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THE CUTTING EDGE: FOCUS ON TECHNOLOGY

Money Couldn't Buy Time for Failed Net Firms

E-tail: Many defunct 'dot-coms' had big ad budgets but miscalculated how long it would take to build brand loyalty.

November 20, 2000|GREG JOHNSON | TIMES STAFF WRITER

It's been less than a year since cash-rich "dot-coms" flooded the Super Bowl broadcast with quirky commercials. Now, a growing number of online companies have been reduced to writing their own obituaries.

The final online gasps underscore that, when it comes to establishing market share, time can be more important than a fat advertising and marketing budget. "For many of these companies, it's just been too quick," said Ed Rice, a San Francisco-based executive director of Landor Associates, a brand and corporate image consulting firm. "Consumers need time to develop relationships with brands. It's the same thing as needing time to develop relationships with other human beings."

Academics are starting to sift through the remains of failed dot-coms. "People in the advertising industry are scrambling to understand how people respond to these [dot-com] messages," said Patty Alvey, director of the Adcenter at Virginia Commonwealth University in Richmond, Va. "A new technology is so fascinating because things happen so fast, they explode. But later on you get a chance to be more reflective."

There is plenty to be studied. Online companies spent $718 million on advertising during the first half of 1999, according to New York-based Competitive Media Reporting. The dramatic wave of advertising slowed to $536 million in the first half of 2000 and is expected to continue declining during 2001.

The wave of advertising produced some effective campaigns. "Don't blame the advertising agency for Pets.com's failure," said UC Berkeley marketing professor Peter Sealey, a former Coca-Cola Co. marketing executive. "They did a brilliant job. A Chihuahua or a sock puppet can be an enormously powerful way to emblazon a brand in consumers' minds."

In contrast to past advertising, the last words being delivered by Web sites of failed dot-coms range from succinct to philosophical.

Mortgage.com discretely tells potential customers that it is "not currently accepting new applications." MotherNature.com advertises a "warehouse clearance sale." Jewelry retailer Miadora.com steers customers to an online discounter that purchased its remaining stock. And failed textbook retailer BigWords.com weighs in with a Zen-like observation: "If you don't dream, you don't win."

Marketers say it is possible for dot-coms to strike long-term relationships with consumers. But "it can be an amazingly slow process," said David A. Aaker, a marketing professor at UC Berkeley. "Look at Tivo and its competitors. Ultimately, that may become the dominant way to record television programs. But it's moving at a very slow pace. And how about the checkless society? We've been reading that headline since the 1960s, yet, 35 years later, people are still writing checks."

Pets.com, which in October became the first publicly traded dot-com to fail, managed to build brand awareness through a cheeky sock puppet advertising icon created by the TBWA/Chiat/Day advertising agency. The icon appeared in a Super Bowl commercial and as a float in the Macy's Thanksgiving Day parade.

But the advertising campaign failed to draw sufficient numbers of customers to the Pets.com Web site to drive profitability. The online pet supply store that was on track toward $35 million in 2000 revenue was never more than a small player in the $23-billion pet supply market.

"Pets.com had great advertising that most people were familiar with," said Greg Kyle, president of Pegasus Research International, a New York-based firm that tracks cash burn rates at online companies. "The problem was they couldn't monetize any of that. It was caught in what we call the 'old dot-com model,' in which you spend aggressively even though profitability isn't within sight."

The open-checkbook mentality, though, dissolved in the spring as wary investors stopped pouring cash into online companies. "There are many more companies caught in that downdraft," Kyle said. "The race is on to reach profitability before the cash runs out."

Some online competitors that have spent heavily to build their brands were never able to differentiate their businesses. Mortgage.com, which is selling its loan portfolio, ran up $78 million in losses during the last two years. The company's competition included other online brokers, traditional mortgage-banking companies, commercial banks, S&Ls, credit unions and insurance companies.

BigWords.com enjoyed early success as a discount textbook seller but ran into trouble when it recast itself as a higher-end lifestyle company. "The reality was these college kids were looking for value, period," said former BigWords.com brand development director Ari Novick, who's now marketing director for a San Clemente-based sports site, Swell.com. "No matter how much marketing we did, we weren't going to get them to buy lifestyle products at a higher margin."

MotherNature.com, an online retailer of vitamins and healthful living products, generated nearly $100 million in losses during little more than a year of existence. It advertised heavily and drew 5.5 million visits during the second quarter, ended June 30. But that online traffic generated just 107,000 orders.

Stuart Fischoff, a professor of psychology at Cal State Los Angeles, ties long-term online success to advertising and marketing that makes it clear what benefits consumers will enjoy by patronizing Web sites. "Eventually you can do it," Fischoff said. "But it's going to take time--just like fast-food restaurants did. The stuff might taste like cardboard, but fast-food restaurants give people something that they want."

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