What Happened to the Stock Market?
| Category: E-commerce | Date: 2001-08-31 |
If you have any money in mutual funds today (and who doesn’t?) you are undoubtedly biting your nails. Funds that went up 20% or more per year for the past five years are barely holding on at a 3% annual gain after nine months of 2000. What is going on, and what will the future hold for us investors?
The answer has a lot to do with the fate of the dot coms, and we marketers have a lot to do with that. For the past four years, we have all been going through a form of mass insanity concerning the Internet. At first many dismissed the web as a valuable phenomenon like DVD or HDTV or video players that might be very successful, but would not turn our world upside down. Then AOL and Amazon caught on, and we realized the web was for real. Many dot com startups had IPOs. Their employees became millionaires. Venture capitalists woke up, and began pouring hundreds of billions of venture dollars into thousands of new dot coms. A new gold rush was on. The NASDAQ began to soar. Many of us saw our mutual fund holdings expand beyond our wildest dreams. But it all came to an end on All Fools Day, 2000. What happened? What went wrong?
On the right side, businesses are working away producing goods and services, paying out wages, salaries, dividends and interest to people, who are also consumers. The consumers, in turn buy products and services from the businesses. For the past 18 years we have had a booming economy with expanding businesses, increasing employment, high technology, and high profits. It has been and still is wonderful. Business, in general is still excellent.
Both businesses and consumers have been saving some of their money. These savings through banks, insurance companies, and pension funds find their way to the venture capitalists and mutual fund managers who look for profitable investments in industry. These investments are the main reason why the economy has continued to grow, and why the stock market has been so wonderful for the past seven or eight years.
When the dot coms began to look promising, the venture capitalists began to divert more and more of America’s savings into these uncertain enterprises. The price of the stock in some of these startups grew so fast that the investors and employees began to feel very rich and successful. Mass hysteria took over as each VC firm frantically sought new web related ventures to throw money at. A couple of years ago, I worked with a group of entrepreneurs seeking to start a new telemarketing venture that promised to make $154 million in profits in the third year based on an initial investment of $8.5 million. The three VC firms that looked at our plans in detail agreed that the venture looked solid and the projections reasonable. But all of them rejected our project because it was not a dot com. Their investors were only interested in web startups, we were told.
The problem with the dot coms, however, was that more than 90% of them not only had no profits, they did not even have hope of significant revenue in the foreseeable future. Many of them were staffed by young techies with no experience at all in business. Profits, we were told, were an old fashioned idea that went out when the web was invented. Market share was everything. Sign up millions of customers, have an IPO, and become rich. That was the new American way.
It all came to a halt on All Fools Day of 2000 when it looked as if the government was going to break up Microsoft. Microsoft, Intel, Cisco and related high tech companies have been the rocks on which the new economy had been founded. The possibility that the government could destroy one, or more, of these solid companies with a court decision led investors to look closely at where their money was going. They did not like what they saw. The song that profits were unimportant no longer sounded as soothing as before. The venture capitalists plugged the drain leading to the dot coms. As the venture funds supporting the startups began to run out they began to fold. The mass hysteria overnight changed to mass paranoia as investors struggled to cut loose from the dot com losers.
But why does the stock market continue to go down, when the basic economy is still so good? Unemployment is still at an all time now, and production and productivity at an all time high. Inflation is low. The answer can be seen in the diagram above. What happened is that hundreds of billions of dollars of America’s savings, instead of being invested in profitable enterprises, were squandered on dot com companies which have failed, or are in the process of failing. Like the savings and loan fiasco, the money is gone. This is money that previously would have been invested in profitable companies. These disastrous losses will continue for some time until the last dot com has frittered away their capital. It will take us several years to rebuild our investment funds to where they were before April 1.
Fine, but where do we marketers come in? Isn’t this a problem created by the Venture Capitalists, not by us marketers? Well, yes and no. It seems to me that most of us have tended to assume that everything we learned about business and marketing over the past decades doesn’t apply to the Web. Wrong. What we direct marketers have learned does give us solid guidance for Internet business. Follow these rules, and e-commerce can become profitable. If we had followed these rules from the beginning, we would have funded only successful dot coms, and the April 1 melt down would not have happened. What are the rules?
· Profits are important. Any business must make a profit in the foreseeable future, or it will fail and should not be funded.
· The web is not a magic selling medium that wipes out our prior experience. We will still need retail stores, radio, TV, telemarketing, print ads, catalogs and direct mail.
· Banner ads work well for some products. Web advertising, however, will never be sufficiently profitable alone to support any but a very few web sites. Why? Because there are millions of web sites, and it is very easy to start another one. Web advertising rates will continue to fall.
· The web is not a push medium. It is not a pull medium either. It is an ordering medium. If you already know what you want, the web is often the fastest way to get it.
· The web is an information resource. Putting all your tech info on the web is a favor to your customers, and can save you millions of dollars. Ditto for letting customers track their shipments, or getting the answers to frequently asked questions. Fedex and UPS depend on this kind of information to keep their costs down and their profits up.
· The web will probably eventually replace the Yellow Pages. It may also replace the White Pages. In doing so, it will save billions of dollars in printing expense, and provide much more useful service.
· To be useful, you have to have all of your products and services on the web. I worked with a major computer hardware manufacturer that had an e-commerce web site. I went on the site to buy toner for my printer, made by this company. The toner was not on the web site. I had to buy it from Staples. Their web site was useless to me. Why would I go back?
· The web will never replace brand names. The millions spent creating more than 500 household names like Hertz, Campbell’s Soup, Xerox, or Kleenex are money well spent. It is hard to create similar names on the web. Amazon, E*TRADE, AOL, Yahoo are a few of the exceptions to that rule. How many others can you think of?
· The web will never replace supermarkets. Why? Because the margin of supermarkets is so small that the web, which requires home delivery of perishable products, can never compete price wise.
· The web will never replace Malls. Malls are meeting places. They are entertaining. They introduce you to new products and services that cannot easily be displayed on the web.
· The web will never replace catalogs. Most people have phone (not cable) modems. They hate to wait while pages are downloaded so they can view them. It is much easier to use a catalog. Where the web is useful, however, is in replacing the telemarketer. People also hate to be put on hold. Use a catalog for selling, and the web for ordering, and you have the perfect combination.
About the Author.
Arthur M. Hughes.
:To contact see details below.
DBMarkets@aol.com
http://www.msdbm.com
The answer has a lot to do with the fate of the dot coms, and we marketers have a lot to do with that. For the past four years, we have all been going through a form of mass insanity concerning the Internet. At first many dismissed the web as a valuable phenomenon like DVD or HDTV or video players that might be very successful, but would not turn our world upside down. Then AOL and Amazon caught on, and we realized the web was for real. Many dot com startups had IPOs. Their employees became millionaires. Venture capitalists woke up, and began pouring hundreds of billions of venture dollars into thousands of new dot coms. A new gold rush was on. The NASDAQ began to soar. Many of us saw our mutual fund holdings expand beyond our wildest dreams. But it all came to an end on All Fools Day, 2000. What happened? What went wrong?
On the right side, businesses are working away producing goods and services, paying out wages, salaries, dividends and interest to people, who are also consumers. The consumers, in turn buy products and services from the businesses. For the past 18 years we have had a booming economy with expanding businesses, increasing employment, high technology, and high profits. It has been and still is wonderful. Business, in general is still excellent.
Both businesses and consumers have been saving some of their money. These savings through banks, insurance companies, and pension funds find their way to the venture capitalists and mutual fund managers who look for profitable investments in industry. These investments are the main reason why the economy has continued to grow, and why the stock market has been so wonderful for the past seven or eight years.
When the dot coms began to look promising, the venture capitalists began to divert more and more of America’s savings into these uncertain enterprises. The price of the stock in some of these startups grew so fast that the investors and employees began to feel very rich and successful. Mass hysteria took over as each VC firm frantically sought new web related ventures to throw money at. A couple of years ago, I worked with a group of entrepreneurs seeking to start a new telemarketing venture that promised to make $154 million in profits in the third year based on an initial investment of $8.5 million. The three VC firms that looked at our plans in detail agreed that the venture looked solid and the projections reasonable. But all of them rejected our project because it was not a dot com. Their investors were only interested in web startups, we were told.
The problem with the dot coms, however, was that more than 90% of them not only had no profits, they did not even have hope of significant revenue in the foreseeable future. Many of them were staffed by young techies with no experience at all in business. Profits, we were told, were an old fashioned idea that went out when the web was invented. Market share was everything. Sign up millions of customers, have an IPO, and become rich. That was the new American way.
It all came to a halt on All Fools Day of 2000 when it looked as if the government was going to break up Microsoft. Microsoft, Intel, Cisco and related high tech companies have been the rocks on which the new economy had been founded. The possibility that the government could destroy one, or more, of these solid companies with a court decision led investors to look closely at where their money was going. They did not like what they saw. The song that profits were unimportant no longer sounded as soothing as before. The venture capitalists plugged the drain leading to the dot coms. As the venture funds supporting the startups began to run out they began to fold. The mass hysteria overnight changed to mass paranoia as investors struggled to cut loose from the dot com losers.
But why does the stock market continue to go down, when the basic economy is still so good? Unemployment is still at an all time now, and production and productivity at an all time high. Inflation is low. The answer can be seen in the diagram above. What happened is that hundreds of billions of dollars of America’s savings, instead of being invested in profitable enterprises, were squandered on dot com companies which have failed, or are in the process of failing. Like the savings and loan fiasco, the money is gone. This is money that previously would have been invested in profitable companies. These disastrous losses will continue for some time until the last dot com has frittered away their capital. It will take us several years to rebuild our investment funds to where they were before April 1.
Fine, but where do we marketers come in? Isn’t this a problem created by the Venture Capitalists, not by us marketers? Well, yes and no. It seems to me that most of us have tended to assume that everything we learned about business and marketing over the past decades doesn’t apply to the Web. Wrong. What we direct marketers have learned does give us solid guidance for Internet business. Follow these rules, and e-commerce can become profitable. If we had followed these rules from the beginning, we would have funded only successful dot coms, and the April 1 melt down would not have happened. What are the rules?
· Profits are important. Any business must make a profit in the foreseeable future, or it will fail and should not be funded.
· The web is not a magic selling medium that wipes out our prior experience. We will still need retail stores, radio, TV, telemarketing, print ads, catalogs and direct mail.
· Banner ads work well for some products. Web advertising, however, will never be sufficiently profitable alone to support any but a very few web sites. Why? Because there are millions of web sites, and it is very easy to start another one. Web advertising rates will continue to fall.
· The web is not a push medium. It is not a pull medium either. It is an ordering medium. If you already know what you want, the web is often the fastest way to get it.
· The web is an information resource. Putting all your tech info on the web is a favor to your customers, and can save you millions of dollars. Ditto for letting customers track their shipments, or getting the answers to frequently asked questions. Fedex and UPS depend on this kind of information to keep their costs down and their profits up.
· The web will probably eventually replace the Yellow Pages. It may also replace the White Pages. In doing so, it will save billions of dollars in printing expense, and provide much more useful service.
· To be useful, you have to have all of your products and services on the web. I worked with a major computer hardware manufacturer that had an e-commerce web site. I went on the site to buy toner for my printer, made by this company. The toner was not on the web site. I had to buy it from Staples. Their web site was useless to me. Why would I go back?
· The web will never replace brand names. The millions spent creating more than 500 household names like Hertz, Campbell’s Soup, Xerox, or Kleenex are money well spent. It is hard to create similar names on the web. Amazon, E*TRADE, AOL, Yahoo are a few of the exceptions to that rule. How many others can you think of?
· The web will never replace supermarkets. Why? Because the margin of supermarkets is so small that the web, which requires home delivery of perishable products, can never compete price wise.
· The web will never replace Malls. Malls are meeting places. They are entertaining. They introduce you to new products and services that cannot easily be displayed on the web.
· The web will never replace catalogs. Most people have phone (not cable) modems. They hate to wait while pages are downloaded so they can view them. It is much easier to use a catalog. Where the web is useful, however, is in replacing the telemarketer. People also hate to be put on hold. Use a catalog for selling, and the web for ordering, and you have the perfect combination.
About the Author.
Arthur M. Hughes.
:To contact see details below.
DBMarkets@aol.com
http://www.msdbm.com
Copyright © 2005-2006 Powered by Custom PHP Programming