"Remember: The race goes not to the strong, nor swift, nor more intelligent but to the less stupid"

Chapter 11

Purple Haze All Through My Brain:
The Internet and ASP Busts

The Book
The Pusher Man

Banner advertising was e-commerce’s first bad trip. Most sources credit the Coors Brewing Company with placing the first Web banner. The ad, a bit larger than the 468×60 pixel form factor that would become a Web standard, was one element in a national campaign on behalf of Zima, a new clear malt “beverage” (otherwise known as “beer”) Coors hoped it would attract barhopping urban professionals everywhere. The banner was placed in October 1994 on the HotWired site, at the time one of the Web’s most active, and was a hit. Response rates (measured by how many times people clicked the banner) averaged between 5 percent and 10 percent over the life of the campaign.

Unfortunately for Coors, its ad campaign was so successful that many people actually ran out and tried Zima,4 only to find the stuff had about as much taste and charm as a glass of warm bathwater. Worse, the
initial response to the banner encouraged e-commerce fans to predict that the Zima campaign would be representative of future Web banner performance It wasn’t. Once the novelty of banners had worn off,
response rates plunged. By 1998, average banner hit rates had dropped from figures of 3 percent to 5 percent to numbers that ranged between one-tenth to one-quarter of a percent on average.

This drop was entirely predictable. A standard 480×60 pixel Web banner consists of about 5 square inches and takes up less that 5 percent of the real estate on a 17" computer monitor. Colors, animation, and interactivity are limited by the bandwidth of the ad server system and
the need to ensure that Web pages load quickly.

Complicating things further is the easy availability of technology capable of blocking most ads, though they’re so easy to ignore most people don’t bother. By contrast,
an ad on a 25" TV consists of about 400 inches of uninterrupted pulsating pixels that talk, sing, and dance while imploring you to buy something. Channel surfing to avoid ads doesn’t help, as most stations run their commercials at the same time. Another option is to learn how to The Internet’s next psychedelic nightmare was frictionless e-commerce.

On the face of it, this was the most intriguing argument made to justify the existence of many dot-com ventures. Web-based companies, the theory went, would “disintermediate” the middlemen (i.e., distributors and resellers) because people could simply buy products directly via their browsers. One writer for NewMedia magazine breathlessly predicted that the Internet would soon replace the country’s malls and retail stores. In their place would be a vast sprawl of distribution centers
and warehouses serviced by fleets of vans designed to deliver purchases to your door within 4 to 6 hours.

This was truly stupid stuff. If we’ve learned anything from history, it’s that new methods of distribution and payment rarely supplant existing systems; either they’re integrated into the existing system or they become an additional enhancement. If you doubt this, take a coin out of your pocket and inspect this product of Bronze Age technology carefully. Coins are heavy, hard to store, and difficult to transport. Are they obsolete? Ask a vending-machine operator or a Las Vegas casino. Scattering vast new warehouse complexes around the country sounded nice to some, but where were they going to be located? There are areas of the country where building a new gas station or restaurant is reason enough for environmental angst.

And direct marketing with overnight delivery was nothing new. Not surprisingly, people who enjoyed direct shopping via the mail also enjoyed direct shopping on the Web, and there are few complaints about the current efficiency of the delivery system for goods. Another obvious problem with the concept of disintermediation was that people like to go out and shop. We’ve enjoyed the experience for several millennia, and we’re not going to drop the habit just because the Internet showed up.

In 1998, total retail sales on the Internet were $20 billion. A healthy figure but contrast this number with the 2.3 trillion in-store shopping dollars targeted by Sears and Wal-Mart alone. In the United States, and increasingly in the rest of the world, shopping is a necessity and entertainment all rolled into one. Rather than replace retail channels, the Internet is being integrated into the existing system. Web-based kiosks, for example, allow shoppers to browse through a store’s inventory and special order items not found on the floor. New advertising “billboard” displays make use of Web technology to dynamically change their content based on the time of day, promotions, and even estimates of current store demographics.

The rise and fall of ValueAmerica.com, one of the Internet’s most storied e-tailers, best exemplifies why the pursuit of frictionless e-commerce was a chimera. If you traveled regularly on business trips in the late 1990s, you probably stayed at one those hotels that likes to shove a copy of USA Today under your door at 5:00AM. As you staggered down to breakfast with McPaper under your arm and waited for that first cup of coffee to kick start your day, you may remember seeing full-page ads on the back pages of the paper for portable computers, desktop PCs, consumer electronics, barbecue grills, and so forth. If you do, that was your introduction to Value America (which, by the way, generated most of its sales from those newspaper ads).

Value America was the brainchild of sell-your-mother sales wunderkind Craig Winn. Earlier in his career, Winn had built a successful home-lighting business, Dynasty Classics Corp., and then promptly turned around and drove it into the ground. Dynasty’s collapse revolved around Winn’s managerial incompetence combined with his continued insistence on butting heads with major distributors and resellers such as Wal-Mart. Like many other entrepreneurs before him, Winn resented the distribution system’s power to dictate prices, margins, and even packaging to vendors and suppliers Value America, in addition to making Winn very rich, was also intended to be his revenge on the U.S. distribution system It would be the system, however, that would have the last laugh.

Value America’s business model was both simple and unworkable. The company presented itself as a giant online store. In truth, it was simply a middleman between buyers and manufacturers. Value America’s plan was for the company to never to have shelves or warehouses and the costs that accompany them. When a customer placed an order, Value America passed the request on to a manufacturer, which shipped the item directly to the consumer. Buyers were instructed to ship returned items directly back to the manufacturer. Value America was ostensibly supposed to make money by “reselling products” at a 1 percent markup over cost. For a bricks-and-mortar retailer this is a suicidal price structure, but Value America’s inventory-free model supposedly made it possible to achieve profitability with this microscopically thin margin.

Despite the patina of high tech the Internet threw about Winn’s creation, nothing he was attempting was new. The manufacturer-direct-tocustomer approach has been tried before, and it has failed before. Many, many times. The reason for this is simple: Distribution systems congeal out of businesses and industries not because of desire or opportunism but out of sheer necessity. Unfortunately for the poor souls who loaded e-tail stocks into their portfolios, few people advocating inventory-free retailing had much understanding of how and why distribution systems exist....

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