It’s Only Money

An e-piphany on e-commerce e-valuations

NEW YORK — Not since David Geffen attended his first Est meeting at the then-Commodore Hotel — now named the Grand Hyatt — has it been the site for such a startling epiphany.

Early in the morning session of the Variety/Schroders Big Picture confab in New York April 4, lightning struck at least this member of the audience. Schroders analyst David Londoner had just flashed several slides on the screen comparing the market caps and the cash flows of the five largest entertainment companies with those of the top five Internet companies.

The seers of Lower Manhattan had valued the five biggest Websters at $326 billion. This was virtually the same value being assigned Time Warner, Disney, News Corp., CBS and Liberty Media combined.

It was Londoner’s next slide that made the sheer insanity of it all apparent. It showed that total 1999 revenues for the worldwide music and movie businesses, plus the U.S.-only revenues from radio, TV, cable systems and cable networks, had reached $164 billion.

Total revenues for the Internet? $12 billion.

Just as this was sinking in, the slide projector jumped to an even more startling comparison: cash flow margins. The various segments of the entertainment industry generated cash flow which averaged more than 30% of revenues, or more than $50 billion.

Cash flow for the Internet? Negative, natch.

Later in the day, as Tom Brokaw moderated the Internet panel, word filtered into the Hyatt ballroom that the stock market appeared on its way to an ’87-style crash, particularly among the hyper-inflated high techs.

The CEOs of such ’Net luminaries as Amazon.com, DoubleClick, Priceline.com and Excite@Home managed to project at least sang froid, if not their customary swagger, as some of their net worths were taking nine-figure hits.

As an old media type who has yet to buy his first Internet stock, I could barely conceal my long-delayed sense of schadenfreude. However, my guilty pleasure proved short-lived, as the market reversed course over the next several hours and restored nearly all the paper value that had been lost in the previous two trading sessions.

To get a sense of just how extraordinary the volatility was that day, check out something traded on the American Stock Exchange called the Inter@ctive Week Internet Index.

Just 18 months ago, this Index of 40 leading ’Net and high tech stocks was below 100; by late March of this year, it was briefly over 700. At the low point April 4, it had hit 479, only to close the day at 572.

This index is not solely composed of money-losing dot-com high flyers, but includes such major — and profitable — companies as Cisco, Qualcomm and Sun Microsystems.

For such an aggregation of companies to see their stock prices fall 15%-20% and then rise by the same amount in a single day is worse than simply irrational. It tells me that the biggest speculative fever in Wall Street history is about to break.

If you are as tired as I am of hearing about 27-year-olds with net worths in the billions, my advice is: Just wait. The revolutionary changes the wildest Internet bull assumes to be a given could indeed occur, while at the very same time these stocks could still fall 50% or 75% or even more from current levels.

To get some idea of how the leading entertainment stocks had performed during the dot-com mania, I decided to create my own little index of the 11 largest media/entertainment companies — think of it as a banker’s dozen.

Back in October 1998 when the Internet Index was beginning its seven-fold upward march, the average share price of my 11 old-media companies was just over 28; as of last week their average price had climbed 170% to nearly 78.

While this isn’t exactly the stuff of dreams, it ain’t shabby for a year-and-a-half return. And I’d like to compare the two industry portfolios five or six years from now. My guess is that the media tortoise will make it across the finish line ahead of the Internet hare.

How dare I make such a bold assertion? Because I am certain that the Internet will profoundly and positively affect the media companies, that their managements will figure out how to turn offline assets into online content, and that the distinction between the old and the new media will become hopelessly blurred.

Suppose for a moment that the entire Internet universe saw its revenues increase by a phenomenal 40% annually for the foreseeable future. Suppose at the same time that our media stalwarts saw their revenues grow at a far more modest 10% per annum.

The revenues of the entire Internet industry would not exceed the old media total until 2012, or when Alicia Silverstone is eligible to run for president.

As for how the profitability would compare, it is difficult to imagine that the Internet will achieve cash flow margins of 30% as long as it gives away its products and as long as it is such a poor environment for advertising. (Note: All of the information I needed to write this column came from Yahoo! for free.)

The entertainment industry, by contrast, is hung up on an old-business model that predicates that someone be charged, preferably as much as the traffic will bear. The old media has customers or at least advertisers who know almost precisely how many eyeballs they are getting and for how long.

The Internet has something called visitors, who in most cases could more properly be called guests. Once it figures out how to turn guests into customers, the economic future of this extraordinary technological advance might be almost as bright as the performance of the Internet stocks has been suggesting.

But, for myself, I think I’ll wait a little while before I buy that 100 shares of eBay or Broadcom.

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