PAPERCUTS: Gone In 60 Seconds

If you've been shopping for shoes at PayLess, and decorating with "simulated wood grain" furniture from WalMart, while your friends and neighbors quintupled their paper profits in the stock market, you may just have the last laugh yet.

The good times are rolling to a screeching halt. Even companies as bulletproof as Cisco Systems and Intel are feeling the backlash. There is no surer indication that the four year internet bubble has burst than the precarious health of, and the recent disembowelling of, the premier content provider on the Web.

Salon went public less than 13 months ago at $10.50 a share, staffed with proven talent, and offering the finest political and cultural commentary in cyberspace. A few days later, it peaked at $15.12 a share, and thereafter, sank like a stone. By January 16 of this year, the company was spending $3 for every dollar it took in, and Salon's stock had sunk to $1.25 a share, a loss of 92 percent of its offering price. This is a company that was solid, respectable, and providing a service that people actually wanted, yet it never made a nickel of profit. Which makes the prospects for the rest of the dot coms look bleak indeed.

After the gold rush, it seems clear that IPO's based on marketing non-existent inventories and dubious content are as worthless as iron pyrite. CEO's still young enough to get carded turn out to have the lifespan of mayflies, and fools and their money don't stick together for long. Venture capital, available six months ago to anyone in a flannel shirt who could spell Java, has dried up faster than spit on a sidewalk in July.

At the end of the day, the only ones left standing are the brokerage houses, who will make a buck whether you buy long or sell short. And the underwriters, the real villains in the dot com debacle. As long as there was an Internet start-up with an itch to go public, no matter how addlebrained its premise, there was an underwriter willing to raise capital for it. Why not? For every dollar raised in an IPO, the underwriter typically walks away with 7 or 8 cents.

Goldman, Sachs & Company is the premier underwriter in the technology field. In the Spring of 1998, it raised $100 million in an IPO for the insufferably insipid, an Oprah-esque "Women's Network", which offers such "Solutions for your life" as lingerie and swimsuits for the extremely pregnant. On that deal alone, Goldman made a tidy profit of $8.4 million. Of the roughly 60 IPO's Goldman Sachs has put together in the last four years, less than six have done well, and forty others, like eToys,, and NetZero, are about to be euthanised.

The mystery here is not just that the dot com premise is flimsy, it's that it took everybody so long to figure that out. There may be an infinite number of possible websites, 800 million now and counting, but there are only a finite number of prospective buyers. While bricks and mortar businesses have a built in customer base, readily transferrable to cyberspace, companies without a proven track record have no guarantee of success, no matter how many millions they spend on advertising.

Even if a website is as tantalizing as the Victoria's Secret catalog, the bottom line is profit margin. When an aggressive newcomer like slashes prices to the bone to bring in customers, it ends up eating through its capitalization, and running out of money, which some are predicting as early as next year for the bigfoot that ate bookstores.

Sacrificing profits to capture a chunk of the market is not innovative. Big chains like WalMart and Price Chopper have been doing it for years, moving to new locations and cutting prices, to force smaller rivals out of business. Once these behemoths have hung the competition out to dry, they raise prices back to a profitable level and begin to make real money.

This strategy may be fine for companies with name brand recognition, and a cash reserve sufficient to fund a price war. But in the case of speculative ventures, not having a continuous revenue stream, or even a workable business plan, translates into multimillion dollar losses. If there's a lesson to be learned from the pyrotechnics of the last few years, it's that traditional business models still apply. There are no free rides, not even for sock puppets who deliver Ken-L-Ration to your door.

For every start-up that turns out to be the next Microsoft, there will be tens of thousands of losers, not the least of them the hapless investors. If you really want to make a few bucks, log on to the "dead pool", f*** (probity forbids my filling in the asterisks), and bet on which of the dot coms will be the next to get flushed.

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