The Industry

Let's talk about the state of the industry. I'm not referring to the trends in technology but rather the external view and the forces at work in the "real world". I've previously written about where I see the industry heading and what the significant technologies will be. All of this has been targeted mostly to people already in the business. While I try to make my essays readable by all, they represent the insider view. It's time to take off the propeller and look at the industry from the outside.

I've been sorely disappointed by recent developments in the world of investing. The volatility in the stock markets is frightening; doubly so when it seems to bear no relation to reality. I personally believe that a significant contributor to the current situation is the advent of internet stock trading and the "day trader" phenomenon. The blind pursuit of profit combined with a lack of research, or even interest, in the actual business of listed companies is an anathema to me.

The traditional role of the stock market has been to permit private and institutional investment in companies. The issue of shares of stock raised capital for a business to fund expansion and purchase equipment. Shareholders were rewarded with dividends and, if the company was successful, steady increases in the value of the shares. A company's perceived value was derived by multiplying the share price by the number of outstanding shares. This is also referred to as the "market capitalization".

Recent events have turned this model upside-down. We have dot com companies with valuations completely out of line with reality. These companies have limited hard assets and so investors would receive next to nothing should such ventures fail. Many of these companies don't even have a coherent business plan! In the rush to cash in on the new wave, people have been figuratively throwing money at the startups. Increases in stock price of 200-400% over the IPO level in a very short period of time have been commonplace.

We've recently seen a significant tumble in the market valuation of dot com stocks, a trend I expect to continue. What is infuriating is that companies which have material assets and excellent track records are being pummeled along with the dot coms. Northern Telecom, a company which sells equipment around the world, recently took a 25% hit in valuation. Why? Some bean counters on Wall Street predicted that profits would be higher than those reported by the company!

Did the value of a giant like Northern Telecom really drop by 25%? Certainly not! This is a company which is well positioned to take advantage of the new economy. Even a company like Cisco, which manufactures the vast majority of the infrastructure of the internet, has been hit recently. Both of these companies are solid performers; Northern Telecom earned over US$21 billion in sales last year while Cisco did over US$12 billion. These companies are not on the ropes and future prospects remain bright.

So what happened? People no longer seem to be investing for the long term. The byword seems to be instant profit, like the instant gratification to which American culture aspires. If a stock doesn't increase in value at least 10% over a month, it's time to move on. Jump on an IPO and sell the stock a week later after it's doubled in value. Don't bother to investigate the "minor" details such as the identities and track records of the principals. Don't trouble yourself with how, or even whether, they've locked-in the brains which are the only real asset of a dot com.

You've read it before and it bears repeating: the internet is going to change the way we live and work. This statement is true but it doesn't guarantee that the changes will always be for the better. Recent developments in the markets have dried up the supply of venture capital such that some original ideas might never see the light of day. Once bitten, twice shy. This is a true American tragedy since hidden among the flotsam are some ventures with great potential.

Public perception of the computer industry, from the investor stand-point at least, is uncomplimentary. At the same time, the inroads that the personal computer industry has been making are undeniable. Recent surveys show that over 50% of American homes now sport at least one personal computer. The growth in all manner of on-line shopping is nothing short of phenomenal. An article I read recently estimated that the dollar value of Christmas shopping on the internet this year will be double what it was last year.

These kinds of estimates, if accurate, show a 100% annual growth rate. For the companies able to take advantage of this trend, profits are sure to follow. Pitfalls abound however, as we all witnessed last Christmas season. A company unable to coordinate all elements of the enterprise, from supply to inventory management to shipping, can rapidly find itself a pariah, unlikely to recover. Corporate largesse aside, parents will never forgive the disappointment of ordering goods on-line and not receiving them in time for the holidays.

The "new economy" promises convenience and, as witnessed by a number of spectacular failures, doesn't always deliver. I wanted to try the services of Webvan, for example, only to find that there are items on my shopping list which they cannot deliver. If I still have to visit the grocery store to purchase these items then Webvan offers no benefits; I can just as easily purchase everything in a single trip and save myself some money!

All is not doom and gloom, however. The availability of travel sites on the internet, some even run directly by the airlines, have given travellers access to the cheapest fares ever. While travel agents might mewl and cry, customers can play with an infinite variety of agendas in order to get from point A to point B. Whether the priority is a minimum number of stop-overs or the absolute lowest fare, the engines available make short work of arriving at the intended destination.

The travel industry is probably one of the best examples of appropriate use of technology. Whether it's hotel chains, car rental companies or airlines, they've leveraged the internet by permitting customers to make all of their arrangements from the comfort of their own home. Incorporate virtual tours and you give customers the ability to determine whether a property is appropriate to their tastes. Secure sites and instant credit (or debit) card authorization mean that planning and booking a vacation is easy, quick and convenient.

Based on what I see, hear and read, people are of two minds regarding the internet. This shouldn't come as a surprise since some people still don't want to use an ATM out of irrational fears. Most people are not as savvy as they should be, but part of that is unfamiliarity with the new technology. Some people still forward the latest virus warning to everyone in their address book without even confirming the veracity of the claim. Others never venture outside the comfortable walls of AOL.

The nature of the internet makes it ripe for abuse, but not to any greater or lesser extent than other media. Unfortunately, the established media tends to paint a sorry picture of the on-line landscape. The Communications Decency Act and the Child Online Protection Act garner publicity even though they don't honestly address the issues. The protection offered by products such as SurfWatch, NetNanny and CyberSitter is merely illusory and not a viable alternative to surfing with your children, just as you should watch television with your kids.

Thus parents are faced with the dichotomy: the internet is incredibly useful and yet not entirely "safe". I don't see this changing anytime soon and I don't believe that anything the government tries to do will be either legal or effective. I believe that we'll just incorporate the potential dangers into our collective psyche in the same way as we accept the perils of driving or walking downtown at night. The benefits outweigh any minor inconvenience, as anyone who has spent any time on-line would agree.

AT&T announced recently that it was considering breaking itself up into four separate units. That news was followed rapidly by word of rumblings within WorldCom regarding spinning off the long-distance business. Despite recent acquisitions by AT&T intended to create a behemouth capable of providing all manner of services, certain sectors are on the wane. The advent of competition in the long-distance market has driven the cost of placing domestic calls to the lower 48 to 5 cents/minute and below.

The profit margin in long-distance has grown remarkably slim. Companies can no longer use this service to fund their other divisions. Cellular revenues have also dropped, with digital services available for 10 cents/minute and below. Even with the attractive pricing of the AT&T One Rate plan, customers are discovering that they have the ability to make long-distance calls for 0 cents/minute!

For those of you who've stuck with me this far, you probably already know that I'm talking about on-line services. While they might not offer the fidelity of an analog land line, the availability and bandwidth of ADSL and cable modem residential internet access make it an attractive alternative. If you haven't already checked it out, click here to visit the website of one of the providers of this service.

Finally, I'd like to address the marketing efforts of the computer hardware manufacturers. I have absolutely no need for a computer faster than 500 MHz and I don't believe that the vast majority of the buying public does either. My home systems are almost as powerful as the Sun Enterprise server I use at work. I use dedicated machines (Sega and Sony) for games so I don't need the latest, fastest CPU or graphics card on my PC. I just wish that Intel, Dell and Gateway would stop trying to sell me machines I don't need.

So that's my take on the state of the industry at this time. Overvalued dot coms, undervalued hardware manufacturers (my advice: buy!) and a society still trying to come to grips with the on-line world. We've seen successes as well as failures and I fully expect a shake-out in the industry over the next year or two. There will be winners and losers and we might even see a new market model established.

In the meantime, people will continue to rely on technology to ever greater degrees. The expectation of continuous availability will represent a challenge to providers but the payoff in terms of customer loyalty is potentially huge! The next time MasterCard tries to tell you that you can't make two payments in a single 24-hour period, take a step back and ask yourself why. In the new economy, we should be able to do almost anything. Don't let anyone tell you any different.

Copyright © 2000 by Phil Selby