When Digging For Internet Gold, Look Beyond Short-Term Glitter
The Internet Gold Rush is under way. Thousands of people and companies are staking claims. Without a doubt there is lots of gold because the Internet is the beginning of something immensely important.
But I believe that most of the gold is buried very deep, and not necessarily in the spots that people expect.
Gold rushes tend to promote overboard behavior. People get so carried away by the prospect of instant riches that they tend to overbid for easy opportunities and ignore longer-term realities.
Few of the thousands of would-be prospectors who converged on the gold fields of California beginning in 1849 made fortunes. The easy pickings were soon exhausted and massive inflation drove the price of a boiled egg to 75 cents and flour to $35 a barrel.
Many who made fortunes in the boom economy weren’t gold prospectors and their success didn’t always come right away.
Three years after the gold rush started, a German immigrant named Levi Strauss started a dry goods business catering to prospectors in San Francisco. He made his fortune 20 years later by making and selling riveted denim pants - the first blue jeans.
The rush to reap profits from the Internet and other interactive networks will make more than a few fortunes. Among the winners will be many like Levi Strauss, who find a spin-off opportunity.
The Internet is another case where people who are selling pans to the prospectors often will do better than the prospectors themselves. Analysts, the people who assemble trade shows, consultants, and others providing Internet-related services may have a more sure-fire way of benefiting than the poor prospectors out there wielding picks and axes in the mines.
When you have a major phenomenon, it’s often not obvious where the great opportunities lie.
If somebody had foreseen that personal computers were going to be a huge business, the obvious investment would have been in PC manufacturers. But the vast majority of PC manufacturers failed although if you had happened to pick Compaq or a few others you would have done well.
The less-obvious but more successful strategy would have been to invest in Intel, a maker of microprocessors, and Microsoft, a maker of software. These companies produced vital components of PCs.
But picking components wasn’t a sure-fire success, either. Markets have been extremely volatile. A few years back if you had picked manufacturers of random-access memory chips (RAM), you would have lost your shirt. Yet if you had invested in RAM manufacturing in the past 18 months you would have made a bundle.
In assigning a strategy for profiting from the Internet, people should think of the next 10 years, not the next six or 12 months. They should evaluate what kinds of assets companies are going to build and what income streams can be expected.
One obvious opportunity is connecting people to the Internet. Companies that had the foresight to get into this business early have been well-rewarded so far.
The longer-term prospects for new companies providing Internet connectivity are less clear. The market is being invaded by giants - the phone companies, long-distance companies and the cable cmpanies. Around the world, every national telephone company has a plan to get involved in Internet access. It will be very competitive.
Opportunities are also plentiful in software that takes advantage of the Internet. This is a bit of a doubleedged sword for the giants of the software industry, including Microsoft.
On one hand successful software products - personal-finance products, spreadsheets, operating systems - are becoming obsolete even faster than in the past. If they aren’t updated to support interactivity across the Internet, they are likely to be overtaken by competing products that are. That’s the risk.
On the other hand there is a spectacular opportunity for software makers to sell Internet-compatible upgrades to existing customers, and to sell software of all kinds to the new customers who enter the PC market because of the Internet. That’s the bonanza.
The obvious software opportunity is selling browsers that allow people to view content on the Internet but this is another case where the obvious opportunity is too competitive to be directly profitable. Browsers such as Netscape Navigator are being given away free because their acceptance has strategic value.
As in any gold rush it pays to be wary of hype. In recent months we’ve entered a period in which many people are willing to believe that cataclysmic things are likely. This has led otherwise-rational people to entertain notions that are a little farfetched.
If somebody had come along even a year ago and said, “We can make a software program 10 times better than anything that’s out there,” the sober response would have been, “That doesn’t sound too likely. Why didn’t anyone do it before?”
But today if somebody makes exactly the same claim, but adds ” - for the Internet,” there is an amazing open-mindedness among those who hear the claim. People say, “Really? Software that’s 10 times better, and for the Internet? That’s great!”
It’s the fever of the new gold rush.
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