From: technews <technews@ou.edu>
To: "'it-fyi@listserv.ou.edu'" <it-fyi@lists.ou.edu>
Subject: it-fyi: Internet, a Trillion-Dollar Prodigy (NY Times on the Web)
Date: Thu, 23 Dec 1999 09:17:49 -0600
December 19, 1999
The Internet at Adolescence: A Trillion-Dollar Prodigy
By KENNETH N. GILPIN
Just think what the language would be like without the Internet. Until five
or six years ago, "Amazon" was a very long, very big river. "Yahoo" was a
favorite expression of delight -- or, to students of Jonathan Swift, a
brutish creature. A "web" was for spiders. "Space" was -- well, it was
space. "Dot-com," "B2B," "e-commerce," "e-mail." Whaaa?
Consider the economy, and its Net effects.
Six years ago, only 90,000 Americans, mostly academics, were wired. Today,
80 million people in this country, and nearly 200 million worldwide, are
online. Within two years, those numbers could double.
Online retail sales have risen from nothing to about $20 billion.
Business-to-business transactions -- that B2B thing -- have grown to $109
billion. By 2003, Forrester Research estimates, online retail sales will
grow to $144 billion, and B2B business e-commerce will jump to $1.3
trillion. (That's just in the United States, folks.)
Finally, there is the stock market. Without the Internet, the initial public
offering market would be pretty dead. Without the Internet, a slew of day
traders might be otherwise engaged. Without the Internet, the Nasdaq
composite index almost certainly would not be up more than 70 percent this
year, and price/earnings ratios would make a lot more sense.
So much for the past.
Last month, with about six weeks left in the century, Mary Meeker, head of
the Internet research team at Morgan Stanley Dean Witter, and Jeff Camp, who
follows Internet data services for the firm, sat down to talk about the
future. Following are excerpts from the conversation:
Q. There have been more than 200 Internet initial public offerings this
year. Is that pace sustainable in the coming 12 months?
MS. MEEKER: As long as the economic environment remains robust, and as long
as new categories of companies keep coming on, it certainly seems as though
it should. I think many people would welcome a slowdown because each crop of
companies is riskier than the last one. That said, the aggregate opportunity
is quite high for high-risk/high-reward companies.
Q. So what sorts of companies will we see? And how have the waves gone so
far? Increasingly, there will be new infrastructure plays. Broadband is
becoming increasingly real. Providing services to build that business will
be another big opportunity. Wireless is another one. And many things are
needed to provide for a better user experience across the board. But the B2B
theme, general business re-engineering, will continue to be a big theme.
It is also our view that sometime in the next year a traditional company
will throw out its traditional business model and become more Internet-like,
where it focuses on the long term and gets away with it. To date, no one has
had the guts to do it or has done it successfully.
Up to now, we have had an infrastructure wave, including companies like
UUnet, PSI and Netccom;, a software wave, with companies like Netscape and
Spyglass;, a content wave, with companies like Lycos, Yahoo and Excite, and
retail and e-commerce, like CDB Now and Amazon.com.
Each year a new crop of companies in a new category have captured peoples'
imaginations and created real businesses and real wealth. Right now we are
seeing a lot of opportunity in the business-to-business area. Two years from
now people may be focused on something else.
Q. Is there any reason to think that business-to-business companies will
generate profits faster than retailers like Amazon.com?
MS. MEEKER: B2B will probably have a shorter ramp-up to profitability
compared to an e-commerce company like Amazon, if only because Amazon's
ambitions are so vast. And operating losses at these companies will also
probably not reach the level of e-commerce companies. Right now it is too
early to tell which companies are going to be the big winners on an ongoing
basis. One of the reasons it is tough to predict is that many of these new
companies are looking at the history of the Internet and asking what lessons
can be learned from what has happened in the past. They have their eyes much
more wide open and are adapting a lot more quickly than companies in the
business-to-commerce area.
I would feel comfortable saying that a year from now we will have a lot more
clarity about winners and losers. Often, the biggest threat is not a market
threat or a competitive threat, but management error. That is something you
can't predict.
Q. Which Internet infrastructure companies look promising?
MR. CAMP: Four companies are worth highlighting: Exodus, which is dominant
in the high end of the United States Web hosting market; InterNAP, which
provides Internet connectivity services that greatly increase performance
and speed of company Web sites; Akamai, a pioneer in the market for
intelligent content distribution services; and Verio, the largest Web
hosting company to small and medium-sized businesses.
Q. If you were constructing an Internet portfolio you could not trade at all
for the next five years, which stocks would have to be included?
MS. MEEKER: America Online, Yahoo, Amazon.com and Cisco Systems.
Q. Nearly all of these companies, and a good chunk of their managers, have
never lived through a recession. What sort of impact would a downturn have
on Internet companies?
MR. CAMP: If you think B2B, businesses are getting online for cogent
economic reasons: It reduces procurement costs; it increases
productivity;inventory management and so forth. It is unlikely that a
recession would derail that overall trend.
MS. MEEKER: It could accelerate it.
MR. CAMP: It may impact what consumers do, but my guess is that the much
larger part of the Internet, which is business-related, is going to be
moving along that trend for the reasons I just mentioned.
You can make a decent argument that parts of the Internet are going to be
recession-proof. If you are a business going online, you need a Web site,
you need Internet access and all the different tools and components that go
into it.
Q. Despite its rapid growth, the move to the Internet is still in its
infancy. Where are we, and how much of a lead does the United States have on
the rest of the industrialized world?
MR. CAMP: It seems as if the Internet is everywhere, but it is really
concentrated in the hands of a group of very large companies. Ninety percent
of large businesses have a Web site or are doing something on the Web. Ten
percent of small businesses do. When you consider that small businesses
represent half the gross domestic product in this country and represent 99
percent of all businesses, a large part of the market is not engaged yet.
MS. MEEKER: In terms of development, Europe is probaby where the United
States was in 1995 or 1996. There are a few reasons for this.
First, personal computer penetration isn't as high as it is in the United
States. Second, telecommunications availability is more restrictive, and
costs are higher. And regional boundaries -- language and other things --
are part of the landscape.
That said, Internet growth is accelerating in those markets. Financial
service companies are more aggressive about online banking than they have
been here. And wireless Internet connectivity is going to happen faster in
Europe than here. That is a big opportunity.
At the moment, though, more than half the usage by European consumers
appears to be targeted at American sites. For example, we believe Yahoo is
probably the leading Web site in France, Britain and Germany. From a content
perspective, the Yahoo and America Online of Europe may be Yahoo and America
Online.
Q. It sounds as though experience is a great comparative advantage. Is that
the case?
MS. MEEKER: People who wring their hands whenever Amazon's or e-Bay's or
Schwab's site crashes should remember that those companies are making
mistakes many companies only wish they could make, because they are
servicing so much volume. They get smarter and smarter and smarter.
Something on the order of 50 percent of all e-commerce knowledge resides in
the brains of Amazon.com employees or Amazon programmers. They know the
patterns when an average American or foreigner goes online. That knowledge
has helped these companies become so big and to understand how to move into
new markets in a very competitive and aggressive way.
I would not want to compete with Microsoft or Netscape or Yahoo, or go
toe-to-toe with Amazon.com or e-Bay. The leading companies of today will not
be failures because of start-ups.
If they fail, it will be because they made a tactical error or one of the
other leaders morphs into their business.
Q. Speaking of Microsoft, what do you think is going to happen with the
antitrust case? Will the company be broken up?
Ms. Meeker: I think the best thing to happen here is that they settle the
case and go forward.
The focus I have had is on whether an adverse ruling will fundamentally
change the company's business model. But the things that will fundamentally
change Microsoft's business model are already in place.
For them, the bad news is that they will not have the kind of market share
on the Internet that they had on the personal computer platform. The good
news is that the Internet, whatever it is, is much bigger, and they are in a
position where they potentially could have smaller market shares in many
markets, so that might not be such a bad thing.