After the burnout: Rebuilding the new economy

Lured by the glamour of a dot.com customer list and a leading position in building the new economy, so-called e-integrators rushed headlong into near-ruin. Middle East e-integrators could be heading into the same trap.

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By  Colin Browne Published  December 19, 2000

Lured by the glamour of a dot.com customer list and a leading position in building the new economy, so-called e-integrators rushed headlong into near-ruin. Middle East e-integrators could be heading into the same trap.

The list of the walking dead is long and impressively populated. When the Internet bubble finally burst in April last year, the fates of so-called e-integrators—those firms responsible for building dot.coms—looked so uncertain, their stocks started a downward plunge which still continues.

Online stock site VTO has tracked 215 Internet companies and found that as of November 30, every single company’s stock was down from a 52-week high by an average of 93%.

The difference between market capitalisation figures for e-integrators between their 52 week highs, and their current lows, show a decline in value for former cutting-edge giants such as Scient of from US$9.84 billion to $255.88 million, for iXL, from $4.47 billion to $80.7 million, and MarchFirst from an impressive $12.63 billion to a paltry $208 million.

So what happened, and what lessons are there for Middle East e-integrators and VARs selling to dot.coms?

According to Sharad Agarwal, CEO of Dubai-based e-integrator Cyber Gear, the first thing to do is to simply discard the hype. The values of those shattered e-integrators may better reflect the state of what is, after all, a new market.

At the same time, the role has been reversed for VARs eager to add dot.coms to their lists of customers: where once potential customers evaluated a suppliers’ capabilities and experience before buying from them, now the onus is on suppliers to evaluate the worth of potential customers.

This is new for VARs; where previously they would try and convert every lead into a sale, with dot.com customers the goal is not to get into bed with a client with a bad business plan, a poor understanding of what they want to achieve, and/or foolishly managed finances.

If you want to be in this game, you should be aware that the rules for customer engagement have changed.

This may be unprecedented, and of course it doesn’t apply to every single case. But a Web site called ‘dotcom failures’ (www.dotcomfailures.com) lists case after case of online businesses which burned their way through millions of dollars in investors’ cash without generating sufficient revenue to match even a fraction of their overheads.

Pets.com for example, secured $125 million of funding in July 2000, but was rumoured to have less than $37 million left by September, and was still burning through $7 million per month. It closed its doors in November, as hundreds of other dot.coms have done this year, leaving suppliers with unpaid bills, a surplus of staff which they had dedicated to those particular projects, and a sudden halt to anticipated incoming revenue streams.

Like too many B2C dot.coms of the last few years Pets.com’s money, by and large, was blown on enormous advertising and marketing campaigns trying to drum up customers for what proved largely to be an unwanted service.

Locally, according to Agarwal, there are exactly the same pitfalls which the canny VAR will recognise and avoid. “I think people who lose money are the ones to watch out for. I know of three big portals operating out of Dubai with a lot of incubators’ money, but they are not performing, haven’t met even 5% of their business plan targets, and very soon, the honeymoon is going to be over,” he said.

“So I am very careful when I deal with such outfits. The bigger they are, the more careful you have to be. Because their business models are iffy; they are based on eyeballs, and eyeballs don’t buy you breakfast. They did four years back, when all of this was hype and it was all about attracting people, but not any more. VCs have become smarter, and incubators are not giving the second round of financing. And the bigger they are, the harder they fall,” he added.

An enormous problem is that of perception: Cyber Gear has built up a list of ‘brick and mortar’ customers, for which it has done Web development work, such as British Airways, Federal Express, Shell and Xerox, as well as local operations such as the Majed Al Futtaim Group, Galadari Brothers, and Al Ghurair Enterprises.

Though Cyber Gear is a provider exclusively of Web software, services and consultancy, its customers are not by-and-large, Internet companies at their core.

“That works well, because there is somebody you can identify with, who has been around a long time, and it is a rare challenge to prove to them the power of the Web. We take on such challenges.

"An example is the conference management company, IIR. They called us two years ago and said they wanted a brochure site—a site with their brochure online for people to read. We said, we are not interested in doing that, instead we will put all of your 200 conferences online, and we did.

"It took us six months to do it, but today every conference that IIR does in this region is online in a database application that you can browse and [drill down into],” said Agarwal. “It is a functional site, and they are making money from it, but at the beginning, they didn’t know it was possible,” he said.

But if there are risks of getting it wrong through a lack of understanding for brick and mortar companies, those seem to be multiplied many times over for dot.coms.

Traditionally, Internet companies have raised millions of dollars which they have invested recklessly, even where those investments have proved to be pure costs, and not contributed to the bottom line.

“If you don’t do it right, it will hurt you. And you can bleed in quick time. I mean burning up money in this business—if you take a few billboards in town, and run a few banners on big sites, you are down by a couple of hundred thousand dollars, which to earn, is one hell of a job for a dot.com,” said Agarwal.

A major issue that dot.coms face is the lack of differentiation—an impossible requirement to meet in so saturated a market. But this isn’t new; throughout history, where a new technology comes along, hundreds of companies are formed to try to exploit that opportunity, including many with weak management or poorly thought out business plans. Intense competition ensues, returns on capital fall, and most of the new entrants either merge or go bankrupt.

The consolidation of the U.S. railroad industry in the twentieth century shows this pattern. In 1929, there were 163 “Class I” railroads in the U.S. Today, there are seven Class I railroads remaining, and they carry more than 90% of the rail freight in the U.S., according to the Association of American Railroads. The Penn Central Railroad was formed from 600 previously independent railroads.

Despite the broad claims of guaranteed future success, according to Agarwal, most dot.coms today are not going to get very far down the road. “A lot of companies will have to exit the market, one way or another. And it will eventually bottom out to a realistic level where you will only see serious players,” he said.

“If you have got your act together in terms of who you are targeting, and are able to get that audience to your site, and have of course done your homework in having your site perform the actual business, you are more likely to succeed than somebody who says OK, I am going to be a dot.com company, I am going to launch this site, and I will make money because I am the only one doing it,” said Agarwal.

“I get quite a few of these situations every week. Last week I had a guy come in who wanted to [build a site to sell groceries online in Dubai]. He came in and said what he wanted to do, and asked how much it would cost to build.

"Within 10 minutes, I convinced him that he will not make money. If he still wanted to do it, fine, I would make money out of him, but he wasn’t going to make money out of his site. I told him to come back and talk to me in six months,” he said.

That common sense advice is something Agarwal says he has had to dispense on a weekly basis to organisations, which, on securing $300,000 of VC funding, suddenly want to look, behave—and spend—as if they are Microsoft.

“I believe the Internet business has a lot to do with knowing what not to do, rather than what to do. A lot of companies in this region have come in, hired ten people, taken fancy offices, run up a bill of one million Dirhams in six months, didn’t make anything close to that, lost money, lost the confidence, and now their people are floating around looking for jobs.

"In this business the only way to succeed is to be lean and mean—unless a rich investor is funding you and isn’t going to ask you any questions for three years. Cyber Gear started with two people and we remained so for the entire first year,” said Agarwal.

Cyber Gear now employs eight people, though Agarwal expects to increase that to 12 early this year, but it can also claim 100+ customers and four and a half years of business experience in the region.

“And keep your overheads to a bare minimum. If you can do without a secretary, do that. Until you turn the corner. It is a perseverance game—there is no magic, and there is no quick money to be made,” he said.

By doing these things, Agarwal believes that a growing market will enable VARs to grow too, though for now that growth will have to be slow.

“I don’t want to paint a negative scenario, but it is early days for the Web here. Some [local B2C and B2B Internet businesses] will succeed, but not now. The market is not ready for all these online stores to come up. Down the road, sometime in 2001, towards the latter half, equations may change,” he said.

But the business that Agarwal has developed in the meantime, and with which he has established a rare position in the marketplace, is in other services built around the Web.

“When we started out, we were a Web design company, but obviously we realised that wasn’t enough, and over the years we have added new Web-related areas of specialisation.

"We do a lot of intranets now, we have started to do shopping cart applications, we do virtual walk-throughs, we started a division for Arabisation, we are into content franchising, and we own six portal sites of our own. Apart from that we build database-enabled applications, [such as for WAP] in a tie-up with info2cell,” said Agarwal.

Perhaps in no other marketplace is it so important for VARs to be the professionals, and to thoroughly take into account the individual needs of each customer.

For Cyber Gear, a solution can vary from AED 50,000 to AED 500,000, depending on the range of products, platform, and degree of sophistication. But more than the cost, the methodology in developing a solution, and the ability of a VAR to provide effective consultancy to customers who ultimately do not understand what is possible is of paramount importance.

“One application we are about to start on is for a government institution which is into e-books, so people can buy online and download research-related stuff, which relates to this region.

"It is very sophisticated in terms of concept, design, archival, and will probably take six months to implement. The client came to us with a one page brief [describing what he thought he wanted], but went back with a seven page one because we added a lot of value to it.

"We went on the Web, we researched, we saw what other guys were doing in the world. We worked on it and said, ‘no that is not all you need to do, you need to do much more’,” said Agarwal.

The result of course, was not just that the customer ended up with a more detailed idea of what would really be required to build a strong solution, but he also ended up with a more realistic idea of the costs—far more than he originally envisaged. “Largely, we find that the onus is on [Cyber Gear] to offer high-tech solutions and things that add value,” said Agarwal.

With the flurry of B2C dot.com launches in the region in November 2000, that looks like expertise which prospective e-integrators had better brush up on.

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