>>>>We'll have to start calling you the "spider".
Na...Peckerhead will do.
Big Dumb Companies Wise Up
By Danny Rimer
In the early days of the commercialization of the Internet – say, 1994 or 1995, before Netscape went public but after UUNet did – investors spent a lot of time discussing how the Net would affect the fate of BDCs, or "Big Dumb Companies."
By the time Netscape had gone public, a semiscientific approach to calculating whether companies "got" the Internet had been popularized. Essentially, the theory was that the size of a company was inversely proportional to the size of that company's brain when it came to "getting" the Internet. Aside from a few large infrastructure companies that were direct beneficiaries of the Internet – Cisco, Ascend, Cascade, Dell – the thinking was, the larger the company, the dumber it was.
The BDC theory has held sway for quite some time. Many large companies that had built impressive and defensible businesses in the physical world were caught by surprise when the Internet came along. The BDCs were blindsided by the rapid adoption of the Internet, which has become a mass medium at rates three to five times faster than previous mass media. Unlike Internet companies, BDCs had to figure out how they were going to leverage the new medium without killing their traditional – and profitable – core businesses.
There have been some high-profile fumbles by BDCs trying to figure out a strategy for the Web. In the book business, offline giant Barnes & Noble lost its lead to online upstart Amazon.com. Even more problematic was Pathfinder, Time Warner's ill-fated foray into the portal space.
Both legacy companies applied old-world methods to the dynamic world of the Internet. Pathfinder, for instance, reduced Time's most important magazine brands – People, Fortune, Time, Sports Illustrated – to items in a disorganized information flea market, setting them up to be mocked by their Internet-only rivals. From Amazon to Yahoo, Internet companies continued to charge ahead, while the BDCs were left wearing dunce caps.
Well, I've got news for you: The days of the Big Dumb Company are over. Oh, they're still BDCs – but the acronym now stands for "Big Dot-Coms."
The dramatic progress that AT&T has made over the last 12 months illustrates what happens when a big company with deep pockets decides to take the Internet seriously. Ma Bell went from being a long-distance provider that had made a poorly executed attempt to become a consumer ISP – AT&T WorldNet – to one of the most feared high-speed access providers, spending billions to become a power in the cable business.
The conversion of Big Dumb Companies into Big Dot-Coms has been driven by Wall Street. Until recently, these large traditional players were essentially victims of their own successes. In short, because they had built such strong, defensible and profitable businesses, investors were unwilling to accept the slightest sign of changing business models. For companies that were valued on an earnings-per-share basis to decrease profitability was unacceptable.
Investors have revised their thinking, though, making it clear that revenue growth and market share on the Internet have become more important than anything else. Even with the recent retreat of Internet stock prices, there is no shortage of examples. Consider, for instance, Priceline.com, which has a market capitalization greater than the airlines for which it sells tickets.
Clearly, investors have shifted their focus from earnings to revenue and from model defensibility to sheer growth. And traditional companies have begun to hear the message. These companies finally realize that investors will reward them for a dot-com strategy. To lure investors, it won't be good enough to have physical world dominance. Companies will need to show digital world dominance, too – even if it comes at the expense of brick-and-mortar results.
Looking ahead at the rest of 1999 and into 2000, we'll see big companies take a revamped approach to the Internet. These companies will spend vast resources to dominate their business segments over the Web. This suggests that investors can no longer discount the success of an offline giant trying to move to the Web. Nor can they evaluate fledgling Web enterprises by looking at the market opportunity of a specific vertical category and assuming that the market share of a traditional player will shift to a Net company.
In short, competition on the Net is about to get tougher, thanks to Wall Street's recent wake-up call to the BDCs.
Danny Rimer, an analyst with Hambrecht & Quist, maintains research coverage of AtHome, BroadVision, Concur, CNET, InfoSpace, Inktomi, Netscape, Pilot Network Services, USWeb and VeriSign. Reach him at drimer@hamquist.com.
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