Have last month’s falling share prices of internet companies vindicated all the dire warnings of a speculative bubble?
Most analysts are still bullish on internet stocks. There is much more to the internet boom than the dot coms: the internet is a productivity-enhancing tool, and contributes to economic growth. “The recent share slides have nothing to do with a bursting bubble,” says Peter Misek, senior research analyst at Chase H&Q. “The internet is a real thing. It is going to change the way we live, and no single sector will be unaffected by the net.”
Farmers, cement factories, car manufacturers and Financial brokers alike have benefited from the internet. “The whole market will become an internet market,” concludes Teun Draaisma, European equity strategist at Morgan Stanley Dean Witter. “In a few years’ time companies will either be internet stocks or not exist.”
What then are the reasons for falling shares? “There is a strong seasonal skew as far as e-commerce revenues are concerned,” says Paul Cooper, fund manager responsible for technology and e-commerce at Sarasin Investment Management. “In the First quarter the market switches out of internet stock for a while. Business for internet companies tends to look very good in the fourth quarter, so shares perform very strongly. This First quarter therefore sees some profit-taking, though compared to the First quarter last year, share prices are still growing.”
When people invest on the basis of a company making a profit in the future, “it can be a dangerous game,” says Draaisma. “After all, as we approach 100% internet penetration levels, prospective growth rates will be much lower than those expected today.”
Although he thinks that the long-term valuations of the internet sector as a whole are justified, Charles Newington-Bridges, technology specialist at Dresdner Kleinwort Benson, agrees that “investors’ sentiments might be shaken by the competitive restructuring that is taking place, particularly in the e-tail sector.”
E-tailers are the pure plays in internet retail business, such as book and CD seller Amazon.com, fashion retailer Boo.com, music distributor Online Classics, or Lastminute.com specializing in last minute deals. According to Newington-Bridges, “the initial enthusiasm for e-tailers has already faded away as the number of start-ups is too high to fulfil expectations of companies making a profit and of wild estimates of growth.”
Even the market leaders have problems turning market share into profit. Amazon.com, the number one player in the consumer e-commerce arena, is not making any profit as revenues go straight back into advertisement to maximize its market position.
“Amazon is the main risk at the moment,” says Pascal Daloz, IT analyst at WDR Paris. “The management said the trend of loss-making will change this year, and they will have to prove that the decrease in losses is higher than the increase in sales. In our view it is impossible for Amazon to become profitable.
Their business model does not work out, and share prices could fall to half their present level in the second half of the year.”
If investors begin to question the validity of the business models of e-tailers, a knock-on effect might be induced on other internet stocks. At the moment, 79% of US pure internet stocks trade above their IPO level, says Draaisma. But this trend will be reversed, Finds Mary Meeker, managing director at Morgan Stanley Dean Witter. “When all is said and done, 70% of US internet IPOs will be trading below issue price.” US companies Drugstore.com, eToys.com, Garden.com and TheGlobe.com have lost much of their initial value, amounting to more than three quarters in the case of Cdnow. UK company Lastminute.com, following an initial run up from its IPO price in mid-March of £3.80 to £5.50 was trading below issue price at £2.87 within a week of going public.
“The real challenge for investors’ confidence may come in the summer,” argues Cooper of Sarasin, “when many internet stocks will have to approach the market for additional capital to Finance further expansion and hefty initial losses.”
But there are safer ways of playing the internet boom than the high-risk, high-reward zone of the pure plays in the business-to-customer (B2C) sectors. Pure internet companies can also be found in business-to-business (B2B) commerce. And investors might begin to shift attention away from the “pure plays”, to the “enablers” and the “beneficiaries”. Enablers are the providers of internet technology and infrastructure, and beneficiaries the traditional old-economy companies, which benefit from the internet by cutting costs and/or enhancing growth.
Of the three, enablers are the safest bet. WDR analysts are expecting the demand for internet-related equipment to grow to 30% of total annual European IT investment by 2002.
Infrastructure providers such as PC makers, server and Fibre-optics manufacturers and suppliers of internet commerce or web development software will be the biggest money makers. Telecommunication companies, too, will be in the running to become the big winners when wireless information devices move into the daily lives of millions of web users.
But it is the B2B sector that will see the biggest growth. WDR analysts expect European B2B revenues to increase more than 45-fold from $3.8 billion in 1998 to an estimated $174.4 billion in 2002. By comparison, a 25-fold increase from $1.9 billion to $48 billion is predicted for revenues in B2C.
This growth comes from companies’ needs to automate their external business processes.
Virtual marketplaces are about to revolutionize B2B commerce, as did the automation of payroll and inventory systems for internal business processes.
With the help of a company-specific marketplace, old-economy companies can hook their suppliers into their own IT system. Most blue-chip companies have set up online procurement sites to save costs through more efficient procurement and transaction processes. General Motor’s GM MarketSite and Ford’s Autoflchange, for example, bring together suppliers and dealers to exchange a variety of products, parts and services and automate supplier interactions from order to payment. While GM MarketSite is part of CommerceOne’s Global Trading Web, a world-wide network of B2B e-commerce portals, Autoflchange is hosted and managed by Oracle, a leading supplier of database software and web-enabled trading platforms.
Significantly, after only four months of launching their sites, Ford and General Motors, together with DaimlerChrysler announced in February plans to create an e-marketplace for the automotive industry. Such a sector-specific, or vertical trading platform will allow all car manufacturers to conduct business with suppliers, partners and dealers through a single portal.
There are trading platforms for each industry by now: Chemdex provides the chemical industry’s exchange. Chevron and Ariba, a B2B software and services vendor, announced in January they would host a marketplace for the energy industry, called Petrocosm Marketplace.
VerticalNet Inc, a portfolio of B2B trading communitites, and Eastman Chemical have formed a joint venture to create a marketplace for the paint and coating industry. SAP, which started off as an enterprise resource planning (ERP) company, and Norwegian Statoil will together develop an e-market for the oil and gas industry. And Oracle will provide further large-scale industry exchanges for retailers Sears and Carrefour, and for Fibermarket for the pulp and papermarkets.
There were an estimated 400 industry e-marketplaces at the end of 1999, which analysts believe could increase to 10,000 over the next few years.
The next stage of e-marketplaces will be cross-industry. Chemdex, for example, will change its strategy to operate a broad portfolio of B2B marketplaces, or “multiple-upon-multiple vertical exchanges”.
SAP’s new inter-business division, mySAP.com, provides software and technology for horizontal and vertical marketplaces. “The launch of its new product is considered an important move by [German] SAP, as it tries to reposition itself in extended ERP and to keep up with American players,” says Newington-Bridges.
In fact, American companies dominate the B2B market. Siebel Systems is the global leader in customer relationship management (CRM). Cisco and Intel enjoyed “First mover advantage” when taking their ordering systems online and i2 is the top player in supply chain management software.
Next to American e-market hosts like Oracle, Ariba and CommerceOne, only SAP covers the e-market business. At the moment it is in negotiations with GM, Ford and DaimlerChrysler to participate in their ambitious project.
There are only a few European B2B companies listed. German company Intershop is the most significant European player in the e-commerce software market. Infobank, a procurement automation software company, and Sage, a provider of accounting software, are quoted British companies.
With 87.3% of the $1.64 trillion global internet revenues by 2003 coming from transactions in the B2B sector, as projected by researchers at IDC, analysts are very positive about B2B. And according to Daloz at WDR, “the average quarterly online spend per individual web consumer in western Europe was $145 at year-end 1998, compared with $565 on average for inter-business transactions.” By 2002 these spending Figures are likely to increase to $440 and $2,140 respectively.
But not only will pure internet companies in B2C see less growth than the B2B sector, they will also face growing pressure from traditional retailers. The latter will quickly ascend into the league of the beneficiaries. “Retailers will evolve into something totally different from what we know now,” says Misek. The internet will, for example, make possible a reverse Flow from customer to seller and thus the event of customized virtual stores.
Traditional retailers will, in fact, be at the forefront of B2C commerce as they have some distinct advantages: an established database of customer information and loyalty to a brand name, both of which must be expensively acquired by the pure plays.
