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More Salad Days for the Internet Sector
by John Riggin
1999 was a record year for value creation among Internet-related IPOs. And 2000 will provide more of the same. That's the story in a nutshell. We're not out of the land-grab phase of the Internet phenomenon. Across the board, be it monthly, quarterly or annually, nearly all growth projections have been borne out. Business and consumer users are on the Web, reading, buying, selling, writing, listening, and more. What isn't available today usually is tomorrow. Problems are being solved, expectations exceeded, blanks filled in.
And most importantly, money is being made. Goods are being sold and inventories are being restocked. Advertisers are getting results and buying more and newer forms of real estate. Miscellenia are being bought and sold at auction. Equities are being traded. The software, hardware and network services required to sustain these ventures are being purchased and deployed at record rates.
For investors, the proof has lived up to the promise. What was "overheated" a year ago is now a "lofty valuation." And although network outages, crashed servers, lawsuits, money market jitters, "strategic" announcements, expired lock-up periods and inexperienced daytraders levy their temporary blips on the sector, the overall Internet sector is decidedly headed in one direction. Up.
Why should we be so sure this will continue? What goes up must come down, right? Where's the "pop," the "correction," the "bear" that all of these smart people have been predicting?
Well, it appears to be somewhere off on the horizon, behind an unprecedented period of wealth creation. In the meantime, let's remember that it takes money to make money. And behind every moonshot IPO is a group of venture capitalists.
According to research firm VentureOne, Internet-related startups raised almost as much venture capital in the third quarter of 1999 as they did during all of 1998. A total of 442 Internet companies raised US$5.4 billion during the third quarter, or 63 percent of all venture money for the quarter. This is nearly 250 percent more than third quarter 1998. For the year, Internet companies have raised US$12.5 billion in venture capital, more than double the US$6 billion raised in 1998.
IPO activity has trailed VC funding nicely. For the 1999 third quarter alone, 83 Internet startups raised US$6 billion. This nearly tripled the more than US$2 billion raised by 28 Internet IPOs throughout all 1998.
Despite the rapidly changing conventional wisdom regarding banner advertising on the Web, online advertising revenue reached US$934 million for the second quarter of 1999, up from US$693 million for the first quarter of the year, according to the Internet Advertising Bureau. Total 1999 advertising revenues for the first half of 1999 were more than double those of the same period in 1998. Forrester Research puts online ad spending at US$2.8 billion for the year; Jupiter Communications is predicting US$3.5 billion for 1999.
Just to stay honest, we should note that eyeballs continue to pour onto the Web--and they're using their credit cards. According to CommerceNet/Nielsen Media Research, more than 92 million Americans and Canadians (that's 40 percent of the population over the age of 16, by the way) report they use the Web. This is up from 34 million surfers in 1996 and 79 million last year. Of total Internet users in 1999, 55 million are shopping and 28 million are buying. Perhaps the best indicator that the Web is here to stay, men and women are now surfing the Web at nearly the same rate (54% male, 46% female). This is up dramatically from 1996, when there were two male surfers for every woman on the Web.
The bottom line is clear: this game is nowhere near being over. The Internet has established itself as a reliable (most of the time), profitable (again, most of the time) and viable medium for new forms of entertainment, communications and commerce. And the best news of all is that there's plenty of room and demand for continued growth in all three of these categories.
What about Bill?
Aside from the near-weekly net IPO moonshot story, the infotech media has been dominated for months by the Department of Justice antitrust inquiry into Microsoft. Now that the judge has confirmed that Microsoft has, in fact, engaged in monopolistic practices, the overwhelming reaction seems to be something along the lines of "duh!" Judge Jackson has merely restated what almost everyone knows about Microsoft and the way they do business. The difference is that Microsoft's competitors, customers and shareholders all have responded in their own way and, somehow, the industry continues to move forward at blinding speed.
It is difficult to see how the Department of Justice inquiry will result in anything more than a temporary setback for Bill Gates and company. Breaking up Microsoft into platform, Internet and applications companies may yield a group of companies that are not worth as much separately, but those companies would still be instant leaders in their respective segments.
Besides, how do you fine the richest man in the world?
As far as "the industry" is concerned, Microsoft's sins cannot be viewed with any sort of judgment without also taking into account the tremendous opportunities they've created. Yes, Microsoft has put companies out of business in ways that may seem nasty. But at the same time, the prevalence of Windows and Internet Explorer has made Web development easier and has contributed significantly to the rapid growth of Internet traffic as a whole. In my humble opinion, every dollar that Microsoft might give back to some squashed competitor ought to be matched by a buck back to the Redmond giant from every dot-com IPO darling whose customers view their Web site with a free copy of Internet Explorer.
"The industry" is moving so quickly that any damage Microsoft could possibly have done has long been relegated to old news. And developers that don't want to play ball with Microsoft do have other opportunities, from hand-held devices to mobile phones to networking products. It's called a free market.
For consumers, or Microsoft customers who use the Windows operating systems, all of this claptrap means nothing. Microsoft has established itself as the dominant player among desktop software systems. The company will not close or go away, therefore it's more of the same old thing: a new operating system every three years or so and more unnecessary upgrades to the suite of business productivity applications. Prices could actually tick up a bit and you won't hear anything more than the usual grousing.
Because there are so many new Internet-related market opportunities, I rarely write about Microsoft's stock (MSFT-NASDAQ). But I will say that all of the conjecture surrounding the stock leaves me puzzled. If the only material event in question is the labeling of Microsoft as a monopoly, as a shareholder I would interpret this as a good thing. Who wouldn't want to own shares of a monopoly, and a vastly profitable one at that? And if the final outcome ultimately serves to open the tech market, then this is good news for other tech stocks as well.
Nobody knows what the final outcome will be, if anything. I would not be surprised to see some sort of fine (practically a nuisance fee for Gates, it should keep Janet Reno in Melissa Etheridge CDs for the next decade) and a spin-off of all Internet-related activity into an independent company. After watching Microsoft's online travel spin-off Expedia (EXPE-Nasdaq) triple on its first day of trading, that would be a nice closing chapter to the whole sordid affair.
Please read on...
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