Pinching Pennies at ‘Dot-Coms’

Amid the din of million-dollar parties and free employee BMWs that have come to define the excesses of the “dot-com” era, the quiet voice of frugality is being heard.

Fiscal reason has been an oxymoron in high-tech centers around the country since the dawning of the “new economy.” With billions of dollars being thrown around, spending big was an easy way to get attention and seem successful.

But the shakeout of Internet companies in recent months and the growing perception among investors that some ventures need adult supervision, has suddenly made cheapness something worth crowing about.

“A party is certainly not in the budget now,” said Will Clemens, chief executive of Respond.com, which threw a $200,000 party in San Francisco a few months ago.

“Our focus is much more on driving toward profitability,” said Brian Stafford, president of CarOrder.com, which spent about $1 million on a weeklong media extravaganza in New York City that included paying bridge tolls and subway fares for about 100,000 commuters.

“Our offices are behind a Kentucky Fried Chicken,” exclaimed Stephen Chapin Jr., whose company, Lifeminders.com, spent $2 million for a 30-second spot during the Super Bowl in January.

A little older and a lot poorer, many dot-coms are waking up to a new reality: Even in the way-new economy, the adage of watching every penny does makes sense. Instead of profligate spending on advertising and parties to seize mind share, companies now are focusing on driving toward profits, or at least showing that they have a business model that can eventually produce profits.

“Last year was a go-go year,” Chapin said. “It was a new market and people were trying to figure out what would win. This year, fiscal responsibility rules.”

For many once-lavish companies, the turn toward frugality has come as a welcome relief--a timeout from the hellish arms race over marketing and employee perks, which had reached hysterical proportions.

It used to be that stories about free sodas and licorice at high-tech companies would draw oohs and aahs from jealous friends slaving away in regular jobs.

Today, there are no limits to what the proletariat is expecting--busty Norwegian masseuses, car-detailing teams, eight weeks of vacation. The excess, and subsequent sense of entitlement among workers, has created a backlash among some employers who are retching over the monster they have created.

“It’s become frightening, because I don’t know where it will stop,” said Andrea Wilson, director of human relations for Lot21, a San Francisco-based new media advertising firm. “We’ve got to get out of commoditizing these perks and get back to basics, to just running a company.”

Common Sense Was Only Hidden

For many observers of the high-tech scene, the basics of fiscal common sense never really disappeared. It was only hidden by the barrage of media articles detailing the apparent kookiness of the new dot-com world.

Jon P. Goodman, who as executive director of USC’s EC2 business incubator has seen her share of failed dot-coms, said that the vast majority of young companies are painfully aware that their survival depends, in part, on controlling costs.

“If your company is sloppy with money, you don’t seriously think your employees are going to be careful,” she said. “Most companies may have foosball and some free cookies laying around, but no one flies first class.”

Goodman said that what is different now is that extravagant companies are no longer grabbing headlines the way they used to. If they are making news, it is often as fatalities of the online shakeout.

One of the most notable victims has been San Juan Capistrano-based Pixelon.com. The Internet broadcast network threw the most lavish dot-com party in history--an affair in Las Vegas last fall with the Who, Natalie Cole and Tony Bennett that cost at least $10 million of the $23 million it raised from investors. The performances were supposed to be broadcast over the Internet, although technical difficulties limited distribution.

Outraged by the excess, the company’s board of directors in November ousted the company’s founder and struggled to survive. Months later, Virginia authorities identified the company’s founder, Michael Adam Fenne, as a convicted embezzler named David Kim Stanley.

Such fiascoes have tarnished the old dot-com theory of “look rich, be rich,” and made thriftiness the hot buzz.

If there is a dean of frugality in the high-tech world, it is John Morgridge--chairman of the board of Cisco Systems Inc., former president of the company and avowed opponent of free sodas at work.

Cisco, the dominant maker of devices that route information over the Internet, has been one of Silicon Valley’s most successful companies. Its stock has risen more than 400% during the last two years, allowing the company to go on an acquisition binge that just this year has already totaled 11 companies.

It is now one of the most valuable companies in the world with a market capitalization of more than $450 billion.

‘More a Case of Message Than Cost’

Morgridge is Cisco’s largest individual shareholder with $5.6 billion in stock. But his own wealth hasn’t stopped him from waging a long crusade against free drinks.

“It costs $400 per year for every employee,” Morgridge groused. “Four hundred times 35,000 employees is a sizable number.”

The number is indeed large, but when compared with the $550,000 a year in revenue generated by each employee, his complaint seems a bit tightfisted.

“It’s more a case of message than cost,” he said. “The key message is that we want people to be thoughtful about where and how they spend money.”

During his tenure as president, Morgridge instituted such traditions as required coach travel (people are free to upgrade themselves), standardized cubicles for everyone and no reserved parking for executives.

He opposes riding in taxis when decent public transportation is available and looks askance at expensive advertising campaigns, which he thinks are often misused. During his time in office, Cisco did no advertising at all.

For Morgridge, it is the excessive marketing of the dot-coms that is at the root of all current evils.

“With the dot-coms, there was this huge effort to establish identity, which is very expensive,” he said. “As short as six months ago, there was this sense that there was an unlimited supply of money. I think there is an increased understanding about how you spend money now because there isn’t an unlimited supply.”

Richard Neely, interim chief executive of online software seller Beyond.com, has felt that pain. He came to Beyond.com in December to help resuscitate a company that had marketed itself into a coma.

In an effort to build its brand name with consumers, the company increased its sales and marketing expenses from a paltry $1.7 million in 1997 to $81 million last year, ballooning its net losses to $125 million.

“Internet e-tailing was a brand new world,” Neely said. “It was going to change the world. The old models didn’t matter. The more you lost, the better you did.”

What Beyond.com overlooked was the amount of money it took to develop a brand and then maintain it in the public eye. Television advertising became an economic black hole, sucking millions of dollars to ensure that the company’s message was repeated.

“It’s like heroin,” Neely said. “You have to keep taking more and more.”

Big Pullback, Shift of Focus

Beyond.com saw a huge leap in its revenue from $17 million in 1997 to $117 million last year, but its net losses mounted as well, increasing from $5.5 million in 1997 to $125 million last year. Meanwhile, its stock plummeted from $38.50 early last year to $2.06, its closing price Wednesday.

The company’s former chief executive, Mark Breier, resigned in January, and Neely began trimming to save the company.

He eliminated all television advertising and canceled the company’s big Web advertising deals. The staff shrank by 150 employees to 230--through layoffs and defections--and the company shifted its focus to selling software to businesses, instead of to the public. Beyond.com even stopped providing free lunches at executive meetings, started requiring coach travel by all employees and changed its weekly beer and pizza parties to monthly affairs.

Neely recently launched “Project Thrifty,” a program for employees to suggest ways of trimming more fat. Good work by employees is rewarded with coupons for free Jamba Juice drinks and Starbucks coffee.

“Not everyone is going to succeed in this business, but we aim to make it,” Neely said.

The goal of spending less and making more may seem ridiculously obvious, but the problem for many dot-coms is that the situation is rarely so simple.

Every Internet company has had to face the reality that it is far too easy for other people to start--or copy--a Web site and become a competitor.

In the race to build new brands, seize market share and steal the best employees, companies argue, they often have to be profligate.

Indeed, advertising outlays by dot-coms have grown at a phenomenal rate, jumping from $236 million in 1997 to $2.8 billion last year, according to EMarketer, an Internet marketing research firm.

David Halperin, a senior analyst with EMarketer, said that Internet companies will spend an estimated $5.8 billion this year on advertising, although he added his estimate was done before the Jan. 30 Super Bowl.

“The Super Bowl was the straw that broke the camel’s back,” he said. “There was lots of advertising, but then people saw the results weren’t that impressive. The numbers for 2000 could be smaller, but it’s really hard to say.”

Many Internet companies argue that despite the fiscal pain, their spending has been worth it. Stafford, of Austin, Texas-based CarOrder.com, said the $1 million his company spent in New York on toll tokens and parties was critical to establishing the company’s name.

Before, it was just one of a zillion other companies on the Internet, but the marketing campaign allowed the company to show consumers that it was a real business with real people and real money, Stafford said.

“Our business is selling cars, so there is an issue of credibility,” Stafford said. “We wanted to show that we weren’t just any Web site, but that there were people behind it. It was the personal interaction that was important.”

Lifeminders.com, based in Herndon, Va., faced a similar problem in its efforts to distinguish itself in the crowded Web market. It chose to spend $2 million on a single Super Bowl commercial in hopes of reaching not just consumers, but potential business partners.

“Investors were trying to figure out who were the winners and losers,” said Chapin, the company’s president. “We wanted to make a big announcement in a grand way. I mean, I can’t walk into Procter & Gamble’s office if they don’t know who we are.”

One of the most difficult areas to trim has been employee perks, which have been driven into ever stranger terrain as technology companies compete for workers.

In this competitive environment, Clemens, of Respond.com, said spending some money on employees--sometimes lots of it--can be justified. His company spent $200,000 on a party to thank workers for the long hours they spent on its Web launch.

“The company had essentially been on a death march and this was a way of celebrating,” he said. “Frankly, it was money well spent. Within a month we closed on $46 million from investors, many of whom were at the party.”

Google Inc. of Mountain View, Calif., is known among engineers as having the best perks in Silicon Valley--a place where few luxuries would be considered too outrageous.

Need anything? That’s the mantra for workers such as Bill Dixon at Google. As steam rolled across the company kitchen, Google’s public relations manager faced the often anguishing decision of what gourmet meal to eat.

“Hmm, should I have the free-range chicken with the raspberry sauce or the lobster risotto?” he murmured, after passing on the roasted sirloin black bean chili.

After lunch, Dixon trotted back to his desk where, an hour later, an e-mail popped up, reminding him of a 2 o’clock deep-tissue back rub in the company’s massage room. Naked under the soft white sheet, Dixon groaned softly, the sound slightly muffled by the cotton towels wrapped around his face.

Google founder Sergey Brin said that none of these amenities are true indulgences in the high-tech world, because any big-league company will offer fat salaries, fancy meals and some form of stress-reduction therapy.

But how about a company hot tub next to the massage room?

“I’d love to put in a hot tub,” he said. “Maybe a pool.”

He pondered the possibility for a moment but was soon pulled back from his reverie by the realities of the new dot-com world.

“We’ll do that,” he said, “just as soon as we’re profitable.”