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Online Extra: Q&A with Mary Meeker: "We Had One Heck of a Feast"


Mary Meeker is Morgan Stanley's star Internet analyst and has long predicted that a Net-based revolution will shake the pillars of the business Establishment. Now the dot-com world seems to be collapsing around her. Yet she still believes the Internet is a very big thing -- and big companies will be born from it. She recently sat down with BusinessWeek Associate Editor Steve Hamm. Here are edited excerpts of their conversation:

Q: Have the decline in tech-stock valuations and the slowdown in demand for tech gear made you reevaluate your expectations for the Net?

A: No. We've just lived through the first phase. The underlying demand for Internet-related stuff is in many respects higher than anyone expected back in 1995.

User growth in the U.S. is somewhere between 15% and 20%. The market opportunities outside the U.S. are where it's at. I think we're going through a classic transition from one computing platform to another.

Q: What are the indicators and the potential problems that you worry about most?

A: No. 1 is that slowing becomes self-fulfilling. I'm worried about whether Alan Greenspan cut interest rates quickly enough. He waited that extra month. When we look back on it, we'll see whether the maestro made one mistake [which then] led to a cascade. People read that things are slowing down, and they slow down their purchases.

No. 2: We made a call early on that 70% of the dot-coms that went public would trade below their issue price. That has come true. And that's bound to change the economic outlook for a lot of companies. Still, I tend to be an optimist. I've been rewarded for being an optimist over time.... I believe in the power of technology and in the power of entrepreneurs.

Q: How does what's happening now compare to the tech bust of 1984?

A: One thing that was different is that very few people were paying attention to the tech sector [then]. Steve Jobs and Apple (AAPL) didn't happen until after that. The personal computer really hadn't taken off.

The...units of PCs being sold were in the single-digit millions. There also was not a capital-markets frenzy. There were very few IPOs.... It took a long time to get it to critical mass. Now, it's much bigger. It's much broader.

The lessons...are, No. 1, excess happens. There were way too many companies that couldn't differentiate themselves. The other thing is it sorted itself out -- after a year or two.

Q: You say you think the best is yet to come. And then you say look two years out. Will it take a couple of years to sort through the current excesses and imbalances?

A: Feast is usually followed by famine, and we have had one heck of a feast. The duration of the famine is the question, and others are better qualified to make those calls. I have my armchair opinions, [such as] Greenspan will continue to cut rates. But if the currents are so powerful in the economy on the downside, there's nothing you can do to change it.

Q: What do you see in terms of new companies being formed and innovation?

A: It's really interesting. In the second half of last year there were more companies privately funded than we've ever seen. The majority of the companies funded over the last three years will not work. The ones that will work will probably work bigger.

There's scar tissue in the market. There were too many venture capitalists who didn't know how to be venture capitalists.

A lot of people didn't appreciate how hard it is to be an entrepreneur -- to be Michael Dell or Scott McNealy. Most people aren't cut out for that. And the number of truly big ideas is low.... The startup world is not for kids. It's dangerous. It's scary.... People were asked to be Michelango and didn't know how to hold a paint brush.

Q: So there's still capital. There has been a weeding out. What do you think will be the next wave of innovation?

A: There's a lot of interesting stuff on the infrastructure side. There will be companies that find ways to keep making the Internet faster. There's interesting stuff on the optical side. The semiconductor business is going though resurgence. The B2B business is a big one.... There will be a lot of software that plays into that. I'm not the expert on wireless, but I think it will be far more dominated by the traditional companies than the new companies.

Q: Why did the dot-com crash happen, and why has it continued for so long?

A: The typical company was going public at what used to be the first round of venture financing. People forgot -- or didn't know -- that 5% of the companies create 80% of the wealth. Equity financings reached a crescendo in the last quarter of 1999 and the first quarter of 2000. We kept saying this is risky. These valuations are high. There could very well be a downside.

Q: So investors just bet on everything, and that's what created an unsustainable bubble.

A: Yeah. And we're testing new ground here. I think the market could get too euphoric again. The optics market got hot for a while. With some of these new technologies coming out in the [next few] months, on a sector-by-sector basis, we might have mini-bubbles or mini-buckets.

A question is: Have the capital markets fundamentally changed where individuals are more willing to take on risk, and what do we do about that? I have issues with that. The disturbing thing is that markets never fully correct until the last believer will never believe again. That was from Adam Smith, in his book The Money Game. It took 10 years for the go-go growth stocks to come back then.

Q: Are there any businesses or business models that you no longer believe in?

A: Priceline is an example. I don't know if I don't believe in it, but it's the best example of a company that was doing so many things right and then suddenly it stopped. I think that's the most extreme example. The challenge for me with that company is that the concept is compelling.

The first questions we ask are: Is it working, and how viable is it? And you look at the data and the numbers, the customer relationship. The revenue was telling you it was working. The [next] question is: How many people will use this? And one of our early concerns about the company was that maybe the market opportunity wasn't going to be big enough. With Priceline, we knew there were limits on its size, but we didn't anticipate how fast it would get to its natural penetration.

Q: You helped invent this new investing paradigm of companies going public before they were making money. You helped convince Wall Street and Main Street this was O.K.

A: We did [it with] Netscape [among others]. At that time the rule of thumb was three consecutive quarters of improving profitability, and you could consider going to a Wall Street shop and taking your company public. With Netscape, the company didn't have that. Before that deal went out, there was a pause. The world was pausing to see how it worked. And it did.

The whole theory is that there are companies that can benefit from economies of scale and network effects. Microsoft (MSFT) and AOL (AOL) have benefited from them. You figure out how big the market could be, how big the company's market share could be, and that can be a good way of valuing companies for the 5% of the companies that can capitalize on network effects.

Q: That makes sense, but was ChemDex going to be in that 5%?

A: Chemdex was the IPO that ushered in B2B. It was very, very early stage. For us, it was almost a bet on how much we believed in B2B in this time of the land grab. In the end, it didn't work.

Q: This new regulation [from the Securities & Exchange Commission on financial disclosure]. How does it change things for you?

A: Fundamentally I'm in agreement with it. If a company has information that will materially affect its financial results -- impact revenue or profits by 5% or more -- the company has an obligation to disclose that in a systematic and broad way. That's the way it should be.

If a company has something that's not really material to their business or they're thinking about it, or an analyst is going though scenario analysis with them -- what if? -- is that something that needs to be issued in a press release? I don't think so.

Q: You've been criticized a lot recently. Is it fair?

A: On one level, I was pretty vocal in saying I didn't want to be the Internet poster child because a lot of this stuff is crazy. And I'm proud of the fact that we did just 8% of the IPOs and we created 40% of the value. Am I proud of the fact that some of those companies are below issue? No. But you can't get rewarded without taking risk.

But I know what I've done as a tech analyst for the past 10 years, and the companies we've recommended have created more than $600 billion in shareholder wealth. That's pretty powerful.

I had lived through 1991. The PC industry really got clocked.... But out of that came some of the greatest investments in history: Microsoft and Dell.

I'm pretty visible. I don't want to downgrade a stock that I truly believe will be one of the great companies of the next 10 years and I think can create a tremendous amount of wealth because it's trading near-term at a valuation that's too high.... I'm talking about the leaders -- Yahoo!, Amazon, all of them.

I believe the wealth creation will be huge. I may be wrong. But the test for me will be where these stocks are trading a year from now. If all the lessons I've learned from the past don't apply, I'll be wrong, and that will be bad.


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