The Internet; just www.what's going on ?
A business revolution is in the making. By now we are all familiar with
most of what's been happening here; a new way of communicating, the
Internet, is facilitating all sorts of new ways of doing business. This is
big, but just how big?
Well it's more than just a new way of communicating. Traditional commerce
is changing to e- commerce: changing manual and previously time-consuming
tasks into electronic and / or automated ones. This is bringing new,
better, and (sometimes) more improved services and ways of doing things.
The uptake of this new technology has been faster than any other technology
ever introduced. In the past five years, about 60 million people have gone
on line. The introduction of Radio took some 40 years to do this,
television 13 years. In the United States one-quarter of the population
use the net. Penetrating to this level of usage took seven years. By
comparison, electricity took 46 years to achieve this level of market
acceptance, the phone 35 years, PCs 15 years, mobile phones 13 years.
(Source; International Data Corp. Internet commerce market model March 5,
1999.) The net is now big business.
Some of the more simple and immediate improvements business have taken on
can be seen in company web sites and how they are being used. As just one
example, visit www.csr.com.au Such sites bring together the company's
entire range of products creating a library of technical information and
data, plus a data base of products and associated details. For the company
it is a new way of doing business.
See also www.thetrip.com/usertools/flighttracking for a great use of the
net, and for a bit of fun visit sites like:
library.advanced.org/16661/index2.html www.spikeradio.com www.961.com.au
Companies soon found they could extend the function of their sites into
direct ordering and trading, tracing and tracking products etc. To see how
this technology is being integrated into business visit the Fed ex site
www.fedex.com, one of the internet's most heavily used sites. See also
www.ec.ups.com and in Australia www.corporate express.com.au
So far, what we've been discussing came to be called business to consumer
type activity. More recently attention has been focusing on business to
business activity. To observe how this is affecting companies and big
business activities checkout: www.ariba.com Ariba tries to show business
how to streamline their purchasing and procurement processes. See also
www.candycommerce.com www.BuilderSupplyNet.com www.freemarkets.com
These are aggregator sites that try to concentrate demand and bring
together supplier content, creating in the process an interactive shopping mall on line for business to business activity
prior to consumer level.
Business to business internet activity could be really explosive.
Previously, companies had already been using electronic networks to
exchange orders and invoices. This was a limited process, and you could
really only deal with another business on your own network. This changed
with the introduction of the net, and web browsers, making possible a whole
new set of internet possibilities and facilitating the creation of market
places like those mentioned above. Business to business activity, moving
companies and business then into further electronic usage through;
- electronic procurement of goods and services at a wholesale level,
- purchasing being even further streamlined by aggregator sites (examples
- on line exchange trading, stock markets as an obvious example.
Slowly, this process will be applied to all old-style industries;
aerospace, chemicals, coal, food, health care, paper, steel and on it
goes. General Motors expects to save $12 billion
each year by shifting further into this process.
Spin offs and effects.
The first effect of all this technological change is that it is forcing
prodigious changes on all businesses. Not one single business activity
will remain unaffected. The example of Encyclopaedia Britannica is often
quoted. Earlier this decade buying the encyclopaedia of books would have
set you back over $2,000. After at first ignoring competition from rivals,
initially a CD-ROM from Microsoft selling for less than $100 (now free),
Britannica finally was forced to completely rethink their business strategy
and last year put their entire 32 volume collection onto the net, available
free. (They tried a CD-ROM first, priced at $299, then access by
subscription). The Britannica site, now a portal attempts profitability through sponsorship, advertising and other
e-commerce activities such as strategic alliances.
In the economic sense, the effect of technology is being expressed in
prices: they are coming down. This is exactly what happened during the
first stages of the industrial revolution last century. If you had lived
last century, prices of most items were cheaper at the end of it, than at
the start. So the Internet has been deflationary (as consistently called
by the EIS). Some examples:
Priceline in the U.S. began similar projects with other industries some
years back; air ticket reservation, groceries to name a few. One US
marketing group ISI compared Priceline products to other non online grocery
groups and found average price savings of some 60%, as below;
- IBM claiming it will sell $15 billion worth of goods over the net this
year, save $600 million as it redirects business customers to its support
web page, and buy $12 billion worth of goods using the net, eliminating 5
million paper invoices in the process.
- British Telecom reported spending 10 million developing its Internet,
saving £663 million last financial year in increased efficiencies.
- GE, General Electric, the first company to realise a profit in excess of
$10 billion has explicitly stated it is doing more business over the net to
- Cisco also has shown how to take a lot of costs out of its business
having customers order over the Internet, making 40% of staff redundant.
- In Australia, observe how a new business called GreenNet could
revolutionise the horticultural industry. Old-style; plant growers load
large trucks full of plant samples and physically travelled to all
nurseries in the country. New style: www.greennet.com.au Growers have
their entire nursery catalogue online, allowing retailers to access price
lists, place orders, search for special items etc. Savings per grower
estimated at $60,000 to $100,000 per year.
item non on line store Priceline
palmolive $2.99 $1.37
listerine $6.99 $2.15
Duracell $11.98 $3.60
Even the simple business items of pens, pencils, computers, and toilet
rolls, ordered over the net, is estimated to be saving business huge
outlays. Apply this to shipping, customs, bills of lading, government
departments, public companies etc. and you can see this process will run a
long way yet.
Two of the biggest electronic commerce projects in Australia have only just
started: in the Superannuation industry, the development of an
industry-wide messaging system to link employers, administrators and fund
managers, enabling the shifting of messages through the system
electronically, reducing costs by 30%, or some $700 million worth. And in
the health area, the Pharmaceutical Electronic Commerce and Communications
project, a joint initiative of government and business to improve supply
chain management in the pharmaceutical industry. It is estimated some $340
million could be saved here using e commerce.
Ford is about to provide each of its 370,000 employees worldwide with PCs
and home Internet access to make sure its work force is Internet literate.
Back home ANZ bank will soon offer staff subsidised, $5 per week, home PCs
and free Internet connection, in a five-year program costing $20 million
All this has shown up in improved labour force productivity figures over
the past few years, low inflation rates, (deflationary even?) and low
unemployment figures. The United States is reporting e-commerce has
reduced the dollar amount spent by U.S. companies on order processing from
$75 to $10, on average. Stock markets and professional investors are quick
to pick up on such developments. It is often said, whatever that the
demand is, Wall Street finds a way to satisfy it.
The stock market
Since 1982 long-term interest rates (bonds) have been steadily declining.
Since this time, equity markets have been in up trend especially in the
U.S., with even the 1987 crash now just a blip on the charts. In addition,
the new technology, first computers, now the internet, and all the
retraining this involved has helped make companies a lot more profitable
since 1991. Stock markets have an uncanny ability to anticipate such
developments, often 12 months to two years in advance. (Dow theory; the
market always looks twelve months ahead). Markets began progressively
pricing in the trend to lower interest rates and the huge increases in
productivity, through technology, years ago.
Then the business cycle picks up. Banks re-commence easier credit
policies, asset prices rise further. Sometimes, especially in Western
society, whenever interest rates have come off major peaks (every 50 years
or so) we end up with the conditions for a sustained stock market or real
estate bull run. The U.S. decade cycle expansion is now the
longest-running in U.S. history at 108 months presently. So the question
arises, is the stock market in a bubble ?
As always there is two sides to the story. One says we have a mania, just
like the Japanese real estate and stock market of 1989, and tulips way
before that. The other side argues we are in the midst of a business,
indeed world economic revolution comparable to what happened in the
industrial revolution. Here is my view:
The mere fact that market commentators have had to resort to so far back in
history for meaningful comparison tells us something big is going on here.
It is a time of unprecedented innovation. This will last a long time,
decades, and has a long way to run yet. It is all a question of timing,
both in the short and long term. Right now though the present is looking
very similar to past patterns in history.
In the end, the bubble will deflate (not necessarily burst - probably has
already) for a very simple reason; each company will at some stage have to
justify its earnings, or lack thereof. Yes we all study charts and trade
the technicals, but in the long run it is the company's fundamentals that
sets the charting parameters.
For sometime now, practically all investors have been chasing returns, any
returns, higher than what you can get in a bank, which have been declining
with lower interest rates. So of course the higher the market goes the
more we are attracted to buy. Yes the Internet is revolutionising the way
we do business, but it is still very much a charity model currently. To
attract business (eyeballs) much of what is on the Net is either being
given away or sold at a discount and / or a loss. One site in particular
Buy.com, with an advertising spiel "the lowest prices on earth" is selling
products below cost, attempting to create its own image synonymous with its
spiel, the discounting to be covered via web banner advertising. Now the
market may believe this for a while but ultimately it is a negative gross
margin. Like selling $10 notes for $9. This is not a sustainable
long-term business model. At sometime in the future Internet investment
will be forced to produce a return on capital, or bust.
Now without being alarmist, it is usual that bubbles of the past have come
to an end once interest rates have about finished being lifted by Reserve
banks. And central bankers have a marvellous way of repeating history.
They (read Greenspan) will push up interest rates to, as they will call it,
"protect economic prosperity", and will continue to do so until it is too
late. As occurred every other cycle since World War II. In reality I
believe that this behaviour is all part of a much bigger economic cycle:
the move up (ultimately unsustainable because it is driven by asset prices
from bank credit expansion), causes eventually the move down. And the
cycle turns once again. (The cycle occurs this way because society does
not collect the economic rent of public resources, allowing it instead to
accumulate into the hands of private interests, but that is another story.
E-mail me if you would like further understanding here. The EIS business
cycles class studies this phenomenon in depth). History might also reveal
that the flood of money pre millennium and the Y2K scare has had a lot to
do with the bubble.
Watch this year for much discussion on whether Reserve Banks can engineer a
"soft" landing for the economy. It's all repetitive of course. Higher
interest rates will slow the economy. Rates are an extremely difficult
instrument, notoriously fickle in timing and higher rates are most likely
to move the economy into recession. Our policy makers won't say so of
course, preferring instead to use the language of 'restraining a booming
economy". Be prepared.
At the very peak of the decade business cycle, greed kicks in. Usually it
is substantial too, and very hard not to get caught up in. Our
publications last year highlighted a list of ten to watch for, all of which
were flashing at least amber in colour, if not red. Here is what we
alerted you to in our May 99 "Indicator":
"Signs of a movement into top gear. A study of history reveals all the
classic signals of an economy in full swing;
And we said at the time this was likely to go on for many months yet.
Earlier this year the intensity of greed got worse;
- rampant gambling, average per person loss in Australia $634 yearly
- Warren buffet tells shareholders he sees nothing on the horizon to
attract his $15 billion cash reserve
- highest ever debt levels, average per person debt level in Australia
stands at $3,600
- mailed invitations to wealth seminars practically every morning
- shades of 1989 in the local auction rooms, though more discreet at the
- luxury car registrations at their highest point since 1989, so too
thoroughbred horse sales."
That's the business cycle for you. We are living through another peak
right now. (And when one man is permitted to gamble $94 million - yes $94
million - through just one Australian casino in under 6 months, greed
- day traders, in fact most traders for that matter, treating stocks as
commodities rather than actual businesses with an underlying value.
- Amazon giving its two newest executives $2 billion in stock options
(March 16th) plus cash bonuses of $7 million each for signing up. That's
stockholders' money I might add. (Each day one third of the entire
available shares of Amazon changes hands.)
- financial scandals and public company executive ripoffs of which 1999 was
a classic year. Trumble's $11 million to walk, Macquarie Bank's $50 million
for advising Boral on its division into two companies, and from the sublime
to the ridiculous Yahoo, with sales of a mere $200 million and a market cap
of $41 billion at one stage (shares outstanding 100 million multiplied by
share price last year just above $400) bigger than established giants with
multibillion-dollar sales like Boeing, Monsanto, and Colgate-Palmolive.
- E-bay earns 8% of its revenue through the trading of beanie babies !
- In Hong Kong Richard Li's Cyberworks is oversubscribed some 500 times, in
Singapore, Singapore technologies IPO is oversubscribed 165 times. Now
there's a mania.
All bubbles deflate. I might add that no one ever rings a bell to signal
the top of the market; meaning that at the top, or least somewhere near it,
it never looks like it. All the good news is coming out, things look rosy
and as I said before it is very hard not to be caught up in it. Bubbles
usually end up ugly. But that said, markets always recover and go on to
bigger and better things.
If the market does not recover immediately from here, it would indeed be
ironic in light of the following article, published in the Financial Review
February 17th, entitled "much ado about nothing".
As reported; "NetJ.com Corp is listed on the New York Stock Exchange and is
capitalised at almost $33 million. It is currently trading at about $4.60
per share with a fairly active turnover of 63,400 shares in a week. But
this company doesn't do anything and apparently has no plans to do anything
other than nothing. It's Bloomberg Business description reads currently
NetJ.com Corp has no business operations. The company is seeking to
acquire or merge with a business or company. Further, a recent Securities
and Exchange Commission filing by the company confessed that the company is
not currently engaged in any substantial business activity and has no plans
to engage in any such activity in the foreseeable future. And as the paper
went on to say, six months ago, the company, which has little more to do
than manage its equity profile, enacted a 5 for 1 stock split, which has
seen its shares soar from 32 cents in July to the current $4.60 at Friday's
close, for more than a seven fold increase for a company that does nothing,
plans to continue doing nothing and which is worth $33 million."
A keen student of history would know
that at the height of the South Sea
bubble in England of 1720, a company was floated with
its articles of association reading "A company for carrying on an
undertaking of great advantage, but nobody to know what it is". I have
been told, though am yet to confirm, that one of the last IPO's floated in
1929 just prior to that crash was Mausoleum Inc, a Funeral and Graveyard
site owner / operator.
Important to note though, this technological revolution is based on solid
and very real productivity advances. It will lead to some amazing
developments, great ideas, and plenty of jobs for those that want them.
Here are some examples of the huge potential growth still latent within
this revolution. (Remember, the internet is not the bubble, the stock
market is; expectations being priced in way too far ahead of reality.)
From US research, 63% of US adolescents prefer being on line to watching TV, 55% prefer online communicating, rather than over the phone.
- Ross Perot, the US billionaire and founder of Perot Systems (revenue last
year $781 million) says business to business sales via the net has been the
key to his companies growth, citing recent research suggesting this sector
of the market will triple in size over the next two years. Note; Perot is
building an internet business with cash flow.
- Bloomberg reported last year, Quantum, a global recycling company from
California "is building its first US plant inside a local prison after
failing to find workers who would work for minimum wages in converting old
tyres into rubber mats and tiles. The company isn't the only one taking
alternate routes to hiring. Whether looking for factory workers or white
collar technical experts, companies are paying referral bonuses to churches
and synagogues, offering free massages and manicures to recruits and even
bringing in people from abroad. Thirty eight states in the US now have
similar programs of hiring workers through prison systems.
- Cisco systems and Cogent Communications are building fibre optic cables
to link 12 major US cities on a new data network. This is not going to
stop just because the stock market deflates a little. (Involves a lot of
fibre optic cable and routers)
- wireless access to the net via mobiles, rather than pc's (Amazon and
Sprint have teamed up to offer Internet shopping on wireless phones)
- Home automation; products to link together pc's, printers, faxes and
general home appliances and white goods. Voice recognition, to make the
net even more accessible.
- Dow Chemical Company has budgeted for $162 million (Aust) spending on
internet activity next financial year.
- Intel is struggling to meet demand for its processors, the larger Nasdaq
tech stocks are still beating analysts estimates of earnings this quarter;
markets do not collapse whilst this is occurring.
The Canadian Government (like it or not) is about to introduce biometric
identification technology at Canadian airports. Unisys will be
commissioning its iris identification system whereby travellers pass
through a series of gates that compare you (and your eyes) to recorded
information stored on your id card. A match allows you to proceed.
So what's next.
Don't be a lemming with the new technology.
The net revolution is not over, not by any stretch of the imagination. But
developments will go in cycles - just like in the past when railways
replaced canals as the new means of transport. At that time, the 1840's,
many canal owners went into protection mode. Consortiums were founded, and
with the help of the maritime navy, even managed at times to prevent
bridges being built over "their" canals, thereby effectively postponing the
spread at rail - for a time. Progress continued of course. The people
demanded better, faster, more efficient services.
I noted with interest the following; the AFR 30.3.00 attributed a great
quote to Westfield's, David Lowey, who is considering laying broadband
cable through all Westfield shopping centres. "He can see opportunities",
the article pointed out, going on to say "But he is a rarity in the
conservative property industry. In the main, the industry has responded to
the new technology as if it were a threat, not an opportunity - and in so
doing has handed the upside to providers like Davnet." (Well not quite
of course - the laying of broadband cable anywhere immediately increases
Keep an eye on where the productivity gains are flowing. Never forget,
society's economic gains accumulate in the private enclosure of public
space. So it is the rent seeking behaviour of entrepreneurs that must be
watched. (If you don't follow this, do the EIS cycles class) The internet
may be new technology, but it will develop along historical patterns. The
development of the worlds railroads illustrate what to look for.
Railroad development opened up
fantastic new opportunities for trade as I'm sure you can imagine. One's
first glimpse of the new iron horses in the 1840's must have been really
something to behold in those days. Innovation and investment went
ballistic, and there were three manias (bubbles) associated with it; 1847,
1857, 1866. In the US alone, freight rates halved, then halved again
between 1870 and 1950. A deflationary economic spiral developed.
Who gained ? Consumers certainly did for a while, with cheaper prices,
better goods and more choice. Eventually - much later - so did labour with
the eight hour working day. But a far larger part of the gain went to
those entrepreneurs - the rent seekers - who controlled key exchange
locations - more particularly in those days the land value underneath.
So watch our own entrepreneurs and more to the point these days the value
of the spectrum. Gains will also show up in share prices, as deals are
done, buyouts initiated, strategic link ups confirmed. Some will go bad,
too, which will wipe millions from stock prices very quickly. A great time
to be trading, but you will have to be alert. And quick. And better
informed. Information spreads quickly with this
new technology. As is always the case, stock prices will pre-empt this
knowledge, prior to public announcements. Your charts will alert you to
these trends, as EIS has shown you.
The possibilities to come
The internet, and the next few years will be incredibly exciting. Without
trying to forecast specifics, here's a few things to think about/ watch
Music format using MP3. Limitless copying and transfer. You have read
enough already on the possibilities of this technology without more
comments from me.
- The internet is likely, in time to carry much of the world's phone
traffic. Internet servers may even replace telephones exchanges. If voice
data does migrate to the net though, internet servers will never be
permitted to replace telephone exchanges until engineers find a way to make
it feasible for government agencies to tap our voice conversations as they
do now by phone. [Digital phones were delayed for this reason]
- Watch the development of on-line service sites ie as we do more and more
business on line, we will look for more and more answers on-line eg
insurance quotes, downloadable form letters, bill paying, employment sites,
downloadable books. The possibilities are endless, and will reduce
business costs continually.
- More media wars. The value of exclusive broadcasting rights for sport
continues to rise. Notice John Elliot keeping Carlton football club and
Carlton football ground. The AFL got most other clubs out of their own
grounds before each club realised the value of their own turf, advertising
space and now internet access via webcasts.
- Stock exchange systems to allow traders to trade directly via
mobile/phones with Wireless Application Protocol - WAP abilities. [New
Zealand has started already]
- The making and distribution of films entirely without film, ie made with
digital technology. Starwars II and III are to be shot digitally. Think
about this: cinemas receiving copies of their films via satellite or over
fibre optic cables. Multiple copies, no loss of quality. What does this
do for Kodak film? Piracy? Theft? PC "crash" (Does windows crash much
?) during the film. And what about encryption requirements when sending
the film to cinemas, smart cards, decoders etc etc. Film projection will
be museum pieces next decade.
India and China getting on line. Hardly started yet
The top 20 net stocks in the US are those providing the internet
"plumbing", - Cisco, Microsoft, Dell, Sun, IBM, Oracle. Akin to the
shopkeepers of the gold mining days of the 1850's who sold shovels to the
miners. Far more profitable in the long run. Therefore: at all times
remember the time frame of the stock you are trading, & how it generates
its revenue. Stop losses on specs are critical. This keeps your capital
alive to continue to play the game.
The death of white goods shopping. Washing machine broken down? Have the
manufacturer deliver you another, free. Connected to the internet you're
charged only for use ie per wash. Now trialling in Sweden. Observe: this
puts such companies into the business of selling services, not just
I remain of the belief that inflation will continue to surprise our experts
on the lower side of expectations. Older style companies just have to keep
introducing technology at lower costs, remain competitive etc etc. I
believe this process has a long way to run yet. The internet and
associated technology (& its introduction) has enormous implications and
exciting investment potential.
- eg wireless telephone and internet services in cars
- household appliances connected to the net
- book publishing over the net
- constant outsourcing by companies to better "specialists"
Some things however do not change
Internet companies still do what all successful businesses do, brand
building, attractive displays, customer service and satisfying consumer
demand. Nothing new about that. [though being on-line, you may find
customers adapting your business to their needs]
On the stock market, for such companies that own the technology, their
share prices will spike from time to time, and trend at other times. Stay
alert for the spikes, but trade the trend; it is, and remains, your best