| BUSINESSWEEK ONLINE : JULY 12, 1999 ISSUE | ||||||||
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| INTERNATIONAL -- INT'L COVER STORY
Forrester's Colony: "The Web Is Incredibly Crude Technology" (int'l edition) George F. Colony, president of Forrester Research Inc., believes there's a lot of air in the Internet balloon. Even though these companies are part of a dramatic global change in communications and the birth of a new medium, many of them will die like tulips in a frost -- or in the panic of an overheated market. The reason: Changing technology has spawned them and could destroy them. Colony recently discussed Forrester's views with Business Week Toronto Bureau Chief Joseph Weber. Here are edited excerpts of their conversation: Q: Internet-related stocks have soared on our BW Global 1000 list, in many cases eclipsing far more established outfits like P&G and DuPont. Does that make sense? A: We are living in a very special time, where we have low interest rates, low bond prices, and you have a great deal of wealth among what we call the emerging affluent who can invest in these companies. There's a confluence of elements, of dynamics, which are making it possible for these valuations to be this high. That's why the valuations are so high, and you have an emerging Internet economy with the expectations that brings for investors. All that being said, does this make sense? I don't think so. There is a common belief that these companies are grabbing land. Because of their first-mover status, these guys have grabbed the land. I think that's garbage. The Web technology could be replaced very quickly with another software technology that connects to the Internet. The real genius is the pipe between myself and 110 million people worldwide. The Web is software we clamp on either end of that wire. The Web is the world where this land is being grabbed and the problem is the Web could be replaced at any moment by a new technology. One stroke of technology could make all that land grabbed by AOL and Amazon and Yahoo! worthless. The Internet will stay stable as a way to move bytes between people. What will change is the experience those bytes give you at the end. The experience that you have on Amazon would be obliterated by a new technology, a more immersive and more interactive technology. If you look at the Barry Dillers of the world, the Eisners, they are looking at the Web like it's TV in 1954 and there's going to be an ABC and a CBS and an NBC. It will not happen that way. The technology is far more dynamic. Q: What will this new technology be like? A: It will be Java-based. There will be programming at each end of the wire. I'll have a program, and you'll have a program, and we'll have a conversation, rather than viewing each other's pages. That's a very inefficient and nonimmersive way of looking at it. It will be a more interactive reality, a much richer experience, more immersive. When that happens, Amazon, with its share price, has legacy technology and so does AOL. They're left with all that land they have won and it's worthless. They become a legacy vendor at that point. And they'll have all the problems of the Barnes & Nobles and the Wal-Marts. They are the future legacy companies. The capital markets cut two ways. The capital markets are very patient with all the Internet startups, the Amazons of the world. But unfortunately, there has been a gush of capital in this market, funding companies that want to cut Amazon's head off. Look at buybooks.com. The stated policy is to underprice Amazon forever. The capital markets cut two ways here. What it may create is an Internet-induced deflationary period. Nobody will make money for years because there will be so much supply, 55 guys selling books on line, and 30 toy stores online, and nobody will make a buck. We may view Yahoo! and Amazon as being the Eagle Computer of the day. If you go back to when PCs began, Eagle Computer was big. Commodore and Osborne were big. Nobody's heard of them now. This is my way of saying it's very, very early in this economy and it's not over. You can't say the land has been grabbed, and it's done. We're sitting around campfires in loincloths, chewing bones. Forrester believes we're in the E-commerce threshold period now. The hypergrowth of the Internet won't begin until late next year and go to 2008. We're still preparing, still doing calisthenics. The technology we have today, the Web, is incredibly crude technology. It's O.K., and we live with it. But it's hardly the end-game. And some fundamentals look ridiculous. It's ridiculous to have eToys worth more than the entire toy industry. At the end of the day, they still sell toys. They are a toy seller, not a technology company. To value eToys at more than all the other toy companies makes no sense. Q: So we've been seeing a new tulip mania? A: I call these stocks tulip stocks. I'm not a financial analyst, but I think that the quality of a market can be pegged directly to the IQ of the buyers and sellers. Joe Kennedy knew the market was at a top in 1929 because shoeshine boys were giving him stock tips. The day traders are the shoeshine boys of the '90s. The quality of the market and the IQ of the market will not sustain a healthy dynamic market in the future. Day trading is a form of gambling, I would say. Wall Street is obviously happy. Goldman Sachs can take a tulip company public at 16 and spin it out at 60. The investment bankers don't want to blow the whistle on this. Q: Lately, the Net stocks have corrected more than 30% or so. Is that slide likely to continue? A: It really depends on the patience of day traders and whether they will hang in at these prices. At some point, maybe not 24 months but maybe 48 months, the bell will ring for earnings. They'll say, "O.K., the Internet companies have been here for seven years now, and where are the earnings? We will not price off multiples of revenues anymore. Where are the earnings?" That's when you may see rationality return, see common sense injected back into the markets. Q: Do you believe the Net ranks up there among innovations such as the telephone, the railroads, and indoor plumbing? A: You have to parse this out. The Web is software -- it's your browser and our server. The Internet is the wire reaching 110 million people. The Internet is clearly on the level of the telephone. I actually think that Vinton Cerf [sometimes called the father of the Net] will 50 years from now be seen as one of the great men of the century for his contributions to the Internet. The Web is different. The Web is transitory technology. It will be very important. It popularized the wire, it popularized the Internet. But while the Web will still be around as a welcome mat, we'll go to a higher level of technology. The Web is sort of like the mainframe computer. It's the first phase of many phases. Q: The U.S. has been the center of Net activity and innovation. Will that change? Will it globalize? A: There will be a couple periods. There will be a threshold period that will last two to three years. That will get the capital aligned. There will then be hypergrowth. The U.S. is about to come out of the threshold and enter hypergrowth. Canada will enter hypergrowth in 2002, the U.K. in 2002, and Germany in 2003. That's the first group. Then you'll get Japan and France and Italy in 2004. That's what it looks like for the G-7. Today you already have companies in Scandinavia, they'll enter the hypergrowth phase in the 2001 range. The difference will be the quality of the pipes, the width of the pipes is a big factor in how fast countries will move. Factor No. 2 is public policies. The French messed this up. They've overregulated it. The third factor is capital. The capital markets have to believe the dynamic and understand and embrace the economy. Q: Would it be smarter for investors to look now at overseas Net-related companies as undervalued then? A: That's a great idea. When I'm overseas and people say, "what do we do?" I say, "just copy what's going on in the U.S. Build the greatest French bookstore online. Just replicate. Build European Toys dot.com." It's a very good idea to invest overseas in the Net. But there are some issues -- the quality of the pipes and the quality of the public policies. In France, for instance, are they going to tax it? Those are the issues. Q: Are the old industrial and consumer products giants that now are lower on our list courting irrelevancy, at least from an investor perspective? A: I have a counterintuitive belief. There are four channels to sell. Channel One is face-to-face, bricks-and-mortar. Channel Two is mail. Channel Three is the telephone, and Channel Four is the Internet. We have not yet seen a powerful multichannel operation. We've seen a lot of pure-play fourth- channel operations, but not a powerful multichannel play. I think a multichannel operation will be far more powerful than a pure fourth-channel play because of the synchronicity of brands, the synchronicity of choice given to consumers. You go into the bookstore or buy online or a combination of the two. I believe that if you are a four-channel brand and you have a very high IQ in the technology and the top-level management understands and pushes, then you have a chance to dominate. The No. 1 retail bank online in America, for example, will be Citibank. We know the consumer well. We survey 100,000 consumers in the U.S. every year on technology. There are 30% of Americans who will be called sideline society. They will not buy online. They do not use PCs -- and they will not use PCs. You can have as many online bookstores as you want, and it won't matter if you want to reach that 30% of America. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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