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Beyond the revolution
Look past the impact of paper money and you'll see that over time, the Internet doesn't displace, it brings together. Just as it doesn't exclude users, it also doesn't exclude existing businesses. Despite the war cries of the revolution, the past two years have proven that the many businesses that were supposed to be obliterated by the Internet were in fact strengthened by it. So, looking forward, here are a variety of lessons and underlying themes that will guide this mainstreaming phase of the Internet build-out.
First, the gas tank is nowhere near being empty. Venture capital continues to fuel Internet entrepreneurs. Although venture capital spending is not growing as rapidly as in the recent past, the amount of money raised and invested in 2000 marks an all-time record. Venture capital firms invested more than US$60 billion through the third quarter of 2000, up from US$33.2 billion in the same period last year, according to Venture Economics.
Add to that the growing indications that the bleeding has stopped among Internet stocks. As the fall earnings season comes to a close, most Internet companies seem to have beaten estimates (unlike a handful of computer manufacturers). Another round of e-commerce players, FTD.com (EFTD:NASDAQ), Homestore.com (HOMS:NASDAQ), and FragranceNet (FRGN:OTC:BB), crossed the threshold of profitability. Yes, there's real business in there somewhere. Where we stressed out over profits in 2000, we'll be evaluating their relative strengths in 2001.
And e-commerce is by no means dead. Sure, the competition is never more than a click away; and yes, building Web sites (or building practically anything, for that matter) can get obscenely expensive if you don't have a clear idea what you're doing. But cast aside the trendy hype and criticism. Shopping on the Web at the very least offers a convenient and valuable alternative to traditional venues. The obvious challenge here is for online stores to meet the same operational challenges faced by traditional retailers. Sure, there will continue to be losers, but don't overlook the fact that there will be winners, too. FragranceNet and FTD.com are just two of the companies offering a glimpse of how a tight-fisted and rational approach to e-commerce can result in profits.
But some of the concepts have become as trendy as the lingo. "First-mover advantage" is a description of a very fortunate set of circumstances, not a revolutionary business axiom enabled by the rapid deployment of technology. The concept is burdened by an assumption that real people actually live in the same "Internet time" occupied by the dreamers and developers of so much of this very real technology. Everyone is learning that, while Internet technology can enable you to distribute products more rapidly, it enables customers to discover and purchase your competitor's product just as fast.
Therefore, let no Web site and no Internet be an island. Remember the basic beauty of hypertext: the hyperlink, the ability to reference anything from your Web site. Reading type and viewing images on a computer screen is nothing new. We got accustomed to that back in the 1980s. The magic is in the sharing. It's not about displacement... the Internet will continue to link with other media. Web and print content will get together to bail each other out. Witness the Primedia (PRM:NYSE) acquisition of About.com (BOUT:NASDAQ). Watch portals go offline to minimize their exposure to dot-com advertisers and maximize the value of their traffic. Yahoo has recently been signing major traditional advertisers like Barnes & Noble (BKS), Neiman Marcus and Pepsi for its interactive marketing services. Likewise, there will be more online companies going offline to acquire and retain customers. Earlier this year, E-Trade (EGRP:NASDAQ) acquired a network of 8,500 ATMs in 48 states to serve its banking customers. By autumn, the company had launched a pilot walk-in facility in a Target store.
Improvement plays
All integration and confluence aside, however, the hottest pure Internet-related prospects for 2001 will remain those companies that make the Internet work better. Three specific areas have emerged in 2000 that have tremendous potential for continued growth: content distribution, Web enablers and wireless Internet.
Last year, the content distribution market was just getting started as Sandpiper Networks and Akamai made their widely acclaimed performance and financial debuts. These companies help big Internet publishers distribute their content across the net to dramatically increase performance. Sandpiper was acquired by Digital Island and Akamai had a huge IPO. According to the HTRC Group, the content distribution space will grow from US$266 million in revenue in 2000 to an estimated US$1.5 billion by 2002. This is a rapidly changing, technology-fueled market that is constantly grabbing for the next big thing. That could well turn out to be satellite-based data content distribution, which is the specialty of a company called Cidera that uses satellite technology to help ISPs transmit content down to their POPs throughout the country. Cidera filed for an IPO earlier this year, then pulled the deal; it continues to plow forward with the help of investors, including New Enterprise Associates, Intel, Dell, GE Equity, PSINet, and Worldcom.
You could call them consultants, developers, content syndicators, software companies, or even geeks — you name it, they all share one thing in common. These companies help make Web sites better. Let's call them "enablers". A consulting firm such as Mainspring (MSPR:NASDAQ) can help you develop the strategy for a successful Web site. Its customers include most of the Fortune 500. Companies like Viant (VIAN:NASDAQ), Agency.com (ACOM:NASDAQ), and ModemMedia (MMPT:NASDAQ) can build your Web site, whether it's a catalog with more than a million auto parts, a corporate intranet for insurance salespeople, or the flashy Web brochure for a national tourist association. These companies have had a tough third quarter, as many of their IPO-funded customers have had to pull the plug on extravagant Web development plans. But as the Web goes mainstream, the mainstream companies will turn to the experts, the companies that are getting the job done.
And then don't forget the growing number of existing Web sites that need to keep serving up an ever-changing menu of content. That's where companies like Screaming Media (SCRM:NASDAQ), Yellowbrix (IPO pending), and iSyndicate (IPO pending) enter the picture. These companies basically buy data feeds (news, stock quotes, weather, etc.) from brand name content publishers, then package and resell the feed to small- and mid-sized Web sites.
Screaming Media may have gone public too early. Watch the iSyndicate and Yellowbrix IPOs — iSyndicate for its breadth of customers and content, and Yellowbrix for the way it integrates contextual e-commerce opportunities into its syndicated content offerings. Most significantly in this enabler space, watch the Napster/Bertelsmann deal as it unfolds. Once Bertelsmann figures out how to squeeze a fee out of the peer-to-peer networking arena, the Web-content afterburners will really start to kick in.
Finally, there is the wireless Internet. Though the whole area has been maligned as much as it has been hyped over the past year, the market for wireless Internet services continues to trail the incredible growth of wireless telephone service. Stock prices for Nokia (NOK:NYSE), Aether Systems (AETH:NASDAQ), Phone.com (PHCM:NASDAQ), and XO Communications (XOXO:NASDAQ) all fell off their hype-driven climbs in the spring of 2000. But all of these companies continue to maintain solid market caps. Where's the opportunity?
Watch TeleCommunications Systems (TSYS:NASDAQ) as a growing mover in the wireless space through the first part of 2001. The company develops network applications that deliver Internet content and short messages to a variety of wireless devices. The company recently cut a marketing deal with Compaq to offer TCS's Wireless Internet Gateway Application Suite and Prepaid Wireless products as turnkey solutions on Compaq servers. The company's first earnings announcement since its late summer 2000 IPO also made a splash, with 31% sequential quarterly revenue growth and an estimate-beating loss of only US$0.10 per share. Currently trading at around US$15 a share, TCS's rapid growth and increased exposure will drive that price up to US$50 by the summer of 2001.
Tired, but true
It's funny — if you could go back 10, 20, even 50 years and talk to entrepreneurs about getting started, you would hear things like building value by taking advantage of efficiencies in new ways, creating proprietary processes, or simply finding new ways of doing business. All of these things still apply to the Internet. The Web provides efficiency and convenience in approximating real-world transactions. And the Web is the best place to most rapidly enter new markets and execute new business ideas.
The notion that the Internet upheaval may not be all that unique compared to our previous bouts with automobiles, televisions and computers, among others, shouldn't put a damper on enthusiasm. Technology will continue to crash the gates of industries ripe for disruption. The Internet just happens to be our mode of the moment, and it continues to offer us opportunities to exploit these disruptions.
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