[NYT] When Digital Darwinists Seek Their Predators

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From: Joachim Feise (jfeise@ics.uci.edu)
Date: Mon Jun 26 2000 - 14:22:03 PDT

The highlight:
"Through this wave of consolidation, at least 20 dot-coms have approached us,
wanting to be acquired," Mr. Morford said. "Frankly, only two of
them were worth talking with for more than a half-hour."


          When Digital Darwinists Seek Their

              Just as this summer's other spectacle of competition and
              humiliation, "Survivor," has captured the public's attention,
          the great dot-com shakeout has garnered high ratings among
          business-minded voyeurs, who are making bets as to which
          Internet company will be the next to fall.

          As the dot-com survival game unfolds, executives at struggling
          Web sites are vying to secure a spot in the next round, which is
          widely believed to start sometime around the holiday season.
          By then, the reasoning goes, enough of the "me too" Internet
          start-ups will have died off, ensuring that the survivors receive
          more serious consideration from investors.

          Oddly enough, for the handful of lucky dot-com executives who
          either secured financing before the market dried up, or who
          enjoy the backing of a traditional company, these times are
          nearly as hectic. As they push their businesses toward
          profitability, these executives are watching the shakeout closely
          for signs of new competition, while at the same time trying to
          determine how much to participate in the weeding-out process.

          "Everyone's for sale," said Matt Hyde, vice president for online
          sales at Recreational Equipment Inc., or R.E.I., the
          outdoor-goods retailing co-op.

          As with many other e-tailing executives, Mr. Hyde said he had
          fielded numerous calls recently from competitors looking to be
          bought out, or from venture capitalists who are shopping around
          various companies that they have invested in, but cannot take
          public in this Internet-averse market.

          "While we look at it from an opportunity standpoint -- what are
          the assets we could bring to R.E.I.? -- we see this as a real
          competitive threat, as well," Mr. Hyde said.

          The threat changes, of course, from category to category, and
          often depends on the extent to which established
          bricks-and-mortar brands have made forays into the online
          world. In April, for instance, Estée Lauder, which had not yet
          created an online store for some of its brands, bought
          Gloss.com, thereby not only eliminating an online competitor,
          but giving Estée Lauder an online home for other brands within
          the company and significantly changing the competitive
          landscape in the beauty market.

          Mergers between Internet-only companies may also put a
          significant wrinkle into the power structure of a given market.
          Earlier this year, for instance, two Internet companies that cater
          to adventure travelers, Greentravel.com and
          AdventureQuest.com, merged to create Away.com. The new
          company, analysts and competitors said, is much stronger than
          either of the two sites that spawned it.

          And the merger created better competition for Recreational
          Equipment's online adventure travel unit, REI Adventures, as
          well as other outdoor sites with travel operations. One such site
          is Altrec.com, which sells goods and travel services to outdoor

          Michael Morford, Altrec's chief executive, said the shakeout
          among the Internet's outdoor retailers had led to more
          distractions than opportunities. "Through this wave of
          consolidation, at least 20 dot-coms have approached us,
          wanting to be acquired," Mr. Morford said. "Frankly, only two of
          them were worth talking with for more than a half-hour."

          But the company has benefited from the shakeout in other ways.
          For instance, Mr. Morford said Altrec had been in negotiations
          with Cox Interactive Media to acquire GreatOutdoors.com, a
          content and community site for outdoor enthusiasts, before
          investors started fleeing Internet companies early this year.

          When the downturn took hold, he said, negotiations suddenly
          became easier, and early last month Cox sold the business to
          Altrec, while also investing an unspecified amount in Mr.
          Morford's company. "If market conditions had been different, the
          ease of that deal may not have been there," he said.

          Daniel Spira, chief executive of BareWalls.com, an online
          retailer of art prints and posters, said he was not as concerned
          about new competitors emerging from the consolidation. If
          merged sites "are starting off bigger, it might help them,
          because their buying power could be more concentrated, but
          that's not everything you need," he said. "You still have to keep
          growing and improving," he added.

          "Now that the gold rush mentality has puttered out, a lot of the
          competitors who were in it for the short term are starting to step
          aside," Mr. Spira said. "If you were in it for the short term,
          adding your business together with someone else's won't make
          it stronger."

          Shelley Nandkeolyar, vice president for e-commerce at
          Williams-Sonoma, said his company was not in an acquisition
          mode, even though competitors like Cooking.com, "have money
          to burn," he said, and could perhaps use that money to buy up
          distressed dot-coms.

          "For us, there's no pressure to go out there and act crazy," Mr.
          Nandkeolyar said. "There's a lot of hype about consolidation,
          but frankly, I don't see the benefit of an acquisition. If I look at the
          cost of doing an acquisition versus what I could do with that
          money to invest in our brand, I'd much rather invest it here."

          As to whether he worries about a stronger competitor emerging
          from the shakeout, Mr. Nandkeolyar said he welcomed
          competition. "It's good for the industry, especially since it's in
          such a nascent stage," he said. "We can learn from our
          competitors, and improve our own game."

          Until this spring, of course, the competition within most
          e-commerce markets has resembled a steel-cage match in
          professional wrestling, with a constantly growing cast of
          characters, and participants coming up with ever-more creative
          methods to edge their opponents.

          Given that the current e-commerce environment promises to
          diminish the number of participants in the dot-com free-for-all,
          Mr. Nandkeolyar and other executives will, analysts said, have
          fewer cues to rely on, as they refine their business approaches.
          And perhaps more important, in an investment environment in
          which the bottom line is king, some analysts fear that e-tailers
          will devote less money and staff to innovations -- at least at the
          same pace as they have in the past.

          Cliff Sharples, chief executive of Garden .com, a home and
          garden e-tailer, said innovation and competition in different
          markets "might well decrease." But Mr. Sharples, who is the
          founding chairman of Shop.org, an industry trade group, said, "It
          hasn't yet affected consumers, and maybe it won't."

          Though some of the less sturdy Internet concerns may, in fact,
          stagnate, he said, the category leaders will not. "My gut feeling
          is that businesses with good models will continue to do smart
          investing," Mr. Sharples said. "And they will continue to

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