Thursday, February 09, 2012

Internet Service Stocks - Once Again Facing Imminent Collapse


The cyber world of dot coms has seen a rather tumultuous start to the 21st millennium.  It began with the dot com boom and bust that peaked in 1999-2000.  As the after market crashed, reality set in, and options morphed from retirement funds to wallpaper, most people believe it was a situation that was overdue.  There was no foundation to support the high flying stock values in the market place.  Seemingly overnight 60-70% of the value of many of these companies vanished.

What insidious dark forces were at work in the high flying tech sector to bring such chaos and devastation to the silver lining?  Well, where do I start?  Perhaps the most obvious can be found in the faces of the new tech Wizards.  Often what is not there is more telling than what is.  Their faces seemed too clean, too unblemished, and too confident.

They lacked the lines and scars of experience found etched in the faces of the Old World masters, meaning those people in business prior to 1999.  When the Wizards were still in diapers and cutting teeth, the old masters were setting in motion a sustained economic growth unparalleled in the history of the US, and the world.

Once e-mails became the staple of American leisure time, and the pc became the Source for all that is, then the Wizards declared the old economy to be a dinosaur and relegated the veterans of American capitalism to be ready for the museums.

That was how we ended the last millennium and the results were quite expected.  The wisdom of the Wizards of technology gave us a stock prices collapse, options evaporated, losses continue to mount and the seemingly endless money pit went dry.  Yes, the Internet certainly speeded up everything, including failure.

Where did the e-commerce Wizards go wrong?  If blame is to be assigned at all, it should be assigned to those that bought the hyperbole in the first place.  For a short time all rules of economic logic and reason were suspended.  For a short time greed dominated the marketplace.

Look at what we forgot.  Revenues were no longer important.  Profitability vanished.  Multiples were no longer relevant.  Market caps were established by smoke and mirrors.  Executive experience was no longer considered necessary.  At times being young enough to have zits was an acceptable substitute for training.

So what if there was no market for the new product or service, the "Internet" would fix all that with its vast new market of consumers.  The principle of supply and demand gave way to the concept of creating demand regardless of need and regardless of supply.

The same with using traditional media and advertising.  The power of the Internet would fix that too.  Conventional broadcast and print media would soon be obsolete, and certainly weren't needed for the e-commerce high flyers.

As for competition, copycats flourished as the new economists determined that the Internet would create such a massive new consumer market that anything and everything could be sold.  Have faith in the digital revolution and trust the cyber gods.

In one form or another capitalism has existed in this country for about 500 years.  We fled unfair taxes, traded Manhattan for costume jewelry, and beat up the English over tax on tea, all before we even had a country.  Now our capitalist system has been a dominant world force for a couple of hundred years.  Yet in the course of 12-18 months the high-flying Wizards of the new economy were going to change all that and bury tradition in the ashes of the cyber firestorm.

By the 4th quarter of 1999 it seemed the cyber gurus might be right as greed and need sucked the masters of the old economy into the furious world of dot coms.  Suddenly the names attached to the IPOs read like a guest list to a presidential fundraiser or Board meeting of the Metropolitan Museum.  Familiar names.  The backbone of the American financial infrastructure.

Well folks, the fad flopped.  Along the way we discovered the Wizards really didn't know it all.  A lot of people got burned, and a lot of people got hurt.  Many compromised their values for the quick buck.  Those rushing to jump on the e-commerce bandwagon, despite the warnings and suspicions of the old economy warriors, found the wagon missing when they landed.

Less than a year after the spectacular ascent of the cyber gods, came the even more spectacular fall.  In the vernacular of the cyber psychics, the ascension never quite got off the ground.  It will take years for the impact to be realized.  Make no mistake, through it all the cyber revolution has forever changed the American and world landscape.  Even in many positive ways.

So in the spirit of David Letterman, perhaps we should establish the top ten misconceptions from the coming out party for the cyber revolution, sort of a new millennium report card for the years 2000-2001.  Clearly these represent the views of the author and will be far from all-inclusive, but I would hope many contributions will be added by more informed readers.

Lesson #10:

The rules of capitalism do not apply to the new economy of the cyber world.

Sorry folks, but capitalism is capitalism no matter what the industry or technology.  The same rules apply to capitalism that always applied to capitalism whether we are in the industrial age, the service age, or the cyber age.  A business still needs a product, revenue and profits to succeed.

Lesson #9:

In the cyber world experience is not necessary for success.

There is still a need for competent and experienced management.  Having Internet access to more choices and information and bigger markets does not automatically result in management knowledge and wisdom.  As always, experience is a process of learning, not declaring.

Lesson #8:

Acceptance of new technology will happen overnight.

It took 70 years for radio to mature in America.  Fifty years for television to take hold.  Vinyl records were around for 75 years before compact discs really replaced them.  Even eight track recorders died a very slow death.  Phones became accepted in the last half-century.  Computers have been in development since the 1940's.  Cable TV has been in use since the 1950's.  And still not all homes in America have phones, personal computers or even cable television.

Lesson #7:

Technology breakthroughs will benefit all related technologies.

So as long as the public buys a new technology, they will buy all new technology.  I don't think so.  The market explosion in video games and high tech gadgets was supposed to mean we are adapting to the cyber world.  Yet Sony sold 80 million Play stations (a high tech marvel at the time) but only 20% of the buyers had access to the Internet.

Lesson #6:

The new economy would render traditional masters of the old economy obsolete.

This is a bold and arrogant perspective with no historical basis.  In our system of capitalism winners and losers are determined by sustained performance, adaptability, access to resources, and staying power.  Often times the traditional economic leaders let others make mistakes before embracing new concepts.  Never will that be more apparent than if or when retailing giants Wal-Mart, K-Mart, Target and J.C. Penny suddenly become the dominant forces in e-commerce.

Lesson #5:

The millions and millions of new Internet users represent an entire new market for consumer goods and services.

This might sound logical but it is based on an unfounded assumption.  What in the world do we think these millions of new users have been doing before the Internet?  They still bought everything they needed from traditional sources.  The Internet does not represent a new market but an opportunity to shift the market share from traditional consumer sources to cyber sources.  To achieve that, the consumer must be given a reason to change buying habits.  Access to the Internet is not a reason, just an opportunity.

Lesson #4:

The Internet will foster unlimited new opportunities in audio and video broadcasting including interactive communication.

Well guess what folks, who in the world will ever have time to surf 500 video channels, 10,000 audio broadcasts, not to mention the hundreds of interactive channels for every major retailer and cause in America?  Already the many but still limited choices on cable television have left the public in a quandary.  Interactive tests have failed miserably.  Over 5 million websites exist before the real broadcast benefits of the Internet have been felt.

Lesson #3:

The Internet itself can provide all the advertising opportunities necessary for the new economy players.

With millions of users in the US one would think this could be true.  But the truth of the matter is the Internet has resulted in market segmentation and fragmentation on a level never before seen or experienced.  What the technology of the Internet has done is give the consumer the chance to exit or ignore ads like never before.  Our click happy culture has discovered the ability to spend an average of a few seconds looking at a screen before zapping along.  So while we are bombarded by more cyber driven commercial messages than radio or television ever dared throw in our face, reach and frequency no longer have meaning.

Lesson #2:

The Internet technology will render all current forms of communication technology obsolete.

This statement implies that the Internet, as well as existing communication technology, is good in the first place, which remains to be proven.  However, whether one surfs the web or works the remote, there is a furious competition for your attention.  Demographic analysis is more complex than ever.  The "known's" of traditional media remain much clearer than the "unknowns" of the Internet.  Don't look for this to change any time soon.

Lesson #1:

Thanks to the Internet, the world will never be the same.

Instant worldwide communications has indeed given us the opportunity to be better informed, better educated, and easier misled than at any other time in our history.  High technology has given us a new way to communicate.  But communications without morality and standards has created a whole new playing field for purveyors of fraud, deceit and corruption.

I count this as a misconception, but with positive leanings, for the power of information and education will, in time, result in a world with more truth.  In a Biblical sense, the Internet will finally bridge the horrible gaps in communication between people and races and maybe even religions.  Ever since we were cursed with multiple tongues as a lesson in ancient Babylon, we have been separated by language.  The cyber world is tearing down those barriers.

So What About Today?

As we sit on the verge of the Face Book IPO for $10 billion has much changed over the past decade?  Not really.  People now lose over $50 billion in fraud, credit card theft, cell phone theft and identity theft thanks to the digital revolution.

Now electronic banking has expanded digital crime to new frontiers.  As we clearly saw this past recession, the Internet age has greatly speeded up the creation of new crimes and the execution of those crimes on a worldwide basis.

Even today the Internet has become the haven for massive "Internet service companies" like Face Book, Google and Yahoo among many others.  With Face Book preparing to make a run at becoming the most valuable company in the world when the IPO is issued, it will leave Face book worth $100 billion, are we hell bent for another major Internet adjustment and market crash?

In terms of establishing fair market value for Internet companies, there is no justification for the Face Book valuations because it is just as impossible today as it was ten years ago to determine the real value of Internet advertising.

Think of this, 90% of the Face Book revenues come from advertising and Internet advertising has been dropping each year as businesses are developing the statistics to prove there is no value in the ads that bombard our computer screens.

With most ad revenues dropping at least 10% this past year, we are on the cusp of seeing a major collapse in the real value of such ads, the real impact on earnings, and the real annoyance factor from being blasted by ads.

Also, in an ad industry with few standards and no guarantees, how long will companies pay exaggerated prices for such ads?  As ad revenue continues to drop what will the Face Books of the world do to maintain stockholder value?

Increase ad prices?  Hardly.  Charge Face Book members a user fee?   Most certainly.  Sell more and more personal data of the members?  That has already begun as you will note from the massive new increase in junk mail based on the sale of your personal information and personal interests stolen from your emails, and web searches.

I predict a massive devaluation of Internet service companies because of their foundation of cards.  This Internet advertising base can evaporate overnight, was never based on loyalty to begin with, violates every accounting standard known in terms of determining the long term value of a company, and is so vague and unregulated those who profit from the stock price manipulations will never be prosecuted for the massive fraud they are currently using to concoct fair market value.

The stock market is dancing on thin ice with the highly inflated Internet service companies and the manipulation of prices and values.  How many normal people will ever get a chance to buy Face Book stock in this new IPO?  Who bought the initial $10 billion since it has all been pre-sold?  Why are certain Internet companies stock priced so high?

These and other issues relating to the rise and fall again of Internet stocks will be examined. In the meantime, you should think about it and study what is taking place so you aren't victimized like the millions of stockholders the last couple of times people operated in the Dark Side of the Internet with our money.

Maybe it is time to consider a break from the Internet world and enjoy what you might have left behind.

No comments: