It's the E-conomy, stupid

In his recent address on the Internet economy, online financial services chief Michael Bloomberg pointed to the need for streamlined order processing and fulfilment. Sounds like workflow over the Web.

It's the E-conomy, stupid

By Phil Sandberg

Focus on your core competencies, leave technology to itself and don't invest in Internet stocks. That's the word from Michael Bloomberg, founder of Bloomberg Financial Markets, the world's most successful online information company for the finance sector.

Speaking recently in Australia, Bloomberg said the virtues of Internet economics are over-emphasised. Despite the promise of being able to bring producers and consumers closer together, the 18-year online services veteran said that even on the Internet there are few examples of frictionless capitalism and that you will always need some form of middleman.

"The problem for the Internet companies," said Bloomberg, "is yes, they have a different economics, but it's not clear whether it's a better economics and you still need all the functions that middlemen provide.

"There are an awful lot of companies that have been floated that really I can't see have any great prospects."

"If you have one of these Internet companies, you still have fundamentally the same economics as the old line companies to provide those services. The one place that the Internet company does have a supposed advantage is they don't need that store."

But, that's not to say that online companies do not incur significant capital and operating costs. Bloomberg pointed to successful online bookseller as one such company, and said that its perceived strengths are also its weaknesses.

"Amazon still has to have a warehouse, and they have to have someone who worries about producing accounting statements and dealing with the lawyers, and they have to have an HR department because they have employees - all the things that real companies with bricks and mortar do," said Bloomberg.

"They do clearly have a better economics than Barnes & Noble when it comes to the corner store. The problem is that anybody can do what Amazon does. It's any Internet company's greatest problem. The ease of access that lets them get in there and do their thing is available to anyone. It's very hard to figure out how they can get an advantage with the possible exception of being there first.

"And, if you go back and look at companies like the PC manufacturers, being there first seldom gives you a great advantage.

"When we started our company in 1981, there were 26 publicly traded manufacturers of PCs in the United States. Now only two either still exist or manufacture PCs and neither of them are the two biggest manufacturers of PCs in the United States. The two that did survive are IBM and Apple, and the two biggest today are Dell and Compaq - neither of those companies had been started in 1981."

The greatest challenge for online companies, said Bloomberg, is standing out in a service market that is oversupplied.

"That's the fly in the ointment for all Internet companies," he said. "How do you go and get something that's unique that nobody can copy and on the Internet it seems pretty difficult.

"For all these E-commerce companies, their problem is they basically sell what everybody else sells - big supply. In terms of demand, there are lots of ways that people can it, so the demand for any one isn't great, and that's the great challenge. A handful of these companies, maybe it's Amazon, will figure out ways to get through this problem, but most of them will not. Most of them cannot get a unique, non-comparable edge and therefore they really can't charge for their product.

"If you go out and look, you will be hard pressed to find any of these companies that are making money. You will be hard pressed to find any of them have a strategy other than, 'down the road I won't have a marketing expense'.

"It's just not going to happen. It can't happen to all of them. It can't even happen to most. One argument is that maybe it won't even happen to any of them."

Against the background of the trade in Internet stocks of recent years, Michael Bloomberg seems to be swimming against the tide. What of the stock market valuations, the rush to invest in online technologies and operations?

"It's a little bit cynical," he said, "to say companies that can't make it, can't make enough revenue to cover their expenses, can't raise any more venture capital, just go to the public market and all of a sudden rake in billions of dollars of market cap. But, in fact, that's exactly what is happening.

"There are an awful lot of companies that have been floated that really I can't see have any great prospects and it's very hard to understand why they get the valuations they do.

"The Internet stock market which, if you look at it by the traditional measures, just makes no sense whatsoever. It isn't that all the Internet companies have no prospects and that they'll all go bankrupt, quite the contrary. Some of them are actually probably very good companies that really have come up with some innovative new ideas that will give them great earning power down the road.

"But, it's all or none. There's just no way to predict which of the companies are going to be the next General Motors, IBMs, General Electrics of the world and which are those companies that will come to market, go up, go down and never be heard of again.

"To go back to the traditional ways of valuing a company, you talk to fundamental analysts and economists. To look at this new market, what you should do is talk to psychologists and publicists."

Bloomberg compares Internet stocks to the art market, saying that art dealers buy paintings not for the intrinsic value of a work, but because they think somebody else will want it more.

"If you want to go buy Internet stocks," he said, "I would argue that what's you really should think about. If you think other people are going to want to buy those stocks at a higher price, great! If you, however, don't think that's the case, don't put your money there. But, you are going to be subject to a supply and demand price market, as opposed to a market that has some tangible value where you can really compare one stock to another.

"The world is changing. Don't get me wrong. The Internet is going to become more and more a part of our lives.

"We are going to be more and more able to communicate with each other. But, the parts of commerce that are going to be automated are not the parts of commerce where human beings currently provide value-adding. We are going to automate the mechanical parts [of commerce] and probably not go any further.

"My scenario for the future is we will deal on the net, most companies will use the net, but they're not going to replace human beings. The technology that we're going to adopt is the technology that makes things easier, but we still go back to the human capital element every time.

"What's happening to us now is that the bandwidth, the ability to deliver information, is going up dramatically and, because of that, we are having a much more open world. And, that trend is going to continue.

"But, the bad news is that it's going to be a much more competitive world down the road because more people can see you, but also more people can see others at the same time.

"Go back to the basics, because at this point in our lives, the technology is going to take care of itself. For your kids, it's reading and writing and arithmetic. For you, it's the ability to think and the ability to present ideas. Those things are going to become more important as opposed to less important."

Phil Sandberg is a Sydney-based technical writer. (