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This is a sample Internet Review newsletter, originally sent to subscribers on Oct. 17.

I regularly look at many different sectors of the market in my job running a fund of hedge funds, as well as for my variouswritings. Sectors I regularly follow include alternative energy, homeland security, areas in information technology other than the Internet, nanotechnology, closed-end funds, and any deep-value stock or company with an activist following.

But no sector excites me as much as the Internet.

The Internet, by itself, is an emerging market, and every day there are new sources of profit that the various public companies are trying to exploit, and new private companies are getting funded every day that will get bought tomorrow by the six companies out there currently doing a landgrab --


(GOOG) - Get Free Report








News Corp.

(NWS) - Get Free Report


Time Warner




(MSFT) - Get Free Report


Looking at the various statistics in the Internet sector is important for unearthing where the trends in profits and M&A will take us.

For instance, in an article earlier this year I outlined the demise of traditional media and pointed out that the right direction would be to look at the companies taking advantage of the 10 million (and rising) blogs out there. I identified

New York Times

(NYT) - Get Free Report

as potentially losing the battle and said that whoever bought blog aggregators like or Gawker would be the potential winners.

The underlying statistic there was that print advertising (including classifieds) and radio advertising were being quickly surpassed by pay-per-click advertising, and that "eyeballs" were going from print to the blog world. New York Times has continued to disappoint since then; meanwhile AOL has bought weblogsinc, and although considered a dying beast just a few months ago, it now has the five landgrab companies that don't own it as possible M&A suitors.

That is a prime example of why I keep track of the stats. Not only because I love the space and it's fun to learn what's going on -- it's the only way to get a sense of where the money is flowing and how to get there first. In turn, it forms a big part of how I pick stocks for the model portfolio of the Internet Review.

Stat No. 1: Keyword Prices

The average price for search terms fell again: According to Fathom Online via Media Post, the average price to buy a keyword on a search engine was $1.44 in September, down from $1.50 in August, and 26% less than the 12-month high of $1.95 in April. The categories down the most were investment, down 17% to $1.46; telecom, down 15% to $1.62; and automotive, down 2% to $1.51.

Just to review: if you want to sell an item (let's say, hypothetically, dogfood) you would go to a search engine (Google being the common choice) and purchase the key words "dog food" for, let's say, 50 cents per click. Whenever anyone searches on the words "dog food" your ad would appear to the right. A click on the ad would result in your account being deducted 50 cents until you hit your allotted ad budget.

What does it mean that prices are declining, particularly when spending on search marketing is up 40% year over year? Gregg Steward from Fathom Online comments: "We continue to see more volume being pumped into this basic commodity market of words and, as volume increases, prices tend to stabilize."

As keyword purchases become a commodity, custom-tailored search engine ad campaigns become more important as companies seek to stand out and optimize their spending online. Although these stocks are not making the recommended list at this point, I am keeping an eye on

CGI Holding





, two companies that specialize in creating search engine marketing campaigns for customers. Of the two companies, Interchange has the better balance sheet, but I'm nervous about its business prospects, particularly the focus on its new division.

CGI Holding is a good business (both for search engine marketing and for its recent foray into online dating) and has acquired some very good businesses but there are two concerns:

First, I'd like to see a solid year of integration between all the businesses CGI's acquired in the past nine months.

Second, CGI has $23 million worth of overhang (selling shareholders) who were unrestricted recently. These selling shareholders include investors in its December 2004 PIPE transaction and shareholders in the companies they've acquired.

I'll revisit CGI in a month or two when some of the dust clears on the recent registration statements and we get one more earnings report.

As long as the prices on keywords don't freefall

vis a vis

the volume, this decline in keyword pricing should have little or no effect on the search engines such as Google, Yahoo!, Time Warner, Microsoft and InteractiveCorp, among others. Nevertheless, this is a statistic I'll keep readers updated on, along with any relevant conclusions.

Stat No. 2: The Number of Web sites

I mentioned this in my article on Mary Meeker last Thursday, but it's important enough to mention again. The Netcraft site,, says that its most recent survey of Web sites showed the number of Web sites (measured by the number of Web servers on the Internet) reached 74,409,971, an increase of 2.68 million from the previous survey of Web sites.

"The large gain makes 2005 the strongest year ever for Internet growth, as the Web has added 17.5 million sites, easily surpassing the previous annual mark of 16 million during the height of the dot-com boom in 2000," was Netcraft's comment.

With the rise in broadband use, the Internet has more than reached its potential in terms of usability, earnings (see Google's last five years) and relevance to commerce (3% of all retail is now done online, significantly more if you include the research being done online).

The key now is to find the public companies that are quickly taking advantage of the latest boom in Internet use. I'll work on this and share them over time.

Stat No. 3: Rise in Online Mobile Workers

iGillottResearch put out a report last April stating that the U.S. mobile workforce numbered 56 million, and it will rise to 61 million by 2009.

From the

Austin Business Journal

in April 2005: "The report says the growth in mobile workers will be driven by more job functions becoming mobile, thanks partly to the installation of more high-speed wireless networks; more workers in already mobile-friendly sectors, such as the legal profession, becoming mobile; and mobile-friendly industries adding employees."

In that vein, I'm adding


(IPAS) - Get Free Report

to the model portfolio as a buy today at $5.50.

Right now, with the Christmas season looming, most investors are (quite rightly) focused on retail, and in particular the further effect the Internet is going to have on retail sales given high oil prices, which make it more difficult to conduct all of your shopping in your car.

However, the key to the ongoing success and analysis of the Internet and its benefits on society is the enormous increase in employee productivity that the Internet has wrought. iPass is a cornerstone of this story: It helps over 2,400 corporate customers enable their mobile employees to connect securely and seamlessly into corporate databases through the Internet.

It customers are sticky because once you sign up to get your workers mobile through iPass, it's very difficult to switch. But that is not the only fundamental reason to like this stock here.

iPass, which is already profitable, has $169 million in cash and cash equivalents and no debt on the balance sheet. In other words, it's likely this company is in business for many years to come.

The company's $350 million market cap and $169 million in net cash put its enterprise value at $180 million. With cash flow generated from operations clocking in at $36 million in the past 12 months, that means that even in a worst-case scenario where those cash flows start to decline, the company remains a buyout candidate.

Shamrock Activist Value Fund bought shares starting at $6.29 last May (the fund filed an


filing May 23, 2005 stating it had accumulated a 7.17% stake) and Shamrock kept on buying all the way down to $5.29. In August the firm filed again, showing an 8.68% stake in the company.

Broadband revenue, which offers higher margin and growth, is starting to kick in, although it's still a small percentage of overall revenue.

So why are the shares so low?

The company's core business is helping workers dial up to its corporate networks through narrowband wireline as opposed to wireless or broadband, and the narrowband business is in decline. Revenue in the quarter ended June 30, 2005, went from $35 million to $33 million year-over-year, but overall revenue was boosted by a $1.6 million increase in broadband revenue.

To combat this decline, the company is actively switching customers to broadband and is focusing on its software connectivity services.

Finally, Merriman Curhan Ford recently rated iPass a Buy with the following comments:

"Software sales. For FY06, we are estimating that iPass will generate $25M in mobile-device security software revenue. Symantec recently paid as much as 7x revenue for Sygate, one of iPass' partners. A 7x multiple would equate to a $175M price tag for iPass' software business alone versus the current EV of only $162M. Customers and partnerships. With 2,400 enterprise customers -- including 270 of the Global 2000 -- and aplatform so well suited to integrations, we can't be too far away from some big customer wins and major software-related partnerships, in our view. Any such news could quickly move iPass shares away from today's deep-value position. Unlocking the valuation. The activist fund, Shamrock, has not had a visible impact on iPass yet. This is uncharacteristic of them, which might suggest that iPass is moving in a direction that will soon begin to unleash value."

James Altucher, writer of Internet Review, is a managing partner at Formula Capital, an alternative asset management firm, and a contributor to's RealMoney. is a publisher and is registered as an investment advisor with the U.S. Securities and Exchange Commission. Mr. Altucher is restricted from transacting for his own benefit in securities discussed in Internet Review. Formula Capital and its affiliates may, from time to time, have long or short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in Internet Review and may take positions inconsistent with the views expressed. Internet Review contains Mr. Altucher's own opinions, and none of the information contained therein constitutes a recommendation by Mr. Altucher, Formula Capital, or that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. To the extent any of the information contained herein may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Past results are not necessarily indicative of future performance.

Investing in the stocks chosen for Internet Review model portfolio is risky and speculative. The companies may have limited operating histories and little available public information, and the stocks they issue may be volatile and illiquid. Trading in such securities can result in immediate and substantial losses of the capital invested. You should use only risk capital, and not capital required for other purposes, such as retirement savings, student loans, mortgages or education. Internet Review portfolio is a model portfolio of stocks chosen by Mr. Altucher in accordance with his stated investment strategy. Your actual results may differ from results reported for the model portfolio for many reasons, including, without limitation: (i) performance results for the model portfolio do not reflect actual trading commissions that you may incur; (ii) performance results for the model portfolio do not account for the impact, if any, of certain market factors, such as lack of liquidity, that may affect your results; (iii) the stocks chosen for the model portfolio may be volatile, and although the "purchase" or "sale" of a security in the model portfolio will not be effected in the model portfolio until confirmation that the email alert has been sent to all subscribers, delivery delays and other factors may cause the price you obtain to differ substantially from the price at the time the alert was sent; and (iv) the prices of stocks in the model portfolio at the point in time you begin subscribing to Internet Review may be higher than such prices at the time such stocks were chosen for inclusion in the model portfolio.