Connect with Fast Company

Every nine months McKinsey and Co., the world's premier management consultancy, publishes an "e-performance" survey of more than 200 Internet businesses around the world. These dotcom companies have combined revenues of roughly $2 billion. The most recent survey, published in May 2001, found that 20% of the companies covered were profitable and that a significant number of the others were heading in that direction.

Dotcoms that were making money were "e-tailers," with clothing e-tailers doing particularly well. Companies that were losing money were content sites; news and sports sites were struggling the most. Monika Kubicová, one of four McKinsey consultants who oversee the survey, told the Financial Times, "For e-tailers there is quite good reason for optimism, with a reasonable number starting to show profitability. Content businesses, however, are still playing with their business models and are in the red."

The McKinsey survey received virtually no press coverage, because it did not fit the major media's prevailing conventional wisdom, which is that the Internet sector in general -- and the dotcom sector in particular -- is as dead as smelts. But as the survey makes clear, for something so dead, these sectors are showing all kinds of life. This past July, a streamlined priceline.com announced that it had turned a second-quarter profit. Google, the search-engine site that is now run by former Novell wizard Eric Schmidt, recently announced that it was solidly profitable. EBay, Travelocity.com, and a host of other companies also reported strong second-quarter earnings. All of these solid performances occurred in the teeth of a global economic slowdown.

Indeed, the big, largely unreported summer story of 2001 was the renewal of financial interest in all things related to the Internet. Goldman Sachs and other major investment houses swarmed across Europe, bottom-fishing among distressed telecom and wireless properties. Deal flow in Internet-infrastructure companies quickened in the United States as price points became much more "realistic." Even seemingly doomed content companies such as Salon.com attracted funding.

A couple of years from now, people will look back on the summer of 2001 as the time when the music started up again. Dan Burstein, a managing partner of Millennium Technology Ventures LP (MTVLP), is one among many smart investors who see the wind shifting. For almost 15 months, Burstein says, MTVLP didn't see a deal that was worth the price of admission. In fall 2000, MTVLP knew of one that was priced at $1 billion. By spring 2001, that exact same deal was valued at below $100 million. At $1 billion, the deal was an almost perfect metaphor for Internet insanity. At below $100 million, it was a good investment. MTVLP bought a stake. Burstein sees the current situation as analogous to the savings-and-loan crisis and the great real-estate collapse of the late 1980s to early 1990s. The S&L meltdown led to write-offs of more than $500 billion and caused a meltdown in the real-estate sector. At the time, there was much talk about "overcapacity" and "glut" in the real-estate markets. Today, the telecom industry may have to write off anywhere from $300 billion to $1 trillion in bad debt. And that has caused severe distress in the Internet-infrastructure world.