TSC Net Stock Summit Transcript: Part 3

TheStreet.com held its Net Stock Summit on Friday in its lower Manhattan offices. This is the third installment of the edited transcript of the Summit, which TSC will be publishing throughout the week. (Click here for Part 1 and here for Part 2.) This installment looks at the impact of MP3 on the record companies. An archived audio version of the Summit is available here.

Dave Kansas: We're going to go into question three. This may not be as rich as the portal discussion, but this is ... technology like MP3 will wipe out record companies. A lot of talk about this new medium erasing old industries. We talked about it here, about dead-tree publications, and things like that.

But in terms of MP3 wiping out record companies, 74% of the TSC readers disagreed with that assertion, and 26% agreed. Does anybody have any thoughts about how MP3 will affect the record industry, or more generally, where the Internet poses a threat to other established, older industries? Publishing, or anything else in the new media space? And do you use that as an investment concept when you're looking for different companies? Brian, do you have any thoughts on that?

Brian Salerno: Sure. I mean, this is not an original thought. I believe Jim mentioned it, in fact, at the Goldman Sachs Tech Conference last week, that a lot of old media companies are in danger right now. And Jim was joking, "Why do we read things on paper? Why do we need that?"

You know, there'll be ways in the future to distribute it differently. I don't know. If you look at newspapers and you look at the cost that goes into the business, that's one side you can look at. You can also look at where they get their money. I believe a lot of newspapers get most of their money from classified ads. And that's something that you can do much better on the Web. You don't have regional boundaries. You don't have geographic hurdles to overcome.

If you have a destination which is seen worldwide by millions of viewers, you can hit everywhere from a guy in Paris trying to advertise something, or post a job, or post an opportunity to a guy in South Amboy, N.J. The point is, the posting from Paris would never have made it into the Star Ledger. But on the Web, that's where I think you can look at just the cost of it but also the revenue side and say, "Yeah, there is a big risk."

Kansas: So how does that drive you to making investment choices? I mean, are there companies outside -- you mentioned monster.com earlier, I think. But when you think about that, you're looking at the old to the new and things in between. Has that led you specifically to investment choices at your fund?

Salerno: Sure.

Kansas: And can you give us an example of how that process works?

Salerno: I'm actually looking at something that -- it has nothing to do with our fund, I don't know if I should talk about it. But there's a venture opportunity personally. I'm not going to say what it is, but it's in this whole category of providing a bridge. That's what media businesses are. They're matching somebody who's providing something with millions of people who need something. Or millions of people need something and somebody can provide something.

If you can bring those together -- I believe Bill Gurley, who's a great Internet analyst and now is a venture capitalist, talked about the concept of vortex companies who match millions on this side of things with millions on this side of things. And they provide tremendous value. And whether that's gained with a service fee or advertising, or an e-commerce play on top of it, it really doesn't matter. But there's tremendous value in being that bridge. Monster.com is just one example.

Nick Moore: You know, we really started -- first stand-alone computing started, then stand-alone network started. One of the first things that came along with that is the idea of print on demand. Right? That's what we do with TheStreet.com or a lot of newswires, we always do that -- seems like always with financial services and newswires and so on. What MP3 is about is MP3 happens to be the current form of this compressed audio, audio on demand. You know, there's always this cute sex appeal, right, this wind blowing in the hair with a white silk scarf about video on demand. It's not in view. It's not in the next 10 years. You know, cable modem won't get you that.

But audio demand works very well today and people should absolutely be looking throughout that whole value chain, you know, right down to the little portable players, which have microprocessors in them, and that little microprocessor has an OS on it. You know, you can look at Integrated Systems (INTS) or Wind River (WIND) on that. You could look at ARM Holdings (ARMHY); it has great low-power microprocessors. We looked at eBay (EBAY), which was sort of a print on demand. I personally spend a lot of money on eBay. I mean, it's a terrific product and it's zero infrastructure, and there are a lot of ways they can grow the business. Digital cameras, same sort of value chain, you're right through to the hard drive being a bloody lot bigger on your machine. "If MP3 ends up making music free, then we're going to be stuck with bad music, until there's a business model that is developed to take advantage of free music. And there are business models that do take advantage of it." -- Andy Kessler

Andy Kessler: Well, the thing about MP3 is you can't put it back in the box. I mean, it's out, it's out there and people are starting to use it. And it's going to cut a swath through what I think is the lower end of the record business because anyone could get a guitar and and a recorder, including me -- and I can't play the guitar -- and you know, put this thing on MP3. It doesn't mean anyone is going to listen to it.

And so, if MP3 ends up making music free, then we're going to be stuck with bad music, until there's a business model that is developed to take advantage of free music. And there are business models that do take advantage of it. Radio stations do, at least on a local basis. And perhaps there's a business model that can turn what is record sales, which is a sort of one-off sale, into a media model. But until that takes place, I think it's going to muck up the record business more than it's going to benefit the record business.

Moore: It's a tragedy, too. This is the biggest opportunity they've ever had. Why do we buy a record? Because it's got one or two hits on it we want to listen to 100 times. Right?

The fact is, if they can just charge for the stupid player ... we get addicted to songs, just like little kids get addicted to watching The Jungle Book over and over again. If they can -- this is -- it's this immense opportunity. Now there's more to the record business than printing discs -- right, it's promotions, you know, producing the music, packaging, promotions, all of that. Somebody still needs to provide that value added. And the thing is that this is just the exact kind of discontinuity where traditional companies drag and somebody gets to build the behemoth from scratch. And, hopefully, they understand their peril, that there's also this huge opportunity and that they're not exploiting it and that's what's painful to see.

Kansas: Is anybody exploiting it? Is there any company?

Moore: Diamond Multimedia (DIMD) ships a little MP3 player. That's about the only for-money thing I know that's going on in all of MP3.

Kessler: Well, there's a number of Web sites, including MP3.com and there's another one whose name escapes me that has gotten funded to the tune of, you know, $10 mil to $20 mil plus. I mean, one of the success stories of Microsoft (MSFT) was that there was huge piracy on their products. I mean, people may have bought a copy of Word for work, and then put on their laptop, put on their home computer, put it on their kids', put it on their friends', etc., and it became the de facto standard, not because people spent $457 for those early copies of Word, it's because when you averaged it out over the number of pirated copies, it ends up being quite cheap. Until prices came down and -- and Borland came along and legitimized it by saying, "Look, I know you're going to steal this, but just give me 89 bucks and you'll get the thing and the manual and ..." and just make it a real business having low-cost software.

And I think perhaps the same thing can happen here -- that piracy is really what MP3 has been about so far. It's "Hey, you know, I can put it on any disc I want and store it in MP3 and send it to all my friends." And perhaps, again, there are companies that can exploit sort of the ubiquity of people listening to what they have into a business.

Greenberg: You have this guy David Cook. I don't know what the real story is with him. He's the former founder of Blockbuster and he's trying it with this one company, some very secretive way to create some sort of downloadable issue -- you know, some way that you can download the hits. But you know, you run into that record industry issue with -- the record industries don't want to give away the rights and that's another aspect of this. But there are people out there like him who are allegedly working their way through this, his company is. Yeah.

Kansas: Jim?

Jim Cramer: Yeah, I wanted to just touch on something that Brian mentioned that I'm kind of fixated on. And I think about it every minute of the day. I keep thinking that the newspaper is this archaic thing, it's kind of like the cavalry, you know, it's like -- well, it was a really good idea at the time. But I'm thinking that the newspaper itself is such a silly way to disseminate so much of the information versus the computer and versus the Web. If you could show me someone who owns 9,000 stocks and 5,000 mutual funds, I would tell you that guy is an ideal reader for every business section, because they post 9,000 stocks and 5,000 mutual funds. But most people have three or five and it's really easy to access them on the Web.

I'm a sports fan, but I'm really only a sports fan to the teams I like. I go through USA Today and I turn to page seven -- or maybe it's nine, maybe eight for the NBA box scores, maybe it's at the top, maybe it's at the bottom. All I want to see is that Sixers box score. For movies, I don't really want to know what's playing in the 20 tritown areas, I want to know what's playing in my local theater. Every one of these is a much easier search -- less time-consuming, easier search on the Web.

And then you start thinking, well, after a while, everything that's in agate type in a newspaper is outmoded. 'Cause then you start thinking, well, the only reason why a lot of the companies advertise in newspapers is to be around the agate types, your movie ads, your sports -- ads in the sports sections, the prospectus ads and mutual fund and brokerage ads next to the stock prices. If you take away why we go to the sections, then why would those advertisers stick with the newspaper? And you end up with classifieds, which is the most vulnerable of all, because eBay is a worldwide classified ad system. And classifieds are the huge center of profits.

So now you're looking at at something that's basically a news hole for international news that maybe someone wants to advertise against, but probably not. So I think what will happen is that -- and I've been using radical time frames, I think, 'cause I think the stocks are saying that to me -- is that two years from now, the newspaper will be seven pages, 'cause there's nothing in it that works better on the Web other than these sections that happen to be powerful sections to advertise against. Which is why if I were owning a newspaper or ran it, I would be shivering right now. And the same way that I'm sure that people who ran the cavalry said, "Jeez, you know, I just got a feeling maybe this isn't going to cut it." And it's going to happen much faster in the same way that on Sept. 1, 1939, cavalry was very cool and Sept. 4, 1939, cavalry was finished. And has been good for 1,000 years.

Kansas: Well, to play the devil's advocate there, Jim, on the newspaper front, believe it or not, what about news? I mean, it seems that most of the people who create news and set agendas are still at newspapers. TV couldn't put them out of business. Radio didn't put them out of business, certainly. And it still seems that if Bill Clinton is having a press conference, it's because of what people read in The New York Times. So how does the Web ever get over that hurdle -- the news hurdle?

Cramer: I think that they're -- people still ride horses, Dave. It's just not necessarily the best move to bring them into battle. I think that newspapers will always have a function. I mean, one of the things that -- look, I'm given to hyperbole and I've certainly not said otherwise.

But the notion is I'm trying to get people to realize that, yeah, there will always be -- you're always going to have papers. I mean, papers are good business. It's a monopoly business. It's a great -- anything that's a monopoly is a great business. But I'm saying that as a distribution method, if you were to start with the tabula rasa and we were all in a room and we were saying, "Well, which is the best way to get the price of where Exxon (XON) went out to people?" I don't know how many people in this room would say, "Well, I'd like to put Exxon in along with 9,000 other stocks or I would just like to give the person the price of Exxon." And I just don't think anyone at this table would design a newspaper once they saw the Web.

Henry Blodget: To follow up on that, what I think the Internet is enabling the economy to do is isolate pockets of value and the pocket of value in The New York Times is the news gathering and writing an analysis organization, not its distribution on paper through trucks. So that core competency of The New York Times, there will continue to be a need for that forever and the value inherent in that is real and I don't know what it's worth now. You go to the Web, it is allowing a different kind of content to be created, which is transactions and interactions and communications and that's what people are paying for on the Web. That's why this idea that, "Just wait till content gets to the Web, Disney TICKER TYPE="EQUITY" SYMBOL="DIS" EXCHANGE="NYSE"/> will rule" is, I don't think, correct, because I think Web content is what Yahoo! (YHOO) and what eBay do, which is pulling everything together.

Ryan Jacob: The only thing I would add, in general, I think it's just important to realize that at the end of the day, whoever provides the most convenient solution to the consumer will in the end win out. And to steal a line from Bob Pittman, he always says, you know, people don't use the microwave because the food tastes better. You know, people are creatures of habit. People are lazy. So in general -- I mean, it's a horrible thing to say, but in terms of running your business, if you're providing that most convenient solution, not only will you attract more people, but a lot of times people pay up for that. "If you're providing that most convenient solution, not only will you attract more people, but a lot of times people pay up for that." -- Ryan Jacob

Moore: There are two really important investment themes there embedded in this last bit that I think are fairly powerful. One is, look for more horizontal markets. Where we had this one newspaper that's got every kind of news, every kind of advertising, it's a community bulletin board, but that's going to be provided by eight companies. There's going to be a specialist getting the employment data, specialist getting the used articles for sale, part of classifieds. That's eBay. There are things they're good at, things that don't -- you know, jobs don't belong there, you know, well, auction, maybe. Might be fun. That's one thing, is look for all of these new horizontals for these things we sort of took for granted in different form.

The other is, what this is all really about is leisure time productivity. This is totally worth believing in, right? I mean, this is what a lot of it's about. This is why you stab a credit card. Don't you take the gas station where you just stab the card in, where they're not even bringing a human to you to deal with the cash part of the transaction? We'd rather serve ourselves 'cause the total work is less, right? In Britain, they check themselves out of the supermarket instead of waiting in line. You know, Symbol (SBL) and some other companies provide that technology. That's leisure time productivity. It's been a win-win for the vendor and for the customer ever since it began. But as long as the total work is less, and that's what all this is about. I'm willing to go to the computer and look for the news and get exactly what I want above them bringing the whole bloody package to my door. I'll pay.

Kessler: Just perhaps a final thought on media. I studied it for quite a long time. Old media doesn't die. It just stops growing. And, Jim, what do you pay for a company that doesn't grow?

Cramer: Nothing.

Kessler: And you go -- you start going through the balance sheet and go, you know, you got anything in here, you got cash, all right. Maybe I'll pay that. And eventually they all get LBO'd.

Cramer: That's right.

Kessler: I mean, billboards are still around. I mean, that's the most ancient of media and it's never going to go away. But as investors, investors need to find growth markets and the disservice that media companies have done is that they didn't recognize that there are growth markets beyond what their great profitable business is. And even if they lost money in those growth markets, they thought their investors would penalize them. Now they're sitting up and going, "Oh, maybe our investors will appreciate these growth markets." So anyway, that's ...

Greenberg: Well, you're going -- if you look at, if you go to Editor & Publisher, their growth is -- they're attempting to grow through the online parts of the .com, of all these big newspapers. And you know, you run into this dilemma you've written so much about, Jim, and that is, still how are they going to make money off of that and they're spending a ton of space, special sections of Editor & Publisher for that whole online world produced newspaper. They just haven't figured out how to make money with them, yet.

I want to point out something kind of interesting here is -- as we go through all this. That is that, you know, I'm trying to get a hold of this guy, Olan King, who runs SCI Systems, because he's apparently just so obsessed with -- worried about his business, SCI contract manufactures out making all the PCs and he's so concerned that the set-top box and the new appliance of sorts is going to come in and it's going to become a very important -- play a very important role.

People will have -- I mean, will start thinking about, you don't need to buy all these PCs. You have a set-top box in your kitchen, you have a set-top box here, you have a set-top box there and it's so easy to look up. When I go to do a long-distance phone call right now, and I don't know where somebody is, I go to the switchboard. Imagine having that right by your telephone. You just punch it in, boom, it's there. It's faster than the voice recognition you've gotta deal with when you go onto the 411 service and to get directory assistance.

And I think you can apply that to many other areas and as that broadband comes in, and as these appliances are in your home -- throughout the home, cheap, and they're all there and your home is wired for them. That's when it's really going to take hold in many ways, when it's gonna be easy. You're going to think it's not going to be something that's easy. You know, you don't -- laziness is not an issue in this case, because it will become a part of your life and I think that's moving very quickly. And I think that will move very quickly to take hold in many of these industries.

Kansas: Henry.

Blodget: I want to pick up on one thing that Andy said because I think it's critical in this particular sector in terms of just understanding evaluations or at least placing them in context. Investment capital migrates toward growth and away from risk and stagnation. And one of the things that's so important about this trend, the Internet, is that it's not only creating the fastest and most widespread economic growth I think the world economy has ever seen, no company in history that I've been able to find has grown as fast as Amazon has. And it's also creating incredible risk for status quo companies in multiple industries, and if you go back to the biotech bubble, that wasn't the case.

Everyone was thinking there's a wonderful future here and the concept for these stocks and there was the potential for a lot of growth, but there wasn't a lot of potential for a lot of risks to existing companies. And I think that's one of the things that's going on here is you have capital that's migrating out of a lot of sectors. It's chasing an incredibly few number of quality shares. And what determines price is not worth, it's supply and demand. And that's why I think these stocks have always had the premium valuations that they've had.

Tomorrow: Will online brokers kill off Wall Street's white-shoe firms?

>To order reprints of this article, click here: Reprints