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
kprksr@gmail.com

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DOTCOMS of Yester years

Table of Contents

S. NO. CONTENTS PAGE NO.

1 Dot Com – An Introduction 3

2 Defining a Dot Com 4
3 Classification of Dot Coms 7

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DOTCOMS of Yester years

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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 semi-
independent 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.

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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

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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 e-
commerce 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.

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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.

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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.

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Dot Coms

Type 1 Type 2 Type 3 Type 4

Web Sole business
New Search engines
retailers – – helping
technology – and tools.
web only others set up
usually web Create software
distribution e-businesses,
related. For and vend it over
channel. Sell whether B2B
ex. Switching the net.
information, or B2C.
related Software might
products, and Usually
technology, be a program,
anything that profitable,
etc. Motto: music etc. A
can be sold. least risky,
make web number of them
Operate on and more
faster, better work on
losses today, difficult to
and cheaper. encryption
profits start as
Profitable, but related
tomorrow competition is
risky. technology
basis. 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

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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.

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