Fallout from the "Dot com" failout
While the graveyard grows with the graves of ill conceived ideas, funded by investors who should have know better. The problem of many the dot.coms wasn't that their ideas were bad, it was often that their structure for achieving these goals was completely top heavy. Would a local pet store hire 200 people, many of whom are top flight engineers?
That's roughly what petstore.com was doing while their sales were equal to a store in a busy metropolitian area. Is the inevitable failure of the site a surprise to anyone?
For web sites who ship physical goods, sustainable growth is the watch word, unless you were lucky enough to be Amazon who have parlayed their first mover advantage into a infrastructure advantage. One of Brave New Worlds first customers was and still is Interact! a great shop that sells new and used CD-Roms and DVDs. They have done so by selling product for more than they pay for it and providing sound customer service. Not a magic formula, but one that enabled their site to be profitable from the start. Maybe it's just me but isn't the point to make money? BTW they don't have an engineer on staff. Reselling software, like shipping dog food has a very low margin.
This column is about the other shoe about to drop on the e-commerce sector, namely the some of the companies that will be adversely affected by the correction that took place in the marketplace. This are largely businesses that have relied heavily on the dot coms. These includecompanies like Net Perceptions - an e-commerce personalization provider, Linkshare - which manages affiliate relationships for ecommerce companies. I haven't singled these companies out because they specifically are in trouble (although that may be the case, but rather the segments they represent are in trouble.)
Net Perceptions sells real time personalization software for e-commerce sites This is highly similar to Amazon recommendations feature and is really handy if you want to sell online. However the product carries an extremely high price tag (over six figures plus deployment and integration costs) and is facing increasing competition from the providers of e-commerce software (Intershop's Enfinity offers this ability as well as the open source and free All Commerceand Symphero. It's difficult to compete at that price point, especially when dot coms are dying left and right and open source software erodes your market. They face a more serious problem in that the bottom of the market is beginning to bundle these sorts of features and rightly so. Ecommerce products should provide a much higher level of reporting than they currently do as well as this sort of functionality.
Net Perceptions represents a first generation technology that is a great idea (personalized cross selling and personalization) that eventually gets wound into the core product. Auction software was the same way after Ebay's IPO. Everyone wanted to sell auction software at $55,000 - $125,000 per site. (Here's your $75,000 CD-Rom, want customization with that?) The problem was of course that the open source products killed the market for auction software. (That and there doesn't really need to be thousands of different auction sites. Network effects again.)
Outside of Oracle, are many companies going to be able to sell software at these price points? Not really since it effectively limits your customer bases to the Fortune 1,000 and Dot Com start-ups. So expect fallout among vendors who sell enterprise solutions without the marketshare of a Microsoft or Oracle, especially those selling software that is the Dot Com flavor of the month. (XML software providers come to mind ;-
Linkshare has a similar problem. They have provided an ASP model for managing affiliate networks. Sounds great until you look more closely. Linkshare, Commission Junction and BeFree all retain ownership of the affiliate, not the merchant, thus putting the merchant and the provider at odds. The pricing schemes vary as well. For example for Linkshare, there is a $5,000 set-up fee and 3% of the transaction, $1,000 monthly miniumum in fees and a three year contract term. This means at the end of your contract term, the merchant ends up without an affiliate network to call his own. All the marketing and promotion that the merchant adds value to the affiliate network which is owned by the ASP. Make sense? Not much, but out-sourcing the affiliate network made sense in the early days of electronic commerce when systems were patch work quilts hacked together with PERL and Unix pipes.
Brave New Worlds has always reccommended that the merchant retain ownership of the affiliate network, even with the added expense of administering the network. This sort of functionality is being bundled with open source e-commerce software (namely our own Symphero and commercial packages such as Intershop, so expect this business model to slowly fade. It will slowly fade due to merchant lockin. (Once you have traffic to your site coming from the affiliates, you are fairly rooted to that vendor. Uproot those affiliate roots and lose sales.) When you are a Dot com, speed to market and customer acquistion were the watchwords. Now it's a path to profitability and giving up 3% of your gross margin to an affiliate network makes no sense.
I have mentioned Intershop quite a few times. They too face this same competition from open source e-commerce packages such as Interchange, All Commerce and our package Symphero which provide similar functionality and the many other benefits that open source provides.
With the return to reality by the dot com deaths, we can expect more rational pricing by Dot com software and service providers as they readjust to the market realities - At the end of the day, you need to take in more money than you spent and you need to have a customer base which is profitable otherwise you are out of business.
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