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Last week we wrote that we’d resist the temptation to write about the recent plunge in Internet stocks. This week we’re giving in.

Like a plague out of the Old Testament, a couple weeks ago the portfolios of many day traders and momentum investors suddenly turned to pillars of Chee-tos. (“quick-fried to a crackly crunch”). Market analysts and pundits sounded more like advertisers for the next “Friday the 13th” movie, pouring on apocalyptic prose with liberal use of the words “bloodbath” and “massacre.” You’d think Norman Bates, not Bill Gates, were at the helm of Microsoft.

With the “tech-heavy NASDAQ” (words the media put together as often as they did the “troubled MIR Space Station”) bloated more than Regis Philbin’s recent salary demands, much of the market’s demise was expected, but not readily predictable. Like Californians always living with the threat of earthquakes, the deflation of dot-com stocks was not a question of if but when.

Wall Street may have wailed and lamented over all the Monopoly money that suddenly became very real when the margins calls came in. However, the market correction (a.k.a. “bloodbath”) will have an overall healthy impact on the Internet industry for several reasons.

“Another B2B broadband wireless solutions provider bites the dust.”

In the best interests of the overall health of the forest, you sometimes need to burn off the parasitic undergrowth. And right now, the Internet is choking with a lot of weeds or what we call “iDiOT-COMs.”

Dot-com billboards and TV commercials have accumulated at a rate faster than any consumer can count. As an analogy, consider if the NBA suddenly expanded to 72 teams. While the number of all-star-caliber players would remain unchanged, the rest of the league’s talent would have to be rounded out by a lot more would-be accountants named Morey playing in marquis media markets such as Lubbock, Tex.

But you can’t blame the Moreys. Investors have signed up in droves as their agents, expecting them to compete with the big boys.

As a direct result, we have second- and third-tier industry players funded with massive marketing budgets but with no wisdom for spending it wisely. Such iDiOT-COMs repeatedly blow their wads outbidding more rational e-businesses for distribution deals, advertising, employee recruitment, acquisitions, and even office space. If you give a kid a $10,000-a-week allowance, don’t be surprised by the circus elephant in the backyard.

However, there’s a huge problem when the financial rewards do not correlate with demonstrated performance. Businesses with business model and cash flow problems are kept afloat by optimistic investors when euthanasia should prevail. Digital Darwinism doesn’t work when people are willing to hand-feed dodo birds.

“What do you mean ‘multiple revenue streams’?”

Today, the dot-com atmosphere has changed dramatically. Investors are starting to demand performance and demonstrated results. (Accountability? What a concept!) Venture capitalists are much more discriminating with their investments, and Internet IPOs are no longer viewed as the rocket to riches they once were. And while Internet stocks remain depressed overall, many of the top-tier e-businesses have made something of a recovery essentially separating the pros from the amateurs.

In lean financial times, advertising and big-money deals come under strict scrutiny. There is a renewed attraction to quality. And the current state of e-business is no exception. Many people working in business development and sales at top-tier Internet companies have told Greg how much easier their jobs have gotten in the past few weeks.

For Sale: Transactive e-business solutions web site. Like new. $500 obo.

But the story isn’t so cheery elsewhere. Private e-businesses with $100 million self-valuations and incomplete, or missing, business models (e.g., web sites with links to someone else’s MP3 files and no revenues) are feeling the greatest pinch.

And well they should. These valuations presume that making an in-demand business profitable is the straightforward, easy part. In the brick-and-mortar world, that would be like Costco paying top dollar for a company that could amass a large number of AA batteries regardless of their production, procurement, and storage costs.

While the long-term players entrench themselves, the iDiOT-COMs are getting nervous and running scared as the e-bubble deflates. Faced with the prospect of running an incomplete business in an unforgiving marketplace, many lower-tier e-businesses are itching to execute their exit strategies. After turning down $200 million buy-out offers, they’re suddenly revisiting these deals in the hopes of cashing out for half that price before it’s too late.

“Log on now… before we disappear off the face of the Internet.”

The Internet’s unprecedented wealth has contributed to an unprecedented level of employee churn. The promise of another, more lucrative job at an unprofitable dot-com lurks around every corner, contributing to a regular brain drain of workers at profitable corporations and dicey dot-coms alike. Whether or not you believe these moves positively contribute to society’s overall productivity, research has shown that attrition hurts a company’s bottom line by up to twice each employee’s annual salary.

The easy riches to date have also tainted the entire industry as a running joke. Each time the media trots out another 22-year-old multimillionaire CEO of some unheard-of dot-com, the credibility of even the most respectable Net brands suffers.

The weeding out of e-businesses is a painful process, but it’s one that’s eventual and necessary for the industry to grow and survive. For comparison, in the early part of the 20th century there were once some 200 automobile manufacturers in the Los Angeles area alone. Today you can count the number of American-owned manufacturers on one hand (and even after a tractor accident at that).

Personally, we’re looking forward to hype and momentum taking a back seat to profitability. There’s something very wrong when frustrated investors whine and unload the stocks of a company making record profits just because of a “paltry” 30 percent annual gain.

It’s hard to show sympathy when, even after factoring in recent drops of more than 50 percent, many of these dot-com stocks still show multiples of five or ten in less time than it took Fox to cancel “Herman’s Head.”

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