TCS Daily

Even as stocks have fallen, the Net keeps booming

By James K. Glassman - April 2, 2001 12:00 AM

It's important not to confuse the fortunes of particular companies with the health of the Internet as a whole. Since March of 2000, investors have trashed Internet-related stocks, tech firms have delivered a series of earnings disappointments and the U.S. economy has downshifted to an anemic growth rate of 1 percent. The news has been horrendous, but here's the important question for investors: from this point forward, does the tech industry offer a growth opportunity?

To put it another way, despite the troubles of the last year, do you think that people will be using the Internet more or less in the future? In your own life, will you stop using technology because many dot-coms have failed? Will you stop sending e-mail because b-to-c business models were flawed? Will your company abandon the Internet as a communications medium because Yahoo! shares have pancaked?

Not likely. Of course it's not a pretty picture right now for stock prices and earnings, but the Internet is booming. There's no other way to describe it. According to semiconductor equipment maker Applied Materials, last year the number of new Internet users worldwide was 100 million. Is there potential for further growth? Consider that fewer than 10 percent of the world's people are online now and I think you can visualize the upside. And don't forget that while many particular stocks were propelled by hype, the reality of the Internet's growth is remarkable. In 1995, according to the tech magazine Industry Standard, there were roughly 100 billion e-mail messages sent worldwide. In 2000, the number reached 2.6 trillion, and forecasts place the number at more than 9 trillion by 2005.

Sure, a lot of these messages are jokes from college roommates and spam ads for online porn, but focus on the productivity that tech tools deliver - being able to share documents and communicate instantaneously, at no marginal cost, with anyone in the world. The ability to shop, negotiate, buy and sell at Internet speed. The Standard reports that the consensus forecast for consumer e-commerce is that this market will grow to $269 billion in 2005, up from $45 billion in 2000. Business-to-business e-commerce is projected to reach $6.3 trillion in 2005, up from $336 billion last year.

Howard Anderson is the founder of the Yankee Group, a technology consultancy, and now manages YankeeTek Ventures, a venture capital firm. Writing in the current issue of Forbes ASAP, Anderson reports: "Despite the gloom in the financial market, curiously enough, the Internet has never been healthier. But it's never been harder to be an Internet startup. Think of sperm swimming upstream. For all but one of them, it's going to be a very bad day."

Anderson says that venture money continues to fund the little companies that will challenge existing ways of doing business, which in turn will force established companies to react with more spending on technology. Sure, a lot of the new companies will die, but they will force changes that require ongoing investment in tech products. Says Anderson, "We in the venture industry are reloading. As they used to put on bumper stickers in Houston, 'Please, Lord: Give us another oil crisis. We promise not to screw this one up!'"

The continued boom in the use of the Internet suggests that the Net economy will continue to drive changes in business practices. So tech investors may have a rare opportunity to buy shares in what Anderson calls the "Arms Merchants" of the Internet economy - companies like Cisco (CSCO), EMC (EMC), Sun Microsystems (SUNW), and Oracle (ORCL). In our competitive, high-tech economy, with continuing challenges from upstarts, large corporations will likely turn to these companies to maintain the edge. "No one wants to go to war with obsolete weapons," says Anderson. And no long-term investor should do without an arms merchant or two in his portfolio.


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