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The Internet lives on
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December 23, 2000: 7:00 a.m. ET
Wait six months and watch for survivors, analysts advise
By Staff Writer Catherine Tymkiw
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NEW YORK (CNNfn) - The Internet was supposed to make life easier for everyone, open the door for aggressive entrepreneurs and send stock prices soaring.
It seemed like a simple-enough formula: Bring on the venture capitalists, secure advertising and ride the technology wave to new heights.
But it was a dream that turned into a nightmare for a lot of dot.com start-ups during 2000. Largely fueled by layoffs at Internet companies, U.S. businesses announced a record 8,789 job cuts last month, a 55 percent increase from October, according to workplace consultants Challenger, Gray & Christmas.
"In 1997, but really 1998-99, investors pumped an awful lot of money into the Internet and it needed that money to get off the ground," said Lanny Baker, Internet research analyst with Salomon Smith Barney. "Sometime in early 2000, investors came back and said 'With all that money we gave you, what have you done for me lately?'"
Click here or more on the Year in Review Special Report
Since the start of the year, more than 32,000 workers at dot.com companies have been laid off and more than 66 Internet companies became mere blips on the screen, shutting down due to lack of funding and lack of profitability, according to data collected by The Industry Standard.
 The year saw the demise of Web retailer Pets.com (IPET: Research, Estimates), leaving the company's lovable sock-puppet mascot to fend for itself. Many other Internet firms closed or announced major layoffs in an attempt to improve their financial situation, including Priceline.com (PCLN: Research, Estimates) and Drkoop.com (KOOP: Research, Estimates).
So what happened? Rising interest rates sent investors scurrying to the sidelines and a closer look at the Internet showed few, if any, of these companies had a cohesive plan for making money.
Capital investing dried up and then the advertisers started jumping ship. It was downhill after that. The tech-heavy Nasdaq composite index tumbled from its March 10 highs and Internet stocks bore the brunt, as companies went under and the remaining dot.com firms struggled to hold onto market share.
"Capital destruction that's taking place this year is staggering. At market cap peak in March, as measured across the Internet companies that we track (around 350 companies), it was nearly $2 trillion, and today the market capitalization of those companies that are still in business is around $1 trillion," analyst David Readerman, internet analyst with Thomas Weisel Partners told CNNfn's market coverage
The future of dot.coms
Many hard lessons were learned as dot.com after dot.com fell off the speeding treadmill, but experts say that Internet evolution is not dead.
"One of the lessons is probably AOL (AOL: Research, Estimates) (America Online)," said Salomon's Baker. "There was a long period of time in AOL's history where they didn't make money and then eventually they have made quite a bit of money and the investors that stuck with it were rewarded handsomely."
AOL is buying Time Warner Inc. (TWX: Research, Estimates), the parent company of CNN and CNNfn.
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I would sit on the sidelines for six months and let the angel of death gather up the corpses
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Daniel Peris
senior analyst
Argus Research |
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Analysts say investors should keep in mind that Internet technology is not going away, just the companies that have weak business models and lack capital. But the Internet is here to stay and dot.coms do have a role, they said.
"It's [the Internet] not going to replace everything," said Baker. "It's going to complement most stuff but there are some things it's going to supplant."
Analysts advise investors to take a back seat during the first half of 2001 while the dot.com shakeout continues, and then seek those stalwarts that prove their survival skills.
"I would sit on the sidelines for six months and let the angel of death gather up the corpses," said Daniel Peris, senior analyst with Argus Research. "The dot.coms that are worth investing in will be around in six months."
Who will survive?
Analysts agree that the first half of 2001 will be a bumpy ride and investors should probably temper their participation. However, they say there are still companies worth watching.
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 DOT.COM DEVOLUTION
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Click below to check out how the dot.com sector has fared
Dot.com shakeout
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"The fact that there's a shakeout in the first generation of companies associated with it [the Internet] clouds the issue, but it is a tremendous productivity booster," said Peris. "The leading companies will benefit long-term."
His favorites include Yahoo! (YHOO: Research, Estimates), eBay (EBAY: Research, Estimates), AOL and Amazon.com (AMZN: Research, Estimates), along with Internet infrastructure companies such as Oracle (ORCL: Research, Estimates), Broadvision (BVSN: Research, Estimates), and Siebel Systems (SEBL: Research, Estimates).
"In terms of being at the flashpoint of the Internet, Amazon is a great company that is not only going to survive but prosper," said Peris. "It's a technology company, an Internet company and a retail company all in one – it seems to offer the best of what the Internet has to offer. Each one of the dot.coms that closes makes Amazon look better."
Struggling through a slowing economy
Now that the U.S. economic slowdown is in full swing, investors remain skittish about how companies will fare in that environment. Slowing economic growth hurts corporate revenues and the Internet sector may feel the brunt of investor fear. Still, analysts say, hang on to your hats for the first half of the year but don't run out the dot.com door just yet. 
"It looks to me, with a slowing economy, the first half of the coming year is going to be pretty challenging but the second half will be a little easier," said Salomon's Baker. "For the investor, the challenge is to stay on the sidelines and watch what the growth expectations are – the challenge is to keep your eye on the trend line and when the markets assumptions get way above, you sell, and when they get way below, you buy." 
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