Pink Slips in Paradise

Suddenly, dot-com jobs seem to be vanishing, along with share prices.

Healthshop.com is laying off most of its 70-person staff because it didn't get third-round funding. InsWeb (INSW) is saying goodbye to 30 employees after losing its biggest client. ChannelSpace.com also recently let go 25, about a quarter of its workforce, so it could "stay healthy" for a planned IPO. Even before the last few weeks of Nasdaq hell, AltaVista (dossier) gave pink slips to 60 people in its Shopping.com (dossier) division, after deciding to shift away from a commerce model. In January, Amazon.com (AMZN) laid off 150, about 2 percent of its workforce. (Amazon says it was just restructuring; some former employees say Amazon wanted to frighten employees into working harder.) And the list goes on.

Call it what you want - shakeout, consolidation, restructuring, streamlining. It all comes down to the same thing: Despite record-low unemployment and shortages of high-tech workers across America, the pressure is on to run tighter ships. Stockholders and venture fund managers are demanding it. The party's not over, but a lot of the cake and ice cream is gone. And this means, inevitably, some people are going to lose their jobs.

Welcome back to the real economy. But just because there are more dot-com layoffs doesn't mean there are fewer dot-com jobs. In fact, a healthy industry continuously fires and hires. Leading-edge firms do both simultaneously. That's because good companies have to change as they grow, and the people who fit perfectly with them at one point in time might not later on.

The apparent increase in dot-com layoffs isn't because fewer people are needed overall. In fact, overall dot-com employment is still growing mightily. The layoffs are occurring because the industry is beginning to behave sensibly.

Until now, so much capital was pouring in that company executives felt no pressure to rationalize their staffs by hiring exactly the talent they needed and letting go what they didn't. Now, they're looking for better fits.

Dot-com employees needn't worry, because the dot-com job market is still tighter than a drum. People who lose their jobs in one firm are getting hired quickly by another. This is especially true for Web designers, Web salespeople and marketers, and software engineers of all kinds. Most of them don't - and won't - have to move to another city to find a good job. Even employees in the more routine end of the business - office management, customer service, inventory control, billing - are in demand.

It's also important to keep in mind that, in a healthy industry, some firms have to go belly-up - and the people in them will have to find work elsewhere. Such failure is a necessary aspect of economic dynamism. No industry can try out new ideas and risk millions without suffering failures along the way. Failures tell an industry what doesn't work - which is almost as important to know as what does work. The worst thing that could happen to the world of Internet startups would be for venture money to keep surging into them at a rate that prevents firms from failing, because then no one would learn a thing.

Even if the national economy begins heading into a recession, most dot-com jobs will be fairly safe. Unlike the old economy, Web-based businesses have highly flexible pay scales - including a lot of stock options and performance bonuses - which means they can weather downturns in the market far more easily than can traditional businesses with fixed salaries and benefits. Pay may shrink, but most jobs will remain.

Undoubtedly, the years to come will see a lot of consolidation. There are huge potential economies of brand recognition in dot-com land - which means that the bigger inevitably will consume the smaller. A century ago there were almost 350 auto companies in America; 50 years ago there were three. A century and a half ago, hundreds of railroad companies existed; 75 years ago, 12. Between 1888 and 1904, approximately one-third of the manufacturing capital of the entire United States was consolidated into 318 giant companies such as ATT (T), General Electric (dossier), International Harvester, Standard Oil and U.S. Steel.