What New Economy? - BD April 2000

It was probably the Economist magazine that coined the phrase New Economy. That is where I first read it. The writer of a recent article on e-commerce economics used it to describe the division of the investing world into two distinct sectors: the traditional one based on high street stores and printed newspapers, and the other that exists only on the Internet.

At the start of this year the New Economy was soaring up an unimagined growth curve. Young billionaires were, regularly, being created by listing their new dot-com ventures. The investing public was hungry for more. Almost anything that came to market with dot-com after its name was guaranteed of a rapturous reception.

Occasionally an analyst or commentator would suggest that this was a bubble about to burst. But the people with the money would not listen. Until, that is, lastminute.com listed in March on the London Stock Exchange and became the first dot-com failure. It rose briefly above its Initial Public Offer (IPO) and then collapsed.


Last week’s Nasdaq and general stock market melt down has vindicated these views. For example it has brought the Amazon.com market cap from a high of over $35 billion, to a slightly less astounding $16,5 billion, which is still not bad for a company not due to make a profit until December 2002.

Until recently the dot-coms were firmly positioned in quadrant 1 of the above matrix. They were the new brands of the new economy. Traditional companies continue to launch brands in the conventional manner and in this conception are doing this in quadrant 2 - the old economy. Quadrant three refers to old economy brands that have established some form of Internet presence, such as our banks, airlines and auction rooms. Quadrant four is the status quo: old fashioned brands such as Castle Lager, BMW, and Pick ‘n Pay which still play by the old rules.

In the same way that it was beginning to look as though investors had discovered a form of return on their money other than profit, the idea that the Internet was in the process of instigating a revolution in marketing was starting to surface. Both have now proved to be redundant arguments. It seems that the new economy is rapidly becoming the only economy, in that the vertical line on the matrix is moving to the right to embrace all before it, while the horizontal line is blurring and will soon vanish as new dot.coms step into quadrant 3 (Amazon.com is talking about building a bricks and mortar store) and old high street brands head the other way, and go dot.com.

This brief analysis is not designed to down play the importance or significance of the Internet and its impact on how we live and do business. Rather its purpose is to draw attention to the need for modified thinking:

· The old marketing model of building awareness of a new brand, encouraging prospects to try it by associating the brand name with favourable, strong and unique attributes; and then banking on confirmation of evaluation in trial that leads to repurchase and loyalty, still applies. The cycle has simply got shorter. Remember that four times more people window shop on the Net than actually spend money. The Net speeds up the process of becoming familiar with a new or unknown brand – dot.com suffix or not.

· Those who do buy (one in four is a market of 75 million Internet users, and growing) are completing the link in memory between attitudes and behaviour. For decades consumer behaviourists have found consumer attitudes frustrating because intention to buy is not a reliable measure of actual purchase. There is too much noise between the intention and taking the brand off the shelf, or driving it out of the show room. Now shopping and buying are a click apart. And there is no sales person to pressure the decision.

· Dot.com brands have a registered Web domain name and address, sophisticated software and computer programs, and not much else. They will soon become an accounting nightmare when accountants have to draw up financial statements based on few if any tangible assets and no profit. New forms of valuation are needed that take account of the intangibility of these new business forms and which are based on minimally subjective assumptions and projections into the future.

While the distinction existed it was handy to have the New Economy moniker. It placed a firewall between the frenetic dot.coms and the staid establishment. It seems that the need is going and so the term will probably vanish. What remains is a dynamic and challenging tool that no one can ignore.

Roger Sinclair is a lecturer in Marketing at Wits University and Managing Director of BrandMetrics.