Online retailers partied like it was 1999 last holiday season, blowing wads of cash on splashy television ads and major media campaigns, and offering freebies to consumers to get them to log on and shop. But for many of those retailers, the first half of 2000 felt like a killer hangover. Dot-coms are dropping like flies, laying off workers, partnering up and in some cases going out of business, as investors pulled their money out of overpriced stocks, venture capital firms suddenly found other places to drop their cash, and accountants and auditors began taking a hard look at their books. As they look ahead to the rest of the year, these companies will have to get back on the wagon, analysts said. No one expects the dot-com death watch to end any time soon, but the companies that do manage to control cash flow and buckle down on the nitty-gritty issues like fulfilment and customer service management should be left standing in time for the 2000 holiday push. But while analysts predicted that some firms will emerge better than before, few expect the high-flying days of 1999 to return, at least as far as stock prices go. All of the public dot-coms in Media Metrix's list of the top ten retailers of the 1999 holiday season are trading at least 50 percent below their 52-week highs. The plunges are alarming: eToys, dropping from 86 to 5 13/16 through 5 July; eGreetings, down to 1 1/2 from 16 1/4; CDNow, falling to 2 7/8 from 23 1/4. Instead, investors may want to be on the lookout for bargains that unfairly got tarred with the same brush as their less fortunate competitors. "As you get into the holiday season there's the opportunity to revisit a lot of these names," said Sara Farley, e-commerce analyst at PaineWebber. "With a lot of these companies, if business begins to pick up significantly there may be some clearance where people threw the baby out with the bath water." Farley said the business models she's most attracted to are the ones where inventory issues are small -- firms like Priceline.com, where what's being bought and sold isn't hard goods, but pieces of information. Priceline certainly is cheaper right now, compared to its highs. The company was recently trading at 37 1/8, off its 52-week high of 119 7/16. But while investors may have been scared away from online shopping retailers, shoppers haven't. A recent report from the US department of commerce found that e-commerce sales rose 1.2 percent in the first quarter of the year -- modest growth to be sure, but impressive in a quarter that's generally slow for retail. "I wouldn't have been at all surprised if we saw a slowdown (in Q1) because retail tends to dip in that quarter, and the Internet tends to be a highly seasonal channel," said Ken Cassar, an analyst at Jupiter Communications in New York. "It's a great sign." Of course, even at $5.26bn the sales still represent a fraction of the overall market. And while growth is expected to continue, no one thinks that brick-and-mortar retail will be replaced with Internet-only shopping any time soon. Still, the numbers have piqued the interest of brick-and-mortar players, several of whom jumped into the market last holiday season. Those companies could be best poised to gain from the faltering dot-coms, Cassar said, snapping up a struggling competitor to get a hold of their customer base and Internet expertise. A few companies have tried this, with mixed results. Walt Disney's Toysmart.com was shuttered in May, and Hollywood Entertainment Group pulled the plug on Reel.com last month. "It's not so much 'Is overall business growing?'; there's no question that it is," Farley said. "The real question is how much is going to traditional e-commmerce firms and how much is going to traditional retail companies moving online. This is still a relatively new business, and to think the game is over after five or six years is a bit of a reach." Clicks-and-mortar firms like Toysrus may try and take advantage of the shrinking pool of dot-coms. The slaughter has been severe, with companies going out of business at what seems like a rate of one a week. Boo.com, Foo-foo.com, Petstore.com -- the list just keeps growing. "The future of online retail is a consolidated one that in some ways replicates the world we see today. Each category will have three or four leaders that will be a mix of online and bricks-and-mortar retailers," said Robert Labatt, principal analyst for the Gartner Group's e-Business Services. "Success will be punctuated by the massive failure of competitors who could not demonstrate a path to profitability." So what will it take for these firms to make it through to the end of the year? Controls on spending would be a good start. Few analysts expect to see the ad spending sprees that took place last year. And several savvy firms have already bought and paid for their holiday placements now, to avoid the higher prices later. The big expenses this year are less sexy but equally important -- things like fulfilment, warehousing and customer management. There are some signs that firms have already started to deal with these issues. Amazon.com has been shelling out cash for months in order to expand its warehouse capability, as has Toysrus.com. Farley said that many firms have already purchased their advertising space for the fourth quarter -- getting in early to try and beat the Christmas rush. "Getting the product off the Web site and to the consumers has become the dirty little secret for Web sites. Its not sexy -- it's business, back office, warehouses, putting things in boxes and shipping them out. However, it's fulfilment that's brought down many of the e-tail success stories," said Geri Spieler, senior analyst for Gartner's e-Business Services. Both pure-plays and clicks-and-mortar firms have fulfilment issues to overcome, she said. Brick-and-mortar firms may not understand all the complexities of Internet retailing, but they have their real-world stores there to support the new channel. But firms that use that channel as the exclusive supplier for their Internet store will find it's an extremely expensive way to do business. And many dot-coms have spent vastly more time on their marketing and Web design than on their back-end processes, a flaw that ended up hurting them last Christmas when orders were late, out of stock or simply disappeared. Many firms have set up relationships with distributors and other outsourcers to handle these processes. That's a plus, in that established companies have the know-how to deal with pick and pack and order processing. But it may leave dot-com firms in the lurch when it comes to another costly aspect of retail sales -- returns. "If you've done an arrangement with a third-party distributor, you'd better have an arrangement to handle [returns] because the distributor is going to say, 'I don't own it, it's yours. You figure it out'," Spieler said. One way around these problems is to do everything inhouse. The advantage to building out your own infrastructure is that it becomes a competitive asset, Jupiter's Cassar said. If you outsource, it's likely that your competitors are using the same outsourcer, which means that they can offer the same inventory, pricing and availability. All that leaves a retailer to compete on is brand, and last year's advertising debacle has scared many companies -- and investors -- off of a big ad blitz. But even all that spending can be a problem, if the revenues aren't there to back it up. Amazon.com recently got spanked by a Lehman Brothers analyst, who complained that "the company's inability to make hard cash per unit sold is clearly manifested in the weak balance sheet, poor working capital management and massive negative operating cash flow." Many of these firms are spending money as if they are a $5bn business, when in reality, they are more like a $50m business. "They've invested to the point that their businesses need to be five to ten times as big as they currently are," Cassar said. "So even if we see solid gains quarter after quarter -- a lot of these firms will struggle to be cash flow positive." See ZDII for US tech investor news. See techTrader for more technology investment news, plus quotes and research. What do you think? Tell the Mailroom. And read what others have said.