companies were just too low.

In an about-face, brick-and-mortar companies such as Wal-Mart Stores Inc. and Gap Inc. started beating e-commerce companies at their own game. With multiple channels--stores, catalogs, and the Net--they produced three times the annual sales volume per customer of a single online site. "We're seeing traditional brick-and-mortar players gaining more and more online revenues because they've got existing infrastructure," said Carl Lenz, director of research at Gartner Group Inc.

As we now know, the biggest winners in online commerce were brick-and mortars or companies like eBay Inc. that created entirely new commercial transactions via the Internet--ones that would be difficult or impossible in the offline world. "It all comes down to the fact that the Web is essentially an information medium," said Kevin Murphy, an analyst at the Gartner Group.

Today, we don't even use the term "Internet business model" unless it's meant as slang, referring to something that is inherently faulty or quickly outmoded (Modulus Outmodedus).

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