From: Doug Bailey (Doug.Bailey@ey.com)
Date: Wed Feb 10 1999 - 10:05:42 MST
The Myth of Ubiquitous Freeness
The extrapolation that the advent of FreePC and other innovative
business models harks to an emerging era where everything is free is
misguided. FreePC's business model depends on the value of the information
it gathers about its customers. If the people who purchase that
information can't sell something of value for a profit to these people
then the information FreePC gathers has no value. Even in Drexler's
wildest dreams, value will exist in the form of nanobot software techniques,
creativity, algorithms, and protection from the nanonightmare scenarios.
Regarding FreePC, one problem I see with their model is that the
people most likely to take advantage of their offer are the ones with
minimal disposable income. A mailing list of every household with
gross income of $20,000 or less is of minimal value to someone trying
to sell exotic vacations, new cars, or high-priced clothing.
Net Worth
The idea that Amazon's gravy is in driving up sales with no regards to
whether it is in the red or the black is a serious misunderstanding of
what drives market valuations in the long-term. Amazon and other "Net"
stock valuations are a product of two converging phenomena: (1) the belief
that the Internet is the next great profitable commercial frontier, and
(2) a very small offering of visible securities attuned exclusively to
this new frontier. Big demand driven by most unsophisticated investors
matched with a paltry demand equals rocketing prices. Why is the eBay
CEO salivating for the date when he can cash out? Why is Compaq ready
to spin off Altavista? Why did Books-A-Million jump on the news it was
opening an internet commerce portal (though rationality settled in there
and the stock retreated)? I don't mind saying I shorted Amazon and Yahoo
in January and made a bundle. I hate that I made money off the ignorance
of the unsophisticated investor.
These instances have occurred before. The railroad
stocks of the 19th century, the airline stocks of the early 20th century
(as an amusing aside, when the airline stocks were forcing the railroad
stocks into the abyss one railroad company decided to IPO with the word
"airlines" in its name and its IPO was a huge success), the biotech stocks
of the early 90s all mirror whats happening with net stocks and tech stocks
on a larger scale. Just as the word "Bio" or "Pharmaceuticals" or "-tech"
seemed to carry some inherent cash flow with it in the early 90s, a firm
that has a novel idea, maybe an interesting business model, and a majority
of its business related to electronic commerce, is assumed to have some
huge cash flow in the distant future just waiting to be had.
Unfortunately, no one has produced a model for justifying why Amazon has a
market value higher than that most of the other booksellers combined. No
one knows where Yahoo's market value is coming from. The common method of
valuing securites is discounted future cash flows. Even once all its
aggressive expansion costs are eliminated, Amazon's future cash flow
predictions hardy warrant a $1 billion market cap.
The Information Economy
Much has been written about the new information economy of late, e.g.,
Shapiro's "Information Rules", et. al. I concede information will be
more of a commodity in the future as its capture and transfer become
less costly. However, if there is nothing of value to sell by leveraging
this information then the information itself is useless. An information
economy may exist one day but only in the realm of uploaded minds, competing
superintelligences and robust MNT.
Doug Bailey
doug.bailey@ey.com
nanotech@cwix.com
Obviously, my opinions stated above reflect my own opinions and not
necessarily those of Ernst & Young, LLP.
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