Want to hear some positive predictions about the Internet economy?
Bullish Net predictions rank about as high on the credibility scale as the sentence: "Wanna buy a bridge?" Over the past year, dot-com has become shorthand for the overhyped and the underperformer, leaving burned investors Net-chary. But yesterday's cheery preannouncement by
Amazon.com(AMZN Quote) sparked a one-day boost in Net stocks.
While most investors don't expect an Internet Renaissance any time in this millennium, Peter Clark expects to see one later this year. In today's Daily Interview, the partner at British consultancy
VBM Consulting and
author of
Net Value boldly predicts that the Internet sectors are poised for recovery. One reason, he says: a merger wave in which the Old Economy eats up the New. And this, Clark says, will attract a second wave of venture capital to a hybrid Internet model of bricks-and-clicks.
Clark is still suspicious about much of the Internet, but he says the time may be nigh to revisit the sector. Do you believe in miracles? Read on.
Is the Internet still a viable medium? More to the point, can people make money off the Web? Clark: I'm very positive about the Internet. The Internet is exactly where it is supposed to be at this point. Every major, revolutionary economic development has crashed and burned after six or seven years -- and then rebounded.
Despite the fact that [business-to-business e-commerce companies] have been lambasted, there is an intrinsic value in the online procurement of goods and services, such as inventory, travel and entertainment, as well as using the Internet as a marketing channel. People are making or saving millions and billions of dollars in value in B2B. When you can find anything that increases shareholder value by 3% or 5%, it's a jewel. And a company that applies the right kinds of Internet tools can sometimes increase their value by more than 20%.
In the [business-to-consumer] area, it's still there, but it's been spoiled. The only areas making money right now are those where there is not an excessive amount of competition because the problem in B2C from the beginning has been the excessive ease of entry. I come out with a terrific idea, and because there are essentially no barriers to entry, 20 other people can copy my idea and bankrupt themselves and bankrupt me along with it. Does this mean the underlying idea didn't have value? No. In a number of instances there was a value. But there were too many people competing.
Now, however, there are some ad hoc barriers coming up in B2C. It's obviously more difficult to get an IPO launched. Venture capital is drying up. And these companies are getting washed out. So, the value in B2C won't become apparent until the problem of excessive entry is addressed by this continuing shakeout that we are seeing every day.
The ones making money right now include the book division within
Amazon (AMZN Quote). A number of specialized financial services sites are making money, such as in residential real estate, insurance and bond trading, where there is not an excessive amount of competition. Both in the U.K. and in the U.S., most travel insurance is now sold online. The fact that the discount brokers were making money during the market run-up is also promising to the future.
And just because online banking has not been particularly successful the first time around with ventures like
Bank One's (ONE Quote) WingspanBank.com, that does not mean that that is not going to come around. If an online bank can come up with ironclad network security assurance and some extra functionality, then online banking can be both attractive and profitable.
Travel and entertainment ticketing is another profitable Internet application, and in many of these instances, the profitability is hidden within the organization. Both
Southwest Airlines(LUV Quote) in the United States and
Ryan Air, which is the leading low-cost carrier in Europe, have both essentially made extensive profits by shifting towards an all online ticket-ordering approach. That profitability is part of the parent company's profitability.
What are some of the lingering fallacies about the Internet that need to be dispelled before its public image can be restored? Clark: During what we call Net Phase I of the dot-com boom, from mid-1996 to mid-2000, people were saying, don't worry about profitability, the important thing is market share. And the argument there was that when you get sufficient market share to command the market, that's where you would see true profitability.
Not many players other than Amazon.com,
AOL Time Warner(AOL Quote) or
Yahoo!(YHOO Quote) have been able to get to the sufficient share because of the excessive entry in the B2C areas. Everybody would get this tiny sliver that was insufficient to support themselves.
We've also had to contend with the likes of Blodget-Meeker-Cohen three-headed dot-com guru [analysts
Henry Blodget and
Mary Meeker and strategist
Abby Joseph Cohen] and the uncontestable gauges of companies like
Gartner and
Jupiter -- untouchable because they are five years out.
Throughout 2000, it seemed that you have these $4 trillion and $7 trillion numbers, and they were always four and five years off, so they sort of defied challenge. Clearly, things have been coming apart for the dot-coms and there has been no updating of these numbers. And how in the world can these demand numbers stay exactly the same over the next 18 months when you have both the B2Bs and the B2Cs going up in flames?
Gartner recently lowered its B2B Internet revenue projections for 2004 from $7.3 trillion to just under $6 trillion. Can investors believe that? Clark: Whenever you throw out these astronomical trillion-dollar figures, it's a little tough to take it seriously. Even when you analyze some corporations' projections of the benefits, there have been some pretty bogus numbers. Not too many companies have been able to talk about hard, dollar-based benefits. More have been about soft benefits, like time savings or staff efficiency gains.
We aren't going to know what the true numbers are until these dot-coms begin building up the numbers the right way, with a viable business model. But we are ahead of the game right now, because in B2B and in B2C we are in the middle of formulating those viable business models.
One of the dot-com legacies is the creation of dubious metrics to evaluate a Web company. Can you recommend any kind of meaningful gauge that investors can use to determine value? Clark: A new pattern that we call 40/40 is beginning to come through where we look at services where 40% of its delivery can move to the Web. For example, term life insurance. If or when 40% of all purchases of term life insurance moves over to the Net, then you will have the opportunity for true profitability.
Then once you reach this point, the companies that achieve a 40% or greater market share of their industry or service are the ones likely to be a success. Only then will we see true critical mass on the Internet. Anything else merely reflects the strange economics that come with start-up companies. What we want to concentrate on in the Net Phase II is stable, reliable, ongoing businesses.
What is the Internet going to look like a year from now? Clark: It will be bifurcated. The top layer will consist of very large, hybrid bricks-and-clicks companies. AOL Time Warner is the grandfather of them all. I think we are going to see a move away from stand-alone B2B and B2C online entities with a number of Old Economy companies buying New Economy companies.
I think it will start in the entertainment area, combinations such as
Disney(DIS Quote) and Yahoo!, which people have been talking about for some time. I wouldn't be surprised if Yahoo! combines with somebody else before the end of this year. We think the availability of IPO financing was one of the culprits in the dot-com hyper boom, and a new wave of secondary financing will also be key to the recovery.
The surviving 12, or 24 or 36 top-layer of dot-com companies will be these hybrid Old Economy-New Economy combinations and they will offer the appeal of some of the earlier dot-com pizzazz, but the stability of revenue from established businesses.
Investment banks will be able to develop syndicates behind such reliable models and continue to finance such ventures. Not just IPOs, but the next wave, and the next wave, and the next wave of financing. And when you get right down to it, it's that kind of lifeblood that's necessary for the dot-coms to move from their current infancy level to a more mature stage.
At the bottom layer, you will still have a situation where junior exchanges around the world will be willing to finance dot-coms. They will stimulate an IPO rebound, but it's going to be a much tougher path and it's unlikely that anyone is going to become frightfully rich, as they did in 1999 and early 2000.
Can you venture to say which Internet outfits will be left standing? Clark: It's hard to say. When you say standing, you have to put in the caveat that it might not be in the same form that they are in right now. If you follow the logic that stable bricks-and-clicks combinations are necessary to attract a second wave of financing, then that would indicate that almost no pure-play Internet sites will be left standing. Except for the very, very large ones that were in early.
I really believe we will see a rush to bricks-and-clicks combinations by the end of this year, initiated by the bricks because they now have the higher multiples. I also think a lot of the online procurement companies in the B2B space will come together.
In e-infrastructure,
Cisco(CSCO Quote),
Juniper Networks(JNPR Quote) and
Nortel(NT Quote) are three that I would name. Even though e-infrastructure is in the doldrums right now, because their customers are broke, that is going to solve itself.
The telecom industry is going to go through a catharsis over the next couple of years, and more companies like
Qwest(Q Quote) are going to come out of it, and they are going to need many more switches and core routers from Juniper and Cisco. The decreasing demand right now is an aberration and I wouldn't bet against it long term.
Regardless of how negative people are now being about B2Bs,
Oracle(ORCL Quote) can pretty much do whatever it wants in that sector. You've also got
SAP(SAP Quote) and
Commerce One (CMRC Quote). These companies are trading at unbelievable prices, and I think we may see a rebound sometime between the fourth quarter of this year and the first quarter of the next.
What about Internet advertising? There are many people who feel that it can never be effective. Clark: It can and must be viable at some point. Banner ads have largely been discredited, but more intrusive ads are what people are now betting on. You'll see it happen. Some people are calling it Revenge of the Nets.
