| BUSINESSWEEK ONLINE : JUNE 28, 1999 ISSUE | ||||||||
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| COVER STORY
PaineWebber's Cyber-Seer: 'We're Only at the Beginning of This' As a managing director and head of technology investment banking at Paine Webber Inc., Frank J. Drazka keeps a very close eye on the Internet. He sees a time when the business model being forged on the Web and the traditional business model will come together. But he also sees plenty of gut-churning change ahead for old-line businesses that don't start cyber-strategies soon. Recently he spoke with Business Week Department Editor Nanette Byrnes. Here are edited excerpts of their conversation: Q: Are traditional companies finally starting to take the Web seriously? A: The way I perceive the market, you've got the ostrich who sticks his head in the sand. That's how I characterize a lot of companies in the brick-and-mortar world. In many cases they've been in business for 100 years plus. It was easy for people up front to dismiss online business as the flavor of the day. Now they see it's an evolution in the cycle of business models. Q: Why now? A: In the last year there have been a lot of board meetings in which management was asked: "How do we compete against the newbies on the block?" Q: What brought on that question? A: The exceptional valuation of Internet companies. Because of their ability to grow rapidly, get their name recognized fast, and a business model which should generate good cash flow, Net companies are selling at a premium. That also means traditional companies can't afford to go out and buy their Internet competition. They have to start from scratch, like Merrill Lynch. Or they have to try to buy smaller or private company. At the end of the day, you could see a lot of Internet businesses buying up traditional companies. Q: What happens then? A: Head-count reduction. If you think about it, Net technology allows greater flexibility in the workforce, and that allows reduction in the workforce. It's pretty draconian. The physical business will still represent some value added, but look at E-tailing. What happens if Amazon goes out and buys Borders? Do they really need all those sales people? Q: Why didn't traditional management recognize this threat sooner? A: Emotionally it's very challenging to suddenly have to accept there's a new challenge and it is very different. You've been doing something so well for so long. By traditional measures you're doing great. You go to the board to say you're happy to report you've had a record year, and they say "But what are you doing about this other thing that's coming at you, the Internet?" And you're scratching your head saying, "But I had a record year." Q: Does that mean the Internet model will be the future model for all businesses? A: I think there will be a hybrid model. One could argue that one of the most successful business models today is Dell's. It's not an Internet company, but it's leveraging the power of Net sales and marketing. They have the better margins, the lower cost of transaction of the Net. You'll see that kind of convergence. If you bring traditional thinking to the Web, you won't succeed. The model is different. The target is different. The second model is a partnership. A traditional retailer through a joint venture working with an E-tailer. The traditional retailer does inventory management, shipping, customer service. The E-tailer focuses on merchandising, the front end. You'll see more joint ventures. Q: Do traditional companies stand a chance of catching up to Net-born competition? A: The leaders of tomorrow are not necessarily going to be the companies we're looking at today. Somewhere in some garage the next great idea is being put together. We're only at the beginning of this. There are still many questions. Like can the physical businesses adapt fast enough? Adapt a model that works for them without jeopardizing their base business? They're using technology to change, but digital businesses are using it to create. They have a leg up because they're not stuck with someone else's mindframe. Physical businesses are challenged because they are trapped by their legacy. Q: We're still just in the early days then? A: When we get to a point of critical mass on the Web -- it's still only a minute part of say the $200 billion spent on advertising -- when you get to trillions of dollars in E-commerce, then there will be an inflection point. When it does, you'll see a lot of traditional business wake up -- and it will be too late. Q: Doesn't the recent volatility in Net stocks spell some trouble for the Net-only companies? Particularly in their ability to raise capital and grow? A: I don't think we have hit any kind of wall in terms of investment opportunity. The market has grown hard and fast, and then gone into a cooldown. But every time we say the bubble is going to burst, it's come back. I think these companies will continue to have very good access to capital. More venture capital than ever is going into this. There's been no pullback in the private market. Some companies are building a war chest today. Amazon has already raised $1.3 billion in convertible debt, and another $300 million. Recently they did a shelf registration for $2 billion. Think about typical traditional businesses and what they'd have to look like to raise that much money. There are so many different dynamics. No one can tell you today what the impact of any move on the chess board will be. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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