SMARTMONEY.COM: Battle of the
Internet Indexes
By DANNY HAKIM
Dow Jones Newswires
Smartmoney.com
NEW YORK (Dow Jones)--One hundred and two years after Charles
Dow concocted his Dow Jones Industrial Average, his namesake company
is planning to start an index for the Internet age.
That's a mixed blessing at best for nine other Internet indexes, some of
them almost three years old, fighting it out to see which one will become
the most influential barometer of the Internet age.
Like the venerable DJIA, some of these Internet indexes have been
created by editors. Others are the brainchildren of analysts and investment
banks. Some of them, like the Chicago Board Options Exchange Internet
Index, are simply trading tools. Others have more lofty goals - lone men
working in their apartments, trying to do what Dow did for the Industrial
Age and leave their own legacies. One BancBoston analyst dubbed his
own index the Kebdex, after himself - Keith E. Benjamin.
"Every Tom, Dick and Harry has an Internet index," says Anthony Italiano,
a senior business editor at Dow Jones' (DJ) indexing division. "We want to
take it to the next phase," he says, by focusing on Internet commerce - as
in companies like eBay (EBAY) and Amazon.com (AMZN) and excluding
access providers like AOL (AOL) and search engines like Yahoo!
(YHOO). This commerce index probably would be one of many future
Internet indexes - Dow Jones already covers 121 different industry groups.
(SmartMoney.com is part-owned by Dow Jones, which also publishes
Dow Jones Newswires.) But Italiano, who will aid in constructing the
index, concedes that he just heard about the plans Wednesday. So it will
take Dow Jones well into 1999 to add an Internet index to its roster of
about 3,000 indexes.
This time around, the Dow name will have plenty of competition.
The Contenders
Steve Harmon downloaded Mosaic onto his Macintosh in 1993. The
primitive prototype of World Wide Web browsers to come had no
pictures, no sound, no chat rooms - just text and links. But Harmon felt "a
tingling feeling," like he had stumbled into something with a whiff of the
revolutionary about it. "I saw Mosaic and I thought, 'This is going to be the
conduit for information flow,"' recalls Harmon, 34.
He was then a media analyst at Kagan Associates, a California company
that analyzes media and communications industries. When the company felt
it needed an Internet analyst, Harmon was the logical choice. "I was the
only guy excited about it," he says. But he had even greater ambitions, too,
which he set about pursuing at his Silicon Valley condo.
Harmon started requesting filings from the SEC, scanning newspaper
reports, talking to aspiring entrepreneurs and visiting the new companies
filling up his neighborhood. He had a plan: build an index and be the
Charles Dow of the 21st Century.
Harmon approached publisher Alan Meckler, the CEO of Mecklermedia,
in 1995 with the idea of starting an Internet index. Meckler backed him,
and the original Isdex was launched in April 1996 and had 11 companies.
"Nobody believed it," Harmon recalls. "They thought - "you're a lunatic!'
Even Microsoft ( MSFT) wasn't focused on the Internet." Now Isdex has
become one of the two most widely followed Internet indexes along with
the AMEX, or American Stock Exchange, Internet Index, which was
created by Internet magazine Inter@ctive Week.
You can look at the Isdex and read Harmon's twice-daily reports about
the stocks in it at Internet.com, a collection of 25 Web sites for people
who work in the industry. The index gets between 50,000 to 100,000
page views a day and Harmon has about 13,000 e-mail subscribers to his
newsletter.
The Isdex and the AMEX Internet Index have more in common with one
another than any of the other seven contenders in that these two both use
50 stocks to represent a broad picture of the Internet sector, and they
have 28 listings in common. One big difference: You can trade options on
the AMEX Internet Index.
Another, says Harmon, is the different focus of the two indexes. Harmon
says the AMEX index is "more infrastructure-based" compared to the
Isdex, which he believes is a "pure play." That means it focuses on
e-commerce companies like eBay instead of companies that develop the
technology that supports the Internet but aren't entirely Internet companies,
like the software manufacturer Adobe Systems (ADBE) and network
developer 3Com (COMS).
Harmon says companies like Microsoft - which is included on the
investment bank Hambrecht & Quist's Internet index - aren't Internet
companies, because, "If the Internet went away, Microsoft would still be in
business." As for the other seven indexes, it's surprising how few stocks
they have in common: AOL (AOL) and Yahoo! (YHOO). Yep, that's it.
Otherwise, they're quite different. Some of the indexes are weighted by the
companies' market capitalizations, others by stock price and some aren't
weighted at all. The conservative GSTI Internet Index has only 11 stocks
culled from Goldman Sachs' technology index, the GSTI, which has a $1.3
billion minimum market cap. Then there's the much broader, 68-stock
Morgan Stanley Internet Index, which is aggressive enough to include a
recent IPO like eBay among its listings.
Trading the Indexes
Right now, the only way to bet on the performance of the indexes is
through options. The Philadelphia Stock Exchange offers options on
TheStreet.com's Internet Index (DOT) and the CBOE offers options on
both its own Internet index (INX) and the GSTI Internet Index (GIN).
And, of course, there's the AMEX Internet Index (IIX).
"I'm seeing a lot more order flow, from making five to 10 trades a day (a
couple of months ago) to 50 to 100 a day," says Tom Bartlett, a trader
who also serves on the CBOE's product development committee.
Granted, the Internet still has nothing on the CBOE's biggest options index
product, the S&P 100. Last month, over 2.1 million options contracts on
the S&P 100 traded on the exchange, compared to about 3,000 on the
Internet index. But that's up from less than a thousand at the beginning of
the year. The American Stock Exchange has 3,000 options contracts
outstanding on the Inter@ctive Week index, as opposed to 22,000 for its
most popular index options trade, the Morgan Stanley High Tech 35.
Pending SEC approval, the Kansas City Board of Trade, best known for
its commodities options, will offer options on the Isdex. But Harmon
expects other options - besides options - by the end of next year.
"We're in discussion now with several different players to launch an Isdex
mutual fund," he says. "The demand for that has been pent up for several
years." That would be the first Internet index fund, though there are several
actively managed Internet funds like Munder NetNet (MNNAX), up
91.6% year-to-date, and WWW Internet (WWIFX), up 57%. The
London-based fund management firm Guinness Flight recently opened an
index fund based on Wired Magazine's new index, which is often confused
with an Internet index. But less than a handful of the Wired Index's 40
stocks are Internet companies, and some, like Wal-Mart (WMT), are
even - God forbid - in the Dow Jones Industrial Average.
The End of the Dow?
The Brooklyn Bridge was three years shy of opening when Charles Dow
moved to Wall Street to work as a financial reporter in 1880. The
magnitude of the project, which boasted more than 3,500 miles of
newfangled steel wire, couldn't have been lost on Dow. Soon he would be
crossing the new bridge to get to his future Brooklyn home.
The bridge was a testament to the technology of the Industrial Age, both its
power and danger. More than 20 people died building it, including chief
engineer John Roebling from an infection after a construction accident.
Roebling's son, Washington, who took over as engineer, was crippled
when he got the bends, as were many workers who were submerged into
the East River in airtight chambers.
Like the bridge, Dow's Industrial Average, which debuted in 1896, would
be a testament to the achievements of the Industrial Age. Its 12 stocks
included Tennessee Coal & Iron, which would be swallowed in a decade
by J.P. Morgan's U.S. Steel; oil companies like Chicago Gas and Laclede
Gas; and General Electric (GE), founded by the wizard of Menlo Park
himself, Thomas Edison, and the only original pick still in the average.
Of course, it was also about making a buck. Dow, after all, was both an
editor and a partner in a brokerage firm, Goodbody, Glyn & Dow.
Likewise, Harmon looks at the Isdex as a "valuable franchise" and is a vice
president of Internet.com, and also owns a stake in the company. Right
now, the index generates revenue from advertising, and from licensing fees
from sites that reprint it, like Yahoo! and Upside.com.
But his pursuit is also about being the quantifier of the future's economy -
profit bound up with legacy. Internet.com clearly believes in the Internet's
potential as a moneymaker. Last year, its ancestor Mecklermedia bought
the Internet.com domain name for $100,000, according to The Wall Street
Journal - another Dow Jones product - thus merging the Isdex with the
medium's ultimate moniker.
Will such flair for the dramatic give the Isdex an edge over the other
current and future contenders for posterity? Will even one of these be
enshrined as a guide for the 21st century's economy? Maybe.
Harmon would like to think so.
"Dow and Jones foresaw the future, and they were correct. The Industrial
Age happened in a big way. Now that it's waning, the Internet is going to
be bigger than anything ever imagined," says Harmon. "Bigger than big."
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