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To: H James Morris who wrote (41341)	2/20/1999 3:05:00 PM
From: Glenn D. Rudolph	Respond to of 164684

4 * The Internet is an entirely new medium that is fundamentally different (it is transactive) than other media and with growth characteristics that are without precedent * Increasing returns drives these companies' success or failure, that positive feedback loops and quasi-monopolies are natural and that it is a winner-take-all medium where first mover advantage is key and great execution a pre-requisite. * Internet companies' business models scale fantastically, with lower variable costs and “Web-server-scaleable” revenues * Online relationships are ultimately what drive shareholder value and that breadth of influence (reach) is as important as depth of influence (usage) * Not all Internet valuations are unjustified; the size of market opportunities, the power of increasing returns, great management teams, and great proven execution deserve premium valuations Merrill Lurches Toward The Inevitable Regular readers of The Internet Capitalist will recognize what has now become a recurring part of these pages: our discussion of how the Internet changes entire segments of the economy by re-organizing industry value chains (please see our original explanation of this in the 11/20/98 Internet Capitalist, “Porter Re-visited”). We are attempting to inculcate a sense of the Internet's underlying importance to the business of allocating capital and to illustrate to institutional investors how broadly the Internet will impact many large and important parts of their portfolios. In our January 8th edition of The Internet Capitalist, we spoke about the internal struggle that Merrill Lynch was undergoing as it debated about the role the Internet should play in its business and how the management team there would deal with the inevitable conflicts that arise from embracing the Internet as a new customer acquisition, service, and distribution channel. This week Merrill announced that it is buying the Internet technology group of D.E. Shaw to beef up its fledging online services. As well, news over the last few weeks has leaked out that Merrill is planning to make online trading available for some 55,000 of its fee-based non-discretionary accounts (which are bundled service accounts with a certain number of trades allowed) holders by the end of March. The D.E. Shaw unit's acquisition (about 30 people from DE Shaw) will help Merrill develop banking and other commercial services online. The official spin is that "they will really rapidly put us where we want to be as far as E-trading, E-banking and E-commerce is concerned" says a spokesperson. The WSJ suggested that Merrill paid something near $30 million for the deal. There can be little doubt that Merrill is coming to recognize the inevitable; that the Internet will forever change the way Wall Street works (first in retail broker-based shops, then proceeding through the rest of the industry players who focus on trading, investment banking, or other services. The important lesson we'll be watching for is how Merrill attempts to balance the opposing needs of their clients and their broker employees, both of which are very important constituents. Someone has got to lose out in this scenario, since the Internet removes margin (read: inefficiencies and cost) from value chains. We tend to think it won't be the customer. Trend Watch Don't Believe The ‘Price Is King' Thesis It's hard to deny that Amazon has come under its own pressure on the stock front over the last few weeks, starting most aggressively with Amazon's announcement of a $1.2 billion