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Monday, December 11, 2000

Dotcoms continue to fall like ninepins
by Imogen O’ Rorke

THE dramatic irony is too rich, even for the scriptwriters of the over-the-top dotcom soap operas: while the need for quality interactive content has never been so pressing, the companies that are producing the sticky stuff — the e-content and commerce producers — are being abandoned en masse by their financiers.

Indeed, the much-maligned dotcom is rapidly becoming an endangered species. At the current rate — one closure a day, according to Webmergers.com or 30 last month, 75 per cent of which were business to consumer or e-commerce — analysts are predicting there will only be a handful left by this time next year, apart from monster brands, such as Yahoo and AOL and those owned by media giants.


Last week, financial news site, TheStreet.co.uk that launched with $ 15.05 m in the spring, was cut off by its American parent, TheStreet.com, because of "failing to meet profitability timetables". Closure seemed the only option; despite the fact it was bringing in a respectable $ 2,84,000 a month and had closed syndication deals with AOL, CompuServe and Lycos, as well as having 80 advertisers.

In addition, Dobedo, the teenage chat site, announced 23 staff cuts. Citykey, a proprietary WAP city guide application, had to call in the liquidators and it was reported that upmarket gossip site, People News.com, had laid off staff and lost its chief executive.

The previous week, Wowgo.com, the teenage girls’ portal, was left high and dry by backers Unilever, Durlacher and Eureka after just six months of operations. Sponsorship coups with Capital Interactive, Sure deodorant and celebrity endorsement from popsicle Billie Piper were not enough to persuade the consortium that Wowgo.com had a future as an independent entity.

This month’s catalogue of dot woe also includes Ebop, the trendy youth lifestyle site, which has laid off all its staff except for its founders.

Ready2, the upmarket shopper’s advice portal fronted by London-based Daily Telegraph newspaper columnists Susannah Constantine and Trinny Woodall, are back down to three mugs and freeze-dried coffee from a peak of 40 at launch; and finally Switch2, the music, sport and the Internet service launched by Tim Southwell (former editor of Loaded magazine) and Adrain Pettett (founder of soccer title 90 Minutes), have been dropped by Edison Interactive because the "penetration of ADSL into the market is too slow".

Since the Boo.com debacle in May, it is true to say that there has been carnage. But Boo’s very public fall was a black-and-white case of bad management, poor research and overspending. The same cannot be said about The Street.co.uk or Boxman, the CD retailer that closed down without warning this autumn. Many of the recent victims had perfectly sound long-term business models but were unable to bridge the gap between the first and second round of financing.

Mike Murphy, Managing Director of Ebop, claims that the company was eight weeks from breaking even when the liquidators were called in. Two unsuccessful attempts to float on AIM had not helped their market value.

He says: "Our backers took the view that the Net wasn’t enough to sustain a business model such as ours (which included a record label and a popular Italian TV show, which is now being sold off). In the past, persons looked at the Internet as a whole new business model when really it was just another delivery medium."

On the day Murphy had to break the news to their staff, Ebop reported their highest-ever user figures. "It is very disheartening for entrepreneurs — we know we created good businesses in their own right," he says. The only thing to do is "batten down the hatches and wait for a sale". Flotations are now very out of fashion.

Speak to any "serious" venture capitalist these days and he will tell you that the B2C model of sponsorship and advertising has been completely discredited. Those, like Ready2, who did not wake up and smell the emergency-board-meeting-coffee and change their business models months ago, have had to suffer the consequences.

Trinny Woodall might complain that the venture capitalists they approached for a further $ 9.94m funding, "preferred not to make a decision they could be fired for rather than take the risk", but the backers don’t see it in such emotional terms.

"They have a fiduciary duty to their clients. If they think they are throwing good money away after bad, that’s their decision," says Peter Bradshaw, analyst from Merrill Lynch Associates, in their defence.

He explains the phenomenon in unequivocal Darwinian terms: "What we are seeing is the end of the beginning. That was the pre-Cambrian growth phase and this is the great extinction phase. When it is all over, good companies will emerge, but only a handful of them, and that’s been the real eye-opener for these dotcoms — it’s a winners-take-all market. Only those who are number one or two in their particular market will survive." Far from thinking that the Internet has been over hyped, most analysts believe we are underestimating the effect it will have on our lives. Online shopping has tripled in the last year (Internet Monitor BMRB figures show that consumers spent $ 3.55 billion online compared with $ 1,221,200 last year) and mobile commerce and TV commerce is predicted to outstrip even the Internet forecasts.

Ironically, this should be the time for a spurt of growth among content providers. The Telcos, who have paid a painful $ 31.24 billion for their UK 3G licences, are looking for compelling applications, services and commerce partners to justify their expenditure. Without the likes of Wowgo, how is Nokia going to persuade teenage girls to buy their new generation of phones?

Without cool broadband entertainment and short-film sites such as Pseudo, Den or Dreamworks SKG-backed Pop.com - victims of the US recent dotcom "inverse hysteria" — how are the broadband providers ever going to make ADSL attractive to the customer, offering them something they can’t get on the TV?

Where will the new generation of dotcom service providers come from if there is no funding? Venture capital matchmaking events, which were once buzzing with ambitious young entrepreneurs wanting to change the world, are now focused on pure infrastructure plays and dull enabling technologies.

Jerome Moll, chairman of tornado-insider.com and CEO of the Internet incubator, GorillaPark, which specialises in early stage start-ups, claims it is "now more difficult than it was 10 years ago to raise money for a dotcom. Venture capitalists are running scared from B2Cs." Even ivory-tower media companies such as News Networks, Emap Online, Associated Newspapers and UNM have been affected by the dot rot, and are dumping their ailing sites and modifying their new-media strategies in order to avert future embarrassment.

— By arrangement with
The Guardian

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