Article on AOL's Purchase of Mirabilis
At Mirabilis they make money the new-fashioned way: they don't earn it
by Robert X. Cringely
But the event that really struck me this week as something totally new was America OnLine's purchase of Mirabilis, the Israeli company behind the incredibly popular ICQ Internet chat software. This signified to me a total change in the way business is done.
How do we decide the value of a company? If it's an old-line industrial company like, say, Alcoa, we look at earnings. How much profit did the company make? Notice that we're setting the price by looking BACK at earnings. This is for two reasons. First, it's hard to beat the accuracy of earnings that have already been, well, earned (Sybase, Informix, and Oracle notwithstanding). There ought to be no error or ambiguity in what's already happened, so past earnings tend to factor very well into the price of industrial companies. The second reason why this works is these capital intensive industries don't just fall in earnings holes. There isn't that much volatility. When Alcoa goes in the toilet its because the economy is going in the toilet.
But it's different for high tech companies. Here market capitalization is based on looking forward, not back: what will the earnings be next quarter? This again has two reasons. First there is the much greater volatility of these markets and their stocks. Just about any high tech company with the possible exception of Microsoft can go in the toilet for almost no reason at all. Company CEOs have even blamed me from time to time for writing something that pulled a hundred million or more out of their net worth. Since going in the toilet is a constant possibility, the expectation that a company will somehow avoid going in the toilet next quarter tends to drive prices up. The other reason why we look forward, not back, is that someone started doing it and if we stopped now it would pull a couple hundred billion out of the stock market and send us all into a recession or worse. We do it because we do it and as long as Microsoft continues to beat earnings estimates we'll continue to do it.
And then there's Mirabilis, which just sold itself to AOL for $287 million. How did they come up with that price? Past earnings? Future earnings? Mirabilis has no earnings, no profits at all. That's okay, you say, Excite has hardly any net earnings either and the market says that company is worth $1.5 billion. Yes, but Excite, while it may not have profits, at least has SALES. Mirabilis has nothing, nada, zilch. They give the stuff away and have no income at all.
So why would AOL pay $287 million for a company that has no sales, no profits, and no clear plan to generate either sales or profits? Steve Case of AOL is not stupid, so this must be another example of the dreaded paradigm shift.
Recently I talked with Jim Clark of Netscape who told me how he decided to start that company. "There were 24 million Internet users in 1994 and one million of them were already using the Mosaic browser" he said. "If we could take the browser lead from Mosaic, that meant we could probably get as many as 24 million customers, and many more than that since the Internet would be a lot bigger by the time we finally shipped. I figured that with 24 million customers there was no way you couldn't make some money, so we just started the business with no idea at all how we'd make a profit. We just assumed it would come, and it did. We made $75 million that first year."
Okay, so maybe Mirabilis was following the Netscape model, but I don't think so. Netscape at least sold something, they licensed Navigator to companies. They put prices on their server software. Mirabilis has no suggested prices and no way of even receiving money.
Maybe they are following the McAffee model, then, which truly was the only new business model for software in the 1980s. John McAffee wrote anti-virus software and gave it away for free on electronic bulletin boards. Then one day, when he felt there were enough users addicted to his stuff, McAffee just started charging for updates. "Suddenly we had a run-rate of $350,000 per year and $15 million in the bank," he said. McAffee's innovation was in knowing when to throw the money switch. Maybe Mirabilis is like McAffee Associates and just waiting to start charging.
Nope. That model is passed, it won't work for Internet chat because there are competing products almost as good as ICQ and those products are free. Charging might work, but it more likely would just make users switch to another service.
So why DID AOL pay $287 million for ICQ? It's because of the 15 million users. What Mirabilis has done is plant its client software in 15 million PCs connected to the Internet. They have a foothold in your silicon and mine and what they'll do with it nobody can say. Advertising is certainly on the agenda, as is the creation of yet another of those Internet portals. The fact is that Mirabilis has got a hook in our computers and can reel-in just about any application they like. And THAT's worth $287 million.
In the old days we would have called it a virus. |
