Death of the dot.com is vastly exaggerated

The stock shake-out does not mark the end of the New Economy, rather its coming of age

At 9.30am last Monday, APBnews.com was a thriving internet content provider, putting out a well-organised, useful news site on crime in America with 140 journalists.

At 9.30am last Monday, APBnews.com was a thriving internet content provider, putting out a well-organised, useful news site on crime in America with 140 journalists.

Minutes later, the number of employees had come down a little - to zero. The company had, like many other dot.coms, hit a funding wall after it failed to find a third round of financing.

It is an all too familiar feeling in the dot.com world, which has prompted widespread calls of "I told you so" from those who always thought the New Economy too good to be true. But reports of the sector's death are vastly exaggerated; in fact, the prospects for those who get their business model right are still exceptionally bright.

That does not lessen the pain for those that fail. "We're all shocked," one employee told Jim Romenesko's MediaNews site. The company "had a new alliance with AOL, they had some alliance with a criminal textbook company, they just started their radio news service (and equipped reporters/freelancers with expensive mini-disc recorders)," wrote the APB staffer - all the things that a content provider ought to be doing.

Yet such failures co-exist with the fact that the internet economy is maturing, and fast. "2000 will be remembered as the year that important psychological thresholds were crossed and technologies once considered cutting-edge entered the mainstream - making the PC as common as the stereo system," said Patrick Callinan, an analyst at Forrester Research.

A study by the US Commerce Department found that between 1994 and 1998, IT-related employment expanded by 30 per cent to 5.2 million jobs. "The first two reports were called the 'The Emerging Digital Economy'," said William M Daley, the Secretary of Commerce of his Department's study. "Today, after just 26 months, we dropped the 'emerging', because it's here."

Another from the University of Texas shows 36 per cent job growth in purely internet-related jobs from 1998 to 1999, to nearly 2.5 million jobs. "To put that in perspective," says the survey, "there are more workers in internet-related jobs than employees for the Federal Government, excluding postal workers (1.827 million), communications and public utilities (2.390 million) and insurance (2.405 million) industries."

There is, of course, a common acceptance that the investment expectations which have gone into the sector have both exceeded the realities, and encouraged some losers on the way. Forrester Research predicts the majority of dot.coms will have gone out of business in a year's time.

In one sense, none of this issurprising: America's Small Business Administration reckons 40 per cent of all start-ups fail within six years. Industry Standard estimates that the chances a Net business plan will make it to IPO or acquisition are only 1 in 833. Research group VentureOne figures that 3,018 Net companies have found venture backing since 1994, of which only 600 have either gone public or been acquired.

The fallout, especially among electronic retail sites, is very real and continuing. Buy.com, Autoweb.com and at least 10 other internet retailers will either find ways to boost their cash reserves or go to the wall in the next year, Goldman Sachs e-commerce analyst Anthony Noto said recently.

But Mr Noto is optimistic about companies which have established clear business models like Priceline.com, Amazon.com, 1-800-Flowers.com and Barnesandnoble.com. The online retail sector is thinning out in a relatively predictable way.

There is another subsector which is proving less predictable, however, and probably more interesting longer term: the sites which do not specifically retail anything, but either provide Web content - including media like APB - or intermediate between businesses.

"There is tremendous potential for growth in the Intermediary layer of the internet economy," says the Texas study, "but it is the layer most likely to contain the most surprises in the future since many intermediary businesses are still trying to demonstrate their value." It estimates that internet intermediaries have the highest level of revenue per employee, but the lowest level of market consolidation: it is clearly a sector ripe for big change, big profits but also big risks.

In retailing the revenue stream - and hence the path to profitability - is relatively clear; not so for intermediaries. "The click-through advertising revenue model is coming under fire and a clear replacement has not yet emerged," says the Texas study. "Market-making intermediaries can only grow relative to the volume of online procurement and are still in the investment phase of testing their business model."

Part of the answer - as in electronic retailing - is likely to lie in acquisitions by bricks and mortar companies. APB, for instance, is still looking for funding, says CEO Marshall Davidson, but probably linked to a larger media company.

That trend, in turn, means a more selective - but potentially as lucrative - stream of funding from venture capital for other firms. But to get the cash, new firms need proven management and astute placing in the market.

Despite the market correction, venture capital is flourishing. Investments soared in the first quarter of the year, according to the National Venture Capital Association and Venture Economics. Venture capitalists invested $22.7bn into companies, compared with $6.2bn in the first quarter of 1999 - a 266 per cent increase. And venture capital firms had a record fund-raising run last year, so there is still plenty of money around.

There is a new emphasis on profit, where before growth was at a premium. "Companies that make money were once derided as old-fashioned but are now coming back in vogue," says Renaissance Capital, a venture capital research firm.

The line of companies waiting for IPOs has not got any shorter, though the mark-ups once floated are smaller. Renaissance notes that "the 379 pending new issues in the pipeline still stand near an all-time high". If the e-boom is over, in short, it certainly doesn't look like it: it is just changing shape.