Investment in the Internet - Alive or Dead?

Dead, says the Wall St Journal:

The days of infinite margins, 1,000% productivity gains, and growth of market throughout the universe are long over. Internet companies now should be treated, at best, like utility companies that get bought at about 10 times earnings and sold at 13 times earnings. Even then, I'm not sure I would give the Internet sector the same respect as the monopoly-protected utility sector.

Don't just ask me. Ask the best. Nobody can figure out a business model.

Time Warner would rather keep their legacy old-media businesses like People magazine than hold onto one of the biggest Internet companies out there, AOL. And News Corp. is shaking up its MySpace business as it figures out its next steps. (News Corp. owns Dow Jones, publisher of this newswire.) Microsoft has spent billions on Internet strategy without a dime of profit. And even Google can't seem to find any other business model other than the one they stumbled into when they bought Applied Semantics in 2001 that had a little piece of software called AdSense. And the new guys: Twitter and Facebook are still scrambling for profits despite blistering usage growth.

Alive, says Fred Wilson:

We (my partners and I at Union Square Ventures) think the Internet is one of those transformative technologies that changes everything. We see it like the industrial revolution or the invention of the printing press. It is a huge game changer. The Internet has been a commercial technology for about fifteen years now. And we are beginning to see the impact of it on everything around us. The industrial revolution and the Renaissance before it lasted a century or more. It takes a long time for such fundamental changes to work their way through the system and produce a new "normal".

Periods of great change produce fantastic investment opportunities and also destroy stable predictable businesses. Investors have the choice to take a chance on the new opportunities, stick with the stable predictable businesses, or sit on the sidelines. I prefer to do the former.

Depends on where you sit. In essence the WSJ article is talking about public stocks, Fred is talking about early stage VC investments.

Internet stocks by and large don't give dividends, and rely on growth to create value (assuming one is not trading on volatility, of course). The current market conditions are not good for any big companies, and many big internet companies are "Web 1.0" era, and are finding the current transformations as disruptive as many a "Web 0.0" business.

Previous comms revolutions (railroads, telegraphs, cars, etc) created huge value, as Fred notes - but also took a lot of people's shirts via speculative bubbles, dead end investments etc.

Fred is investing in early stage internet companies, a small % of which grow very fast and return major value, a far larger % of which fail. Fred has to ensure he has a few home runs in his portfolio or he too will find Internet companies are a cr*p investment. Biggest risk in this sector right now is lack of ways to exit.

For the private retail investor it is virtually impossible to buy into Fred's deals, so the WSJ article deserves close study. Most "Web 2.0" exits are trade sales, not IPOs, which proves the WSJ's point for public investors. Biggest risk here is the emergence of newer companies with (often speculatively funded) disruptive technologies that crash existing value without replacing it. Only invest in public Internet businesses with real business models and growth potential.