February 1, 1999
Making Sense of Internet Stocks
By Bob O'Donnell
As much as I enjoy following and figuring out Internet technologies, there's one aspect
of the Internet industry I'm not sure I'll ever understand: Internet stock valuations.
Like everyone else, I've watched with a combination of shock, disgust, amazement, and
wonder over the past year or two at how companies that have no substantial income have
turned into enormous entities -- at least financially speaking -- with larger market
values than many well-established household names. (By the way, let me clarify up front
that I do not own -- nor because of my position as a columnist am I permitted to own --
any individual technology stocks, including Internet stocks.)
On the one hand, I can appreciate the fact that the Internet is rewriting the business
landscape as we know it. I also have no doubt that it will continue to do so for many
years to come. There really is a new economy developing that's based around the Internet.
However, as gung ho as I am about the Net and as actively involved as I am with it, I
still don't understand how, for example, a company like eBay -- that, in many ways, is
nothing more than a fancy classified ad system -- can possibly be worth however many
billions of dollars its stock value put it at this week. (I don't dare quote a specific
number because it will undoubtedly change dramatically between the time I write this and
the time you read it.) I surf the Web constantly and have been doing so for several years,
but I've never even been to their site, nor had I even heard of it until recently.
Similarly, while I know that something like Yahoo is a nifty search engine, and that
portals that complete with all kinds of great additional services supposedly are the
future, I don't understand how it could be worth more than probably all the radio and TV
stations in the world combined. Similarly, how @Home could possibly justify a $6.7 billion
purchase price for Excite is beyond me. After all, most of Yahoo and Excite's revenue is
from advertising -- and frankly, advertising that really isn't at all compelling. (How
many banner ads have you ever clicked on?)
The truth is, the Web just isn't anywhere close to being a good or effective place to
advertise. The Super Bowl brings this point home loud and clear. Companies such as Apple
are known for spending millions of dollars to create special TV spots for the game, not
only because they know they'll have a big audience, but because they know that television
is an effective advertising medium. No one is doing anything of the sort for the Web,
however, because they know it would be a waste of money. If done well, TV ads have impact;
Web ads don't.
Part of the reason the Web isn't a good place for a marketing message is that the
bandwidth needed to create compelling content just isn't there yet, nor will it be for
some time to come. I just rediscovered this point myself, even though I'm the proud new
owner of a 1.5Mbps Asymmetrical Digital Subscriber Line (ADSL) for my home office. The sad
truth is, after using the ADSL a bit, I was quickly reminded of all the backbone and
network congestion problems that plague even high-speed connections. Throw in the fact
that most of the country still can't get past 56K, and you've got a big problem on your
hands.
In fact, if anything, it makes me think that if any Internet-related companies ought to
have soaring market capitalizations, it should be the ones who provide the pipes that
connect everything together. The telcos and Ciscos of the world, it seems to me, should be
enjoying the wild ride up, instead of the eBays and Yahoos.
Who knows, though. Maybe I've got it all wrong. I have to admit that part of me is
almost ashamed to write a column like this, for fear of exposing myself as someone who
just doesn't "get it." But the truth is, I don't. If you do, please join this
week's forum and fill me in, because I'd love to find out.
©
Copyright 1999, by InfoWorld Publishing Corp., a
subsidiary of IDG Communications, Inc. Reprinted from InfoWorld,
155 Bovet Road, San Mateo, CA 94402. Further reproduction is prohibited.
