Another commentary from TheStreet.com:
thestreet.com
The Hole Truth
By Adam Lashinsky
Silicon Valley Columnist
8/9/99 7:01 AM ET
Call it the "hole" theory: Every company that matters on the Net has a hole in its story, if not its business model.
America Online (AOL:NYSE), powerful for its solid brand, loyal customers and e-commerce revenue, is vulnerable for its lack of a slam-dunk broadband strategy as well as the threat from "free" Internet access providers, notably Microsoft (MSFT:Nasdaq).
Excite@Home's (ATHM:Nasdaq) hole is its conflicted relationship with shareholder AT&T (T:Nasdaq), a known content hater, as well as its own inability to sell high-speed Internet access over cable wires quickly to every customer that wants it. Further, Excite@Home's brand name is perhaps the weakest in the bunch, a problem as the online "industry" matures.
Microsoft's weak spot is that AOL has the most powerful brand on the Web and therefore a relationship with consumers that makes the software giant salivate -- and quake. For the perennially also-ran Microsoft Network (otherwise known as MSN) to succeed, it's got to have more eyeballs, hence the access agenda. The law of big numbers, which dictates that it gets tougher and tougher to grow by the same percentage as you get bigger and bigger, also hobbles Microsoft, at least in theory.
The hole at Yahoo! (YHOO:Nasdaq) is the concern that Microsoft, AOL and Excite@Home somehow will lure enough customers to their Internet sites that Yahoo!'s growth will slow. It's believable, by the way, that Yahoo! doesn't need a broadband strategy per se, provided it can figure out how to attract enough eyeballs. But it badly lags AOL as an e-commerce player, a key revenue generator for the oughties.
But Yahoo!, like all the others, must grow to keep its valuation intact. Yahoo!'s stock price, down 48% from its high, still trades for a price-earnings multiple of 227 times analysts' estimates of next year's earnings. AOL, down 51%, is worth 96 times forward earnings. Microsoft, off just 15% from its high, has a forward multiple of about 47. Excite@Home? It has taken the worst hit, off 57% from its high, and still is worth a whopping 234 times the 18 cents per share of profits that Wall Street forecasts it will earn in its first-ever profitable year.
So how do these Lords of Techland plug their holes? Each publicly professes to have a strategy: AOL focuses on digital subscriber lines and satellite service; Excite@Home spends AT&T's money and ignores Daddy's (Mommy's?) concerns with its child; Microsoft beefs up MSN with its rebate strategy and talk of a tracking-stock panacea; and Yahoo! spins deals to link its spiffed up content with other companies' customers.
That's all good and fine, but there remain the holes. And plugging them will involve some kind of combination of these same players plus others (e.g.: Amazon (AMZN:Nasdaq) as Yahoo!'s e-commerce channel?). In other words, the end of the century will be the time when the giants of the Internet cut the boldest deals yet. Hold the emails about how 2000, not 1999, is the last year of the century; it doesn't sound as good.
"You should see some major shifts here," argues Keith Benjamin, top Net-stock guesser for BancBoston Robertson Stephens in San Francisco. "It just makes sense."
Makes sense, but oh, will the egos be tough to sort out. This is strategy stuff, not stock-picking stuff. And good strategy or not, no CEO who's been on the cover of BusinessWeek or Fortune wants to sell out to another, especially not when his (or her, in the case of eBay (EBAY:Nasdaq)) stock price is hurting.
But if the stocks stay down, or if the cracks now appearing persist, watch the merger dance begin. Arguably it began last week with somebody's trial balloon (as TSC's Spencer Ante and Scott Moritz insightfully labeled it) that Yahoo! wants to buy Excite@Home and deal the access business to AT&T.
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