Web tycoons pin hopes on new gadgets
TIM KOOGLE, the chief executive of Yahoo!, looked down from the podium at the bankers crammed into the grand ballroom of the St Francis Hotel in San Francisco and told them: "I feel like a rock star."
His sentiment was understandable. It was shared by dozens of other Internet bosses who were mobbed by bankers last week at the annual technology conference hosted by Hambrecht & Quist (H&Q), the West Coast investment bank.
Almost every one of the 316 companies featured at the conference made the Net a central part of its presentation.
H&Q, which specialises in advising Net companies and raising capital for them, was surprised by the level of interest. Paul Noglows of H&Q said: "Everyone this year is talking about the Net. Last year less than half the attending companies did that."
Although Net shares have rocketed, H&Q analysts say the best may be yet to come. That optimism is based on the rapid development of digital devices that are spreading the Net beyond the personal computer. As one recent gung-ho H&Q report noted: "The ability to access any information in real time over any network from anywhere is the promise of universal access."
The machines that will enable people to do this are such things as smart telephones with Net screens, interactive televisions, cell phones, PDAs (personal digital assistants, such as the Palm Pilot) and gaming devices, such as Sega's Dreamcast. "Others will resemble gadgets that we have only seen in science-fiction movies," said H&Q.
International Data Corporation, a computer research firm, says the worldwide shipment of these appliances will grow from 5.9m units (worth $2.2 billion) last year to 55.7m (worth $15.3 billion) in 2002. The development and promotion of these devices is likely to be pushed and subsidised by phone companies, cable operators and wireless carriers that want to encourage greater use of the Net to increase the sales they make from providing access to the Net.
But the biggest winners in this post-PC age, H&Q analysts argue, will be the big Net players, such as Yahoo!, America Online (AOL) and Amazon.com.
Danny Rimer of H&Q says 92% of the traffic on the Net is probably going to about 8% of the sites on the World Wide Web. "These dominant companies are establishing incredible brands," he says. "They are taking the information about their users, filtering it and using it and continually, dynamically learning from it. You are going to see all these brands exploding beyond the desktop."
Several top Net companies reported unexpectedly strong results last week for the first quarter of 1999. AOL, which has seen the number of Web "hits" by its 17m customers double over five months (from 1.3 billion to 2.6 billion a day), reported a 55% sales jump (from $704m to $1.1 billion) and a tripling of operating earnings (from $39m to $117m); the figures exclude the effect of its recent acquisition of Netscape.
Amazon, the online retailer, tripled its sales from $87.4m to $293.6m. At the same time it said it had bought three more Net companies for $645m. Exchange.com takes it into the rare-books trade, Accept.com provides it with new technology to protect customers making online purchases and Alexa International gives it the means to track the sites visited by consumers and build profiles of Net users for targeted advertising. In the past two months Amazon has made investments in companies that sell pharmaceuticals and pet supplies online and has started an online auction business.
Rimer, who covers Net technology and service companies, says: "Quarter over quarter growth of revenues has really been surprising. I don't know any other analyst who covers 10 companies with all of them reporting quarterly results that are exceeding Wall Street's expectations."
Yet many investors felt the results were not good enough. The shares of AOL, chaired by Steve Case, and Amazon plunged last week. Amazon fell 13% on Thursday after it said it expected to report widening losses in the next few quarters as it spent more money on acquisitions, expanding its warehouses and promoting its brand. Amazon is now down 20% from its peak. AOL is off 18% and Yahoo! is down almost 30%.
But these companies, which have been trading at vast multiples of earnings for more than two years, have made huge gains in recent weeks. AOL is still up about 70% since mid-February. Investors are clearly wondering if the Net "bubble" is about to burst.
David Simons of Digital Video, a New York technology research firm, says: "The fall in Amazon's stock is important because it is really the first time investors have been forced to focus on the issue of grabbing market share instead of grabbing profits. Amazon's bombshell was saying that, rather than progressing to profit, its losses would increase in future quarters. It is the first time we have seen something like that spook investors. At what point do investors decide that profits are more important than sales growth?"
Simons does not share the rosy predictions of H&Q. He believes many Net companies are overpriced and they could lose 70%-80% of their value in a stock-market correction and never regain their highest values, even though they may survive as viable businesses.
He says: "Net companies are geared for 30% annual growth. It does not take much for them to stall and the stocks to go off the cliff. So much of the Net economy is founded on [high] stock prices [which are used for acquisitions and raising capital]. The margins are so low, and 100%-500% of earnings is being invested in marketing. No traditional business run that way could survive for long. EBay is raising $1 billion in a follow-on offering. Amazon raised $1 billion in the convertible bond market. But a six-month stagnation in the growth of the Net market could end all that. It just does not take much for nuclear winter to descend on that munificence."
Simons says big companies, such as AT&T, have lost billions of dollars during the past decade unsuccessfully trying to develop and market non-PC devices. "They have been the Bermuda triangle of the information age," he says.
He suspects a more important and profitable development will be interactive television, which will give viewers a wide range of information and services and will enable advertisers to target specific neighbourhoods and even individual homes. He believes that television and media companies such as News Corporation, the ultimate owner of The Sunday Times, will not allow the big Net companies to dominate or prosper from this new medium. Last week News Corp announced the formation of a $300m fund to invest in interactive television.
But H&Q analysts claim the "first movers" on the Net are now locked into a virtuous circle, gaining greater and greater market share, acquiring other linked sites and developing progressively deeper relationships with customers.
Genni Combes, who covers electronic commerce, says: "The instant availablity of doing anything, anywhere, on any machine will increase the success of these companies. People do not want to have to re-enter all their personal information, credit-card numbers, passwords and everything else every time they go online. They prefer to stick with a few companies with which they have built a relationship. There really is an emotional component in the relationship Amazon has established with its customers."
Noglows predicts that the number of AOL users will grow to 35m in the next five years and believes Yahoo! is weaving its way deeper into the lives of its 60m "unique" users. He says: "Once you get comfortable with a service you are going to keep using it [on a non-PC device]."
Rimer says these firms are using "viral marketing schemes" to allow them to expand exponentially through Web-linked sites. Drawing an analogy with the robotic villains of Star Trek, he says: "We are in the Borg school [of thought]. We believe that the advantage lies in the collective. If you are not leveraging a network you are not in the running."
Regards
JC.
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