Dot-Com Shake-Out - The Shakeout Commences

As the 1990s drew to a close, it was increasingly clear to analysts that the e-commerce world was becoming dangerously overcrowded, with sectors struggling to support more players than the market could reasonably maintain. The beauty products, consumer electronics, pets, and other consumer-goods sectors all featured upwards of 10 companies—all of them with large piles of capital backing—competing for what were actually exceptionally small and unproven markets. Other sectors, including those trafficking in Web content, enjoyed fantastic initial public offerings only to go belly up as market realities caught up.

For example, in 1999, there were over a dozen variations on the pets e-commerce theme, and while some enjoyed the support of major pet-supply chains like PETsMART and Petco Animal, few of them could boast anything close to a sound business strategy. For instance, Business Week reported in March 2000, just as the shakeout was beginning, that market leader Pets.com was collecting only about 43 cents in consumer sales for every dollar it spent on supplies, and that was before other major expenditures such as advertising and distribution. The online operation at PETsMART, meanwhile, collected only 62 cents for each dollar spent on supplies. This scene was repeated in dozens of market sectors, leaving it to investors and consumers to separate the wheat from the chaff. For most market sectors, those e-commerce players that weren't ranked first or second were extremely hard-pressed to stay afloat, and as brick-and-mortar firms caught up with dot-coms in e-commerce strategy, that factor grew more pronounced.

One clear sign that consolidation was in the cards for the dot-com industry was the surprise announcement in January 2000 that America Online, the largest property on the Internet, would merge with the media giant Time Warner. This, perhaps more than any major business realignment, signaled that the exclusively Internet-based business wasn't destined to displace the traditional bricks-and-mortar firm; rather, the future of e-commerce was likely to witness a blurring line between the two. When, a few months later, the bottom began to fall out of the Internet economy and the well of venture capital suddenly ran dry, e-commerce players scrambled to make themselves attractive to potential suitors. The survival method thus shifted from the reliance on stratospheric market capitalization to absorption into a deep-pocketed traditional business. Suddenly, dot-coms found that profitability was for the first time a major factor in the evaluation of their firms.

Other companies, convinced that the B2C (business-to-consumer) model was a dead end, quickly transformed themselves to take advantage of the B2B (business-to-business) market. However, while the shakeout in the latter sector wasn't as pronounced or as dramatic as that in the B2C field, B2B soon found that it, too, fell prey to the backlash against e-commerce. Particularly in the realm of business-to-business exchanges, it was simply a matter of too many businesses and too little differentiation, leading inevitably toward consolidation. As a result, B2B exchanges en masse either scrambled for particular niches or sought out a buyer. According to Computerworld, more than half of the 900 B2B e-marketplaces in existence in mid-2000 were defunct by the end of that year.