What Is a Dry Hole?

Breaking Down Dry Hole

Newer businesses often run at a net loss for the first few years (while acquiring one-time expenses such as equipment and buildings) before becoming profitable; however, these are not usually referred to as dry holes. A dry hole is typically thought never to be able to produce a profit.

What Constitutes a Dry Hole

Typically, what precedes a dry hole is an expectation of business activity or profitability from a business venture. Such expectations may be based on the success of other businesses in the same market or industry or a belief that a new type of market may be ready for launch and exploitation. Online daily deals – from Groupon, for example – drew significant attention to their niche of commerce. The initial popularity and expected growth led to a series of copycat operations that sprang up, hoping to capitalize on the public’s attention.

As with many trends, the peak popularity for daily deals subsided, and the overall activity declined. This circumstance left numerous late entrants to the market with few or no customers. The prospects for launching a new business or even continuing to grow in the market diminished while attrition forced out many players. Though Groupon and some other businesses endured, many faced dry-hole conditions where their efforts generated little to no revenue.

Traditional and legacy industries may have to deal with dry situations if their customer base diminishes to negligible levels that can no longer support a business. For instance, the adoption of digital media formats for music and video allowed for streaming and downloads of contents. This shift, along with other market factors, led to declining sales at brick-and-mortar music retailers and video rental locations. Once prominent companies in those markets such as Tower Records and Blockbuster Entertainment saw their sales erode as a result. Coupled with other factors, the dry-hole circumstances of their respective sectors contributed to their decline, as customers turned to other outlets and sources for such content.

Obsolescence of technology can also push companies into dry-hole circumstances if they are not able to adapt and produce products and services that remain in demand. Palm, for example, specialized in producing personal digital assistants, or PDAs. The introduction of smartphones that superseded the capabilities of PDAs led that sector to shrink until even once-prominent Palm could no longer sustain its operations.