Getting the Balance Right - Industry Trend or Event

THE INTERNET ECONOMY HAS BEEN IN TRANSITION ever since the stock bubble burst last spring, and it's now becoming clear just how tough a transition it is likely to be. The stock market, gloomy about the election standoff and disappointing corporate profit growth, continues to fall. Early signs are that it's going to be a tough Christmas for retailers, online and off. Many sectors of the business world are bracing for a very weak first quarter. Economic growth is slowing significantly, and it's anyone's guess as to whether there will be a "soft landing" or something more painful.

In the dot-com world, the boundless enthusiasm of a year ago is now being mirrored by savage pessimism. Where once investors were ready to fund lavishly anything that said dot-com, they are now eager to defund entire sectors, even shutting down companies that have plenty of customers and plenty of cash but seem to lack the much-vaunted "path to profitability."

Much of this is a useful and inevitable corrective. While the arguments of "long boom" theorists, who hold that technological progress has made traditional boom-and-bust cycles obsolete, are certainly appealing, they are also a little too good to be true. The ups and downs aren't going to disappear, and times of growth will always be followed by periods of retrenchment.

The danger for the long-term health of the Internet Economy is that this retrenchment will be as extreme and irrational as the exuberance of yesterday. While it might have been silly to think that there would be five major online pet-supply companies, it's also silly to think there will be none. If investors and managers cut and run too early, they will be leaving huge opportunities on the table.

Similarly, many old-economy companies that were just coming around to the idea that they needed to take this Internet thing seriously will now be tempted to think they don't really need to do anything after all. Executives and investors alike might easily consider investments in Net-related initiatives too peripheral just now. But that ignores the persistent fact that the underlying changes really are big. And if their impact seems muted for the moment, that's just a temporary blip.

It's always difficult to continue investing in the face of a business slowdown, but the companies that will be successful over the long run will find ways to do just that. There are countless examples of firms that eventually secured market leadership by being willing to absorb a short-term financial penalty in order to position themselves for the future.

For companies that have the resources and the will to do it, a slow period is actually a great opportunity. Struggling competitors can be pushed to the wall. Great talent can be had relatively easily. Customer loyalty and market share can be built in an environment of relatively little resistance -- setting the stage for a huge payoff when business conditions inevitably improve.

Finding the right balance between common-sense, short-term efficiency and shrewd long-term investment is probably the biggest challenge facing investors and executives in this uncertain period. Let's hope that simply reacting doesn't push them in the wrong direction.

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