The Dot-Coms Go Back to Basics

Jan. 15 -- No, the Internet is not shutting down.

Neither are dot-com companies. Though many have lost dizzying amounts of stock value in the past six months and hundreds have closed, analysts are seeing the current shakeout as just that: a return from cash-infused, growth-centric hysteria to a philosophy where simple, sound business practices rule.

“To oversimplify, some of the [dot-com] business models just weren’t successful,” said Rob Zidar, portfolio manager of the Merrill Lynch Internet Strategies Fund.

But there have been successes in the dot-com economy, from pure Internet companies that managed to stay at the top of their game to tiny, private shops who slipped under the stock market’s radar.

ABCNEWS.com talked to several Internet economy analysts and examined several different companies in order to make sense of what’s working, and what’s not, as the economy teeters on the brink of its first real downturn since the dot-com mania began. Take a tour of the online world in 2001, and see why the winners won and the losers lost.

The Flameouts

Dot-coms are dropping like flies. According to industry benchmark Web site f —-company.com, nine failed last week alone. At least 210 bit the dust last year, according to webmergers.com

The problem, analysts say, is that they weren’t paying attention to building a good business. In the heady days of the dot-com boom, venture capitalists were throwing money at anything online without applying simple rules from Accounting 101 to see whether they’d succeed.

Businesses need a big potential market, competitive advantages, a well-marked road to profitability and the ability to carry out their plans, said Scott Kessler, an Internet analyst with Standard & Poor’s. Many e-retailers fell to their online competition. Content companies, meanwhile, fell to a lack of advertising revenue and disappointing market sizes.

The much-hyped Digital Entertainment Network had almost no market at all for its TV-style Web shows, which most people couldn’t download easily through telephone connections. And they shed huge sums of money on parties, salaries, and talent.

Online pet store Pets.com, which closed its doors in December, was felled by tough competition, and a profitability plan that didn’t factor in the enormous shipping costs of sending huge bags of pet food long distances, Kessler said.

“You’re talking about 20-pound items — the cost to ship it is more expensive than the prices people were paying,” he said.

Analysts also said you have to prove that people would want to buy something online as opposed to going to a store.

“It’s not even clear that people want to buy pet supplies on the Web. I’m not sure that you need five highly capitalized companies selling pet supplies online,” Zidar said.