Reflections on: When Internet companies morph
First Monday

Reflections on: When Internet companies morph by Robert J. Kauffman, Tim Miller, and Bin Wang

This paper is included in the First Monday Special Issue #6: Commercial applications of the Internet, published in July 2006. Special Issue editor Mark A. Fox asked authors to submit additional comments regarding their articles.

Read the original article here

Although there is a large body of literature that has examined information technology (IT) and firm performance from perspectives such as productivity (Brynjolfsson and Hitt, 1996) and organizational form and market structure (Clemons and Reddi, 1993; Malone et al., 1987), the literature still lacks a theoretical interpretation of the survival of IT-focused firms, in spite of the many Internet firm failures observed since 2000. According to (2003), about 4,854 Internet companies actually shut down their Web sites or were acquired by other firms during the three-year period from 2000.

Internet firms are businesses, so results from previous research on business failure should inform our understanding of their survival. But, Internet firms also have unique characteristics. Their use of the digital channel has enabled Internet firms not only to deliver physical products to their customers, but also to provide digital products that can be directly downloaded or consumed via the Internet. In addition, the hype around Internet firms in the late 1990s and the subsequent large-scale failures demonstrate that Internet firms went through their initial development stages in a very sensitive period of time, where the results from previous research may not be so readily applied and similar conclusions so blithely reached.

Although research on firm survival can be conducted at different levels of analysis (e.g., the industry or economy level), our recent research work has focused on the business process-to-firm level, where there are identifiable and controllable characteristics that may affect survival. In related work (Kauffman and Wang, 2006; Banerjee, Kauffman and Wang, in press), we conducted theory-based analyses of the duration, or time of survival, of 112 publicly-traded Internet firms after their initial public offerings (IPOs) using a variety of statistical and econometric methodologies. We obtained several major results.

First, most failures of publicly-traded Internet firms seem to have occurred between one and five years after they floated their IPOs. After that, the firms seem to have had a greater capacity to survive. Our comparisons involved gauging survival for firms based on the time of their IPO issuance. This permitted us to examine the life cycle of Internet firms based on their age, and not just on the calendar time of their operations, which obviously were heavily affected by the vagaries of the dotcom marketplace and the economy. This “life cycle” interpretation suggests that the growing pains of Internet firms were likely shared by their traditional firm counterparts, so that the findings of the prior literature are still relevant.

Second, Internet firms seem to have been able to compete better when they created breakthrough markets. Breakthrough markets, a term coined by Day et al. (2003), use the Internet to facilitate the creation of new products or services and markets. Examples are portal sites like Google (, online auctions like eBay (, and new Internet-based payment mechanisms like PayPal ( Re-formed markets, on the other hand, have a structure, function and purpose that do not change in the presence of the Internet. They enhance existing business practices. Electronic procurement markets in healthcare such as the Global Healthcare Exchange ( and Neoforma (, and the online banking capabilities of firms such as Wells Fargo ( or US Bancorp ( are good examples.

With significant financial resources, a well-developed industrial network and the significant business know how that incumbent traditional firms possess, these firms were able to quickly catch up to their Internet pure-play counterparts, even if the latter had a head start on the Internet. On the other hand, breakthrough markets offered the newly-emerged Internet firms the opportunity to innovate and test their business models in a trail-and-error fashion. Kim and Mauborgne (2005) propose similar concepts at the corporate strategy level: blue ocean strategies vs. red ocean strategies. Using a blue ocean strategy, a company is able to create an uncontested market space and enjoy the success that comes from selling to new market demand. On the other hand, a red ocean strategy will only put a company into direct competition with its rivals. This will force it to face a value-to-cost trade-off. The economics literature on firm survival in the manufacturing sector also suggests similar results.

Third, the greater density of Internet firm IPOs in the stock market seemed to reduce the likelihood of bankruptcy for existing public Internet firms. This is an interesting observation because most would interpret this congestion with greater competition and a lower likelihood of survival for any given new firm. In the case of Internet firms, however, this crowding was beneficial: it reflected the availability of venture capital, market funding and investor interest, and these sustained the Internet firms longer than the quality of their business plans should have permitted. This effect lasted only for a time though, and ultimately these firms became subject to the normal forces of the capital market. As a result, more critical financial profitability, product choice and market positioning issues became the determining factors in firm survival.

Another possibility is that the quality of the underlying financials at the time of the dotcom firms’ IPOs played some role in success and failure. Our impression is that many companies were rushed to market with very slim financials in the excitement of the moment—something that is no longer the case today in the venture capital and IPO marketplaces. We have not investigated success and failure as it ties in with the quality of these firms’ business plans and financial fundamental at IPO in any detail to date. However, our observation of the current marketplace nevertheless informs our thinking and evaluation of what went on with the dotcoms.

Based on the difficulties that the technology firms in this sector experienced in this sector between 2000 and 2002, it is natural to assert that many firms with weak financials at IPO ultimately failed, just as there were many firms with more attractive financials at IPO that also failed. In fact, this is main storyline for that time in electronic commerce. What we don’t know with certainty though is whether the larger proportion of successes came from the population of dotcom firms with attractive financials. This is an important observation because it may have been the case that dotcom firms with less attractive financials at IPO time during that period may have had nearly as good a chance to survive in the marketplace over time—a beneficial effect of crowding in the venture capital market, and the parallel interest in traditional equity markets for dotcom stocks. This is because most of the firms that were able to stay alive in this sector successfully morphed their strategies and adjusted their business models to suit the changing times in e-commerce. Still, we believe that further examination of the underlying financials of these firms at IPO would yield modest additional information, at best, to predict their survival or demise. From a statistical perspective, the number of failed firms was too large, and for those firms that did survive, there were many path-dependent developments that would make it difficult for additional data to tell the full story.End of article


About the authors

Robert J. Kauffman is Director, MIS Research Center, and Professor and Chairman of the Department of Information and Decision Sciences at the Carlson School of Management, University of Minnesota. His doctorate is from Carnegie Mellon University, and he has held faculty positions at New York University and the University of Rochester, and previously worked in international lending and corporate finance. His research interests center on senior management issues in IS, organizational strategy and technology, e-commerce, and IT in various services industry contexts. His articles on IS and e-commerce issues have appeared in leading academic journals, and he has been recognized many times with research awards for his work on strategic pricing in e-commerce, digital wireless technology diffusion, and IT infrastructure investment decision making, among other topics.

Tim Miller is Vice President and General Manager, Financial Markets (San Francisco), of The 451 Group. He was formerly president of, a hub for buyers and sellers of technology properties. Prior to establishing Webmergers in 1999, he spent five years as President of New Media Resources, a consulting firm to interactive media startups. Before starting New Media Resources, Miller spent five years in corporate development at Ziff Communications Co., assisting senior management in acquisitions research, strategic planning and development of online products. Before that, Miller studied interactive services in a fellowship at the Gannett Center for Media Studies at the Columbia University in New York. Miller has written a number of articles on interactive media, serves on the program committee of the MIT/Stanford Venture Laboratory and has chaired several national conferences on Internet M&A topics.

Bin Wang is Assistant Professor, Computer Information Systems and Quantitative Methods at the College of Business Administration, University of Texas Pan American in Edinburg, Texas. She has a doctorate in Information and Decision Sciences from the Carlson School of Management of the University of Minnesota. She also has a Master of Science in Retail Management from Purdue University, and is a past graduate of Renmin University in Beijing, China. Her research interests focus on electronic commerce, the analysis of electronic marketplaces and the new business models of the Internet, and the applications of theory and methods from marketing science and economics. Her empirical study of the performance of's group-buying mechanism was recognized as "best research paper" in the Economics and Electronic Commerce Mini-Track at the Hawaii International Conference on Systems Science in Maui, Hawaii in January 2001. Her work also has appeared in the Journal of Management Information Systems. Her publications include "Bid Together, Buy Together: On the Efficacy of Group-Buying Models in Internet-Based Selling," in: P.B. Lowry, J.O. Cherrington, and R.R. Watson (editors). Handbook of Electronic Commerce in Business and Society. Boca Raton, Fla.: CRC Press, 2002.



Sudipto Banerjee, Robert J. Kauffman, and Bin Wang, 2006. "A Dynamic Bayesian Analysis of the Drivers of Internet Firm Survival," Electronic Commerce Research and Applications, in press, and at

Erik Brynjolfsson and Lorin M. Hitt, 1996. "Paradox Lost? Firm-Level Evidence on the Returns to Information Systems Spending," Management Science, volume 42, number 4, pp. 541-568.

Eric K. Clemons, Sashidhar P. Reddi, and Michael C. Row, 1993. "The Impact of Information Technology on the Organization of Economic Activity: The ‘Move to the Middle’ Hypothesis," Journal of Management Information Systems, volume 10, number 2, pp. 9-35.

George S. Day, Adam J. Fein, and Gregg Rupperberger, 2003. "Shakeouts in Digital Markets: Lessons from B2B Exchanges," California Management Review, volume 45, number 2, pp. 131-215

Robert J. Kauffman and Bin Wang, 2006. "An Integrated Theoretical Perspective of Internet Firm Survival," Working Paper, MIS Research Center, Carlson School of Management, University of Minnesota, Minneapolis, MN, at

W. Chang Kim and Renee Mauborgne, 2005. Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant. Boston, MA: Harvard Business School Press.

Thomas W. Malone, Joanne Yates, and Robert I. Benjamin, 1987. "Electronic Markets and Electronic Hierarchies: Effects of Information Technologies on Market Structure and Corporate Strategies," Communications of the ACM , volume 30, number 6, pp. 484-497. 2003. “Internet Companies Three Years after the Height of the Bubble,” Research Report. San Francisco, CA. Cited by, November 18, 2003. Available at id=277224.


Contents Index

Copyright ©2006, First Monday.

Copyright ©2006, Robert J. Kauffman, Tim Miller, and Bin Wang.

Reflections on: When Internet companies morph by Robert J. Kauffman, Tim Miller, and Bin Wang
First Monday, Special Issue #6: Commercial applications of the Internet (July 2006),

A Great Cities Initiative of the University of Illinois at Chicago University Library.

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