Re: only 3% of US market cap is pure-play Internets

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From: Roy T. Fielding (fielding@kiwi.ICS.UCI.EDU)
Date: Mon May 01 2000 - 19:39:54 PDT

>> But the real money is in the production and transport of goods and services,
>>not in the exchange of information about those goods and services.
>Not really.
>The Official Airline Guide is profitable
>Flying carbon-based molecules is not--net profit in the history of passenger
>aviation is approximately zero.
>Other examples abound.

The rail barons and UPS would be better examples. Moving consumers
around is a lot harder to optimize than moving their baggage.

However, I meant in relation to the Internet -- the infrastructure for
getting the stuff ordered through e-commerce (B2B,B2C,whatever) to the
buyer, whether that be in carbon atoms or bits, is where all of those
"pure play" companies are spending all of their earnings plus IPO cash.
They are getting severely beaten by the companies who can combine some
advantage in distribution or buying power, which is something the impure
folks have in abundance.

Another way to put it is: the cheapest way to ship goods is to have
them already located at the destination. Likewise, the cheapest way
to buy goods is to piggyback onto a much larger order. This may not
seem like a huge deal, but when shows your shopping
site with prices 5% lower than the competition, it matters.
The slow brick-and-mortar organizations are just beginning to understand
what that means, but they will all be on-line by the end of this year.

It is sometimes hard to see from the stock market perspective.
Many of the impure dot coms are branches of much larger companies,
where the real cost of shipping and warehousing is being absorbed.
Costco Online is one example (and the only one I know of for whom
I am not under NDA, unfortunately).

Likewise, the companies that have made the most profit off the Internet
have been those selling the network components, servers, and server
software. They are the ones who make money even when the start-up fails.
But they don't count as pure plays either, so their increased market
valuations make it even less likely for pure plays to achieve 10-15% of
the overall market.

I suppose it is theoretically possible for Microsoft to halt all of its
normal software sales and declare itself an ASP, but I don't think so.

>Of course it depends on what you mean by "exchange of information" and
>"transport of goods and services". There's money in making bank transfers, as
>the part(ies) facilitating the trasnsfer charge their mils for their work. Is
>a bank transfer an exchange of information ("Tom would like you to take 50
>cents from his account and put it into Roy's")--or is it the production of a
>service and/or the transport of goods (i.e. money, albeit intangible byte
>money, not trangible biteable money)?

Banking is transport of goods, in my opinion. Fees are paid, responsibility
is transferred, etc. As Adam mentioned, many of the post-IPO wonders
are much better bankers than they are businesses.

>>The exceptions are the firms that create new markets on the Internet itself
>A large and growing exception.

>The central point, on which we agree I suspect, is that it will become harder
>and harder to distinguished betwen e-commerce and commerce. It will create
>new services, new buisnesses; and it will change the dynamics of competing in
>old ones--both

Yep. What I find bizarre is how easy it has become for public companies
to play shell games with their assets and iterate them as IPOs. I don't
understand why most of the deals done by CMGI over the past year have
been legal, let alone profitable.

But I don't understand the stock market in general. My last grande pick
was Inacom (ICO), a company which has managed to befuddle its way down
to $1.25 per share and a market cap of $56 million even though they
recently sold one of their smaller divisions for $300 million (cash).
I suspect it has something to do with their failure (so far) to come
up with an annual report for 1999. Or maybe this is the ultimate example
of how bad the typical American stock owner is at basic math.

So, judging from my past experience, now would be a good time to
invest in pure plays, because they won't ever be profitable.


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