The Day Ahead: Dot com dominoes

Investors are pummelling Net services firms
Written by Larry Dignan, Contributor

Net services firms are dishing out profit warnings this week as dot-com clients struggle to pay the bills, but these once-ballyhooed companies are just the latest victims of the dot-com domino effect.

Investors are pummelling Net services firms, which consult and implement Web strategies, after a string of profit warnings. Organic, iXL Enterprises, Viant and Xpedior all said revenue would fall short of expectations because of frugal dot-coms. Meanwhile, corporate customers are putting off big projects because they don't have to chase Internet upstarts.

Sound familiar? If not, it will. Here's a look at how the dot-com dominoes are falling.

1. Free-spending dot-coms go under: You've heard the story a million times by now: Company blows all its venture capital and IPO proceeds on Super Bowl ads, has razor-thin margins and big losses and eventually goes broke. That process sent ripples through the Net sector.

2. Online advertising slows. The surviving dot-coms cut back on advertising. DoubleClick toned down expectations for a seasonally slow third quarter. Avenue A also announced its third quarter revenue will fall way short of estimates. Both companies see good fourth quarters.

3. Net services companies take a hit. Consolidation looms and many firms will be forced to merge. Executives at AppNet, a services firm that sold out to Commerce One, look like geniuses given the recent carnage.

4. The kingmakers lose their swagger. Amazon.com, which has a portfolio of struggling dot-com partners, renegotiated big-ticket partnerships. America Online took Drkoop.com stock in lieu of cash. Meanwhile Wall Street analysts flagged Yahoo!. Lehman Brothers analyst Holly Becker said it's only a matter of time before Yahoo! is hit by a slowdown. Yahoo! CEO Tim Koogle said Wednesday that "short-term upside" is limited amid advertising consolidation.

5. Web hosting companies could be next. The dot-com carnage could shrink the pool of customers for Web hosting companies. At the very least, revenue growth will slow.

6. Newspapers get battered. Old media may love documenting the dot-com demise, but it went along for the ride too. A lot of those free-spending dot-coms were taking out full-page ads in big metropolitan dailies. Deutsche Bank Alex Brown downgraded newspaper stocks this week, partially because of advertising concerns.

7. Radio takes a hit. Radio was one of the best vehicles for dot-com advertisers, but ad rates will come down as fewer Net companies compete for placement.

8. New economy business magazines get tired. Any trip to the newsstand will reveal a dozen business magazines targeting the new economy. When fast companies slow down and layoffs are everywhere no one wants to hear about new-age economics. When Time Warner finally launched a new economy magazine to compete with The Industry Standard, Business 2.0 and the rest of the bunch, you knew the party had to be just about over.

9. Silicon Valley's real estate market becomes reasonable (compared to current prices). Those dot-com millionaires really managed to jack up property values. Don't look now, but many dot-coms are packing their bags to cut costs. The exodus has to at least slow the cost of housing in the Valley

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