Is This The End.com?

By Chris Taylor/San Francisco

In every revolution there comes that bitter moment when the flag-waving has to stop, the grand social theories have to adapt to reality, and a large number of the revolutionaries inevitably find themselves hauled off to the guillotine. The dotcom revolution is no different, except that, true to form, it has accelerated the process. The time it takes to go from hero on the barricades to zero with your head in a basket has shrunk to a nanosecond.

For even the truest of new-economy true believers, bloody April--during which the NASDAQ fell 25.3% and the IPO window slammed shut--has given way to a Summer of Discontent. While most of the big names have recovered a bit from their April depths, they are still down for the year: Yahoo, off 50%; CMGI, down 70%; Priceline.com off 57%. Just last Friday, amid renewed analyst concerns about disappointing revenues, Amazon.com dropped 19% more to close at $34, off 70% from its December high. Amazon laid off 150 workers in January, Oxygen Media fired 15, and AltaVista sacked 50.

And when these Internet elephants begin to stumble, the mice get crushed. For every Amazon or Yahoo, there are 10,000 smaller Net companies that never got the chance to go public--and now probably never will. For those companies and their employees, who believed just as hard as Jeff Bezos and Jerry Yang but got to the barricades a lot later, the business climate is drastically different. Call it the new new economy.

Consider the case of Tor Thorsen, movie reviewer and employee No. 5 at Reel.com formerly one of the Web's largest DVD and video stores. Six months ago, Thorsen was a true believer. Three years' worth of 60-hr. weeks seemed about to pay off. He held 32,000 shares of Reel.com which was planning to go public. And he was whooping it up at the Sundance Film Festival. A-list stars like Kevin Spacey, Nick Nolte and Emily Watson granted interviews. "For the first time, we were really part of the film scene," recalls Thorsen. "People knew our name. They were like, 'See you next year.'"

Except there will be no next year. Last week Reel.com's headquarters in Emeryville, Calif., was like a ghost town. Every last one of the site's 230 employees had got a pink slip the previous week. Some, in a rush or in disgust, hadn't even cleaned out their cubicles. Thorsen and 14 others remained as independent contractors, keeping the site running while its owner, Hollywood Entertainment, based in Portland, Ore., worked out the details of how to give it a decent burial.

In 1998, in the full flush of the revolution, Hollywood ponied up $100 million for Reel.com Now, with the site's IPO canceled because of lack of interest and venture capital running dry, its e-commerce operations were halted. That left Thorsen's 32,000 shares worthless. "I used to think about buying a house and paying off my student loans," he says. "Now I'm thinking about unemployment."

When his contract runs out in a month, Thorsen will hardly be the only dotcom refugee standing in line. Nor will he be the only one cursing his valueless options. This has always been a highly volatile industry, but recent events have been on the scale of a virtual earthquake. Here's a sample of the casualty list for just two days last week: More than a third of Seattle-based Hardware.com's workers went under the hammer. Furniture.com in Framingham, Mass., laid off 80 employees--that's 41% of its work force. Streaming video site Pseudo.com axed 58 jobs in New York City. Planned IPOs were canned by firms including Furniture.com electronics site 800.com in Portland, Ore., and video-delivery site Kozmo.com in New York City. BBQ.com a fully funded San Francisco website offering nothing but barbecuing tips and equipment, went pork-belly up. (Haven't heard of any of these sites? Lack of exposure was part of their problem.)

It's not as if the Internet economy is about to collapse. In fact, most laid-off workers are being recruited by other tech firms faster than ever. (A group of headhunters from Amazon.com arrived at Reel.com's offices a day after the firings and found the company's engineers and management had already obtained employment elsewhere.) It's just that cautious investors have finally forced websites to think about that once blasphemous bottom line.

Talk to upper management at more mature online companies--any more than two years old, say--and you'll hear strange new words like consolidation, restructuring, streamlining, even profitability. "The downturn in the 'stupid' economy is going to precipitate a flight to quality," says Kyle Shannon, co-founder of agency.com a business-support site that lost employees as its stock went from $98 to $17 in seven months. "I can't wait, frankly. I'm so excited."

Shannon's sentiments, if a little overenthusiastic, are fairly orthodox. You would be hard-pressed to find anyone who does not outwardly profess that a market correction and a separation of wheat from chaff are good for Internet business. But a lot of get-rich-quick dreams have died, and it would be surprising if disappointment did not manifest itself.

"Before the last market tank [April's NASDAQ collapse], I could have retired, bought three houses and my dream boat, and had $150,000 a year in interest to live on. Now I'm back where I started," says a senior engineer at a West Coast Web-services company, whose stock was briefly worth $9 million and is currently underwater. That means it has sunk beneath the price at which he originally bought it.

Even more cruel, of course, is when the paycheck stops too. Just ask the 140 former employees at APBnews.com a Wall Street- based crime-reporting website that hired reporters for a salary in the low $40,000s--very low for a New York City dotcom--plus a meager 500 to 1,000 options. Once again, they turned out to be worthless when the site ran out of cash. As with most dotcom firings, the end was as swift as it was ignominious. News editor Jim Edwards returned from a vacation in Amsterdam to find his company had collapsed.

While Edwards is still looking for a job, a dozen rehired employees are keeping the site alive as its owners make one last bid to stave off bankruptcy. It's hard for even the most radical revolutionary to keep the faith under such circumstances. "I would go to a dotcom again," says reporter Joe Beaird, "but once you see your company go under overnight, you know how it really is. And it screws you up."

The e-commerce struggle has also produced plenty of grizzled, cynical veterans. Take Janice Crotty, a San Francisco Web consultant. In the space of a single year, she helped give birth to two online ventures--and watched both of them pass away. In early 1999 Crotty quit her job and went without pay for five months to found a Web portal called iAuthentic.com That failed to attract venture funding, so she joined health site wholepeople.com which, in turn, was recently rescued by, and merged with, rival site Gaiam.com

Now Crotty is back in the consulting business with no regrets. Her only beef is with venture capitalists, the moneymen who she believes are responsible for most dotcom failures. She thinks they push sites into an early grave by forcing them to become too big, too fast. "I've been burned by the culture of stupid growth that VCs have fostered," she says. "Some businesses ought to grow organically. You can't just add water and expect to compete in the mass market."

The VCs say they're simply reacting to the demands of the market, which has become far more cautious and skeptical in the past three months. The game used to be about building a virtual Roman Empire, all glorious acquisitions and land-grabs. Now it's about building a Monaco, a tiny but incredibly profitable niche nation. Companies that don't understand the need to change direction--in geekspeak, the phrase is "turn and burn"--are doomed.

"The great thing is that people aren't throwing in the towel," says Quincy Smith, partner at the Barksdale Group, a VC firm founded by former Netscape supremo James Barksdale. "They're saying this is a fact of life. Let's get back to work."

It's fair to say the dotcom hubris of a few years ago has gone, replaced by an almost paranoid fear of being the next company to go under. Cautionary tales circulate like computer viruses. Most often cited is Boo.com the European fashion website that collapsed last month under the weight of poor design, lousy customer service and clueless founders who threw excessively lavish parties. "Everyone's afraid of what happened to Boo," says San Francisco Web designer Kathleen Craig.

Guessing who's going to be next has become a kind of morbid party game. It has given rise to the dotcom dead pool, a highly popular website run by 24-year-old New Yorker Philip Kaplan (found at the X-rated address F_____dCompany.com) Launched on Memorial Day, it has already received more than 80,000 sign-ups. Kaplan's secret: besides running sweepstakes on the big losers, his site has quickly become the central rumor mill of the Internet economy. Human-resources departments scour it for tips on where to send the headhunters next, and analysts check it before recommending a company to investors.

It's partly to avoid ending up in Kaplan's extensive archives that the digital workforce has started to act in a new and strangely sensible manner. When he got bored in his last job, software engineer Jason Fisher went to a headhunter and arranged interviews with 10 small, good-looking pre-IPO companies. Each made him a higher offer than the one before, and yet Fisher chose the company--myplay.com which copies and stores your CDs online--that made him the lowest offer. In fact, it was a pay cut. Why? "I didn't want to go anywhere that I didn't feel was going to succeed," he explains. It was a wise decision. The man Fisher interviewed with at his second-choice company is currently looking for a job himself.

Myplay also has what Fisher calls engineer gravity. As the guys who do the heavy lifting in any start-up, engineers are heavily in demand. The companies where they cluster are the ones with the greatest chance of attracting more engineers--especially ones that take pay cuts. Engineer gravity may determine who lives and dies in Round 2 of the Net economy.

That and the kind of homespun frugality on display at Medsprout.com a New York start-up that provides online information for doctors. Directions to the half-finished office are scrawled on sheets of paper taped to the elevator bank. The conference room is also the bottled-water room. The CEO shares his office."I took a salary cut last week because of the funding situation," boasts Erin Meek, a former consultant. "But it doesn't bother me because of the experience I'm getting."

While no one's taking vows of poverty, working for love more than money is clearly hip with online employers. "I'm not sure the message has got out to the masses, but the gold rush is over," says Lesley Workman, CEO of Urbanite Networks in San Francisco. "If you hire someone who's in it for the money, you can be sure they're going to get calls from 700 headhunters a week. That's not the basis of a good relationship."

In other words, Eldorado just closed its gates. That bright shining myth we became so accustomed to over the past two years, the idea that you can make your millions simply by being at the right junction of Silicon Valley's Route 101 at the right time, no longer applies. Says Tony Perkins, editor of Red Herring magazine: "No one is going to become a billionaire in the Internet era without deserving it anymore." Or earning, through decades of turn and burn, an inescapable engineer gravity. The revolution is dead; long live the evolution.

--With reporting by Kate Kelly/New York