What makes sense, and doesn't, or how to resist Internet's song

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I was dining with an old friend a few afternoons ago and was telling him how, until very recently, I had been feeling like Odysseus in the Internet Economy. "What do you mean?" he asked.

The hero of Homer's "The Odyssey," I reminded him, wanted to hear the song of the Sirens -- but knew doing so drove men to madness. So he had his crew stuff their own ears with cotton and tie him to the mast so he could listen as his ship sailed through the deadly melody. That's how I felt during the Web's ascendancy because, I explained, as my friends were becoming wealthy (and some quite rich) and as I, in my professional capacity, listened to the seductive harmonies of red herrings and analysts' calls, I never once bought any Internet stocks.

My friend asked why I hadn't, and I finally articulated the theretofore inchoate analysis which, from the beginning, had left me troubled about the so-called New Economy. "When you read a business plan and it doesn't seem to make sense," I told him, "then it doesn't make sense."

While this would seem conventional wisdom to anyone with limited means and a future to secure, it seemed as if wisdom and logic were suspended during the past few years. Thankfully, a plummeting Nasdaq appears to be bringing a portion of the population back from the planet Uranus. As these people -- your friends and neighbors, and perhaps you, too -- try to make sense of the mass hysteria to which they'd succumbed, I'd like to offer, by way of help, a few words of summary wisdom.

First, good businesses are not necessarily good, high-valuation, publicly-traded businesses. My pals who bolted to content-based Web startups still argue with me about this, but plain logic tells you that when you fragment an audience into myriad bits, the ability to gather enough bits together into an audience that can produce revenue (either by subscription or advertising sales) is constrained. Done right, of course, the elimination of production and distribution costs can make the economics of a Web site better than those of a magazine. But since when do individual magazines trade on the stock market? I mean, grow up.

Second, e-commerce is largely a more efficient way of doing catalog sales, not a replacement for millennia-old shopping habits. Worse, it's not scalable: the more you send out -- whether books, toys or suppositories -- the larger the infrastructure you need, the greater the fixed costs, the more difficult your inventory management and the more at risk your margins. There's a reason J. Peterman went under, and a reason L.L. Bean, which has been in this game for decades, isn't spending billions on new warehouses. Oh, and remains privately held, too.

As a corollary to the above, while the Internet destroys many existing economic models, it doesn't necessarily replace them with something equally viable. I've written about the radio's problem: With universal broadband penetration, the individual listener has access to thousands of stations, serving every niche interest imaginable. With any 17-year-old with a handful of MP3s and some time on his hands able to have his own global network, the value of brick-and-mortar stations, which has skyrocketed in recent years as conglomerates tried to assemble national networks, erodes. How do you rebuild -- or sell advertising within -- an industry composed of a kazillion stations, each with a handful of listeners?

Damned if I know.

And it goes without saying branding has been exposed as a hoax. I recently received an e-mail from a dot-com executive whose advertising I'd publicly criticized as puerile and impenetrable. After providing a statistical response (in the first five days of the campaign, the average daily number of page views doubled, registration of new users increased by 85%, etc.), the executive speculated, "I am wondering if fast brand-building is the way of the future?" The "emergence of faster and more ubiquitous communication channels," he went on, "can contribute to a faster development of brands."

Oh, I doubt it. Brands are promises -- of service, quality, values and substance -- made by a company to its own people, and thereon to its customers. To believe such a promise, which normally takes years to build, can be short-circuited by a multi-million-dollar network dump, in an economy where employees have the loyalty of rutting gerbils, strains credulity. Just like most dot-com advertising, I might add.

Sorry your portfolio's down. But, as I told my friend at lunch, it's good to be back in Ithaka.

Mr. Rothenberg can be reached at rothenberg_randall@strategy-business.com.

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