Karl Marx on Internet Time

While there are a number of reasons for business failure, one common cause is overpaying, either for a service, a product, a CEO, an acquisition, etc. Consider some examples from the world of hi-tech.

First, many internet-enabled firms wound up, in hindsight, making a gargantuan mistake when they got around to contracting for the design and implementation (front and back end) of their web sites. The preliminary misconception was the incorrect belief that the site itself was the value proposition, the engine that would produce revenues. ‘Eyeballs to the site’ was not a means to an end, but an end in itself. There was a pervasive belief that advertising to a captive audience would get the job done. The managers failed to understand that the internet is an enabling piece of technology, of little value unless it helps make some independent business activity more efficient and profitable. The underlying business activity must be one that existed and been proven before the web was devised. While eBay and Amazon did not exist before the internet, auctions and mass-merchandisers did. This led in turn to the mistaken idea (which corrupts so much government planning) that Karl Marx was right. In Marx’s theory, the economic value of an item is derived from its cost. In the case of dotcoms, this translated into the belief that the amount of money spent on site development directly translated into the amount of revenue it could generate. This is the same theory that stipulates that a hat increases in value by $1.00 every time you check it.

Marx’s labor theory of value, old wine in new bottles, was magnified in its wrong-headness by a truly extraordinary and largely unprecedented phenomenon. The prices charged by firms providing web site design and construction services were spread across a spectrum that was breathtakingly wide. For essentially the same end product, you could pay anything, from a few hundred thousand dollars to several million dollars! Flush with cash, the dotcomers elected not to comparison shop, which is all the more ironic considering how many of them were promoting comparison-shopping technology. The vendors were ecstatic. Divorced from the iron laws of fundamental economics, they charged whatever they wanted. After all, the more expensive the site, the more robust its revenue generation potential. The vendors weren’t gouging, by and large. With a $3 million order, they put umpteen people to work, paid up for exotic design talent, over-engineered the software, bought Super Bowl ads, rented the Temple of Dendur, etc. And, the clients cheerfully paid.

The sad part is that the luxuries can rarely be recovered. The over-designed, over-engineered and over-promoted web sites are 21st Century versions of Fountainbleau, each a symbol of the Sun King’s excess, resulting inevitably in the guillotine.

Of course, the poster-child for over development was Boo.com, which burned through $135 million of VC money. The e-commerce site that was finally developed was widely considered the most advanced of its kind, and likely too advanced for the limited technology and bandwidth used by its target market. While the site allowed users to view clothing in 3D formats, try on clothes 'virtually' before buying, and even featured 'Miss Boo,' the cyber shopping assistant, the technology itself managed to keep away many customers. In addition, the fundamental metrics of supporting such a robust technology by selling sportswear are questionable. In the end, Boo.com's massive infrastructure was liquidated for less than $375,000, a fraction of the development cost.

Had the high fliers of a year or so ago not lost sight of economic fundamentals, and insisted on value for their money, there would be a lot more of them around today.