What We Learned In The New Economy

But have we learned anything at all? Are we doomed to live through another season of high hopes and dashed expectations? We are all older--like the grizzled sock puppet on our cover, who once starred in e-tailer Pets.com's $20 million ad campaign and who now toils as a pitchman for auto loans for people with bad credit (hey, at least he has a job). But are we any wiser?

Like Pacific Shores, the New Economy isn't dead. It just didn't happen in the way we all imagined. And now it's been long enough that we can think more analytically about which of the shiny and alluring ideas of the New Economy were lasting and real, and which were just the iridescent glint of a bubble.

Boom-Time Buzz: The Internet changes absolutely everything.
Cold Reality: Absolutist statements are absolutely a bad idea.

Finding a job was once an inky slog through the Sunday paper, a groveling call to those college acquaintances whom you never really liked, a random letter hoping for an interview. Then came Monster.com.

Quickly, it became a symbol of how the easy access, low cost, and ubiquity of the Internet was utterly transformational. Why would anyone go back to the old way when the new way was so efficient, cheap, and easy?

That, in a nutshell, was the religion of the Internet, practiced in the church of the New Economy. You could get anything, anywhere, at any time. The cost of information was no more than that of bringing the pipe into your home or office; the tiniest storefront could compete with the biggest; the middleman was toast.

There is no question that the Internet has been a technological earthquake, transforming the way individuals and businesses use information. When was the last time you visited a library to look something up? Went to a travel agent's office? Bought anything without doing research? "The first wave of e-commerce was about things that hadn't seen any innovation for 100 years," says Jeff Taylor, Monster's founder and chairman. Internet retailing continues to boom, with 2003 sales (excluding auctions and travel) expected to hit $52 billion, up 22% over 2002, according to comScore Networks.

But with the benefit of hindsight--and looking over the scattered graves of thousands of Net companies--the original exuberance seems rather naive. Existing as a stand-alone Internet business has proved to be much tougher than any of the purveyors of dog food or toilet paper ever anticipated. At General Electric, says former CEO Jack Welch, "[the Internet] created new distribution models. But that's all that came out of the Internet. I don't see any new inventions."

Some of the most successful Internet businesses, as it turned out, were embraced by seasoned brick-and-mortar companies, as when TMP Worldwide scooped up Monster.com, or when Toys "R" Us partnered with Amazon.com. A big reason they work is that they're parts of larger, traditional businesses. In other cases, such as Dell's reconfiguring of the online process for buying a computer, or GE's efforts to revamp its supply chain, the potential of the Internet to transform existing businesses became apparent only as other models collapsed.

And then there are the clear exceptions--the Amazon.coms, Expedia.coms, and eBays. What separates the winners from the dot-gones? Start with what you sell. The Internet gives an edge to products with unpredictable or fragmented demand, because it reduces risk by not forcing you to carry, say, an obscure book in every one of your stores. Yet it may also increase other costs, such as transportation (which isn't an issue for travel services or an online auction business in which third parties pay the freight). "The Internet facilitated certain business models and didn't facilitate others," says Sunil Chopra, an operations management expert at Northwestern's Kellogg School of Management. "Why doesn't P&G sell detergent direct to customers? Even if the Internet does let you, sending it to each individual customer's home is not an efficient way." The choice, he says, is stark: Either dramatically increase the efficiency of getting a product to market or offer something that others don't.

The Internet seems to work best alongside existing systems rather than, as the dotcommers believed, undercutting them entirely. That's the rationale for Connection to eBay, a new Web-based company that sets up a virtual storefront for larger companies that want to get rid of excess inventory on the auction site. Here, the Internet is not the sole distribution system but rather an alternative to liquidators and others. "I've never seen a business that can use one channel," says CEO Robin Abrams. "This is absolutely complementary." Now there's an absolutist statement.