MARCH 21, 2000
"THE FUTURE OF DATA IS LIGHT"
Steve Harmon, CEO of Net investor e-harmon.com, on what's happening in the market now: Optical networking
Internet stocks have been highly volatile lately, but that doesn't concern Steve Harmon, CEO of Internet investment center e-harmon.com. He believes the Net is changing business forever and that it's healthy for the stocks to correct because they've gone too high too soon. That said, not all Internet sectors are created equal. He sees photonics (optical networking) as the hottest sector right now, and he expects the big networking companies to start buying these companies in the near future.
In a chat hosted by Business Week Online on America Online on Mar. 16, Harmon discussed his views on a number of Internet sectors. He also talked about upcoming IPOs worth looking at, the B2B sector, and the changing role of venture capitalists. Here is an edited transcript of Harmon's answers to questions from the online audience and from Business Week Online moderator Jack Dierdorff. The full transcript is available from Business Week Online on AOL at keyword: BW Talk.
Q: The market action in the last few days has prompted a lot of talk about Old Economy stocks coming back and New Economy stocks, such as Net issues, getting their comeuppance. How do you view the recent days from a Net stock perspective?
A: I think it is healthy. The tech and Internet stocks were getting way too ahead of themselves. The Dow is actually down, year-to-date, whereas the Nasdaq is up year-to-date. So it's important to keep it in context and look at the bigger picture. The Internet is changing business forever, and there is no longer a debate about Old Economy vs. New Economy. It is simply the economy.
Q: What is the best B2B play?
A: The best B2B play is probably Commerce One. They enable the Old Economy to become the New Economy. Companies do procurement using the Internet, and that's very powerful. I encourage everyone to take a look at it.
Q: What do you think of eBay?
A: I think eBay has a critical mass in the consumer-auction space, but now it's time for them to leverage their technology for more business-centric auctions and procurement. They have a long way to go to embrace the business side, and I think they have maxed out on the consumer side.
Q: What is your thinking on the prospects for Check Point Software?
A: I think Check Point has an enviable lead in the firewall software market. Firewalls protect corporate networks, an area which I think is massive and certainly underserved even today.
Q: How about PeopleSoft? Do you foresee this stock breaking out?
A: PeopleSoft could break out, but I think they are losing market share to the more Internet-based efforts. The problem with PeopleSoft is they are migrating to the Internet base, but the startups are already there.
Q: New techs, such as broadband, photonics, B2B, wireless, and biotech seem to do better than the pure Net. What are the growth areas?
A: Photonics is the hottest sector by far. Photonics is optical networking, which basically sends data as light. The future of data is light. Fiber and light -- that is the Net 5 or 10 years from now, and photonics is right in the middle of it. I expect Cisco, 3Com, Nortel, and Lucent to be acquiring in the photonics space very soon. Otherwise, the photonics companies will get larger than they are. It has already happened with JDS Uniphase.
Q: Do you think that the good venture capitalists are the smartest investors in the world, or were they just lucky enough to be in the right place at the right time?
A: I think it is their business to invest, so it is half luck and maybe half brains. Venture capital is changing, however. I don't think it is enough just to invest in companies. I think the better firms will help companies grow and manage the process from idea to IPO and from IPO to public market. They will also be proactive in helping entrepreneurs navigate the risk that is out there.
Q: Do you know of any IPOs coming up among the tech stocks that you would recommend?
A: One company is Blaze Software, in Internet-infrastructure software -- it could be one to keep an eye on. It is scheduled for the week of Mar. 20. Also, AltaVista from CMGI. A third one will be Broadview Networks, in Internet-telecommunications services. They should come out the week of Mar. 27 from Goldman Sachs.
Q: Where do you see 3Com and Palm going?
A: I think 3Com could be a better stock. It is going to have to get into photonics in order to grow, or it's in big trouble, because networking is all photonics in the future. I think Palm as a hardware play is not a good idea because there are 500 million cell phones in the world that are migrating to be PDAs [personal digital assistants], whereas there are 3 million Palms that want to be cell phones.
Q: What do you think of Yahoo!?
A: Well, Yahoo could be interesting. It is a little expensive. On the Internet there is one important rule -- the rule of one degree of separation. In other words, once you have a digital enterprise and a digital relationship with a customer, you can do any business. You are one click away from doing anything they want to do. That is very powerful. The key is having a critical mass of relationships or a platform.
A good example is Microsoft getting into mortgages, via a separate company. It's getting companies like Merrill Lynch, Citibank, and PaineWebber nervous. They could all lose their core businesses because the digital companies have a direct relationship with the customers. That's what companies are scared of. Nobody would have guessed that Microsoft would do mortgages. What is next? Where do they want to go tomorrow? Anywhere they want.
Q: Do you think that the advent of the Internet has made it harder or easier for the individual investor to keep up with the institutions?
A: I think in some ways. individuals may be ahead of institutions because knowledge transfer is immediate. But unfortunately, institutions cherry-pick all the best stocks at IPO time. The situation, we think, needs correcting. We continue to look into it.
Q: What do you think of the online brokers as investments?
A: The online brokers have become a commodity, and they are starting to look more like traditional banks. E*Trade is going after ATM machines and online bank accounts. To me, they are losing some appeal. It is a mechanical process, executing a trade. ECNs are better if they only migrate to the retail space.
Q: What do you think of CMGI?
A: I think CMGI is making some of the right moves in the Internet space. They are extremely efficient and intelligent, and I am somewhat biased because Dave Wetherell is a professional colleague of mine who I have a lot of respect for. But I think long term, CMGI has been and could continue to be an incredible company. Their portfolio is $15 billion, and AltaVista is probably going to be $5 billion. So you are paying $10 billion for CMGI for future funds and the existing platform. It is reasonable. It could be bigger than Oracle if they execute right.
Q: How do you feel the CRM [customer-relationship management] market will play out?
A: There are lots of players in the space, including Siebel, Oracle, Kana Communications, and eGain. It is quite likely that there will be a time when there will be a material consolidation, and it is better to own a player that has the currency to acquire right now. Those players are Kana Communications, Siebel, and also a potential spin-off from Oracle.
Q: What are your top five buys now?
A: JDS Uniphase in the photonics sector, Kana in customer-relationship management, ,Asiainfo Holdings in Internet infrastructure, Net Perceptions in personalized marketing, and NBC Internet as a consumer play. NBC television is in 99 million homes, and 70 million homes receive CNBC. GE is the ultimate conglomerate with very deep pockets, so I await movement with NBCI.
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