I love bankruptcy. There is nothing like it in all of capitalism. It is the epitome of failure, the pinnacle of imperfection. There is nothing like total, catastrophic failure to capture your attention, focus your mind and drive your friendly banker to distraction. What's most impressive about the spate of e-bankruptcies is the quality and quantity of them. E-retailers that entered the market with a bang just one year ago are crashing and burning at a remarkable rate. Boo.com, DEN, Toysmart, Craftshop.com, Violet and Red Rocket are just the beginning of an unprecedented rash of e-retailing bankruptcies.

Markets Need Failure

From a competitive perspective, nothing is more satisfying than seeing your competition go bankrupt. And from that perspective, solvent e-retailers must have had a most satisfying time recently as an increasing number of high-profile e-retailers either went bankrupt, or in the case of Peapod.com, came perilously close to it.

Besides, unending success is boring. Success just reinforces what you already know. In a world that is constantly changing, success is a very dangerous thing. Only in failure do organizations and markets ever learn anything. There is one thing you can say about failure, though: It forces you to change.

Bankruptcy is an essential component to the efficient functioning of markets. Efficient markets are a balance of greed and fear. Without bankruptcy, markets over time become overwhelmed with greed. Without the fear of bankruptcy, markets have nothing to fear and lose their discipline. The lack of fear results in over-investment. Until recently, there was no fear when it came to investing in e-retail. The result was absurd market valuations, over-investment and wasted resources. The only cure for this bad behavior is bankruptcy.

Hard-earned Lessons

No man is of so little value that he can't be used as a bad example.—Mark Twain

Or bad companies, as the case may be. Bankruptcy is a great teacher. Every bankruptcy exposes some hard and important lessons to those who are willing to learn. The recent e-commerce bankruptcies are rich in valuable lessons that still-viable e-retailers will ignore only at their peril.

Lesson 1: Money Can't Buy Success

You probably already knew that money couldn't buy you love or happiness. You can now add success to the list as well. Boo, DEN and Toysmart all had well-established companies who acted as deep-pocket backers. Money for start-up investment was never an issue for any of these companies.

If money alone could buy success, then Boo.com would have been a screaming success. In the past six months, Boo.com managed to burn through a remarkable $135 million. Some of that money went to really cool office space in some of the most expensive real estate on the planet. Some of it went to building high-impact graphics design that was annoying to the customer and drove many of them away. And some of it went to developing a global presence in no less than 17 different countries. None of it made a difference.

Lesson 2: Always Do First Things First

I am sure your mother told you this one, but it is an easy thing to forget. In their press release looking for more money, Boo management said they needed extra cash, reported to be $30 million, to develop a clearer marketing vision and to create a fulfillment capability. What have they been doing for the past year? Developing a murky marketing vision?

The problem with Boo wasn't so much a murky marketing plan; it was their tardiness in launching their Web site, some six months late. They created a lot of consumer buzz and considerably high consumer expectations about their business, and then failed to deliver either on time or in terms of content. Fulfillment would strike most casual observers as one of the first things that any consumer direct business should have.

Lesson 3: Globalization Is Risky Business

You have to hand it to the creators of Boo—they certainly took a global view of their business. Based in the U.K., they were selling stuff, or at least trying to, in 17 different countries. The language, cultural and legal, to say nothing of logistical, problems of a multinational operation can be mind-boggling for an established company with depth of experience and management. For a start-up, this degree of complexity is a killer. No land-based retailer would dream of trying such risky and complex adventure. Being successful in a home country is a prerequisite for trying to take on the world.

Lesson 4: Size Still Matters

It is amazing how quickly e-retailing moved from new innovation to market consolidation. Retailing, whether it is virtual or real, operates with large economies to scale. The rash of bankruptcies that has swept through the e-toy space is going to be quickly followed in other product categories. What companies like Toysmart and Red Rocket had in common was a lack of scale. Faced with competitors like Toys "R" Us, Amazon and even WalMart, they just had no chance of ever gaining the scale they needed to be successful.

What is remarkable is how quickly this process of online consolidation has taken place. In 1999, the top 10 online retailers accounted for 24 percent of total online retail sales, still short of the degree of consolidation that exists elsewhere in retailing but clearly moving in that direction. Going forward, e-bankruptcy will only accelerate this process.

Lesson 5: There Is No First-mover Advantage

This is a hard one for many to swallow. But repeat after me: There is no first-mover advantage. Make it your mantra; you will feel better for it. If there were a first-mover advantage, we would all be using Macintosh computers, running Mosaic browsers and interacting with Univac mainframes. Amazon.com was not the first mover in any of the growing number of product categories that it now finds itself in.

Nobody has more experience in the e-grocery business than Peapod. They have been losing money at it for 11 years now. No company has had more of a first-mover advantage then Peapod, and yet they have not been able to convert it into a competitive advantage. If Peapod does survive, it will be for reasons other than the fact that they were the first one to the marketplace.

Lesson 6: Brands Alone Don't Win

The Internet was supposed to be a brand-friendly space. Build a great brand, or leverage an existing brand, and they will come. But branding alone is not enough to generate traffic or sales.

Boo spent millions creating a highly visible brand. They also had many of the great high-end brands of their deep-pocket backers to sell on their site. Toysmart, with the backing of Disney, had the backing of one of the best-known brands on the planet. It still was not enough. While Boo made many mistakes in its short life, it did create a distinctive brand that was painfully hip with a lot of attitude and consumer awareness. That was not enough.

Lesson 7: Simplicity Has Great Value

One of the first things they teach you in the military is KISS, which is short for "keep it simple, stupid." This simple lesson is chronically ignored on the Internet, as well as in basic systems and software design. Big development organizations breed complexity when it comes to both software and Web-page design. Everyone has to get their little bell or whistle built into the site or the next software release. The result is bloatware when it comes to software and annoyingly complex and slow-to-load Web pages when it comes to e-retailers.

Was there anything more annoying than Miss Boo, who would jump out at you at the most inappropriate time and tell you something, or try to sell you something that you had no interest in whatsoever? Pop-up menus that create new browser windows become like that old carnival game, Whack-a-Mole. You just want them to go away.

DEN, a Hollywood-based entertainment site, made life difficult for its customers by requiring a browser plug-in to see anything on the site. They made the mistake of thinking that the consumer would shift from TV to the Web to get bad entertainment. If you really want bad entertainment, you can always watch TV. Even Microsoft learned this obvious lesson back in 1997, when they pulled the plug on their TV on the Web business.

What makes all of these sites hopelessly consumer unfriendly, is that they all required a high-speed connection to make them worthwhile. The problem is that only 5 percent of the Internet population has broadband access. In a recent survey done for The Industry Standard, 73 percent of all households indicated that they had no plans to ever get broadband Internet access. Consumers don't get on the Internet to download streaming video or high-impact visuals. They still have very much a text-based orientation to the Web.

All of the eye candy that e-retailers put on their sites is a waste of time, money and customer patience. Most e-consumers are plodding along with a 28k modem. Loading up their screen with a lot of bulky images is just trying their patience. Is it any wonder that so many Internet purchases are abandoned before they are completed? E-retailers just push their customers over the edge trying to cram too much unneeded content through too little bandwidth. Less is definitely more when it comes to site design.

Conclusion: E-bankruptcy Is a Growth Business

Traditionally, January was the big month for retail bankruptcy. A bad Christmas season pushed many a poor-performing retailer over the edge into insolvency. January was also the month when even poorly performing retailers had more cash than usual, giving them more flexibility in bankruptcy. The banks eventually caught on to this gambit and responded by pushing retailers into bankruptcy in September, when the retailers were gearing up for Christmas and needed more working capital. This maneuver shifted the advantage to the bankers.

With e-retailers, bankruptcy is a year-round, four-season sport. What we are discovering is that with negative cash flow, an e-retailer can run out of money at any point in time. With the IPO window closed and venture capitalists taking a very dim view of the business-to-consumer business model, more e-retail bankruptcies are coming. When the dust clears, e-retailing will look a lot like the rest of retail. It will be a highly consolidated business with two or three big successful players in each product category.