from Article---Myth: We are filing dozens of patents which protect us from competition.
Truth: Internet patents granted in the United States are a false gold rush. First, many of them are granted based on poorly prepared applications that include no patent prior art. Second, many patents ignore non-patent prior art. Xybernaut claims to have invented wearable computers in the '90s, even though certain geeks have published articles about wearing their computers and digital cameras since the early 1980s. Third, patents are granted for fancy descriptions of common Internet technology, not for anything remotely approaching something novel or non-obvious. Amazon.com has found itself victim of a boycott led by Richard Stallman. He claims that Amazon told an outrageous lie to win its one-click shopping patent-infringement case against barnesandnoble.com.
Stallman is right. The one-click patent is a fancy way to talk about cookies, which are not patented, nor do they belong to Amazon in any proprietary way. Patenting one-click shopping is like patenting the ?process? of having your refrigerator magnet hold down a carbon copy of your shopping list, and saying this is ?one pick shopping? because it has a copy of your previous information. Only a truly Net-incompetent court would let this stand, but this was not hard to find.
I predict that the tough cybersquatters law (up to five years in jail and a $100,000 fine) will be expanded to include claiming patents for obvious or prior art. Such trumped-up patent claims are the worst form of cybersquatting, and are simply unenforceable internationally, as the offshore casino business indicates. The practice is yet another reason that foreign firms will end up taking market share against U.S. firms, who will be too patent paranoid to improve their models.
intellectualcapital.com
The Myths that Support Massive Internet Market Caps
by Alex Lightman
Thursday, January 13, 2000
Comments: 28 posts
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From the safety and smugness of the post-Y2K days, we look across the landscape of time and wonder, at the marvelous works of, well, ourselves. Our opinion of ourselves, especially those of us in the Internet industry, is to think we are just simply the best that has ever been. The proof is in the market capitalization of America's public companies: the highest value ever recorded, by a wide margin. About $20 trillion in aggregate valuation, enough to buy a controlling interest in every firm on earth outside of America.
The Internet sector will be the largest fraction if current trends continue. Though it loses money at an increasingly rapid rate, the Net sector will soon be valued at over $1 trillion, or about 5% of the whole shebang. This valuation is built out of hundreds of dot coms, which, in turn, are built not on inventions, improvements, genius, tonnage, sales, profits, or billions served, but on "stories." You tell your business plan to investors, and if they think it will attract other investors, you receive the eloquently simple, "What a great story."
Dangerous beliefs
Can the market survive
the dot-com mythmaking?
These stories form the hook to grab investors like fish. Here are seven common building blocks of investor-hooking stories, which contribute to the dot-com mythmaking. All are false indicators of sustainable market capitalization, and companies with investors who believed these statements will, sooner or later, learn that they are false. A drop is inevitable, costing Americans trillions of dollars in lost wealth. This would not be so bad if Americans actually saved cash, but we do not, and stock market gains have filled in the gap.
Myth: The Internet is adding tens of millions of users across America monthly, and growing wildly.
Truth: The Internet's growth in the U.S. has slowed dramatically. According to a controversial study by Cyber Dialogue: "The number of U.S. adults online grew at an annualized rate of 13% the first half of 1999 vs. 58% the same period last year, according to the report. While the Web's meteoric growth rate was expected to slow, the sharp decline surprised analysts. Only 3.9 million adults went online for the first time during the first six months vs. 12 million a year ago, according to the report."
Just a few years ago, there were 10 PCs for every Net connection. Now that ratio is almost one to one, and PC penetration, at 56%, is stalling out. Reporters, enamored with a tool that has kept them out of libraries, mistakenly grope to hype the growth of the Net. The number of users who have tried the Net and left has risen in the last year from 9 million to about 25 million. Look for single digit, or even negative growth, this year in the United States, not counting voice phones that simply add simple data connections.
Myth: America is such a large market that we can ignore the rest of the world.
Truth: I heard this from venture capitalist Neil Weintraut at the spring 1999 Internet World in Los Angeles. Never mind that 97% of all humans do not live in the United States, and that 93% do not speak English as their native language. The fact is that foreign enterprises, starting with Israel and northern Europe, are going after global markets, and naturally America will be included. This narrow focus already has resulted in American companies (like Motorola, inventor of the mobile phone) losing out on the first phase of wireless-phone market leadership, which leads to a double assault on our standards leadership. Internationally savvy wireless Internet firms will gain market share in a stagnant, slow growth U.S. market, instead of U.S. firms leading internationally.
Look into it: Coca-Cola derives more than two-thirds of its revenues and earnings abroad. Does any public U.S. dot com derive even a third of its revenue internationally? Not to the best of my knowledge. The leading Internet companies of the future will derive less than 25% of their revenues from the United States -- the same proportion as the U.S. share of gross domestic product. No American companies are likely to achieve this because they are too U.S.-centric.
Myth: We are filing dozens of patents which protect us from competition.
Truth: Internet patents granted in the United States are a false gold rush. First, many of them are granted based on poorly prepared applications that include no patent prior art. Second, many patents ignore non-patent prior art. Xybernaut claims to have invented wearable computers in the '90s, even though certain geeks have published articles about wearing their computers and digital cameras since the early 1980s. Third, patents are granted for fancy descriptions of common Internet technology, not for anything remotely approaching something novel or non-obvious. Amazon.com has found itself victim of a boycott led by Richard Stallman. He claims that Amazon told an outrageous lie to win its one-click shopping patent-infringement case against barnesandnoble.com.
Stallman is right. The one-click patent is a fancy way to talk about cookies, which are not patented, nor do they belong to Amazon in any proprietary way. Patenting one-click shopping is like patenting the ?process? of having your refrigerator magnet hold down a carbon copy of your shopping list, and saying this is ?one pick shopping? because it has a copy of your previous information. Only a truly Net-incompetent court would let this stand, but this was not hard to find.
I predict that the tough cybersquatters law (up to five years in jail and a $100,000 fine) will be expanded to include claiming patents for obvious or prior art. Such trumped-up patent claims are the worst form of cybersquatting, and are simply unenforceable internationally, as the offshore casino business indicates. The practice is yet another reason that foreign firms will end up taking market share against U.S. firms, who will be too patent paranoid to improve their models.
Myth: We have the top-tier venture capital firms and, consequently, the top-tier investment banks backing us, and they never lose because they can just arrange a sale to another of their keiretsu companies.
Truth: So far, so good for this one. If you get VC money from firms such as Kleiner Perkins or Benchmark, (which rank as wonders of the modern world for their staggering successes) and select few other firms, and get taken public by Goldman or Morgan Stanley, you have won. Institutions will buy your stock and might not even flip it the first day. If you burn through your money, you have an immortality card: keiretsu acquisition. Your firm can, at least today, be sold to another affiliated firm, providing the illusion that this acquisition safety net will always be available. Though Netscape was going to get crushed by Microsoft, Kleiner was able to help arrange a sale to AOL for what Kleiner claims was a $15-billion valuation. Kleiner also was able to merge Excite, overpowered by Yahoo, with another Kleiner creation, @Home, and then sell the money loser to AT&T.
However, what works for a few Internet industry icons (every one but the last buyer makes money) cannot work if hundreds of companies start doing secondary offerings, burn through this money, and then still cannot be financially self-sufficient. There is not enough capital to absorb them a trillion dollars worth of turkey even if during a hurricane a turkey can fly. Consider Amazon, again. After burning through its IPO money and much of its $1.2-billion debt offering -- like the old joke, "losing money on each book and trying to make it up on volume" -- it may run out of cash in early 2000, according to Forbes.
Myth: We will keep losing money until the cone of opportunity to any possible competition closes, and we own the market.
Truth: Amazon?s Jeff Bezos' claim in his Time ?Person of the Year? article about the cone is terribly flawed. Since Amazon sells 17 million different products, there will always be competitors of all sizes for all or nearly all of Amazon's products, now and forever. Bezos should get someone to tell him about Harvard Business School Professor Michael Porter's model of competition, which includes barriers to entry (none!), barriers to exit (none!), new entrants (virtually endless, from around the world), substitute products (for information products like books? Also endless) and existing rivalries. Amazon's competition is Wal-Mart, which can accept returns at more than 1,300 stores.
Given that Wal-Mart sells over $100 billion in products annually, and is valued at greater than this amount, the company will never leave the market, and Amazon will have to continue selling at a loss just to keep up. If computers can be given away as part of Internet subscriptions, why not other things -- like the ones Amazon has to sell instead of give away -- like books and electronics?
Myth: Mind share equals market value, so we can build share of mind through television advertising, even if we have the same offering as other companies.
Truth: According to ?The 22 Immutable Laws of Branding,? a company cannot profitably create or build a brand through advertising, but must do it through (free) public relations. A company does this by being first in its category, and getting all the publicity for years to come, like true pioneer eBay. How many Internet companies are really first in their category? I've seen dozens of ads each from dot-com upstarts such as Fogdog, Dsports, Checkout, Boo, Outpost and Beyond, but have never gone to one of their sites, proving, at least to me, that even with name recognition, you can still have nothing, and that mind share does not equal market value.
Myth: The technical issues are all solved, and everything will work fine, all the time.
Truth: As eBay learned, even real pioneers with $25-billion market caps still have technical issues. eBay experienced outages for 10 to 24 hours on several occasions, but other sites did not mock it because the same thing could happen to them. Telephone companies might have 99.9% uptime, but they have had over 100 years to work on quality of service refinements to Alexander Graham Bell's system. The fact is that Web sites cannot approach this level of quality, and thus risk alienating customers in ways that are beyond their span of control.
A dash of cold water
In sum, the story for the leading U.S.-based public dot coms is not as good as most investors imagine. So why are they still valued so highly? Two reasons: They still have cash from their IPOs to waste on advertising and expanding, and they serve as "placeholders" for the added value that the Internet will add to all companies.
However, it is increasingly likely that existing brick-and-mortar companies will end up adding this market cap because they can "close the loop" by having humans give input and accept returns. American corporations already put half their capital spending into information systems, over $1 trillion annually. Put this into servers and e-commerce software for a year or two, and you have everything that the dot coms have, other than the seven story points above. And these aren't worth a trillion dollars.
The dot coms' can salvage their value only by using inflated shares to simply buy their temporarily undervalued brick-and-mortar counterparts. Otherwise, as pointed out by TheStreet.com, many public companies will simply buy back their stock, go private, build up their Web sites, make a few partnerships with Yahoo and/or AOL, and relaunch themselves as profitable dot coms. At that point, the dot-com advantage will be over.
Alex Lightman is CEO of InfoCharms and a contributing editor for Red Herring magazine. He writes regularly on the business of the new economy for IntellectualCapital.com.
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