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Currently everyone looks at Old vs New economy. Since markets rarely end
up doing what has been widely thought it would (recent examples are post
asia 98/99 recession, octobre 99 rate scare and y2k scare) I suspect we
will have something else:
Neither old nor New will win.
Some Old will be eaten by New, some New will be eaten by Old.
I suspect this year will be the year of the stock pickers with a skill
in detecting in what way technology is going to affect the various
business. Takes B2B for instance. Who is winning most Commerce One or
GM? In mark cap Commerce One, but in profits, GM???
In the end, there will be mostly surprises, that I bet.
Gwenn
PS: I forward a Michael Lewis article on Old vs New from todays
Bloomberg.
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Date: Fri, 10 Mar 2000 09:18:07 -0500 (EST)
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From: "GWENAEL GAUTIER, CAISSE DES DEPOTS ET" <GGAUTIER@xxxxxxxxxxxxx>
Subject: (BN ) Welcome to the End of Corporate Profits: Michael Lewi
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Welcome to the End of Corporate Profits: Michael Lewis
3/10/0 9:1 (New York)
(Michael Lewis, the author of ``Liar's Poker'' and ``The New
New Thing,'' is a columnist for Bloomberg News. His opinions don't
necessarily represent those of Bloomberg News.)
New York, March 10 (Bloomberg) -- Since the Dow Jones
Industrial Average reached its record high on Jan. 14, the ``blue
chip'' benchmark has plummeted 15 percent, while the Nasdaq stock
index has soared 24 percent. This new trend in the U.S. stock
market is even more unsettling than the indiscriminate bull market
of the past nine-plus years.
The sort of big established companies with lots of profits
that make up the Dow find themselves lunging toward a bear market,
while the newer, smaller companies that make up the Nasdaq are
still seeing their stock prices rally, no matter how much money
they lose. This is exactly the opposite of the way a stock market
is meant to function. So why is it functioning this way?
One explanation, widely offered, is that the markets have
finally wised up to the fact that the Old Economy and New Economy
are no longer uneasy partners, but enemies, in the miraculous U.S.
economic expansion.
Moreover, investors are now treating the struggle between Old
Economy and New Economy companies more and more as a zero sum
game. By their handling of capital they seem to be saying, more or
less, that a dollar increase in the expected future profitability
of a New Economy enterprise implies a dollar decrease in the
future profitability of an Old Economy business. Good news for
Amazon.com Inc. and eBay Inc. is bad news for Wal-Mart Stores Inc.
and Sotheby's Holdings Inc.
Goodbye, Profits
That is, the markets have finally bought the argument that
Silicon Valley futurologists have been making for the past six
years: Bricks-and-mortar businesses will not be forced to co-exist
with their Internet cousins but will be devoured by them.
This new way of thinking about the Internet revolution may
not be entirely insane. Old bricks-and-mortar businesses obviously
find their profit margins reduced by Internet competitors, and
therefore should be less able to attract capital.
But the new way of thinking isn't entirely sane either. The
reduction in Old Economy profits does not imply anything about New
Economy profits. It is not merely the profits of Old Economy firms
that are threatened by the Internet. It is corporate profits,
period.
This is especially true of the New Economy firms with the
best-known brand names, those involved in e-commerce. Take
Amazon.com. The company behaves more like a charity than a
business, selling books at, or below, cost. (There has never been
a better time to be a best-selling author.)
Amazon.com's astonishing stock market success -- its shares
are up about 3,800 percent since going public in May 1997 -- is
premised on the belief that after some indefinite period, the dust
will settle on the Internet boom, and Amazon.com will be among the
few companies left standing. Then, presumably, it will cease to
sell New York Times bestsellers at cost.
Goodbye, Loyalty
But the success of Amazon.com is itself evidence against its
core beliefs about the way its business will one day work. After
all, customers previously believed loyal to independent bookstores
and to Barnes & Noble Inc. were happy to drop their old fashioned
merchants once Amazon.com offered them an easier, cheaper way to
buy books. And you'd expect an e-customer to be even less loyal
than a bricks and mortar customer, as it is so easy for the
Internet buyer to shop around.
And why should the newly acclimated mass of e-customers have
anything like the inertia of bricks and mortar customers?
Amazon.com has taught them to be disloyal shoppers.
Given this, and the absence of any of the old-fashioned
barriers to entry for would-be competitors, it will be impossible
for Amazon.com to price much profit into its products. The same
argument can be made for virtually every e-merchant. And if the
merchants cannot find profits, the businesses that serve the
merchants won't either.
Better Mousetraps
Today the stock markets are saying that the New Economy will
spawn new businesses that are not less but more profitable than
the Old Economy ones they replace. It's hard to say why New
Economy investors believe this. Perhaps they are -- as University
of Michigan psychiatrist Randolph M. Nesse has proposed -- heavier
than average users of anti-depressant drugs. Or perhaps they
assume that any company that builds a better mousetrap, as
Internet companies often do, must be paid well for it.
But there is a paradox at the heart of the Internet: It
builds better mousetraps that don't pay very well. It increases
efficiency at the same time it eliminates the possibility of
profit. It has created a social and economic revolution on the
scale of the Industrial Revolution, with no real economic
justification.
Then again, perhaps investors don't believe anything at all
about the New Economy. They just think other people do.
--Michael Lewis through the New York newsroom (212) 318-
2300./cws/jmw
Story illustration: To graph the performance of the Bloomberg U.S.
Internet Index of stocks for the past year, enter:
{BUSNET <Index> GP D <GO>}.
Company news:
AMZN US <Equity>
EBAY US <Equity>
WMT US <Equity>
BID US <Equity>
BKS US <Equity>
NI Codes:
NI MI
NI RET
NI CA
NI AK
NI ECOM
NI US
NI WA
NI LEWIS
NI COLUMNISTS
NI GEN
NI NY
NI INT
NI WIN
-0- (BN ) Mar/10/2000 9:01
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