It is difficult to move at the moment without hearing the sound of crashing dot.com companies. It started in the spring, when free-spending sports retailer, Boo.com, bit the dust, and has been gathering pace ever since. The fall in European shares has been happening against the descant of a worldwide slump in technology stocks that has seen high-flyers like Priceline (the US pioneer of customers bidding online for airline tickets) fall by 42% in a single day.
Yahoo, one of the strongest net stocks, suffered a 27% fall in its share price last week. Even mighty Microsoft has seen its market capitalisation more than halve this year (before recovering this week). The latest casualty is Boxman.com, thought to be one of the most viable e-retailers, which sells CDs on the net from a central warehouse. This week it announced it was facing liquidation.
A year ago it was so different. Venture capitalists - hitherto a rare sighting in Britain's capital markets - appeared from nowhere and were falling over themselves to lend money to almost any young person with a business plan in their knapsack and the word "internet" in the executive summary. The word "dot.com" - American, of course - soon became a sassy suffix for coolness in business..
The explosion of web start-ups in the UK was heralded as the start of a New Economy, albeit blown in by a transatlantic wind. In this new world, the internet would lower prices by cutting out the middle person while enabling budding entrepreneurs to start up global businesses from their back bedrooms. Any company that didn't embrace the world wide web for selling (and purchasing), would be smothered by those that did.
So what went wrong? Nearly all the early claims of the internet were, and still are, true. Yes, it is an all-embracing change that will transform the way we do business, the way we are educated, and the way we are entertained. What the preppy-preneurs forgot, however, was the importance of two rules of the old economy and one of the new.
First, they failed to appreciate that in the old economy 50% of all new small companies fail within the first four years. Whether you call it the creative destruction of capitalism or just natural selection, it is inescapable. Given that the brash new internet companies were run by people who were young and often inexperienced, and who were operating in an unexplored area, the failure rate for dot.coms was always going to be higher than the historic average for small companies.
What was different was the extraordinary media attention these upstarts attracted. Small businesses which normally die unmourned and alone are now being cremated under a national spotlight. Take Clickmango, the start-up that attracted a lot of publicity because it had Joanna Lumley as its figurehead. When it crashed it emerged that its monthly turnover was only £4,000. My local corner shop does better than that, but you won't see it in the national press.
Second, they underestimated two old economy mantras: marketing and delivery. It is easy to build an attractive website that anyone in the world can access at the click of a mouse, but expensive to tell people it is there and to get them to buy, let alone deliver quickly when they do buy. Small wonder that virtually no dot.coms in the UK selling to the consumer are making money. And that includes Lastminute.com. It has been beating its budgets but its last quarterly accounts revealed it spent almost £6m on marketing, nearly six times the value of its entire sales. Yesterday the head of Altavista, the US search engine portal, resigned. Earlier in the year the division had reported losses of $307m on revenues of $98m in the second quarter. Say no more.
Third, and most culpably, the dot.coms failed to understand the nature of the beast they had embraced: on the internet the consumer, not the producer, is king. The centrifugal forces of the world wide web push power away from the centre and outwards to the millions of global users who, at the click of a mouse, can find the same product cheaper elsewhere. The dot.economy turned out to be just a more expensive way of selling old economy goods at knockdown prices.
Was it all just a year of madness, a momentary dot.con? Not at all. We are merely entering the second stage of a long voyage with some of the flotsam discarded. Traditional companies are waking up to the fact that old economy strengths like brands and reliable delivery are vital in the new era. They are already starting to gobble up the failing dot.coms to boost their own net initiatives.
It is no coincidence that the biggest successes of the new economy - like the universal portal, Yahoo, and the electronic auction house, eBay, are companies that couldn't exist without the internet. The next stage of the revolution will not only see traditional industries embracing the net. There will also be an explosion of activities that exist only within the internet - like digital music, films, two-way video and the huge potential of the new "peer-to-peer technology". This enables computers around the world to exchange files (whether music or films or data) with each other without going through intermediaries.
This is brilliant for the consumer but bad for business. There is a real possibility that items like pop songs or books will become commodities like "breaking news" which are given away for nothing because it is impossible to make money from them as long as they are freely exchangeable on the net. Unsurprisingly, companies are seeking refuge by trying to build monopolies (whether of "content" or infrastructure) to escape the deflationary forces of the internet.
Even the current rush to build giant "business-to-business" electronic market places, where spare parts and components can be bought at the cheapest price, can be seen in the same light - a defensive move by producers to offset the web-induced downward pressure on retail prices.
This is the reality behind the absurd overvaluation of internet share prices. Some of the valuations made the South Sea Bubble seem like a village jumble sale. Now they are falling rapidly to earth, but with some way to go. Be happy you are a consumer: there will be lots of bargains among the debris.
