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New Economy can't forget Old rules

C. Gopinath

THE last few weeks have seen a drastic decline in the value of tech stocks. The Nasdaq Composite Index, which reflects the technology sectors, has fallen almost 40 per cent from its previous high in March. Even the shining stars, such as Microsoft, Lucen t, Intel and Dell Computers, are down at least 50 per cent from their peak.

The company count suggests that an increasing number of dotcom companies are closing -- 130 closed this year and 50 more are likely to shut down before the year end. That would mean about 10,000 jobs, which is not much on a national scale. But these comp anies were part of the mystique of a New Economy; they were furthering a new business model. They were the pathway to new riches. But, much like the lamp in Alladin's tale, it is all beginning to look old.

What is the New Economy? Even if we can't give it a definition, we understand how it looks and sounds. It has some peculiar characteristics that make it very different from the Old Economy we are all familiar with. It is technology-driven, comprising ini tially computer (hardware and software) related firms.

With the advent of the World Wide Web and the need for connectivity, telecommunications firms joined the new economy. Not only did they recognise the demand for their services, their businesses also started being hit by the new technology, fuelling the n ew economy further. Gradually, old economy firms did not want to be left behind and began their entry into the new economy by embracing the Web as a new way of doing business. They had come a full circle.

Other characteristics of the new economy made it fascinating. The technology meant that power was shifting from sober and conservative investment bankers to young and savvy techno-geeks. The future had become unpredictable in terms of consumer reactions, buyer behaviors, and estimates of present value.

The new economy gave rise to certain unstated ways of doing business that were very different from what we had come to expect. It was becoming very difficult to predict the prospects of companies selling products we did not know too much about (beepers o r palm-held computers), or selling products or services with a global reach but with seemingly insignificant overheads (like amazon.com). So, earnings concerns were temporarily ignored as the prospects seemed dazzling. Innovative ways of doing business, like auction sites (such as eBay.com), kept the interest going.

The tide slowly began to turn when it was clear that the economy's expansion was not limitless. After ten good boom years, when news of softening of growth in the US began to appear, analysts started taking a closer look at earnings of their portfolios a nd started feeling queasy. The anti-trust suit against Microsoft showed that monopolies are also not forever. Moreover, small dynamic firms like Dell Computer had also grown big and was beginning to face problems of size.

Consumer-oriented sites have taken the biggest hit. About three-fourths of those that have closed are the B2C or web-based retail units. Some of these names include: Garden.com, Pets,com, Furniture.com, and MotherNature.com. The name itself, in most case s, gives you an idea of what their business was all about. When the expected business did not materialise, they decided to shut. That they shut before the peak consumer buying period, that is, the Christmas season, is an indication of how serious their p rospects were.

Back to the old

But what has been happening to consumer buying? Well, the experts have slowly realised that buyer behavior is indeed peculiar. Many of the web-based retail companies figured that consumers were too busy to make the trip to stores and services, and would rely on the convenience of home shopping. Thus, these stores on the Net allow you to see what the item is, click, and have the goods delivered. It turned out that only a small percentage of those who tried the service were willing to stay with it.

All those people who complain that grocery shopping was a nuisance and the checkout lines were too long mean just that. They still want to go to the grocery store, except that they want the lines to be short. They are not prepared to switch to on-line sh opping as they want to touch and feel the bananas, and love the impulse-buying that takes place when they are in the store. So, a majority switched back to what they used to do. (Does this remind you of those in India who tried ready-made breakfast cerea ls out of a cardboard box and then went back to idli and uppuma?)

A recent survey of customer satisfaction in e-commerce companies affords a clue. Customers don't seem to be too happy, on an average, with the customer service they get from on-line retailers. This is a major cause for worry since service is the key to h ow these firms differentiate themselves from the brick-and-mortar companies. When you are in a store and have selected your items but don't get decent replies from the clerk, or find the lines too long, you are unhappy but would still stick it, while mut tering under your breath. In the case of an on-line retailer, if the screen is too confusing or you are being asked too many questions, you just click and move away!

Priceline.com offers discount travel tickets to its customers on-line by allowing customers to pick their own low price. If an airline is able to match it, you get your discount ticket with a click. It is able to do this because it has a deal with the ai rlines who want to off-load capacity that would otherwise go unfilled. Customers had to provide their credit card numbers when making their bid. If there was a match, you were immediately charged for it. But when the founder started another company Price line WebHouse Club Inc to sell groceries, he lost millions and his initial backers refused to lend him more money to continue. It has since closed down.

Streamline.com, another on-line grocery business in north-east US, decided on an orderly form of decline recently. While it still had some cash on hand, and with the prospect of additional funding being bleak, the firm decided on an orderly shut down whi le it still had the money to pay vendors and meet employee severance payments.

Welcome back the sober conservative investment bankers! Even venture capitalists (VCs), whose business it is to take undue risks, have suddenly turned shy of funding units that have little prospect of making a profit in the near term. The main focus of a VC is to be able to make above average returns in at least one out of five units funded. These returns are not from the profits (and, therefore, dividends) of these units but from the rise in their share price. Thus, in a market that is placing a very l ow premium on dotcoms, the flow of VC funds have also begun to shrink. There is now a greater stress on cash generation and a clearer prediction of profitability in the visible future.

Rapid growth can be very forgiving of minor faults. But with the US economy showing increasingly clear signs of a slowing down, everyone is going back to familiar rules of doing business, and familiar standards for financing.

(The author is a professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)