The Next Stock Mkt. Crash-When ?

Great Debates
21

dhanson asks: “What am I missing”

Maybe nothing, maybe everything. I’m not going to endorse **or ** attack any particular company’s business model here, but maybe I can explain what they seem to be shooting for.

Think free TV. Networks spend hundreds of millions of dollars on programming, distribution, etc., all to attract eyeballs, not one of whom pays the network for any of the programming viewed. So if not for advertising, the network would lose every cent spent.

But they do have advertisers. And in a new development, networks sometimes sell ancillary product to viewers to supplement the bucks from advertisers. And having collected all those eyeballs, a network becomes an attractive asset for a diversified media company that needs access to viewers.

Now think of an internet company. Your favorite dotcom says, "By selling products at or near cost (or even at a loss), I can deliver people at a lower per-eyeball cost than networks. What’s more, my advertisers can track exactly how effective advertising with me really is, something they have to guess at with TV. So I need fewer eyeballs, I can deliver a lower per-eyeball price to advertisers, and if I’m good I become a must-buy for advertisers.

Then comes ancillary revenue sources. They can extract better terms from suppliers (by charging them for prominent mention, for example). This can allow them to maintain their price advantage, ala WalMart. They can move an occasional high-profit item. By diversifying the product mix and adding services, they can even become a “portal.” And if they don’t become unbuyable (too expensive), they, too become an attractive asset for a larger company’s portfolio.

And first to market and name recognition do (or can) make a difference. While I imagine that it’s less popular among sophisticated SDMBers than among the general public, an early entrant to the net-search business that has a catchy name and has successfully built a product portfolio is among the few internet companies to turn a profit.

Finally, the process is not different at all from brick-and-mortar companies, just faster. Remember the huge chains that have disappeared from the earth for the same reasons that you believe some internet companies might fail. They all fell to companies that were at one point startups. In real space or cyberspace, execution is everything.

All that said, think free TV again. With cable and the internet, many observers believe that the basic business model will have to change for them to stay viable. Could the same thing happen to some or all of the internet companies now sporting billion-dollar valuations? Stay tuned.

IMPORTANT DISCLAIMER
This is for general information only and is not an offer to sell, or a solicitation of an offer to buy, the securities or instruments mentioned. The information has been obtained or derived from sources believed by me to be reliable, but I do not represent that it is accurate or complete. Any opinions or estimates contained in this information constitute my judgment as of this date and are subject to change without notice. The author of this post, or affiliates of the author may provide advice or may from time to time acquire, hold or sell a position in the securities mentioned herein. It is the intent of this poster to remain anonymous, and readers of the post should exercise the due care appropriate when evaluating information from a source not personally known to them.

22

TV is a good example of my point. NBC can be killing everyone in the ratings, but their viewership is very fickle. They can have all the viewers one season, but if another network puts out a good show they lose all their viewers overnight. After all, how many people turn on the TV and say, “I think I’ll watch NBC tonight?” None. They go where the programming is. It’s too easy for them to change for NBC to hope to grab anyone with just name recognition.

Your other arguments would apply if these companies were going after an advertising revenue model, but they aren’t. Buy.com wants to make money selling product. They don’t have commercial advertising. So they sell below cost to build a market share, hoping that this initial period will end and they’ll be able to go back to charging enough that will allow them to make a profit. I just don’t see this as being very realistic.

And these companies (Amazon, buy.com, etc) are the BEST of the internet stocks. Some of the other ones are operating with business models that have never been shown to be successful, but more importantly they really don’t have anything for a product that anyone else couldn’t create in a few week’s time. I’m thinking of a recent IPO of a company started by a couple of young guys (19 and 21 or something like that) for a ‘portal’ site that’s supposed to attract all kinds of advertising revenue. I believe these guys raised over 100 million dollars on an IPO, despite having no assets, no established market, no proprietary technology, and having never made a nickel with their idea.

The cynic in me says that there are a lot of net companies with an ‘internal’ business model that goes something like this: “Build up a cool sounding company and make it viable enough to get us to an IPO, so we can all make millions and bail”

23

Again, without endorsing or attacking any company’s strategy:

Every single thing you say about TV networks is true. And yet the big, old networks are profitable most years and they carry valuations in the billions (ask Viacom). They survived lots of things that many people predicted would bring them down. VCRs, the remote control, rising programming costs, declining daytime audience size, even (so far and to some extent) cable. The same might (or might not) eventually be true of net companies that want advertising.

I can’t say anything about Buy.com, as it is a private company and has not filed any documents with the SEC regarding their intentions. But it reminded me of another thing important to net companies. Float. When you go to the store, you purchase a product that the vendor has already bought and paid for. Or at least is going to pay for very soon. Financing that working capital is one of the biggest profit-killers for standing stores. On the net, a good company will hit your credit card for its money before or immediately after ordering your product from the maker.

An example: At the end of the last quarter, Amazon.com owed its suppliers $166 MM, or 53% of the revenue it generated that quarter and almost 3 times the company’s inventory. Home Depot owed $2.4B, or only 23% of its revenue for the quarter and 48% of inventories. And Home Depot is among the very best at inventory management. As you know, Amazon currently spends all that extra cash on growing its business, but as a company grows, receiving cash before it pays it to suppliers can be an enormously profitable undertaking.

Your example of the new “portal” site is a good one. Will it actually become a profitable portal? Who knows? But many internet investors (institutional ones, anyway) take a “shotgun” approach to the sector rather than a “rifle” approach. That is, they invest in lots of companies, knowing that most will fail but believing that the successes will overwhelm the failures, giving them a larger-than-normal return on the portfolio. If these guys raise the money it’s because at least some investors believed that they have at least some chance of doing well, and if they fail, another portal company in the portfolio will succeed.

The internet is not the first place where this has happened. Biotech, in the 80’s, was similar. Most “rifle” investors lost out, a few “rifle” investors got rich beyond anyone’s wildest dreams, and I don’t remember how most of the “shotgun” guys did.

And the cynic in you is right. A lot of net companies are probably doing exactly that. But not all. Most actually are trying to build a successful business. Will they succeed? Some will, some won’t. But don’t write off the entire sector just because there’s no profit today.

IMPORTANT DISCLAIMER
This is for general information only and is not an offer to sell, or a solicitation of an offer to buy, the securities or instruments mentioned. The information has been obtained or derived from sources believed by me to be reliable, but I do not represent that it is accurate or complete. Any opinions or estimates contained in this information constitute my judgment as of this date and are subject to change without notice. The author of this post, or affiliates of the author may provide advice or may from time to time acquire, hold or sell a position in the securities mentioned herein. It is the intent of this poster to remain anonymous, and readers of the post should exercise the due care appropriate when evaluating information from a source not personally known to them.

24

I don’t write them off… Some net companies are likely to become huge. I just think the internet market in general has all the signs of a wildly speculative market running amok.

Another example: EToys has a market cap of over 2 billion dollars after their IPO, when their annual sales were only $30 million, and they had a net loss last year.

I believe eToys is now worth almost as much as Toys 'R Us, even though TRU has a nationwide distribution system, thousands of stores, serious brand recognition, and all kinds of other advantages. And, Toys R Us has moved into the web business and is a direct competitor. This just doesn’t make a lot of sense to me.

25

dhanson posted 09-07-1999 06:18 AM

I disagree. Just how are viewers supposed to know that the other network has put out a better show? Maybe advertising will tell them, maybe word of mouth will, but this can take several weeks. Add in a few more weeks as viewers try to decide whether they like the show (after all, it’s hard to tell whether a series is good or not until you’ve seen several episodes), and we’re talking about a month or more.

  Really? You don't think that there's anyone that just says "I feel like relaxing. I think I'll sit down, turn on the TV, and veg out, regardless of what's on"? And what network do you think those people will choose? The opne they're most familiar with of course. Why was the space between Seinfeld and ER so valuable? Because people don't want to deal with evaluating what the best show in each time slot is. They want to have as simplest an answer as possible to the question "what should I watch tonight". When  I'm looking through the TV guide to see if anything good is on, I tend to check the listings for networds such as NBC and Fox first, and look at networks like the WB later on. PAX I ignore completely. Do you really think that name recognition is useless?
26

About 20 years ago when I started working I was told that about 6 months before every recession the paper industry would go south. Their markets would pick up about 6 months after. The paper industry has been doing poorly for a while–they really have been hit by both overcapacity and by the Asian market meltdown. Today I read that Mexico is basically becoming a lawless country because of police and governmental corruption–the example was of the trucking industry. Now trucks have to have armed escorts because of basically pirates. I’m getting nervous–but not much. I’m in money markets for the long term and I think over 20 years there will be ups and downs. But, I just cannot comprehend a market that doesn’t have some sort of recession–business cycles still exist.

27

The Ryan: Have a look at the network ratings from season to season: They have nothing to do with the ‘network’ itself, but with the shows. CBS, ABC, and NBC, all take turns being number one, and all wind up on the bottom from time to time. They move about somewhat randomly, because their popularity comes from the shows they are airing at a given time, and not from any intrinsic value of being NBC vs CBS etc.

Now, that block of three has built some credibility which gives them a competitive advantage over networks like Fox, WB, etc.

And all of them are still in a much more traditional industry as compared to the Internet. Networks gain considerable value from having more affiliates, which gives them more local advertising clout, etc. A new network has to compete without that infrastructure, which is one reason why it has taken FOX so long to come close.

On the internet, none of that applies.

28

The next stock market crash will happen on September the 9th of this year (9/9/99). Be prepared.

29

The stock market will crash very, very soon. As a knowledgeable trader, I know that the faith that people have misplaced in the bull market is a terrible folly, and that they will lose all their invested assets if they don’t pull it all out as soon as possible. Which is why, in my compassion for the people ( fuck the corporations! ), I am going on every message board my browser can take me to and telling everyone to sell, sell, sell! You must do it NOW before the stock values fall to the center of the earth! Don’t hesitate, take it ALL out now! You don’t want to suffer the consequences, BELIEVE ME!!!

                  Giggling in anarchistic joy,
                       Andrew Thomas Gallien
30

Yes, sell sell sell! The market is going to crash! And I’m certainly not just saying that because I just did a lot of short-selling or bought a bunch of Put options and am trying to make the coming stock market crash into a self-fulfilling prophecy!

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