What to Invest When It Comes to Internet Business?
Internet is in dire need of being rejuvenated. Keyword: innovation.
[+] Internet business have exhausted all new ideas in a matter of a decade
The past few months have seen local media taking an inventory of what Internet has gone through in the past decade. On that basis, media have also suggested a couple of routes that Internet might embark on. By all means, a number of IPOs of local Internet companies in Taiwan during the past six months and the revealing of some quite appealing operating results have, too, been responsible for the re-ignition of media interest in Internet.
Compared to the ruins when the Internet bubble burst, the current Internet fervor should come as a solace to those who have fallen in those early battles. While I do not claim to be among those most fitting to make a stand on this topic, some media have approached with questions I had to respond to out of a concern for courtesy.
Interestingly enough, these interview questions revealed some discrepancies between the ways I and the media see things, explaining why my opinions have not been too successful in currying favor with the chief editors – more than one occasions. I could say proudly that I have been quite philosophical about the fact that media did not take a special liking to my remarks as I was not exactly a stranger to how media worked, and I call myself lucky to have the Internet as a free channel through which to express my views.
When it comes to the Internet, what comes to mind for most investors is extremely large fluctuations of stock prices and young entrepreneurs with their dotcom companies that last only months or even weeks. While there are endless reports and analysis on the media telling investors which to invest in and which not to, one can not help but wonder if Internet stocks' soaring prices are based on anything concrete.
Around late 1990s, the Internet that had just turned commercial was pinned on with so much hype in a very short period of time and had seen stock prices hitting the stratosphere before year 2000. The overnight boom could be ascribed to two types of innovation, one of technology and one of business mode.
The innovation with business mode, in particular, is the key. Before year 2000, whatever mature or nutty business ideas people might have had, other people have thought of them and have started up a company for them, for that matter. In fact, you'll be amazed how crazy some of these ideas were if someone would just collect them all and put them in a book. That, in its own right, would be a good idea, too.
[+] There is nothing cutting-edge about the Internet anymore
One thing we must recognize is that the bulk of innovations that have come with the Internet had come of age before 2000. Some made it; other didn't, while others are still struggling. That's about the status quo of most current Internet companies, without any news ideas, just seeking improvement on the basis of their innovations in the past.
The search engine, for one, is in very aspect an innovation. That is, nothing of the kind has ever been with us since the dawn of day. This is what I call a technology innovation, which has brought about the equally innovative business mode of keyword search advertising.
At this moment in the US, search engines companies have lock themselves up in a fiery battle over market shares. And their ways of going about gaining an edge are simply attempts to improve accuracy or expand scope of services base on the innovations 10 years ago. They are again fighting a war of technicalities, though.
VoIP, as the latest 15-minute fame holder, has in fact been in existence years ago when 56k modem Internet access was considered chic, and what powered it up from rags to the current riches was no other than much-improved penetration of broadband acess and improvement of VoIP technology headed by Skype.
One might question the importance of discerning innovation from improvement. But this discernment makes perfect sense, since any industry can improve on what it already has while innovation from scratch is few and far between and by any standard a matter of sheer luck, and only full-fledged innovation can produce millionaires overnight.
As such, it would be rather unrealistic for investors of Internet stocks nowadays to look forward to multiple-fold earnings seen prior to 2000, since Internet sector as it is has achieved the same level of maturity as the "traditional industries," which typically grow more on improved profitability of incumbent business model and less on major innovations.
[+] High returns go hand in hand with high levels of chaos and uncertainty
On more than one speech occasions I have posed to the audience the question, "what line of business is an online store in?" Most people were speechless. Stripped own, online stores are doing retail business. In this sense, online stores are no different from convenience stores. The same question can be asked of portal sites, and the answer would be just as simple. That is, portal sites are in the media business, just like TV stations.
Easy as I may sound when answering these questions, things were not exactly crystal clear prior to 2000, when portal website owners were feeling their way forward themselves. Even the management of these Internet companies had no idea where their companies were headed.
I was amazed at how quickly the business platform could change for those Internet start-ups, who started out saying they would focus on being an Internet-borne media featuring search engines before they would try their hand at Internet advertising at that time. But before you knew it, they had their hands full with the Internet community service. That is, portal sites began buying up all the community websites they could find once the knowledge that community websites were all the rage hit them.
In 1999, it was eCommerce's turn on center stage. Like a moth to the fire, Internet companies swarmed to the front of "commodity," and that's when they realized how little they knew about commodity. Terms like souring and inventories simply blew their mind. Later on, in a strikingly similar fashion, these Internet wild geese simply felt inspired by eBay and the likes. They figured eBay would be the way to go since there was no inventories whatsoever. With that, dotcoms got all busy again, this time fussing over online auction websites.
The next chapter of the Internet fickleness began when B2C eCommerce encountered difficulty converting consumers who remained suspicious, forcing those who stuck around to push for B2B instead. That didn't last very long either before ASPs ran its own full circle of boom and bust. By late 2000, eBook stores had showed up and disappeared, just like clockwork.
The point I aim to make with the above elaboration on Internet evolution is that all the thinkable innovations have been thought of and put to trial before 2000. One can only imagine how chaotically dotcoms ran their business and how often they changed organizational structures and personnel. For Internet start-ups, there was no such thing as stability, and profitability proved a total stranger.
However, if a daredevil had risked one dollar with one of these start-ups and stayed put, chances are he/she will be a reaping some profits from their venturous moves right now. I, myself, for instance, once bought Sina.com at US$3 per share. Now the shares are trading at US25 per share. But if you ask me, such windfalls are growing rarer by the day.
[+] Next big thing: technology innovation and operating abilities
Back when Internet was at a time comparable to Mayflower docking in US history, it's not hard to imagine a scenario in which your boss asked you to handle Internet advertising this day and eCommerce the next, which worked like a free pass to total chaos. Here and now, Internet companies are characterized by better-observed division of labor, with the entire kit of guidelines and standard operating procedures (SOP) to boot, in the process giving rise to more recognizable corporate cultures.
Under the circumstances, it is rather hard to initiate a new business pattern. To avoid disappointment, we might want to pin our hopes on technology improvement or innovations. That, however, does not mean that investors should skip all existing Internet companies as components of their portfolios. It's just that timing of engagement and exit is all the more important right now and that one should refrain from high hopes of multiplying earnings.
For Internet companies involved in services characterized by less capacity for innovation and a higher degree of maturity, such as eCommerce,
what can they do? I suggest that they work on their operating ability. That is, see it as a race of who can get more clients and who can sell more products at lower cost. In this sense, however, running an online store would be no different from running a department store.
What I intend to do is rip the high-tech skin off Internet companies, which by any standard are just as conventional as it can get nowadays, so that investors can have more realistic expectations of investment in Internet stocks, instead of being conned into believing otherwise. The bottom line is that Internet business is not a high-tech business any more. In fact, it is now officially a traditional business and mass media can quit handing out false hopes already.
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