The Internet Analyst....DLK
Forget About Semantics, Convergence Means
Opportunity
By Lauren Keyson
When a new technology or device or invention comes along, do people really want to think about
changing in order to adopt it? I'm sure even the cup-holders on movie theater seats had their
detractors when they were introduced, because even the coolest new ideas mean effort and risk.
And, why get a phone with buttons when a rotary dial works just as well?
All right, I'll try to get serious. Change – especially in the fast-moving technology sector – is a critical
concept for investors and managers. Clayton M. Christensen has written a terrific book, "The
Innovators Dilemma," that explores how smart, well-run companies get blindsided by new wrinkles in
technology. These companies focused on developing profitable businesses that serve their
customers. They never bothered to see that a seemingly insignificant development – one for which
there was no demand in their target markets – could grow large enough to overwhelm their strategy.
But it has happened time and again. "The Innovators Dilemma" is must reading, and it brings me
back to convergence. Many investors believe that buying a pure-play Internet, telecom or computer
company gives them the same benefits of a convergence company without the added risk. I'm
pounding the table on convergence because pure-play, single-note companies tend to become commodities, moving ever further down
technology's food chain.
The synergy reaped by weaving together a plethora of proven components into a new and interconnected solution is the wave of the future.
And I'm not talking semantics. I am not just saying that the Internet by itself is an example of convergence. Sure, you can take a computer,
a phone line or phone jack, and application server, and you can pull all these things together to create the Internet, which is far greater than
the sum of all its parts.
But convergence is bigger than that. It has almost unlimited applications. I've heard from readers and a few of my faithless colleagues that
convergence is a trend. They believe convergence is just another way of taking advantage of economies of scale and scope, like back in the
1950s when investors were investing in glassmakers as a way of playing the then high-growth auto industry. But when you intertwine
computers, the Internet, telecommunications and media/content, you have a whole new market, a new investment opportunity. We're talking
about being at the leading edge of investing and getting in on the first-mover and early-adopter curve.
I called Anthony N. LaPine, the chairman, president, and chief executive officer of DATALINK NET (DLK) to talk about his
convergence-industry company. His company is best known as a wireless application service provider (ASP). Its consumer business delivers
financial and lifestyle information to wireless devices. Its enterprise operations enable Web companies to extend their businesses to the
wireless space. So, DATALINK has all four of my convergence components. It's a wireless ASP that works extensively with software and
writes custom software applications. The company is carrier agnostic, device independent and protocol universal. On top of that, DATALINK
aggregates content for 500 providers and also supplies market news, financial products, the weather and even horoscopes. Whew!
Investing in DATALINK is a good example of convergence investing because it's all about synergy. I asked Mr. LaPine about the risks
associated with convergence companies. "You want to get in on these types of companies because of the reward of buying into one that
makes it," he said. "You know the biblical saying, 'Many are called, few are chosen.' Many companies have gone public, few have survived.
And even fewer will have survived before it's all done. I came out of the storage industry, where at one time we had 72 disk drive companies,
and today there are only four major disk drive companies in the world."
"If you're looking for low risk, I would suggest a money market account or cash," said Mr. LaPine. "On the other hand, if you're looking for
attractive serious returns that can be in the thousand-percent range, then you have to assume much higher risks. Emerging technologies
tend to be very high risk and very high reward. And anyone who is a sophisticated investor will have some funds in emerging technologies."
DATALINK was one of the first companies we put on our Convergence Industry Index. The company gets a consensus BUY/HOLD rating
from Wall Street according to the most recent Multex Investment Review for the company. DATALINK lost $0.59 a share in fiscal 2000,
which ended in March. The consensus forecast calls for a loss of $0.63 a share in fiscal 2001 and a loss of $0.74 a share in fiscal 2002. For
its fiscal first quarter analysts expect DATALINK to report a loss of $0.10 a share. DATALINK's stock has been volatile – it hit a record high
of $44.63 on March 22, 2000 only to drop as low as $8.50 at the end of May. The shares closed at $21.56 on July 25, up nearly fourfold for
the year to date.
DATALINK recently announced that it will switch from the American Stock Exchange to the Nasdaq National Market. "There's a perception
and an expectation that high-tech companies like DATALINK are Nasdaq companies," said Mr. LaPine. "So we have been pushed by
shareholders and institutions to move to Nasdaq so as not to carry any stigma that might be from a legacy point of view related to Amex. I'm
leaving with a saddened heart, but we have to do what's in our best interest of our shareholders."
I want to thank the readers who wrote in with many new suggestions for our Convergence Index, The new additions, which bring the total
number of companies to 24, include CHEQUEMATE INTERNATIONAL (DDD), SCIENTIFIC-ATLANTA (SFA), SOURCE MEDIA (SRCM),
TIVO (TIVO) and UNITED PAN-EUROPE COMMUNICATIONS (UPCOY). UPC, suggested by a reader in the United Kingdom, is one of my
favorites. It's noteworthy because, as Europe's largest cable/broadband operator, it also owns a content supplier. It has Internet presence
through chello, which is merging with EXCITE@HOME's (ATHM) international operations. Through its Priority division, UPC offers telephone
service over cable. It's involved in hardware because it will run all these services via a digital set-top computer.
We'll talk more about this and other Convergence entrants in next week's column. Keep writing in with your Convergence suggestions and
comments to Lkeyson@multex.com.
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