How the World Got Wired

Chapter 11 — Sock Puppets and Pet Food

For a few months at the end of the 1990s, one of the most famous celebrities in America was a sock puppet.

The puppet was a brown, floppy-eared dog with a microphone clutched in his mouth. He had a name: he was the Pets.com Sock Puppet. He had a personality: smart-aleck, self-deprecating, a little goofy. He had a tagline, which he used in every commercial: Because pets can’t drive. He appeared on Good Morning America. He floated as a giant balloon in the Macy’s Thanksgiving Day Parade. He starred in a Super Bowl ad in January of 2000 that cost his company more than a million dollars and was watched by about ninety million people.

He worked for a website called Pets.com that sold pet food online.

His company was, at the time, considered an example of the future of business.

His company, less than two years after its founding, would be bankrupt.

His company would lose about $147 million in its short life, almost all of it spent on advertising and on shipping heavy bags of dog food across the country for less money than it cost to ship them.

Pets.com is today, mostly, remembered as a joke. But for a brief, strange period — a period that came right after the chapter you just read, and right before the one you are about to read — Pets.com and dozens of other companies just like it were treated, by serious investors and serious newspapers and serious people on television, as the future. People believed in them. People put their retirement savings into them. People quit their jobs to start companies like them.

This chapter is about how that happened.

Eyeballs

The thing to understand about the years between 1996 and 2000 is that a new theory of business had taken hold, and the theory had become so widely accepted, so quickly, that almost nobody in the technology world questioned it anymore.

The old theory of business had been: a company should earn more money than it spends. If you sell lemonade, you should sell each cup for more than the lemons cost you. The faster you make money, the more your company is worth. This had been the rule for hundreds of years.

The new theory was: a company should grow its number of users as fast as possible, even if it loses money on every user, because once you have a huge number of users, you will figure out how to make money from them later.

The new theory had a word for what it cared about. It cared about eyeballs — the number of pairs of eyes looking at your website. It also had a word for the money you spent attracting those eyeballs while losing money on every one of them. That word was burn rate. A company with a high burn rate was spending its investors’ money quickly. In the old theory, this was a sign that something was wrong. In the new theory, a high burn rate was a sign of ambition. It meant you were growing. You were gaining eyeballs. You would worry about being profitable later.

You should know that there was a small grain of truth in the new theory. Some kinds of internet businesses really do need to grow before they can make money. An auction site, for example, is more useful when more people use it. (One person trying to sell something on a site with no buyers is a sad sight.) So getting big first, and then earning later, was sometimes the right plan.

But the small grain of truth grew, in the late 1990s, into something much bigger and stranger. Companies that sold ordinary physical products — pet food, groceries, furniture, books — were also told that they should grow at any cost. Even when it made no sense. Even when getting bigger only meant losing more money.

The investors who funded these companies were not being completely foolish, but they were being something close to it. They believed — they really believed — that there was a New Economy. That the old rules did not apply. That the internet was changing every part of business in ways nobody could yet calculate. That whoever moved fastest, even if they bled money for years, would emerge at the end as the dominant player in some giant new market. That billions of dollars of losses now would translate to trillions of dollars of profits later.

Some of them turned out to be right. Most of them turned out to be wrong.

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