Internet business news and analysis by Dylan Tweney

The coming shakeout

After a couple years of hearing almost nothing but success stories from the dot-com quarter, we're starting to see the BEGINNINGS OF A SHAKEOUT among Internet companies. Last week Peapod shocked investors with the announcement that its CEO, Bill Malloy, is retiring (due to "health reasons") -- and that consequently the company is losing $120 million in promised investments [1,2]. Peapod -- a seemingly successful online grocer that predates Webvan by several years -- has only $3 million in cash on hand, which may be enough for the next month or so. Oops. Suddenly the company is looking for a quick exit via acquisition, not the hoped-for IPO.

I can only imagine the boardroom meetings with Malloy. Somebody was no doubt screaming "You'll never work in this industry again!" The only thing is, an experienced dot-com CEO is such a hot commodity that, even with this defection on his permanent record, I'm sure we'll be seeing Malloy at the helm of another Internet company before long. Once his health returns, of course.

Peapod's spectacular flameout coincides with another dot-com disappointment: CDNow. The company announced last week that its planned merger with Columbia House was off [3]. While Columbia House still plans to invest $51 million in CDNow over the next year, that's less than a third of what they need to remain afloat, according to their CDNow's CEO Jason Olim [4]. While the company looks for a partner with deep pockets, they're trimming their marketing and promotions budget -- which will in turn hurt revenues. Catch-22.

Also on this page:
- Jumping on the business-to-business bandwagon
- Software patents revisited

- Search back issues

See the future:
Next week's Tweney Report, now in progress at my new weblog.

Both companies invite comparison with Iridium. While it's not exactly a dot-com stock, this communications boondoggle has many of the same characteristics: massive upfront spending, vague marketing plans, miniscule revenues, and ultimately disappointment and ruin. Motorola and others sank billions into Iridium, a massive network of satellites (66 in all) linking up proprietary Iridium wireless phones. The great thing about these phones is that they could be used anywhere on Earth: Mount Everest, the Sahara desert, Cleveland, you name it.

Unfortunately, the phones and the service cost an arm and a leg. And if you think about it, those remote locations don't tend to contain that many people who need to be in constant touch with the rest of the world. After failing to find someone to acquire its assets, Iridium is shutting off the service (stranding a couple of Norwegian polar explorers in the process) and plans to drop its satellites into the sea [5].

Reader Jon Pall Hreinsson corrects me -- the Polar explorers are not Norwegian:
"They are Icelandic (We are a small country and need all the attention we can get)"
(22 March)

Peapod, CDNow, and Iridium point to one thing: The days when investors would tolerate billion-dollar losses in the name of "infrastructure" and "building market share" may be coming to a close. Peapod and Iridium had both established terrific infrastructures, and CDNow has succeeded in building an impressive customer base. But none of these companies was able to generate sufficient revenues quickly enough. In the absence of additional capital investment, they were doomed -- just like any company in a comparable situation.

And there may be more companies in that position than you think. A recent Barron's article examined the balance sheets and cash flow of 207 top Internet companies. Their conclusions? A quarter of the companies surveyed -- 51 in all -- will run out of cash this year, if they don't secure additional investments before then [6].

Raising more capital is easy when your stock is moving up. But if the stock takes a beating in the market, securing cash gets much, much harder. With no sugar daddies in sight, a company's burn rate and cash reserves will start to be much more critical to its survival -- let alone success.

Overall, it's not looking good for consumer-oriented Internet companies right now. As Barron's points out, e-tailing market leaders like E-Loan, EToys, CDNow, and Amazon.com are already well below their onetime highs. Business-to-business stocks are doing much better, although Barron's is pessimistic about the long-term prospects of this sector, too, which they point out is also very dependent high-flying stock prices.

Where's it all headed? I certainly don't pretend to understand the stock market. But one thing seems clear: Commerce portals and e-tailers are beginning to feel real pain.

[1] Peapod Splits Open

[2] Peapod Considers Possible Sale as CEO Leaves

[3] CDNow-Columbia merger falls through

[4] CDNow flounders following failed merger

[5] Iridium asks court to let satellites burn

[6] Burning Up -- Warning: Internet companies are running out of cash -- fast
-- try this alternate URL if the above link doesn't work:

Just as fast as investors are fleeing consumer-oriented Internet companies, they're rushing onto the BUSINESS-TO-BUSINESS BANDWAGON.

Although I've been writing about B2B ever since I started covering e-commerce, the opportunity really hit me last year, when I attended the first Net Market Makers conference in Berkeley. At the time, it seemed that the Internet's first gold rush had given way to land grab fever. Savvy entrepreneurs with deep experience in specific industries were rushing to create vertical marketplaces for those industries, knowing that ultimately each industry can support only one B2B trading hub. They -- and the VCs backing them -- were eager to stake out choice territory before anyone else could [7].

Less than a year has gone by and hundreds of B2B marketplaces have been staked out already. VerticalNet alone now has over 50 separate marketplaces, and B2B poster child Chemdex, which was just a trading hub for the life sciences industry, has renamed itself Ventro and is opening trading hubs in a handful of other industries. Last week, eBay unveiled a business-to-business auction [8], while Yahoo and AOL both announced plans to deliver services to the B2B market [9,10]. Even the grocery industry, envious of the auto industry's big plans (and perhaps chagrined by the Peapod debacle) is getting into the B2B act [11].

Meanwhile, the Net Market Makers newsletter and conference is booming -- so much so that founder Kevin Jones has already sold his company, to Jupiter Communications, for a healthy dose of cash and stock. Call it the Alsop Indicator: When newsletters start to get acquired by big media companies for large amounts of money, it's a sure sign that the markets they cover are reaching maturity.

I talked with Kevin and a number of other B2B entrepreneurs last week when doing the research and interviews for a feature story on B2B marketing (the story will appear in April; I'll publish the URL here as soon as I have one). One thing really struck me: There's a lot of excitement around B2B marketplaces right now.

It's funny, when you think about what these marketplaces trade in -- raw steel, industrial reagents, natural gas, cuts of beef, and similarly prosaic products. But the opportunities to make these markets more efficient are so massive that people really get enthusiastic. When you're used to doing business by phone and fax, an online marketplace that actually works is a revolutionary development. No wonder folks get excited.

What does it take to make a successful B2B trading hub? One thing is a critical mass of buyers and suppliers. Another, as the founder of B2B meat market FoodUSA Rod Heller told me, is that the marketplace needs to have substantial trading activity right from the start -- otherwise potential marketplace participants will see the lack of action and they'll never return. And a third component is deep, reliable information on the market's products, services, and participants.

Infrastructure is also critical -- you've got to provide security, ease of use, and a transaction-processing system that integrates easily with the information systems of the buyers and sellers who will use it. (Interestingly, Microsoft seems far behind the curve in providing software for the B2B space [12].)

Over the next few issues of the Tweney Report, I'll examine some of the characteristics of successful B2B marketplaces in more detail. If you are involved in a B2B trading hub / vertical marketplace / exchange, drop me a line -- I'd love to hear your thoughts.

[7] Better claim your space: The Internet land grab will produce many minimonopolies

[8] eBay latest to tout its e-business ways

[9] Yahoo starts B2B market listing service

[10] AOL taps business e-commerce rush

[11] Grocery Manufacturers Go B-to-B

[12] B-to-B exchanges bypass Microsoft

Reader Rich Clayton took me to task for applauding Jeff Bezos' recent about-face on SOFTWARE PATENTS. Rich wrote: "My impression from reading news commentaries was that a lot of digerati were skeptical about Bezos' motives: they anticipate that Amazon will continue pursuing patents for what might seem to be obvious innovations, even while claiming that they'd like to see the whole system changed for public relations reasons. That having been said, one could always argue that Amazon's pursuit of patents does not belie Bezo's interest in changing patent laws, since Amazon needs to protect its interests in the currently existing system (sort of like the way Al Gore needs to keep accepting soft money contributions, even though he's now in favor of campaign finance reform)."

Rich went on to point me to an article by James Gleick that appeared in the NY Times Magazine a week ago; it's also available at Gleick's Web site [13]. Gleick's article is long, but it's thoughtful and has a lot of meat to it.

As Gleick argues, the initial purpose of the Patent Office was to stimulate invention and innovation. Now, Gleick persuasively argues, patents serve much more to protect the interests of large corporations than they serve to stimulate innovation. When it typically costs $1 million or more to defend a patent in court, individual inventors and small companies have little chance of leveraging the value their patents provide. Instead, it's big companies who benefit, by using phalanxes of patents (and lawyers) to collect licensing fees, drive cross-licensing agreements, and motivate mergers and acquisitions.

What's more, the number of patents is swelling. In the late 1700s and early 1800s, patents were a relatively rare occurrence; now 10,000 patents are issued every week. Since the Patent Office's income depends on patent fees, it has a strong incentive to award more and more patents. And recent court decisions have opened the gates to patents on software and even on ways of doing business.

Is the U.S. patent system is spinning out of control? Rich thinks so -- and, as he pointed out in his message to me, "shareware and open source software both seem able to find people willing to invest time and money into developing them despite the lack of patent-like property rights. Which suggests that the much touted necessity of exclusive private property rights for an innovation may be a bit exaggerated."

[13] Patently absurd

~ Back issues ~

Closing the gap: Jeff Bezos changes his mind on software patents; Webvan gears up; bridging the digital divide?; Levinson on buyer pooling (9 March 2000).

Massive marketplaces: The Big Three automakers -- the biggest companies in the world -- are building an online trading hub; Amazon.com gets a ridiculous patent (2.29.2000).

Introducing Utipia: Entrepreneur's notebook on the launch of my company, Utipia Inc.; DoubleClick's privacy gaffes (2.15.2000).

The whole dang archive...