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edthesockpuppet.jpg

Puppet goes viral; company goes bust

Hype was a closer late in the dot-com craze; no one bothered to do their homework. Had investors taken a close look, they would have seen that the company took in $619,000 in revenue during its first fiscal year and spent $11.8 million dollars on advertising. However, no independent market research was done.

Fueled almost entirely by speculation and a brilliant ad campaign, investors famously ignored red flags when investing in Pets.com during the dot-com frenzy in 1999. Known all over the U.S. for its viral TV commercials starring a sock puppet named Ed, the internet-based pet delivery enterprise coasted into its IPO on a cloud of hype. Then it made one of the quickest journeys from IPO to insolvency ever seen.

Dubbed “the sock puppet that kept Pets.com alive” by Better Marketing, wisecracking Ed the Sock was a one-puppet hype machine that kept the internet venture in the public eye. The Pets.com methodology was simple and endemic to the dot-com bubble: strong brand recognition leads to viral popularity, which leads to profits. Just how viral did Ed go? Getting a balloon in the Macy’s Thanksgiving Day Parade cost about $200,000 at the time. Ed was offered a free spot.

That virality came at a cost: Pets.com spent $25 million on Ed-centric advertising, mainly in the television market.

Venture capitalists and partners, including Amazon.com, poured money into the enterprise, which raised nearly $110 million in four rounds of funding by December 1999. Pets.com went public a few months later, but shares never rose much above their $11 IPO price. In less than six months, the company was in a freefall, declaring bankruptcy in November 2000, by which time its share price had reached a low of $0.22. Several lesser-known companies in the delivery-only pet supplies sector were also on their way to insolvency, making this particular dot-com business model a complete failure.

The Wall Street Journal cited the sector’s collapse as an example of the dot-com bubble’s worst excesses:

Pets.com's downfall was particularly swift and brutal. The company, conceived in February 1999, courted publicity and was at the forefront of a pack of pet-oriented dot-coms that burst into prominence as Internet hysteria soared last year. Almost from the start, Pets.com was a losing proposition, despite its backers' talk about how much money consumers lavish on their pets.

The closure of Pets.com, as well as rival pet-supply websites, "symbolizes the worst excesses of the capital market," said Matt Stamski, a senior analyst at Gomez Advisors in Lincoln, Mass. "People were betting on ideas that were almost stillborn. It's almost unprecedented to see an entire sector go from an idea to heavily funded to defunct in just a year and a half."

Pets.com had no small ambition. The company set out to take on the big boys, the established brick-and-mortar chains like Petsmart and Petco. Pets.com had no figures to back up this plan. The only information about the new dot-com came from its viral ad campaign and word of mouth.

That was enough to entice such heavy hitters as Jeff Bezos. Amazon.com was Pets.com’s biggest partner, with a 54% stake in the company. Hype was a closer late in the dot-com craze; no one bothered to do their homework. Had investors taken a close look, they would have seen that the company took in $619,000 in revenue during its first fiscal year and spent $11.8 million dollars on advertising. However, no independent market research was done.

The source of the disconnect: a puppet. Even as Pets.com failed, Ed the Sock continued to surge in popular commercials. In the ads, Ed tagged along on Pets.com deliveries joking raucously with humans and animals. That the pets were incommunicado was of no concern to Ed. Heck, he would have delivered treats and toys himself, but — as Ed’s catchy slogan went — “pets can’t drive.”

As Ed’s popularity grew, Pets.com’s future dwindled. CEO Julie Wainwright desperately looked for a buyer in the summer of 2000, but the writing was on the wall. The company was losing customers as it struggled to deliver heavy bags of dog food on time. Pets.com had a warehouse chock-full of designer dog food with nowhere to go.

There was also that bit about the business plan… or lack thereof.

In a feature dubbed “Disaster of the Day,” Forbes wrote:

Like most dot-com death notices, Pets.com cited its trouble raising cash, though it clearly had no problem spending it. Last quarter, the company lost more than $21 million on sales of just $9.4 million.

Pets.com’s colossal failure has become the stuff of legend, the low watermark against which other business busts are measured. In 2014, The Business Journals examined Pets.com’s rise to trope status.

Pets.com will never rest in peace. Every time someone wants to invoke the specter of a brand-new tech bubble, they inevitably name-drop the ill-fated late '90s e-tailer. Case in point, yesterday's guest column on Uber by Foodie Media Network CEO Bill Baker. His point of course, the overrated Uber is the new Pets.com.

Interestingly, Pets.com might have had a fighting chance had it fumbled its way into a time warp, said Robert McMillan in Wired. In the 2010s, market analysts began revisiting failed ’90s business models with a new-century perspective.

Now that the internet has become a much bigger part of our lives, now that we have mobile phones that make using the net so much easier, now that the Googles and the Amazons have built the digital infrastructure needed to support online services on a massive scale… now that Amazon and others have streamlined the shipping infrastructure needed to inexpensively get stuff to your door, the world is ready to cash in on the worst ideas of the '90s.

There is one success story in the Pets.com debacle. Want to venture a guess? You got it: Ed the Sock. In 2000, the puppet Pied Piper got its own line of merchandise and won the kind of following that eluded its creators. Today, vintage Ed swag fetches a steep price: A “VERY RARE!!!” 1999 Ed the Sock doll is currently available on eBay for $200. Ed also returned to the airwaves in 2002 headlinng a TV advertising campaign for Bar None, a company specializing in auto loans for people with bad credit.

Pets.com’s marketing director John Hommeyer, for one, said he was rooting for Ed. He told the New York Post: “Everyone deserves a second chance.”

Photo by Jacob Bøtter on Flickr, under Creative Commons.

Tamara Kerrill Field is Managing Editor at Kaiju Capital Management. Her writing and commentary on the intersection of race, politics and socioeconomics has been featured in USNews & World Report, the Chicago Tribune, NPR, PBS NewsHour, and other outlets. She lives in Portland, ME.

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