The Success and Failure of Dotcoms: a Multi-Method Survival Analysis

THE SUCCESS AND FAILURE OF DOTCOMS: A MULTI-METHOD SURVIVAL ANALYSIS Robert J. Kauffman Co-Director, MIS Research Center Professor and Chair [e-mail] Bin Wang Doctoral Program [e-mail] Information and Decision Sciences Carlson School of Management University of Minnesota Minneapolis, MN 55455 ______________________________________________________________________________ ABSTRACT: Using a multi-method survival analysis, we explore the drivers behind DotCom success and failure. Specifically, we test the impact of industry-, firm- and e-commerce-specific factors on a DotCom’s sustainable competitive advantage. KEYWORDS: DotCom firms, econometric analysis, electronic commerce, empirical research, strategic morphing, survival analysis. ______________________________________________________________________________ ACKNOWLEDGEMENTS: The authors thank Kemal Altinkemer and Kaushal Chari, cochairs of the Fall 2001 INFORMS Conference on Information Systems and Technology, and the anonymous reviewers of an earlier version of this manuscript for helpful comments. We also thank Tim Miller, President, Webmergers.com, for access to data and project sponsorship. ______________________________________________________________________________ INTRODUCTION The number of DotCom firms exploded during the last six years, as pure-play Internet startups emerged and existing companies migrated some of their operations onto the Internet to take advantage of the new channel for business. We define DotCom firms as those that do business via the Internet only. Among the DotComs that are publicly traded or have obtained investments of more than $1 million, more than 500 have ceased their operations since January 2000 (Internetweek, 2001). Still, many of the remaining DotComs are struggling to sustain themselves in a marketplace with fiercer competition coming from both online and offline competitors, and more reluctant investors. Why are so many DotComs failing? With this

References: Agarwal, R., and Gort, M. The Evolution of Markets and Entry, Exit and Survival of Firms. The Review of Economics and Statistics, 78, 3 (August 1996), 489-498. Audretsch, D.B. New Firm Survival and the Technological Regime. The Review of Economics and Statistics, 60, 3 (August 1991), 441-450. Audretsch, D.B. Innovation and Industry Evolution. Cambridge, MA: MIT Press, 1995. Audretsch, D.B., and Mahmood, T. The Hazard Rate of New Establishments. Economic Letters, 36, 2 (1991), 409-412. Audretsch, D.B., and Mahmood, T. New Firm Survival: New Results Using a Hazard Function. The Review of Economics and Statistics, 77, 1 (February 1995), 97-103. Burnham, B. How to Invest in E-Commerce Stocks, New York, NY: McGraw-Hill, 1999. Cook, J. Venture Capital: Where Mercata Led, Consumers Were Unwilling to Follow. Seattle Post – Intelligencer (January 12, 2001). Available on the Internet at seattlep-i.nwsource.com/ business/ vc122.shtml. Cox, D.R. Regression Model and Life-Tables. Journal of the Royal Statistical Society Series B 34 (May/August 1972), 187-202. Cox, D.R. Partial Likelihood. Biometrics, 62, 2 (1975), 269-275. Cusamano, M. A., and D. B. Yoffie. Competing on Internet Time: Lessons from Netscape and Its Battle with Microsoft, New York, NY: Free Press, 1998. Das, S., and Srinivasan, K. Durations of Firms in an Infant Industry: The Case of Indian Computer Hardware. Journal of Development Economics, 53, 1 (June 1997), 157-167. Downes, L., and C. Mui. Unleashing the Killer App: Digital Strategies for Market Dominance, Cambridge, MA: Harvard Business School Press, 1998. Dybvig, P. H., and Spatt, C. Adoption Externalities As Public Goods. Journal of Public Economics, 20, 2 (March 1983), 231-247. Gentry, J. A., Newbold, J. P., and Whitford, D. T. Classifying Bankrupt Firms With Funds Flow Components. Journal of Accounting Research, 23, 1 (Spring 1985a), 146-160. Gentry, J. A., Newbold, J. P., and Whitford, D. T. Predicting Bankruptcy: If Cash Flow 's Not the Bottom Line, What Is? Financial Analysts Journal, 41, 5 (September/October 1985b), 4756. Gentry, J. A., Newbold, J. P., and Whitford, D. T. Funds Flow Components, Financial Ratios and Bankruptcy. Journal of Business Finance and Accounting, 14, 4 (Winter 1987), 595-606. Ghemawat, P., and Nalebuff. Exit. The Rand Journal of Economics, 16, 2 (Summer 1985), 184194. Gombola, M.J., Haskins, M.E., Ketz, J.E., and Williams, D.D. Cash Flow in Bankruptcy Prediction. Financial Management, 16, 4 (Winter 1987), 5565. Hensler, D.A., Rutherford, R.C., and Springer, T.M. The Survival of Initial Public Offerings in the Aftermarket, The Journal of Financial Research, 20, 1 (Spring 1997), 93-110. Honjo, Y. Business Failure of New Firms: An Empirical Analysis Using a Multiplicative Hazards Model. International Journal of Industrial Organization, 18, 4 (90 July 2000), 557-574. Hosmer, D.W., Jr., and Lemeshow, S. Applied Survival Analysis. New York, NY: Wiley, 1999. InternetWeek. E-Business Carnage Continues, 868 (July 9, 2001), 9. Katz, M.L., and Shapiro, C. Technology Adoption in the Presence of Network Externalities. Journal of Political Economy, 94, 4 (August 1986), 822-841. Katz, M.L., and Shapiro, C. Systems Competition and Network Effects. Journal of Economic Perspectives, 8, 2 (Spring 1994), 93-115. Kauffman, R.J., and Wang, B. New Buyers’ Arrival Under Dynamic Pricing Market Microstructure: The Case of Group-Buying Discounts of the Internet, Journal of Management Information Systems, 18, 2 (Fall 2001), forthcoming. Kalbfleisch, J. D., and Prentice, R. L. The Statistical Analysis of Failure Time Data. New York, NY: John Wiley and Sons, 1980. Lieberman, M.B. Exit From Declining Industries: “Shakeout” or ‘Stakeout”? The RAND Journal of Economics, 21, 4 (Winter 1990), 538-554. Mossman, C.E., Bell, G.G., Swartz, L.M., and Turtle, H. An Empirical Comparison of Bankruptcy Models, The Financial Review, 33, 2 (May 1998), 35-53. Mougayar, W. Opening Digital Markets: Battle Plans and Business Strategies for Internet Companies, New York, NY: CommerceNet Press/McGraw-Hill, 1998. Rugullies, E. Power to the Buyer with Group-Buying Sites. e-Business Advisor, 10 (February 2000), 10-13. Available on the Internet at www.advisor.com/articles.nsf/aid/rugue05. Sandoval, G., and Kawamoto, D. Group-Buying Site Mercata to Shut Its Doors. CNet News.com (January 4, 2001). Available on the Internet at news.cnet.com/news/0-1007-200-4372403.html.