October 31, 1999

Things That Go Bump

Maybe something happened on the "Information Superhighway" in September, 1999.

Maybe it didn't.

Reporting thus far has been skimpy, as if the event or non-event, as the case may be, happened deep in some nightmare no one really wishes to fathom, not even the analysts. The most common reaction has been to attribute, based on little or no evidence, the "September thing" to flaws in the relatively new methods and software that recorded it; that is, to invoke the all-powerful resources of denial and disbelief. It is as Ralph Waldo Emerson said of human disenchantment, the ever-disappointing rediscovery that we really do exist in a world of finitude and limitation rather than the boundless universe of visionary ideas we prefer and work so hard believe: "That discovery is called the Fall of Man. Ever afterwards, we suspect our instruments."

The Great Unbelievable Thing: In September 1999, as millions of pimple-popping adolescents and college kids presumably left behind all thought of sunshine and the great outdoors to return to school and the midnight glow of interminable computer screens, "the number of active Web consumers dropped a slight 2.81 percent from 66.8 million to 64.9 million." Or at least that's what was reported by Nielsen/NetRatings based on its regular survey of 33,000 Net users.

"So is this truly the end of the Web civilization?" asks ZDNET's slap-happy opinion monger Jesse Berest ("Why Web Surfing Is Down," October 29,1999). Of course he doesn't think so, but his offhand and uncharacteristically reasonable explanation has little to offer by way of consolation to the howling mob of Web-hypesters and IPO-conartists who have misled public thinking about "the new information society" since the Web's inception:

The answer is quite simple: For now, the months of double-digit growth have reached a plateau. The next round of mega-growth is likely to happen sometime in the next few years when fat pipes (aka higher speed connections) permeate the home market. That will bring those who left the Web because of slow access speeds back, as well as attract an entirely new market of those lured by the thrill of "real" sound and video.

"Sometime in the next few years"? That's over a century away on the time scale we've grown accustomed to using to track and predict "The Revolution." Worse, what if this is only a sign of things to come? What if there's another plateau waiting a few years out, even after "fat pipes (aka higher speed connections) permeate the home market"? Even worse, what if this is really a sign of some underlying, fundamental limitation to the Internet's appeal as a mass media? What if there is a "virtual" saturation point, hard or soft, beyond which advertising, marketing, news hype, political plugging, curriculum bullying, and declining prices cannot cattle-prod further masses to get and stay online? What if surfing reality really is better? And what if they, the general public, already know it and can by no means be persuaded otherwise? It's certainly ominous that even September's continued upward spiral in the total Web population--an estimated 1.5 million newly plugged-in users--was not enough to offset the staggering 1.9 million who, in the same month, joined the pack of digital dropouts who now represent about 32% of the Net's estimated population.

In an effort to find some "good news" in the Nielsen//NetRatings report, perhaps before the implications of the September data hit Wall Street (linear extrapolation of October data through the 24th indicates a further slight decline for a second month in a row), Berest eagerly grasps at straws:

Nielsen/NetRatings data suggests a growth in some vertical categories, most noticeably sports (the National Football League kicked off in September) and financial sites. ... The Web is becoming far more verticalized far more quickly than anticipated. Once Web consumers learn the power of the Internet as a means for gathering news and information, they might prefer going to the inch-wide, mile-deep content purveyors (verticals) than the "one size fits all" sites (search engines, portals). At the highest level, it's a sign of a rapidly maturing business and one quite appealing to advertisers and commerce companies who prefer targeted eyeballs and are willing to pay for them.

While this line of thought may provide a glimmer of competitive hope for some of the bigger Net-bucks players, particularly those with cash on hand to participate in the current barrage of dot-com television spots, it hardly alters the dark possibility that the Internet game itself may have turned less than zero-sum for the foreseeable future, at least in terms of overall demographics. And that remains the most significant news from September, because the dot-com explosion has been financed almost exclusively on air. No significant corporate or IPO Internet venture is turning a profit. Most are running at incredible losses: hopes and dreams and pyramid schemes.

Consider the case of online retailer Buy.com, the latest Southern California huckstering scheme to file for IPO with the Securities and Exchange Commission. In its first six months of operation in 1997, Buy.com earned $390,000 on sales of $878,000. Thereafter, as is typical of these basically unregulated con-games, Buy.com entered its secondary round of private capitalization and started to loose money as if there were no tomorrow. Of course, the only tomorrow that counts in the IPO game is the public offering. Then founders, initial investors and ideally second and third-round investors fleece the market-mad public for double-digit multiples of pre-IPO investments, selling out and shifting these multiplied dollars from the now over-valued IPO company, incapable of ever earning a decent return on it obscenely bloated public capitalization, to similar schemes or to more sound stocks and bonds, avoiding capital gains taxation on their IPO windfall and thereby fleecing the general tax-paying public as well. In 1998, Buy.com posted losses of $17.8 million on $125.3 million in sales. And in only nine months of this year, Buy.com has surpassed its 35-year-old SoCal founder's wildest dreams, posting losses of $80.5 million on $397.6 million in sales.

Yet, according to the LA Times ("Retailer Buy.com Files for IPO," October 28, 1999), top market analysts, such as Yobie Benjamin of Ernest & Young, believe "the stock market is likely to embrace Buy-com's offering," despite consensus that, as Benjamin bluntly put it to the LA Times, "I don't think it's a sustainable business." Not that it takes a wizard to figure that one out.

Buy.com's "business" thus far has been to front for the Ingram family empire based in Nashville: "Almost all the company's distributors are related to one of the nation's riches families ... whose members control the country's largest distributors of computer hardware and software, books, videos, DVDs, and computer games." Buy.com essentially gives away the Ingrams' goods at or below cost, thus its mounting losses, while the Ingrams take their profit on Internet-supercharged flow-through. Meanwhile, Buy.com officially seeks a profit from advertising alone--selling banner space on its site--while trying to last it out until the great IPO tomorrow. Not surprisingly, no one can sell or even take orders for advertising as fast as $80.5 million can be lost retailing $397.6 million in mostly hardware and software at or below cost. So on the eve of its IPO dream-come-true, Buy.com has had muddy the water by declaring a change of course: now it says it will sell goods at a profit, relegating its steep discounts to consumers to a traditional loss-leader strategy. Even that announcement may not have been necessary internal wrangling had not delayed the planned IPO by a year. The final obstacles were cleared only last month. Founder Scott Blum stepped aside, his 56% ownership still intact, to let a trusted Ingram family insider see the scheme through to fruition as CEO, with the help of a truly world-class number juggler from Disney as chief financial officer.

Buy.com founder Scott Blum's current employment? Online retailing, in which he presumably has some experience and perhaps some new ideas? No, that's neither the "experience" nor the kind of "idea" that counts these days. Admitting "he's not suited to run large companies," Blum has just formed, according to the LA Times, "an Internet venture capital firm with the Japanese investment giant Softbank Corp." Now a credentialed big-time IPOer, Blum can dispense with the need to come up with an idea to match or top his first. He only needs to dredge, with ample Japanese funds, for quick turnovers in the expanding cesspool of wannabe scammers from which he was lucky enough to emerge with Buy.com.

The Buy.com story is not unusual. It's a window into the Internet IPO business, especially into the e-commerce boom we are all being sold in one way or another. But IPO e-commerce schemes are precisely those most threatened by reports of a static or diminishing pool of active Internet users, lasting perhaps for several years. And, although Jesse Berest would hardly say so even if he thought so, this may be the real "good news" of the Nielsen/NetRatings report: that some, just some of the most overpowering scam money may be driven out of Internet, allowing the formation and continuation of smaller but actually profitable companies capable of building for end-users a Net that will last beyond tomorrow.

Even better, the best news from September's bump in the night on the Information Superhighway may be that none of us, from the currently "unplugged" to the Ingrams of Nashville and Softbank of Japan, yet know what the Net is or might yet become.

Scary, isn't it?

Happy Halloween, 1999.

Posted by Raoul

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