Many US-based Internet start-ups in the retail and leisure sector have lost their Midas touch and are coming down to earth with a bump, as the inevitable shake-out gathers pace, analysts here said.
Four months after Internet stocks took a tumble on Wall Street — cutting short what had been an almost irrational euphoria around the dotcom market — the list of bankruptcies in the sector gets longer every day.
Only the most hardy dotcom names will survive, analysts believe.
"It's just the beginning of the shake-out," said James Fitchett, e-commerce professor at Harvard University. "We'll see more bankruptcies, we'll certainly see more mergers and acquisitions, more consolidations."
Furniture retailer Living.com, for example, closed down August 16 in spite of a promising relationship with e-commerce leader Amazon.com, which started life as a books retailer on the net. Value America, an e-commerce trail-blazer, went bankrupt a few days later after having dismissed some 600 employees.
Other retail sites like Petstore.com, with everything for your pet, Reel.com, a site for movie-buffs, and Carorder.com, selling all types of cars, also gave up the ghost.
These companies, like many dotcom start-ups, were able to raise money relatively easily through public offerings before they had turned a profit, and used the funds to finance costly advertising campaigns.
"Their revenue model is based on advertising ... but models of creating customers through advertising are very expensive," Fitchett pointed out.
In 1999, such Internet retailers were typically paying around $82 for each new customer they secured — or three to six times more than other distribution channels, according to a study by the Boston Consulting Group.
This mode of business is unsustainable, according to Fitchett.
"The dotcom companies had a grace period where they could experiment, but we are starting to learn the lessons from these experimentations," he said.
"One of them is that you can't make enough to sustain yourself just on advertising."
In spring, Internet stocks, whose prices had reached dizzying heights which were not justified by companies' sales levels, and which looked increasingly risky as the companies continued to post large losses, finally crashed.
Although some share prices have recovered, many investors started looking to put there money elsewhere.
The negative market atmosphere forced Kozmo.com, selling everything from books to records and electronics, to retreat from its planned initial public offering scheduled for August 18.
Drkoop.com, a health information site, is still fighting for survival after posting a loss of almost $40 million in the second quarter, on sales of just $2.5 million.
The threatened website got a last minute $20 million cash injection from venture capital investors.
Other e-commerce operations are turning to more traditional sales channels. Carorder.com is looking into purchasing car dealerships in the "real" world after having failed in the virtual world.
Amazon.com has joined Toys "R" Us to establish itself in the toy kingdom through a co-branded online toy store — a type of alliance that could create more resilient Internet companies.
"We think at least 30 percent of currently public Internet companies will be bankrupt or be acquired at 1-2 dollars per share, and we think that 75 percent or more will disappear," estimated Henry Blodget, senior Internet analyst at Merrill Lynch.
"We also, however, think that some of the leading internet companies will be among the most valuable companies in the world within 3-5 years," said Blodget, in a recent study titled "After the Fall: the Outlook for the Consumer Internet. — (AFP)
© Agence France Presse 2000
© 2000 Mena Report (www.menareport.com)
