Old ones still the best as dot-coms retake the stage

There are real signs that e-commerce is on track to financial stability, but we should beware banks once more forecasting the end of old economies, says George Pitcher

The alleged reinvigoration of dot-com companies is not unlike yet another story about Liz Hurley – everybody agrees they’re attractive, but we have a strong feeling that we’ve seen it all before. Some of the mature and less excitable among us might go so far as to wish they would just go away.

Of the two of these most glamorous of industries, I suspect it will be Hurley who is sooner to be granted her heart’s desire – just to be left alone, away from the public spotlight, to live a quiet family life, crocheting and making jam. Or possibly not.

Meanwhile, the internet and all the commercial high and low life that go with it will continue to attract public attention, flaunting its pneumatic assets in dubious outfits held together by safety pins. And attracting a good deal of sneering contempt. That, at least, is the common perception of the dot-coms.

The reality is rather different. The dot-com industry, too, has grown up. It has left its tawdry past behind. It just wants not to be left alone, so it can get on with its life. But it wants its sources of major funding back – which starlet doesn’t?

Unlike the last profligate boom in dot-com valuations, in all the excitement of the new millennium, the industry is said to have learned its lesson. The argument runs that the first signs of a new upswing in the internet markets is based on realistic earnings forecasts, which are calculated on similarly realistic sales projections – which, in turn, means that there is a real market out there for them to plunder.

I note with interest that Goldman Sachs has just published a research note on the mass-market tour operators, suggesting that the sector may be in “structural decline”, because consumers are able to arrange their holidays online and at far cheaper prices than those offered by traditional travel agents.

We could be forgiven for observing that we’ve been here before too. The major investment banks were happy – nay, delighted – to inform us three or four years ago that any number of sectors were in structural decline, because the internet would destroy their old economies.

Disintermediation was the game. From fashion to pharmacy, we were told to disintermediate or die. In the event, it was a multitude of dot-coms that managed both to disintermediate and to die.

Many of us, I’m afraid, gloated rather a lot over their nemesis, mostly because dot-coms were run by bumptious young women with crops and young men with pony-tails, who had upset our cosy bourgeoisie by gazumping them for old rectories in attractive rural locations.

But, in the cold light of economic dawn, one has to concede that it wasn’t entirely the fault of the dot-com entrepreneurs, odious as some of them were. If you throw a great deal of money at people, they tend to think that they’re worth something. If it works for B-list actresses with an appetite for foreign billionaires, why shouldn’t it work for impressionable, young industries?

It was the investment institutions that suggested it was all over for traditional service sectors, just because the dot-coms looked like they could disintermediate them. It’s a bit hard to single out Goldman Sachs, because they were all at it, but it was precisely the enthusiasm of banks such as this that caused all the dot-com trouble in the first place.

It is true that some fairly dreadful people hosed away many hundreds of millions of investors’ money in dot-com ventures before the collapse in 2000, but let it never be forgotten that it was the love-struck institutions that came up with investment formulae that valued these enterprises on absurd multiples of future and wholly notional profits.

So let’s be cautious about what such institutions say now. That said, there really are signs that the inevitable development of the Net as an effective route to market is producing a sector with real business models and real opportunities.

According to Forrester Research, e-commerce sales in Europe nearly doubled between 2001 and last year to some £21.5bn and are expected to reach £34.4bn this year, or 2.5 per cent of total retail expenditure. The internet is on the move, whatever the past aberrations of dot-coms and their supporters in the capital markets.

So what sort of online service providers are driving this growth? The word these days is not so much disintermediation as connectivity. It is the simple notion of connecting people – trite as that sounds in the telecoms markets – that lies behind the rampant success of the online social club, Friends Reunited.

Connectivity also supports the online offers of those who simply want to book things. I used to be very bearish of online ticketing services, calling them virtual bucket-shops with insupportably narrow margins. But Ebookers and Lastminute.com were top FTSE-index performers last year, with share prices rising 324 per cent and 240 per cent respectively, so I respectfully retract.

Meanwhile, high street brands, such as Next and John Lewis, prosper online in what used to be called the clicks-and-mortar market, because the consumer can return unwanted goods to the store. It’s prosaic, but true.

And that’s the bottom line for the internet. Just like showbiz, the lasting value is delivered by old troopers, not the passing fancies. As EM Forster had it: Only connect.

George Pitcher is a partner at communications management consultancy Luther Pendragon

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