With more than 350 Internet focused companies jockeying for market positions
and high public market values picking long-term winners in the Internet
space is no easy task.
Reporter@Large believes that only a fraction of
the stocks listed in WSRN.com’s Internet sectors), including
business-to-business e-commerce stocks will ultimately survive. Most
companies will either consolidate or fail. The time horizon I’m looking
at is five years and not included are the companies preparing to go
public. The following factors are critical in finding long-term winners
in the Internet space. Reporter@Large has labeled the methodology,
“Picking Winners.”
Early Movers
It’s good to be an early mover, but Reporter@Large especially likes
first movers. First movers garner what is now widely known as a First
Mover Advantage (FMA). Why is it important to be an early mover? For
obvious reasons, early movers are able to most easily capture mind-share
and market-share. Early movers are able to exploit their advantage by
acquiring customers at lower costs, earlier than
competitors, in the race for the top spot in a market.
First movers
like Amazon.com (AMZN)
are given premiums due to their ability to tap into capital markets
first, and then use that financing to
distance themselves from their competitors. The idea is get big fast!
Players: Amazon.com, Yahoo! (YHOO),
America Online (AOL),
Broadcom Corp. (BRCM),
Cisco Systems (CSCO),
CMGI (CMGI),
Commerce One (CMRC),
Doubleclick (DCLK),
eBay (EBAY),
E-Loan (EELN),
eToys (ETYS),
E*Trade Group (EGRP),
Exodus Communications (EXDS),
FatBrain.com (FATB),
Healtheon (HLTH),
InfoSpace.com (INSP),
Inktomi (INKT),
Internet Capital Group (ICGE),
Kana Communications (KANA),
NetZero (NZRO),
Priceline.com (PCLN),
RealNetworks (RNWK),
Red Hat (RHAT),
Student Advantage (STAD),
VeriSign (VRSN),
VA Linux (LNUX).
Focus
In the beginning, search engines often realized revenues from licensing
their in-house technology to other web companies. While Lycos (LCOS) and Infoseek tried to license/syndicate their respective
technologies in addition to their core search engine business, Yahoo! (YHOO) has remained focused on
continually adding content and services for their existing and growing
customer base. Yahoo was able to become a leading portal and media
company on the Web by benefiting from the lack
of focus by its competitors.
Focus is important for all companies in
all Internet sectors, but a
strong focus does not preclude leveraging one business into another.
Players: Yahoo!, Amazon.com, Internet Capital Group, Exodus, Inktomi,
Priceline.com, Cisco Systems, HomeStore.com (HOMS),
VerticalNet (VERT),
Lycos (LCOS).
Scalability
Focus enables a company to build a strong business as well as a strong
platform. The platform is utilized by remaining true to one’s core
business but at the same time, adding new content, products,
services or even entering new markets. America Online has shown
tremendous scalability by
leveraging its existing assets to capitalize on advertising and
e-commerce opportunities. The company is clearly devoting more focus
and energy to its online properties such as Instant Messenger, ICQ and
Digital Cities. Plus, the recent merger with Time Warner solidifies
AOL’s power, vision, and ability to adapt and respond to changing
business conditions.
The merger brings AOL: 1) cable pipes accessing 20
million homes, allowing AOL to deploy another channel of high-speed
Internet access, 2) enormous advertising/sponsorship opportunities(the
merger is a marriage of the best offline and online content), and 3)
Time Warner has succeeded with a pay-for-content model on television
(i.e.-HBO). This success and model will be crucial in the coming years
as broadband takes center stage and Internet companies figure out how to
monetize content and users. The shift comes at a time when free PCs,
free Internet access, and broadband competition are eroding at AOL’s
traditional Internet access subscriber revenues.
Other examples of scalability include Yahoo! and Amazon.com. Yahoo!
began as a simple web-site
directory and is now the Web’s leading portal and media company.
Amazon.com began as solely a
bookseller, and is now the leading multi-product etailer on the web.
Players: Amazon.com, Yahoo!, AOL, CMGI, E*Trade, Priceline.com,
VerticalNet, Homestore.com.
Scale
Scale is especial
ly important in an industry often measured by hits,
clicks, and eyeballs. Scale is the
equivalent of having pull. The more scale a company has, the more pull
the company possesses. As
the Internet industry moves further toward advertising and
e-commerce-based revenues and models,
companies with the most scale will be able to best leverage their assets
in order to generate
advertising and e-commerce dollars. A prime example is AOL, with its 20
million subscribers. Back
in the day, AOL actually paid content providers for permission to
display their content. Today, content providers are willing to pay AOL
enormous amounts of money, and sometimes give up
equity stakes in their companies, in order to be featured on AOL. What
happened? AOL, along
with other leading portals, reached a point of “critical mass” whereby
it became a liability for
advertisers, commerce vendors, and content providers not to be partnered
with AOL. A large
customer base (scale) yields advertising, commerce, and content revenue.
Players: Yahoo!, Amazon.com, AOL, eBay, Cisco Systems.
Management
We look for experience, vision and passion when assessing a company’s
management team. We’re
impressed by management teams that are more interested, in its own
company’s well being and
place in such a historic time, rather than their own “net worth.” A key
question, then, is does the
management team believe in its company? Insider selling therefore
explains a lot. Look no further
than a comparison of insider selling between Yahoo! and EarthWeb
(EWBX). While the
co-founders of Yahoo!, Jerry Yang and David Filo, rarely sell their
Yahoo! stock, EarthWeb execs
can’t seem to get rid of enough of their own shares. Talk about true
colors!
Players: Yahoo!, InfoSpace.com, CMGI, Internet Capital Group,
Amazon.com, Red Hat, VA Linux, E*Trade, eBay, Broadcom Corp, Cisco
Systems, Real Networks, Priceline.com.
Brand Name
Building a brand name on the Web is critical, especially when
competitors are only a mouse-click
away. Companies that are able to build successful online brands, will
reap the benefits of lower
customer acquisition costs. It will come at a high initial price
though, as companies such as
Amazon.com and E*Trade have proven. Both Amazon and E*Trade will spend
close to $300 million over the next year on marketing alone. A
well-regarded brand name in itself, creates high barriers to entry.
Players: Yahoo!, Amazon.com, AOL, Red Hat, E*Trade, eBay, Cisco Systems,
Priceline.com.
Market Opportunity
Key factors to consider when analyzing company within a market is:
competition, potential competition (high or low barriers to entry),
numbers of potential users/customers and of-course the
amount of money in the respective market. Most of these companies fall
within either the business-to-business or infrastructure sectors. The
B2B sector will be a $1.3 trillion market opportunity by 2003, while
Internet infrastructure companies benefit from the overall growth of the
Internet without having to sell their goods or services directly over
the medium.
Players: Broadcom Corp., Internet Capital Group, CMGI, VerticalNet,
Yahoo!, Commerce One, Homestore.com, Doubleclick, Healtheon, Cisco
Systems, Priceline.com.
Reporter@Large tallied up the points. The highest score possible was a
7.
7 points: Yahoo!
6 points: Cisco Systems, Amazon.com, Priceline.com
4 points: AOL, eBay, CMGI, E*Trade, Internet Capital Group
3 points: Broadcom Corp., Red Hat, Homestore.com, VerticalNet
2 points: Commerce One, Doubleclick, Exodus Communications,
Healtheon,Infospace.com, Inktomi, Real Networks, VA Linux.
1 point: E-Loan, eToys, FatBrain.com, Kana Communications, NetZero, Student Advantage, VeriSign, Lycos.
