WEBVTT 00:00:00.000 --> 00:00:01.580 Okay, so I want you to close your eyes for a 00:00:01.580 --> 00:00:03.600 second. We're going back in time. Uh -oh. Where 00:00:03.600 --> 00:00:06.320 are we going? It's the late 90s. Let's say it's 00:00:06.320 --> 00:00:09.359 1999. You're sitting in front of a computer monitor 00:00:09.359 --> 00:00:11.900 that's roughly the size and weight of a microwave 00:00:11.900 --> 00:00:14.339 oven. I remember those. The beige boxes. The 00:00:14.339 --> 00:00:16.739 beige boxes, exactly. And you're listening to 00:00:16.739 --> 00:00:22.500 that screeching, clicking sound of a 56K modem 00:00:22.500 --> 00:00:24.620 trying to connect to the internet. A sound that 00:00:24.620 --> 00:00:28.480 an entire generation will never experience. It's 00:00:28.480 --> 00:00:31.059 probably for the best. Probably. And everywhere 00:00:31.059 --> 00:00:33.320 you look on that painfully slow -loading webpage, 00:00:33.619 --> 00:00:36.179 on your television, on a billboard on your way 00:00:36.179 --> 00:00:38.179 to work, you see him. Oh, I know who you're talking 00:00:38.179 --> 00:00:40.439 about. The sock. The sock. It's just a plain 00:00:40.439 --> 00:00:44.299 white athletic tube sock. It has two completely 00:00:44.299 --> 00:00:47.560 mismatched button eyes, a little felt watch wrapped 00:00:47.560 --> 00:00:50.420 around its neck like a collar. And the microphone. 00:00:50.439 --> 00:00:52.060 You can't forget the microphone. A little stick 00:00:52.060 --> 00:00:54.479 microphone just sort of taped to its side. And 00:00:54.479 --> 00:00:56.979 it's flailing around, interviewing people on 00:00:56.979 --> 00:00:58.979 the street, making these frantic, high -pitched 00:00:58.979 --> 00:01:01.119 jokes. You literally could not escape this thing. 00:01:01.259 --> 00:01:03.299 No, you couldn't. It really was a phenomenon. 00:01:03.299 --> 00:01:06.069 I think for anyone who... didn't live through 00:01:06.069 --> 00:01:11.189 that very specific window of time, it's hard 00:01:11.189 --> 00:01:13.450 to communicate just how pervasive that puppet 00:01:13.450 --> 00:01:15.670 was. Pervasive is the right word. It wasn't just 00:01:15.670 --> 00:01:18.469 a mascot for a company. It became a kind of B 00:01:18.469 --> 00:01:21.219 -list celebrity in its own right. B -list? I 00:01:21.219 --> 00:01:23.040 would argue it was A -list for a minute there. 00:01:23.219 --> 00:01:25.500 I mean, it was on Good Morning America. It was 00:01:25.500 --> 00:01:28.299 in the Macy's Thanksgiving Day Parade. And we 00:01:28.299 --> 00:01:30.480 were talking, of course, about the icon, the 00:01:30.480 --> 00:01:34.640 legend, the disaster that was Pets .com. Disaster 00:01:34.640 --> 00:01:36.319 is the key word there, I think. Right. Because 00:01:36.319 --> 00:01:39.299 I feel like today, if you mention Pets .com to 00:01:39.299 --> 00:01:41.400 someone, it's basically just a punchline. It's 00:01:41.400 --> 00:01:45.040 shorthand. It's shorthand for... dumb .com failure. 00:01:45.359 --> 00:01:48.180 You say tets .com, people kind of chuckle, they 00:01:48.180 --> 00:01:50.040 think about the sock puppet, and that's it. The 00:01:50.040 --> 00:01:51.959 conversation's over. Yeah, the story gets flattened. 00:01:52.060 --> 00:01:53.819 Exactly. And that's why I wanted to do this deep 00:01:53.819 --> 00:01:55.480 dive, because I feel like we are missing the 00:01:55.480 --> 00:01:58.819 actual story, the real meat of it. You are absolutely 00:01:58.819 --> 00:02:01.099 right. The puppet is the memory that everyone 00:02:01.099 --> 00:02:04.599 holds on to, but the reality is a much darker, 00:02:04.719 --> 00:02:07.480 much more complex story. It's about capital, 00:02:07.640 --> 00:02:10.919 it's about hubris, and a fundamental misunderstanding 00:02:10.919 --> 00:02:13.879 of, like, Business physics. Business physics. 00:02:13.919 --> 00:02:16.080 I like that. This isn't just a story about a 00:02:16.080 --> 00:02:18.460 funny ad campaign that went wrong. It's a case 00:02:18.460 --> 00:02:21.560 study in how you can incinerate $300 million 00:02:21.560 --> 00:02:24.879 of investment capital in just about 24 months. 00:02:25.340 --> 00:02:29.729 $300 million. That number. It's still just so 00:02:29.729 --> 00:02:31.830 hard to wrap your head around. It's a staggering 00:02:31.830 --> 00:02:34.349 amount of money, especially in 1999 dollars. 00:02:34.590 --> 00:02:35.889 And that's what we're going to do today. We're 00:02:35.889 --> 00:02:37.610 going to unpack how that happened. We are going 00:02:37.610 --> 00:02:40.250 to talk about lawsuits with insult comic dogs. 00:02:40.430 --> 00:02:42.250 That's a story in itself. We're going to talk 00:02:42.250 --> 00:02:45.530 about 21 tons of dog food being airlifted to 00:02:45.530 --> 00:02:47.430 Alaska. And we're going to try to answer that 00:02:47.430 --> 00:02:50.569 fundamental question. How do you spend $11 million 00:02:50.569 --> 00:02:55.539 on advertising to make $600 ,000 back? The math 00:02:55.539 --> 00:02:57.819 is truly the most terrifying and I think the 00:02:57.819 --> 00:03:00.099 most instructive part of this whole saga. So 00:03:00.099 --> 00:03:02.759 let's get into it. Our main source for this is 00:03:02.759 --> 00:03:05.699 the Wikipedia entry for Pets .com, accessed this 00:03:05.699 --> 00:03:09.080 year, 2026. But before we get to the sock puppet 00:03:09.080 --> 00:03:11.259 and the Super Bowl ad, we have to start at the 00:03:11.259 --> 00:03:14.280 beginning. Because Pets .com didn't actually 00:03:14.280 --> 00:03:16.599 begin with the puppet, did it? No, it didn't. 00:03:16.599 --> 00:03:18.400 And this is a part of the history that usually 00:03:18.400 --> 00:03:21.400 gets glossed over in the, you know, the punchline 00:03:21.400 --> 00:03:24.020 version of the story. Right. It started... Like 00:03:24.020 --> 00:03:26.259 so many things in the mid -90s with a domain 00:03:26.259 --> 00:03:28.939 name. The digital real estate rush. People were 00:03:28.939 --> 00:03:31.639 just snapping up URLs. Exactly. We're talking 00:03:31.639 --> 00:03:35.120 about November 1994. The web is barely a toddler 00:03:35.120 --> 00:03:37.139 at this point. There's an entrepreneur named 00:03:37.139 --> 00:03:39.719 Greg McLemore. And he's looking at the internet 00:03:39.719 --> 00:03:43.500 and he sees the potential for these category 00:03:43.500 --> 00:03:45.840 killers. The category killer. The idea that you 00:03:45.840 --> 00:03:47.740 could have a single online destination for a 00:03:47.740 --> 00:03:52.139 very specific interest. Toys .com. Cars .com. 00:03:52.539 --> 00:03:54.930 So he goes out and he registers the domain. ThePets 00:03:54.930 --> 00:03:57.150 .com. Which, I mean, honestly, that's a home 00:03:57.150 --> 00:03:59.289 run of a domain name. It's short. It's descriptive. 00:03:59.569 --> 00:04:02.550 It's easy to spell. In 1994, getting that is 00:04:02.550 --> 00:04:04.629 like buying a plot of land in Manhattan before 00:04:04.629 --> 00:04:06.789 any of the skyscrapers went up. It was prime 00:04:06.789 --> 00:04:09.789 digital real estate. Absolutely. But for a long 00:04:09.789 --> 00:04:11.930 time, that's all it was. It was just real estate, 00:04:12.069 --> 00:04:15.270 a concept. It eventually launched in late 1998 00:04:15.270 --> 00:04:18.230 as a spinoff of a company called WebMagic. Okay. 00:04:18.290 --> 00:04:20.790 But it was small. It was quiet. It wasn't making 00:04:20.790 --> 00:04:23.970 any waves. ThePets .com that we all remember. 00:04:24.139 --> 00:04:27.139 the monster that ate the world that really didn't 00:04:27.139 --> 00:04:30.399 start until early 1999. And that's when Julie 00:04:30.399 --> 00:04:32.459 Wainwright comes into the picture. That's right. 00:04:32.699 --> 00:04:36.240 Julie Wainwright takes over as CEO in early 1999. 00:04:36.860 --> 00:04:39.540 And her vision was not to have a small niche 00:04:39.540 --> 00:04:42.420 website for pet enthusiasts. Her vision was, 00:04:42.579 --> 00:04:45.199 for all intents and purposes, global domination 00:04:45.199 --> 00:04:47.959 of the pet supply category. Ambitious. Very. 00:04:48.120 --> 00:04:51.379 And to do that, she knew she needed fuel. A lot 00:04:51.379 --> 00:04:53.839 of it. Rocket fuel. And this is where the story 00:04:53.839 --> 00:04:55.300 takes a turn that I think a lot of people just 00:04:55.300 --> 00:04:57.560 completely forget or maybe never even knew. Because 00:04:57.560 --> 00:04:59.899 when I think of Pets .com, I think of this scrappy 00:04:59.899 --> 00:05:02.600 kind of stupid startup operating out of a garage 00:05:02.600 --> 00:05:04.480 somewhere. Right. But they weren't alone, were 00:05:04.480 --> 00:05:06.259 they? They had the biggest big brother you could 00:05:06.259 --> 00:05:08.060 possibly have in the e -commerce playground. 00:05:08.459 --> 00:05:11.220 They certainly did. And this is absolutely crucial 00:05:11.220 --> 00:05:13.360 for understanding why investors went so crazy 00:05:13.360 --> 00:05:17.110 for this company. Amazon .com was involved. And 00:05:17.110 --> 00:05:19.889 not just as a casual observer or a fan. Wait, 00:05:19.949 --> 00:05:22.870 Amazon? As in Jeff Bezos, we're going to sell 00:05:22.870 --> 00:05:26.310 everything? Amazon? The one and only. In the 00:05:26.310 --> 00:05:28.389 very first round of venture funding, which was 00:05:28.389 --> 00:05:31.990 in March of 1999, Amazon didn't just toss in 00:05:31.990 --> 00:05:34.269 a few bucks for goodwill. What did they do? They 00:05:34.269 --> 00:05:38.189 purchased a 54 % majority stake in Pets .com. 00:05:38.569 --> 00:05:41.550 Hold on. 54%. So Amazon owned more than half 00:05:41.550 --> 00:05:43.449 of the company. Effectively, yes. They were the 00:05:43.449 --> 00:05:45.709 majority owner right out of the gate. I had no 00:05:45.709 --> 00:05:48.110 idea. Most people don't. And along with some 00:05:48.110 --> 00:05:51.069 other big name venture capital firms, Hummer, 00:05:51.069 --> 00:05:53.430 Winblad, Bowman Capital Management, they poured 00:05:53.430 --> 00:05:56.490 in an initial $10 .5 million. But the money, 00:05:56.509 --> 00:05:59.449 in a way, was almost secondary to the signal 00:05:59.449 --> 00:06:01.209 it sent. What do you mean? You have to remember 00:06:01.209 --> 00:06:04.550 the atmosphere of 1999. Amazon was the kingmaker. 00:06:04.810 --> 00:06:07.149 If Jeff Bezos pointed his finger at a company 00:06:07.149 --> 00:06:09.209 in the e -commerce space and said, this is the 00:06:09.209 --> 00:06:12.009 one, the market treated it as gospel. So it's 00:06:12.009 --> 00:06:14.009 like a seal of approval. It's a massive shortcut 00:06:14.009 --> 00:06:15.850 for all the other investors. It's more than a 00:06:15.850 --> 00:06:17.610 seal of approval. It's a coronation. It says. 00:06:18.410 --> 00:06:21.189 Amazon thinks this is the future, so it must 00:06:21.189 --> 00:06:23.310 be the future. Don't waste your money betting 00:06:23.310 --> 00:06:26.629 on anyone else. Wow. In fact, Julie Wainwright 00:06:26.629 --> 00:06:29.449 herself, the CEO, she called the partnership, 00:06:29.589 --> 00:06:32.129 and this is a direct quote, a marriage made in 00:06:32.129 --> 00:06:35.350 heaven. A marriage made in heaven. And from a 00:06:35.350 --> 00:06:38.009 narrative and fundraising standpoint, it was. 00:06:38.230 --> 00:06:41.389 It gave Pets .com instant unassailable credibility. 00:06:41.769 --> 00:06:44.370 It told the entire world, this is the winner. 00:06:45.000 --> 00:06:47.519 And even after later funding rounds diluted their 00:06:47.519 --> 00:06:51.339 stake, by October 2000, Amazon still held 30 00:06:51.339 --> 00:06:53.319 percent of the company. They were in it for the 00:06:53.319 --> 00:06:55.800 long haul. Or so they thought. Or so they thought. 00:06:55.980 --> 00:06:58.560 So, OK, they have the cash. They have the backing 00:06:58.560 --> 00:07:00.579 of the biggest player in the game. They have 00:07:00.579 --> 00:07:02.980 this marriage made in heaven. What was the strategy? 00:07:03.079 --> 00:07:05.120 Was it just, you know, sell dog food online? 00:07:05.439 --> 00:07:07.680 The strategy was the mantra of the entire era. 00:07:07.819 --> 00:07:10.980 Get big fast. Get big fat. This was not about 00:07:10.980 --> 00:07:14.269 building a sustainable. profitable business slowly 00:07:14.269 --> 00:07:17.810 and carefully. This was a land grab. It was about 00:07:17.810 --> 00:07:21.199 achieving market dominance at any cost. So they 00:07:21.199 --> 00:07:23.139 took that venture capital and they immediately 00:07:23.139 --> 00:07:25.720 started pouring it into massive infrastructure. 00:07:25.980 --> 00:07:27.660 When you say infrastructure, what are we talking 00:07:27.660 --> 00:07:30.339 about? Like servers and coders? Servers and coders, 00:07:30.360 --> 00:07:33.240 yes, but physical infrastructure, too. We're 00:07:33.240 --> 00:07:36.339 talking about massive, sprawling warehouses. 00:07:36.540 --> 00:07:38.560 They were setting up state -of -the -art distribution 00:07:38.560 --> 00:07:41.199 centers all across the United States. So they 00:07:41.199 --> 00:07:43.439 were building a physical footprint. A huge one. 00:07:43.500 --> 00:07:44.939 They were building their own shipment network. 00:07:45.389 --> 00:07:47.389 They were trying to replicate Amazon's model 00:07:47.389 --> 00:07:49.550 but for a single category and do it overnight. 00:07:49.810 --> 00:07:52.350 They even went out and just bought their biggest 00:07:52.350 --> 00:07:55.509 online competitor, a site called PetStore .com, 00:07:55.689 --> 00:07:59.009 in June of 2000. How much did that cost? $10 00:07:59.009 --> 00:08:01.949 .6 million. They just wrote a check for $10 million 00:08:01.949 --> 00:08:04.370 to eliminate the competition. That was the Get 00:08:04.370 --> 00:08:07.610 Big Fast playbook. Consolidate the market. Be 00:08:07.610 --> 00:08:10.490 the only game in town. The idea was to build 00:08:10.490 --> 00:08:13.750 the skeleton of a giant retail empire literally 00:08:13.750 --> 00:08:15.779 overnight. Okay, so you build the warehouse, 00:08:16.040 --> 00:08:18.480 you buy the trucks, you buy the competition, 00:08:18.759 --> 00:08:22.040 but now you have a bunch of enormous empty warehouses. 00:08:22.040 --> 00:08:24.240 You need people to actually, you know, buy the 00:08:24.240 --> 00:08:27.040 kibble. And that brings us to the most famous 00:08:27.040 --> 00:08:29.160 and certainly the most expensive part of the 00:08:29.160 --> 00:08:32.279 entire story, the marketing machine. The puppet. 00:08:32.480 --> 00:08:35.379 The puppet. So where did this thing even come 00:08:35.379 --> 00:08:38.220 from? Because it's such a weird, almost daddiest 00:08:38.220 --> 00:08:41.519 concept. We sell pet food, and to communicate 00:08:41.519 --> 00:08:45.000 that, here is a sock. It came from the ad agency 00:08:45.000 --> 00:08:48.039 TBWA Shia Day. Now, you have to understand, these 00:08:48.039 --> 00:08:50.580 weren't amateurs. These were the same creative 00:08:50.580 --> 00:08:52.840 minds who had just given the world the Taco Bell 00:08:52.840 --> 00:08:55.940 Chihuahua. Yo quiero Taco Bell. I can still hear 00:08:55.940 --> 00:08:57.960 it in my head. They knew how to create what we 00:08:57.960 --> 00:09:00.080 would now call a viral sensation, even before 00:09:00.080 --> 00:09:02.240 social media really existed. They were masters 00:09:02.240 --> 00:09:05.360 of creating these cultural earworms. Annoying 00:09:05.360 --> 00:09:07.700 but memorable mascots seemed to be their specialty. 00:09:08.080 --> 00:09:10.360 Annoying but memorable was absolutely their specialty. 00:09:10.539 --> 00:09:12.460 And they designed the puppet to be deceptively 00:09:12.460 --> 00:09:15.519 simple. Just a sock, the button eyes, the flailing 00:09:15.519 --> 00:09:18.539 arms. But the genius of it, or maybe the madness 00:09:18.539 --> 00:09:21.000 of it, was in the performance. Right. Who was 00:09:21.000 --> 00:09:23.080 the voice? It was voiced and operated by the 00:09:23.080 --> 00:09:25.659 comedian Michael Ian Black. Oh, I love Michael 00:09:25.659 --> 00:09:27.759 Ian Black. From the state. I had no idea that 00:09:27.759 --> 00:09:30.399 was him. It was him. And he gave it that manic, 00:09:30.600 --> 00:09:33.779 slightly desperate, high -pitched energy. The 00:09:33.779 --> 00:09:36.960 puppet debuted in August of 1999, and the goal 00:09:36.960 --> 00:09:39.940 was brutally simple. Make sure that every single 00:09:39.940 --> 00:09:43.240 human being in America knows the name Pets .com. 00:09:43.399 --> 00:09:46.440 And I have to say, looking back at it, it works. 00:09:46.500 --> 00:09:48.440 I mean, here we are talking about it almost 30 00:09:48.440 --> 00:09:50.960 years later. In terms of pure brand awareness, 00:09:51.240 --> 00:09:53.480 it was an absolute masterpiece of advertising. 00:09:53.799 --> 00:09:56.179 The source material we're looking at notes that 00:09:56.179 --> 00:09:58.759 the puppet achieved cultural dominance in a matter 00:09:58.759 --> 00:10:01.159 of months. How dominant are we talking? Well, 00:10:01.220 --> 00:10:03.460 it was interviewed by People magazine. It got 00:10:03.460 --> 00:10:05.559 feature articles in Time and Entertainment Weekly. 00:10:05.899 --> 00:10:08.720 It appeared on Good Morning America, Nightline, 00:10:08.860 --> 00:10:12.059 and Live with Regis and Kathie Lee. Wait, it 00:10:12.059 --> 00:10:14.299 was doing the talk show circuit? A piece of fabric 00:10:14.299 --> 00:10:16.620 was sitting on a couch next to Regis Philbin? 00:10:16.740 --> 00:10:19.659 It was. It transcended being an ad and became 00:10:19.659 --> 00:10:22.340 a legitimate cultural character. And the absolute 00:10:22.340 --> 00:10:25.139 peak of this cultural insanity has to be the 00:10:25.139 --> 00:10:28.789 Macy's Thanksgiving Day Parade in 1999. Oh, I've 00:10:28.789 --> 00:10:30.649 heard about this. This is where it gets really 00:10:30.649 --> 00:10:33.009 crazy. They commissioned something called a falloon. 00:10:33.190 --> 00:10:35.850 A falloon? What on earth is a falloon? It's a 00:10:35.850 --> 00:10:39.289 portmanteau. It's half float, half balloon. It 00:10:39.289 --> 00:10:41.990 was a 36 -foot -tall version of the sock puppet. 00:10:42.389 --> 00:10:45.350 36 feet? 36 feet. So why don't you just imagine 00:10:45.350 --> 00:10:47.830 a three -story building made of nylon, shaped 00:10:47.830 --> 00:10:50.509 like a sock, just floating down 6th Avenue in 00:10:50.509 --> 00:10:52.809 New York City on Thanksgiving morning. That is 00:10:52.809 --> 00:10:56.929 both horrifying and majestic at the same time. 00:10:57.470 --> 00:10:59.970 It really was the perfect symbol of the bubble. 00:11:00.090 --> 00:11:03.690 Just this massive, hollow, inflated object taking 00:11:03.690 --> 00:11:06.230 up all the air in the room. And they didn't stop 00:11:06.230 --> 00:11:08.590 there. They started merchandising the puppet 00:11:08.590 --> 00:11:11.070 itself. They sold the actual puppet. They sold 00:11:11.070 --> 00:11:13.710 a replica of the sock puppet. And it sold like 00:11:13.710 --> 00:11:16.490 crazy. 10 ,000 of them flew off the shelves in 00:11:16.490 --> 00:11:19.570 the first week. By July of 2000, they had sold 00:11:19.570 --> 00:11:22.080 35 ,000 of them. So people were paying money 00:11:22.080 --> 00:11:24.799 to own a company's advertisement. Yes. And it 00:11:24.799 --> 00:11:26.879 even had an autobiography. You are kidding me. 00:11:27.179 --> 00:11:32.279 A book? A book. It was titled Me by Me. And it 00:11:32.279 --> 00:11:34.980 was this sort of coffee cable book filled with 00:11:34.980 --> 00:11:37.639 photos and witty observations from the sock puppet. 00:11:37.820 --> 00:11:40.779 I just, I cannot grapple with the layers of absurdity 00:11:40.779 --> 00:11:43.259 here. They are an e -commerce company for pet 00:11:43.259 --> 00:11:45.779 supplies, but they are making money selling a 00:11:45.779 --> 00:11:48.419 book supposedly written by their sock puppet 00:11:48.419 --> 00:11:51.480 mascot. Well, making money is a very generous 00:11:51.480 --> 00:11:53.679 term. They were generating revenue, certainly. 00:11:54.240 --> 00:11:57.259 But the cost to achieve this level of fame was 00:11:57.259 --> 00:11:59.659 absolutely astronomical. And the pinnacle of 00:11:59.659 --> 00:12:02.519 that spending came in January of 2000. The Super 00:12:02.519 --> 00:12:05.220 Bowl? The Super Bowl. The absolute height of 00:12:05.220 --> 00:12:08.419 the dot -com mania. Pets .com buys a national 00:12:08.419 --> 00:12:10.340 advertising slot during the biggest television 00:12:10.340 --> 00:12:12.600 event of the year. And Super Bowl ads are famously 00:12:12.600 --> 00:12:17.340 not cheap. This one cost $1 .2 million for 30 00:12:17.340 --> 00:12:20.559 seconds. $1 .2 million for half a minute of television. 00:12:20.559 --> 00:12:23.049 And culturally, again, it was a smash hit. USA 00:12:23.049 --> 00:12:25.230 Today's ad meter, which is the big ranking system 00:12:25.230 --> 00:12:27.629 for these things, it ranked the Pets .com ad 00:12:27.629 --> 00:12:30.090 as number five for the whole game. People loved 00:12:30.090 --> 00:12:32.149 it. It was funny. It had a catchy song. It was 00:12:32.149 --> 00:12:34.389 memorable. Okay, but this is where the disconnect 00:12:34.389 --> 00:12:36.470 begins, right? This is where we have to put on 00:12:36.470 --> 00:12:39.509 our business analyst hats. This is exactly the 00:12:39.509 --> 00:12:42.169 moment. Because having a famous mascot is great. 00:12:42.269 --> 00:12:44.190 It's wonderful for brand recognition. But does 00:12:44.190 --> 00:12:47.710 a famous mascot actually make people buy a 40 00:12:47.710 --> 00:12:51.120 -pound bag of dog food from your website? That 00:12:51.120 --> 00:12:54.279 is the $300 million question, isn't it? It is. 00:12:54.480 --> 00:12:57.360 There is a profound and often fatal difference 00:12:57.360 --> 00:13:00.320 between being famous and being a viable business. 00:13:00.580 --> 00:13:03.740 Everyone in America knew the puppet. But did 00:13:03.740 --> 00:13:06.179 everyone in America trust the puppet to deliver 00:13:06.179 --> 00:13:08.720 their pet supplies reliably and cheaply? Before 00:13:08.720 --> 00:13:10.480 we get into the answer to that, there is one 00:13:10.480 --> 00:13:13.279 more story from this marketing mania phase that 00:13:13.279 --> 00:13:15.440 I think we just have to tell because it so perfectly 00:13:15.440 --> 00:13:18.159 encapsulates the mindset of the company at the 00:13:18.159 --> 00:13:21.379 time. The lawsuit. Yeah, yes. The Triumph incident. 00:13:21.620 --> 00:13:23.919 This is almost Shakespearean in its pettiness 00:13:23.919 --> 00:13:26.120 and absurdity. So for anyone listening who doesn't 00:13:26.120 --> 00:13:28.460 know, there's another famous dog puppet from 00:13:28.460 --> 00:13:31.840 that era, Triumph the insult comic dog. A cultural 00:13:31.840 --> 00:13:35.080 icon. A cultural icon. He's a Rottweiler puppet. 00:13:35.220 --> 00:13:38.039 He smokes a cigar. He's incredibly rude to celebrities. 00:13:38.460 --> 00:13:41.139 He was a staple on Conan O 'Brien's late night 00:13:41.139 --> 00:13:44.600 show. Right. Created and performed by a brilliant 00:13:44.600 --> 00:13:47.769 comedy writer named Robert Smigel. Now, Smigel 00:13:47.769 --> 00:13:51.509 sees the Pets .com puppet, which, let's be honest, 00:13:51.649 --> 00:13:54.110 is a dog -like sock puppet holding a microphone. 00:13:54.289 --> 00:13:56.769 And he thinks, hey, this looks a little too much 00:13:56.769 --> 00:13:59.370 like my act. So he sends a cease and desist letter, 00:13:59.490 --> 00:14:01.090 which is pretty standard stuff in Hollywood, 00:14:01.269 --> 00:14:03.870 right? Very standard. A rational company, a company 00:14:03.870 --> 00:14:06.389 focused on its core operations, might have called 00:14:06.389 --> 00:14:08.190 him up, maybe worked out a small settlement, 00:14:08.309 --> 00:14:10.590 or more likely just ignored it, knowing that 00:14:10.590 --> 00:14:12.549 the characters were different enough. But Pets 00:14:12.549 --> 00:14:15.429 .com was not a rational company. Pets .com went 00:14:15.429 --> 00:14:19.139 nuclear. In April of 2000, they filed a lawsuit 00:14:19.139 --> 00:14:21.179 against Robert Smigel in U .S. District Court. 00:14:21.299 --> 00:14:23.519 They sued him. They sued him for $20 million. 00:14:23.940 --> 00:14:27.960 $20 million? For what? For defamation and trade 00:14:27.960 --> 00:14:30.759 libel. Their argument was that by claiming the 00:14:30.759 --> 00:14:33.740 Pets .com puppet was a ripoff, Smigel had damaged 00:14:33.740 --> 00:14:36.120 their brand and their business. That is insane. 00:14:36.399 --> 00:14:39.620 The CEO. Julie Wainwright gave this amazing quote 00:14:39.620 --> 00:14:41.759 to the press. She said, we were surprised we 00:14:41.759 --> 00:14:43.580 received the letter because there's obviously 00:14:43.580 --> 00:14:46.360 no relation between the Pets .com sock puppet 00:14:46.360 --> 00:14:49.879 and Triumph. I mean, OK, she has a point. One 00:14:49.879 --> 00:14:52.299 is a grumpy Rottweiler and one is a manic sock. 00:14:52.919 --> 00:14:57.559 But to sue a comedian for $20 million while you're 00:14:57.559 --> 00:14:59.629 trying to build a startup. It just speaks to 00:14:59.629 --> 00:15:01.309 the hubris of the moment. They felt they were 00:15:01.309 --> 00:15:03.090 untouchable. They were just a pet store anymore. 00:15:03.309 --> 00:15:05.950 In their minds, they were a media empire. They 00:15:05.950 --> 00:15:08.470 were fighting these PR battles and legal battles, 00:15:08.649 --> 00:15:11.529 spending enormous amounts of money on lawyers. 00:15:11.750 --> 00:15:13.929 At a time when, as we were about to see, their 00:15:13.929 --> 00:15:16.490 actual business was bleeding to death. Precisely. 00:15:16.490 --> 00:15:18.629 The lawsuit, by the way, was eventually dismissed 00:15:18.629 --> 00:15:22.210 in February 2001. But by then, the company was 00:15:22.210 --> 00:15:24.169 already gone. It was a complete and utter waste 00:15:24.169 --> 00:15:27.519 of time, energy, and money. Okay, so we've painted 00:15:27.519 --> 00:15:30.220 the picture. We have the Amazon backing, the 00:15:30.220 --> 00:15:33.159 warehouses, the famous puppet, the ridiculous 00:15:33.159 --> 00:15:36.259 lawsuits. Now let's lift the hood and look at 00:15:36.259 --> 00:15:38.899 the actual business model. Because you threw 00:15:38.899 --> 00:15:40.919 out a number earlier that just made my jaw drop. 00:15:41.659 --> 00:15:45.399 $11 million in ads to make $600 ,000 in revenue. 00:15:45.620 --> 00:15:47.919 It is staggering when you see it written down. 00:15:48.120 --> 00:15:50.919 So let's look at their first fiscal year, which 00:15:50.919 --> 00:15:54.519 ran from February to September of 1999. In those 00:15:54.519 --> 00:15:57.159 nine months, Pets .com brought in a total of 00:15:57.159 --> 00:16:02.460 $619 ,000 in revenue. That's total sales. $619 00:16:02.460 --> 00:16:05.179 ,000. I mean, that's not nothing, but that's 00:16:05.179 --> 00:16:07.100 like the annual revenue of a decent neighborhood 00:16:07.100 --> 00:16:09.620 pizza place. It's a very small number for a company 00:16:09.620 --> 00:16:11.600 with this much hype. Yeah. But here's the kicker. 00:16:11.620 --> 00:16:15.820 To get that $619 ,000 in sales, they spent $11 00:16:15.820 --> 00:16:19.789 .8 million on advertising. So let me do the math 00:16:19.789 --> 00:16:22.070 here. For every $1 in sales they brought in, 00:16:22.149 --> 00:16:24.690 they spent nearly $20 just shouting, hey, look 00:16:24.690 --> 00:16:28.929 at us. That's right. A 20 to 1 ratio of ad spend 00:16:28.929 --> 00:16:31.669 to revenue. And that is just advertising. That 00:16:31.669 --> 00:16:33.529 doesn't count the cost of the goods they sold, 00:16:33.610 --> 00:16:36.230 the warehouses, the executive salaries, the legal 00:16:36.230 --> 00:16:38.769 fees for suing comedians. How does anyone on 00:16:38.769 --> 00:16:40.549 the planet look at that spreadsheet and say, 00:16:40.710 --> 00:16:43.850 yes, this is a company that is ready to go public? 00:16:44.289 --> 00:16:47.580 Well, welcome to the year 2000. Despite those 00:16:47.580 --> 00:16:49.940 numbers, which were public, they launched their 00:16:49.940 --> 00:16:52.919 IPO, their initial public offering, in February 00:16:52.919 --> 00:16:55.740 2000, right after that big Super Bowl ad. They 00:16:55.740 --> 00:16:57.500 went on the stock market. They listed on the 00:16:57.500 --> 00:17:00.000 Nasdaq -U stock exchange under the symbol IPET. 00:17:00.759 --> 00:17:04.019 And they successfully raised $82 .5 million. 00:17:04.740 --> 00:17:07.819 The stock opened at $11 a share. So the market 00:17:07.819 --> 00:17:09.880 looked at this machine that was literally designed 00:17:09.880 --> 00:17:12.660 to burn cash and said, here, have another $82 00:17:12.660 --> 00:17:15.059 million to burn. Why? I mean, were investors 00:17:15.059 --> 00:17:17.400 just stupid? Stupid is a harsh word. I would 00:17:17.400 --> 00:17:19.759 say they were intoxicated. They were high on 00:17:19.759 --> 00:17:22.059 the narrative. The theory at the time, which 00:17:22.059 --> 00:17:25.240 now sounds insane, was customer acquisition at 00:17:25.240 --> 00:17:27.599 all costs. Get the customer now. Worry about 00:17:27.599 --> 00:17:30.660 profit later. Exactly. The belief was that if 00:17:30.660 --> 00:17:32.519 you grab the customer, if you got their email 00:17:32.519 --> 00:17:35.259 address, you could figure out how to make profit 00:17:35.259 --> 00:17:38.019 off them sometime in the distant future. It was 00:17:38.019 --> 00:17:41.579 a land grab, but there were fundamental structural 00:17:41.579 --> 00:17:45.180 flaws in the pets .com business model that no 00:17:45.180 --> 00:17:47.440 amount of time or customers would have ever fixed. 00:17:47.900 --> 00:17:49.960 Okay, let's break those down. What was flaw number 00:17:49.960 --> 00:17:52.859 one? Flaw number one, no market research. Come 00:17:52.859 --> 00:17:56.700 on, none. Zero. The source material is explicit 00:17:56.700 --> 00:17:59.500 about this. There was no independent market research 00:17:59.500 --> 00:18:01.779 conducted before the launch. They never actually 00:18:01.779 --> 00:18:04.140 asked the fundamental question, do people want 00:18:04.140 --> 00:18:06.539 to buy heavy bags of pet food online and have 00:18:06.539 --> 00:18:08.680 them shipped to their house? They just assumed 00:18:08.680 --> 00:18:11.079 they would. That feels like the first slide in 00:18:11.079 --> 00:18:14.160 any business 101 presentation. Is there a market 00:18:14.160 --> 00:18:16.339 for your product? You would think so. But flaw 00:18:16.339 --> 00:18:18.339 number two was the real killer. And this is where 00:18:18.339 --> 00:18:20.539 we need to talk about a concept called unit economics. 00:18:21.039 --> 00:18:23.859 OK, break that down for me. What are unit economics? 00:18:24.180 --> 00:18:26.819 Unit economics is the most basic building block 00:18:26.819 --> 00:18:31.000 of a business. It's the question. On a single 00:18:31.000 --> 00:18:35.119 transaction, do you make or lose money? So how 00:18:35.119 --> 00:18:37.799 much does it cost me to sell one unit of my product? 00:18:38.119 --> 00:18:40.960 And do I make a profit on that specific sale? 00:18:41.160 --> 00:18:44.500 And Pets .com was? Pets .com was failing this 00:18:44.500 --> 00:18:48.059 test catastrophically. The data shows they were 00:18:48.059 --> 00:18:50.500 selling their merchandise for approximately one 00:18:50.500 --> 00:18:52.759 -third the price they paid a distributor to obtain 00:18:52.759 --> 00:18:54.160 it. Wait, wait, wait. Let me get this straight. 00:18:54.380 --> 00:18:56.839 If they bought a squeaky toy from a supplier 00:18:56.839 --> 00:18:59.720 for $3... They were turning around and selling 00:18:59.720 --> 00:19:02.720 it to you for $1. Why in God's name would you 00:19:02.720 --> 00:19:05.400 do that? Aggressive customer acquisition. They 00:19:05.400 --> 00:19:07.160 were trying to undercut all the local pet stores. 00:19:07.279 --> 00:19:09.200 They thought, if we give them a deal that's too 00:19:09.200 --> 00:19:11.059 good to be true, they'll become loyal customers 00:19:11.059 --> 00:19:13.740 for life. But even in their second fiscal year, 00:19:13.859 --> 00:19:15.819 after they'd been around for a bit, they were... 00:19:15.849 --> 00:19:18.410 still selling goods at about 27 % below their 00:19:18.410 --> 00:19:21.009 cost. So they were personally subsidizing every 00:19:21.009 --> 00:19:23.990 single dog bone and cat toy that left their warehouse? 00:19:24.410 --> 00:19:27.210 Exactly. And this creates what economists call 00:19:27.210 --> 00:19:30.289 a death spiral. Usually in a healthy business, 00:19:30.450 --> 00:19:33.069 when your sales go up, your financial situation 00:19:33.069 --> 00:19:36.609 improves. More sales, more profit. Right. But 00:19:36.609 --> 00:19:38.829 for Pets .com, because they lost a significant 00:19:38.829 --> 00:19:41.390 amount of money on every single item they sold, 00:19:41.609 --> 00:19:44.509 the dramatic rise in their sales only hastened 00:19:44.509 --> 00:19:47.089 their demise. The more they sold, the faster 00:19:47.089 --> 00:19:49.930 they went bankrupt. So success was actually accelerating 00:19:49.930 --> 00:19:52.990 their failure. Precisely. And then, on top of 00:19:52.990 --> 00:19:55.390 all that, there's the shipping problem. The shipping 00:19:55.390 --> 00:19:57.150 problem. This is the business physics you were 00:19:57.150 --> 00:19:59.549 talking about. This is the physics. It's inescapable. 00:19:59.670 --> 00:20:02.390 What is the most common, most frequently purchased 00:20:02.390 --> 00:20:05.809 item a pet owner buys? Food and cat litter. Right. 00:20:06.160 --> 00:20:07.880 And what are the defining physical properties 00:20:07.880 --> 00:20:10.799 of a big bag of dog food and a tub of cat litter? 00:20:10.960 --> 00:20:13.839 They're heavy and they're bulky. They are extremely 00:20:13.839 --> 00:20:16.900 heavy and dense. A 40 -pound bag of cat litter 00:20:16.900 --> 00:20:19.359 is 40 pounds of what is essentially sand and 00:20:19.359 --> 00:20:22.259 clay. Shipping 40 pounds of clay across the country 00:20:22.259 --> 00:20:25.579 via FedEx or UPS is incredibly expensive. And 00:20:25.579 --> 00:20:27.920 Pets .com, to attract customers, was offering 00:20:27.920 --> 00:20:30.720 free or heavily discounted shipping. They often 00:20:30.720 --> 00:20:33.460 did. They ran promotions for free shipping or 00:20:33.460 --> 00:20:36.700 charged a very low flat rate. But the profit 00:20:36.700 --> 00:20:39.839 margin on pet food itself is already razor thin. 00:20:40.240 --> 00:20:43.220 Best case, a retailer makes maybe 2 to 4 percent. 00:20:43.359 --> 00:20:45.579 OK, so let's do the math on that. I go to Pets 00:20:45.579 --> 00:20:48.740 .com. I buy a $20 bag of dog food. The actual 00:20:48.740 --> 00:20:52.359 profit for Pets .com on the food itself is what? 00:20:52.680 --> 00:20:55.299 Maybe 50 or 80 cents. Best case scenario, yes. 00:20:55.500 --> 00:20:57.980 Maybe a dollar if they're lucky. But then they 00:20:57.980 --> 00:21:00.660 have to turn around and pay UPS 10 or 15 dollars 00:21:00.660 --> 00:21:03.640 to ship that heavy bag to your front door. So 00:21:03.640 --> 00:21:05.599 on that one transaction, they have instantly 00:21:05.599 --> 00:21:08.099 lost somewhere between nine and 14 dollars. I 00:21:08.099 --> 00:21:10.380 have to assume the grand plan was, well, OK, 00:21:10.519 --> 00:21:12.480 we'll lose money on the food, but they'll also 00:21:12.480 --> 00:21:15.140 throw in a diamond studded collar with a huge 00:21:15.140 --> 00:21:17.160 90 percent profit margin. That was the dream. 00:21:17.630 --> 00:21:19.390 That was the entire thesis of the company. They 00:21:19.390 --> 00:21:21.589 believed the food and litter were loss leaders 00:21:21.589 --> 00:21:23.890 that would get you in the door to buy the high 00:21:23.890 --> 00:21:27.109 -margin items like toys, accessories, and gourmet 00:21:27.109 --> 00:21:29.569 treats. That's not what happened, is it? Consumer 00:21:29.569 --> 00:21:32.089 behavior did not cooperate. People are smart. 00:21:32.390 --> 00:21:35.289 They took the cheap, heavy food with the subsidized 00:21:35.289 --> 00:21:37.309 shipping, said thank you very much, and they 00:21:37.309 --> 00:21:40.299 didn't buy the expensive, spooky toys. The purchasing 00:21:40.299 --> 00:21:42.259 patterns never shifted to high -margin goods. 00:21:42.519 --> 00:21:44.980 So they built this incredibly complex, incredibly 00:21:44.980 --> 00:21:47.359 expensive machine that was perfectly designed 00:21:47.359 --> 00:21:50.380 to lose money. They built a very efficient, very 00:21:50.380 --> 00:21:53.220 high -tech incinerator for venture capital. It's 00:21:53.220 --> 00:21:55.859 just amazing because when you lay it all out 00:21:55.859 --> 00:21:59.000 like that, it seems so painfully obvious. Shipping 00:21:59.000 --> 00:22:01.680 sand is a bad business model. Selling dollar 00:22:01.680 --> 00:22:04.700 bills for 70 cents is a bad business model. Why 00:22:04.700 --> 00:22:07.299 didn't anyone with any power step in and stop 00:22:07.299 --> 00:22:09.900 them? Because of a concept from behavioral finance 00:22:09.900 --> 00:22:13.579 called the fantastic object. The what? The fantastic 00:22:13.579 --> 00:22:15.980 objects. It's a term used to describe an investment 00:22:15.980 --> 00:22:18.599 that becomes so exciting, so hype, so seemingly 00:22:18.599 --> 00:22:21.440 revolutionary that it stops being analyzed as 00:22:21.440 --> 00:22:24.140 a business and becomes a screen onto which people 00:22:24.140 --> 00:22:26.619 project their fantasies. So it's not a company. 00:22:26.680 --> 00:22:29.380 It's a dream. It's a dream. It was the future 00:22:29.380 --> 00:22:31.859 of retail. It was the Amazon of pet supplies. 00:22:32.420 --> 00:22:35.430 When you have a fantastic object. People, investors, 00:22:35.750 --> 00:22:38.470 journalists, even the employees, they stop looking 00:22:38.470 --> 00:22:40.289 at the profit and loss statement and they start 00:22:40.289 --> 00:22:42.130 looking at the giant balloon in the Macy's parade. 00:22:42.410 --> 00:22:44.589 They get caught up in the story. So the sock 00:22:44.589 --> 00:22:47.210 puppet was almost like a magician's trick. Look 00:22:47.210 --> 00:22:48.950 at the funny sock over here. Don't look at the 00:22:48.950 --> 00:22:50.910 giant burning pile of money in our warehouse. 00:22:51.410 --> 00:22:53.890 It was the perfect distraction. It distracted 00:22:53.890 --> 00:22:57.170 everyone, possibly including the executives themselves, 00:22:57.549 --> 00:23:00.930 from the cold, hard, terrifying reality of their 00:23:00.930 --> 00:23:03.529 own numbers. So let's talk about when reality 00:23:03.529 --> 00:23:05.849 finally crashed the party. Because for a company 00:23:05.849 --> 00:23:09.750 that rose so incredibly fast, the fall was. I 00:23:09.750 --> 00:23:11.710 mean, it was blink and you miss it fast. It was 00:23:11.710 --> 00:23:14.170 incredibly rapid. The velocity of the collapse 00:23:14.170 --> 00:23:15.990 is one of the most remarkable parts of the story. 00:23:16.150 --> 00:23:19.869 Remember, the IPO was in February of 2000. By 00:23:19.869 --> 00:23:22.089 September 2000, that's just seven months later, 00:23:22.230 --> 00:23:25.470 the walls were already closing in. The cash from 00:23:25.470 --> 00:23:27.650 the IPO was almost gone. Did they try to make 00:23:27.650 --> 00:23:30.089 any changes to stop the bleeding? They flailed. 00:23:30.380 --> 00:23:32.299 In September, they made this big announcement 00:23:32.299 --> 00:23:34.579 that they were moving their customer service 00:23:34.579 --> 00:23:37.279 call center from San Francisco to Greenwood, 00:23:37.299 --> 00:23:41.259 Indiana. Why Indiana? Cost cutting. Yeah. It's 00:23:41.259 --> 00:23:43.400 much cheaper to run a call center and pay salaries 00:23:43.400 --> 00:23:46.539 in Indiana than it is in the Bay Area. But that's 00:23:46.539 --> 00:23:50.259 like, it's like rearranging the deck chairs on 00:23:50.259 --> 00:23:53.259 the Titanic. It saved them a few bucks, but the 00:23:53.259 --> 00:23:55.579 ship had a hole in the hull the size of a blue 00:23:55.579 --> 00:23:58.539 whale. Did they try to find a buyer? Surely someone 00:23:58.539 --> 00:24:00.819 wanted that brand recognition, the customer list. 00:24:01.079 --> 00:24:04.220 They did. They went, cap in hand, to PetSmart, 00:24:04.400 --> 00:24:06.220 the big brick -and -mortar giant they had been 00:24:06.220 --> 00:24:08.160 trying to destroy. Yeah. And they asked for a 00:24:08.160 --> 00:24:09.880 buyout. That must have been a humbling conversation. 00:24:10.339 --> 00:24:13.460 I imagine so. PetSmart looked at their books, 00:24:13.619 --> 00:24:16.200 saw the disaster, and made an offer. Was it a 00:24:16.200 --> 00:24:18.440 good offer? It was a deeply insulting offer. 00:24:18.779 --> 00:24:20.900 PetSmart offered to buy the company for less 00:24:20.900 --> 00:24:23.700 than the net cash value Pets .com had in the 00:24:23.700 --> 00:24:26.319 bank. What does that mean? I mean, it means PetSmart 00:24:26.319 --> 00:24:28.980 basically said, we will take your company, but 00:24:28.980 --> 00:24:30.700 we're going to pay you less than the actual money 00:24:30.700 --> 00:24:32.740 you currently have. We're essentially charging 00:24:32.740 --> 00:24:35.359 you to take this disaster off your hands. Wow. 00:24:35.839 --> 00:24:38.359 And the board said no. The board refused. Pride, 00:24:38.460 --> 00:24:41.299 I guess. They still thought, we're Pets .com. 00:24:41.539 --> 00:24:43.799 We have the sock puppet. We're worth more than 00:24:43.799 --> 00:24:45.839 this. The narrator's voice comes in. They were 00:24:45.839 --> 00:24:47.740 not, in fact, worth more than this. They were 00:24:47.740 --> 00:24:51.759 not. So November 2000 arrives. This is less than 00:24:51.759 --> 00:24:54.599 a year after that triumphant Super Bowl ad. The 00:24:54.599 --> 00:24:57.400 money is gone. No new investors are stepping 00:24:57.400 --> 00:25:00.000 up because the entire dot -com bubble is bursting 00:25:00.000 --> 00:25:02.819 everywhere. The party is over. So what happens 00:25:02.819 --> 00:25:06.410 the final day? November 7th, 2000. The announcement 00:25:06.410 --> 00:25:08.490 comes down from the board. Pets .com is shutting 00:25:08.490 --> 00:25:11.410 down all operations. Effective immediately. Just 00:25:11.410 --> 00:25:13.869 like that. A press release. Just like that. They 00:25:13.869 --> 00:25:15.690 announced they would cease taking new orders 00:25:15.690 --> 00:25:19.109 on November 9th at 1100 a .m. Pacific Standard 00:25:19.109 --> 00:25:21.069 Time. I'm just imagining being a customer. You 00:25:21.069 --> 00:25:23.089 go to the website at 10 .59 a .m. You can buy 00:25:23.089 --> 00:25:25.150 a bag of dog food. You refresh the page at 11 00:25:25.150 --> 00:25:28.069 .01 and it's just gone. It was a hard stop. A 00:25:28.069 --> 00:25:31.079 digital ghost town overnight. And the human cost 00:25:31.079 --> 00:25:34.859 was immediate and brutal. They laid off 255 of 00:25:34.859 --> 00:25:37.259 their 320 employees that day. Almost everyone. 00:25:37.400 --> 00:25:40.539 Just gone in an instant. Almost everyone. And 00:25:40.539 --> 00:25:43.400 the investors who bought in at the IPO. Remember 00:25:43.400 --> 00:25:46.960 that stock price? It debuted at $11 a share. 00:25:47.359 --> 00:25:49.200 Right. On the day of the liquidation announcement, 00:25:49.500 --> 00:25:53.440 it fell to 19 cents. $11 to 19 cents. That's 00:25:53.440 --> 00:25:56.519 effectively zero. It's a total wipeout. A total, 00:25:56.619 --> 00:25:59.839 complete wipeout. If you had invested $1 ,000 00:25:59.839 --> 00:26:03.299 into Pets .com's stock in February, by November, 00:26:03.319 --> 00:26:05.960 you had enough left to maybe buy a sandwich and 00:26:05.960 --> 00:26:08.000 a cup of coffee. Now, whenever we talk about 00:26:08.000 --> 00:26:10.039 these massive corporate failures, there's always 00:26:10.039 --> 00:26:11.779 a part of the story that just makes me a little 00:26:11.779 --> 00:26:14.869 angry. The executives, the people who were actually 00:26:14.869 --> 00:26:16.910 steering the ship into the iceberg, did they 00:26:16.910 --> 00:26:21.170 go down with the ship? Well, yes and no. The 00:26:21.170 --> 00:26:23.930 CEO, Julie Wainwright, and nine other top executives 00:26:23.930 --> 00:26:27.430 did stay on to, and I quote, oversee the liquidation. 00:26:27.549 --> 00:26:29.490 Which means what? Turning off the lights and 00:26:29.490 --> 00:26:31.559 selling the furniture? Pretty much. selling off 00:26:31.559 --> 00:26:33.500 the assets, winding down the company legally. 00:26:33.660 --> 00:26:36.559 Did they do it for free as a gesture of goodwill 00:26:36.559 --> 00:26:38.859 to the employees they just fired? They did not. 00:26:39.380 --> 00:26:43.380 Wainwright received $235 ,000 in severance pay. 00:26:43.799 --> 00:26:47.359 But on top of that, the board approved a $225 00:26:47.359 --> 00:26:50.299 ,000 retention payment. A retention payment? 00:26:50.599 --> 00:26:54.059 To retain her for what? The company is dead. 00:26:54.119 --> 00:26:56.240 There's nothing to retain her for? The justification 00:26:56.240 --> 00:26:58.539 was that they needed to pay her to retain her 00:26:58.539 --> 00:27:00.480 services to manage the shutting down process. 00:27:01.190 --> 00:27:04.269 So while 255 people were sent home with their 00:27:04.269 --> 00:27:06.970 personal belongings and cardboard boxes, the 00:27:06.970 --> 00:27:09.789 CEO walked away with nearly half a million dollars 00:27:09.789 --> 00:27:12.569 for overseeing the spectacular failure she had 00:27:12.569 --> 00:27:15.450 presided over. That just, it leaves a very bitter 00:27:15.450 --> 00:27:18.170 taste. It does. It's legally standard in many 00:27:18.170 --> 00:27:20.470 cases, but ethically, it's tough to swallow. 00:27:20.670 --> 00:27:22.910 The stockholders had a final meeting in January 00:27:22.910 --> 00:27:25.950 2001 to formalize the end. They changed the company's 00:27:25.950 --> 00:27:28.430 name to iPad Holdings, sold off the last of the 00:27:28.430 --> 00:27:31.170 assets, and that was it. Pets .com was officially 00:27:31.170 --> 00:27:34.230 dust. But the pieces of the company, the valuable 00:27:34.230 --> 00:27:36.549 bits, they didn't just vanish into thin air. 00:27:36.650 --> 00:27:39.349 They went somewhere. Let's talk about the scavengers. 00:27:39.369 --> 00:27:41.369 Who got the good stuff from the wreckage? Well, 00:27:41.390 --> 00:27:43.809 the single most valuable asset they owned, by 00:27:43.809 --> 00:27:48.150 far, was the domain name. Pets .com. And who 00:27:48.150 --> 00:27:51.309 ended up with that? PetSmart. Of course. The 00:27:51.309 --> 00:27:53.430 very company they tried to disrupt, the company 00:27:53.430 --> 00:27:55.730 that made that insulting offer, ended up owning 00:27:55.730 --> 00:27:57.769 their name. And if you go to your browser right 00:27:57.769 --> 00:28:01.740 now, today, in 2026, and you type in pets .com, 00:28:01.839 --> 00:28:04.559 go ahead, try it. It just redirects you straight 00:28:04.559 --> 00:28:07.039 to PetSmart's website. The old school brick and 00:28:07.039 --> 00:28:09.880 mortar giant won. They were patient. They waited 00:28:09.880 --> 00:28:12.980 out the storm. They let pets .com burn through 00:28:12.980 --> 00:28:15.559 hundreds of millions of dollars educating the 00:28:15.559 --> 00:28:17.839 market about online shopping. And then they swooped 00:28:17.839 --> 00:28:19.980 in and bought the front door for pennies on the 00:28:19.980 --> 00:28:23.059 dollar. That is a masterclass in strategy. What 00:28:23.059 --> 00:28:25.180 about the puppet? Did someone buy the rights 00:28:25.180 --> 00:28:28.140 to the sock? The puppet had a very strange afterlife. 00:28:28.539 --> 00:28:31.880 In 2002, a joint venture literally called Sock 00:28:31.880 --> 00:28:34.599 Puppet LLC, I'm not making that up, bought the 00:28:34.599 --> 00:28:38.700 rights to the mascot for $125 ,000. $125 ,000 00:28:38.700 --> 00:28:41.240 for a disgraced mascot. What on earth did they 00:28:41.240 --> 00:28:43.200 do with it? It was licensed to a company called 00:28:43.200 --> 00:28:46.279 Bar None, Inc. They were a finance firm that 00:28:46.279 --> 00:28:48.779 specialized in car loans for people with bad 00:28:48.779 --> 00:28:51.640 credit. Wait, a subprime auto loan company used 00:28:51.640 --> 00:28:54.400 the Pets .com puppet as their mascot? They did. 00:28:55.049 --> 00:28:58.490 And get this, the new slogan spoken by the puppet 00:28:58.490 --> 00:29:01.910 in the commercials was, everyone deserves a second 00:29:01.910 --> 00:29:05.529 chance. Oh, wow. That is incredibly, almost poetically 00:29:05.529 --> 00:29:09.690 meta. I'm a failed .com mascot. You have a terrible 00:29:09.690 --> 00:29:12.049 credit score. Let's work together. It was actually 00:29:12.049 --> 00:29:13.930 pretty clever advertising. It ran for about nine 00:29:13.930 --> 00:29:16.490 commercials in 2002, but then the puppet kind 00:29:16.490 --> 00:29:19.000 of faded back into obscurity. You know. For all 00:29:19.000 --> 00:29:22.420 the talk of greed and hubris and stupidity, I 00:29:22.420 --> 00:29:24.400 did read one thing in our source notes that made 00:29:24.400 --> 00:29:26.640 me smile. A little moment of redemption right 00:29:26.640 --> 00:29:29.160 at the very end. Yes, the dog food. Tell us about 00:29:29.160 --> 00:29:31.660 the dog food. So when they shut down in November 00:29:31.660 --> 00:29:34.839 2000, they had these massive warehouses full 00:29:34.839 --> 00:29:37.440 of inventory. Tons and tons of kibble. They couldn't 00:29:37.440 --> 00:29:39.160 sell it. The easiest thing would have been to 00:29:39.160 --> 00:29:41.259 just dump it all in a landfill. But they didn't. 00:29:41.279 --> 00:29:43.480 They didn't. They worked with their charity arm, 00:29:43.559 --> 00:29:45.940 which was called Pets .Commitment, and they arranged 00:29:45.940 --> 00:29:48.400 for a massive donation. Where did it all go? 00:29:48.619 --> 00:29:51.339 They sent more than 21 tons of high -quality 00:29:51.339 --> 00:29:54.299 dog food to the mushers in Alaska's interior. 00:29:54.599 --> 00:29:57.380 To the sled dog teams? Exactly. To the working 00:29:57.380 --> 00:30:00.200 dogs that run the Iditarod and other races. It 00:30:00.200 --> 00:30:02.519 was a huge logistical challenge to get it all 00:30:02.519 --> 00:30:05.079 up there, but they did it. So the final act of 00:30:05.079 --> 00:30:08.099 Pets .com wasn't a frivolous Super Bowl ad. It 00:30:08.099 --> 00:30:10.480 was feeding thousands of hungry dogs in the Arctic. 00:30:10.859 --> 00:30:13.019 I really like that. It doesn't forgive the $300 00:30:13.019 --> 00:30:16.380 million loss, but it is a really nice final footnote 00:30:16.380 --> 00:30:19.079 to the story. It is a positive final act. So 00:30:19.079 --> 00:30:20.640 let's zoom out a little. We've told the story 00:30:20.640 --> 00:30:23.279 from beginning to end. But why does it stick 00:30:23.279 --> 00:30:25.220 with us? Why are we still talking about this 00:30:25.220 --> 00:30:27.960 specific failure decades later? You mentioned 00:30:27.960 --> 00:30:31.059 that fantastic object idea earlier. I think Pets 00:30:31.059 --> 00:30:33.720 .com persists in our collective memory because 00:30:33.720 --> 00:30:36.910 it's the perfect, most concise symbol. of the 00:30:36.910 --> 00:30:39.769 irrational exuberance, as Alan Greenspan called 00:30:39.769 --> 00:30:42.190 it, of that time. It shows how quickly the culture 00:30:42.190 --> 00:30:43.990 can build something up and then tear it down. 00:30:44.150 --> 00:30:46.369 One minute, you're the hero of the new economy. 00:30:46.549 --> 00:30:48.950 The next, you're the villain. There's that commercial 00:30:48.950 --> 00:30:51.170 that aired right after they crashed, the parody 00:30:51.170 --> 00:30:53.869 ad. Oh, the E -Trade ad. It was savage. Yes. 00:30:54.150 --> 00:30:56.450 Tell us about that. So this is during the 2001 00:30:56.450 --> 00:31:00.309 Super Bowl. Just one year after Pets .com had 00:31:00.309 --> 00:31:03.210 been the star of the show, the online brokerage 00:31:03.210 --> 00:31:06.970 firm E -Trade aired this spot that was a parody 00:31:06.970 --> 00:31:09.150 of that famous crying Indian anti -pollution 00:31:09.150 --> 00:31:11.289 commercial from the 1970s. I remember that ad. 00:31:11.579 --> 00:31:14.160 In the E -Trade version, it showed a chimpanzee 00:31:14.160 --> 00:31:16.640 on a horse riding through a ruined, desolate 00:31:16.640 --> 00:31:20.119 landscape. A post -apocalyptic dot -com wasteland. 00:31:20.400 --> 00:31:23.279 Exactly. You see broken computers, empty office 00:31:23.279 --> 00:31:26.359 buildings with police signs, and the chimp rides 00:31:26.359 --> 00:31:29.180 past a demolished company called eSocks .com. 00:31:29.359 --> 00:31:32.339 And then a dirty, discarded, rain -soaked sock 00:31:32.339 --> 00:31:35.039 puppet lands at his feet, and the chimpanzee 00:31:35.039 --> 00:31:37.630 sheds a single tear. That is just brutal. It's 00:31:37.630 --> 00:31:39.470 kicking a man when he's already down. It was 00:31:39.470 --> 00:31:41.769 vicious. But it perfectly captured the public 00:31:41.769 --> 00:31:44.349 mood. America felt scammed. They felt like they 00:31:44.349 --> 00:31:46.089 had been sold a bill of goods by all these dot 00:31:46.089 --> 00:31:48.410 -com companies. And the sock puppet had become 00:31:48.410 --> 00:31:51.410 the face of that scam. CNET later named it one 00:31:51.410 --> 00:31:53.710 of the greatest dot -com disasters of all time. 00:31:53.869 --> 00:31:56.990 But, and here is the big twist. This is the part 00:31:56.990 --> 00:31:58.490 of the story that I think is most relevant to 00:31:58.490 --> 00:32:02.650 us today. The fundamental idea. It wasn't actually 00:32:02.650 --> 00:32:05.720 wrong. No. The core idea was sound. It was just 00:32:05.720 --> 00:32:08.039 20 years too early. Because I order my dog's 00:32:08.039 --> 00:32:11.009 food online. All the time, everyone I know with 00:32:11.009 --> 00:32:13.589 a pet orders their supplies online. The company, 00:32:13.690 --> 00:32:16.630 Chewy .com, is a massive, publicly traded, successful 00:32:16.630 --> 00:32:19.289 company. Chewy is basically the ghost of Pets 00:32:19.289 --> 00:32:21.950 .com, but a version that actually worked. So 00:32:21.950 --> 00:32:24.849 what's the difference? Why is Chewy a multi -billion 00:32:24.849 --> 00:32:27.650 dollar success story and Pets .com is a late 00:32:27.650 --> 00:32:30.109 night talk show joke, if they are, for all intents 00:32:30.109 --> 00:32:32.630 and purposes, doing the exact same thing? I wouldn't 00:32:32.630 --> 00:32:34.970 say they are doing the exact same thing. The 00:32:34.970 --> 00:32:37.740 what is the same selling pet food online. But 00:32:37.740 --> 00:32:40.619 the how and, crucially, the when are completely 00:32:40.619 --> 00:32:42.700 different. Okay, so break down the how for me. 00:32:42.759 --> 00:32:44.660 What did Chewy do differently? First, logistics 00:32:44.660 --> 00:32:48.259 and technology. In 1999, warehousing was largely 00:32:48.259 --> 00:32:51.039 a manual process. Tracking shipments was primitive. 00:32:51.339 --> 00:32:54.079 Today, Chewy uses these highly automated fulfillment 00:32:54.079 --> 00:32:56.759 centers with robots that dramatically cut the 00:32:56.759 --> 00:32:59.200 cost per order. So robots are packing the kibble 00:32:59.200 --> 00:33:02.319 now, which is way cheaper than human hands. Right. 00:33:02.400 --> 00:33:05.200 Second, and this is a big one, is route density. 00:33:05.970 --> 00:33:09.190 In 1999, the FedEx truck was stopping at maybe 00:33:09.190 --> 00:33:12.150 one house in your entire neighborhood. Today, 00:33:12.430 --> 00:33:15.750 that same Amazon or FedEx truck is stopping at 00:33:15.750 --> 00:33:19.009 20 houses on your block. The last mile cost of 00:33:19.009 --> 00:33:21.269 delivery is shared across way more packages. 00:33:21.529 --> 00:33:24.049 That makes a ton of sense. The network is denser, 00:33:24.049 --> 00:33:26.250 so it's cheaper for them to drop off my 40 -pound 00:33:26.250 --> 00:33:29.329 bag of sand. Exactly. And finally, there's just 00:33:29.329 --> 00:33:33.180 cultural adoption. In 1999, buying things online 00:33:33.180 --> 00:33:35.380 was still a little bit scary for a lot of people. 00:33:35.500 --> 00:33:38.960 It was a novelty. Today, it's the default. Chewy 00:33:38.960 --> 00:33:41.420 didn't have to spend $11 million just to explain 00:33:41.420 --> 00:33:43.680 to people how to use a website and trust it with 00:33:43.680 --> 00:33:45.339 their credit card. The market was ready. The 00:33:45.339 --> 00:33:47.640 market was ready. The technology was ready. Ryan 00:33:47.640 --> 00:33:49.940 Cohen, the founder of Chewy, was actually asked 00:33:49.940 --> 00:33:52.680 about the Pets .com comparison when Chewy had 00:33:52.680 --> 00:33:55.400 its own IPO back in 2019. Did he embrace it? 00:33:55.460 --> 00:33:57.440 Did he say, we stand on the shoulders of giants? 00:33:57.720 --> 00:34:00.180 He hated it. He absolutely rejected it. He called 00:34:00.180 --> 00:34:02.480 the comparison absolute crazy and said there 00:34:02.480 --> 00:34:04.339 was nothing in common between the two companies. 00:34:04.559 --> 00:34:06.900 Which feels a little defensive, doesn't it? It 00:34:06.900 --> 00:34:09.079 is a bit defensive, but he was right about the 00:34:09.079 --> 00:34:12.360 execution. He focused on obsessive customer service. 00:34:12.780 --> 00:34:14.760 and getting the unit economics right from day 00:34:14.760 --> 00:34:17.760 one. He didn't buy a Super Bowl ad until he knew 00:34:17.760 --> 00:34:19.920 he could afford it. He built the business first, 00:34:20.039 --> 00:34:23.360 and then he built the brand. Pets .com did the 00:34:23.360 --> 00:34:26.099 exact opposite. That's the takeaway right there, 00:34:26.139 --> 00:34:28.860 isn't it? Brand versus business. It is. A brand 00:34:28.860 --> 00:34:32.000 is what people think and feel about you. A business 00:34:32.000 --> 00:34:35.099 is how you make money. Pets .com had a world 00:34:35.099 --> 00:34:37.619 -class, globally recognized brand. They just 00:34:37.619 --> 00:34:39.840 had zero business attached to it. It really makes 00:34:39.840 --> 00:34:42.059 you look at the current landscape a lot differently. 00:34:42.780 --> 00:34:45.039 Because we are right now living through another 00:34:45.039 --> 00:34:47.260 massive hype cycle, aren't we? We always are. 00:34:47.320 --> 00:34:49.159 There's always a new bubble, whether it was crypto 00:34:49.159 --> 00:34:52.579 a few years ago or AI today or the metaverse. 00:34:52.820 --> 00:34:55.579 It makes me wonder, are there sock pippets out 00:34:55.579 --> 00:34:58.179 there right now today? I can guarantee you that 00:34:58.179 --> 00:35:00.519 there are. Companies that everyone knows that 00:35:00.519 --> 00:35:02.659 are on the cover of every magazine that have 00:35:02.659 --> 00:35:05.239 that marriage made in heaven with all the big 00:35:05.239 --> 00:35:08.699 investors. But if you actually lifted the hood 00:35:08.699 --> 00:35:11.679 and looked at their unit economics. you'd find 00:35:11.679 --> 00:35:13.900 out they're just selling dollar bills for 70 00:35:13.900 --> 00:35:16.199 cents. That is the provocative question I would 00:35:16.199 --> 00:35:18.840 leave you, the listener, with. Look at the apps 00:35:18.840 --> 00:35:21.619 on your phone. Look at the services you use every 00:35:21.619 --> 00:35:24.460 day, especially the ones that seem weirdly cheap 00:35:24.460 --> 00:35:27.500 or free. Which ones are actually sustainable, 00:35:27.679 --> 00:35:30.139 profitable businesses? And which ones are just 00:35:30.139 --> 00:35:32.820 burning through a mountain of venture capital 00:35:32.820 --> 00:35:35.039 to keep the lights on until they either get bought 00:35:35.360 --> 00:35:37.340 Or they collapse. Are you buying a product or 00:35:37.340 --> 00:35:39.039 are you just buying into a fantastic object? 00:35:39.440 --> 00:35:41.820 Exactly. And just because it has a really cool 00:35:41.820 --> 00:35:44.599 logo or a cute mascot doesn't mean it's going 00:35:44.599 --> 00:35:47.300 to survive the winter. On that slightly ominous 00:35:47.300 --> 00:35:49.119 note, I think we're going to wrap up. I'm now 00:35:49.119 --> 00:35:51.239 going to go look at my entire investment portfolio 00:35:51.239 --> 00:35:54.679 and panic slightly. It's always a healthy exercise. 00:35:55.099 --> 00:35:57.300 If you want to see the terrifying math for yourself 00:35:57.300 --> 00:36:00.880 or pictures of that giant faloon or read the 00:36:00.880 --> 00:36:03.420 details of the triumph, the insult comic dog 00:36:03.420 --> 00:36:05.760 lawsuit. Please check the show notes on our website. 00:36:05.980 --> 00:36:07.400 We've got all the sources linked there for you 00:36:07.400 --> 00:36:09.480 to go even deeper. Thanks for taking this deep 00:36:09.480 --> 00:36:10.679 dive with us. Thank you.