Spring Showers for E-Tailers

Please forgive me, but I do love this stage of the business cycle.

Whenever growth slows just a bit, the first casualties are always those deals that were too dumb to live, which makes reading the corporate obituaries just delicious.

So let’s hear a little boo-hoo for boo.com, the overpublicized fashion site that launched both late and poorly. While we’re at it, how about an annoyed grunt (Doh!) for DEN, the “movie” site that ran through $54 million in cash in just one year.

Unfortunately, we next have to suffer from clueless reporters throwing the s-word (for “shakeout”) around, so let’s review what’s actually happening.

When growth slows, some dumb, lame, and unlucky businesses in crowded niches have to go broke or get merged away. (Just look at the list of problem children in this link are you really going to miss any of them?) Without such times idiots would just get wealthier and wealthier, turning Woodside into a glorified trailer park. If everyone got rich all the time, what would be the point, right?

Unfortunately, many in the media equate this necessary adjustment period with real trouble. We think of the death throes of newspapers. Watching obsolete industries fall can be painful, as hardworking people lose their careers and (often) their pensions. But we also know change is necessary. If you don’t want the grandkids grubbing coal or firing steel furnaces for a living, those jobs have to be replaced by automation. Think of it as evolution in action.

The same pruning is now taking place in e-tailing, although the problems are less serious because the industry is still growing. Business plans that weren’t executed, like those of Value America, are being ditched. One-trick ponies that lived on their capital are finding the funding windows closed. Dilettantes that weren’t committed to web retailing are letting those people go.

Some niches that turned out to not be as big as advertised are going through a more serious withdrawal of cash. What will be left will be a few leaner competitors that might actually turn a profit. You have a problem with that?

Sure, there are some human tragedies in all these stories, which we in the media are happy to milk for all we’re worth. We envision unpaid bills, hungry children, and vans coming around to take back the furniture or (worse) unplug the cable.

But that’s not the way it’s working here. Top executives often leave with lovely “parting gifts” worth millions, and the rest find new jobs (hopefully with smarter bosses) soon enough. If the pain continues, they might actually appreciate those jobs.

No, the conventional view of a shakeout, that of a financial earthquake, is all wrong. Think of it instead as a line of thunderstorms. They might spawn some tornadoes, but they also leave the air cleaner, with the delightful tang of ozone, preparing the ground with wisdom so new plants can thrive.

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