In support of Charter Communications. Jeff
fnews.yahoo.com
Industry Analysis
Nov 30, 1999
Internet: BID & ASK: Applying History to Internet Investing
Tom Byrne (11/30/99)
Who made more money on radio, the companies that developed programming, the companies that made the radios, or the companies that delivered electricity that allowed you to listen to the radio?
Answer: It?s not the first two.
Who made more money on TV, the broadcasting companies, the companies that made the TVs, or the companies that delivered electricity, allowing you to watch TV?
Answer: It?s not the first two.
The companies that made radios and TVs, like Emerson and Magnavox, don?t even exist anymore.
In fact, there is not one U.S.-based company that makes TVs, a far cry from 50 years ago when Westinghouse and Magnavox were the ONLY companies in the world that made TVs.
So what is my point? History tells us to buy companies that give you access to the medium, not companies that create content for the medium. Which brings us to the Internet.
The Internet is the fourth largest medium to hit the world in the last 100 years, based on its ability to reach a large part of the population.
Radio was first, and within 20 years of its invention, more than 50% of the U.S. population had a radio. Today, more than 90% of U.S. households have a radio.
TV was second, and within 20 years of its invention, more than 50% of the U.S. population had a TV. Today, more than 80% of U.S. households have a TV.
The computer was third (although strictly speaking the computer is not a medium, as far as its impact on business and the home I am including it as a major force), and within 20 years of its invention, more than 30% of the U.S. population had a computer.
The Internet is fourth, and within five years of its introduction, more than 50% of the U.S. population has accessed the Internet. Today, more than 60 million people in the U.S. access the Internet regularly, or about 17% of the population.
If the Internet is going to be as ubiquitous as its predecessors, the radio and the TV, who is going to end up making more money - the content providers, the companies that make computers, or the companies that make fiber optics, cable and other transmission conduits?
This one is easy, and it?s not the first two.
That?s why history can be such a great guide when you are investing.
At the turn of this century, Edison Electric and Bell Telephone provided electricity and telephone lines that made access to radios and TV possible. One hundred years later, both of those companies are still around.
Edison Electric became the second-largest company in the world in terms of market cap, General Electric. Bell Telephone became AT&T and the baby bells (if you add them all together, they would be the second largest company in the world). Interestingly, the largest company in the world is Nippon Telephone & Telegraph, which has a virtual monopoly on the Japanese telecommunications industry.
The Internet, within 20 years of its debut, is going to be as ubiquitous as the radio and the TV, probably faster.
If I use history as a guide, I have a pretty good idea where to invest. Content providers are a dime a dozen. In less than five years, more than 20,000 Web sites have been established, which are the official numbers. More likely, there are five times that number. So I wouldn?t buy them. The field is too crowded and it is almost impossible to get an audience of critical mass.
Companies that sell computers are growing their sales by leaps and bounds -- but not their profits. Competition is causing price wars, which is eating into profit margins. So I wouldn?t buy them. TV and radio manufacturers ended up going broke due to competitive pricing pressure for a commodity item.
Companies that sell transmission conduits, such as cable lines, T1 lines, DSL lines, routers and switches, and satellite equipment are going to profit. Consider them the Edison Electrics and Bell Telephones of the turn of the next century. Global Crossing (NASDAQ:GBLX - news) , RCN Corp. (NASDAQ:RCNC - news) , Corning Inc. (NYSE:GLW - news) , PSINet (NASDAQ:PSIX - news) and Charter Communications (NASDAQ:CHTR - news) are all great plays in this arena.
Vital Viatel
One of my favorites, though, is Viatel (NASDAQ:VYTL - news) , which is building a fiber optic network in Europe that will connect 35 cities in six countries.
Viatel already has over 3,000 route kilometers of high capacity, fiber-optic, broadband network infrastructure (called the Circe Pan-European Network) in commercial service in Western Europe, with an additional 5,700 route kilometers scheduled to go into service by mid-year 2000.
Viatel also has a presence in the U.S., with its recent purchase of Destia (NASDAQ:DEST - news) . The combined company has a broadband network that delivers a full array of communications services, including voice, high speed Internet access, digital subscriber line services (DSL), virtual private network services and other data applications to over 700,000 customers in North America and Western Europe.
Viatel is a telecommunications infrastructure company, and as such, it spends an enormous amount on its equipment ($238 million in the last quarter alone). Exorbitant capital spending has not allowed the company to post a profit yet. Nor will it in the next several years. This is not an earnings story; with a company like Viatel you are looking for cash flow to become positive, which will happen in fiscal 2001.
Bottom Line:
Viatel is currently trading hands around $46. If the company turns cash flow positive in 2001, the stock price will easily triple. That will be some nice history to look back on for your portfolio. |
