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The Web Economy’s Wild Ride

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ObjectivesIn this chapter, you will learn: The main reasons that business on the

Web grew so quickly The reasons that Web sites experienced

huge losses in the late 1990s Global economic factors that contributed

to the Web economy’s downturn The role of brands in Web site success The differences between online and mass

media advertising

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Objectives The rush to invest in sites that were

conceptually flawed How traditional businesses entered the

online online marketplace What to expect in the future for Web

business

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A quick tour of the Web landscapeWhat goes up must come down

Web start-ups or businesses that exist only online are called pure-coms

Dot-com refers to the online businesses of both the pure-coms and the traditional marketers

Having a “dot-com” next to your name practically guaranteed success; not having one got you branded “old fashioned” by the industry media

For a while, the sky was the limit and electronic commerce (e-commerce) increased to record levels

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What Goes Up Must Come Down The third quarter of 2000 saw the

beginning of the end of the hype

Interest rates and gasoline prices were on the rise as the U.S. presidential election was being hotly contested

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The Party’s Over In the middle of the third quarter of 2000, the

pure-com market started to collapse

Priceline.com stock price fell from the 52-week high of around $104 to just over $1 per share

Amazon.com stock dropped from a high of $250 per share to around $12

It was no longer a badge of pride to be an Internet only business and many pure-coms re-branded themselves to avoid the negative ramifications of Internet association

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Many Causes The inexhaustible venture capital

money that funded many start-ups began drying up

The Federal Reserve’s planned slow down of the U.S. economy was not as effective as anticipated

The growth of the computer industry that had helped fuel the economy of the 1990s suddenly began to dry up

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Many Causes

NASDAQ, the home of the pure-coms and other tech funds, began a dramatic downturn

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A Changing Economy In the Old Economy fewer than 5 percent

of American households owned stock Those who did own stock were generally

a specific type of conservative white-collar investor

The market was a source of stability even during times of economic recession

Stock reports were available in a few editions of a daily newspaper

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A Changing Economy The New Economy of the 1990s and beyond

is an environment of instant data, endless opportunity, and instantaneous decision-making

The average American is an informed and active participant

Circumstances and conditions we’ve never faced before are creating a haphazard set of economic rules that we struggle to understand and work within

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An Upward Spiral For most of the 1990s, the U.S. enjoyed intense

economic growth

In 1999 alone, the Dow was up 25 percent; the NASDAQ climbed 85 percent

Growth of new Internet companies from pure-coms, consultancies, ISPs, to production houses, benefited the existing tech companies as they gained new customers

Smart money at the time was betting that Internet usage would eclipse television usage

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An Upward Spiral NASDAQ’s indexes were rising higher than

ever

The Federal Reserve issued repeated warnings about the dangers of inflation in an over-heated market, but investors continued to pour money into many pure-com start-ups

Seemingly endless wealth and extraordinarily high consumer confidence were creating new markets for high-tech gizmos

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An Upward Spiral To maintain growth, companies needed to

expand and recruit skilled workers

The market for employees was saturated

Employers went to great lengths to find and retain qualified employees

High demand for employees is what kept the Federal Reserve nervous about potential inflation

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An Upward Spiral

Increased salaries to lure and maintain new workers would require a rise in prices of their goods and services

Instead of offering more cash, enticing stock options were offered

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An Upward Spiral

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The Downward Slide When Pets.com shut its doors in the third quarter

of 2000 it was the first real indicator that something was terribly wrong

Soon, many high profile pure-coms were warning that they only had enough cash to last for a few more months

Traditional tech stocks plummeted as bills from failing pure-coms went unpaid

The economy for the third quarter of 2000 grew at 2.2 percent, the slowest rate in years

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The Downward Slide

The Standard 100, an index consisting only of dot-com and tech stocks gained 28 percent between January 2000 and March 2000

However, the Standard 100 suffered a 69 percent loss between January and November of 2000

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Contributing FactorsThe New Economy Environment The New Economy is an economic

environment in which the majority of American workers are participants

Information has become easier than ever to get and this brought too many inexperienced people into the stock market

With so many people invested in stocks, the market became less a source of stability and more a measure of the economy in general

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Contributing FactorsThe New Economy Environment Consumer confidence is the single most

important factor in maintaining momentum in the economy

The slide in the market and talk of a recession didn’t immediately hurt the unemployment rate, though later on, it rose to 5 percent

Over 145,000 new jobs were created in the midst of all the layoffs, although biotech and pharmaceutical firms created most of these new jobs

At the same time, nearly 65,000 tech workers lost their jobs

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Disregarding the Brand Basics Many pure-com sites used large-scale advertising

campaigns to drive traffic to their sites and not enough to build up the brand

A brand is the promise that a Web site, company, product, or service makes to its customers

Logos, along with tag lines, colors, and font styles are just components of the brand

One of the hard lessons of marketing is that it is rare for a brand to be built over a very short period of time

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Dot-Coms and Branding Failure to deliver on brand promises is

where many of the pure-coms went wrong Massive amounts of money thrown at

expensive advertising campaigns do not equate to brand development

Instead of expensive ad campaigns, the pure-coms should have spent more on shipping and distribution systems and building site enhancements to keep visitors coming back

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Dot-Coms and Branding Customer service, public relations, a well

organized marketing strategy, uniqueness in offering, and quality of service are all part of the overall brand

Brands take time to develop and the strategy behind them needs to be long-term – not overnight

Although a strong brand cannot guarantee success, the lack of one can almost guarantee failure

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The Perceived Failure (and Misconception) of Banner Advertising

Web site banner advertising is more effective than its mass media counterparts

According to Jupiter Media Metrix, general consumers are over 3.5 times more likely to retain and recall the message and brand associated with a Web banner ad than with a TV commercial

Marketers new to the Web are eager to quantify advertising success by measuring click-through

Currently, click-through rates are approximately 0.5 percent

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Recognition versus Action Most of the TV ads are brand recognition efforts An advertiser doesn’t expect you to get up and

buy their product as soon as you see the commercial; instead its goal is to build the brand

Television has survived and prospered as an industry because it is an advertising/branding medium, not a call to action forum

Television also has some call to action ads, which require immediate customer response to be successful

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Revenue Models The main reason for starting a Web site

is usually to make money and there are various methods to bring in revenue online, including: Selling advertising

Selling information

Selling products or services

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Revenue Models Online retail sales known as business-to-business

electronic commerce (B2C), comprises the largest percentage of sites and by all indications, most sites should be generating a profit by now

A July 2001 article in The Industry Standard showed that of the 43 publicly traded online retailers only four had managed to squeeze out a profit

Online sales are obviously hot and still growing rapidly, but distribution problems often cost sites more money than anticipated

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Some Ideas Just Don’t Work

Mercata.com worked off the concept of group buying, which is the idea that the more people buy a product, the lower the price becomes

It was difficult or impossible to find a large group of shoppers who wanted to buy the same gadget all at the same time

The site closed at the end of January 2001

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Unforeseen Issues in Electronic Commerce As the Web was gaining some commercial

success, a few economic theories became popular among site developers and marketers: If you build it, they will come

The Web lets small players compete equally with the monster corporations

Getting into a Web business is relatively cheap

Not surprisingly, not one of these early “Webisms” proved true

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The Web Got Ahead of Itself During the 1999 pure-com boom, it was generally

believed that online purchases would account for a significant percentage of all retail sales

As of the first quarter of 2001, online sales accounted for only about 1 percent of all retail sales

Three reasons why Americans weren’t ready to do more Web business: Poor service and high prices

Too much to choose from

Inconsistent technology

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Too Many Choices Is more always better?

An online search normally results in hundreds of items

Overwhelmingly, buyers have turned away from an excess of choice, abandoning their intended purchase because of “selection fatigue”

Site navigation and the ability to better confine a search for increased convenience are issues that e-tailers will need to deal with

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Enter the Experienced Business Players

While start-ups were dominating the Internet the established retailers were barely visible in the online world

The big players suddenly became dinosaurs

Did the established retailers know something?

In the rubble of start-up collapse, the Internet horizon boasts a new landscape

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Brand Loyalty and an Established Market Established retailers already enjoy brands

that have penetrated consumers’ consciousness over the course of decades, not just months

Brand recognition brings a high level of trust

Ideas and good intentions just can’t compete with experience and strong branding

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Deeper Pockets Many pure-coms were warning that they

only had enough cash to last for a few more months

Some traditional marketers have also succumbed to a dropping economy

Generally, the big retailers have dot-com operations that can rely on more traditional sources of revenue to weather the storm

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Easier, Less Expensive Marketing Avenues Established retailers already have

marketing dollars worked into their annual budgets as they continue brand awareness campaigns

Mailing lists of established customers already exist

Brick-and-mortar locations are aggressively used to promote their affiliated Web sites

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What’s in the Future? The one universal truth that we can

safely assume is that the Web will only get bigger and better

It won’t necessarily take the path that most people expected it to

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Hype Will be Replaced by Substance

The new Web businesses will be stronger, more reliable with clear, manageable business models

Partnerships similar to the ToysRUs/Amazon affiliation will be standard

Shoppers will have more options for using both a retailer’s Web site as well as its brick-and-mortar location

This form of partnership will work together more frequently for service, support, ease of production return, and so on

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Convenience Will Increase While Prices Will Decrease Web businesses will develop dramatic

improvements in how they serve their clientele

real-time chat sessions

toll-free 24-hour phone access to helpdesks at partnership’s brick-and-mortar retail location

e-tailers will quickly find ways to reduce shipping costs and pass those savings along to valuable customers to bring back the disenchanted and also help recruit new Web shoppers as well

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Merging Old and New Technologies As TV and Internet converge, and as

products like TiVo catch on, product advertising will take the form of in-show placements rather than standard 30-second spots

In the future, with a click of a button on the remote, viewers will go directly to the product’s Web site for further information or order it directly

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Summary As the Web comes of age and the shakeout leaves many

of the original players dead and forgotten, the financial world is learning a few lessons about the Web and the New Economy

The stock market has become a part of common culture, and fortunes rise and fall with popular opinion

Traditional marketers are making a big splash on the Web, leveraging their established brand identity, deeper financial pockets, and easier marketing avenues for better Web potential.

The Web will become a haven for traditional marketers, as business-to-business sites become more popular

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Summary The most important factor – increased

convenience – ultimately, will drive the success of Web sales

Increased customer convenience will need to be enhanced to compensate for high shipping costs as the dot-coms make their way into the next phase of development