Dear Reginald: Nice to see you around. By the wa here is a nice piece of positive commentary from the raging Bull folks!
The Microsoft Juggernaut Rolls On
By Joe Arena
With the IPO of Geocities last week, combined with Microsoft quietly
increasing it's reach on the Internet, we may be getting closer to the
point
where many are going to realize that the emperor has no clothes
relative to
the valuations of Internet stocks. With e-commerce expected to reach
$28
billion this year, there is no doubt of the prolific growth potential
of this
nascent industry. But with competition for ad revenues increasing,
investors
are going to take a much closer look at the viability of each
individual
company's business model, and the rising tide will no longer lift all
boats.
Geocities exemplifies the growing challenge of leveraging unique
visitors
and pageviews into revenue growth better than most Internet companies.
The
company generated 14.8 million unique visitors and 925 million
pageviews last
month. Although Geocities is the seventh most popular site on the
web, there
is a paradox between their business model and the prospect of
generating
advertising revenues. The company was founded as a place in
cyberspace for
people who eschew advertising and business to develop their own
websites.
This perception still exists, and it is making the selling of
advertising a
difficult task. To illustrate, consider that Infoseek (SEEK), which
is ranked
the number nine web site, had three times the ad revenue versus
Geocities in
the recently ended quarter. This company is in a business with no
significant
barriers to entry, rampant competition, questionable management, and
dubious
prospects at best for becoming profitable. It has been a losing
proposition
to short Internet IPO's, and Geocities may not be an excellent short
candidate
despite it's questionable fundamentals. However, those who expect it
to
appreciate in the manner of Amazon.com or Yahoo may be severely
disappointed.
Microsoft, on the other hand, is now a close second to Yahoo in terms
of
unique users, with 24.1 million versus 26.6 for Yahoo. This figure
includes
not only users of MSN.com, but all other Microsoft sites as well. The
plan is
for Microsoft to integrate all their sites into one portal site
(MSN.com) this
fall. This will include Hotmail (e-mail), Expedia (on line travel
service),
Carpoint (online car buying service), and Home Advisor (online real
estate
service). Microsoft Expedia now boasts 2.5 million users per month,
and is
driving bookings of around $6 million per week. More importantly,
Microsoft
will now begin penetrating the more lucrative Corporate Travel space
in a big
way with American Express Interactive. Estimates are that 300
corporations
will be participating in this service by the end of this year. These
corporations, as you might have guessed, are all NT and BackOffice
accounts.
Microsoft's acquisition of Hotmail could also prove to be very
rewarding, as
it now has over 21 million subscribers, and is signing up about
100,000 per
day. Microsoft Carpoint is now driving business in excess of $250
million per
month through automobile dealers. How about MSFDC, a joint venture
with First
Data Corp for online bill paying? At some point in time, probably
determined
by the evolutionary pace of encryption technology and user interfaces,
we will
all be paying our bills on line. However, right now, six major banks
have
signed agreements with Microsoft to participate.
Last week, Microsoft took another major step toward becoming number
one. First, the company signed an advertising agreement for Home
Advisor with Yahoo
on its finance and real estate sites. Microsoft also signed
distribution
agreements with WhoWhere, Infoseek, Tripod, Switchboard, Pathfinder,
DoubleClick, BigYellow, and GTEInterNet. Web sites of USA Today,
Worth
Magazine, and US News And World Report.
The launch of MSN.com is expected to reach 30% of Internet users
immediately. Since only 3% of the world's population has Internet
access right now, that number is small on a percentage basis as well
as an absolute basis. But in five years if a billion people have
Internet access, this number becomes even more significant if you
extrapolate some share growth. It is also germane to bear in mind
that e-commerce could conceivably be a trillion dollar business in the
next 5-7 years.
There are those who question the competitive threat that America
Online (AOL) represents to Microsoft. There is no question that
America Online has developed brand equity, which is an incalculable
asset. Despite this, it is far too early in the game for this brand
equity to be an important consideration. Was brand equity able to
prevent the demise of Apple Computer? How about the equity that
Netscape Navigator developed in the early stages of the browser wars?
The fact remains that the Microsoft mantra of "embrace and extend" has
proved to be a formidable strategy which has been able to overcome
many of Microsoft's late entries into certain markets. The
risk/reward ratio of betting that Microsoft will not get it right when
it comes to competing with America Online is not favorable. Consider
that MSN.com already boasts more unique users than AOL, which very few
people realize. More importantly, it is all about content, and
Microsoft understands this better than anyone. To illustrate this,
consider the following analogy. When you watch Seinfeld on TV, does
it matter whether it is on ABC or NBC? Of course not; however, if
all your favorite television shows were on NBC, there would be no
reason to watch other stations. This is the rationale behind
Microsoft's strategy of bundling it's resources into the portal site
MSN.com.
With Microsoft executing the strategy of bundling all these services,
the future growth of these new revenue streams is huge. Thus, it can
be argued that the potential earnings growth to be realized from
e-commerce alone presents an opportunity for long term investors to
continue buying the stock at these levels. Many investors spend
countless hours trying to discover the next Microsoft. However, it is
within the realm of possibility that the next Microsoft could very
well be <sum><sum><sum><sum><sum> Microsoft.
JFD |
