From: Linda (firstname.lastname@example.org)
Date: Thu Nov 30 2000 - 20:54:00 PST
[A decent write-up for those playing 'Net stocks. As of yesterday,
25% of Nasdaq stocks were more than 80% below their all time high.
I suspect that this figure may be higher after today's close, the
lowest since August '99, on an incredible volume of 2.7 billion shares.
The Internet: What We've Learned
27-Nov-00 08:23 ET
[BRIEFING.COM - Robert V. Green] The first era of internet investing is
over. Many public investors have been badly burned, as they bought hot
internet stocks, and believed in the "internet revolution" hype. But
while the internet hype-hot stock momentum games are over, the internet
as a driving force in the economy, is not going away. Here are some of
the clear lessons about what the internet is, and isn't, that investors
Not A Revolution For Sales
The clearest message of all in the internet stock market of 2000 is
this: The internet works when the product and the sale is delivered
over the internet. When only the sale is over the internet, there is no
lasting competitive advantage.
For retailers, the internet is just a more efficient ordering process.
Building a brand, developing good service, and competing on price, are
extremely important in retail, but the internet, by itself, doesn't
help with these issues. Having internet ordering systems didn't make
Building a lasting retail business has always been hard. In fact, the
internet made it harder, not easier. With marketing expenses exceeding
100% of revenue at nearly every internet retailer, revenue curves
looked great for the first few quarters. But then they leveled off,
for nearly every e-retailer you can name.
Amazon.com (AMZN) was able to conceal its sequential revenue declines
(from books) by starting new lines of business, but even it showed
sequential declines eventually.
In sharp contrast, there are examples of successful internet models.
But they involve models where the product, or service, is delivered
over the internet. Those models, which include financial transactions
(like online trading), or the sale of information (like Briefing.com),
or the booking of a service (like airline reservations), all have one
thing in common: a zero cost-of-goods-sale. The incremental cost of
an additional sale is nil. Variable costs are all controllable, and
once fixed costs are recovered, everything can drop to the bottom
line, if desired.
Ironically, very few new models have been developed where the
delivery of the service is entirely electronic. eBay (EBAY) is
possibly the only public example. Literally billions of dollars
were wasted trying to develop the wrong models.
When Amazon.com falls, and it seems clear to us that its day of
reckoning is sooner rather than later, due to its impending debt load,
this lesson will finally be pronounced by the mass media. But it is
Turning Customers Into Clerks
A corollary to the above lesson is the following:
One of the best uses of the internet is having customers do work that
clerks used to do.
The best examples of this are the airplane and hotel reservation
systems, although internet retailers also made use of it.
But the internet retailers had only this one advance going for them.
And fundamentally, it is only a cost reduction of the order taking
expense. In many business, eliminating the order taking expense
wouldn't even double the operating margin.
Furthermore, the benefit of that cost reduction accrues to the largest,
existing players, not newcomers. L.L. Bean will probably earn more
money through cost savings on internet orders, than Amazon.com will
ever earn in profit.
The Advertising Model Is Incremental
Another clear message is that advertising on the internet has not
turned out to be the model that was expected.
Advertising on the internet is an incremental model, not a core model.
Much was made in the early days about the ability to track user's
preferences, through their traffic, and develop more focused, more
refined pitches to users. And who could resist a targeted banner ad?
The mere thought made marketing heads spin.
The only problem is that is hasn't been working. Profiles have been
developed, and companies like Engage Technologies (ENGA) and
Doubleclick (DCLK) employed sophisticated technologies to track your
"shopping profile." But, it hasn't generated new sales for the
advertisers, with a corresponding rapid decline in the ad rates that
advertisers are willing to pay.
Compared with ads in the TV media, which have been proven to work,
despite the inability to "target" audiences, internet ads have been
largely about building name recognition. Brand building, however,
is very different, and is largely done with "stories." So far, the
internet ad medium has proven unsuccessful in "telling a story,"
and therefore hasn't worked for building brand. Name recognition
is important, but it isn't as valuable as brand building.
This means that advertising on the internet, instead of leapfrogging
existing advertising mediums, actually occupies the lowest of all
rungs in the advertising world. Internet ads are much closer to the
"taxi-top" style advertisements than TV ads.
It's Already Big, And Has Been For A While
Another lesson learned, which few mention, is that the internet has
arrived. Put another way:
The rapid adoption phase of the internet is over.
There are more than 44 million households in the US with internet
access, out of 105 million. But PC penetration, which is still
required for "internet access" is only 55 million households.
Furthermore, the PC penetration in households hasn't risen much.
Five years ago, the penetration for PCs was 48 million.
In other words, the world left for new adoption of the internet is
around 12 million households in the US, who for some reason or other,
haven't adopted it yet. They either have plenty of access at work,
or they just don't want it.
Nearly everyone who wants internet access has it, already. It makes
AOL's customer base of 22 million accounts even more impressive.
The land rush is over. In fact, it was pretty much over in the
summer of 1999 (when Briefing first started pointed out the leveling
off of the internet, in June of 1999.) The growth of the internet
overseas is often pointed to as "the next wave," but there are still
numerous access problems in most foreign countries, which will be
slow in falling.
The Next Era Is Unclear
Just one year ago, everyone, including us at Briefing.com, expected
the next era of the internet to start appearing this year.
That next era was to be a broadband based video expansion of the
internet. We believed that development of on-demand video, delivered
over the IP protocol, would unleash a whole new set of broadband
applications. The lesson learned?
The video era of the internet is not right around the corner.
Whether the video IP future becomes one of those "always right around
the bend" type of possibilities, like electronic checks, remains to be
seen. For further thoughts on this topic, see our October 23
Stock Brief "The Broadband Future Gets Fuzzy."
Implications For Investors
You may react to these "lessons" with "Why are you telling me now?
I already lost money on internet stocks."
Long time Briefing readers will know that some of the above themes
have been repeated on these pages for many months. But the lessons
are worthwhile, even to new investors.
Internet stocks have been devastated, but it would be wrong to deduce
that the internet is not a major force for economic change.
So where can forward looking internet investors look? Here are some
examples of areas that the internet still promises to deliver
businesses of lasting value:
Financial services: further development of technology that will
automate financial processes previously done by human labor. Bill
paying, loan processing, business payrolls, retirement plans, are
Microtransactions: internet based financial transactions in small
increments (buying a bus ticket with your Palm Pilot or cell phone,
for example, instead of coins) Information transmission: IP based
distribution of valuable information.
Unfortunately, many of these areas are still being developed by
private companies. But they will be public eventually. The era of
"hot internet stocks" may be over. But the internet, as a force of
economic change, hasn't vanished, and will continue to provide
opportunities in the future. They are just going to be harder to
But they will be all the more valuable when they appear, because
of the lessons the market has learned already.
"...we need to open down, continue down, and have people throwing up."
--G.B. Smith, TSC, on Market bottoms
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