Who Pays When Dot-Com Partners Fail?

It truly is a Web. Today’s e-commerce industry could not have been built without the interconnecting threads of partnerships, affiliate programs, marketing deals and other alliances.

However, the Web remains vulnerable in spots. eBay (Nasdaq: EBAY) partnered with Eppraisals.com, only to see that site go under two months later. Investments by Amazon.com (Nasdaq: AMZN) in relative startups like Kozmo, Pets.com and Wine.com failed to return any profit.

When a dot-com teammate has to abandon the playing field, what is the cost for the players left behind?

“These partner failures do have an effect,” Morningstar.com stock analyst David Kathman told the E-Commerce Times. “They do register on investors’ radar screens, even though companies try their hardest to get people to ignore them.”

Operating While Impaired

In Amazon’s case, for instance, the e-tailer took US$184 million in impairment charges in the fourth quarter of 2000 and another $114 million in the first quarter of this year, most of it from partnerships or investments that did not pan out. All of that tied-up cash might be preventing Amazon stock from rising above current levels, Kathman said.

Amazon has been criticized for not showing the losses clearly in its quarterly earnings reports. In fact, the accounting of those losses has helped fuel negative speculation about Amazon’s cash position.

“They’re real expenses, because they represent investments Amazon made that basically went down the drain,” Kathman said.

Kathman added, however, that he believes the worst is over for Amazon in terms of suffering collateral damage.

Subtle Hints

The impact of other failed partnerships might be harder to measure, because they take longer to surface. For example, eBay’s forlorn partner, Eppraisals.com, shut down just two months after eBay trumpeted its partnership with the service as a valuable tool for buyers and sellers alike.

The failure didn’t cause a blip on eBay’s stock price, which continues to outperform most of the e-commerce sector. However, even without easily identifiable costs, partnerships gone bad can have lingering impacts.

“We tell all our clients to choose their partners wisely,” Mainspring consultant Jennifer McKinley told the E-Commerce Times. “Given the volatility out there, Web partnerships should be taken in short bites.”

Short-Term Parking

By striking year-by-year deals rather than long-term agreements with e-tail partners, portals and even offline partners, e-commerce firms can avoid having a major investment of capital, time or corporate goodwill lost all at once.

“Try deals out and really get to know the partner,” McKinley said. “If it works out, then expand. Too many players locked themselves in early on and are paying the price now.”

Fever Pace

In fact, partnerships happened at a rate of more than three per day during the heyday of the Internet boom in 1999, according to New York-based consulting firm McKinsey & Company.

The idea behind many alliances was to quickly grab a presence in markets that seemed to be coming into existence overnight. While McKinsey said that more than half of these deals had an immediate positive effect when they were announced, in the form of higher stock prices and increased traffic, the long-range outlook is clouded by the ongoing dot-com shakeout.

For instance, painful dot-com failures like the bankruptcy of CyberRebate.com, which left thousands of consumers waiting for rebate checks, can stain the failed company’s partners.

Lost Opportunities

Just how much damage a partner like Yahoo! (Nasdaq: YHOO) will sustain over the long-term from having funneled shoppers to CyberRebate is unclear. Many analysts think the memory will fade over time, though Mainspring’s McKinley admits that the impact of making bad partnership decisions might be hard to measure.

“There may be other partnerships that should be consummated that aren’t, and if you miss too many opportunities, it can come back around down the road,” McKinley said.

Analysts agree that solid e-tailers like eBay and Amazon can withstand the loss of some partners without their core business taking a hit. However, there is little doubt that everyone will be looking a bit deeper into the books of potential partners from now on.

4 Comments

  • I appreciate this article because it seemed to discuss some of the history and dangers of entering partnering agreements without performing sufficient due diligence on your partner. However, I was concerned by the author’s tendency to focus on the negative. I AM tired of hearing the “dark side” of the web. There is a terrific opportunity in all down markets and business cycles that could be articulated just as easily.

    Consider the climate for web-based businesses today. Venture capital and Angel financing has become very difficult and the terms of such deals have become more risky for the entrepreneur than ever. This is a wonderful time for strategic partnerships to be formed–the deals are better now, the entrepreneurs’ concepts are more fully developed, and the business plans are complete.

    In every business sector there are better times than others to step out from the crowd. There are always good business models being developed, but not always an open environment for financing. Supply and demand cycles have swung heavily in favor of those willing to “venture” out. In the end, both will lose if the potential “big brothers” stay on the sidelines.

  • Ultimately, as in all these commercial failures, whether web related or just “business as normal”, the consumer, and thereby the taxpayer, pays. I could quote instances, but it would be redundant.

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