Editor's note: James J. Cramer gave a speech at the Goldman Sachs International Tech conference in London today. We're running the full text of that address here.
Investment in the Internet has become a joke. There, phew, I said it. I, having made millions of dollars investing in the Net and having spent millions of dollars building a site, am out of the closet -- free at last -- to speak the truth about what really goes on behind the URL.
Tell us what you think on our message boards.
Yes, you lucky listeners, I am about to give you the confession of a lifetime, what nobody wants said -- not the analysts, not the bankers, not the venture capitalists and certainly not the fellow entrepreneurs. The Net is the most overhyped investment story in history. It is so hyped that it is hurting those of us who have developed legitimate businesses that would do quite well even if there were no Web and would definitely perform much better now that there is!!
It wasn't always like this. Three years ago, when we started TheStreet.com, our online journal of investing which last week announced its U.K. expansion, 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. Some would live; the vast majority would die.
As we made the rounds with venture capitalists and Wall Street firms, there was a notion that management, game plan and execution mattered. Man, is that ever out the window now. That's because what nobody counted on was the change that the Net brought in reduced stock commissions and the subsequent democratizing of the underwriting process. There had always been a notion that you should not buy an underwriting unless the issuer paid the freight. You had to be a client of one of the major firms to get in on the ground floor. That left only seasoned players making decisions about what companies should pass muster and what companies should crumble before tapping public money. While not as savvy as bankers -- and that's none too savvy -- the market professionals demanded a sense, a notion, that the business be a business -- or at least appear to be a business and not just be a name, a person or a catchy URL.
The Net changed that all right. When the Net brought commissions to below a movie ticket, it empowered a new class of buyer -- the Net buyer -- who didn't give a darn about management, execution or financials -- or even viability. These people wanted a piece of the action that the big boys never let them have. And they could judge the merchandise because, after all, it was a site, and they, by virtue of their e-trading prowess, knew sites. Was it hot? Would it get on CNBC? Was it hummable? Did it rhyme? Get me as much as possible. At any price.
That's the analysis in total.
The Net buyer became so enamored of the Net, so thrilled about being in the game that, as he made money, he began to ascribe magical powers to anything that had an "e" or a "dot" or a "com" in it. The Net buyer wrestled the capital formation process away from the traditional skeptics, the mutual funds, the underwriters and the salespeople themselves and put it in the hands of true believers who simply equated buying stock with voting for favorite Web sites. Openings of new stocks were determined by the level of popularity of the site among a handful of active traders, not the prospects of the business itself. Underwriters, including the one that I am speaking to, lost all control over their merchandise. 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 of dollars. We soon began to believe that running an Internet business is an inherently profitable affair; we just don't see it yet from anybody except maybe with Yahoo! (YHOO:Nasdaq) and America Online (AOL:NYSE)!! We became insistent that a Net business, when stacked up against a bricks-and-mortar business, must always win. It's a given. The principles of business simply don't apply. The Net transcends business. That's why, of course, we invest in everything from eToys (ETYS:Nasdaq) to e-Stamps. We know that if a company has a catchy URL, its birthright is to succeed.
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. Running a Web business requires a level of attention to detail that others off the Web would choke on and die from. It is an around-the-clock affair that taxes every aspect of your life to its core. It is a family man's worst nightmare. There is never a moment's downtime, except when you go down, and that happens only when you are dead anyway. Just ask eBay (EBAY:Nasdaq)!
The 10 Biggest Internet Myths
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:
It's cheap to do business on the Web. As I say in my column, Wrong!, which appears as often as 10 times a day in TheStreet.com, it is phenomenally expensive to run a fresh, continually interesting, Web site. First of all, the technology itself is positively Linotype -- that's the old-fashioned hot graphic way of printing newspapers. 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 lines of code, the time it takes to rewrite them and the reconfigurations are so cumbersome and cloddy that it is almost impossible to be nimble and flexible on a Web site.
The good news though is that it used to be like Gutenberg when we started, if you can understand that magnitude of improvement. Our first design, out of date within a month, took a year before we could fix it up 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. Don't believe otherwise. 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. They all read from far different books at this time.
Advertising is flocking to the Web in record numbers and will be the Web's savior. Here is a totally false assertion. We are still at the client level when it comes to advertising, meaning that almost no agency is placing ads on sites. You have to appeal directly to the client for the ads. 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.
You always know when you are dealing with one of those closet Web-o-phobes. You get their business cards and it doesn't have an email address. These people want nothing to do with the intimate nature of the Web. They have their secretary on the Web for them. What a joke! The Web is a personal experience, yet it is one that 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 anemic. 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. I know when I talk to portfolio managers about TheStreet.com they say, hey, what is the deal with the paid model? You should be free. To which I say, fine, we go free, we not only kill our most reliable revenue stream -- the subscriber stream with its 93% renewal rate -- but our advertisers will desert us in a flash. Our subscription model is precisely why we have been so successful in getting ads while others have failed miserably.
The traditional advertisers hate appearing in free publications. They like proven high-net-worth demographics that only a paid model can deliver. But these portfolio managers and analysts, unsure of how to value companies like mine and mesmerized by Media Metrix (MMXI:Nasdaq), 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!! It's time we started admitting that, too!!!
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. No one will pay you for them other than if you are willing to receive another dot-com's stock! 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. Nobody, and I reiterate -- literally nobody else -- gets enough advertising for it to be a lasting business. Those who value stocks by eyeballs should go be ophthalmologists, not stock analysts. They won't make you any money in this market.
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 come 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, around 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. And no company, with the exception of Barnes & Noble (BKS:NYSE), has raised enough money to be able to get those people to come in and remain loyal without interaction with customers by all levels of management. 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.
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. They are in different rooms. Print is even worse. It doesn't work at all. There is no correlation between print ads and traffic.
But Web advertising and Web promotions, they drive serious amounts of traffic. As Web ad prices come down, the real bargain for driving traffic will be from other Webs sites. Everything else is a waste of money as far as I am concerned. And billions are being wasted trying to drive traffic via old fashion advertising. Better to pay people individually to come to the sites! Email 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 that most sites don't have.
Ad campaigns centered on Web ads, coupled with customer service of the highest touch, is the way to go. You click on any name on any site in the universe except for TheStreet.com and you get a canned response that will never be touched by a live human. You click on any name on our site and I guarantee you almost instant turnaround from a live human, including me. That's because you are a member and a customer when you sign up for our service, not a pageview or an eyeball.
People like to shop on the Web. Nonsense. People love to shop in stores. They just don't want to have to interact with salespeople and they don't want to pay sales tax. Shoppers hate the register. They love not being sold to and not waiting in line. But as far as Web shipping experience, forget it. It is soulless and rates about 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. Of course, 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, and I will short you until the cows come home. That's why great retailers have nothing to fear from the Web, but those with reputations for shoddy service will get annihilated.
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! It is expensive to open the doors every day. The labor shortages and labor costs for the lowest level programmers and execs are totally out of control. Just mind-boggling.
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.
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. It is why, even though I am now just a lowly director at TheStreet.com (TSCM:Nasdaq), I focus intensely on cutting costs and saving money because only that way will revenues ever extend to profitability. It is why when we sit down at board meetings, we talk chiefly about how to get to profitability fast -- faster than anybody expects. The lines will never cross if you are thinking that reach alone will put you in the black. Tell Wal-Mart (WMT:NYSE) about reach. Tell Home Depot (HD:NYSE). They will tell you that what matters is profitability, not reach. They are in the same world that I am in. There is no cyberworld where reach trumps profits.
And this is the biggest, as far as I can tell. People will never pay for content over the Web. That is totally wrong and is based on the current print world's shaky margin structure. 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. It simply repackages it. 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 that is available 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. In fact, next year will be the year when these free sites began to cannibalize the paid, hard-copy versions, and you will see a margin decline that will knock your socks off. The dead-tree competitors are trapped and we are coming in for the kill.
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, and here I have quotation marks around 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. I will be selling you short all the shares you need of it from my trading turret at my hedge fund. And I promise you, I will never have to cover. |
