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How soon until the Web is worthless?
by J.K. Riggin
Time to toss the Web? Say it ain't so!
Not unless you're talking about Web Hubble, maybe.
Things are just starting to turn the corner with Web-based advertising and commerce business models. Yahoo (YHOO – NASDAQ) is making money. Advertising is actually selling. Amazon's losses notwithstanding, the Web really is a place to do business now.
Why do these geeks have to mess it all up again?
Because the Web is jam-packed with as much useless garbage as it is with valuable, "need-to-know" content? Because for everything new that you find on the Web that you think is interesting and valuable, there are at least ten more things that you might find more interesting and more valuable, but you never seem to get to them all through the noise and clutter? Because sometimes it's easy to forget that the Web is only one piece of the Internet?
It's only been a little over five years since Mosaic and then Netscape got the party started. Nowadays, you have to snicker at certain little antitrust lawsuit over browser technology. Not that Bill Gates is going to have to start shopping for used cars, but if anything is clear with this Internet stuff, it's that nothing is forever.
And up until now, the Internet and the Web have been almost exclusively about personal computers, operating systems and Web browsers. Over the next few years, however, we're going to see more of a shift to alternative platforms and software applications. In other words, appliances other than PCs are going to take us to the Drudge Report, and programs other than Netscape are going to provide us with even more wonderful content distractions.
The Sculley Effect
No, not Gillian Anderson (though she certainly does have an effect!). I'm talking about Mr. Apple-PepsicoÖ the guy who fired Jobs. Seems Mr. Sculley wants to cash in on this Internet thing, and he's chosen Gizmoz and his vehicle. Gizmoz makes software that provides a new way to distribute content on the Internet. The company's tiny applications offer an animated message, then stream the real meat of whatever you like.
For gullible netizens, Gizmoz is about making a real go of "viral marketing," that is, the penchant we humans have for passing on cool things to each other. The company's software (each "gizmo") is small enough that to be shared via email through the power of word of mouth, Gizmoz hopes to have us all sending these things back and forth to each other.
The advantage for content owners is increased customer base, relationships, more traffic and higher revenues by distributing content through visually animated messages. The company is hoping to attract entertainment, music, sports and consumer content publishers to its technology, figuring that content publishers will use Gizmoz to drive commerce, membership, audience and brand.
Gizmoz is not alone in this kind of endeavor. There are tens of very sophisticated little schemes to squirt content here and there over the Internet. Gizmoz, however, has Sculley, who has helped bring in blue chip investors such as Chase Equity Associates, AOL Investments, GE Venture Fund and 1-800-FLOWERS.COM.
But that's only part of the picture. OnePage is a new piece of software that allows surfers to cut and paste parts of various Web pages to another site. More than customizing portal views, OnePage lets you combine your Yahoo Fantasy Baseball team with your CNBC stock ticker. Needless to say, this is problematic for today's Web site giants who are only beginning to see the payoff on years of building a viable vehicle for Internet advertising.
Neither Gizmoz nor OnePage is anywhere near going public, but their bold moves threaten current paradigms.
Ripping the recording industry
If you got caught up in the MP3 madness of last year, you've long since "ripped" your CDs, that is, copied the music files from your CD and translated them into smaller MP3 format files that you can play on your computer or Diamond Rio player, or share with friends. Much like other forms of content on the Internet, the long-established business model of creating and distributing music is radically being altered. And the technology goes beyond the Web.
First off on music-related Web ventures: avoid Web-based CD retailers like the plague. Don't think for a moment that the battering of Emusic.com (EMUS – NASDAQ) and CDnow (CDNW – NASDAQ) stock prices makes them a bargain. All these companies do is sell flat $11 boxes on their Web site and ship them to consumers. Don't be fooled by CDNow's traffic statistics. The awful truth is that these companies must pay hopelessly more to acquire a customer than they ever get back in the way of profit. And shipping charges have long been the life-saver for mail-order catalogs; please chuckle the next time you see a free shipping offer dangled by one of these companies on such low-margin items.
Which is not to say that CDs, or Web-based sales of CDs, are dead. They just won't sustain a business in themselves. CDs are, however, entering the next-generation format hit. It won't happen as quickly as the transition from vinyl and cassettes to digital. MP3 files are still big and unwieldly for dial-up users. Computers have yet to be fully integrated with home audio systems. But the wheels are turning, and so far the recording industry has done little more than blink and file a bunch of desperate lawsuits.
Enter Napster, the clever non-Web application (and royal pain-in-the-ass of university network administrators) that lets users share MP3 music files. You "rip" your CDs, get all your tunes on your PC, and, with Napster, any of the other million Napster users can see and copy any of your music files and you can see and copy theirs. It's the ultimate tape-copying party, and an intellectual property lawyer's wet dream. Piracy aside, however, the Napster model (getting exactly what you want, bypassing banner ads and excessive marketing detritus) opens the door to other forms of content.
Napster will most likely be acquired or sued out of existence before it gets anywhere near an S-1 registration (MP3.com could be a potential suitor).
Which brings us to the real Internet music pick of the moment: MP3.com (MPPP – NASDAQ). Not at all like a fine wine, but for lack of a better metaphor, the company has aged well since its much-hyped IPO of last summer. The company offers an innovative approach to promoting and distributing music over the Internet. The MP3.com Web site is a community for music-lovers in a wide variety of genres, and it represents a new and well-executed marketing channel for independent artists.
By leveraging all aspects surrounding the searching, communicating, reviewing, etc. of MP3 music files by both listeners and artists, the company is flourishing. With profitability projected for next year, MP3.com targets and markets artists who have not been signed by the major labels. This offers a powerful boost to unsigned bands trying to make it big, while providing music fans with access to the cutting edge of new music. In addition to marketing these bands (and collecting half of related CD sales), MP3.com sells advertising. As of February, the company boasted more than 10 million registered members.
Earnings have kept pace. As of 4th quarter, 1999, the company saw a 297% rise in online advertising and a 310% increase in offline revenues from its previous quarter, and more than tripled its sequential revenue growth. Yes, MP3 the format and the company are here to stay. The site is sticky, but more important, the company is executing.
After the IPO last year, the stock ran up quickly, then fell back just as rapidly. With another balloon rise in November, the stock dropped down to the US$20 – US$30 range before taking its worst punishment over the past weeks. The company has aged well, using its IPO dollars to build infrastructure and marketing clout. Despite the market's recent Dear John emails to most Internet stocks, MP3.com is a hotty. At less than US$20, MP3.com is the most attractive play in the Internet music space.
Geeks without wires
As all Webhead readers know, the real news in alternative Internet connectivity is wireless. Last November, I wrote about Nokia (NOK – NYSE) — up 100% since 11/1/99; Nortel (NT – NYSE) — up 63% since 11/1/99; Phone.com (PHCM – NASDAQ) — up 27% since 11/1/99; Aether Systems (AETH – NASDAQ) — up 147% since 11/1/99; and Nextlink (NXLK – NASDAQ) — up 84% since 11/1/99.
The wireless angle has gathered big momentum. Everyone wants it. No one has enough. I like two current wireless plays. One has been sitting out there in the open and the other has been hiding out in the OTC.
After a joyride of an IPO in February, Palm (PALM – NASDAQ) has settled in the upper US$30s and low US$40s. At US$.06 earnings per share, Palm is profitable, but beyond that there are not a lot of shares of pure wireless Internet stocks available. And although Palm is not a pure wireless Internet play, it does provide what is perhaps the most realistic platform for wireless Internet communications. Let's face it, even a Palm Pilot is preferable to a 3 by 6 line cell phone when it comes to reading news or sports. Institutional interest in anything involving wireless Internet will continue through the summer, and Palm is another technology sector victim that will get 'discovered."
Another hot area in wireless Internet is high-speed broadband wireless connectivity, and that is the business of Worldwide Wireless Networks (WWWN – OTC). The company provides direct service links, frame relay, web hosting and network consulting services and serves business and home office markets.
In March, when Yahoo needed wireless Internet connectivity for its Yahoo! Internet Life Magazine Online Film Festival in Hollywood, they turned to Worldwide Wireless Networks for a fractional DS-3. A week later, the company was video-enabling 20 points of presence (POPs) throughout southern California. In conjunction with wireless video specialist FVC.COM (FCVX – NASDAQ), the Worldwide Wireless network ultimately will deliver two-way video services to homes and businesses throughout southern California. FVC.COM handles video calls, conferences and broadcasts; Worldwide Wireless's broadband network will carry these services at speeds up to 155Mb/sec.
The market for wireless broadband is projected to reach more than US$3.4 billion in 2003. Feel like listening to all those cutting edge MP3 files in your car? How about beaming shipping and vehicle information to and from your fleet of 18-wheelers? Currently at just over US$7, WWWN is truly a ground floor opportunity.
Only diamonds are forever
As sophisticated as Internet companies have become, it's important to remember that still only half of U.S. adults have access to the Web. Add to that the markets' current rethinking of Internet company valuations. The fusion of widely distributed technology and marketing capabilities that is the Internet forces all business models (right down to the very de facto standards we may take for granted) to be continually tested. When the Internet truly becomes a ubiquitous element in American consumers' lives, it will have many more faces than just a simple Web browser.
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