Mike: this commentary is from Briefing.com. Interesting.
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For private use only:
Updated: 29-Apr-99
Themes from the H&Q Conference
As the 1999 Hambrecht and Quist Conference continues, several overall themes are emerging. Here's some brief thoughts on some of the themes.
The Dice Game in the Corner
The most obvious theme is the disparity between the "old" technology world of the PC world and the "new" technology world of the internet. Nearly every internet company presentation is packed with high interest and attentive listeners. The "old" technology presentations are more sparsely attended. And at the panel discussion on storage software companies, the manager next to us fell asleep. Money managers know about the PC technology stocks, but the internet stocks are puzzling, and can't be ignored anymore.
Money managers have come to realize that the internet stocks, with their high market capitalizations, and incredible returns, are going to have a major impact on the overall market indexes, particularly the technology indexes. Unless they hold the internets, they risk having returns below the indexes against which they are compared. Their very jobs are on the line. But if they jump in now, they fear they will be entering at the top. It is a quandary of unbelievable proportions, and it is dominating the overall tone of the conference.
It is almost as if a group of street people snuck into the New York Stock Exchange and began playing craps in one corner. At first, institutional people just looked over in wonderment and chuckled. But now all the money is migrating to that corner, with the party getting noisier, the wagers getting higher, and everyone with chips on the tables giving high-fives as the roller just keeps making the point.
Meanwhile the institutional managers are making modest 10% annualized gains, or even losing money in the old standards. (We can't believe how many times we have heard complaints about PeopleSoft (PSFT), for example.) But jumping in now requires abandoning every metric they have ever used for determining a "good investment."
Roger McNamee, of Integrated Capital Partners, educated the money managers at a lunchtime panel with the following explanation of the new game: "$50 a share means the stock is cheap. $150 is fairly valued. $200 is cheap again, because it means a 4-for-1 stock split is coming." The comment generated tremendous laughter, but what the comment really proves is that money managers do not know how to deal with the fact that individuals are slowing taking control of the overall market away from them.
The key question of this year will be whether institutional money decides to enter the internet frenzy in full force, or whether they continue to be tentative about the "new" world of the market and its valuations.
The Battle of Ideas
In the internet world, investing is a battle of ideas. With almost no large scale verification of proof of concept, except for Amazon.com and America Online, all internet companies claim their ideas are the best, and therefore will be dominant over time. The interesting thing about this, of course, is that the market is willing to accept all kinds of ideas right now.
In the past, the venture stage of a company was supposed to provide "proof-of-concept" where the basic business idea was verified. But internet stocks are coming to market far before proof-of-concept. Where unproven business plans would not have been well received at a conference five years ago, today, internet companies try to distinguish themselves by unique and new ideas. Proof that the idea works is expected to come later.
As examples, companies like Inktomi (INKT) and InfoSpace.com (INSP) offered ideas to invest in, not established businesses. Both are basing their future on "percentage of ecommerce" models, but neither have established any track record in this area. But it doesn't matter. The very hypnotic nature of the promise makes for a good investment story.
Horizontal versus Vertical
One of the most dramatic battle of ideas is the "horizontal" versus "vertical" argument. A horizontal web model is one where a single web site or company provides a myriad of services and features, such as Yahoo! (YHOO). A vertical web site is one which focuses on a single service, feature, or user community, such as iVillage (IVIL).
Infospace.com CEO Naveen Jain made the bold claim that only horizontal ecommerce companies would survive. Single focus ecommerce sites will die, he said. Only sites that offer multiple sources and prices for an item would eventually survive.
In contrast, iVillage CEO Candice Carpenter claimed that the new trend is towards focused sites, which iVillage, of course, is. She claimed that advertising dollars were steadily moving away from portals to specialized sites. iVillage, along with its sister site, iBaby, is entirely devoted to women's issues. Discussions and articles about women's issues are surrounding with items to buy. Ironically, iVillage claimed that women's biggest issue is time limitations, squeezing in the responsibilities of professional jobs, mothering, and running a household. With the internet being an incredible time sink in itself, adding iVillage to one's routine would seem to only increase this problem, but apparently two hours spent on iVillage will save four somewhere else. (Disclaimer: this paragraph written by a man.)
Every presentation is a sales pitch for the uniqueness of each company, and not a true analysis of the overall market. While it is interesting that companies have begun to make the "horizontal vs. vertical" argument, Briefing.com believes that there is plenty of room for both types of sites. The focus will be different for each, however.
Vertical sites will occur where brands are already established. Lands End or Delia's do not need to become part of a portal to sell its own line of clothing. Horizontal sites will likely begin to accumulate off-brand merchandise which will need the aggregation of other products to draw traffic.
Search for New Metrics
First if was revenue growth curves. Then it was number of page views. Then it was signup of registered users. Then it was reach. Now some of the internet companies are "inventing" new metrics to justify their "dominance" in some area. eBay (EBAY) came up with a new one in their presentation: "unique visitor minutes per day", which is the number of unique visitors times the average minutes each user stays on the site. Of course, eBay according to the presentation, has the highest unique visitor minutes per day on the internet.
The new metric inventions started with EBITMA, invented by Joy Covey, CFO of Amazon.com. This was the standard EBITDA (Earnings before interest taxes depreciation, and amortization), but with Marketing added in. The first time Ms. Covey used this metric, a year ago, at the 98 H&Q Conference, audible snickers could be heard.
Ms. Covey's point was that any dollar spent on marketing was an investment in brand and barrier to entry and therefore they should spend every possible dollar on marketing. She has clearly won that argument.
After Ms. Covey's successful creation of a new metric, every other internet company has looked for their own.
The latest metric we have heard discussed, not yet seen in any presentation here, but starting to appear in business plans is: PBE, or profits before expenses. Apparently a renaming of gross margin, it is meant to emphasize the leveraged nature of most internet business plans, and is used in graphs that point skyward. Everyone seems to forget that the very word "profit" includes "after expenses" in its definition. Oh well.
But ever since analysts started saying "We expect XYZ company to beat our expectations," doubletalk has become acceptable.
Liquidity Driven Market
If you wanted any proof that this is a liquidity driven market, E*Trade's presentation was it.
In Q1, E*Trade signed up more than 234,000 new accounts, more new signups than in all of 1998. In addition, the total number of transactions, at an average of 70,000 per day, was more than in all of the previous year.
The big question, of course, is rather these new accounts represent money shifted from old brokerage style accounts, or whether they are new accounts. Somehow, we think it mostly represents brand new money as online trading begins to penetrate the entire US culture.
And as long as newbies keep bringing in more money, prices are likely to rise.
Direct Marketing: Just Ask Them
One trend on the internet is the "Big Brother Direct Marketing" argument. Many companies are out there arguing that they will "watch" their customers, measure their web activities, and customize their advertiser pitches, resulting in more efficient targeted marketing.
But XOOM.COM's (XMCM) presentation revealed a much simpler idea:. "Just ask customers what kind of direct marketing they want." Xoom.com allows users to sign up for direct email promotions in categories the users choose. Using this remarkably simple concept, Xoom.com has signed up more than 7 million registered users, all of whom have directly asked for email promotions on items of their interest.
Just ask them what they want to buy. Who would have thought it.
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