Lots of dotcoms are impatiently waiting for the stock market to view them more kindly before they go IPO. Some are waiting for Internet share prices to go up before they dare call the venture capitalists for a new round of funding. Question is, will they be able to hang on for the year or so it will take before this happens?
June 28, 2000
From November to April I watched the stock markets and saw nothing but collective madness. How could a company be valued at $300 per unique user? Maybe $30 a user, OK, but not $300. Many are still valued at $100 or $150 per user, so they've still got a long way to fall, because no Internet company is worth that.
The madness of the dotcom bubble happened because the stock market found itself suddenly immersed in a new and unfamiliar culture - the Internet culture. And like any individual in an unfamiliar country, nobody was quite sure of the rules. Was it safe to burp or pass wind? Which fruits tasted nice and which turned your skin green? How did you judge somebody by the cut of their suit when the locals never wore one? Most important of all, which of the old rules applied and which had to be thrown out to make money?
Since the Internet was clearly going to be the major driver and business mechanism of the world economy (and that bit's still true) everything connected with it seemed worth investing in. Forget P&L, forget leverage, just give us a slice of the action.
Well, P&L and leverage are certainly less valuable measures than they once were, but with or without them, it's become clear that many dotcoms were wearing the emperor's new clothes. Nobody would dare say they were almost valueless until somebody else said it first. But now it's been said, it's blatantly obvious.
We've had the first round of sorting the wheat from the chaff. More rounds will come later.
So, who's still glued to the sieve and who's gone flying in the wind? Computer, software, telecoms and Internet development companies have done fine. Business to business Internet ecommerce companies have done OK too (their sort-out comes later). It's mainly business to consumer ecommerce and consumer Internet service companies who've been found lacking.
Somebody has finally twigged that the Internet might be great for consumers but it's not so good for businesses trying to get money out of them.
There are two sides to this. One is purely a business side. Every successful business likes to avoid true competition. If you're a coffee shop, you want to be the only coffee shop in town. If you're an airline you want to make sure your country restricts flights in and out by competing airlines. If you're a software business, you want to make sure your operating system and your applications go hand in glove so no other software company gets their chance to insert a digit (your government might bring an anti-trust case, but hey, the appeal process can last for years).
As soon as competition becomes too real and fierce, you can't make much money. A good example is the car manufacturing industry in Europe. Right now it's hugely competitive and there's not much profit there for anybody.
Well, the Internet is free competition gone mad. Your competitor is just a couple of clicks away. Branding works to some extent, and shoppers are much lazier than anybody imagined when it comes to comparison shopping, but it's hard to find those essential restrictive practices so there's no place for fat margins. That's why b2c ecommerce companies can't put up their prices to the level where they'd make a profit.
There are a few exceptions. Amazon's book business, viewed on its own without the company's other ventures, would turn a profit, though a rather small one considering it's now the world's biggest bookseller. Stock-trading, gambling (are they different?) and travel do fine, but that's because they can undercut real-world transactions yet keep margins high. Once they turn big time and have to compete with each other online, they'll suffer the same problem. Pornography is a clear exception, and (bizarrely) leads the way in profitability as it generally has done in everything else from page layout to payment processing since the Web became popular. I'm not sure what lesson can be learned there, but I bet right now some stock market analysts are studying pornography in great detail. Software is another exception, because companies generally have unique products and make sure nobody but they themselves can offer it as a download.
The second factor is consumer resistance. People don't want to pay for anything on the Net, and even if they do, they're worried about the risks. I can't blame them. Right now I think the risks are going up rather than down. The last figure I saw showed that 14% of all credit card fraud happened on the Internet. That's ridiculously high considering the small number of transactions. I also see no evidence that corporate security specialists are winning the battle against hackers. Once DSL and cable kick in fully, the hacking problem will increase dramatically because of all those extra connections with static IP addresses ready to be hijacked for exploits. The Windows operating system has been shown up as horribly insecure on the Internet, and to cap it all (keep this quiet) we've finally got Web pages that when clicked on can destroy a computer just as effectively as a virus.
It's madness out there. This isn't a culture where people just burp and let wind, they also steal stuff and destroy each other.
Dotcom valuations haven't plummeted through an aberration, they were too high through an aberration, and now more people in the stock valuation business can see clearly that Internet business is far too competitive and in any case the punters aren't keen, expect valuations in ecommerce companies and other consumer business to go down even further. The big bubble has burst. Somebody has noticed the Emperor is nude and the stock market and venture capitalists are no longer prepared to pay for his wardrobe.
Anybody counting on them opening their purses again within a few months is in for an unpleasant surprise.
