Don't be a fool on Internet stocks
BY DAN GILLMOR (Dec 29, 1998)
Mercury News Technology Columnist
WHEN the Internet stock-gambling bubble finally bursts, as it
surely will, the greatest fools will suffer the most, as they always
do. But if history is any guide, the people who took them for fools
will have already cashed in their winnings.
In this sickening replay of previous manias, the losers will find
themselves with few allies. They'll be written off as greedy
suckers who wanted something for nothing and got what they
deserved -- while the financial daisy chain that put the mania in
motion will retreat into its comfortable lair for a time, waiting for
the next crowd of greater fools.
When? I have no idea. I would never advise anyone to bet
against market momentum in the short run.
I am absolutely convinced, moreover, that the Internet will be the
catalyst for enormous change in our economy and culture, and
that in at least a few cases genuine value is being created in this
market. So I'm sure that some of today's hot Internet companies
have a strong future. A couple may even be worth buying at
today's prices.
But if you believe that all or even most of the so-called Internet
stocks are worth anything like their current valuations, you must
also believe that the Internet will utterly destroy almost all of what
has come before it. You must be convinced that the new
e-businesses will not only take their place alongside today's
brick-and-mortar brands but will actually supplant most of them.
Otherwise this makes no sense.
But look at the numbers -- and I'm not talking about Zapata's
on-again, off-again Zap ''network'' and the other flaky companies
that zoom in price on the slightest of pronouncements. Look at
the supposedly gilt-edged outfits. Their valuations suggest that
investors are betting on a total upheaval of today's marketplace.
Consider the eBay Web-auction site, now valued by investors at
about $12 billion -- almost as much as Kellogg, the giant food
company. Last week, Amazon.com's market capitalization
exceeded the Sears retail empire. And America Online moved
ahead of Disney.
The total-upheaval scenario strikes me as unlikely. But it's not
impossible: Witness the way industry after entrenched industry --
including much of the newspaper business -- has reacted to the
Internet like a deer frozen in the headlights of an oncoming car.
That hesitation stems from a dilemma faced by many traditional
businesses. They grew up with business models that don't
translate well to the Internet, or which are open to attack from
smaller, more nimble start-up companies.
Some entrenched businesses undoubtedly will be replaced over
time. But not all; smart companies will incorporate the Net into
their everyday existence -- enduring some painful transitions, no
doubt, but ultimately moving into the new era with their brands
intact or stronger than ever. And new Net companies will quickly
imitate today's successful upstarts.
I doubt that most Internet investors are expecting a total
overturning of today's economy. I suspect they're jumping on a
rocket ship that has brought such public wealth to so many, and
want some of that lucre. (Are the small investors pouring money
into Net companies considering what will happen to their own
jobs and lives if the economy changes to that degree? I doubt it.)
I believe an Internet-stock reckoning is coming, because I don't
believe we've repealed all of the business logic of the past, or the
laws of supply and demand. In the meantime, however, we've
abandoned some venerable principles -- assuming they meant
something in the first place.
Our economic system is unencumbered today by such notions as
civic responsibility or ethics. The game is about pure power and
greed. From venture capitalists to executives of start-up
companies to investment bankers to stock brokers to investors,
no one wants to miss out on the boom that is spraying money
around like water from a fire hose.
They play because they can, knowing they're fueling a bubble but
unwilling to say no. Company X went public at an early stage and
raised a bundle of cash, so the people running Company Y want
to stay competitive and go public, too, and they know there are
plenty of naive investors willing to buy shares in the most
speculative venture so long as it has some connection to the
Internet. The bankers and brokers earn millions in fees; they may
know they're selling garbage, but they also know that if they don't
make the deal, someone else will. The credulous media keep
telling the amazing stories of lottery-like stock rises, making
heroes of people who are just this side of con artists.
And the bubble keeps inflating.
The cynicism is beyond breathtaking. The consequences will be
devastating to small investors who told themselves they were
buying a sure thing. In fact, they treated their savings like a
hundred-dollar bill at a Las Vegas blackjack table, where the
casino can legally eject any customer who figures out how to win
consistently.
If justice had anything to do with markets, the people most to
blame for the coming debacle would be held accountable. It
doesn't anymore (if it ever did), and they won't.
So remember: If you are a small investor and playing this market
with money you really can't afford to lose, you are nothing but a
gambler. You may win. But you are playing a fool's game. Don't
expect much sympathy if you lose.
Dan Gillmor's column appears each Sunday, Tuesday and Friday.
Write him (and please include a daytime phone number -- for
verification, not publication) at the Mercury News, 750 Ridder
Park Drive, San Jose, Calif. 95190; e-mail:
dgillmor@sjmercury.com; phone (408) 920-5016; fax (408)
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