Dot Coms

DOTCOMS of Yester years

Dot Com Companies: A Study (This paper was written in 2001 to explain about DOTCOM organizations. You can still use it as a reference on what was the scenario during that time) Presentation by Prof.K.Prabhakar, Director, KSR College of Technology, KSR Kalvinagar, Tiruchengodu-637209 [email protected]

1

DOTCOMS of Yester years

Table of Contents

S. NO. 1 2 3

CONTENTS Dot Com – An Introduction Defining a Dot Com Classification of Dot Coms

PAGE NO. 3 4 7

2

DOTCOMS of Yester years

3

DOTCOMS of Yester years

Dot Com – An Introduction Dot coms have proved to be more than a passing fad in the US, and have come to dominate the technology sector, especially the Internet related Commerce field. While it has brought in an entirely new business model, it also presents an opportunity, which is open to all across the spectrum, from the established giants to a single person start-up. In the US, the dot coms have affected the business scenario by 1. Shortening the traditional time specified for a business from start to gaining prominence and market share. 2. Attracting the best talent from the universities and the industry, leading to a shortfall in the other sectors. 3. Causing a drain of talent from traditional management consulting firms, forcing them to rethink their business model. 4. Garnering the major share of venture capital and new IPO funds. 5. Challenging existing IT companies to either improvise, or perish. 6. Ushering in new technology and ideas at an ever-increasing pace. 7. Encouraging the setting up of a parallel industry to cater to their demands. India, with its pool of talent and ideas, is next on the list of venture capitalists. It is the VCs who have been largely responsible for the phenomena of dot coms, for without their ability and acceptance of investing in a risky venture, dot coms would have died off early in their inception phase due to lack of financial support. That India has been relatively isolated in the starting of dot coms can be attributed to the lack of Venture Capitalists, as a large number of dot coms in the US are by Indian expatriates. India being at the threshold of the dot com revolution, established Indian IT giants could face the following implications and questions at this time: 1. The challenges put up in the field of e-commerce, wherein these start-ups will prove to be nimble players and extremely competitive, banking on public funds and “Profits Tomorrow” motto while quoting for projects. 2. Like the consulting firms abroad, some of the IT firms in India might face the problem of loosing some of its middle and top management, who might like to start their own ventures, given their experience and contacts in the industry. 3. Hiring of talent might become more difficult as these ventures attract the best from universities with stock options and “greater challenge jobs”. 4. Competition will also come from some other IT firms that set their own semiindependent dot coms to retain talent and flexibility, and use them as “fighting brands”. 5. The question of Mergers and acquisitions, which are relatively rare in India today, are however, a part and parcel of growing in such an atmosphere, for organic growth and in house development can mean the end of an opportunity.

4

DOTCOMS of Yester years

Defining a Dot Com If asked for a definition of what exactly constitutes a Dot Com company, it would be difficult to arrive at a satisfactory conclusion. Derived from the increasingly popular extension to the website name, namely “.com”, a dot com company, loosely defined can be said to be one that derives its revenues from business on the net, or over the net or through the net. This would put most of the leading companies in the world into this league, as most of them do derive some of their revenues from commerce over the web, or can at least attribute a percentage of sales to those induced by web based advertising. Yet few of them are today called so, nor are all willing to be so labeled, as is evident from the statement made by Lou Gestetner, who refutes the claim of IBM being one, despite generating almost $20 billion, or 25% of IBM’s revenue from sales, over and related to the net.

Defining dot coms more specifically, we could place them as those companies that derive the major part of their revenues from web related activities. This could either be through portals, ISPs, or plain selling over the web, as do Webvan, Amazon and the like. In the past few years, the craze of dot coms has come to affect the US psyche and its economy. It has triggered not only entirely new phrases and terminology, but also, akin to the Gold Rush of the past century, attracted the best and the most enterprising people to chance their future on a new venture. Dot coms –changing the way consulting is done Dot coms have had far reaching implications for every industry, more so of all, for those in Consulting. Having lost boatloads of potential recruits over the last twelve months to high-flying Internet startups, the industry's leading strategy firms are striking back at the .com invaders by hatching a string of Internet joint ventures and positioning themselves as a central conduit of human capital inside the new Internet economy - a mighty river of top talent that flows between Fortune 1000 companies and the venture firms that cradle the startups. Internet ventures are only part of the plan. As the .com culture begins to sink its roots deep into MBA campuses, strategy consultants and their IT consulting siblings are raising the stakes in the war for talent by expanding their talent search far beyond campus borders. Aggressive referrals, alternative sourcing strategies, and acquisitions will all be part of the next big battle that may well trigger the most significant enhancements yet to consulting's time-honored partnership model. Perhaps nowhere is this more evident than at BCG, where over the next eight months the consultancy expects to launch as many as ten new e-commerce ventures with some of its largest clients. Just how the consultancy goes about turning its equity stakes in these ventures into wealth-creation opportunities for its best people is something BCG's top partners are now carefully considering. "We think some of these ventures are going to be dramatically successful and, if that's the case, then it will create a significant difference in the compensation structure of our people," says David Pecaut, BCG senior vice

5

DOTCOMS of Yester years

president and head of the consultancy's e-commerce practice. According to Pecaut, BCG now has the rarest resource inside the Internet economy - quickly accessed talent. "People are coming to us not just because we're great thinkers, but also because we have a way to manage and access talent, and make it much faster and more effective than if you were to do it in the traditional way," explains Pecaut, who describes BCG's new offerings as a kind of "how to be successful in e-commerce model." Typically, BCG ecommerce clients are asked to sign an agreement with the consultancy for an extended period, during which a venture can be launched that allows BCG to gain an equity stake in exchange for its consulting services. BCG is not alone. Bain & Company and McKinsey & Company are also pursuing different consulting-for-equity arrangements with both small and large clients inside the e-commerce space, according to firm employees and venture capitalists. "Certainly we are working on very creative arrangements in e-commerce with clients, and that's big companies, small companies. ... In some cases, it makes sense for our clients to drive that business as a separate financial structure, and in some cases it makes sense for them to grow within the company. ... We're working very closely with our clients in both of these scenarios," said McKinsey partner Wendy Becker, who explains that the best large companies have learned how to mimic small companies - they create smaller, more autonomous units to attract talent and open more leadership opportunities. "A lot of times these (startups) are going through enormous growing pains, and if you think about the market being talent-constrained, we can really help a lot of these firms through key periods of growth, helping them to focus and make decisions quickly," says Becker, who believes the challenges startup companies offer have wide appeal among McKinsey consultants, particularly new recruits. The above excerpt, taken from a leading magazine for consultants, highlights some of the new challenges faced by the consulting firms. However, it doesn’t end there. Not only are dot coms being encouraged by these consulting giants, but the employees who leave the consulting firm to join a startup venture, usually as its head, are encouraged to maintain contact and be partners in projects requiring their startup company’s skills. In India, the recent entry of McKinsey and Company, along with Warburg Pincus and Mr. Narayana Murthy of Infosys foretell a boom time to come for those seeking venture capital and an entry into e-commerce. Why are dot coms so popular? But how have the dot coms managed to capture the imagination of the people so vividly over the past few years. One popular version is that these companies provide for the ultimate market - a perfect market according to the theory of economics, where all required knowledge is available to everyone involved in the transaction, geographic boundaries and tariffs do not apply, costs for advertising are low, overheads are limited and choice is unlimited for the customer. Given the attractiveness of such a system, and the potential that such a system would unleash, any startup that seeks to contribute towards such a market would be onto a winning idea.

6

DOTCOMS of Yester years

However, as the company would be setting up a precedent, future earnings and attractiveness would be difficult to predict, in this highly fluid atmosphere of change. The attractiveness of these firms as expressed by the response they face in the stock markets is not based on their physical assets owned by these firms. Indeed, that is hardly the case. Instead, what is added in their valuation is the potential earning, value of human capital etc., features that have confounded the traditional accounting practices. This is added to the fact that these many of these companies have never made profits. With the IPOs opening with ever increasing margins, and venture capitalists joining in to feed the frenzy, setting up a dot com is becoming increasingly easier, especially in the silicon valley, and now, also in India. What could possibly put a spoke in the growth of the dot coms are government legislation on e-commerce or the drying up of easily available funds. The first seems to be a genuine threat, but the second seems only a distant possibility as of now. These have been mentioned and discussed in the following chapters.

7

DOTCOMS of Yester years

Classification of the Dot Coms While the word dot coms is generic to all the firms/companies that use the web for any transaction, the business they are in can be divided into four main categories, as is seen below.

7

Dot Coms

Type 1 New technology – usually web related. For ex. Switching related technology, etc. Motto: make web faster, better and cheaper. Profitable, but risky.

Type 2 Web retailers – web only distribution channel. Sell information, products, and anything that can be sold. Operate on losses today, profits tomorrow basis.

Type 3 Search engines and tools. Create software and vend it over the net. Software might be a program, music etc. A number of them work on encryption related technology

Type 4 Sole business – helping others set up e-businesses, whether B2B or B2C. Usually profitable, least risky, and more difficult to start as competition is intense.

As seen above, the first category is into high technology design. The most common focus of all these companies is switching technology, or other telecommunication related technology. These companies, much favored by Venture Capitalists and IPOs, follow an entirely different business evolution cycle, which normally ends with their acquisition and merger into one of the giants such as Cisco, US West etc. The second category consists of businesses that sell over the web, and often, this is the sole distribution channel they use (in actual marketing lingo, they are actually redistributors). They hold little or no inventory, and follow a “Leader takes All” model, wherein the first firm to come up with an innovative idea usually becomes the leader, and is able to beat off competition. However, while almost everything can be sold over the web, just like the real world, rules of the game here are different from that of the real world. The business offers interactivity much like the real world, but is more like tele shopping in terms of consumer fickleness and attention span. The actual advantage of internet commerce is from the customer relationship that can be built over time, in terms of the personalized service through behavior pattern mapping. This of course, requires extensive investments in terms of building up of a database mapping their behavior. The 8

DOTCOMS of Yester years

battle is thus, for “eyeballs”, as firms spend far more than the gross profits they earn each year on advertising to attract customers and encouraging them to buy more. For example, eToys spent $20million on advertising last year, which amounted to 784% of its gross profits. The third category is similar to the second, in terms of sales and services. Software vendors like Beyond.com have been vending software for some time, and loads of sites offer music files on the net. However, the first has yet to prove profitable (having spent 563% of its gross profits of $4.3 million on advertising), and the second is mired in legal and copyright related controversies yet to be resolved. A fast growing field is that of the encryption providers - technology that can help make over the net cash transactions much more secure. The US laws are stringent and allow a 40 key encryption facility only (FBI or a determined programmer can break into such a key) for encrypting confidential data like credit card information while purchasing goods. However laws in Finland, are more liberal and permit a 128 key encryption facility. This allows firms in Finland to act as a hub for financial transactions being conducted over the net, requiring more secure encryption. However, this advantage is temporary, and with a change in laws in the US becoming imminent, the situation is open to change. New encryption techniques are however, always in demand. The last category is the safest bet for an investor – they thrive on the demand for being web enabled. However, being primarily long term service providers, with high exit barriers, they are not very popular with VCs. Starting one therefore, requires ingenuity in securing capital, while running one would require jungle skills to survive in the competitive atmosphere that prevails in this sub segment. Demand however, is high, and the segment would undoubtedly, continue to grow at an increasing pace. The evolution cycle would definitely be closer to the one seen in the rush for computerization of services, with development taking a backseat to maintenance and enhancement, as time goes by.

9

DOTCOMS of Yester years

10