Dot.com domino effect threatens Old Economy as well as the New

Is it all over for the dot.coms? You would certainly think so, given the relentless flow of grim news from this punch-drunk sector in the past few weeks. The list of lay-offs, liquidations and asset write-downs has grown longer and longer with each passing day.

Is it all over for the dot.coms? You would certainly think so, given the relentless flow of grim news from this punch-drunk sector in the past few weeks. The list of lay-offs, liquidations and asset write-downs has grown longer and longer with each passing day.

Thursday last week saw the sector hit new lows with the closure of Mercata, an online retail business backed by Microsoft co-founder Paul Allen, just a day after scrapping plans for a stock market float. The same day saw eToys, the stricken US toy e-tailer, lay off 700 of its 1,000 staff just days after closing its UK operation.

That bulletin came after a report by Webmaster.com, which said that at least 210 dot.com firms folded globally in the past year, with 60 per cent of those occurring in the final three months when the venture capital firms switched off the cash lifeline.

Other cutbacks listed on US websites that chronicle dot.com failures include lay-offs at listen.com, a music site, and beenz.com, the digital currency venture, as well as redundancies at the US digital media division of News Corporation. Also included are online funeral arrangers such as heavenlydoor.com and legacy.com.

Industry reports have put the number of job losses in the internet sector at up to 41,000 in December alone in the United States. In the UK the figure is put at 31,000 redundancies so far in the dot.com shake-up.

But this is likely to be an underestimate given how many internet enterprises are back-bedroom operations whose demise would go unreported.

With sentiment towards dot.coms plumbing new depths you would have thought business-to-consumer internet entrepreneurs in particular would be queuing up to throw themselves off the nearest tall building. In fact there is a scramble to reinvent their enterprises as broader businesses, with many backing away from the dot.com tag altogether.

Two managers who are doing just that are James Benfield and Chris Littmoden, former Marks & Spencer directors who left the ailing retailer to join the internet revolution. Mr Littmoden, who used to run Brooks Brothers for M&S in the US, is winding up Easier, the quoted online estate agency, while his other business, Freecom.net, has been reinvented as a software house under the name Systems Union .

Mr Benfield, Marks & Spencer's former marketing director, is chairman of the Confetti network, a wedding website. He says his business is now more of a gift-list and delivery operation than a dot.com. Mr Benfield makes the point that success now is all about having a strong brand, whether you are online or not.

That view is born out by recent figures showing that 11 out of the top 15 websites over Christmas were traditional high-street names rather than dot.coms. Only stellar internet brands such as Amazon and Yahoo! bucked the trend.

These findings were supported by figures from Toys'R'Us last week. The company said that its internet toy sales in the holiday period were more than triple the previous year's level. This was primarily due to its decision to scrap its own problem- plagued website and team up with Amazon.com instead. Wal-Mart, K-Mart and Target have also done well online, even though Wal-Mart has been disappointing investors with its core business.

In the UK, Hamleys is said to be very pleased with its Christmas online sales and is due to update the markets with a trading statement today. Elsewhere in the Old Economy, Littlewoods achieved online sales of £2.3m in the month of December.

Where will all this end? The future is bleak for standalone dot.coms; they must cut marketing budgets to save cash, but in doing so will find sales falling. But the knock-on effects will be extensive. For example, every dot.com in Britain seemed to employ a public relations firm six months ago. Now that business is drying up.

Worse will be the impact on technology and support services spending by traditional companies, which no longer feel under competitive pressure to keep pace with the young upstarts. This domino effect is only just beginning.