Analyst looking for big moves in DRIV..From Briefing.com.." Notes From the Conference Front updated 2/23/99
The BancBoston Robertson Stephens Tech99 Conference is taking place this week at the Ritz Carlton Hotel in San Francisco.
Here is a Brief list of some observations from the first day.
The Bottom is Open; The Top is Closed
An interesting contrast in strategies emerged between CISCO's presentation and the Internet Panel Discussion on the future of the Internet.
In CISCO's presentation, Don Listwin, EVP, argued that the growing trend in the infrastructure of the internet is open standards. Clearly this is currently true for IP based computer networks. You can use an server, any web-server software, and any browser,. But the trend is also happening, according to CISCO, in voice telephony systems and in wireless infrastructures, both of which are still dominated by proprietary vertical systems. If you buy a Lucent telephony systems, you can't attach non-Lucent phones to it. But with IP-based voice packets as a standard, the enterprise telephone marketplace will become open. CISCO argues that in an open system environment, they are the clear winners, because of their superior distribution and efficient production cycle.
But at the top "layer" of the Internet, companies like AOL are arguing that because they are the Internet to most people, AOL has a winning edge. Because AOL can capture the user and contain them within the "AOL experience" AOL will be able to control ecommerce with the customer.
It is almost as if the largest internet companies are arguing that the internet is a proprietary system, and they own it.
So should the Internet be considered an "open system environment?" From a hardware point of view, CISCO argues yes. At the ecommerce level, however, the leading ecommerce vendors would prefer that investors think of it as closed environment. "Since we own the customer" they argue, "we will capture the ecommerce revenue."
It's a interesting contrast in perception. Why is it that the top layer of the internet is being treated as a proprietary layer, when it could just as easily be viewed as an open layer? You don't have to buy anything from AOL ecommerce vendors, when you can just easily buy from anything on the internet? Nevertheless, institutional investors clearly perceive the fight at the top layer of the internet as a fight for proprietary dominance.
But what if the internet turns out to the most open architecture of all, including ecommerce habits?
Bigger than Portals: ICQ
America Online made a startling point at their presentation. When asked why AOL would pay $400 million for a company that had no revenues, Ted Leonsis, President of America Online Studios, stated, "Because it is worth $4 billion. ICQ is bigger than portals." Expanding on that idea, he note that ICQ has more registered users than any portal, at 30 million, and it only took 21 months to achieve that. 85,000 new users are registered every day and more than 1 million users actively using it everyday. Furthermore, ICQ is a true "sticky" portal, because users keep it on their screens continually. How AOL will leverage ICQ for ecommerce isn't clear yet, but it is obvious they plan to.
The implication is also that AOL will not need to join forces with any existing portal.
Bigger than Ecommerce
In the lunchtime panel discussion by Robertson Stephens analysts Keith Benjamin and Lauren Cooks Levitan, Mr. Benjamin asserted that while everyone thinks the Internet will boom, the real boom will happen in the "enabling technologies" sector, not the ecommerce level. Here are his projections for the year 2001 for total revenues from each component.
Market Segment Projected Size, Billions, in 2001
Consumer Access Fees 12
Business Access Fees 16
Business-to-Consumer Advertising 16
Business-to-Consumer Commerce 23
Business-to-Business Advertising 1.4
Business-to-Business Commerce 200
Enabling Technologies 750
Enabling technologies, the pieces of the internet infrastructure is more than twice the size of all other components put together.
Mr. Benjamin's leading picks in each category of the enabling technology level are listed below.
Segment Companies Combined Market Cap. 1999
PCs IBM, DELL, CPQ, HWP 420
Software MSFT, ORCL, BVSN 452
Network Hardware CSCO, ASND, COMS 188
Services WCOM, EXDS, USWB 157
Security CHKPF, ENTU, ISSX, SDTI 5
What It Takes to Win In The Internet; The Current Monsters
Institutional investors all agree: Big is Better. big is defined by revenue, not market cap. The theory is that eventually profits will be possible, if revenues are big enough. How will current big internet companies get bigger? According to Mr. Benjamin, the following tactics are necessary to become, or stay, a monster on the Internet.
Use inflated stock currency for acquisitions
Partner with existing media companies
Grow revenues faster than competitors
Mr. Benjamin's current monsters are: America Online (AOL), Amazon.com (AMZN), Network Solutions (NSOL), and the Lycos (LCOS)/TicketMaster (TMCS)/USA Networks combination. Continuing to grow revenues at incredible rates, as difficult as that may seem, is crucial. In fact, Mr. Benjamin expressed reservations about @Home (ATHM) with the statement that if they didn't reach a level of 2 million users by the end of 1999, he would be worried about the future of the company. Big is better. Big is necessary. At least for institutional investors.
The Next Monsters
Also from the Internet Panel Discussion was a list of the "next monsters" of the internet. Here are Mr. Benjamin's picks for the Internet companies must likely to go on acquisition sprees to grow bigger as fast as possible.
Digital River (DRIV)
CNET (CNET)
@Home (ATHM)
Excite (XCIT)
The Next Meals
So who will be acquired in the great acquisition spree to build the giant Internet companies? Here's the list of the most likely "meals," according to Mr. Benjamin.
Sportsline USA (SPLN)
Preview Travel (PTVL)
DoubleClick (DCLK)
NetGravity (NETG)
Getty Images (GETY)
The Virtual Retailer Is A Myth
Another interesting point made by Ms. Levitan is that the virtual retailer is a myth of the internet. Investors have been fond of stating that internet retailers have no "brick-and-mortar" expenses as they expand. But expansion for internet retailers does come with expense, and it is considerable. Higher technology costs, especially as we move into broadband, are proving to be considerable. While brick-and-mortar costs are smaller, the idea that virtually unlimited upward leverage is possible, should be discarded.
The Next Wave
Finally, the Robertson Stephens analysts listed the private or recently public companies most likely to be the next important internet companies. Here's the list:
Digital River (DRIV)
Stamps.com and/or eStamp
iPrint
Loopnet
RealSelect
AllApartments.com and/or Rent.net
MonsterBoard
Chemdex
However, Mr. Benjamin also stated that it looks like Q2 will have a glut of internet IPOs, judging from the deals in the pipeline.
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