The Web Economy’s Wild Ride

1. The Web Economy’s Wild Ride

2. Objectives In 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. Many Causes • NASDAQ, the home of the pure-coms and other tech funds, began a dramatic downturn

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. An Upward Spiral

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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