WASHINGTON, December 26, 2000 --  

The concurrence of the holiday shopping season and the end of the year make opportunities ripe to discuss the reported downfall of the Internet economy over the past nine months. Nowhere has this downfall been more widely discussed than in the realm of electronic retailing.

Pets.com became the poster boy for Internet naysayers when it closed its doors last month after blowing through $82.4 million in money raised in its February initial public offering.¹ With all the benefits of hindsight, Pets.com's business practices are impossible to defend. The tiny new company spent $2.6 million of its limited assets on advertising during the January Superbowl to help create a brand identity.² The massive hype generated by the wildly popular ads over the next few weeks greatly expanded Pets.com's take from its IPO at the peak of the even more-massively hyped dot-com IPO market. The company then used this money to buy even more advertising, and -- inexplicably -- sell pet supplies at a loss despite the presence of numerous deep-pocketed competitors. When investors sobered up and the NASDAQ stock index started to tumble in March, Pets.com stock fell from its high of $14 per share to less than $1 when shop was closed in November.^2,3

This, along with countless other high-profile closings and layoffs at dot-com companies, has led many to conclude that the new economy is dead. To make such a conclusion is to follow the same idiotic herd mentality that led people to buy worthless Pets.com stock for $14 per share.

What is truly remarkable is the number of articles discussing the failure of the new economy identify the herd mentality that led to the go-go markets of 1999 and early this year, but fail to recognize an equal but opposite herd mentality of naysayers now. One of the dumbest stories I've seen was written by Matthew Broersma, a writer for the British edition of ZDNet, who reported the eye-catching but meaningless statistic that the dot-com failure rate has reached "one a day."⁴

The simple reality is that failure happens all the time to all kinds of businesses -- about 900,000 of them close their doors in the United States every year.⁵ Given that the failure rate of new businesses is highest of all, it should hardly be big news when Internet startup companies close. The current environment is much like the California Gold Rush of 1849. In each case, massive opportunities led an even more massive number of people to try and get their share of the riches. Then, as now, many people ended up broke. But that doesn't mean there isn't gold in them there hills.

The fact that some Internet companies close or lay off employees means nothing about the market as a whole. In the case of Pets.com, its closure speaks volumes about the dangers of irrational business models and irresponsible management and nothing about the importance of the Internet to the economy.

I can't stress enough how important -- and destructive -- a herd mentality is to the equation. I can remember when everyone was fascinated by the theory that a web site could give away $1 to every visitor and finance the operation via advertising. This stupid idea led to a surge of bargain-basement electronic retailers that gave away products on banner-ad-laden sites. This didn't work, of course, and after the stock values of Internet retailers began crashing in March, the entire concept of consumer-oriented e-commerce became tainted. Cultish business school graduates switched gears overnight to talk-down their experience with "B2C" (business to consumer) web sites and play up their involvement with newly fashionable "B2B" (business to business) web sites. Nine months later, these lemming-like businessmen who read the same books and the same journals are shedding their newfound buzzwords and poo-pooing the business to business concept, too.

It is these sheep of the business world that are to blame for the vast majority of dot-com failures. They cannot be saved from following the hype, but maybe you can. Don't believe for a second that the New Economy is dead. Preliminary numbers show that online sales for the holiday season have more than doubled since last year to $8.7 billion,⁶ despite a generally disappointing season for retail. Keep in mind that this statistic is for the most maligned part of the Internet economy -- online retailing. Other less-visible but more information-based sectors are undoubtedly growing at an even higher rate, and with greater benefits to society.

The simple truth -- despite all the hype -- is that the Internet really is a revolutionary force in our economy. The real story is not the losses suffered by a few dot-com companies, but the boon experienced by millions of consumers and the economy as a whole.

Notes: 

1. CNET News, Pets.com latest high-profile dot-com disaster, November 7, 2000
2. The New York Times, IPO Market Goes to the Dogs, December 25, 2000
3. NASDAQ, NASDAQ 12-Month Index, December 26, 2000
4. ZDNet, Dot-com Failure Rate--One A Day, November 20, 2000
5. United States Small Business Administration, Small Business Answer Card, 1998 (Bankruptcies, Failures and Terminations 1995-1997)
6. CNET News, Holiday online spending soars--but is it enough? December 26, 2000