OCTOBER 30, 2000 VOL. 156 NO. 17

Kazuhiro Nogi/AFP. In Asia, optimism has been replaced by fear as the stock markets issue a rude wake-up call.

Is the New Economy Dead?
Asia's dotcom dreams may be dashed as the stock markets issue a rude wake-up call
By APARISIM GHOSH and JOHN GREENWALD

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It was fun at first, admit it—watching those bratty dotcom billionaires, oops, millionaires—ha!—thousandaires squirm as their cyberpriced stocks came screaming back to earth and their dotcoms disappeared overnight. But then something else dawned. It wasn't just the rich geeks taking it on the chin. It was everyone. Starting with Wall Street, stock markets everywhere began to fall into chaos. Two weeks in a row, the key U.S. indexes dropped precipitously, only to stage 11th-hour recoveries. Last Wednesday, the Dow Jones average plunged 433 points and the tech-heavy NASDAQ index fell to its lowest level of the year. Then both markets rebounded spectacularly on Thursday and ended the week on a high note. As always, Asia's bourses rose and fell in tandem with the U.S. markets. Tokyo's Nikkei Index went from 15,340 on Tuesday to 14,872 on Wednesday and back up to close Friday at 15,198.

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The volatility is the work of old villains—rising oil prices, violence in the Middle East, lower-than-expected corporate profits, uncertainties over the U.S. presidential election, even traditional October jitters. But this time it's claiming new victims. Make that New Economy victims. Already rattled by the NASDAQ's sharp reverses over the summer, dotcom companies watched the latest swings with a gathering sense of gloom. Daily announcements of start-up closures, mass layoffs and postponed IPOS aren't helping. "The mood is grim," says Chris Giacomelli, co-founder of IandI Asia, a Hong Kong forum for Internet professionals and entrepreneurs. At IandI's weekly gatherings, once occasions for boasting about sky-high valuations and listing plans, members now tend to talk about "how to get through the next few months," he says.

Some analysts complain the markets are unfairly tarring all New Economy stocks with the same brush. "Yahoo is reporting better earnings, but it's trading down: it doesn't make sense," says Jonathan Iu, Internet analyst at SG Securities in Hong Kong. Sure, but the market value of New Economy stocks never made any sense. Consider how dotcom mania showered wealth on every jaunty entrepreneur with the glimmering of an idea but not a clue about earnings. In the past, the stock market would rarely show its checkbook to a start-up sans profits. Now that investors have been burned, the fear is that the current stock pullback could leave even companies with real potential starved for cash—thereby stifling innovation. "Even good companies are being seriously hurt, and start-ups are being deprived of the opportunity to start—this will slow down the growth of the New Economy," warns Lee Jae Woong, ceo of Daum Communications, which runs Korea's largest portal.

Maybe things aren't as dire as all that. Step back from the market madness and the big picture still seems promising. Look at the U.S., which appears to be witnessing something richer and more varied than either New Economy enthusiasts or dotcom alarmists have envisioned: the rapid—if still painful and uneven—merging of the old and new economies. That's evident from deals as complex as America Online's proposed acquisition of Time Warner (the corporate parent of this magazine) or as simple as the act of buying a Pokémon video game or a bedding set from K Mart's website, BlueLight.com. "What we're seeing," says Garth Saloner, a professor of e-commerce at Stanford's business school, "is the diffusion of technologies that were popularized by the dotcoms into traditional companies."

Viewed in that fashion, the New Economy is nothing more than a fancy term for the basic infrastructure that allows consumers and companies across the globe to shop, work and play at Internet speed. In New York City, for example, travel agencies routinely farm out chores like updating frequent-flyer credits to online boutiques as far away as India. "All our activities from consumption to production are unalterably changed," says Allen Sinai, chief global economist for Primark Decision Economics. "In that sense, the New Economy is for real, and it's here forever."

But try telling that to all the dotcommers who have seen their stock options turn into toilet paper in the past few months. Or to those whose dreams of joining the Internet revolution now lie in tatters because prospective investors cringe at the very mention of the New Economy. "We are seeing many venture capitalists swing 100% away from dotcom investments," laments Angeline Chow, ceo of cwow.com, an online marketplace for wedding, baby and parenting-related needs. "There just isn't the money out there anymore," says Charles Zhang, ceo of the Chinese portal Sohu.com, which narrowly cashed in on the NASDAQ IPO frenzy in July, just before the mood turned sour.

Not true, say the venture capitalists. They have the money—they're just not giving it out as freely as they used to. "Now, if you take a dotcom idea to a VC, it's not enough to have a concept paper—you need a business plan," says Peeyoosh Chadda, associate director of Asian Direct Capital Management, a private-equity manager. "And your plan shouldn't be about eyeballs and page views, but cash-flow and profitability." One Hong Kong VC says, only half in jest, that he will never again open a dotcom proposal that's less than 30 pages long. "Kids who come to my office with ideas scribbled on the back of beer coasters will be turned away at the door," he says.

Those looking to the U.S. for the inspiration to stick it out might be disappointed: even companies showing growth have shut down in the face of VC disdain and looming cash shortages. Last month, Kibu.com, a start-up that had made healthy inroads in the teen-girl market by building a cyberchat "hangout," shocked analysts by closing while it still had a healthy bank balance. The reason? Kibu was unlikely to be "valued appropriately"—in other words, stupefyingly overvalued—by a market that has lost its appetite for initial public offerings. So it gave investors some of their money back. In the U.S., as many as 4,000 people have quit or been laid off from online ventures in the past month.

The Asian toll is harder to count—few dotcoms are listed, for a start—but there's already a mountain of anecdotal evidence. Kwon Eun Jong, ceo of Worldposting.com, a Seoul-based e-commerce company, says that she has witnessed more than 20 start-ups close down in the past six months. You hear the same story in Hong Kong, Singapore and Bombay. Jasmine Koh, regional Internet analyst for UBS Warburg in Hong Kong, says there is more carnage to come: "In the next 24 months, 99% of Chinese Internet companies will either merge, be bought by other companies or go bankrupt." Only months ago China seemed to hold unlimited potential for dotcommers with dreams. Now, as elsewhere in Asia, optimism has been replaced by fear. "We have to keep telling employees that they're in it for the long run, to not get worried about market fluctuations," says Sohu.com's Zhang. "Otherwise, people will start to panic." The panic may already be upon us.

With reporting by Crystyl Mo and Daffyd Roderick/Hong Kong, Hannah Beech/Beijing, Stella Kim/Seoul, Eric Roston/New York and Chris Taylor/San Francisco

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