What Marketers can learn from the Dot Com Recession
In part three of the recession series, I look at the Dot Com Crash and recession of 2001. It was an interesting time with events, such as the birth of Wikipedia, the regulation of Microsoft, the iPod, and fear of the Millenium bug. Well, it’s always easier to be smarter afterward ;-).
In my research, I leaned the following papers and articles:
How the Dot Com Recession came to be
The Dot Com Recession started in 2000 as a result of overhyped internet startups and IPOs.
In April 2000, the Nasdaq had dropped by 34.2% within a month when investors realized many internet businesses had no sustainable model and path to profitability.
Companies like Priceline catered by 94%.
Losses amounted to $1.7 trillion. 7-10K companies went under.
Then 9/11 came on top of the economic shock and accelerated the recession.
But the Dot Com bubble also paved the way to a more mature internet: Over 80m miles of fiber cable were installed leading up to it until a $2 trillion telecommunication bubble burst.
The recession lasted 8 months and the economy took 2 years to recover.
The impact on marketing and business and parallels to COVID
Both, the 2007 Great Recession and the Dot Com Bubble recession had very similar beginnings and reactions:
- A part of the US economy is taken to an extreme (subprime mortgages and startups)
- Economists misjudge the situation (2001 and 2008)
- The FED reacts by lowering interest rates and providing liquidity
- Stock indices respond with growth
The difference between the two is that the Dot Com recession was driven by new technology, the Internet, whereas the Great Recession was not (mortgages).
The COVID recession fits into the irregular pattern because it’s driven by biology - not technology or the economy. The cause is not the same, but we observe similar reactions to the crisis like lowering interest rates and providing liquidity.
Another important pattern that the 2000 recession strongly highlights is the variance in industry impact. Not all sectors see the same impact:
The timing of contractions in sector-level sales and EBITA indicates that the four most recent recessions began with a core underlying shock that then spread through the economy in a fairly predictable way. All four began with falling sales and EBITA in the consumer discretionary sector, and three began with similar declines in the IT sector as well (Exhibit 1). By contrast, in three of the four, the energy sector was among the last to be hit. Some sectors have been fairly resistant to recessions: consumer staples wasn’t affected significantly in the last three, and the last two didn’t significantly affect health care.
Not only were industries hit at different times, they also saw different degrees of impact in the Dot Com crash. Consumer, IT (of course), materials, and telecommunication sectors were hit earlier and saw the sharpest drops. IT spend typically falls twice as much as GDP, in the 2000 downturn it was even more (-27% IT spend, -3.7% GDP drop). The energy and financial sectors were hit later.
The COVID crisis paints a familiar picture: travel, tourism, local retail, restaurants, and local entertainment sectors are hit the hardest. At the same time, online retail, services, software, and logistics are booming beyond any previous records.
Drops in recessions are almost always sharper than the recovery. It typically takes 6-8 quarters for a sector to bottom out. It took most sectors about 2 years to recover from the 2001 Recession. The telecommunications industry never hit its peak again.
This might help us understand in parts how quickly the economy could recover, depending on how long certain sectors are frozen.
Another important indicator to assess in recessions is the Zeitgeist in technology at the time. In the 2007 recession, for example, many people who lost their jobs compensated their income with the gig economy, e.g. UBER/Lyft. During COVID, we see a lot more businesses relying on online streaming, remote services, and delivery.
In an interview from 2001 with Wharton college, Randall J. Weisenburger, VP and CFO of Omnicon Group - one of the largest marketing communication firms back at the time - said:
These trends [increased acquisitions, globalization, segmentation of channels] have major implications for issues such as pricing. For example, in the U.S. at least, it used to be that if you advertised on the three major national television networks (ABC, NBC and CBS), you could cover 85% to 90% of whatever area you wanted. Today, advertising on those networks can get you just 45% to 50% of the people. That means if you have a broad-based brand, you need to work on segments as well as the whole, and that complexity becomes difficult to manage.
In a nutshell, marketing after the 2000 recession saw new opportunities in online marketing that weren’t there before. Pre Dot Com, marketers relied on a few channels and lots of brand building. Post-crisis, performance marketing became a thing and the internet unbundled lots of previously static channels like newspapers or TV.
One fascinating question we marketers should think about is what channels the COVID crisis might unbundle.
What we can learn from the Dot Com Recession
The Dot Com crash had a different cause than previous recessions but similar implications on consumer and company spending: smaller budgets, higher focus on value and durability, harder price comparisons, longer sales cycles.
You would think that there is nothing unique to learn from this one, compared to the Great Recession from 2007, but the 2001 recession was substantially shorter (8 instead of the average 14 months) and broke out in a different sector (IT instead of finance and real estate).
As such, we can take away the following:
- Spend smarter. Look for advertising channels that have gotten cheaper and monitor if and where your competitors are spending less so you can take advantage of it. For example, SAP increased advertising expenditures from $1.23bn to $1.36bn and lowered administrative cost by 8%.
- First ensure to retain current customers, then go after acquiring new ones.
- Go for the market share of your competitors.
- Invest in growing market segments.
- Understand how your industry is impacted by the crisis instead of generalizing or believing generalized statements/data.
- Lean on performance metrics instead of CPMs.
- Look for channels that might be unbundled due to people working remotely.
Next week, I’ll take a look at the 90s recession if no other topic squeezes in between.