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Explaining the Dot-Coms, Part 1

In the first of two articles on Internet businesses, Cramer looks at the roots of the dot-com madness.
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"What's this?" I asked my eldest as I picked up the piece of paper she'd been writing on.

"It's a list of WWWs I saw when I was watching cartoons after we came back from the beach," she said. "I figure we can go on Igor and look at them all." (The kids call my computer Igor because it is my evil assistant that comes with me everywhere, including Montauk.)

I looked at her and said simply, "Why would we want to go to them?"

She looked back, puzzled, and said, "Why would they have them if they weren't worth going to?"

Ah, and isn't that the rub?

So, sure enough, we went to a couple of these sites and she said, "You were right, daddy. They aren't worth going to." And she went back to watching cartoons.

Yep, that pretty much sums up the state of the Web right now. Everybody's got a site now -- every soda company, retail store, restaurant and health-care product. Every Tom, Dick and

And very few of them are worth going to.

For Madison Avenue, the Web has become a flat-panel 800 number, a place to snare unsuspecting children and another billboard space.

So what? Well, the stock-market implications of this vast Web commoditization are huge. There's enough clutter on the Web right now that it would take a fortune to stand out from your competitors. Nobody has enough money right now to start a new

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. Nobody.

Let's consider the evolution of the Web from four years ago until now. At that point, very few people saw the potential of what a good URL meant. It was possible to lock up important brand names, including the brand names of major companies that never thought to have a Web presence, for a song. (A reader recently told me that a couple of years ago, he locked up all of the


names of import because

Philip Morris

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never dreamed it would need them.)

You could establish yourself as a new portal with a funny name like





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. Guys like Jeff Bezos figured out that if you have some friendly software, you don't need expensive retail real estate. Instead, you could have people pay you, and you could live off the float while you sent them the books they ordered.


America Online


figured out that most people didn't know how to work their silly computers anyway, always the Achilles' heel of the process. So it used snail mail as a Trojan horse to send diskettes to everybody in America, and suddenly there was an audience big enough to advertise on.

At the same time, brokerage houses figured out a way to harness the Net to get commissions low enough so that people no longer felt ripped off by the stock process. That led to a mass love affair with the very stocks that changed the stock game.

Naturally, these new stock players, emboldened by the Net's power to transform the brokerage industry, figured that every new Net company would do the same. (Who can blame them?




Merrill Lynch


in no time, while AOL's stock got bigger than all other media companies in what seemed like the speed of light.)

Now fast-forward to this year. The venture capitalists, stunned by what the Net traders would do to dot-coms, created thousands of them. The off-line players, unwilling to be beaten by Amazon, threw big money at their sites and kept their prices low enough to knock out new competitors. They rushed to create separate Web entities that would get some of that cheap capital that only seemed open to true dot-coms. The brokerage houses, squeezed horribly on the commission side, loaded the pipeline with every conceivable URL-cum-company. As long as it had dot-com, the



buyers (that's the company most of these e-brokers clear with) insured an opening pop.

Amazingly, perhaps because of the media -- including sites like ours -- we began to judge the success of new companies by how much they opened up from the offering price.

Frankly, this method of valuation was both a comical and an astoundingly wrong way of analyzing the worth of a company. Remember, the only thing the pop measures is how far off the bankers were from the real demand. That's hardly a measure of anything other than how out of touch the old off-line underwriters were with the new trading community. The result, however, was that a lot of companies came public because they could generate a pop, regardless of whether they should. Enthusiasm as a method of investment is doomed from inception.

Even more ridiculous was what kind of company got the biggest pop. It tended to the URL that had the best ring to it. Or a URL that was popular with the trading community or


. We were voting, not investing.

Look for Part 2 later this morning


James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund was long America Online, and Yahoo!. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at