Top Of The Third

June 22, 2001
Daniel Beighley

Former
Intel Chairman Andy Grove has said that in less than five years,
there will be no Internet companies. According to Grove, there will just be
companies, and each of these companies will simply have adopted or embraced the
Internet — or they might not exist. Likewise, many of the companies that are
currently labeled as Internet will just become known as “regular” companies.

With the meltdown of
tech, telco and Internet stocks over the past year or so, many ideas have been
put to the test, and many have failed. Even the once “sure bet” idea of just simply being the modern
equivalent of the type company
that sold gold pans and shovels to prospectors during the Gold Rush — a la Cisco and
the networkers — also proved to be a dangerous strategy that did not work. As the buyers of all those swithches and routers (the picks and shovels of the Internet) dried up, so too did all those sales and earnings.

Early
Internets Prospering

True, each remains
50% or more off their all-time highs, but relative to many other techs that are
off 80%, 90% or even 99%, these traditional Net powerhouses are poised to
prosper as the Internet revolution continues. Each has morphed, changed, and
adapted their strategies over the
past two years, and each is positioned to continue to dominate their industry
niches. Keep in mind its still in the early innings of this brutally dynamic
game.

eBay is one Net
pioneer of note, and as the chart below shows, it was hardly one of the dot.com
blow-ups. It continues to gain online auction market share, and its acquisition
of Half.com has placed it at the forefront of fixed price retail online sales.
Add to that the fact the company has received a slew of positive comments from
the analyst community (for what that’s worth), and eBay has been off to the
races.

AOL is
another early Net that was a Wall Street outcast for many years until it turned
profitable and caught the attention of the institutional crowd in late 1998. After many
concerns about its merger with Time-Warner, AOL has begun to show some teeth and
has seen volume surge as it moved higher in recent days. With 30 million-plus
subscribers, AOL has an extremely tight grip on the online market. Even its
recent $2.00 per month price hike was hardly noticed. With that kind of pricing
power, AOL has obviously survived the Net collapse and is well positioned for
the next wave.

The
heavy volume that accompanied this week’s increase and the fact it bounced
solidly off of its 200-day moving average suggests that AOL might again be
attracting some institutional buyers much like it did in late 1998 and early 2000.
Coincidence or not, the solid performance of these two early Internet leaders
shows that there most definitely are some survivors in the crowd, and the fact
AOL and eBay have down so well since early April reminds many tech investors of
late 1998 when AOL and eBay were almost like the pace cars for the wild ride
that was to follow.

The
Floodgates Opened

The torrential flood
of cash that mindlessly flowed into the tech and Internet sectors in 1999 and
early 2000 was hell bent on grabbing the "next" AOL, Yahoo, or eBay. After all,
the valuations of those early Internet powerhouses went through the roof, and
most importantly, each of these Internet pioneers (except Amazon) was posting
real, honest-to-goodness profits, rapid revenue growth, and huge gains in market
share.

If they were
profitable and they were leaders in their respective product or service niches,
so the rationale went, then jumping on the next tech-niche leader made perfect
sense. We therefore saw the continual rollouts of the newest flavor of the
month. The list was never-ending and the voracious appetite for IPOs guaranteed
a steady stream of “the next” AOL, Yahoo, or eBay. Rolled out as
quickly as the prospectuses could be printed, were the ISPs, the B2Bs, global
Internets, optical networkers, wireless, CLECs, ASPs and every other crazy idea
that had a completed business plan.

With the dot-com
debacle now the subject of late-night talk show jokes, it has become easy to
laugh off the whole Internet bubble as some momentary flash of investment
insanity. But as is evident now, there were many deeper problems in tech-land
than just a big slug of venture-capital money chasing crazy ideas. What
continues to surface is the blatant failure of the broadband revolution’s
promise, mainly being broadband access everywhere. The so called “last
mile” problem is still with us, as less than 10% of consumer households now
have high-speed access to the Internet.

Failure
At The Last Mile

Who is to blame?
Well, DSL was supposed to be the revolutionary solution via the copper phone
lines, but conflicts with local Baby Bells and a quagmire of local and federal
telco regulations strangled the efforts of DSL providers to get through that
last mile in a cost-effective or timely manner. Broadband cable access from
firms like Road Runner or @Home have run into similar regulatory problems, and
what the Net revolution is left with are the same roadblocks that existed three
years ago.

The problem with
“the last mile” helps also explain the terrible performance of
traditionally “blue chip” tech and telco names like Lucent, Nortel
Networks, JDS Uniphase, AT&T, WorldCom, and even Cisco and Sun Micro. The
overcapacity that these firms all helped create sits unused, since so few
consumers and businesses have high-speed access that actually works.

How will this whole
“last mile” bottle-neck be cleared? Some say technology could solve the
problem, as local-area wireless access could run an end around both the cable and
the telco operators. Others say that government regulatory policies are the key.
However it is accomplished, it will eventually occur, and then the optical
network will finally get to show its amazing capacity to change the whole game.

Look, for example,
how tiny Napster logged on 60 million users in a couple of years and turned a
timid and confused music industry inside out. Broadband will do the same for all
industries, and those corporations who hesitate (or who have put their Cisco
purchases on hold) will be late in getting back into the game and will be
crushed.

So
What’s Working?

So, what looks good
right now as the next stage of the Internet revolution begins? As I stated
above, eBay and AOL continue to increase market share and are positioned
perfectly to dominate their fields. If anything, eBay has become more of a
consumer-related company while AOL is obviously the new model of a global media
giant. So like Andy Grove has said, "Internet" companies will soon be
known simply as "companies," and if they are growing their earnings
and market share, the stock prices will take care of themselves.

In addition to AOL
and eBay, also looking strong
in recent months is Verisign, which has now been awarded a multi-year grant of
complete control over the dot-com and dot-net registries. Verisign originally
was a Internet security and digital certificate firm, and its acquisition of
Network Solutions was a brilliant fit into its broader Net strategy.

Granted
the stock is significantly off its highs, it has avoided the extreme meltdown
levels of many tech stocks, and since its April lows has based and managed to
stage a nice comeback. Verisign has a market cap of $11.7 billion, no debt and nearly a
billion in cash, so it is not nearly as cash strapped as many of the bleeding
techs and telcos. What was constructive this week was the fact it held above its
50-day moving average. Verisgn’s next challenge is to take out its late May
highs and recapture its 200-day moving average on big volume.

The Goliath from
Redmond is obviously another resilient survivor of the tech/Net meltdown, especially
since it’s
looking more and more like the company will not be split up by the government,
Microsoft will likely remain a formidable tech and Net powerhouse. Its dot-net
initiative is set to roll out, and the company is also attempting to go after
AOL’s Instant Messenger domination. In my mind, Microsoft is still a stock to
keep an eye on.

Overall, the
Internet revolution is still in its early stages. I would liken it to the top of
the third inning of a nine-inning ballgame. As the Net revolution shakes up all
businesses — much like Napster shook up the music industry — then all that excess
optical network capacity that so many companies went broke building, will, at last,
be filled. And that will still only be the fourth inning, with many more amazing
changes to come.

Top Of The Third

BUY THE FEAR, SELL THE GREED

Quick Links

Company Info

Contact

Company Resources