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10 myths about the Internet
Soaring stock prices have built huge expectations
for everything dot-com. But James J. Cramer,
co-founder of The Street.com, says many of the
breathless claims for the Net's bright future are
just plain lies
James J. Cramer
Financial Post
Investment in the Internet has become a
joke. There -- I said it. Having made
millions of dollars investing in the Net and
having spent millions of dollars building a
site, I am out of the closet -- free at last --
to speak the truth about what really goes on
behind the URL. The Net is the most
over-hyped investment story in history.
It wasn't always like this. Three years ago,
when we started TheStreet.com, our online
investment journal, there was a level of
skepticism that fit the notion of business.
Investors recognized that e-businesses
would have ups and downs and sideways
moves and multiple failures and maybe --
just maybe -- a handful of successes.
The lunacy of it all still astounds me. Overnight, as dot-com after
dot-com went to hideous and unreasonable premiums, a perception
developed that nothing could be easier than running a Web business.
This perception was quickly lapped up by the media, eager to rationalize
how seemingly inept, wet and inexperienced young 'uns could suddenly
be worth gazillions.
We soon began to believe that running an Internet business is an
inherently profitable affair. We became insistent that a Net business,
when stacked up against a bricks-and-mortar business, must always
win. The principles of business simply don't apply.
The reality, of course, is far, far different. In fact, from my experiences
as a founder of TheStreet.com, I can tell you that it is harder to do
business on the Net than off it, and anybody who tells you otherwise is
a dreamer or a fraud.
So, without further ado, let me blow away the 10 biggest myths of the
Internet, with the hopes that I can save you money as an investor or a
trader in Net stocks.
Myth 1: It's cheap to do business on the Web.
It is phenomenally expensive to run a fresh, continually interesting Web
site. First of all, the technology itself is positively old-fashioned. To
change even one line of bold type on our site requires a massive
overhaul. To reconfigure pages is almost impossible. A redesign is
incredibly costly and involves massive interaction with a costly host,
who wants nothing to do with your changes or your people.
The good news, though, is that it used to be worse when we started.
Our first design, out of date within a month, took a year to fix to our
satisfaction. I could change the look and feel of the Sistine Chapel more
cheaply, more quickly and more artfully than I can change the simplest
aspects of our Web site.
Those who would tell you otherwise are simply hunting for a chunk of
ill-gotten action themselves. They won't do it better, either. This Web
thing is a cumbersome, slow, expensive product that won't get better
until the phone companies, the computer companies, the Internet
service providers and the network companies all get on the same page.
Which could be years from now.
Myth 2: Advertising is flocking to the Web in record numbers and will
be the Web's saviour.
Here is a totally false assertion. We are still at the client level when it
comes to advertising, meaning almost no agency is placing ads on sites.
You have to appeal directly to the client. Here it is, year three, and we
are still doing missionary work. And you only get their attention if the
client's grandchildren think the Web is cool. The people who run big
advertising companies that are not in tech aren't even on the Web.
The Web is a personal experience, yet it is not being experienced
firsthand by the current generation of people who run ad dollars. And it
won't be until they die off or retire. The ad revenues are totally anómic.
And they will stay that way for one main reason: Most of the Web is
free. The vast majority of advertisers don't want to appear on free sites.
They don't trust them. They think the numbers are made up. They want
to be in expensive publications, or productions with big barriers to entry
and wealthy readers. Not Web penny-savers. They like proven
high-net-worth demographics that only a paid model can deliver.
But portfolio managers and analysts think that you can make it up in
eyeballs. They don't take eyeballs at the bank; they take cash. Free
generates no cash from subs or ads, unless you are lucky enough to be
Yahoo!. And it only works for Yahoo! because Yahoo! has won the
battle over reach. All the rest of the sites have lost it already.
Myth 3: You can give away the merchandise as long as you generate
enough eyeballs because one day you will monetize those eyeballs.
Here is another pack of lies. The eyeballs are meaningless in the world
of business, and they will never be worth the merchandise you are
giving away for virtually nothing. You will never have gross margins
that rise, and the pageview can never be monetized.
So if you are giving away books for 50% below posted price, you aren't
going to make it up anywhere else. You are just going to lose a fortune.
All of the e-commerce sites out there with one revenue stream --
potential advertising -- won't exist two years from now. Those who
value stocks by eyeballs should go and be ophthalmologists, not stock
analysts.
Myth 4: You have a clever URL, they will come.
Wrong again! People will only come if you interact with them
successfully, which is an expensive and time-consuming process that
requires great customer service and a level of attention to detail by
senior management that most new firms just don't have. At least 30
companies have gone public this year on the strength of their catchy
URLs. But this is meaningless. Nobody surfs the Web for URLs. If you
want traffic, you have to buy traffic and you have to interact with that
traffic one-on-one, round-the-clock, once it is in the cyberdoor.
You have to force people to notice you and go to you, and when they
get there they have to be pampered and made to feel that there is
someone behind the URL in order to build brand loyalty.
The companies that issued a few million shares here and there to make
and keep the stock hot will burn through that cash in no time trying to
service their clients.
Myth 5: Traditional advertising brings eyeballs to the Web and generates
bountiful traffic.
This is totally false. I have spent more time on TV networks, cable,
local access -- you name it -- pushing our site than anyone has pushed
any site anywhere. But we have minute-by-minute traffic collections in
TheStreet.com's database that show virtually no increase, or mere
incremental increases from TV advertising and even my appearances. It
just doesn't happen. People don't watch TV and work on their
computer. Print is even worse. It doesn't work at all.
But Web advertising and Web promotions drive serious amounts of
traffic. As Web ad prices come down, the real bargain for driving
traffic will be from other Web sites. Everything else is a waste of
money.
E-mail word of mouth among satisfied customers is the most effective
way to build traffic, and that can only be done by offering an intensely
personal customer experience most sites don't have.
Myth 6: People like to shop on the Web.
Nonsense. People love to shop in stores; they just don't want to interact
with salespeople and pay sales tax. Shoppers hate the register. They
love not being sold to and not waiting in line.
But as for the Web shopping experience -- forget it. It is soulless and
rates on par with the home shopping experience, except for books,
second-hand stuff and goods that could be ordered by catalogue and
phone anyway, the advantage being you don't have to speak to a rep
who knows nothing or cares nothing about you and wants you to buy
more than you want to.
If you are going to give stuff away at low prices in order to capture
eyeballs, you will end up losing both on the product end and the
advertising end. That's why great retailers have nothing to fear from the
Web, but those with reputations for shoddy service will get annihilated.
Myth 7: It costs nothing to get a site up and running.
Forget it. These days, almost no one but the richest companies can
afford to staff a new large-scale Web site business. We lose a
programmer, we can hardly afford to replace him. Just to hire an
investor-relations professional costs us hundreds of thousands of
dollars. The market for Web professionals is so thin that you have to
pay fortunes to get anybody with a brain and then top that off with a
hefty dollop of stock options. And once you get them, they tend not to
know as much as you thought they did!
Myth 8: The Web is a reliable commercial activity.
Oh boy, is this ever wrong! The Web goes down constantly. The
providers let you down constantly. Some of the greatest names,
including multibillion-dollar companies that shall go nameless lest there
be an exodus of customers, can't deliver the product regularly with
precision.
The downtime would simply be unforgivable even if it were some
remote cable access station in North Podunk, Ky.
Myth 9: Just you wait: The profitability is right around the corner.
Most companies are pushing out profitability, as we speak, to sacrifice
for reach -- reach that only Yahoo! will ever have. But attempts at mass
reach won't pay the bills when you get there. This is why, even though
I am now just a lowly director at TheStreet.com, I focus intensely on
cutting costs and saving money, because only that way will revenues
ever extend to profitability.
Tell Wal-Mart about reach. Tell Home Depot. They will tell you that
what matters is profitability, not reach. There is no cyberworld where
reach trumps profits.
Myth 10: This is the biggest myth, as far as I can tell: People will never
pay for content on the Web.
That is totally wrong. In fact, without that second revenue stream, your
business will never amount to a hill of beans.
So why do people think you can't charge for stuff on the Web? I have a
suspicion. The print world knows that there is not enough advertising
on the Web. It knows that the Web is a superior, cheaper, more fully
featured experience than print.
But it can't get the advertisers to migrate. So it puts the same stuff that
people already pay for in print on the Web. And then it pronounces the
Web unpayable.
Of course, no one will pay a second time for what they already pay for.
But if you give them fresh stuff they can't get elsewhere, they are more
than content to pay.
Other than TheStreet.com and one or two other sites, though,
everything on the Web is available in print. Why pay for it a second
time?
Yet every week we receive thousands of dollars in revenue from eager
and willing buyers who thirst for original material on the Web and get it
nowhere else. It is a very winning model.
So, what is the state of Web investing? I think it is pretty simple. If you
want to know who will survive, you need only ask who has more than
one potentially profitable revenue stream. If you find a Web business
with just one revenue stream, that business will fail.
If you find a business that does not include interaction with people at
the highest level, that will fail. And if you find a "business" that wouldn't
look like a business if it were off the Web, don't be fooled. It isn't one.
It never will be.
James J. Cramer is manager of a hedge fund and co-founder of
TheStreet.com. He recently delivered a longer version of this text at the
Goldman Sachs International Tech conference in London. |
