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To: Amy J who wrote (17818)	2/25/2004 8:22:17 AM
From: Wyätt Gwyön	Read Replies (2) \| Respond to of 306849

I'd have to disagree with you on this tiny point about RND being an uneconomic pursuit. I can think of more than a dozen companies that have gone public due to their core RND. going public is not a sign that RND spending is economically justified. the point is, if you add up all the money spent on RND, and look at the economic return from it, the return is VERY poor. people misunderstand because they confuse market cap (investors' momentary assessment of value in a tech bubble) with the actual cash flows derived from the RND. most of the RND that goes on in tech startups is not real cash-flow-centric RND (if that were the case nobody would need to go public); it is imo more along the lines of Ponziesque RND (which requires an "exit strategy" consisting of investors willing to overpay for stock in a bubble). take google--the "IPO of the Decade", which everybody is hoping will ignite a new tech stock IPO bubble. they created some worthwhile technology and are now going public. they turned down a $10 billion buyout offer from MSFT. they will supposedly achieve a market cap of $25 billion due to all the hype--this on a revenue base of $900 million. meanwhile, MSFT will try to copy google since they could not buy them. $25 billion market cap on $900 million sales is not the economic "return" on google's VC-funded RND; it is imo a ridiculoulsy overpriced stock, like Palm at 160. 27 times sales is imo ludicrous. the economic return on google's RND is the actual profit from their sales deliverable to investors, which is obviously a fraction of their total sales. that fraction is imo likely to remain quite small in an ad-driven business when the world's largest IT monopoly, with $50 billion in the bank, has google in the crosshairs. if you took $25 billion and bought 25yr US Zero Coupon bonds, you could buy nearly $100 billion face. the profit over 25 years would be about $75 billion. this works out to $3 billion/year profit on average. what would it take for google to provide an economic return just equivalent to US treasury bonds, starting with $25 billion market cap? assuming a huge 10% net payout on revenues, they could pay $90 million today. for them to reach the $3 billion avg of the Zeros, their revenue would need to go to $30 billion, or 30 times current revenue. and it would need to do it soon enough so that the average payout could be maintained at the $3 billion average of the Zeros. let's say google maintains zero payouts for 15 years so that it can pump the money back into more RND to "grow" the business. then in 15 years it is able to pay out 10% of revs, which remain flat. how big do its revs need to be to equal the payout of the Zeros? $75 billion, or 83 times current revenues. ha ha ha! and that assumes google can still maintain super-high margins at 83 times its current revenue base....AND that's just to compete with Treasury Bonds, which are backed by the full faith and credit of the US govt. we haven't yet even considered that there might be RISK involved in google's business model, such that an investor would want a premium return over USTs. so my conclusion is, if google IPOs at $25 billion, then it is selling at a ridiculous price. this price is not a return on RND cash flow; it is imo representative of idiotic mutual fund investors working with OPM. and i doubt google will be redeemable for 4 times $25 billion par a quarter-century from now.