It seems a little extreme to write e-commerce off as something that doesn't work. The fact of the matter is that in 2000 total e-commerce revenues, according to most published reports, increased by 100%. This is on top of 100% or greater increases for each of the preceding 5 years and amounted to a little more than $20 billion in sales in 2000. Obviously, any industry that can go from $0 to $20000000000 in annual revenue in 5 years can in no way be regarded as a failure.

Now, just because e-commerce hasn't been a consumer disaster does not mean that it hasn't been an investor disaster. In the 12 months following the Nasdaq's top in March 2000 American investors saw their net worth fall by nearly $3 trillion. In fact, the debacle surrounding shares in electronic retailers does represent a breakdown in portions of the financial system, just not where you'd expect. The real lesson of e-commerce has very little to with consumers and a great deal to do with the psychology of investors and the ability of a new industry to absorb capital.

The fundamental problem revealed by the e-commerce crash is that, at this point in time, our communication media are far more efficient than our financial markets are. With modern communications technology it is easier to convince millions of people of a point (in this case of the viability of electronic retailing) than it is to absorb those millions of individuals' capital and channel it to enterprises that will pay off in the long term. What happened with the e-tailers is that nearly everybody understood how huge the long-term impact of moving sales out of the store would be and they all, almost as a single giant mass, threw every shred of capital they could find at the industry.

In fact, within a short time (by the end of 1997, at the latest) there was far more available capital than there were organizations that could make use of it. But investors, still recognizing the long-term potential of e-tailing, continued to pour additional money into financing the e-tail buildout. The venture capitalists, predictably enough, weren't exactly shy about accepting these bucketfuls of cash, but that didn't mean they all of a sudden had worthwhile companies to pour that money into. Thus, we saw the only result possible: the money had to go somewhere and, for a time, it went to anyone who could find a noun that hadn't already become an e-noun. Of course, most of these weren't viable companies, but at least the capital had been absorbed.

Expect to see this same scenario play out in every industry that spends time as a media darling in the future. It's a result of the speed with which information moves through our society--it doesn't take long before everybody is looking at the same set of ideas. It shouldn't come as a surprise then that most investors, who all have identical information, come to the same conclusions about the right "place" to park their money. But remember that it says very little about the underlying viability of an industry, though it speaks volumes for the current state of financial fashion.