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Dot-Gone: The Declining Dot-Com Industry

May 4, 2001 at 12:00 AM EDT


SPENCER MICHELS: During the height of the Internet boom, the foosball game — often installed in a company’s recreation room — became a standard perk in an optimistic and youthful high tech industry. Today, a San Francisco-area firm that leases out foosball and pinball machines is reclaiming the games, as one dot-com or Internet-based company after another lays off its workers and closes its doors.

ROMAN FLODR, Video Amusements Inc.: Just about all the dot-coms, the true dot-com companies we were dealing with, they are pretty much gone.

SPENCER MICHELS: Flodr’s business problems speak to a larger economic downturn in an area where the promise of the Internet still jumps out at freeway commuters from roadside billboards. One hundred fifty thousand people were employed in the Bay area alone in dot-com enterprises last year, where the average yearly salary for tech workers exceeded $78,000. Stock options, with the expectation of huge payoffs, were part of the lure.

But Internet start-ups are falling by the wayside. Some, like Geocast, have posted their own death notices; others, like eHow, keep their sites running, but the staff is gone. Hundreds of Web sites have closed down. Estimates vary, but some reports say 65,000 people nationwide have been laid off, 22,000 in the Bay area alone. All this has changed lives and the world of business.

Analysts say the fundamental reason for the shakeout is that e-commerce firms, like Webvan — which sells home-delivered groceries over the Internet — were not making profits. Webvan recently laid off 1,800 people and closed its Dallas and Atlanta operations, but is still in business in the West. Ken Rosen is a consultant and a professor at the University of California’s Business School.

KEN ROSEN, University of California: And so this was basically a system that was almost an implicit ponzi scheme — that you basically raised money and make money without any profits being made in the enterprise. It was appealing. The technology is real, it’s here to stay, it’s going to improve the efficiency of the economy. But the pure e-commerce companies, I think, really didn’t have a good business model. And in the end, if you don’t make money, you don’t survive.

SPENCER MICHELS: Laurie Pregenzer was a victim of the burst dot- com bubble. The Internet-based company she worked for cut back and had layoffs. And so today, she is one of those looking for a job.

LAURIE PREGENZER: Is there a way you can help me get in touch with her? I was supposed to call her between 9:00 and 10:00 this morning.

SPENCER MICHELS: Pregenzer’s job search is talking longer than she thought it would. She was laid off after two and a half years as a manager at a firm that coordinates large construction projects. She loved the excitement of a startup.

LAURIE PREGENZER: Working there in the very beginning, it was an absolute blast. It was our lives. We invested every amount of energy and time that we had into this company and it was very common that you’d write an e-mail at 1:00 in the morning, 2:00 in the morning, and get a response back immediately.

SPENCER MICHELS: The stress of the dot-com lifestyle, its ups and downs, cost her her marriage. And her company experienced disturbing changes as well. It acquired one firm, then merged with another, changed its name, and went through management shake-ups.

LAURIE PREGENZER: We had new leadership, everything was up in the air.

SPENCER MICHELS: Her project was deemed too expensive. The company had three rounds of layoffs, and finally Pregenzer was told it was her turn to see the boss.

LAURIE PREGENZER: So I went in there and he talked me through the whole package that I’d already given to about 20 other people myself. I’m guessing about 60 people were laid off that day. So we just spent the day together and had a pink slip party with everyone else, about you know, 100 people down at Pier 23 and celebrated.

SPENCER MICHELS: Pregenzer was lucky: She had invested some money in property, including this town house in Sausalito, near San Francisco. Even after her layoff, she bought a new Mercedes. For a while, she felt good.

LAURIE PREGENZER: It felt like graduation. What most people go through in ten, 15, 20 years of a company, I had experienced in two and a half years.

SPENCER MICHELS: Pregenzer is leaving no stone unturned in her job search. Along with a crowd of others, she registered recently at a San Francisco job fair sponsored by, a job-search company that recently laid off 15 percent of its own workforce.

MAN: Thank you much. Appreciate your time.

WOMAN: Take care.

SPENCER MICHELS: Reporter: 5,000 job hunters, most of them refugees from failed high-tech firms, swarmed the recruiters.

DAVID JULIAN: My name’s David Julian,

SPENCER MICHELS: David Julian was in charge.

DAVID JULIAN, We’ve been doing these shows for about two years and normally we’d see about 70 or so companies at one, at an event like this. Today we’re seeing about 40, but we’re seeing almost three times the amount of job seekers at this event, which says to me that there’s still a lot of jobs in the Bay area, but there’s a lot more people looking for jobs right now than were a year ago.

SPENCER MICHELS: Many of the job-seekers seemed upbeat, but not all.

JOB SEEKER: Yeah, it’s serious, because I have a family to take care of. But I’ll find a job. I’ve been off work since December, part of the dot-com, but luckily I was practical with my money and I’ve been able to survive so far.

MAN: You’re not going to find a job right now — less opportunities than when I got hired a year ago.

SPENCER MICHELS: You know, there’s some people in the economy who say, “well, these young people got too much, too fast.”

MAN: Absolutely.

SPENCER MICHELS: Is that true?

MAN: Absolutely.

SPENCER MICHELS: Your expectations were too high. You thought you’d have a $100,000 job getting out of college.

MAN: And it happened. A lot of people did. I, personally, did not, but a lot of people did.

SPENCER MICHELS: You were saying?

LAURIE PREGENZER: Yeah, I mean, we did and we built our lives around that. I think, you know, a lot of us bought big houses, really nice cars and now we’re in tasked with sustaining that. Other people, you know, had families and we all tried to save and do the best we could. But I think, I personally thought that it was going to last forever — ignorantly or not, I really did.

SPENCER MICHELS: There’s an upside to business failures as well. The closures have actually helped some surviving dot-coms, freeing up real estate they can afford. The vacancy rate for dot-com office space in San Francisco has already increased eight-fold, to 16 percent, and rents have dropped 25 percent.

WOMAN: You also need to be looking at what can be identified and readily reached through your marketing efforts.

SPENCER MICHELS: The layoffs have seeded the job market with trained and talented workers, previously difficult to recruit by fledgling companies. At a high-tech center in San Francisco designed to help launch a dozen startups, entrepreneurs say the collapse of many dot-coms has weeded out employees and bosses unsuited for the field.

CHARLES WU, Panasonic Technologies: Some people are leaving, but it’s the people that never had the passion in the first place. They came to the valley for the wrong reasons: They came because it was a gold rush, they thought you could make a lot of money.

TIFFANY BUKOW, Eighty percent of the people were wrong for a startup environment. And so we’re having a natural flush out of those people that really need to be a more structured corporate environment. And now you’re getting back to the basics: The entrepreneur who will bootstrap and do anything to make that business a success and get their first client.

SPENCER MICHELS: Other sectors of the economy will also be helped by the move of dot-com employees into bricks and mortar firms, according to venture capitalist Maragarita Quihuis.

MARAGARITA QUIHUIS, New Vista Capital: Maybe working for a slow, traditional company is more attractive. The gain for these traditional companies is that they’re going to have people who’ve had first-hand experience about what it takes to implement Internet technology at an enterprise; and that, I think, is going to be the great thing for the U.S. economy in the next five to ten years.

SPENCER MICHELS: But business consultant Ken Rosen is less sanguine. His 1999 report on fool’s gold predicted the big downturn and a new study foresees more serious problems ahead.

KEN ROSEN: And we found that there had already been a number of dot-com companies closed and our study indicated that 80 percent of them would be closed over the next year to year and a half, reducing the jobs in that sector by about 30,000.

SPENCER MICHELS: Rosen says that not just Internet companies and their employees will be caught in the fallout from the burst dot-com bubble.

KEN ROSEN: I think we underestimate what this has done, this boom psychology and then the following bust psychology. It’s going to have a pretty negative impact. Nasdaq created a lot of wealth and then a lot of wealth was lost. And I’m afraid that that’s going to be a hangover in the economy certainly for the next nine to eighteen months.

SPENCER MICHELS: If he’s right, these job lines could get longer before the predicted benefits of the shakeout become clear.